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As filed with the Securities and Exchange Commission on April 28, 1999
Registration Nos. 33-51268 and 811-7134
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. 13 [x]
----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 14 [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
Kevin L. Howard
Integrity Life Insurance Company
515 West Market Street
Louisville, Kentucky 40202
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon after the effective date
of this Registration Statement as is practicable.
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b) of Rule 485
---
x on (May 1, 1999) 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
---
75 days after filing pursuant to paragraph (a)(2) of Rule 485
---
on (date) pursuant to paragraph (a)(2) 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.
<PAGE>
PROSPECTUS
PINNACLE
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity contract offered
by Integrity Life Insurance Company, a subsidiary of ARM Financial Group, Inc.
(ARM). The contracts provide several types of benefits, some of which have
tax-favored status under the Internal Revenue Code of 1986, as amended. Two
separate accounts, Separate Account II and Separate Account Ten, fund the
Variable Annuity contracts. You may allocate contributions to various available
investment divisions of the Separate Accounts, called Variable Account Options,
or to our Fixed Accounts, or both. The Variable Account Options and Fixed
Accounts are together referred to as INVESTMENT OPTIONS.
Your contributions to the Variable Account Options of Separate Account II are
invested in shares of the Portfolios of the following mutual funds: BT Insurance
Funds Trust; Fidelity's Variable Insurance Products Fund (VIP), Fidelity's
Variable Insurance Products Fund II (VIP II), and Fidelity's Variable Insurance
Products Fund III (VIP III), trust funds of the Fidelity Investments group of
companies; The Legends Fund, Inc.; Janus Aspen Series; J.P. Morgan Series Trust
II; and Morgan Stanley Dean Witter Universal Funds, Inc. (MSDW UNIVERSAL FUNDS).
The prospectuses for the Portfolios describe their investment objectives,
policies and risks. Contributions to the Variable Account Options of Separate
Account Ten are allocated to its Select Ten Plus Divisions, which invest
directly in securities. The value of your contributions to the Variable Account
Options reflects the performance of the Portfolios and/or the Select Ten Plus
Divisions. There are 27 Variable Account Options available under the Separate
Accounts:
<TABLE>
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BT FUNDS TRUST FIDELITY'S VIP FUNDS
EAFE Equity Index Fund VIP Equity-Income Portfolio: Initial Class
Equity 500 Index Fund VIP II Contrafund Portfolio: Initial Class
Small Cap Index Fund VIP III Growth & Income Portfolio: Initial Class
VIP III Growth Opportunities Portfolio: Initial Class
JANUS ASPEN SERIES VIP Growth Portfolio: Service Class
Janus Aspen Capital Appreciation Portfolio VIP III Mid Cap Portfolio: Service Class
Janus Aspen Balanced Portfolio
Janus Aspen Worldwide Growth Portfolio J.P. MORGAN SERIES TRUST II
Janus Aspen Money Market Portfolio J.P. Morgan International Opportunities Portfolio
J.P. Morgan Bond Portfolio
LEGENDS FUND MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
Harris Bretall Sullivan & Smith Equity Growth Portfolio MSDW Universal Funds Asian Equity Portfolio
Zweig Asset Allocation Portfolio MSDW Universal Funds Emerging Markets Debt Portfolio
Zweig Equity (Small Cap) Portfolio MSDW Universal Funds High Yield Portfolio
Scudder Kemper Value Portfolio MSDW Universal Funds U.S. Real Estate Portfolio
SELECT TEN PLUS DIVISIONS
Select Ten Plus Division March
Select Ten Plus Division June
Select Ten Plus Division September
Select Ten Plus Division December
</TABLE>
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Part I of this prospectus describes the contract and provides background
information about the Separate Accounts. Part II of this prospectus (beginning
on page 37) provides information about the investment activities and operations
of the Select Ten Plus Divisions, including their investment policies.
We also offer Guaranteed Rate Options (GROs) and a Systematic Transfer Option
(STO), together referred to as FIXED ACCOUNTS. The money you put into a GRO
earns a fixed interest rate that we declare at the beginning of the duration you
select. A MARKET VALUE ADJUSTMENT will be made for withdrawals, surrenders,
transfers and certain other transactions made before your GRO Account expires.
However, your value under a GRO Account can't be decreased below an amount equal
to your contribution less prior withdrawals plus interest compounded at an
annual effective rate of 3% (MINIMUM VALUE). Withdrawal charges and an annual
administrative charge may apply, and may invade principal. Your allocation to
the STO earns a fixed interest rate that we declare each calendar quarter,
guaranteed never to be less than an effective annual yield of 3%. YOU MUST
TRANSFER ALL CONTRIBUTIONS YOU MAKE TO THE STO INTO OTHER INVESTMENT OPTIONS
WITHIN ONE YEAR OF CONTRIBUTION ON A MONTHLY OR QUARTERLY BASIS.
This prospectus contains information about the contracts that you should know
before investing. You should read this prospectus and any supplements, and
retain them for future reference. This prospectus isn't valid unless provided
with the current Portfolio prospectuses, which you should also read.
For further information and assistance, contact our Administrative Office at
Integrity Life Insurance Company, P.O. Box 740074, Louisville,
Kentucky 40201-0074. Our 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.
Registration statements relating to the contracts, which include a Statement of
Additional Information dated May 1, 1999, have been filed with the Securities
and Exchange Commission. The SAI is incorporated by reference into this
prospectus. A free copy of the SAI is available by writing to or calling our
Administrative Office. A table of contents for the SAI is found in Appendix C.
*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 OREGON.
THE CONTRACTS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY ANY
BANK, NOR ARE THEY INSURED BY THE FDIC. THEY ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
CONTRACTS OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
YOU CAN REVIEW AND COPY INFORMATION ABOUT THE CONTRACTS AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. FOR HOURS OF OPERATION OF THE PUBLIC
REFERENCE ROOM, PLEASE CALL 1-800-SEC-0330. YOU MAY ALSO OBTAIN INFORMATION
ABOUT THE CONTRACTS ON THE SEC'S INTERNET SITE AT http://www.sec.gov, OR, UPON
PAYMENT OF A DUPLICATING FEE, BY WRITING THE SEC'S PUBLIC REFERENCE SECTION,
WASHINGTON, D.C. 20459-6009.
The date of this Prospectus is May 1, 1999.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
SECTION 1 - SUMMARY
<S> <C>
Your Variable Annuity Contract . . . . . . . . . . . . . . . . . . . . . . . 1
Your Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
How Your Contract is Taxed . . . . . . . . . . . . . . . . . . . . . . . . . 1
Your Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Your Investment Options. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Variable Account Options . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Account Value, Adjusted Account Value and Cash Value . . . . . . . . . . . . 2
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Charges and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Your Initial Right to Revoke . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk/Return Summary: Investments and Risks. . . . . . . . . . . . . . . . . 3
Year 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table of Annual Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . 4
Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 2 - INTEGRITY AND THE SEPARATE ACCOUNTS
Integrity Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . 9
The Separate Accounts and the Variable Account Options . . . . . . . . . . . 9
Assets of Our Separate Accounts. . . . . . . . . . . . . . . . . . . . . . . 9
Changes In How We Operate. . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 3 - YOUR INVESTMENT OPTIONS
The Legends Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
BT Insurance Funds Trust . . . . . . . . . . . . . . . . . . . . . . . . . .11
Fidelity's Variable Insurance Products Funds . . . . . . . . . . . . . . . .11
Janus Aspen Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
J.P. Morgan Series Trust II. . . . . . . . . . . . . . . . . . . . . . . . .13
Morgan Stanley Dean Witter Universal Funds, Inc. . . . . . . . . . . . . . .13
The Select Ten Plus Divisions of Separate Account Ten. . . . . . . . . . . .14
Fixed Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Guaranteed Rate Options . . . . . . . . . . . . . . . . . . . . . . . .15
Renewals of GRO Accounts . . . . . . . . . . . . . . . . . . . . . .15
Market Value Adjustments . . . . . . . . . . . . . . . . . . . . . .16
Systematic Transfer Option. . . . . . . . . . . . . . . . . . . . . . .16
SECTION 4 - DEDUCTIONS AND CHARGES
Separate Account Charges . . . . . . . . . . . . . . . . . . . . . . . . . .17
Annual Administrative Charge . . . . . . . . . . . . . . . . . . . . . . . .17
Portfolio and Division Charges . . . . . . . . . . . . . . . . . . . . . . .17
Reduction or Elimination of Separate Account or Administrative Charges . . .17
State Premium Tax Deduction. . . . . . . . . . . . . . . . . . . . . . . . .17
Contingent Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . .17
Reduction or Elimination of the Contingent Withdrawal Charge . . . . . . . .18
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Transfer Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Hardship Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Tax Reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
SECTION 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract. . . . . . . . . . . . . . . . . . . . . .19
Your Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Units in Our Separate Accounts . . . . . . . . . . . . . . . . . . . . . . .20
How We Determine Unit Value. . . . . . . . . . . . . . . . . . . . . . . . .20
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Death Benefits and Similar Benefit Distributions . . . . . . . . . . . . . .22
Annuity Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Fixed Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Timing of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
How You Make Requests and Give Instructions. . . . . . . . . . . . . . . . .24
SECTION 6 - VOTING RIGHTS
Portfolio Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . .24
How We Determine Your Voting Shares. . . . . . . . . . . . . . . . . . . . .25
How Portfolio Shares Are Voted . . . . . . . . . . . . . . . . . . . . . . .25
How Separate Account Ten Interests Are Voted . . . . . . . . . . . . . . . .25
Separate Account Voting Rights . . . . . . . . . . . . . . . . . . . . . . .25
SECTION 7 - TAX ASPECTS OF THE CONTRACTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Your Contract is an Annuity. . . . . . . . . . . . . . . . . . . . . . . . .26
Taxation of Annuities Generally. . . . . . . . . . . . . . . . . . . . . . .26
Distribution-at-Death Rules. . . . . . . . . . . . . . . . . . . . . . . . .27
Diversification Standards. . . . . . . . . . . . . . . . . . . . . . . . . .27
Tax-Favored Retirement Programs. . . . . . . . . . . . . . . . . . . . . . .28
Federal and State Income Tax Withholding . . . . . . . . . . . . . . . . . .28
Impact of Taxes on Integrity . . . . . . . . . . . . . . . . . . . . . . . .28
Transfers Among Investment Options . . . . . . . . . . . . . . . . . . . . .28
SECTION 8 - ADDITIONAL INFORMATION
Systematic Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Income Plus Withdrawal Program . . . . . . . . . . . . . . . . . . . . . . .28
Dollar Cost Averaging. . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Systematic Transfer Program. . . . . . . . . . . . . . . . . . . . . . . . .30
Customized Asset Rebalancing . . . . . . . . . . . . . . . . . . . . . . . .30
Callan Asset Allocation and Rebalancing Program. . . . . . . . . . . . . . .30
Systematic Contributions . . . . . . . . . . . . . . . . . . . . . . . . . .31
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . .31
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SECTION 9 - PRIOR CONTRACTS
Death Benefit Information for Contacts Issued Before January 1, 1997 . . . .33
Reduction in Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Contingent Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . .34
Retirement Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Contracts Issued to Oregon Residents . . . . . . . . . . . . . . . . . . . .34
Callan Asset Allocation and Rebalancing Program. . . . . . . . . . . . . . .35
Hardship Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
PART II - THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN
SECTION 1 - INVESTMENT OBJECTIVE, STRATEGY AND RISK FACTORS
The Divisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Investment Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Dow Jones Industrial Average . . . . . . . . . . . . . . . . . . . . . . . .37
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
SECTION 2 - PERFORMANCE INFORMATION
Performance History of the Dogs of the Dow Strategy - Comparison of
Historical Total Return. . . . . . . . . . . . . . . . . . . . . . . . . . .39
Performance History of the Dogs of the Dow Strategy - $10,000 Hypothetical
Investment. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . .40
SECTION 3 - CONTRACTHOLDER INFORMATION
Pricing of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . . .42
SECTION 4 - MANAGEMENT
The Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . .41
The Sub-Adviser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
APPENDIX A - FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNTS.. . . . . . . .45
APPENDIX B - ILLUSTRATION OF A MARKET VALUE ADJUSTMENT . . . . . . . . . . .50
APPENDIX C - TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION. . . .53
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.
</TABLE>
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PART I
SECTION I - SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
When this prospectus uses the terms "we," "our" and "us," it means Integrity
Life Insurance Company. When it uses the terms "you" and "your" it means the
Annuitant, who is the person upon whose life the annuity benefit and the death
benefit are based. That person is usually the Owner of the contract. If the
Annuitant doesn't own the contract, the Owner has all the rights under the
contract until annuity payments begin. If there are Joint Owners, they share
the contract rights and any changes or transactions must be signed by both of
them. The death of the first Joint Owner to die will determine the timing of
distribution.
If you want to invest for retirement by buying a Pinnacle Variable Annuity
contract, complete a Customer Profile form (unless your state requires an
application) and send it to us along with at least the minimum initial
contribution. Because the premium is flexible, your future contributions can be
any amount you choose, as long as it's above the minimum required contribution,
discussed below.
The latest your endowment or "retirement" date can be is your 98th birthday,
unless your state law requires it to be a different date, or unless you specify
an earlier date.
YOUR BENEFITS
Your contract has an Account Value, an annuity benefit and a death benefit.
These benefits are described in more detail below.
Your benefits under the annuity contract may be controlled by the usual tax
rules for annuities, including deferral of taxes on your investment growth until
you actually make a withdrawal. You should read Part I, Section 7, "Tax Aspects
of the Contracts" for more information, and possibly consult a tax adviser. The
contract can also provide your benefits under tax-favored retirement programs,
which may be subject to special eligibility and contribution rules.
HOW YOUR CONTRACT IS TAXED
Under the current tax laws, any increases in the value of your contributions
won't be considered part of your taxable income until you make a withdrawal.
However, most of the withdrawals you make before you are 59 1/2 years old are
subject to a 10% federal tax penalty on the taxable portion of the amounts
withdrawn.
YOUR CONTRIBUTIONS
The minimum initial contribution is $1,000 ($3,000 in South Carolina and
Pennsylvania). Contributions after your initial one can be as little as $100.
Some tax-favored retirement plans allow smaller contributions. For more details
on contribution requirements, see Part I, Section 5, "Contributions Under Your
Contract."
YOUR INVESTMENT OPTIONS
You may have your contributions placed in the Variable Account Options or in the
Fixed Accounts, or place part of your contributions in each of them. The
Variable Account Options and Fixed Accounts are together referred to as the
INVESTMENT OPTIONS. You may have money in as many as nine different Investment
Options at any one time. See "Contributions Under Your Contract" in Part I,
Section 5. The effective dates of contributions to the Select Ten Plus Divisions
are subject to special rules. See "Investment Strategy" in Part II, Section 1.
To select Investment Options that most closely reflect your investment goals,
see Part I, Section 3, "Your Investment Options."
VARIABLE ACCOUNT OPTIONS
Each of the Variable Account Options, except the Select Ten Plus Divisions,
invests in shares of an investment portfolio of a mutual fund. Each investment
portfolio is referred to as a PORTFOLIO. The investment goals of each Variable
Account Option are the same as the Portfolio in which it's invested. For
example, if your investment goal is to save money for
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retirement, you might choose a GROWTH oriented Variable Account Option, which
invests in a GROWTH Portfolio. Your value in a Variable Account Option will
vary with the performance of the corresponding Portfolio. For a full
description of each Portfolio, see that Portfolio's prospectus and Statement of
Additional Information. The Select Ten Plus Divisions invest directly in
securities. For a full description of the Select Ten Plus Divisions, see Part
II.
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
Your ACCOUNT VALUE consists of the values of your Fixed Accounts and Variable
Account Options added together. Your ADJUSTED ACCOUNT VALUE is your Account
Value increased or decreased by any MARKET VALUE ADJUSTMENT. Your Account Value
in the GROs can never be decreased below the Minimum Value. You'll find a
discussion of Market Value Adjustment in the Guaranteed Rate Options paragraph
of Part I, Section 3, "Your Investment Options." Your Cash Value is your
ADJUSTED ACCOUNT VALUE reduced by any withdrawal charges or pro rata annual
administrative charges that may apply. Fees and charges are discussed in more
detail in the "Charges and Fees" section below.
TRANSFERS
You may transfer all or any part of your Account Value among the Investment
Options, although there are some restrictions that apply. You can find these
under "Transfers" in Part I, Section 5. Any transfer must be for at least $250
and may be arranged through our telephone transfer service. Transfers may also
be made among certain Investment Options under the following special programs:
(i) Dollar Cost Averaging, (ii) Customized Asset Rebalancing, (iii) Callan Asset
Allocation and Rebalancing, or (iv) transfer of your STO contributions. All of
these programs are discussed in Part I, Section 8. If you make more than twelve
transfers between your Investment Options in one contract year, your account can
be charged up to $20 for each transfer.
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year before your Retirement Date, an annual administrative expense charge of $30
is deducted from your Account. A daily charge equal to an annual fee of 1.35%
is deducted from the Account Value of each of your Variable Account Options to
cover mortality and expense risks (1.20%) and certain administrative expenses
(.15%). The charges will never be greater than this. For more information
about the account charges, see Part I, Section 4, "Deductions and Charges."
Investment management fees and other expenses are deducted from Separate Account
Ten and from amounts Separate Account II invests in the Portfolios. The advisory
fees of a Portfolio or Division can't be increased without the consent of its
shareholders. See "Table of Annual Fees and Expenses" below. For a discussion
about the fees of various investment advisers and sub-advisers of the
Portfolios, see the Portfolio prospectuses. For a discussion about the fees of
investment adviser and sub-adviser of the Divisions, see Part II, Section 4.
WITHDRAWALS
You may make any number of withdrawals as often as you wish. Each withdrawal
must be for at least $300. You may withdraw up to 10% of your Account Value
each year with no withdrawal charges. After the first 10% within a year, there
will be a charge for any withdrawals you make, based upon the length of time
your money has been in your account. See Part I, Section 4, "Contingent
Withdrawal Charge" and Part I, Section 5, "Withdrawals."
YOUR INITIAL RIGHT TO REVOKE
You can cancel your contract within ten days after you receive it by returning
it to our Administrative Office. We will extend the ten-day period as required
by law in some states. If you cancel your contract, we'll return your entire
contribution, with adjustments made for any investment gain or loss experienced
by the Variable Account Options from the date you purchased it until the date we
receive your cancelled contract, along with any charges deducted. If your state
requires, upon cancellation we'll return your contribution without any
adjustments. We'll return the amount of any contribution to the Guaranteed Rate
Option upon cancellation.
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RISK/RETURN SUMMARY: INVESTMENTS AND RISKS
VARIABLE ANNUITY INVESTMENT GOALS
The investment goals of the Pinnacle Flexible Premium Variable Annuity are
protecting your investment, building for retirement and providing future income.
We strive to achieve these goals through extensive portfolio diversification and
superior portfolio management.
RISKS
An investment in any of the Variable Account Options carries with it certain
risks, including the risk that the value of your investment will decline and you
could lose money. This could happen if one of the issuers of the stocks becomes
financially impaired or if the stock market as a whole declines. Because most
of the Variable Account Options are in common stocks, there's also the inherent
risk that holders of common stock generally are behind creditors and holders of
preferred stock for payments in the event of the bankruptcy of a stock issuer.
The Select Ten Plus Divisions are non-diversified, which means that they invest
a large amount of their assets in a very small number of issuers. As a result,
an investment in a Division may experience greater fluctuations in value than an
investment in a diversified Variable Account Option. In addition, a Division
may be concentrated in one or more market sectors. Concentration may involve
addition risk because of the decreased diversification of economic, financial
and market risks.
There are certain risks that are specific to certain industries or market
sectors. Examples of this are industries that are highly regulated and could
experience declines due to burdensome regulations, and industries such as the
tobacco industry that are the subject of lawsuits and governmental scrutiny.
Some issuers of stock refine, market and transport oil and related petroleum
products. These companies face the risks of price and availability of oil, the
level of demand for the products, refinery capacity and operating costs, the
cost of financing the exploration for oil and the increasing expenses necessary
to comply with environmental and other energy related regulations. Declining
U.S. crude oil production is likely to lead to increased dependence on foreign
sources of oil and to uncertain supply for refiners and the risk of
unpredictable supply disruptions. In addition, future scientific advances with
new energy sources could have a negative impact on the petroleum and natural gas
industries.
For a complete discussion of the risks associated with an investment in any
particular Portfolio, see the prospectus of that Portfolio. For a complete
discussion of the risks associated with an investment in the Divisions, see Part
II of this prospectus.
YEAR 2000
Many computer programs are written so that only the last two digits of the year
are read. Because of this, many computer systems will read the year 2000 as
1900. This could cause many programs to malfunction. We are evaluating, on an
ongoing basis, our computer systems and the systems of other companies on which
we rely, to determine if they'll function properly, and make the transition from
1999 to 2000 smoothly. These activities are designed to ensure that there is no
adverse effect on our business operations. While we've been working very hard
to make sure that this process will be problem-free, we can't guarantee that
there won't be some Year 2000 problems experienced by our systems and we can't
make any representations or guarantees that the outside sources on which we rely
will be ready to make a smooth transition to Year 2000 with their systems.
3
<PAGE>
TABLE OF ANNUAL FEES AND EXPENSES
<TABLE>
<CAPTION>
Contract Owner Transaction Expenses
- -----------------------------------
<S> <C>
Sales Load on Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0
Deferred Sales Load (as a percentage of contributions) (1). . . . . . . . . . . . . . . . . . . . 8% Maximum
Exchange Fee (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0
</TABLE>
<TABLE>
<CAPTION>
Annual Administrative Charge
- ----------------------------
<S> <C>
Annual Administrative Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30
* This charge applies only if the Account Value is less than $50,000 at the end of any contract
year before your Retirement Date. See "Annual Administrative Charge" in Part I, Section 4.
</TABLE>
<TABLE>
<CAPTION>
Annual Expenses of the Separate Accounts
(as a percentage of average account value) (3)
- ----------------------------------------------
<S> <C>
Mortality and Expense Risk Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.20%
Administrative Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15%
Total Separate Account Annual Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.35%
</TABLE>
Portfolio Annual Expenses After Waivers/Reimbursements
(as a percentage of average net assets)
- ---------------------------------------
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---------- --------- ------------
<S> <C> <C> <C>
EAFE-Registered Trademark- Equity Index . . . . . . . . . . 0.45% (4) 0.20% (4) 0.65% (4)
Equity 500 Index. . . . . . . . . . . . . . . . . . . . . . 0.20% (4) 0.10% (4) 0.30% (4)
Small Cap Index . . . . . . . . . . . . . . . . . . . . . . 0.35% (4) 0.10% (4) 0.45% (4)
VIP Equity-Income: Initial Class. . . . . . . . . . . . . . 0.49% 0.08% 0.57% (5)
VIP II Contrafund: Initial Class. . . . . . . . . . . . . . 0.59% 0.07% 0.66% (5)
VIP III Growth & Income: Initial Class. . . . . . . . . . . 0.49% 0.11% 0.60% (5)
VIP III Growth Opportunities:Initial Class. . . . . . . . . 0.59% 0.11% 0.70% (5)
VIP Growth: Service Class . . . . . . . . . . . . . . . . . 0.59% 0.16% (6) 0.75% (5)
VIP III Mid Cap: Service Class. . . . . . . . . . . . . . . 0.56% 0.54% (6) 1.10% (7)
Harris Bretall Sullivan & Smith Equity Growth . . . . . . . 0.65% 0.30% 0.95% (8)
Scudder Kemper Value. . . . . . . . . . . . . . . . . . . . 0.65% 0.29% 0.94% (8)
Zweig Asset Allocation. . . . . . . . . . . . . . . . . . . 0.90% 0.28% 1.18% (8)
Zweig Equity (Small Cap). . . . . . . . . . . . . . . . . . 1.05% 0.47% 1.52% (8)
Janus Aspen Capital Appreciation. . . . . . . . . . . . . . 0.70% (9) 0.22% (9) 0.92% (9)
Janus Aspen Balanced. . . . . . . . . . . . . . . . . . . . 0.72% (9) 0.02% (9) 0.74% (9)
Janus Aspen Worldwide Growth. . . . . . . . . . . . . . . . 0.65% (9) 0.07% (9) 0.72% (9)
Janus Aspen Money Market. . . . . . . . . . . . . . . . . . 0.25% (9) 0.09% (9) 0.34% (9)
J.P. Morgan International Opportunities . . . . . . . . . . 0.60% 0.60% (10) 1.20% (10)
J.P. Morgan Bond. . . . . . . . . . . . . . . . . . . . . . 0.30% 0.45% (10) 0.75% (10)
MSDW Universal Funds Asian Equity . . . . . . . . . . . . . 0.00% (11) 1.21% (11) 1.21% (11)
MSDW Universal Funds Emerging Markets Debt. . . . . . . . . 0.27% (11) 1.25% (11) 1.52% (11)
MSDW Universal Funds High Yield . . . . . . . . . . . . . . 0.15% (11) 0.65% (11) 0.80% (11)
MSDW Universal Funds U.S. Real Estate . . . . . . . . . . . 0.17% (11) 0.93% (11) 1.10% (11)
</TABLE>
4
<PAGE>
Division Annual Expenses After Reimbursement
(as a percentage of average net assets)
- ---------------------------------------
<TABLE>
<CAPTION>
Management Fees(12) Other Expenses (13) Total Annual Expenses (13)
------------------- ------------------- --------------------------
<S> <C> <C> <C>
Select Ten Plus Division March .50% .35% .85%
Select Ten Plus Division June .50% .35% .85%
Select Ten Plus Division September .50% .35% .85%
Select Ten Plus Division December .50% .35% .85%
</TABLE>
- -------------------------
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part I,
Section 4. You may make a partial withdrawal of up to 10% of the Account Value
in any contract year minus withdrawals during the current contract year, without
incurring a withdrawal charge.
(2) After the first twelve transfers during a contract year, we can charge a
transfer fee of $20 for each transfer. This charge doesn't apply to transfers
made for dollar cost averaging, customized asset rebalancing, asset allocation
and rebalancing, or systematic transfers. See "Deductions and Charges - Transfer
Charge" in Part I, Section 4.
(3) See "Deductions and Charges - Separate Account Charges" in Part I,
Section 4.
(4) Under the Advisory Agreement with Bankers Trust, the Portfolios will pay
advisory fees at the following annual percentage rates of the average daily net
assets of each Portfolio: 0.45% for the EAFE Equity Index Fund, 0.20% for the
Equity 500 Index Fund and 0.35% for the Small Cap Index Fund. These fees are
accrued daily and paid monthly. Bankers Trust has voluntarily undertaken to
waive its fees and to reimburse the Portfolios for certain expenses so that the
EAFE Equity Index Fund, Equity 500 Index Fund and Small Cap Index Fund total
operating expenses will not exceed 0.65%, 0.30% and 0.45%, respectively.
Without the waiver and reimbursement, annualized total expense ratios for the
year ended December 31, 1998 would have been as follows: 1.66% for the EAFE
Equity Index Fund, 1.19% for the Equity 500 Index Fund and 1.58% for the Small
Cap Index Fund.
(5) Part of the brokerage commissions that certain of Fidelity's VIP Funds pay
was used to reduce the Portfolios' expenses. In addition, certain Portfolios,
or FMR on behalf of certain Portfolios, have arranged with their custodian to
use uninvested cash balances to reduce custodian expenses. Without these
reductions, the total operating expenses presented in the table would have been
.58% for VIP Equity-Income Portfolio, .80% for VIP Growth Portfolio, .70% for
VIP II Contrafund Portfolio, .71% for VIP III Growth Opportunities Portfolio,
and .61% for VIP III Growth & Income Portfolio.
(6) The "Other Expenses" reflect the payment of 0.10% pursuant to a Rule 12b-1
Plan adopted by the underlying Mutual Funds.
(7) The investment adviser agreed to reimburse part of the expenses for the VIP
III Mid Cap Portfolio during the period. Without this reimbursement, the
management fee, other expenses and total expenses would have been .56%, 115.40%
and 115.96% respectively for the VIP III Mid Cap Portfolio.
(8) Integrity Capital Advisors has agreed to reimburse each of the Legends Fund
Portfolios for operating expenses (excluding management fees) above an annual
rate of .50% of average net assets for all Portfolios of the Legends Fund.
Without reimbursements, total annual expenses for the Portfolio's fiscal year
ended June 30, 1998 would have been 1.56% for the Zweig Equity (Small Cap)
Portfolio. Integrity Capital Advisors has reserved the right to withdraw or
modify its policy of expense reimbursement for the Portfolios, but doesn't
intend to do so during 1999. In the Legends Fund's prospectus, see "Management
of the Fund."
(9) The fees and expenses in the table above are based on gross expenses after
expense offset arrangements for the fiscal year ended December 31, 1998. Fee
reductions for the Janus Aspen Balanced, Janus Aspen Capital Appreciation and
Janus Aspen Worldwide Growth Portfolios reduce the management fee to the level
of the corresponding Janus retail fund. Other waivers, if applicable, are first
applied against the management fee and then against other expenses. Without
waivers or reductions, the Management Fee, Other Expenses, and Total Annual
Expenses would have been .67%, .07%, and .74% for
5
<PAGE>
Worldwide Growth Portfolio and .75%, .22% and .97% for Capital Appreciation
Portfolio. Janus has agreed to continue the waivers and fee reductions until at
least the next annual renewal of the advisory agreement.
(10) The information in this table has been restated to reflect a voluntary
agreement by Morgan Guaranty Trust Company of New York, an affiliate of JPMIM,
to reimburse the Trust to the extent certain expenses in any fiscal year exceed
1.20% of the average daily net assets of J.P. Morgan International Opportunities
Portfolio and .75% of the average daily net assets of J.P. Morgan Bond
Portfolio. Without this agreement, the Other Expenses and Total Annual Expenses
for the fiscal year ended December 31, 1998 would have been as follows: 2.66%
and 3.26% for the International Opportunities Portfolio, and 0.72% and 1.02% for
the Bond Portfolio.
(11) The Portfolios' expenses were voluntarily waived and reimbursed by the
Portfolios' investment advisers. Without the waiver and/or reimbursement, the
Management Fee, Other Expenses and Total Annual Expenses for the fiscal year
ended December 31, 1998 would have been as follows: .80%, 2.00% and 2.80% for
the Asian Equity Portfolio; .80%, 1.25% and 2.05% for the Emerging Markets Debt
Portfolio; .50%, 0.65% and 1.15% for the High Yield Portfolio; and .80%, 0.93%
and 1.73% for the U.S. Real Estate Portfolio. MSDW Investment Management Inc.
or Miller Anderson & Sherrerd, LLP may modify or terminate the waivers or
reductions at any time.
(12) Integrity Capital Advisors will pay a portion of its Management Fee to
National Asset for its services under a sub-advisory agreement at an annual rate
of .10% of the Divisions' average daily net assets up to $100 million and .05%
of the Divisions' average daily net assets in excess of $100 million. Integrity
Capital Advisors has guaranteed it will pay National Asset a minimum
sub-advisory fee of $25,000 during the Divisions' first year of operations.
(13) Integrity Capital Advisors has agreed to reimburse each Division for
operating expenses (excluding management fees) above an annual rate of .35% of
each Division's average net assets. Without that reimbursement, Integrity
Capital Advisors estimates that operating expenses would be approximately 4.20%.
Integrity Capital Advisors reserves the right to withdraw or modify its policy
of expense reimbursement for the Divisions, but doesn't intend to do so during
1999.
6
<PAGE>
EXAMPLES
The examples below show the expenses charged to the Annuitant per $1,000
investment, assuming a $60,000 average contract value and a 5% annual rate of
return on assets.
Cumulative expenses per $1,000 investment if you surrender your contract at the
end of the applicable period:
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
EAFE-Registered Trademark- Equity Index . . . . $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: Initial Class. . . . . . . . $100.17 $122.27 $146.82 $229.88
VIP II Contrafund: Initial Class. . . . . . . . $101.10 $125.06 $151.50 $239.40
VIP III Growth & Income: Initial Class. . . . . $100.48 $123.20 $148.38 $233.07
VIP III Growth Opportunities: Initial Class . . $101.51 $126.30 $153.57 $243.61
VIP Growth: Service Class . . . . . . . . . . . $102.02 $127.84 $156.16 $248.84
VIP III Mid Cap: Service Class. . . . . . . . . $105.61 $138.62 $174.14 $284.71
Harris Bretall Sullivan & Smith Equity Growth . $104.07 $134.01 $166.47 $269.49
Scudder Kemper Value. . . . . . . . . . . . . . $103.97 $133.70 $165.95 $268.47
Zweig Asset Allocation. . . . . . . . . . . . . $106.42 $141.07 $178.21 $292.73
Zweig Equity (Small Cap). . . . . . . . . . . . $109.91 $151.44 $195.35 $326.10
Janus Aspen Capital Appreciation. . . . . . . . $103.76 $133.09 $164.93 $266.42
Janus Aspen Balanced . . . . . . . . . . . . . $101.92 $127.53 $155.65 $247.79
Janus Aspen Worldwide Growth. . . . . . . . . . $101.71 $126.92 $154.61 $245.70
Janus Aspen Money Market . . . . . . . . . . . $ 97.82 $115.12 $134.76 $205.16
J.P. Morgan International Opportunities . . . . $106.63 $141.68 $179.22 $294.73
J.P. Morgan Bond. . . . . . . . . . . . . . . . $102.02 $127.84 $156.16 $248.84
MSDW Universal Funds Asian Equity . . . . . . . $106.73 $141.99 $179.73 $295.72
MSDW Universal Funds Emerging Markets Debt . . $109.91 $151.44 $195.35 $326.10
MSDW Universal Funds High Yield . . . . . . . . $102.53 $129.39 $158.75 $254.04
MSDW Universal Funds U.S. Real Estate . . . . . $105.61 $138.62 $174.14 $284.71
Select Ten Plus Division March. . . . . . . . . $103.04 $130.93 $161.33 $259.22
Select Ten Plus Division June . . . . . . . . . $103.04 $130.93 $161.33 $259.22
Select Ten Plus Division September. . . . . . . $103.04 $130.93 $161.33 $259.22
Select Ten Plus Division December . . . . . . . $103.04 $130.93 $161.33 $259.22
</TABLE>
7
<PAGE>
Cumulative expenses per $1,000 investment if you elect the normal form of
annuity or don't surrender your contract at the end of the specified period
(i.e., no deferred sales load charged):
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
EAFE-Registered Trademark- Equity Index . . . . $20.99 $64.75 $110.98 $238.35
Equity 500 Index. . . . . . . . . . . . . . . . $17.41 $53.87 $ 92.66 $200.80
Small Cap Index . . . . . . . . . . . . . . . . $18.94 $58.54 $100.54 $217.06
VIP Equity-Income: Initial Class. . . . . . . . $20.17 $62.27 $106.82 $229.88
VIP II Contrafund: Initial Class. . . . . . . . $21.10 $65.06 $111.50 $239.40
VIP III Growth & Income: Initial Class. . . . . $20.48 $63.20 $108.38 $233.07
VIP III Growth Opportunities: Initial Class . . $21.51 $66.30 $113.57 $243.61
VIP Growth: Service Class . . . . . . . . . . . $22.02 $67.84 $116.16 $248.84
VIP III Mid Cap: Service Class. . . . . . . . . $25.61 $78.62 $134.14 $284.71
Harris Bretall Sullivan & Smith Equity Growth . $24.07 $74.01 $126.47 $269.49
Scudder Kemper Value. . . . . . . . . . . . . . $23.97 $73.70 $125.95 $268.47
Zweig Asset Allocation. . . . . . . . . . . . . $26.42 $81.07 $138.21 $292.73
Zweig Equity (Small Cap). . . . . . . . . . . . $29.91 $91.44 $155.35 $326.10
Janus Aspen Capital Appreciation. . . . . . . . $23.76 $73.09 $124.93 $266.42
Janus Aspen Balanced. . . . . . . . . . . . . . $21.92 $67.53 $115.65 $247.79
Janus Aspen Worldwide Growth. . . . . . . . . . $21.71 $66.92 $114.61 $245.70
Janus Aspen Money Market. . . . . . . . . . . . $17.82 $55.12 $ 94.76 $205.16
J.P. Morgan International Opportunities . . . . $26.63 $81.68 $139.22 $294.73
J.P. Morgan Bond. . . . . . . . . . . . . . . . $22.02 $67.84 $116.16 $248.84
MSDW Universal Funds Asian Equity . . . . . . . $26.73 $81.99 $139.73 $295.72
MSDW Universal Funds Emerging Markets Debt. . . $29.91 $91.44 $155.35 $326.10
MSDW Universal Funds High Yield . . . . . . . . $22.53 $69.39 $118.75 $254.04
MSDW Universal Funds U.S. Real Estate . . . . . $25.61 $78.62 $134.14 $284.71
Select Ten Plus Division March. . . . . . . . . $23.04 $70.93 $121.33 $259.22
Select Ten Plus Division June . . . . . . . . . $23.04 $70.93 $121.33 $259.22
Select Ten Plus Division September. . . . . . . $23.04 $70.93 $121.33 $259.22
Select Ten Plus Division December . . . . . . . $23.04 $70.93 $121.33 $259.22
</TABLE>
These examples assume the current charges that are borne by the Separate
Accounts, and the investment management fees and other expenses of the
Portfolios and the Divisions as they were for their most recent fiscal years or
estimated expenses (after reimbursement), if applicable. ACTUAL
PORTFOLIO/DIVISION EXPENSES MAY BE GREATER OR LESS THAN THOSE ON WHICH THESE
EXAMPLES WERE BASED. The annual rate of return assumed in the examples isn't an
estimate or guarantee of future investment performance. The table also assumes
an estimated $60,000 average contract value, so that the administrative charge
per $1,000 of net asset value in the Separate Account is $0.50. The per $1,000
charge would be higher for smaller Account Values and lower for higher values.
The above table and examples are shown only to increase your understanding of
the various costs and expenses that apply to your contract, directly or
indirectly. These tables show expenses of the Separate Accounts as well as those
of the Portfolios and the Divisions. Premium taxes at the time of payout also
may be applicable.
CONDENSED FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNTS IS PROVIDED IN
APPENDIX A.
8
<PAGE>
SECTION 2 -- INTEGRITY AND THE SEPARATE ACCOUNTS
INTEGRITY LIFE INSURANCE COMPANY
Integrity is a stock life insurance company organized under the laws of Ohio.
Our principal executive offices are located in Louisville, Kentucky. We are
authorized to sell life insurance and annuities in 47 states and the District of
Columbia. We sell flexible premium annuities with underlying investment
options, fixed single premium annuity contracts and flexible premium annuity
contracts offering both traditional fixed guaranteed interest rates along with
fixed equity indexed options. In addition to issuing annuity products, we
provide administrative and investment support for products designed,
underwritten and sold by other insurance companies.
Integrity is a subsidiary of ARM, which specializes in providing retail and
institutional customers with products and services designed for long-term
savings and retirement planning. ARM is a publicly traded company listed on the
New York Stock Exchange under the symbol "ARM." At December 31, 1998, ARM had
$9.9 billion of assets under management.
THE SEPARATE ACCOUNTS AND THE VARIABLE ACCOUNT OPTIONS
Under your contract, you may allocate contributions to our Separate Accounts or
to our Fixed Accounts or both. Separate Account II is comprised of all of the
Variable Account Options other than the Select Ten Plus Divisions. Separate
Account Ten is comprised of the Select Ten Plus Divisions. The Separate
Accounts are established and maintained under the insurance laws of the State of
Ohio.
Separate Account II was established in 1992 and is a unit investment trust,
which is a type of investment company, registered with the Securities and
Exchange Commission (SEC). SEC registration doesn't mean that the SEC is
involved in any way in supervising the management or investment policies of
Separate Account II. Each of Separate Account II's Variable Account Options
invests in shares of a corresponding Portfolio. We may establish additional
Investment Options from time to time. The Variable Account Options currently
available are listed in Section 3, "Your Investment Options."
Separate Account Ten was established in 1998 and is registered with the SEC as a
management investment company. Registration with the SEC doesn't involve any
supervision by the SEC of the management or investment policies or practices of
Separate Account Ten. The Divisions invest directly in securities according to
their investment objective and policies.
ASSETS OF OUR SEPARATE ACCOUNTS
Under Ohio law, we own the assets of our Separate Accounts and use them to
support the variable portion of yours and other variable annuity contracts.
Annuitants under other variable annuity contracts participate in the Separate
Accounts in proportion to the amounts in their contracts. We can't use the
Separate Accounts' assets supporting the variable portion of these contracts to
satisfy liabilities arising out of any of our other businesses. Under certain
unlikely circumstances, one Variable Account Option may be liable for claims
relating to the operation of another Option.
Income, gains and losses, whether realized or unrealized, from assets allocated
to the Separate Accounts are credited to or charged against the Separate
Accounts without regard to our other income, gains or losses. We may allow
charges owed to us to stay in the Separate Accounts, and thus can participate
proportionately in the Separate Accounts. Amounts in the Separate Accounts
greater than reserves and other liabilities belong to us, and we may transfer
them to our general account.
CHANGES IN HOW WE OPERATE
We may change how we or our Separate Accounts operate, subject to your approval
when required by the Investment Company Act of 1940 (1940 ACT) or other
applicable law or regulation. We'll notify you if any changes result in a
material change in the underlying investments of a Variable Account Option. WE
MAY:
9
<PAGE>
- - add Options to, or remove Options from, our Separate Account, combine two
or more Options within our Separate Accounts, or withdraw assets relating
to your contract from one Option and put them into another;
- - register or end the registration of the Separate Accounts under the 1940
Act;
- - operate our Separate Accounts under the direction of a committee or
discharge a committee at any time (the committee may be composed of a
majority of persons who are "interested persons" of Integrity under the
1940 Act);
- - restrict or eliminate any voting rights of Owners or others who have voting
rights that affect our Separate Accounts;
- - cause one or more Options to invest in a mutual fund other than or in
addition to the Portfolios;
- - operate our Separate Accounts or one or more of the Options in any other
form the law allows, including a form that allows us to make direct
investments. We may make any legal investments we wish. In choosing these
investments, we'll rely on our own or outside counsel for advice.
SECTION 3 -- YOUR INVESTMENT OPTIONS
Management fees and other expenses deducted from each Portfolio are described in
that Portfolio's prospectus. FOR A PROSPECTUS CONTAINING MORE COMPLETE
INFORMATION ON ANY PORTFOLIO, CALL OUR ADMINISTRATIVE OFFICE TOLL-FREE AT
1-800-325-8583.
THE LEGENDS FUND
The Legends Fund is an open-end management investment company registered with
the SEC. Integrity Capital Advisors is the investment adviser to the Legends
Fund. Integrity Capital Advisors has entered into a sub-advisory agreement with
a professional manager to invest the assets of each of its Portfolios. The
sub-adviser for each Portfolio is listed below.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Following is a summary of the
investment objectives of The Legends Fund Portfolios. We can't guarantee that
these objectives will be met. YOU SHOULD READ THE LEGENDS FUND PROSPECTUS
CAREFULLY BEFORE INVESTING.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
Harris Bretall Sullivan & Smith Equity Growth Portfolio's goal is growth of your
Account Value. It invests primarily in stocks of established companies with
proven records of superior and consistent growth. The Portfolio may invest in
U.S. government securities, cash and cash equivalents when that appears to be a
better choice in light of the Portfolio's investment objective or when justified
by market conditions. Harris Bretall Sullivan & Smith, LLC is the sub-adviser
to the Portfolio.
SCUDDER KEMPER VALUE PORTFOLIO
Scudder Kemper Value Portfolio's goal is to increase your Account Value and to
provide current income. It invests primarily in stocks that its sub-adviser
considers to be undervalued. The sub-adviser's philosophy centers on choosing
stocks of large, well-known companies with solid financial strength and large
dividend payment histories that have low price-earnings ratios and have been
generally overlooked by the market. Scudder Kemper Investors, Inc. is the
sub-adviser to the Portfolio.
ZWEIG ASSET ALLOCATION PORTFOLIO
Zweig Asset Allocation Portfolio seeks to increase your Account Value over the
long term with investments primarily from the 1,000 most liquid stocks. The
Portfolio's sub-adviser strives to do this while protecting your principal and
reducing its exposure to market risk. The 1,000 most liquid stocks are those
that the sub-adviser considers comparable to those included in the S&P 500, and
that have a minimum of $400 million market capitalization, average daily trading
volume of 50,000 shares or $425 million in total assets, and that are traded on
the New York Stock Exchange (NYSE), American Stock Exchange (AMEX),
over-the-counter (OTC) or on foreign exchanges. Zweig/Glaser Advisers is the
sub-adviser to the Portfolio.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO
Zweig Equity (Small Cap) Portfolio strives to build your Account Value with
investments primarily in Small Company Stocks. The Portfolio's sub-adviser
tries to do this while protecting your principal and reducing its exposure to
market risk. This Portfolio doesn't look for stocks that provide you with
current income. SMALL COMPANY STOCKS are the 2,000 stock positions immediately
after the 1,000 largest stocks ranked in terms of market capitalization and/or
trading volume, and that are traded on the NYSE, AMEX, OTC or on foreign
exchanges. Zweig/Glaser Advisers is the sub-adviser to the Portfolio.
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BT INSURANCE FUNDS TRUST
The BT Insurance Funds Trust is an open-end management investment company
registered with the SEC. Bankers Trust Global Asset Management Services, a unit
of Bankers Trust, is the investment adviser to the BT Funds Trust.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Following is a summary of the
investment objectives of the BT Funds Trust. We can't guarantee that these
objectives will be met. YOU SHOULD READ THE BT FUNDS TRUST PROSPECTUSES
CAREFULLY BEFORE INVESTING.
EAFE-Registered Trademark-EQUITY INDEX FUND
The EAFE-Registered Trademark-Equity Index Fund tries to replicate as closely as
possible (before expenses are deducted) the total return of the Morgan Stanley
Capital International Europe, Australia, Far East (EAFE) Index, a
capitalization-weighted index containing approximately 1,100 equity securities
of companies located outside the United States. The Portfolio invests primarily
in stocks of businesses organized and domiciled outside of the United States or
for which the principal trading market is outside the United States.
Statistical methods will be used to replicate the EAFE Index by buying most of
the EAFE Index securities. Securities purchased for the Portfolio will
generally, but not necessarily, be traded on a foreign securities exchange.
EQUITY 500 INDEX FUND
The Equity 500 Index Fund seeks to replicate as closely as possible (before the
deduction of expenses) the total return of the Standard & Poor's 500 Composite
Stock Price Index (the S&P 500), an index emphasizing large-capitalization
stocks. The Portfolio will include the common stock of those companies included
in the S&P 500, other than Bankers Trust New York Corporation, selected on the
basis of computer-generated statistical data, that have been determined to
represent the industry diversification of the entire S&P 500.
SMALL CAP INDEX FUND
The Small Cap Index Fund seeks to replicate as closely as possible (before
deduction of expenses) the total return of the Russell 2000 Small Stock Index
(the RUSSELL 2000), an index consisting of 2,000 small-capitalization common
stocks. The Portfolio will include the common stock of companies included in
the Russell 2000, on the basis of computer-generated statistical data, that have
been determined to represent the industry diversification of the entire Russell
2000.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUNDS
Each of Fidelity's VIP Funds is diversified mutual fund registered with the SEC.
Fidelity Management & Research Company (FMR) serves the investment adviser to
each Portfolio.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of Fidelity's VIP Funds. There are no guarantees
that a Portfolio will be able to achieve its objective. YOU SHOULD READ
FIDELITY'S VIP FUNDS PROSPECTUS CAREFULLY BEFORE INVESTING.
VIP EQUITY-INCOME PORTFOLIO
VIP Equity-Income Portfolio seeks reasonable income. The Portfolio will also
consider the potential for capital appreciation. The Portfolio seeks a yield
which exceeds the composite yield on the securities comprising the S&P 500. FMR
normally invests at least 65% of the Portfolio's total assets in
income-producing equity securities.
VIP II CONTRAFUND PORTFOLIO
VIP II Contrafund Portfolio seeks long-term capital appreciation. FMR normally
invests the Portfolio's assets primarily in common stocks. FMR invests the
Portfolio's assets in securities of companies whose value FMR believes is not
fully recognized by the public. The types of companies in which the Portfolio
may invest include
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companies experiencing positive fundamental change such as a new management team
or product launch, a significant cost-cutting initiative, a merger or
acquisition, or a reduction in industry capacity that should lead to improved
pricing; companies whose earnings potential has increased or is expected to
increase more than generally perceived; companies that have enjoyed recent
market popularity but which appear to have temporarily fallen out of favor for
reasons that are considered non-recurring or short-term; and companies that are
undervalued in relation to securities of other companies in the same industry.
VIP III GROWTH & INCOME PORTFOLIO
VIP III Growth & Income Portfolio seeks high total return through a combination
of current income and capital appreciation. FMR normally invests a majority of
the Portfolio's assets in common stocks with a focus on those that pay current
dividends and show potential for capital appreciation. FMR may also invest the
Portfolio's assets in bonds, including lower-quality debt securities, as well as
stocks that are not currently paying dividends, but offer prospects for future
income or capital appreciation.
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth. FMR
normally invests the Portfolio's assets primarily in common stocks. FMR may also
invest the Portfolio's assets in other types of securities, including bonds
which may be lower-quality debt securities.
VIP GROWTH PORTFOLIO
VIP Growth Portfolio seeks capital appreciation. FMR invests the Portfolio's
assets in companies FMR believes have above-average growth potential. Growth
may be measured by factors such as earnings or revenue. Companies with high
growth potential tend to be companies with higher than average price/earnings
(P/E) ratios. Companies with strong growth potential often have new products,
technologies, distribution channels or other opportunities or have a strong
industry or market position. The stocks of these companies are often called
"growth" stocks.
VIP III MID CAP PORTFOLIO
FMR normally invests the VIP III Mid Cap Portfolio's assets primarily in common
stocks. FMR normally invests at least 65% of the Portfolio's total assets in
securities of companies with medium market capitalizations. Medium market
capitalization companies are those whose market capitalization is similar to the
capitalization of companies in the S&P Mid Cap 400 at the time of the
investment. Companies whose capitalization no longer meets this definition
after purchase continue to be considered to have a medium market capitalization
for purposes of the 65% policy.
JANUS ASPEN SERIES
Each portfolio of the Janus Aspen Series is a mutual fund registered with the
SEC. Janus Capital Corporation serves as the investment adviser to each
Portfolio.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
goals of the Portfolios of the Janus Aspen Series. There are no guarantees that
these objectives will be met. YOU SHOULD READ THE JANUS ASPEN SERIES
PROSPECTUSES CAREFULLY BEFORE INVESTING.
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO
Janus Aspen Capital Appreciation Portfolio seeks long-term growth of capital.
It is a non-diversified portfolio that pursues its objective by investing
primarily in common stocks selected for their growth potential. The Portfolio
may invest in companies of any size, from larger, well-established companies to
smaller, emerging growth companies.
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JANUS ASPEN BALANCED PORTFOLIO
Janus Aspen Balanced Portfolio seeks long-term capital growth, consistent with
capital preservation and balanced by current income. It is a diversified
portfolio that pursues its objective by normally investing 40-60% of its assets
in securities selected primarily for their growth potential and 40-60% of its
assets in securities selected primarily for their income potential. The
Portfolio normally invests at least 25% of its assets in fixed-income
securities.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Janus Aspen Worldwide Growth Portfolio seeks long-term growth of capital in a
manner consistent with the preservation of capital. It is a diversified
portfolio that pursues its objective by investing primarily in common stocks of
companies of any size throughout the world. The Portfolio normally invests in
issuers from at least five different countries, including the United States.
The Portfolio may at times invest in fewer than five countries or even a single
country.
JANUS ASPEN MONEY MARKET PORTFOLIO
Janus Aspen Money Market Portfolio seeks maximum current income to the extent
consistent with stability of capital. There is no guarantee that the Portfolio
will meet its investment goal or be able to maintain a stable net asset value of
$1.00 per share. The Portfolio will invest in high quality, short-term money
market instruments that present minimal credit risks, as determined by Janus
Capital. The Portfolio may invest only in U.S. dollar-denominated instruments
that have a remaining maturity of 397 days or less (as calculated pursuant to
Rule 2a-7 under the 1940 Act) and will maintain a dollar-weighted average
portfolio maturity of 90 days or less.
J.P. MORGAN SERIES TRUST II
Each portfolio of the J.P. Morgan Series Trust II is a diversified mutual fund
registered with the SEC. J.P. Morgan Investment Management Inc. is the
investment adviser to the J.P. Morgan Series Trust II.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of the J.P. Morgan Series Trust II. There is no
guarantee that these objectives will be met. YOU SHOULD READ THE PROSPECTUS FOR
J.P. MORGAN SERIES TRUST II CAREFULLY BEFORE INVESTING.
J.P. MORGAN BOND PORTFOLIO
J.P. Morgan Bond Portfolio seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Total return will
consist of realized and unrealized capital gains and losses plus income, less
expenses. Although the net asset value of the Portfolio will fluctuate, the
Portfolio tries to preserve the value of its investments consistent with its
objective.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO
J.P. Morgan International Opportunities Portfolio seeks to provide a high total
return from a portfolio of equity securities of foreign corporations. Total
return will consist of realized and unrealized capital gains and losses plus
income, less expenses. The Portfolio is designed for investors who have
long-term investment goals and who want to diversify their investments by adding
international equities, taking advantage of investment opportunities outside the
U.S. The Portfolio seeks to meet its investment goal through country allocation
and stock valuation and selection.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
Each of the MSDW Universal Funds is a diversified mutual fund registered with
the SEC. Morgan Stanley Dean Witter Investment Management, Inc. (MSDW
INVESTMENT MANAGEMENT) is the investment adviser for the Emerging Markets Debt,
U.S. Real Estate, and Asian Equity Portfolios. Miller
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Anderson & Sherrerd, LLP (MAS) is the investment adviser for the High Yield
Portfolio. MSDW Investment Management and MAS are subsidiaries of Morgan
Stanley Dean Witter & Co.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of the MSDW Universal Funds. There is no guarantee
that these objectives will be met. YOU SHOULD READ THE MSDW UNIVERSAL FUNDS
PROSPECTUS CAREFULLY BEFORE INVESTING.
MSDW UNIVERSAL FUNDS ASIAN EQUITY PORTFOLIO
MSDW Universal Funds Asian Equity Portfolio seeks long-term capital appreciation
by investing primarily in a diversified portfolio of equity securities of Asian
issuers (excluding Japan). The adviser employs a disciplined, value-oriented
approach to security selection, focusing on larger companies with strong
management teams. The adviser evaluates top-down country risk factors and
opportunities when determining position sizes and overall exposure to individual
markets.
MSDW UNIVERSAL FUNDS EMERGING MARKETS DEBT PORTFOLIO
MSDW Universal Funds Emerging Markets Debt Portfolio seeks high total return by
investing primarily in fixed income securities of government and
government-related issuers and, to a lesser extent, of corporate issuers in
emerging market countries.
MSDW UNIVERSAL FUNDS HIGH YIELD PORTFOLIO
MSDW Universal Funds High Yield Portfolio seeks above-average total return over
a market cycle of three to five years by investing primarily in a diversified
portfolio of high yield securities of both U.S. and non-U.S. issuers. The
adviser may also invest in other fixed income securities, including U.S.
government securities, investment grade corporate bonds, mortgage securities and
derivatives. High yield securities are rated below investment grade and are
commonly referred to as "junk bonds." The Portfolio's average weighted maturity
will usually be greater than five years.
MSDW UNIVERSAL FUNDS U.S. REAL ESTATE PORTFOLIO
MSDW Universal Funds U.S. Real Estate Portfolio seeks above-average current
income and long-term capital appreciation by investing primarily in equity
securities of U.S. and non-U.S. companies in the U.S. real estate industry,
including real estate investment trusts ("REITs") and real estate operating
companies.
THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN
Each Division is a non-diversified investment company that invests directly in
securities. There is no guarantee that any Division will meet its investment
goals. Separate Account Ten may also offer other investment divisions that
aren't available by buying the contracts offered by this prospectus.
Integrity Capital Advisors serves as investment adviser of the Divisions and
National Asset Management serves as the sub-adviser of the Divisions.
FOR COMPLETE INFORMATION ABOUT THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT
TEN, INCLUDING THE RISKS ASSOCIATED WITH THEIR INVESTMENTS, SEE "INVESTMENT
OBJECTIVE," "INVESTMENT STRATEGY" AND "RISK FACTORS" IN PART II, SECTION 1. FOR
EXPENSE INFORMATION, SEE PART II, SECTION 4 ENTITLED "MANAGEMENT OF SEPARATE
ACCOUNT TEN."
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FIXED ACCOUNTS
FOR VARIOUS LEGAL REASONS, GRO CONTRACTS HAVEN'T BEEN REGISTERED UNDER THE 1940
ACT OR THE SECURITIES ACT OF 1933 ("1933 ACT"). THUS, NEITHER THE GRO CONTRACTS
NOR OUR GENERAL ACCOUNT, WHICH GUARANTEES THE VALUES AND BENEFITS UNDER THOSE
CONTRACTS, ARE GENERALLY SUBJECT TO REGULATION UNDER THE PROVISIONS OF THE 1933
ACT OR THE 1940 ACT. ACCORDINGLY, WE HAVE BEEN ADVISED THAT THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION HASN'T REVIEWED THE DISCLOSURE IN THIS
PROSPECTUS RELATING TO THE GROS OR THE GENERAL ACCOUNT. DISCLOSURES REGARDING
THE GROS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE SUBJECT TO CERTAIN GENERALLY
APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY
AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
GUARANTEED RATE OPTIONS
We offer GROs with durations of two, three, five, seven and ten years. We can
change the durations available from time to time. When you put money in a GRO,
that locks in a fixed effective annual interest rate that we declare (GUARANTEED
INTEREST RATE) for the duration you select. The duration of your GRO Account is
the GUARANTEE PERIOD. Each contribution or transfer to a GRO establishes a new
GRO Account for the duration you choose at the then-current Guaranteed Interest
Rate we declare. We won't declare an interest rate less than 3%. Each GRO
Account expires at the end of the duration you have selected. See "Renewals of
GRO Accounts" below. All contributions you make to a GRO Account are placed in a
non-unitized separate account. Values and benefits under your GRO contract are
guaranteed by the reserves in our GRO separate account as well as by our General
Account.
The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO
Value at the expiration of the GRO Account, assuming you haven't transferred or
withdrawn any amounts, will be the amount you put in plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate.
We may declare a higher rate of interest in the first year of any GRO Account
that exceeds the Guaranteed Interest Rate credited during the rest of the
Guarantee Period (ENHANCED RATE). This Enhanced Rate will be guaranteed for the
Guaranteed Period's first year and is declared at the time of purchase. We can
declare and credit additional interest based on Contribution, Account Value,
withdrawal dates, economic conditions or on any other lawful, nondiscriminatory
basis (ADDITIONAL INTEREST). Any Enhanced Rate and Additional Interest credited
to your GRO Account will be separate from the Guaranteed Interest Rate and not
used in the Market Value Adjustment formula. THE ENHANCED RATE OR ADDITIONAL
INTEREST MAY NOT BE AVAILABLE IN CERTAIN STATES.
Each group of GRO Accounts of the same duration is considered one GRO. For
example, all of your three-year GRO Accounts are one GRO while all of your
five-year GRO Accounts are another GRO, even though they may have different
maturity dates.
You can get our current Guaranteed Interest Rates by calling our Administrative
Office.
ALLOCATIONS TO GROS CAN'T BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES. THE
TEN-YEAR GRO ISN'T AVAILABLE IN OREGON.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO
Account for the same duration as your old one, at the then-current Guaranteed
Interest Rate, unless you withdraw your GRO Value or transfer it to another
Investment Option. We'll notify you in writing before your GRO Accounts expire.
You must tell us before the expiration of your GRO Accounts if you want to make
any changes.
The effective date of a renewal of a GRO Account will be the expiration date of
the old GRO Account. If a GRO Account expires and it can't be renewed for the
same duration, the new GRO Account will be set up for the next shortest
duration. For example, if your expiring GRO Account was for 10 years and when
it expires we don't offer a 10-year GRO, but we do offer a seven-year GRO, your
new one will be for seven years. You can tell us if you
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want something different within 30 days before the GRO Account expires. You may
not choose, and we won't renew, a GRO Account that expires after your Retirement
Date.
MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up
or down, that we make to your GRO Value if you make an early withdrawal or
transfer from your GRO Account. No Market Value Adjustment is made for free
withdrawal amounts or for withdrawals or transfers made within 30 days of the
expiration of the GRO Account. In addition, we won't make a Market Value
Adjustment for a death benefit. The market adjusted value may be higher or
lower than the GRO Value, but will never be less than the MINIMUM VALUE.
Minimum Value is an amount equal to your contribution to the GRO Account, less
previous withdrawals (and associated charges) from the GRO Account plus 3%
interest, compounded annually and less any applicable contingent withdrawal and
administrative charges. Withdrawal charges and the administrative expense charge
could take away part of your principal.
The Market Value Adjustment we make to your GRO Account is based on the changes
in our Guaranteed Interest Rate. If our Guaranteed Interest Rate has increased
since the time of your investment, the Market Value Adjustment will reduce your
GRO Value (but not below the Minimum Value). On the other hand, if our
Guaranteed Interest Rate has decreased since the time of your investment, the
Market Value Adjustment will increase your GRO Value.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
N/12 N/12
MVA = GRO Value x [(1 + A) / (1 + B + .0025) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
Market Value Adjustment, for current allocations to a GRO Account, with a
duration that is equal to the number of whole months remaining in your GRO
Account. Subject to certain adjustments, if that remaining period isn't
equal to an exact period for which we have declared a new Guaranteed
Interest Rate, B will be determined by a formula that finds a value between
the Guaranteed Interest Rates for GRO Accounts of the next highest and next
lowest durations.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula will be adjusted to comply
with state requirements.
If for any reason we are no longer declaring current Guaranteed Interest Rates,
then for purposes of determining B we'll use the yield to maturity of U.S.
Treasury Notes with the same remaining term as your GRO Account, using a formula
to find a value when necessary, in place of the current Guaranteed Interest Rate
or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix B.
SYSTEMATIC TRANSFER OPTION
We also offer a Systematic Transfer Option that guarantees an interest rate that
we declare in advance for each calendar quarter. This interest rate applies to
all contributions made to the STO Account during the calendar quarter for which
the rate has been declared. You MUST transfer all STO contributions into other
Investment Options within one year of your most recent STO contribution.
Transfers are automatically made in approximately equal quarterly or monthly
installments of at least $1,000 each. You can't transfer from other Investment
Options into the STO. Normal contingent withdrawal charges apply to withdrawals
from the STO. We guarantee that the STO's effective annual yield will never be
less than 3.0%. See "Systematic Transfer Program" in Part I, Section 8 for
details on this program. This option may not be available in some states.
New contributions to a Select Ten Plus Division can be held in the STO or
another Investment Option until the next available Investment Date. You can
also tell us to transfer approximately equal quarterly installments of at least
$1,000 each over a one-year period from the STO to each of the four Divisions.
We can hold new contributions
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received less than five Business Days before any Division's Investment Date, and
put in the STO, in the STO until the following Investment Date. See Part II for
important information on the Divisions.
SECTION 4 -- DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
We deduct a daily expense amount from the unit value equal to an effective
annual rate of 1.35% of the Account Value in the Variable Account Options. This
daily expense rate can't be increased without your consent.
Of the 1.35% total charge, .15% of the Account Value in the Variable Account
Options is used to reimburse us for administrative expenses not covered by
the annual administrative charge described below. The remaining 1.20% is
deducted for our assuming the expense risk (.85%) and the mortality risk
(.35%) under the contract. The expense risk is the risk that our actual
expenses of administering the contracts will exceed the annual administrative
expense charge. Mortality risk, as used here, refers to the risk we take that
annuitants, as a class of persons, will live longer than estimated and we
will be required to pay out more annuity benefits than anticipated. The
relative proportion of the mortality and expense risk charges may be changed,
but the total 1.20% effective annual risk charge can't be increased.
We may realize a gain from these daily charges to the extent they aren't needed
to meet the actual expenses incurred.
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
before your Retirement Date, we charge an annual administrative charge of $30.
This charge is deducted pro rata from your Account Value in each Investment
Option. The part of the charge deducted from the Variable Account Options
reduces the number of units credited to you. The part of the charge deducted
from the Fixed Accounts is withdrawn in dollars. The annual administrative
charge is pro-rated in the event of the Annuitant's retirement, death,
annuitization or contract termination during a contract year.
PORTFOLIO AND DIVISION CHARGES
Separate Account II buys shares of the Portfolios at net asset value. That
price reflects investment management fees and other direct expenses that have
already been deducted from the assets of the Portfolios. The amount charged for
investment management can't be increased without shareholder approval. The
Divisions invest directly in securities. Management fees and other expenses are
deducted directly from the Divisions.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
We can reduce or eliminate the separate account or administrative charges for
individuals or groups of individuals if we anticipate expense savings. We may
do this based on the size and type of the group or the amount of the
contribution.
We won't unlawfully discriminate against any person or group if we reduce or
eliminate these charges.
STATE PREMIUM TAX DEDUCTION
We won't deduct state premium taxes from your contributions before investing
them in the Investment Options, unless required to by your state law. If the
Annuitant elects an annuity benefit, we'll deduct any applicable state premium
taxes from the amount available for the annuity benefit. State premium taxes
currently range up to 4%, if applicable.
CONTINGENT WITHDRAWAL CHARGE
We don't deduct sales charges when you make a contribution to the contract.
However, contributions withdrawn may be subject to a withdrawal charge of up
to 8%. As shown below, the charge varies, depending upon the "age" of the
contributions included in the withdrawal-- that is, the number of years that
have passed since each contribution was made. The maximum of 8% would apply
if the entire amount of the withdrawal consisted of
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contributions made during your current contribution year. We don't deduct
withdrawal charges when you withdraw contributions made more than seven years
before your withdrawal. To calculate the withdrawal charge, (1) the oldest
contributions are treated as the first withdrawn and more recent contributions
next, and (2) partial withdrawals up to the free withdrawal amount aren't
subject to the withdrawal charge. For partial withdrawals, the total amount
deducted from your account will include the withdrawal amount requested, any
Market Value Adjustment that applies, and any withdrawal charges that apply, so
that the net amount you receive will be the amount you requested.
You may take up to 10% of your account value (less any earlier withdrawal in the
same year) each year without any contingent withdrawal charge or Market Value
Adjustment. This is referred to as your "free withdrawal." If you don't take
any free withdrawals in one year, you can't add it to the next year's free
withdrawal. If you aren't 59-1/2, federal tax penalties may apply.
<TABLE>
<CAPTION>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current........................ 8%
First Prior.................... 7
Second Prior................... 6
Third Prior.................... 5
Fourth Prior................... 4
Fifth Prior.................... 3
Sixth Prior.................... 2
Seventh Prior and Earlier...... 0
</TABLE>
We won't deduct a contingent withdrawal charge if you use the withdrawal to buy
from us either an immediate annuity benefit with life contingencies, or an
immediate annuity without life contingencies with a restricted prepayment option
that provides for level payments over five or more years. Similarly, we won't
deduct a charge if the Annuitant dies. See "Death Benefits and Similar Benefit
Distributions" in Part I, Section 5.
REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE
We can reduce or eliminate the contingent withdrawal charge for individuals or a
group of individuals if we anticipate expense savings. We may do this based on
the size and type of the group, the amount of the contribution, or whether there
is some relationship with us. Examples of these relationships would include
being an employee of Integrity or an affiliate, receiving distributions or
making internal transfers from other contracts we issued, or transferring
amounts held under qualified plans we or our affiliate sponsored. We won't
unlawfully discriminate against any person or group if we reduce or eliminate
the contingent withdrawal charge.
TRANSFER CHARGE
If you make more than twelve transfers among your Investment Options during one
contract year, we may charge your account up to $20 for each additional transfer
during that year. Transfer charges don't apply to transfers under (i) Dollar
Cost Averaging, (ii) Customized Asset Rebalancing, (iii) Callan Asset Allocation
and Rebalancing, or (iv) systematic transfers from the STO, nor do these
transfers count toward the twelve free transfers you can make during a year.
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HARDSHIP WAIVER
We can waive contingent withdrawal charges on full or partial withdrawal
requests of $1,000 or more under a hardship circumstance. We can also waive the
Market Value Adjustment on any amounts withdrawn from the GRO Accounts.
Hardship circumstances include the Owner's (1) confinement to a nursing home,
hospital or long term care facility, (2) diagnosis of terminal illness with any
medical condition that would result in death or total disability, and (3)
unemployment. We can require reasonable notice and documentation including, but
not limited to, a physician's certification and Determination Letter from a
State Department of Labor. Some of the hardship circumstances listed above may
not apply in some states, and, in other states, may not be available at all. The
waivers of withdrawal charges and Market Value Adjustment apply to the Owner,
not to the Annuitant. If there are joint Owners, the waivers apply to the
primary Owner. If no primary Owner can be determined, the waivers will apply to
the youngest Owner.
TAX RESERVE
We can make a charge in the future for taxes or for reserves set aside for
taxes, which will reduce the investment experience of the Variable Account
Options.
SECTION 5 - TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, can't be less than $1,000
($3,000 for residents of South Carolina and Pennsylvania). We'll accept
contributions of at least $50 for salary allotment programs. We have special
rules for minimum contribution amounts for tax-favored retirement programs. See
"Tax-Favored Retirement Programs" in the SAI.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach nine years
before your Retirement Date, we may refuse to accept any contribution.
Contributions may also be limited by various laws or prohibited by us for all
annuitants under the contract. If your contributions are made under a
tax-favored retirement program, we won't measure them against the maximum limits
set by law.
Contributions are applied to the various Investment Options you select and are
used to pay annuity and death benefits. Each contribution is credited as of the
date we have RECEIVED (as defined below) at our Administrative Office both the
contribution and instructions for allocation among the Investment Options,
PROVIDED THAT AT ANY TIME YOU MAY NOT HAVE AMOUNTS IN MORE THAN NINE INVESTMENT
OPTIONS. In determining the nine Investment Options, each of your GRO Accounts
counts as one Investment Option. Wire transfers of federal funds are deemed
received on the day of transmittal if credited to our account by 3 p.m. Eastern
Time, otherwise they are deemed received on the next Business Day. Contributions
by check or mail are deemed received when they are delivered in good order to
our Administrative Office. A BUSINESS DAY is defined as any day that the New
York Stock Exchange is open. Contributions to the Select Ten Plus Divisions are
subject to special rules described in Part II, Section 1, "Investment Strategy."
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change, and you should sign the request. When the Administrative Office
receives it, the change will be effective for any contribution that accompanies
it and for all future contributions. See "Transfers" in Section 5. For special
rules on transfers to the Select Ten Plus Divisions, see Part II, Section 1,
"Investment Strategy."
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YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Part I, Section 4, "Deductions
and Charges." Annual deductions are made as of the last day of each contract
year. Withdrawal charges and Market Value Adjustments, if applicable, are made
as of the effective date of the transaction. Charges against our Separate
Accounts are reflected daily. Any amount allocated to a Variable Account Option
will go up or down in value depending on the investment experience of that
Option. The value of contributions allocated to the Variable Account Options
aren't guaranteed. The value of your contributions allocated to the Fixed
Accounts is guaranteed, subject to any applicable Market Value Adjustments. See
"Guaranteed Rate Options" in Part I, Section 3.
UNITS IN OUR SEPARATE ACCOUNTS
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated as of the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units of Separate Account II
fluctuates with the investment performance of the corresponding Portfolios,
which in turn reflects the investment income and realized and unrealized capital
gains and losses of the Portfolios, as well as the Portfolios' expenses. The
value of units of Separate Account Ten varies with the performance of the
securities held by the Divisions.
Your unit values also change because of deductions and charges we make to our
Separate Accounts. The number of units credited to you, however, won't vary due
to changes in unit values. Units of a Variable Account Option are purchased when
you allocate new contributions or transfer prior contributions to that Option.
Units are redeemed when you make withdrawals or transfer amounts from a Variable
Account Option. We also redeem units to pay the death benefit when the Annuitant
dies and to pay the annual administrative charge. Please note that special
rules apply to the timing of allocations to the Select Ten Plus Divisions. See
Part II.
HOW WE DETERMINE UNIT VALUE
We determine unit values for each Variable Account Option at 4 p.m. Eastern Time
on each Business Day.
The unit value of each Variable Account Option in Separate Account II for any
Business Day is equal to the unit value for the previous Business Day,
multiplied by the NET INVESTMENT FACTOR for that Option on the current day. We
determine a NET INVESTMENT FACTOR for each Option in Separate Account II as
follows:
- - First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by
the Portfolios.
- - Next, we add any dividends or capital gains distributions by the Portfolio
on that day.
- - Then, we charge or credit for any taxes or amounts set aside as a reserve
for taxes.
- - Then, we divide this amount by the value of the amounts in the Option at
the close of business on the last day that a unit value was determined
(after giving effect to any transactions on that day).
- - Finally, we subtract a daily asset charge for each calendar day since the
last day that a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is an amount equal to an effective annual rate of 1.35%. This charge is for
the mortality risk, administrative expenses and expense risk assumed by us
under the contract.
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We determine a net investment factor for each Division as follows:
- - First, we take the value of the assets in the Division at the end of the
preceding period.
- - Next, we add any investment income and capital gains, realized or
unrealized, credited to the assets during the current valuation period.
- - Then, we subtract any capital losses, realized or unrealized, charged
against the assets during the current valuation period.
- - Next, we subtract any amount charged against the Division for any taxes.
- - Then, we divide this amount by the value of the assets in the Division at
the end of the preceding valuation period.
- - Then we subtract the daily charge for management and investment advice for
each day in the valuation period and a daily charge for estimated operating
expenses for each day in the valuation period.
- - Finally, we subtract a daily asset charge for each calendar day since the
last day that a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is an amount equal to an effective annual rate of 1.35%. This charge is for
the mortality risk, administrative expenses and expense risk assumed by us
under the contract.
Generally, this means that we adjust unit values to reflect what happens to the
Portfolios and the Divisions, and also for the mortality and expense risk charge
and any charge for administrative expenses or taxes.
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to our transfer restrictions. You can't make a transfer into the
STO. Transfers to a GRO must be to a newly elected GRO (that is, to a GRO that
you haven't already purchased) at the then-current Guaranteed Interest Rate,
unless we agree otherwise. Unless you make a transfer from a GRO within 30 days
before the expiration date of a GRO Account, the transfer is subject to a Market
Value Adjustment. See "Guaranteed Rate Options" in Part I, Section 3. Transfers
from GROs will be made according to the order in which money was originally
allocated to the GRO.
You can transfer from a Select Ten Plus Division at any time. Transfers to a
Select Ten Plus Division from any other Investment Option in which you are
invested will be effected at a price determined as of the day preceding the next
available Investment Date. We reserve the right not to accept transfer
instructions received less than two Business Days before any Investment Date.
See Part II for important information on the Divisions.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. You have twelve free transfers during a contract year.
After those twelve transfers, a charge of up to $20 may apply to each additional
transfer during that contract year. No charge will be made for transfers under
our Dollar Cost Averaging, Customized Asset Rebalancing, Callan Asset Allocation
and Rebalancing or Systematic Transfer programs, described in Section 8.
You may request a transfer by sending a written request directly to the
Administrative Office. Each request for a transfer must specify the contract
number, the amounts to be transferred and the Investment Options to and from
which the amounts are to be transferred. Transfers may also be arranged through
our telephone transfer service if you've established a Personal Identification
Number (PIN CODE). We'll honor telephone transfer instructions from any person
who provides correct identifying information and we aren't responsible for
fraudulent telephone transfers we believe to be genuine according to these
procedures. Accordingly, you bear the risk of loss if unauthorized persons make
transfers on your behalf.
A transfer request is effective as of the Business Day our Administrative Office
receives it, except for transfers to the Select Ten Plus Divisions (see Part
II). A transfer request doesn't change the allocation of current or future
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contributions among the Investment Options. Telephone transfers may be requested
from 9:00 a.m. - 5:00 p.m., Eastern Time, on any day we're open for business.
You'll receive the Variable Account Options' unit values as of the close of
business on the day you call, except that you'll receive the unit values for the
Select Ten Plus Divisions as described in Part II. Accordingly, transfer
requests for Variable Account Options (other than the Select Ten Plus Divisions)
received after 4:00 p.m. Eastern Time (or the close of the New York Stock
Exchange, if earlier) will be processed using unit values as of the close of
business on the next Business Day after the day you call. All transfers will be
confirmed in writing.
Transfer requests submitted by agents or market timing services that represent
multiple policies will be processed not later than the next Business Day after
the requests are received by our Administrative Office.
WITHDRAWALS
You may make any number of withdrawals as often as you wish. Each withdrawal
must be at least $300. The money will be taken from your Investment Options pro
rata, in the same proportion their value bears to your total Account Value. For
example if your Account Value is divided in equal 25% shares among four
Investment Options, when you make a withdrawal, 25% of the money withdrawn will
come from each of your Investment Options. You can tell us if you want your
withdrawal handled differently. During the first seven years of your contract,
there is a contingent withdrawal charge for any withdrawals other than free
withdrawals (discussed below). The charge starts at 8% and decreases depending
on the age of your account. This charge is in addition to any Market Value
Adjustments made to early withdrawals from GRO Accounts. Under some
circumstances, the contingent withdrawal charge and Market Value Adjustment may
be waived.
When you make a partial withdrawal, the total amount deducted from your Account
Value will include the withdrawal amount requested plus any contingent
withdrawal charges and any Market Value Adjustments. The total amount that you
receive will be the total that you requested. Most of the withdrawals you make
before you are 59-1/2 years old are subject to a 10% federal tax penalty. If
your contract is part of a tax-favored retirement plan, the plan may limit your
withdrawals. See "Tax Aspects of the Contracts" in Part I, Section 7.
Residents of Pennsylvania and South Carolina are required to keep at least
$3,000 in their Accounts.
ASSIGNMENTS
If your contract isn't part of a tax-favored program, you may assign the
contract before the Annuitant's Retirement Date. You can't, however, make a
partial assignment. An assignment of the contract may have adverse tax
consequences. See Part I, Section 7, "Tax Aspects of the Contracts." We won't be
bound by an assignment unless it is in writing and is received at our
Administrative Office in a form acceptable to us.
DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
We'll pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
contract's 10th anniversary date, if later), the death benefit is the contract
account value at the end of the business day when we receive proof of death.
Similarly, if the contract was issued on or after the youngest Annuitant's 86th
birthday, the death benefit is the contract account value at the end of the
business day when we receive proof of death.
For contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the contract's 10th anniversary date, if later) and before
annuity payments have started, the death benefit is the highest of:
a) Your highest Account Value on any contract anniversary (before age
81), plus subsequent contributions and minus subsequent withdrawals
(after being adjusted for associated charges and adjustments);
b) Total contributions, minus subsequent withdrawals (after being
adjusted for associated charges and adjustments); or
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c) Your current Account Value.
The reductions in death benefit described in a) and b) above for subsequent
withdrawals will be calculated on a pro rata basis with respect to Account Value
at the time of withdrawal. We'll also adjust the death benefit for any
applicable Market Value Adjustments and/or charges.
Death benefits and benefit distributions required because of a separate Owner's
death can be paid in a lump sum or as an annuity. If a benefit option hasn't
been selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The Owner selects the beneficiary of the death benefit. An Owner may change
beneficiaries by submitting the appropriate form to the Administrative Office.
If an Annuitant's beneficiary doesn't survive the Annuitant, then the death
benefit is generally paid to the Annuitant's estate. A death benefit won't be
paid after the Annuitant's death if there is a contingent Annuitant. In that
case, the contingent Annuitant becomes the new Annuitant under the contract.
The maximum issue age for the Annuitant is 85 years old.
ANNUITY BENEFITS
All annuity benefits under your contract are calculated as of the Retirement
Date you select. You can change the Retirement Date by writing to the
Administrative Office any time before the Retirement Date. The Retirement Date
can't be later than your 98th birthday, or earlier if required by law. Contract
terms applicable to various retirement programs, along with federal tax laws,
establish certain minimum and maximum retirement ages.
Annuity benefits may be a lump sum payment or paid out over time. A lump sum
payment will provide the Annuitant with the Cash Value under the contract,
shortly after the Retirement Date. The amount applied toward the purchase of an
annuity benefit is the Account Value less any pro-rata Annual Administrative
Charge, except that the Cash Value will be the amount applied if the annuity
benefit doesn't have a life contingency and either the term is less than five
years or the annuity can be changed to a lump sum payment without a withdrawal
charge.
ANNUITIES
Annuity benefits can provide for fixed payments which may be made monthly,
quarterly, semi-annually or annually. You can't change or redeem the annuity
once payments have begun. For any annuity, the minimum initial payment must be
at least $100 monthly, $300 quarterly, $600 semi-annually or $1,200 annually.
If you haven't already elected a lump sum payment or an annuity benefit, we'll
send you a notice within six months before your Retirement Date outlining your
options. If you fail to notify us of your benefit payment election before your
Retirement Date, you'll receive a lump sum benefit.
We currently offer the following types of annuities:
A LIFE AND TEN YEARS CERTAIN ANNUITY is a fixed life income annuity with 10
years of payments guaranteed, funded through our General Account.
A PERIOD CERTAIN ANNUITY provides for fixed payments to the Annuitant or the
Annuitant's beneficiary for a fixed period. The amount is determined by the
period selected. If the Annuitant dies before the end of the period selected,
the Annuitant's beneficiary can choose to receive the total present value of
future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed payments for at least the
period selected and after that for the life of the Annuitant, or for the lives
of the Annuitant and another annuitant under a joint and survivor annuity. If
the Annuitant (or the Annuitant and the other annuitant under a joint and
survivor
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annuity) dies before the period selected ends, the remaining payments will go to
the Annuitant's beneficiary. The Annuitant's beneficiary can redeem the annuity
and receive the present value of future guaranteed payments in a lump sum.
A LIFE INCOME ANNUITY provides fixed payments to the Annuitant for the life of
the Annuitant, or until the last annuitant dies under a joint and survivor
annuity.
FIXED ANNUITY PAYMENTS
Fixed annuity payments won't change and are based upon annuity rates provided in
your contract. The size of payments will depend on the form of annuity that was
chosen and, in the case of a life income annuity, on the Annuitant's age (or
Annuitant and a joint annuitant in the case of a joint and survivor annuity) and
sex (except under most tax-favored retirement programs). If our current annuity
rates would provide a larger payment, those current rates will apply instead of
the contract rates.
If the age or sex of an annuitant has been misstated, any benefits will be those
which would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we'll deduct the overpayment from the next payment or payments
due. We add underpayments to the next payment.
TIMING OF PAYMENT
We normally apply your Adjusted Account Value to the purchase of an annuity
within seven days after receipt of the required form at our Administrative
Office. Our action can be delayed, however, for any period during which
(1) the New York Stock Exchange has been closed or trading on it is restricted;
(2) an emergency exists so that disposal of securities isn't reasonably
practicable or it isn't reasonably practicable for a Separate Account
fairly to determine the value of its net assets; or
(3) the SEC, by order, permits us to delay action to protect persons with
interests in the Separate Accounts. We can delay payment of your Fixed
Accounts for up to six months, and interest will be paid on any payment
delayed for 30 days or more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you write to our Administrative Office, use the address on the first page
of this prospectus. We can't honor your request or instruction unless it's
proper and complete. Whenever possible, use one of our printed forms, which may
be obtained from our Administrative Office.
SECTION 6 - VOTING RIGHTS
PORTFOLIO VOTING RIGHTS
We are the legal owner of the shares of the Portfolios held by Separate Account
II and, therefore, have the right to vote on certain matters. Among other
things, we may vote to elect a Portfolio's Board of Directors, to ratify the
selection of independent auditors for a Portfolio, and on any other matters
described in a Portfolio's current prospectus or requiring a vote by
shareholders under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We'll send you Portfolio proxy materials and a form for giving us
voting instructions.
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If we don't receive instructions in time from all Owners, we'll vote shares in a
Portfolio for which we have not received instructions in the same proportion as
we vote shares for which we have received instructions. Under eligible deferred
compensation plans and certain qualified plans, your voting instructions must be
sent to us indirectly, through your employer, but we aren't responsible for any
failure by your employer to solicit your instructions or to send your
instructions to us. We'll vote any Portfolio shares that we're entitled to vote
directly, because of amounts we have accumulated in Separate Account II, in the
same proportion that other Owners vote. If the federal securities laws or
regulations or interpretations of them change so that we're permitted to vote
shares of a Portfolio on our behalf or to restrict Owner voting, we may do so.
HOW WE DETERMINE YOUR VOTING SHARES
You vote only on matters concerning the Portfolios in which your contributions
are invested. We determine the number of Portfolio shares in each Variable
Account Option under your contract by dividing your Account Value allocated to
that Option by the net asset value of one share of the corresponding Portfolio
on the record date set by a Portfolio's Board for its shareholders' meeting. For
this purpose, the record date can't be more than 60 days before the meeting of a
Portfolio. We count fractional shares. After annuity payments have commenced,
voting rights are calculated in a similar manner based on the actuarially
determined value of your interest in each Variable Account Option.
HOW PORTFOLIO SHARES ARE VOTED
All Portfolio shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) that require collective approval. On
matters where the interests of the individual Portfolios differ, the approval of
the shareholders in one Portfolio isn't needed to make a decision in another
Portfolio. To the extent shares of a Portfolio are sold to separate accounts of
other insurance companies, the shares voted by those companies according to
instructions received from their contract holders will dilute the effect of
voting instructions received by us from its Owners.
Owners of units in the Divisions also have voting rights. Each Owner will be
given one vote for every $1.00 of value in a Division. Fractional interests are
counted, unless different voting rights are required under the law.
HOW SEPARATE ACCOUNT TEN INTERESTS ARE VOTED
Separate Account Ten's rules don't require Separate Account Ten to hold annual
meetings, although special meetings may be called for purposes such as electing
or removing members of the Board of Managers, changing fundamental policies, or
approving a contract for investment advisory services. When required, "the vote
of a majority of the outstanding voting securities" of Separate Account Ten
means the lesser of:
(1) The holders of more than 50% of all votes entitled to be cast with
respect to Separate Account Ten; or,
(2) The holders of at least 67% of the votes that are present or
represented by proxy at a meeting, assuming more than 50% of those
entitled to vote are present or represented.
We'll determine the number of votes you can instruct us to vote 60 days or less
before a Separate Account Ten special meeting.
SEPARATE ACCOUNT VOTING RIGHTS
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part I, Section 2) may require Owner approval. In
that case, you'll be entitled to a number of votes based on the value you have
in the Variable Account Options, as described above under "How We Determine Your
Voting Shares."
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We'll cast votes attributable to amounts we have in the Variable Account Options
in the same proportions as votes cast by Owners.
SECTION 7 - TAX ASPECTS OF THE CONTRACTS
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on several factors. These factors may
include Integrity's tax status, the type of retirement plan, if any, for which
the contract is purchased, and the tax and employment status of the individuals
concerned.
The following discussion of the federal income tax treatment of the contract
isn't designed to cover all situations and isn't intended to be tax advice. It's
based upon our understanding of the federal income tax laws as currently
interpreted by the Internal Revenue Service (IRS) and various courts. We can't
guarantee that the tax code or the courts will or won't change their views on
the treatment of these contracts. Future legislation could affect annuity
contracts adversely. Moreover, we haven't attempted to consider any applicable
state or other tax laws. Because of the complexity of tax laws and the fact that
tax results will vary according to particular circumstances, anyone considering
the purchase of a contract, selecting annuity payments under the contract, or
receiving annuity payments under a contract should consult a qualified tax
adviser. INTEGRITY DOESN'T MAKE ANY GUARANTEE REGARDING THE TAX STATUS, FEDERAL,
STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
YOUR CONTRACT IS AN ANNUITY
Under federal tax law, anyone can purchase an annuity with after-tax dollars and
your annuity earnings won't be taxed until you make a withdrawal. Or, an
individual (or employer) may purchase the annuity to fund a tax-favored
retirement program (contributions are with pre-tax dollars), such as an IRA or
qualified plan. Finally, the individual (or employer) may purchase the annuity
to fund a Roth IRA (contributions are with after-tax dollars and earnings may be
excluded from taxable income at distribution).
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars (a nonqualified annuity), and some of the
special tax rules that apply to an annuity purchased to fund a tax-favored
retirement program (a qualified annuity). A qualified annuity may restrict your
rights and benefits to qualify for its special treatment under federal tax law.
TAXATION OF ANNUITIES GENERALLY
Section 72 of the Code governs the taxation of annuities. In general,
contributions you put into the annuity (your "basis" or "investment" in the
contract) won't be taxed when you receive the amounts back in a distribution.
Also, an Owner isn't taxed on the annuity's earnings (increases in Account
Value) until some form of withdrawal or distribution is made under the contract.
However, under certain circumstances, the increase in value may be subject to
current federal income tax. For example, corporations, partnerships, trusts and
other non-natural persons can't defer tax on the annuity's income unless an
exception applies. In addition, if an Owner transfers an annuity as a gift to
someone other than a spouse (or former spouse), all increases in the Account
Value are taxed at the time of transfer. The assignment or pledge of any portion
of the value of a contract is treated as a taxable distribution of that portion
of the value of the contract.
You can take withdrawals from the contract or you can wait to annuitize it when
the annuitant reaches a certain age. The tax implications are different for
each type of distribution. Section 72 of the Code says that the proceeds of a
full or partial withdrawal from a contract before annuity payments begin are
treated first as taxable income, but only to the extent of the increase of the
Account Value. The rest of the withdrawal, representing your basis in the
annuity, is not taxable. Generally, the investment or basis in the contract
equals the contributions made by you or on your behalf, minus any amounts
previously withdrawn that weren't treated as taxable income. Special rules may
apply if the contract includes contributions made before August 14, 1982 that
were rolled over to the contract in a tax-free exchange.
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If you take annuity payments over the lifetime of the annuitant, part of each
payment is considered to be a tax-free return of your investment. This tax-free
portion of each payment is figured using a ratio of the Owner's investment to
his or her expected return under the contract (exclusion ratio). Once you get
the tax-free part, the rest of each payment will be considered the increase of
your Account Value, and is ordinary income. When all of these tax-free portions
add up to your investment in the annuity, future payments are all counted as an
increase in your Account Value, and are taxable income. If the Annuitant dies
before recovering the total investment, a deduction for the remaining basis will
generally be allowed on the Owner's final federal income tax return.
We may be required to withhold federal income taxes on all distributions unless
the eligible recipients elect not to have any amounts withheld and properly
notify us of that election.
The taxable portion of a distribution is taxed at ordinary income tax rates. In
addition, you may be subject to a 10% penalty on the taxable portion of a
distribution unless it is:
(1) on or after the date on which the taxpayer attains age 59-1/2;
(2) as a result of the Owner's death;
(3) part of a series of "substantially equal periodic payments" (paid at
least annually) for the life (or life expectancy) of the taxpayer or
joint lives (or joint life expectancies) of the taxpayer and
beneficiary;
(4) a result of the taxpayer becoming disabled within the meaning of Code
Section 72(m)(7);
(5) from certain qualified plans (note, however, other penalties may
apply);
(6) under a qualified funding asset (as defined in Section 130(d) of the
Code);
(7) purchased by an employer on termination of certain types of qualified
plans and held by the employer until the employee separates from
service;
(8) under an immediate annuity as defined in Code Section 72(u)(4);
(9) for the purchase of a first home (distribution up to $10,000);
(10) for certain higher education expenses or
(11) to cover certain deductible medical expenses.
Please note that items (9), (10) and (11) apply to IRAs only.
Any withdrawal provisions of your contract will also apply. See "Withdrawals"
in Part I, Section 5.
All annuity contracts issued by us or our affiliates to one Annuitant during any
calendar year are treated as a single contract in measuring the taxable income
that results from surrenders and withdrawals under any one of the contracts.
DISTRIBUTION-AT-DEATH RULES
Under Section 72(s) of the Code, in order to be treated as an annuity, a
contract must provide the following distribution rules: (a) if any Owner dies
on or after the date the annuity starts and before the entire interest in the
contract has been distributed, then the rest of that annuity must be distributed
at least as quickly as the method in effect when the owner died; and (b) if any
Owner dies before the date the annuity starts, the entire contract must be
distributed within five years after the Owner's death. However, any interest
that is payable to a death beneficiary may be annuitized over the life of that
beneficiary, as long as distributions begin within one year after the Owner
dies. If the death beneficiary is the Owner's spouse, the contract (along with
the deferred tax status) may be continued in the spouse's name as the Owner.
DIVERSIFICATION STANDARDS
We manage the investments in the annuities under Section 817(h) of the Code to
ensure that you will be taxed as described above.
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TAX-FAVORED RETIREMENT PROGRAMS
An owner can use this annuity with certain types of retirement plans that
receive favorable treatment under the Code. Numerous tax rules apply to the
participants in these qualified plans and to the contracts used in connection
with those qualified plans. These tax rules vary according to the type of plan
and the terms and conditions of the plan itself. Owners, Annuitants, and
beneficiaries are cautioned that the rights of any person to any benefits under
qualified plans may be subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the contract. In addition,
loans from qualified contracts, where allowed, are subject to a variety of
limitations, including restrictions on the amount that may be borrowed, the
duration of the loan, and repayment of the loan. (Owners should always consult
their tax advisors and retirement plan fiduciaries before taking any loans from
the plan.) Also, special rules apply to the time at which distributions must
begin and the form in which the distributions must be paid. THE STATEMENT OF
ADDITIONAL INFORMATION CONTAINS GENERAL INFORMATION ABOUT THE USE OF CONTRACTS
WITH THE VARIOUS TYPES OF QUALIFIED PLANS.
FEDERAL AND STATE INCOME TAX WITHHOLDING
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES ON INTEGRITY
The contracts allow us to charge the Separate Accounts for taxes. We can also
set up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There won't be any tax liability if you transfer any part of the Account Value
among the Investment Options of your contract.
SECTION 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program that allows you to pre-authorize periodic withdrawals from
your contract before your Retirement Date. You can choose to have withdrawals
made monthly, quarterly, semi-annually or annually and can specify the day of
the month (other than the 29th, 30th or 31st) on which the withdrawal is made.
You may specify a dollar amount for each withdrawal or an annual percentage to
be withdrawn. The minimum systematic withdrawal currently is $100. Residents of
Pennsylvania and South Carolina must keep a $3,000 minimum account balance after
any withdrawal. You may also specify an account for direct deposit of your
systematic withdrawals. To enroll under our systematic withdrawal program, send
the appropriate form to our Administrative Office. Withdrawals may begin one
business day after we receive the form. You may terminate your participation in
the program upon one day's prior written notice, and we may end or change the
systematic withdrawal program at any time. If on any withdrawal date you don't
have enough money in your accounts to make all of the withdrawals you have
specified, no withdrawal will be made and your enrollment in the program will be
ended.
Amounts you withdraw under the systematic withdrawal program may be within the
free withdrawal amount. If so, we won't deduct a contingent withdrawal charge
or make a Market Value Adjustment. See "Contingent Withdrawal Charge" in Part
I, Section 4. AMOUNTS WITHDRAWN UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM GREATER
THAN THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL
CHARGE AND A MARKET VALUE ADJUSTMENT IF APPLICABLE. WITHDRAWALS ALSO MAY BE
SUBJECT TO THE 10% FEDERAL TAX PENALTY FOR EARLY WITHDRAWALS UNDER THE CONTRACTS
AND TO INCOME TAXATION. See Part I, Section 7, "Tax Aspects of the Contracts."
INCOME PLUS WITHDRAWAL PROGRAM
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We offer an Income Plus Withdrawal Program that allows you to pre-authorize
equal periodic withdrawals, based on your life expectancy, from your contract
before you reach age 59-1/2. You won't have to pay any tax penalty for these
withdrawals, but they will be subject to ordinary income tax. See "Taxation of
Annuities Generally," in Section 7. Once you begin receiving distributions,
they shouldn't be changed or stopped until the later of:
- - the date you reach age 59-1/2; or
- - five years from the date of the first distribution.
If you change or stop the distribution or take an additional withdrawal, you may
have to pay a 10% penalty tax that would have been due on all prior
distributions made under the Income Plus Program, plus any interest.
You can choose the Income Plus Withdrawal Program at any time if you're younger
than 59-1/2. You can elect this option by sending the election form to our
Administrative Office. You can choose to have withdrawals made monthly,
quarterly, semi-annually or annually and can specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is made. We'll calculate
the amount of the distribution under a method you select, subject to a minimum,
which is currently $100. You must also specify an account for direct deposit of
your Income Plus Withdrawals.
To enroll in our Income Plus Withdrawal Program, send the appropriate form to
our Administrative Office. Your withdrawals will begin at least one Business
Day after we receive your form. You may end your participation in the program
upon seven Business Days prior written notice, and we may end or change the
Income Plus Program at any time. If on any withdrawal date you don't have
enough money in your accounts to make all of the withdrawals you have specified,
no withdrawal will be made and your enrollment in the program will end. This
program isn't available in connection with the Systematic Withdrawal Program,
Dollar Cost Averaging, Systematic Transfer Option or Callan Asset Allocation and
Rebalancing Program.
If you haven't used up your free withdrawals in any given contract year, amounts
you withdraw under the Income Plus Withdrawal Program may be within the free
withdrawal amount. If they are, no contingent withdrawal charge or Market Value
Adjustment will be made. See "Contingent Withdrawal Charge" in Part 4. AMOUNTS
WITHDRAWN UNDER THE INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS OF THE FREE
WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE AND A MARKET
VALUE ADJUSTMENT IF APPLICABLE.
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which we transfer contributions
allocated to the Janus Money Market Option to one or more other Variable Account
Options on a monthly, quarterly, semi-annual or annual basis. You must tell us
how much you want to be transferred into each Variable Account Option. The
current minimum transfer to each Option is $250. We won't charge a transfer
charge under our dollar cost averaging program, and these transfers won't count
towards the twelve free transfers you may make in a contract year. The Select
Ten Plus Divisions aren't eligible for the dollar cost averaging program.
To enroll under our dollar cost averaging program, send the appropriate form to
our Administrative Office. You may end your participation in the program upon
one day's prior written notice, and we may end or change the dollar cost
averaging program at any time. If you don't have enough money in the Janus Money
Market Option to transfer to each Variable Account Option specified, no transfer
will be made and your enrollment in the program will end.
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<PAGE>
SYSTEMATIC TRANSFER PROGRAM
We also offer a systematic transfer program under which we transfer
contributions allocated to the STO to one or more other Investment Options on a
monthly or quarterly basis, as you determine. See Part I, Section 3,
"Systematic Transfer Option." We'll transfer your STO contributions in equal
installments of at least $1,000 over a one-year period. If you don't have enough
money in the STO to transfer to each Option specified, a final transfer will be
made on a pro rata basis and your enrollment in the program will end. All
interest accrued and any money still in the STO at the end of the period during
which transfers are scheduled to be made will be transferred at the end of that
period on a pro rata basis to the Options you chose for this program. There is
no charge for transfers under this program, and these transfers won't count
towards the twelve free transfers you may make in a contract year.
We'll hold new contributions to a Select Ten Plus Division in the STO until the
next available Investment Date. You may ask us to transfer approximately equal
quarterly installments of at least $1,000 each over the next year from the STO
to each of the four Select Ten Plus Divisions. We can hold new contributions
received less than five Business Days before any Investment Date in the STO
until the next Investment Date. See Part II for important information on the
Divisions.
To enroll under our systematic transfer program, send the appropriate form to
our Administrative Office. We can end the systematic transfer program in whole
or in part, or restrict contributions to the program. This program may not be
available in some states.
CUSTOMIZED ASSET REBALANCING
We offer a customized asset rebalancing program that allows you to determine how
often the rebalancing occurs. You can choose to rebalance monthly, quarterly,
semi-annually or annually. The value in the Variable Account Options will be
automatically rebalanced by transfers among the Variable Account Options, and
you will receive a confirmation notice after each rebalancing. Transfers will
occur only to and from those Variable Account Options where you are making
contributions. We won't charge a transfer charge to transfers under our
customized asset rebalancing program, and these transfers won't count towards
the twelve free transfers you may make in a contract year.
Fixed Accounts and the Select Ten Plus Divisions aren't included in the
customized asset rebalancing program.
To enroll in our customized asset rebalancing program, send the appropriate form
to our Administrative Office. You should be aware that other allocation
programs, such as dollar cost averaging, and transfers and withdrawals that you
make, may not work with the customized asset rebalancing program. You should,
therefore, monitor your use of other programs, transfers, and withdrawals while
the customized asset rebalancing program is in effect. You may end your
participation in the program upon one day's prior written notice, and we may end
or change the customized asset rebalancing program at any time.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
We also offer an Asset Allocation and Rebalancing Program, developed with Callan
Associates. Callan Associates is an independent research and consulting firm,
specializing in the strategic asset allocation decision.
You may select one of five proposed Asset Allocation and Rebalancing Models:
Conservative, Moderately Conservative, Moderate, Moderately Aggressive, or
Aggressive. The contributions you are making will initially be allocated among
the Options established for each Model. You and your financial representative
can design a program that is tailored to your specific retirement needs.
When you select this program, your contributions will be allocated and your
variable portfolios will be rebalanced at least annually. The program applies
to all contributions made to your annuity contract. You will receive a
confirmation notice after each rebalancing. No transfer charge will apply to
transfers made under the Callan Asset
30
<PAGE>
Allocation and Rebalancing Program, nor will these transfers count toward the
twelve transfers you may make in a contract year before we charge a transfer
fee. See "Transfer Charges" in Part I, Section 4.
In each Asset Allocation and Rebalancing Model, a portion of all contributions
is allocated to a five-year Guaranteed Rate Option (GRO). The amount allocated
to the GRO won't be reallocated or rebalanced while you are participating in a
specific Model. You may cancel or change the Model you have selected at any
time. The GRO funds may be subject to a market value adjustment (MVA) that may
increase or decrease your account value.
To enroll under the Callan Asset Allocation and Rebalancing Program, complete
the Dollar Cost Averaging/Asset Allocation and Rebalancing form. You should be
aware that other allocation programs, such as dollar cost averaging, as well as
additions, transfers and withdrawals that you make, may not work with the
Customized Asset Rebalancing program. If, after selecting one of the five
Models, you request a transaction that results in a reallocation outside your
Model, your participation in the program automatically ends. Because of this,
you should monitor your use of other programs, transfers, and withdrawals while
the Asset Allocation and Rebalancing program is in effect. This program isn't
available with the Customized Asset Rebalancing program described above. The
Select Ten Plus Divisions aren't eligible for the Asset Allocation and
Rebalancing Program. We can end or change this program in whole or in part, and
we may restrict contributions to the program. This program may not be available
in all states.
You may end your participation in this program upon one day's prior written
notice.
SYSTEMATIC CONTRIBUTIONS
We offer a program for systematic contributions that allows you to pre-authorize
monthly, quarterly, or semi-annual withdrawals from your checking account to
make your contributions. To enroll in this program, send the appropriate form to
our Administrative Office. You or we may end your participation in the program
with 30 days' prior written notice. We may end your participation if your bank
declines to make any payment. The minimum amount for systematic contributions is
$100 per month. The Select Ten Plus Divisions aren't eligible for Systematic
Contributions.
PERFORMANCE INFORMATION
Performance data for the Investment Options, including the yield and effective
yield and total return of the Investment Options, may appear in advertisements
or sales literature. This performance data is based only on the performance of
a hypothetical investment in that Option during the particular period of time on
which the calculations are based. Performance information should be considered
in light of investment objectives and policies of the Portfolio in which the
Option invests and the market conditions during the given time frame, and it
shouldn't be considered a representation of performance to be achieved in the
future.
TOTAL RETURNS are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return information reflects changes
in Portfolio share price, the automatic reinvestment of all distributions and
the deduction of contract charges and expenses that may apply, including any
contingent withdrawal charge that would apply if an Owner surrendered the
contract at the end of the period shown. Total returns may also be shown that
don't take into account the contingent withdrawal charge or the annual
administrative charge that is applied when the Account Value is less than
$50,000 at the end of the contract year.
CUMULATIVE TOTAL RETURNS show an Investment Option's performance over a specific
period of time, usually several years. An AVERAGE ANNUAL TOTAL RETURN shows the
hypothetical yearly return that would produce the same cumulative total return
if the Investment Option experienced exactly the same return each year for the
entire period shown. Because performance will fluctuate on a year-by-year
basis, the average annual total returns tend to show a smooth result that won't
mirror actual performance, even though the end result will be the same.
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<PAGE>
Some Investment Options may also advertise YIELD, which shows the income
generated by an investment in that particular Option over a specified period of
time. This income is annualized and shown as a percentage. Yields don't take
into account capital gains or losses or the contingent withdrawal charge that
may apply if you withdraw your money at the end of the hypothetical time period.
The Janus Aspen Money Market Option may advertise its CURRENT and EFFECTIVE
YIELD. Current yield reflects the income generated by an investment in that
Option over a specified seven-day period. Effective yield is calculated in a
similar manner, except that it assumes that the income earned is reinvested, and
the income on the reinvested amount is included. The J.P. Morgan Bond Option
may advertise a 30-day yield, which reflects the income generated by an
investment in that Option over a specified 30-day period.
For a detailed description of the methods used to determine the yield and total
return for the Variable Account Options, see the Statement of Additional
Information.
In Part II of this prospectus, there is a table showing what the performance of
the strategy for the Select Ten Plus Divisions would have been relative to the
Dow Jones Industrial Average for the last 26 years. The information is
historical and reflects a hypothetical investment, and shouldn't be used as an
indicator of future performance. In some years, the strategy outperformed the
Dow Jones index, and in some years, it didn't. The performance of this strategy
depends both on stock prices, which will fluctuate, and dividend payments, which
may increase, decrease or be eliminated. There are no guarantees that this
strategy will outperform the Dow Jones Industrial average over any given period
of time.
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<PAGE>
SECTION 9 - PRIOR CONTRACTS
AVAILABILITY OF VIP GROWTH PORTFOLIO AND VIP III MID CAP PORTFOLIO
For contracts issued before May 1, 1999, the VIP Growth Portfolio and VIP III
Mid Cap Portfolio are not yet available.
DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997
This section shows the Death Benefit information for contracts issued before
January 1, 1997. It may be different from other provisions in this prospectus.
For contracts issued before 1997, the following provisions apply:
For contracts issued before January 1, 1995, the amount of the death benefit is
the greatest of:
- your 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 younger than 70 years old on the birthday nearest the
date on which their contract was issued, an enhanced minimum death
benefit, explained below.
For contracts issued 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
For contracts issued during 1996, the amount of the death benefit is the
greatest of:
- your Account Value
- the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments that apply to those withdrawals and reduce the
death benefit on a pro rata basis.
The enhanced minimum death benefit is the same as the guaranteed death benefit,
except that the guaranteed death benefit may not exceed the maximum guaranteed
death benefit. The guaranteed death benefit on your Participation Date is your
initial contribution. After that, every month we recalculate that portion of
your guaranteed death benefit allocated to the Separate Account by adding
interest at an annual rate of 7% until the contract anniversary nearest your
70th birthday, subject to the maximum. We subtract from that the sum of any
withdrawals or transfers from the Separate Account during the month and a pro
rata amount of the interest accumulated that applies to the withdrawn or
transferred amount. Therefore, your guaranteed death benefit at any time,
subject to the maximum, is the sum of (1) your Guarantee Period Values, and (2)
your Separate Account contributions, including the amount of interest calculated
on your Separate Account values for purposes of determining the guaranteed death
benefit, less any withdrawals or transfers and less the interest calculated on a
pro rata basis on those withdrawals or transfers. Your maximum guaranteed death
benefit is determined by totaling your contributions during your first five
participation years, subtracting all withdrawals, taking into consideration any
market value adjustments made under the contract, multiplying the result by two,
and then adding that to your total contributions made after the first five
participation years.
REDUCTION IN CHARGES
If your contract was issued on or after January 1, 1995, but before January 1,
1997, the effective annual rate of mortality, expense and administrative charges
will reduce to 1.10% after your contract has been in effect for six years.
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<PAGE>
CONTINGENT WITHDRAWAL CHARGE
For contracts issued before February 15, 1997 (2/27/97 in Washington, 5/30/97 in
Pennsylvania, 7/7/97 in Maryland, 10/16/97 in Oregon) the following rules apply
even if they are different from other provisions in this prospectus:
There is a withdrawal charge of up to 7% on all contributions withdrawn. As
shown below, this charge varies, depending upon the "age" of the contributions
included in the withdrawal, that is, how long ago you made your contributions.
The maximum percentage of 7% would apply if the entire amount of the withdrawal
consisted of contributions made during your current contract year. No
withdrawal charge applies when you withdraw contributions made earlier than your
fifth prior contribution year. For purposes of calculating the withdrawal
charge, (1) the oldest contributions will be treated as the first withdrawn and
more recent contributions next, and (2) partial withdrawals up to the free
withdrawal amount won't be considered a withdrawal of any contributions. For
partial withdrawals, the total amount deducted from your Account Value will
include the withdrawal amount requested, any applicable Market Value Adjustment
and any applicable withdrawal charge, so that the net amount you receive will be
the amount requested.
No charge will be applied to your partial withdrawals that don't exceed the free
withdrawal amount in any contract year. On any Business Day, the free withdrawal
amount is the greater of (i) 10% of your Account Value and (ii) any investment
gain during the prior contract year, less withdrawals during the current
contract year. Investment gain is calculated as the increase in the Account
Value during the prior contract year, minus contributions during that year, plus
withdrawals made during that year. We'll deduct contingent withdrawal charges
for any partial withdrawal amount that is over the free withdrawal amount. The
contingent withdrawal charge is a sales charge to help pay our costs of selling
and promoting the contracts. We don't expect revenues from contingent withdrawal
charges to cover all of those costs. Any shortfall will be made up from our
General Account assets, which may include profits from other charges under the
contracts.
<TABLE>
<CAPTION>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current........................... 7%
First Prior....................... 6
Second Prior...................... 5
Third Prior....................... 4
Fourth Prior...................... 3
Fifth Prior....................... 2
Sixth Prior and Earlier........... 0
</TABLE>
We won't deduct a contingent withdrawal charge if the Annuitant uses the
withdrawal to buy from us either an immediate annuity benefit with life
contingencies or an immediate annuity without life contingencies with a
restricted prepayment option that provides for level payments over five or
more years. Similarly, we won't deduct a charge if the Annuitant dies and the
withdrawal is made by the Annuitant's beneficiary. See "Death Benefits and
Similar Benefit Distributions" in Part 5.
The minimum withdrawal permitted is $300.
Retirement Date
For Contracts issued before January 1, 1997, the Retirement Date will be the
date you specify, but no later than your 85th birthday or the 10th Contract
Anniversary, whichever is later.
CONTRACTS ISSUED TO OREGON RESIDENTS
If you are a resident of Oregon and your Contract was issued before 10/16/97
(Contract Form No. 11960CNQ-I-OR), additional contributions into Investment
Options are accepted, including the 10-Year GRO Account, and the prospectus
provisions relating to these items apply.
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CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
The Callan Asset Allocation and Rebalancing Program uses the 4-year Guaranteed
Rate Option for the Fixed Income Investment Sector of the Model.
HARDSHIP WAIVERS
Hardship Waivers aren't available.
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PART II
THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN
SECTION 1 - INVESTMENT OBJECTIVE, STRATEGY AND RISK FACTORS
THE DIVISIONS
Separate Account Ten is currently divided into four Divisions: March, June,
September and December. Each Division is a non-diversified investment company
that invests directly in securities. We can't guarantee that any Division will
meet its investment goals. Separate Account Ten may also offer other securities
that aren't available through this prospectus.
INVESTMENT OBJECTIVE
The Divisions seek total return by investing in shares of the ten highest
dividend yielding common stocks in the Dow Jones Industrial Average (DJIA) in
equal weights and holding them for twelve months. The dividend yield for each
stock is calculated by annualizing the last quarterly or semi-annual ordinary
dividend distributed on that stock and dividing the result by the market value
of that stock at the close of the New York Stock Exchange (NYSE) on the business
day before the investment date. This yield is historical and we can't guarantee
that any dividends will be declared or paid in the future on the stocks in the
Divisions. The term "equal weights" means that if you invested $100 in a
Division, the Division would buy $10 of each of the ten highest yielding stocks.
The selection process is a straightforward, objective, mathematical application
that ignores any subjective factors concerning an issuer in the DJIA, an
industry or the economy generally. The application of the selection process may
cause a Division to own a stock that the sub-adviser doesn't recommend for
purchase. In fact, the sub-adviser may have sell recommendations on a number of
the stocks at the time the stocks are selected for inclusion in a Division's
portfolio.
There are various theories to explain why a common stock is among the ten
highest yielding stocks in the DJIA at any given time:
(1) the issuer may be in financial difficulty or out of favor in the
market because of weak earnings, performance or forecasts, or negative
publicity;
(2) there may be uncertainties because of pending or threatened litigation
or pending or proposed legislation or government regulation;
(3) the stock may be a cyclical stock reacting to national and
international economic developments; or
(4) the market may be anticipating a reduction in or the elimination of
the issuer's dividend.
While these factors may affect only a part of an issuer's overall business, the
publicity may be strong enough to outweigh otherwise solid business performance.
In addition, companies in certain industries have historically paid relatively
high dividends.
INVESTMENT STRATEGY
The Divisions seek total return by buying the ten highest yielding stock in the
Dow Jones Industrial Average (DJIA) in equal weights and holding them for
approximately twelve months. Each new Division begins on the last Business Day
of each calendar quarter. At the end of each Division's twelve-month period,
its portfolio is restructured to hold the current ten highest yielding stocks in
the DJIA. Separate Account Ten's four Divisions, operating at the same time,
may each have different investment portfolios for its own twelve-month period.
New contributions and transfers to a Division are invested on only one day each
year, the INVESTMENT DATE, as follows:
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Division Investment Date
-------- ---------------
Select Ten Plus Division - March last Business Day of March
Select Ten Plus Division - June last Business Day of June
Select Ten Plus Division - September last Business Day of September
Select Ten Plus Division - December last Business Day of December
The weights of the individual stock positions won't be rebalanced during the
year, and additional contributions or transfers won't be accepted during any
Division's twelve-month holding period. Instead, additional contributions or
transfers are invested on the next Investment Date.
On the day we receive a dividend from a stock in a Division's investment
portfolio, we'll reinvest it in the form of additional shares of the stock that
paid the dividend. We can't guarantee that the dividend rates on the selected
stocks will be maintained. Reduction or elimination of a dividend could
adversely affect the stock price.
The "highest yielding stocks" are determined by calculating the yield for each
stock by annualizing the last ordinary quarterly or semi-annual dividend
distributed on that stock and dividing the result by the market value of the
stock at the close of the NYSE on the Business Day before the Investment Date.
The investment strategy is based on three time-tested investment principles:
(1) time in the market is more important than timing the market;
(2) the stocks to buy are the ones everyone else is selling; and
(3) dividends can be an important part of total return.
Investment in a number of companies with high dividends relative to their stock
prices is designed to increase a Division's potential for higher returns.
Investing in these stocks of the DJIA may be effective as well as conservative
because regular dividends are common for established companies and have
accounted for a substantial portion of the total return on stocks of the DJIA as
a group. Each Division's return will consist of a combination of capital
appreciation and current dividend income.
Transfers from any other Investment Option into one of the Divisions will be
effective at a price determined as of the day preceding the next available
Investment Date. We reserve the right not to accept transfer instructions
received less than two business days before any Investment Date. See Part I,
Section 5, "Transfers."
THE DOW JONES INDUSTRIAL AVERAGE
The DJIA consists of 30 common stocks chosen by the editors of THE WALL STREET
JOURNAL as representative of the NYSE and of American industry. The companies
are highly capitalized in their industries and their stocks are widely followed
and held by individual and institutional investors. The companies marked below
with an asterisk are the ten highest yielding stocks in the DJIA as of the
market close on March 31, 1999. The ten highest yielding stocks in the DJIA are
commonly known as the "Dogs of the Dow":
AT&T Hewlett-Packard
Allied Signal IBM
Aluminum Co. of America International Paper
American Express J.P. Morgan*
Boeing Johnson & Johnson
Caterpillar* McDonald's
Chevron* Merck
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Citigroup Minnesota Mining & Manufacturing*
Coca-Cola Philip Morris*
DuPont* Proctor & Gamble
Eastman Kodak* Sears Roebuck
Exxon* Union Carbide
General Electric United Technologies
General Motors* Walmart
Goodyear* Walt Disney
The designations Dow Jones, Dow Jones Industrial Average and DJIA are the
property of Dow Jones & Company, Inc. (DOW JONES). Dow Jones isn't affiliated
with the Divisions, hasn't participated in any way in the creation of the
Divisions or in the selection of stocks included in the Divisions and hasn't
reviewed or approved any information included in this prospectus. The Divisions
aren't sponsored, endorsed, sold or promoted by Dow Jones, and Dow Jones has no
relationship at all with the Divisions. Dow Jones isn't responsible for and
doesn't participate in determining the timing, price, or quantity of the
Divisions' shares to be issued or redeemed. Dow Jones doesn't have any
obligation or liability in connection with the administration or marketing of
the Divisions.
RISK FACTORS
RISKS IN GENERAL
An investment in a Division results in certain risks common to all stock
investments. Stocks fluctuate in price for a variety of reasons. For example,
the value of your investment will decline if the financial condition of the
issuers of the stocks becomes impaired or if the general condition of the stock
market worsens. Common stocks in general may be especially susceptible to
general stock market movements and to increases and decreases in value as market
confidence in and perceptions of the issuers change. These perceptions are
based on unpredictable factors, including government, economic, monetary and
fiscal policies, inflation and interest rates, economic expansion or
contraction, and global or regional political, economic or banking crises. In
addition, holders of common stocks generally are behind creditors and holders of
preferred stock for payments in the event of the bankruptcy of a stock issuer.
Common stocks aren't backed by an obligation of the issuer and therefore don't
offer any assurance of income or provide the degree of protection of capital
provided by debt securities.
STRATEGY SPECIFIC RISKS
Each Division is non-diversified and invests a larger portion of its assets in
the securities of fewer issuers than diversified investment companies. As a
result, an investment in a Division may be subject to greater fluctuation in
value than an investment in a diversified investment company. In addition, a
Division may be concentrated in issuers primarily engaged in a particular
industry. Concentration may involve additional risk because of the decreased
diversification of economic, financial, and market risks. In addition,
increased regulation, particularly with respect to the environment or with
respect to the petroleum or tobacco industry, may have a negative impact on
certain companies represented in a Division's portfolio.
SECTION 2 -- PERFORMANCE INFORMATION
The performance of the investment strategies for the Divisions relative to other
investment strategies can be shown using historical data. You should note that
Separate Account Ten didn't start operations until 1998. Therefore, the returns
shown in the following tables reflect the historical performance of a
hypothetical investment in the ten highest yielding stocks in the DJIA and the
performance of the DJIA, and not the performance of any Division. They don't
guarantee future performance or predict any Division's returns. Stock prices
(which will fluctuate in value) and dividends (which may be increased, reduced
or eliminated) can affect the returns. The strategy has underperformed the DJIA
in certain years. Accordingly, we can't guarantee that any Division will
outperform the DJIA over the life of the Division.
An investor in a Division might not receive as high a total return on an
investment in the Divisions that the hypothetical returns are based on because
(1) the total return figures shown don't reflect Division expenses or brokerage
commissions, and (2) the Divisions are established at different times of the
year. If these charges were reflected in the hypothetical returns, the returns
would be lower than those shown here.
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<PAGE>
PERFORMANCE HISTORY OF THE DOGS OF THE DOW STRATEGY -
COMPARISON OF HISTORICAL TOTAL RETURN (1)
<TABLE>
<CAPTION>
Ten Highest Dividend
Year Yielding Stocks (2) DJIA
---- -------------------- ----
<S> <C> <C>
1973 3.9% (13.1)%
1974 (1.3)% (23.1)%
1975 55.9% 44.4%
1976 34.8% 22.7%
1977 0.9% (12.7)%
1978 (0.1)% 2.7%
1979 12.4% 10.5%
1980 27.2% 21.5%
1981 5.0% (3.4)%
1982 23.6% 25.8%
1983 38.7% 25.7%
1984 7.6% 1.1%
1985 29.5% 32.8%
1986 32.1% 26.9%
1987 6.1% 6.0%
1988 22.9% 16.0%
1989 26.5% 31.7%
1990 (7.6)% (0.4)%
1991 39.3% 23.9%
1992 7.9% 7.4%
1993 27.3% 16.8%
1994 4.1% 4.9%
1995 36.7% 36.4%
1996 27.9% 28.9%
1997 21.9% 24.9%
1998 10.7% 18.1%
Cumulative 7,271.4% 2,429.7%
</TABLE>
- ----------------------------------
(1) Total Return is the sum of the percentage change in market value of each
group of stocks between the first and last trading days of a period and the
total dividends paid on each group of stocks during the period, divided by
the opening market value of each group of stocks as of the first trading
day of a period. Total Return doesn't take into consideration any expenses
or commissions. Over the twenty-six years listed above, the ten highest
dividend yielding stocks in the DJIA achieved an average annual total
return of 18.0%. Over this period, the strategy achieved a greater average
annual total return than that of the DJIA, which was 13.2%. Although each
Division seeks to achieve a better performance than the DJIA as a whole, we
can't guarantee that a Division will achieve a better performance.
Performance may also be compared to the performance of the S&P 500
Composite Price Stock Index or performance data from publications such as
Morningstar Publications, Inc. Source for years 1973-1997: BEATING THE
DOW, by Michael O'Higgins with John Downes, published by Harper Perennial,
1992, and "Beating the Dow," edited by John Downes, published by the Hirsch
Organization. Used with permission of the authors. Source for 1998: ARM.
(2) The ten highest dividend yielding stocks in the DJIA for any given year
were selected by ranking the dividend yields for each of the stocks in the
index at the beginning of that year, based upon an annualization of the
last quarterly or semi-annual regular dividend distribution (which would
have been declared in the preceding year), divided by that stock's market
value on the first trading day on the NYSE in that year.
39
<PAGE>
PERFORMANCE HISTORY OF THE DOGS OF THE DOW STRATEGY -
$10,000 HYPOTHETICAL INVESTMENT (1)
<TABLE>
<CAPTION>
Ten Highest Dividend
Year Yielding DJIA Stocks DJIA Index
---- -------------------- ----------
<S> <C> <C>
1973 $ 10,390 $ 8,690
1974 10,255 6,683
1975 15,987 9,650
1976 21,551 11,840
1977 21,745 10,336
1978 21,723 10,616
1979 24,417 11,730
1980 31,058 14,252
1981 32,611 13,768
1982 40,308 17,320
1983 55,907 21,771
1984 60,155 22,010
1985 77,901 29,230
1986 102,908 37,092
1987 109,185 39,318
1988 134,188 45,609
1989 169,748 60,067
1990 156,848 59,827
1991 218,489 74,125
1992 235,749 79,610
1993 300,109 92,985
1994 312,413 97,541
1995 427,069 133,046
1996 546,221 171,496
1997 665,843 214,199
1998 737,136 252,971
</TABLE>
The table above represents a hypothetical investment of $10,000 in the DJIA and
the ten highest dividend yielding DJIA Stocks from January 1, 1973 through
December 31, 1998. The table assumes that all dividends and distributions
during a year are reinvested at the end of that year. The table doesn't reflect
expenses or commissions. The value of the ten highest dividend-yielding DJIA
stocks would have been $449,913 if the following fees and expenses had been
charged: (1) insurance charges of 1.20%, (2) management fees of .50%, (3)
administrative fees of .15%, and (4) other expenses of .35%.
Investors shouldn't rely on performance information as an indication of the past
or future performance of the Divisions. We can't guarantee that any of the
Divisions will outperform the DJIA.
Performance data for the Divisions, including the yield and total return of the
Divisions, may appear in advertisements or sales literature. See "Performance
Information" in Part I, Section 8 for a discussion of how performance is
calculated.
SECTION 3 -- CONTRACTHOLDER INFORMATION
PRICING OF UNITS
The net asset value of the units of each Division is determined on each day the
NYSE is open for trading. The net assets are valued based on market quotations
as of the close of business of the NYSE, which is currently 4:00 p.m., Eastern
Time. Each Division's unit value is calculated separately by dividing the value
of the securities held by the Division plus any cash or other assets, less
liabilities, by the number of outstanding units of the Division.
40
<PAGE>
Amounts contributed and transferred to the Divisions are invested on only four
days each year, the INVESTMENT DATE for each of the four Divisions. Because of
this, purchase orders are priced at the net asset value that is next computed at
the end of the Business Day preceding the next available Investment Date after
receipt of your order. Redemption orders and transfers out of the Divisions are
priced at the net asset value next computed after receipt of your order. See
Part II, Section 2 - "Investment Strategy."
DIVIDENDS AND DISTRIBUTIONS
Dividends from stocks in each Division's portfolio will be reinvested on the day
the dividend is received in additional shares of the stock that paid the
dividend.
SECTION 4 -- MANAGEMENT
THE INVESTMENT ADVISER
Integrity Capital Advisors Inc. serves as the investment adviser to the Select
Ten Plus Divisions. Integrity Capital Advisors provides investment management
and supervisory services to investment companies, and has been in operation
since October 1994. Integrity Capital Advisors is a wholly owned subsidiary of
ARM. Its offices are located at 515 West Market Street, Louisville, Kentucky
40202.
Integrity Capital Advisors has overall responsibility for administering all
operations of the Divisions and for monitoring and evaluating the management of
the assets of the Divisions by the sub-adviser. Specifically, Integrity Capital
Advisors:
- provides the overall business management and administrative services
necessary for each Division's operation;
- furnishes or procures on behalf of the Division the services and
information necessary to the proper conduct of the Divisions'
business;
- acts as liaison among the various service providers to the Divisions,
including the custodian, portfolio accounting personnel, sub-adviser,
counsel, and auditors;
- is responsible for ensuring that the Divisions operate in compliance
with applicable legal requirements and for monitoring the sub-adviser
for compliance with requirements under applicable law and with the
investment policies and restrictions of the Divisions; and
- is responsible for monitoring and evaluating the sub-adviser on a
periodic basis and considering its performance record with respect to
the investment objective and policies of the Divisions.
Integrity Capital Advisors is authorized to exercise full investment discretion
and make all determinations with respect to the investment of each Division's
assets and the purchase and sale of securities for the Divisions in the event
that at any time a sub-adviser isn't engaged to manage the assets of the
Divisions.
For providing investment management services to the Divisions, Integrity Capital
Advisors receives a monthly fee based on an annual rate of .50% of each
Division's average daily net assets. Integrity Capital Advisors will pay a
portion of those fees to National Asset for its services under a sub-advisory
agreement at an annual rate of .10% of the Divisions' average daily net assets
up to $100 million, and .05% of the Divisions' average daily net assets over
$100 million. Integrity Capital Advisors guaranteed it would pay National Asset
a minimum sub-advisory fee of $25,000 during the Divisions' first year of
operations.
Integrity Capital Advisors has agreed to reimburse each Division for operating
expenses (excluding management fees) above an annual rate of .35% of the
Division's average net assets. Integrity Capital Advisors can change or
terminate its expense reimbursement policy for the Divisions, but doesn't
currently intend to do so.
41
<PAGE>
THE SUB-ADVISER
National Asset Management Corporation serves as the sub-adviser to the Divisions
and in that capacity provides investment advisory services, including security
selection. National Asset makes all determinations with respect to the
investment of each Division's assets and the purchase and sale of securities and
other investments under the Divisions' investment objectives and policies.
National Asset is a Kentucky corporation with executive offices at National City
Tower, Louisville, Kentucky 40202. Since its inception in 1979, National Asset
has provided customized investment management services to corporations,
governmental entities, foundations, endowments, and similar entities. As of
December 31, 1998, National Asset managed approximately $10.2 billion in assets.
42
<PAGE>
GLOSSARY
ACCOUNT VALUE - the value of your contract, which consists of the values of your
Fixed Accounts and Variable Account Options added together.
ADJUSTED ACCOUNT VALUE - your Account Value increased or decreased by any Market
Value Adjustment made to your GRO Account.
ANNUITANT ("You," "Your") - the person upon whose life an annuity benefit and
death benefit are based.
ANNUITY PAYMENT - one of a series of payments made if you choose to annuitize
your contract.
ARM - ARM Financial Group, Inc.
BUSINESS DAY - any day that the New York Stock Exchange is open.
CASH VALUE - your Adjusted Account Value reduced by any withdrawal charges
and/or any pro rata annual administrative charges that may apply.
CONTRACT - your variable annuity contract.
DIVISION - an investment division of the Select Ten Plus Divisions. There are
four Divisions: the Select Ten Plus Division - March, June, September and
December.
ENHANCED RATE - a higher rate of interest we may declare for the first year of
any GRO Account that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period.
FIXED ACCOUNTS - Guaranteed Rate Options and the Systematic Transfer Option.
GRO - Guaranteed Rate Option, which offer durations of two, three, five, seven
and ten years and lock in a fixed annual effective interest rate.
GRO VALUE - the value of a GRO Account. The GRO Value at the expiration of a
GRO Account, assuming you haven't withdrawn or transferred any amounts, will be
the amount you put in plus interest at the Guaranteed Interest Rate.
GUARANTEE PERIOD - the duration of your GRO Account.
GUARANTEED INTEREST RATE - a fixed annual effective interest rate that we
declare for the duration of your GRO Account.
INVESTMENT OPTIONS - Variable Account Options and Fixed Accounts, collectively.
MARKET VALUE ADJUSTMENT ("MVA")- an upward or downward adjustment (never below
the Minimum Value) made to the value of your GRO Account for withdrawals,
surrenders, transfers and certain other transactions made before the GRO Account
expires.
MINIMUM VALUE - an amount equal to your net allocation to a GRO Account, less
prior withdrawals (and associated charges) accumulated at 3% interest annually,
less any administrative charge.
NON-DIVERSIFIED - a "non-diversified" portfolio may invest a larger portion of
its assets in the securities of fewer issuers than could a diversified
portfolio.
OWNER - the person who owns the contract, and is usually the annuitant.
Includes any person named as Joint Owner.
PORTFOLIO - an investment portfolio of a mutual fund in which Separate Account
II invests its assets.
43
<PAGE>
RETIREMENT DATE - the date you elect annuity payments to begin. The Retirement
Date can't be later than your 98th birthday, or earlier if required by law.
SEPARATE ACCOUNTS - Separate Account II and Separate Account Ten of Integrity
Life Insurance Company. Each Separate Account consists of assets that are
segregated by Integrity and invested in Variable Account Options.
STO - Systematic Transfer Option - our STO provides a guaranteed interest rate;
contributions to the STO must be transferred into other Investment Options
within one year of your most recent STO contribution.
UNIT - a measure of your ownership interest in a Variable Account Option.
UNIT VALUE - the value of each unit calculated on any Business Day.
VARIABLE ACCOUNT OPTIONS - the various investment options available to you under
the contract, consisting of the Divisions and the Portfolios. The value of your
contract will reflect the investment performance of the Variable Account Options
you choose.
WE, OUR AND US - Integrity Life Insurance Company, a subsidiary of ARM Financial
Group, Inc.
44
<PAGE>
APPENDIX A
FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNTS
The table below shows the unit value for certain Variable Account Options at
inception, the number of units outstanding at December 31 of each year since
inception, and the unit value at the beginning and end of each period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SCUDDER KEMPER VALUE
Unit value at beginning of period ......................... $23.47 $18.24 $14.85 $10.34 $10.56
Unit value at end of period ............................... $27.42 $23.47 $18.24 $14.85 $10.34
Number of units outstanding at end of period............... 1,385,723 1,278,296 1,119,634 806,752 733,336
HARRIS BRETALL SULLIVAN & SMITH EQUITY
GROWTH
Unit value at beginning of period ......................... $19.74 $14.85 $13.21 $10.17 $9.91
Unit value at end of period ............................... $26.42 $19.74 $14.85 $13.21 $10.17
Number of units outstanding at end of period .............. 1,345,118 1,295,185 1,184,119 1,342,971 1,014,016
ZWEIG ASSET ALLOCATION
Unit value at beginning of period ......................... $18.32 $15.23 $13.44 $11.23 $11.33
Unit value at end of period ............................... $17.70 $18.32 $15.23 $13.44 $11.23
Number of units outstanding at end of period .............. 1,761,932 2,107,245 2,434,199 2,541,023 2,558,692
ZWEIG EQUITY (SMALL CAP)
Unit value at beginning of period ......................... $18.15 $14.71 $12.58 $10.53 $10.74
Unit value at end of period ............................... $17.80 $18.15 $14.71 $12.58 $10.53
Number of units outstanding at end of period .............. 581,283 592,060 592,469 587,830 567,827
BT EAFE EQUITY INDEX
Unit value at beginning of period ......................... $9.42 - - -
Unit value at end of period ............................... $11.30 $9.42
Number of units outstanding at end of period .............. 177,704 19,652
<CAPTION>
1993 1992 INCEPTION*
---- ---- ---------
<S> <C> <C> <C>
SCUDDER KEMPER VALUE
Unit value at beginning of period ......................... $10.07 - $10.00
Unit value at end of period ............................... $10.56 $10.07
Number of units outstanding at end of period............... 547,498 3,540
HARRIS BRETALL SULLIVAN & SMITH EQUITY
GROWTH
Unit value at beginning of period ......................... $10.05 - $10.00
Unit value at end of period ............................... $9.91 $10.05
Number of units outstanding at end of period .............. 830,307 18,906
ZWEIG ASSET ALLOCATION
Unit value at beginning of period ......................... $9.99 - $10.00
Unit value at end of period ............................... $11.33 $9.99
Number of units outstanding at end of period .............. 1,518,39 11,385
ZWEIG EQUITY (SMALL CAP)
Unit value at beginning of period ......................... - - $10.00
Unit value at end of period ............................... $10.74 -
Number of units outstanding at end of period .............. 425,500 -
BT EAFE EQUITY INDEX
Unit value at beginning of period ......................... - - $10.00
Unit value at end of period ...............................
Number of units outstanding at end of period ..............
45
<PAGE>
<S> <C> <C> <C> <C> <C>
BT EQUITY 500 INDEX
Unit value at beginning of period ............................ $10.16 - - -
Unit value at end of period .................................. $12.90 $10.16
Number of units outstanding at end of period .................1,563,771 224,706
BT SMALL CAP INDEX
Unit value at beginning of period ............................ $9.44 - - -
Unit value at end of period .................................. $9.11 $9.44
Number of units outstanding at end of period ................. 389,699 70,238
VIP EQUITY-INCOME
Unit value at beginning of period ............................ $10.06 - - -
Unit value at end of period .................................. $11.08 $10.06
Number of units outstanding at end of period .................1,206,214 155,520
VIP II CONTRAFUND
Unit value at beginning of period ............................ $9.73 - - -
Unit value at end of period .................................. $12.47 $9.73
Number of units outstanding at end of period ................. 893,485 129,361
VIP III GROWTH & INCOME
Unit value at beginning of period ............................ $10.24 - - -
Unit value at end of period .................................. $13.10 $10.24
Number of units outstanding at end of period ................ 859,704 119,576
VIP III GROWTH OPPORTUNITIES
Unit value at beginning of period ............................ $10.26 - - -
Unit value at end of period .................................. $12.62 $10.26
Number of units outstanding at end of period ................. 617,513 78,180
BT EQUITY 500 INDEX
Unit value at beginning of period ............................ - - $10.00
Unit value at end of period ..................................
Number of units outstanding at end of period .................
BT SMALL CAP INDEX
Unit value at beginning of period ............................ - - $10.00
Unit value at end of period ..................................
Number of units outstanding at end of period .................
VIP EQUITY-INCOME
Unit value at beginning of period ............................ - - $10.00
Unit value at end of period ..................................
Number of units outstanding at end of period .................
VIP II CONTRAFUND
Unit value at beginning of period ............................ - - $10.00
Unit value at end of period ..................................
Number of units outstanding at end of period .................
VIP III GROWTH & INCOME
Unit value at beginning of period ............................ - - $10.00
Unit value at end of period ..................................
Number of units outstanding at end of period ................
VIP III GROWTH OPPORTUNITIES
Unit value at beginning of period ............................ - - $10.00
Unit value at end of period ..................................
Number of units outstanding at end of period .................
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
JANUS ASPEN CAPITAL APPRECIATION
Unit value at beginning of period............................. $9.47 - - -
Unit value at end of period................................... $14.77 $9.47
Number of units outstanding at end of period.................. 712,285 92,194
<CAPTION>
1993 1992 INCEPTION*
---- ---- ---------
<S> <C> <C> <C>
JANUS ASPEN CAPITAL APPRECIATION
Unit value at beginning of period............................. - - $10.00
Unit value at end of period...................................
Number of units outstanding at end of period..................
46
<PAGE>
<S> <C> <C> <C> <C> <C>
JANUS ASPEN BALANCED
Unit value at beginning of period............................... $9.95 - - -
Unit value at end of period..................................... $13.19 $9.95
Number of units outstanding at end of period.................... 5,548,134 5,661,088
JANUS ASPEN WORLDWIDE GROWTH
Unit value at beginning of period............................... $9.47 - - -
Unit value at end of period..................................... $12.04 $9.47
Number of units outstanding at end of period.................... 1,327,696 151,721
JANUS ASPEN MONEY MARKET
Unit value at beginning of period............................... $10.08 - - -
Unit value at end of period..................................... $10.48 $10.08
Number of units outstanding at end of period.................... 1,709,186 634,249
J.P. MORGAN INTERNATIONAL OPPORTUNITIES
Unit value at beginning of period............................... $9.28 - - -
Unit value at end of period..................................... $9.59 $9.28
Number of units outstanding at end of period.................... 137,064 41,664
J.P. MORGAN BOND
Unit value at beginning of period............................... $10.19 - - -
Unit value at end of period..................................... $10.85 $10.19
Number of units outstanding at end of period.................... 1,499,874 418,029
MSDW UNIVERSAL FUNDS ASIAN EQUITY
Unit value at beginning of period............................... $8.46 - - -
Unit value at end of period..................................... $7.81 $8.46
Number of units outstanding at end of period.................... 476,370 484,093
MSDW UNIVERSAL FUNDS EMERGING MARKETS DEBT
Unit value at beginning of period............................... $9.23 - - -
Unit value at end of period..................................... $6.52 $9.23
Number of units outstanding at end of period.................... 607,509 653,365
<S> <C> <C> <C>
JANUS ASPEN BALANCED
Unit value at beginning of period............................... - - $10.00
Unit value at end of period.....................................
Number of units outstanding at end of period....................
JANUS ASPEN WORLDWIDE GROWTH
Unit value at beginning of period............................... - - $10.00
Unit value at end of period.....................................
Number of units outstanding at end of period....................
JANUS ASPEN MONEY MARKET $10.00
Unit value at beginning of period............................... - -
Unit value at end of period.....................................
Number of units outstanding at end of period....................
J.P. MORGAN INTERNATIONAL OPPORTUNITIES
Unit value at beginning of period............................... - - $10.00
Unit value at end of period.....................................
Number of units outstanding at end of period....................
J.P. MORGAN BOND
Unit value at beginning of period............................... - - $10.00
Unit value at end of period.....................................
Number of units outstanding at end of period....................
MSDW UNIVERSAL FUNDS ASIAN EQUITY
Unit value at beginning of period............................... - - $10.00
Unit value at end of period.....................................
Number of units outstanding at end of period....................
MSDW UNIVERSAL FUNDS EMERGING MARKETS DEBT
Unit value at beginning of period............................... - - $10.00
Unit value at end of period.....................................
Number of units outstanding at end of period....................
47
<PAGE>
<S> <C> <C> <C> <C> <C>
MSDW UNIVERSAL FUNDS HIGH YIELD
Unit value at beginning of period................................ $10.11 - - -
Unit value at end of period...................................... $10.45 $10.11
Number of units outstanding at end of period..................... 578,494 69,823
MSDW UNIVERSAL FUNDS U.S. REAL ESTATE
Unit value at beginning of period................................ $10.15 - - -
Unit value at end of period...................................... $ 8.93 $10.15
Number of units outstanding at end of period..................... 252,794 67,357
SELECT TEN PLUS DIVISION JUNE
Unit value at beginning of period................................ - - - -
Unit value at end of period...................................... $10.43
Number of units outstanding at end of period..................... 195,841
<S> <C> <C> <C>
MSDW UNIVERSAL FUNDS HIGH YIELD
Unit value at beginning of period................................ - - $10.00
Unit value at end of period......................................
Number of units outstanding at end of period.....................
MSDW UNIVERSAL FUNDS U.S. REAL ESTATE
Unit value at beginning of period................................ - - $10.00
Unit value at end of period......................................
Number of units outstanding at end of period.....................
SELECT TEN PLUS DIVISION JUNE
Investment income.............................................. $0.14
Expenses....................................................... $0.11
Net investment income.......................................... $0.03
Net realized and unrealized gains (losses)
on securities................................................ $0.40
Net increase (decrease) in unit value.......................... $0.43
Unit value at beginning of period.............................. $10.00
Unit value at end of period.................................... $10.43
Expenses to average net assets................................. 2.20%
Portfolio turnover rate........................................ 0.86%
Number of units outstanding at end of period................... 195,841
48
<PAGE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994 1993 1992 INCEPTION*
---- ---- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECT TEN PLUS DIVISION SEPTEMBER
Investment income.......................... $0.07
Expenses................................... $0.06
Net investment income...................... $0.02
Net realized and unrealized gains
(losses) on securities................... $0.24
Net increase (decrease) in unit value...... $0.26
Unit value at beginning of period.......... $10.00 - - $10.00
Unit value at end of period................ $10.26
Expenses to average net assets............. 2.20%
Portfolio turnover rate.................... 1.35%
Number of units outstanding at
end of period........................... 1,072,954
SELECT TEN PLUS DIVISION DECEMBER
Investment income.......................... $-
Expenses................................... $-*
Net investment loss........................ ($-*
Net realized and unrealized gains
(losses) on securities................... ($0.18)
Net increase (decrease) in unit value...... ($0.18)
Unit value at beginning of period.......... $10.00 - - $10.00
Unit value at end of period................ $9.82
Expenses to average net assets............. 2.12%
Portfolio turnover rate.................... -
Number of units outstanding at
end of period........................... 1,478,641
*Less than $0.01
</TABLE>
*The unit value for each Variable Account Option at inception is $10.00. The
inception date for the Harris Bretall Sullivan & Smith Equity Growth Option is
December 8, 1992. The inception date for the Zweig Asset Allocation, Scudder
Kemper Value and Zweig Equity Options is December 14, 1992. The inception date
for the EAFE Equity Index, Equity 500 Index, Small Cap Index, VIP
Equity-Income, VIP II Contrafund,VIP III Growth & Income,VIP III Growth
Opportunities, Janus Aspen Capital Appreciation, Janus Aspen Balanced, Janus
Aspen Worldwide Growth, Janus Aspen Money Market, J.P.Morgan International
Opportunities, J.P. Morgan Bond, MSDW Universal Funds Asian Equity, MSDW
Universal Funds Emerging Markets Debt, MSDW Universal Funds High Yield, and MSDW
Universal Funds U.S. Real Estate Options is October 1, 1997. The inception date
for the Select Ten Plus Division June is June 30, 1998. The inception date for
the Select Ten Plus Division September is September 30, 1998. The inception
date for the Select Ten Plus Division December is December 31, 1998. The
inception date for the Select Ten Plus Division March is March 31, 1999. The
inception date for the VIP Growth Portfolio and VIP III Mid Cap Portfolio is May
1, 1999. Because the VIP Growth Portfolio, VIP III Mid Cap Portfolio and Select
Ten Plus Division March had not yet begun operations as of the end of 1998, we
have provided no data for these Variable Account Options.
49
<PAGE>
APPENDIX B
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
contingent withdrawal charge may affect the values of a contract upon a
withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the
Example under "Table of Annual Fees and Expenses" in this Prospectus. In these
examples, the withdrawal occurs at the end of the three year period after the
initial contribution. The Market Value Adjustment operates in a similar manner
for transfers. Contingent withdrawal charges don't apply to transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed for these examples that you haven't made any prior partial withdrawals
or transfers.
The Market Value Adjustment will be based on the rate we are crediting (at the
time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next lower
number of complete months. If we don't declare a rate for the exact time
remaining, we'll use a formula to find a rate using GRO Accounts of durations
closest to (next higher and next lower) the remaining period described above.
Three years after the initial contribution, there would have been four years
remaining in your GRO Account. These examples also show the withdrawal charge,
which would be calculated separately.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and that at that time,
we're crediting 6.25% for a four-year GRO Account. Upon a full withdrawal, the
Market Value Adjustment, applying the above formula would be:
48/12 48/12
-0.0551589 = [(1 + .05) / (1 + .0625 + .0025) ] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
The Market Adjusted Value would be:
$54,688.58 = $57,881.25 - $3,192.67
A withdrawal charge of 6% would be assessed against the $50,000 original
contribution:
$3,000.00 = $50,000.00 X .06
Thus, the amount payable on a full withdrawal would be:
$51,688.58 = $57,881.25 - $3,192.67 - $3,000.00
50
<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:
$957.18 = [($14,211.87+ $783.91)/(1 - .06)] - ($14,211.87+ 783.91)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,741.09 = $20,000.00 + $783.91 + $957.18
The ending Account Value would be:
$36,140.16 = $57,881.25 - $21,741.09
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we're crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
48/12 48/12
.0290890 = [(1 + .05) / (1 + .04 + .0025) ] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
A withdrawal charge of 6% would be assessed against the $50,000 original
contribution:
$3,000.00 = $50,000.00 X .06
Thus, the amount payable on a full withdrawal would be:
$56,564.96 = $57,881.25 + $1,683.71 - $3,000.00
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
51
<PAGE>
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:
$880.75 = [($14,211.87 - $413.41)/(1 - .06)] - ($14,211.87 - $413.41)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,467.34 = $20,000.00 - $413.41 + $880.75
The ending Account Value would be:
$37,413.91 = $57,881.25 - $20,467.34
Actual Market Value Adjustments may have a greater or lesser impact than
shown in the examples, depending on the actual change in interest crediting
rate and the timing of the withdrawal or transfer in relation to the time
remaining in the GRO Account. Also, the Market Value Adjustment can never
decrease the Account Value below your premium plus 3% interest, before any
applicable charges. Account values less than $50,000 will be subject to a
$30 annual charge.
The above examples will be adjusted to comply with applicable state regulation
requirements for contracts issued in certain states.
52
<PAGE>
APPENDIX C - TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Part 1 - Integrity and Custodian
Part 2 - Distribution of the Contracts
Part 3 - Investment Restrictions and Policies of the Select Ten Plus Divisions
Part 4 - Management of Separate Account Ten
Part 5 - Portfolio Transactions and Brokerage
Part 6 - Performance Information
Part 7 - Determination of Accumulation Unit Values
Part 8 - Tax Favored Retirement Programs
Part 9 - 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 (Pinnacle) and Separate Account Ten
Name:
-------------------------------------------------
Address
-----------------------------------------------
City: State: Zip:
--------------- -------- ---------------
53
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
FOR
PINNACLE
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT II
AND SEPARATE ACCOUNT TEN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Part 1 - Integrity and Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Part 2 - Distribution of the Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 2
Part 3 - Investment Restrictions and Policies of the Select Ten Plus Divisions . . . . . 3
Part 4 - Management of Separate Account Ten. . . . . . . . . . . . . . . . . . . . . . . 4
Part 5 - Portfolio Transactions and Brokerage. . . . . . . . . . . . . . . . . . . . . . 7
Part 6 - Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Part 7 - Determination of Accumulation Unit Values . . . . . . . . . . . . . . . . . . .15
Part 8 - Tax-Favored Retirement Programs . . . . . . . . . . . . . . . . . . . . . . . .15
Part 9 - Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
</TABLE>
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for the contracts, dated May 1, 1999.
For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at Integrity Life Insurance Company
("Integrity"), P.O. Box 740074, Louisville, Kentucky 40201-0074, or by calling
1-800-325-8583.
1
<PAGE>
PART 1 - INTEGRITY AND CUSTODIAN
Integrity Life Insurance Company is an Ohio stock life insurance company
organized in 1966 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 and Separate Account
Ten, is a wholly owned subsidiary of Integrity Holdings, Inc., a Delaware
corporation that's 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 that's
a financial services company focusing on the long-term savings and retirement
marketplace by providing retail and institutional products and services
throughout the United States. ARM owns 100% of the stock of (i) ARM Securities
Corporation (ARM SECURITIES), a Minnesota corporation, registered with the SEC
as a broker-dealer and a member of the National Association of Securities
Dealers, Inc., (ii) Integrity Capital Advisors, Inc., a Delaware corporation
registered with the SEC as an investment adviser, (iii) SBM Certificate Company,
a Minnesota corporation registered with the SEC as an issuer of face-amount
certificates, and (iv) ARM Transfer Agency, Inc., a Delaware corporation
registered with the SEC as a transfer and dividend disbursing agency.
ARM is 100% publicly owned, trading on the New York Stock Exchange (NYSE). No
one has the direct or indirect power to control ARM, except power he or she may
have by virtue of his or her capacity as a director or executive officer of ARM;
no individual beneficially owns more than 5% of the common shares.
ARM has provided substantially all of the services required to be performed on
behalf of Separate Account II since 1994, and on behalf of Separate Account Ten
since its inception. Total fees paid to ARM by Integrity for management
services, including services applicable to Separate Account II and Separate
Account Ten, in 1996 were $13,823,048, in 1997 were $19,307,552 and in 1998 were
$27,158,002.
Integrity is the custodian for the shares of Portfolios owned by Separate
Account II. Investors Fiduciary Trust Company is the custodian for the shares
of stocks owned by Separate Account Ten. The 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 Investors Service, Inc., Standard & Poor's Corporation, Duff &
Phelps Corporation, or other recognized rating services. Integrity is currently
rated "A" (Excellent) by A.M. Best Company, and has received claims paying
ability ratings of "A" (Good) from Standard & Poor's Corporation, "Baa1"
(Adequate) from Moody's Investors Service, Inc., and "A+" (High) from Duff and
Phelps Credit Rating Company. However, Integrity doesn't guarantee the
investment performance of the portfolios, and these ratings don't reflect
protection against investment risk.
Under prior management, Integrity was subject to a consent order in the State of
Florida that precluded it 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 was able to comply
with the investment limitations of the State of Florida. A request for full
relief from the consent order was granted by the Florida Department of Insurance
on November 4, 1994.
TAX STATUS OF INTEGRITY
Integrity is taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code of 1986, as amended (the CODE). Since the Separate
Accounts aren't separate entities from us and their operations form a part of
us, they aren't taxed separately as "regulated investment companies" under
Subchapter M of the Code. Investment income and realized capital gains on the
assets of the Separate Accounts are reinvested and taken into account in
determining the accumulation value. Under existing federal income tax law, the
Separate Accounts' investment income, including realized net capital gains,
isn't taxed to us. We can make a tax deduction if federal tax laws change to
include these items in our taxable income.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
2
<PAGE>
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 $12,537,715 for
the year ended December 31, 1998, $1,570,251 for the year ended December 31,
1997 and $617,264 for the year ended December 31, 1996. Distribution allowances
weren't 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,
those types of incentives may be offered only to certain broker-dealers that
sell or are expected to sell certain minimum amounts of the contracts during
specified time periods.
PART 3 - INVESTMENT RESTRICTIONS AND POLICIES OF THE SELECT TEN PLUS DIVISIONS
INVESTMENT RESTRICTIONS
The investment objective of each Division is to seek total return. The
Divisions' investment strategy, objective and policies are described in Part II
of the prospectus under the captions "Investment Strategy" and "Investment
Objective and Policies." The following are the Divisions' fundamental
investment limitations, which can't be changed without shareholder approval.
Each Division:
1. May not borrow money, except that each Division may borrow up to 5% of its
total assets (not including the amount borrowed) from a bank for temporary
or emergency purposes (but not for leverage or the purchase of
investments).
2. May not issue senior securities, except as permitted under the 1940 Act.
May not act as an underwriter of another issuer's securities, except to the
extent that the Divisions may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase and
sale of portfolio securities.
3. May not purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments.
4. May not make loans if, as a result, more than 33 1/3% of that Division's
total assets would be lent to other persons, except through (i) purchases
of debt securities or other debt instruments, or (ii) engaging in
repurchase agreements.
5. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this won't prohibit the
Divisions from purchasing or selling securities or other instruments backed
by real estate or of issuers engaged in real estate activities).
The following are the Divisions' non-fundamental operating policies, which may
be changed by the Board of Managers of the Divisions without shareholder
approval.
Each Division may not:
1. Sell securities short, unless the Division owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, or
unless it covers such short sale as required by the current rules and
positions of the SEC or its staff.
2. Purchase securities on margin, except that each Division may obtain such
short-term credits as are necessary for the clearance of transactions.
3. Invest in illiquid securities if, as a result of such investment, more than
15% of its net assets would be invested in illiquid securities, or such
other amounts as may be permitted under the 1940 Act.
3
<PAGE>
4. Purchase securities of other investment companies except in compliance with
the 1940 Act and applicable state law.
5. Make any loans other than loans of portfolio securities, except through (i)
purchases of debt securities or other debt instruments, or (ii) engaging in
repurchase agreements.
Except for the fundamental investment limitations listed above and the
Divisions' investment objective, the other investment policies described in the
prospectus and this SAI aren't fundamental and may be changed with the approval
of the Divisions' Board of Managers. Unless noted otherwise, if a percentage
restriction is adhered to at the time of investment, a later increase or
decrease in percentage resulting from a change in the Divisions' assets (i.e.,
due to cash inflows or redemptions) or in market value of the investment or the
Divisions' assets won't be considered a violation of that restriction.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Divisions'
investment strategy, objective, policies and techniques that are described in
Part II of the prospectus under the captions "Investment Strategy," "Investment
Objective and Policies" and "Risk Factors."
LENDING OF PORTFOLIO SECURITIES. Each Division is authorized to lend up to 33
1/3% of the total value of its portfolio securities to broker-dealers or
institutional investors that the investment adviser and sub-adviser determine
are qualified, but only when the borrower maintains with the Divisions'
custodian bank collateral, either in cash or money market instruments, in an
amount at least equal to the market value of the securities loaned, plus accrued
interest and dividends, determined on a daily basis and adjusted accordingly.
Although each Division is authorized to lend, the Divisions don't presently
intend to engage in lending. In determining whether to lend securities to a
particular broker-dealer or institutional investor, the investment adviser and
sub-adviser will consider, and during the period of the loan will monitor, all
relevant facts and circumstances, including the creditworthiness of the
borrower. The Divisions will retain authority to terminate any loans at any
time. The Divisions may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or money market instruments held as collateral to the borrower or
placing broker. The Divisions will receive reasonable interest on the loan or a
flat fee from the borrower and amounts equivalent to any dividends, interest or
other distributions on the securities loaned. The Divisions will retain record
ownership of loaned securities to exercise beneficial rights, such as voting and
subscription rights and rights to dividends, interest or other distributions,
when retaining such rights is considered to be in the Divisions' interest.
REPURCHASE AGREEMENTS. The Divisions may enter into repurchase agreements with
certain banks or non-bank dealers. In a repurchase agreement, a Division buys a
security at one price, and at the time of sale, the seller agrees to repurchase
the obligation at a mutually agreed upon time and price (usually within seven
days). The repurchase agreement, thereby, determines the yield during the
purchaser's holding period, while the seller's obligation to repurchase is
secured by the value of the underlying security. The investment adviser and
sub-adviser will monitor, on an ongoing basis, the value of the underlying
securities to ensure that the value always equals or exceeds the repurchase
price plus accrued interest. Repurchase agreements could involve certain risks
in the event of a default or insolvency of the other party to the agreement,
including possible delays or restrictions upon the Divisions' ability to dispose
of the underlying securities. Although no definitive creditworthiness criteria
are used, the investment adviser reviews the creditworthiness of the banks and
non-bank dealers with which any Division enters into repurchase agreements to
evaluate those risks. The Divisions may, under certain circumstances, deem
repurchase agreements collateralized by U.S. government securities to be
investments in U.S. government securities.
PART 4 - MANAGEMENT OF SEPARATE ACCOUNT TEN
BOARD OF MANAGERS OF SEPARATE ACCOUNT TEN
The business and affairs of Separate Account Ten are managed under the direction
of a Board of Managers, currently consisting of four (4) members, or Managers,
according to a set of rules adopted by the Board of Managers called "Rules
4
<PAGE>
and Regulations of Separate Account Ten". The Board of Managers has
responsibility for the investment management related operations of Separate
Account Ten and matters arising under the 1940 Act. The Board of Managers
doesn't have responsibility for the payment of obligations under the contracts
and administration of the contracts. These matters are Integrity's
responsibility. The day-to-day operations of Separate Account Ten are the
responsibility of its officers. The names, addresses, and ages of the Managers
and the officers of Separate Account Ten, together with information as to their
principal business occupations during the past five years, are listed below.
NAME, AGE, AND ADDRESS OF PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ------------------------- -------------------------------------------
MANAGER
- -------
John R. Lindholm (50)* President of Integrity and Vice President-Chief
515 West Market Street Marketing Officer of National Integrity since
Louisville, KY 40202 November 26, 1993; Executive Vice President-Chief
Marketing Officer of ARM Financial Group, Inc.
since July 27, 1993; since March 1992 Chief
Marketing Officer of Analytical Risk Management
L.P. From June 1990 to February 1992, Chief
Marketing Officer and a Managing Director of the
ICH Capital Management Group, ICH Corporation,
Louisville, Kentucky; prior thereto, Chief
Marketing Officer and Managing Director for
Capital Holding Corporation's Accumulation and
Investment Group. Director of The Legends Fund,
Inc. since October, 1993. Director of the mutual
funds in the State Bond Group of mutual funds
from June 1995 to December 1996.
John Katz (60) Investment banker since January 1991; Chairman
10 Hemlock Road and chief Executive Officer, Sam's Restaurant
Hartsdale, NY 10530 Group, Inc. (a restaurant holding company), from
June 1991 to August 1992; Executive Vice
President (from January 1989 to January 1991) and
Senior Vice President (from December 1985 to
January 1989), Equitable Investment Corporation
(an indirect wholly-owned subsidiary of The
Equitable Life Assurance Society of the United
States, through which it owned and managed its
investment operations). Director of The Legends
Fund, Inc. since November, 1992. Director of the
mutual funds in the State Bond Group of mutual
funds from June 1995 to December 1996.
William B. Faulkner (71) Director since November 1996. President, William
240 East Plato Blvd. Faulkner & Associates (business and institutional
St. Paul, MN 55107 adviser), since 1986; Consultant to American
Hoist & Derrick Company (construction equipment
manufacturer), from 1986 to 1989; prior thereto,
Vice President and Assistant to the President,
American Hoist & Derrick Company. Director of The
Legends Fund, Inc. since November, 1995. Director
of the mutual funds in the State Bond Group of
mutual funds from June 1995 to December 1996.
Chris LaVictoire Mahai (44) President, clavm, inc. (a firm that provides
425 Portland Avenue consulting, project management and infomediary
Minneapolis, MN 55488 services to organizations interested in creating
and implementing innovative business, community
and marketplace strategies and initiatives);
Poynter Fellow, the Poynter Institute for Media
Studies; Board Member (Cowles Media) Star Tribune
Foundation, from September, 1992 to June, 1998;
Senior Vice President, Cowles Media Company/Star
Tribune, from August, 1993 to June 1998; Director
of The Legends Fund, Inc. since February of 1998;
Director of the mutual funds in the State Bond
Group of mutual funds, June 1984 to December
1996.
* Mr. Lindholm is an INTERESTED PERSON, as defined in the 1940 Act, by virtue
of his position with ARM Financial Group, Inc.
5
<PAGE>
THE INVESTMENT ADVISER
Integrity Capital Advisors is the investment adviser to Separate Account Ten
under an investment advisory agreement. Integrity Capital Advisors is a wholly
owned subsidiary of ARM and is registered as an investment adviser under the
Investment Advisers Act of 1940. Its offices are located at 515 West Market
Street, Louisville, Kentucky 40202.
Subject to the direction of the Board of Managers, Integrity Capital Advisors is
responsible for providing all supervisory and management services reasonably
necessary for the operation of Separate Account Ten other than those investment
advisory services performed by the sub-adviser. These services include, but
aren't limited to, (i) coordinating all matters relating to the functions of the
sub-adviser, custodian, accountants, attorneys, and other parties performing
services or operational functions for Separate Account Ten, (ii) providing
Separate Account Ten, at Integrity Capital Advisor's expense, with the services
of a adequate competent staff to perform such administrative and clerical
functions as are necessary to provide effective supervision and administration
of Separate Account Ten, (iii) making its officers and employees available to
the Board of Managers and officers of Separate Account Ten for consultation and
discussions regarding the supervision and administration of Separate Account
Ten, (iv) maintaining or supervising the maintenance by the sub-adviser or third
parties approved by Separate Account Ten of such books and records as may be
required by applicable federal or state law, (v) preparing or supervising the
preparation by third parties approved by Separate Account Ten of all federal,
state and local tax returns and reports of Separate Account Ten required by
applicable law, (vi) preparing, filing and arranging for the distribution of
proxy materials and periodic reports to Owners as required by applicable law,
(vii) preparing and arranging for the filing of such registration statements and
other documents with the SEC and other federal and state regulatory authorities
as may be required by applicable law, (viii) taking such other action with
respect to Separate Account Ten as may be required by applicable law, including
without limitation, the rules and regulations of the SEC and other regulatory
agencies, and (ix) providing Separate Account Ten, at Integrity Capital
Advisor's expense, with adequate personnel, office space, communications
facilities, and other facilities necessary for its operations as contemplated in
the investment advisory agreement. Other responsibilities of Integrity Capital
Advisors are described in the prospectus.
Integrity Capital Advisors is authorized to exercise full investment discretion
and make all determinations with respect to the investment of the Division's
assets and the purchase and sale of securities for the Divisions if at any time
a sub-adviser isn't engaged to manage the Divisions' assets. If that should
occur, Integrity Capital Advisors will be entitled to a fee that would otherwise
be paid to the sub-adviser. This fee would be in addition to its usual
compensation for services as investment adviser. The Divisions pay Integrity
Capital Advisors a monthly fee based on an annual rate of .50% of the Division's
average daily net assets. Integrity Capital Advisors will pay a portion of
those fees to National Asset Management Corporation (NATIONAL ASSET) for its
services under the sub-advisory agreement at an annual rate of .10% of the
Division's average daily net assets up to $100 million and .05% of the
Division's average daily net assets in excess of $100 million. Integrity
Capital Advisers has guaranteed a minimum sub-advisory fee of $25,000 to
National Asset during the Divisions' first year of operations.
Integrity Capital Advisors has agreed to reimburse the Divisions for operating
expenses (excluding management fees) above an annual rate of .35% of average net
assets for the Divisions. Integrity Capital Advisors 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 1999.
The following table shows the amount of advisory fees the Divisions (other than
Select Ten Plus Division March, which had not yet begun operations) paid to
Integrity Capital Advisors, and the amount of sub-advisory fees Integrity
Capital Advisors paid to National Asset, for the period ended December 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amount Integrity
Amount Division Capital Advisors
Paid to Integrity Paid to National
Capital Advisors Asset
- --------------------------------------------------------------------------------
<S> <C> <C>
Select Ten Plus Division June $ 4,961.03 $3,997.83
- --------------------------------------------------------------------------------
Select Ten Plus Division September $14,134.01 $2,826.84
- --------------------------------------------------------------------------------
Select Ten Plus Division December $ 199 $ 0
- --------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
THE SUB-ADVISER
National Asset is the sub-adviser to the Divisions and in that capacity provides
investment advisory services for the Divisions including security selection.
Under the supervision of the Board of Managers and Integrity Capital Advisors,
National Asset will provide a continuous investment program for the Divisions
and will determine the composition of its assets, including determinations about
the purchase, retention and sale of securities, cash and other investments
contained in the Division's portfolio. National Asset will also provide
investment research and conduct a continuous program of evaluation, investment,
sales and reinvestment of the Division's assets. National Asset will receive a
monthly fee for its services based on an annual rate of .10% of the Division's
average daily net assets up to $100 million and .05% of the Division's average
daily net assets in excess of $100 million. Integrity Capital Advisers has
guaranteed a minimum sub-advisory fee of $25,000 to National Asset during the
Divisions' first year of operations. The table above shows actual sub-advisory
fee amounts paid.
PART 5 - PORTFOLIO TRANSACTIONS AND BROKERAGE
National Asset makes investment decisions for the Divisions, under the
supervision of the Board of Managers of Separate Account Ten and Integrity
Capital Advisors. National Asset has investment advisory clients other than the
Divisions. A particular security may be bought or sold by National Asset for
certain clients even though it could have been bought or sold for other clients
at the same time. In the event that two or more clients simultaneously purchase
or sell the same security, each day's transactions in that security are, as much
as possible, allocated between the clients in a manner deemed fair and
reasonable by National Asset. Although there is no specified formula for
allocating these transactions, the various allocation methods used by National
Asset, and the results of those allocations, are subject to the periodic review
by Integrity Capital Advisors and the Board of Managers of Separate Account Ten.
National Asset places all orders for the purchase and sale of securities,
options, and futures contracts for the Divisions through a substantial number of
brokers and dealers. In executing transactions, National Asset will attempt to
obtain the best execution for the Divisions, taking into account such factors as
price (including the applicable brokerage commission or dollar spread), size of
order, the nature of the market for the security, the timing of the transaction,
the reputation, experience and financial stability of the broker-dealer
involved, the quality of the service, the difficulty of execution and
operational facilities of the firms involved, and the firm's risk in positioning
a block of securities. In transactions on stock exchanges in the United States,
payments of brokerage commissions are negotiated. In making purchases and sales
of securities on U.S. stock exchanges for the Divisions, National Asset may pay
higher commission rates than the lowest available when National Asset believes
there is value in doing so in the form of the brokerage and research services
provided by the broker effecting the transaction, as described below. In the
case of securities traded on some foreign stock exchanges, brokerage commissions
may be fixed and National Asset may be unable to negotiate commission rates for
these transactions. In the case of securities traded on the over-the-counter
markets, there is generally no stated commission, but the price includes an
undisclosed commission or markup.
It has for many years been a common practice in the investment advisory business
for advisers of investment companies and other institutional investors to
receive research services from broker-dealers which execute portfolio
transactions for the advisers' clients. Consistent with this practice, National
Asset may receive research services for the Divisions from many broker-dealers
with which National Asset places the Divisions' portfolio transactions. These
services, which in some cases may also be purchased for cash, include such
matters as general economic and security market reviews, industry and company
reviews, evaluations of securities and recommendations as to the purchase and
sale of securities. Some of these services may be of value to National Asset
and its affiliates in advising its various clients (including the Divisions),
although not all of these services are necessarily useful and of value in
managing the Divisions. The sub-advisory fee paid by Integrity Capital Advisors
to National Asset isn't reduced because National Asset and its affiliates
receive such services.
Section 28(e) of the Securities Exchange Act of 1934, allows National Asset to
cause the Divisions to pay a broker-dealer a disclosed commission for handling a
securities transaction for the Divisions that is more than the commission that
another broker-dealer would have charged for the same transaction because of the
value of the "brokerage and research services" provided by the broker-dealer.
Brokerage and research services include (i) furnishing advice as to the value of
securities, the advisability of investing in purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities,
(ii) furnishing analyses and reports concerning issuers, industries, securities,
7
<PAGE>
economic factors and trends, portfolio strategy, and the performance of
accounts, and (iii) effecting securities transactions and performing functions
incidental thereto (e.g., clearance, settlement, and custody).
National Asset may place orders for the purchase and sale of exchange-listed
portfolio securities with a broker-dealer that is an affiliate of National Asset
where, in the judgment of National Asset, that firm will be able to obtain a
price and execution at least as favorable as other qualified brokers. Pursuant
to rules of the SEC, a broker-dealer that is an affiliate of the investment
adviser or sub-adviser, or, if it is also a broker-dealer, the sub-adviser, may
be paid for handling portfolio transactions for an account on a national
securities exchange of which the broker-dealer is a member if the transaction is
"executed" on the floor of the exchange by another broker that isn't an
"associated person" of the affiliated broker-dealer or sub-adviser, and if there
is in effect a written contract between the sub-adviser and the account
expressly permitting the affiliated broker-dealer or sub-adviser to receive
payment. The sub-advisory agreement provides that National Asset may retain
compensation on transactions effected for the Divisions in accordance with the
terms of these rules.
SEC rules further require that commissions paid to an affiliated broker-dealer
or sub-adviser by the account on exchange transactions not exceed "usual and
customary brokerage commission". The rules define "usual and customary"
commissions to include amounts which are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time". The Board of Managers has adopted procedures for evaluating the
reasonableness of commissions paid to broker-dealers that are affiliated with
National Asset and will review these procedures periodically.
PART 6 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its units in
advertisements or in other information furnished to shareholders. The Janus
Aspen Money Market Option may also from time to time include the Yield and
Effective Yield of its units in information furnished to shareholders.
Performance information is computed separately for each Option in accordance
with the formulas described below. At any time in the future, total return and
yields may be higher or lower than in the past and there is no guarantee that
any historical results will continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all
applicable charges to the Option on an annual basis, including mortality risk
and expense charges, the annual administrative charge and other charges against
contract values. Quotations also will assume a termination (surrender) at the
end of the particular period and reflect the deductions of the contingent
withdrawal charge, if applicable. Total returns may be shown at the same time
that don't take into account deduction of the contingent withdrawal charge,
and/or the annual administrative charge.
Nonstandardized "total return" will be calculated in a similar manner and for
the same time periods as the average annual total return and for three years
except total return will assume an initial investment of $60,000 and won't
reflect the deduction of any applicable contingent withdrawal charge, which, if
reflected, would decrease the level of performance shown. The contingent
withdrawal charge isn't reflected because the contracts are designed for long
term investment. We use an assumed initial investment of $60,000 because that
figure more closely approximates the size of a typical contract than does the
$1,000 figure used in calculating the standardized average annual total return
quotations. The amount of the hypothetical initial investment assumed affects
performance because the annual administrative charge is a fixed per contract
charge. For purposes of determining these investment results, the actual
investment performance of each fund is reflected as of the date each fund
commenced operations, although the Contracts weren't available at that time.
An AVERAGE ANNUAL TOTAL RETURN shows the hypothetical yearly return that would
produce the same cumulative total return if the Investment Option experienced
exactly the same return each year for the entire period shown. Because the
performance will fluctuate on a year-by-year basis, the average annual total
returns tend to show a smooth result that won't mirror the actual performance,
even though the end result will be the same. Investors should realize that the
Option's performance isn't constant over time, but changes from year to year,
and that the average annual
8
<PAGE>
returns represent the averages of historical figures as opposed to the actual
historical performance of an Option during any portion of the period
illustrated. Average annual returns are calculated pursuant to the following
formula: P(1+T) TO THE POWER OF n = ERV, where P is a hypothetical initial
payment of $1,000, T is the average annual total return, n is the number of
years, and ERV is the withdrawal value at the end of the period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or the imposition of
any contingent withdrawal charge. Yields are annualized and stated as a
percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the Janus Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values during the period
(the BASE PERIOD), and stated as a percentage of the investment at the start of
the base period (the BASE PERIOD RETURN). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
365/7
Effective Yield = {(Base Period Return) + 1) } - 1
9
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<TABLE>
<CAPTION>
SEC Standardized Average Annual Return (1). All figures are unaudited.
-----------------------------------------------------------------------
FOR THE PERIOD ENDING: 12/31/98 ACCOUNT
VARIABLE OPTIONS INCEPTION LIFE OF
DATE (2) 1 YEAR 5 YEAR 10 YEAR ACCOUNT
<S> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 10/22/97 12.97% n/a n/a 5.01%
BT Insurance Funds Trust - Equity 500 Index 10/1/97 19.98 n/a n/a 17.23
BT Insurance Funds Trust - Small Cap Index 10/7/97 -10.50 n/a n/a -13.13
Fidelity's VIP Equity-Income 10/2/97 3.12 n/a n/a 3.04
Fidelity's VIP II Contrafund 10/2/97 21.23 n/a n/a 14.00
Fidelity's VIP III Growth & Income 10/2/97 20.84 n/a n/a 18.82
Fidelity's VIP III Growth Opportunities 10/2/97 15.93 n/a n/a 15.13
Harris Bretall Sullivan & Smith Equity Growth 12/7/92 26.83 21.40 n/a 17.23
Janus Aspen Series Balanced 10/9/97 25.47 n/a n/a 19.84
Janus Aspen Series Capital Appreciation 10/10/97 48.98 n/a n/a 32.18
Janus Aspen Series Worldwide Growth 10/2/97 20.18 n/a n/a 10.65
JP Morgan Bond 10/2/97 -.45 n/a n/a 1.23
JP Morgan International Opportunities 10/2/97 -3.68 n/a n/a -9.03
MSDW Universal Funds Asian Equity 10/22/97 -14.71 n/a n/a -24.94
MSDW Universal Funds Emerging Markets Debt 10/3/97 -36.33 n/a n/a -35.31
MSDW Universal Funds High Yield 10/16/97 -3.61 n/a n/a -2.07
MSDW Universal Funds U.S. Real Estate 10/16/97 -19.06 n/a n/a -14.93
Scudder Kemper Value 12/21/92 9.79 20.74 n/a 18.07
Zweig Asset Allocation 12/14/92 -10.39 8.91 n/a 9.70
Zweig Equity (Small Cap) 1/4/93 -8.94 10.29 n/a 9.80
Select Ten Plus June 6/30/98 n/a n/a n/a .72
Select Ten Plus September 9/30/98 n/a n/a n/a 2.73
Select Ten Plus December 12/31/98 n/a n/a n/a -107.87
</TABLE>
1) Standard average annual return reflects past fund performance based on a
$10,000 hypothetical investment over the period indicted. The performance
figures reflect the deduction of mortality and expense and administrative
charges totaling 1.35%. They also reflect any withdrawal charges that
would apply if any owner terminated the policy at the end of the period,
but exclude deductions for applicable premium tax charges. Surrender
charges are 8% in year one, declining 1% annually in years one through
seven, 0% thereafter.
(2) Inception date of the variable account option represents first trade date.
Returns for accounts in operation for less than one year aren't annualized.
10
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FOR THE PERIOD ENDING: 12/31/98
RETURNS WITHOUT SURRENDER CHARGES (1) All figures are unaudited.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
----------------------- ---------------------
FUND
INCEPTION LIFE OF
VARIABLE OPTIONS DATE (3) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 6/21/96 n/a n/a n/a 21.58% 19.97% n/a n/a n/a
BT Insurance Funds Trust - Equity 500 Index 12/31/92 93.72 148.10 n/a 159.40 26.98 24.66 19.93 n/a
BT Insurance Funds Trust - Small Cap Index 8/13/96 n/a n/a n/a 32.51 -3.50 n/a n/a n/a
Fidelity's VIP Equity-Income 10/9/86 56.89 120.85 272.77 339.65 10.12 16.20 17.17 14.06
Fidelity's VIP II Contrafund 1/3/95 87.77 n/a n/a 158.87 28.23 23.37 n/a n/a
Fidelity's VIP III Growth & Income 12/31/96 n/a n/a n/a 64.07 27.84 n/a n/a n/a
Fidelity's VIP III Growth Opportunities 1/3/95 83.87 n/a n/a 140.42 22.93 22.51 n/a n/a
Harris Bretall Sullivan & Smith Equity Growth 12/8/92 99.97 166.68 n/a 164.19 33.83 25.99 21.67 n/a
Janus Aspen Series Balanced 9/13/93 82.88 123.99 n/a 139.14 32.47 22.29 17.50 n/a
Janus Aspen Series Capital Appreciation 5/1/97 n/a n/a n/a 95.69 55.98 n/a n/a n/a
Janus Aspen Series Worldwide Growth 9/13/93 95.08 145.54 n/a 191.26 27.18 24.95 19.68 n/a
JP Morgan Bond 1/3/95 15.13 n/a n/a 30.51 6.55 4.81 n/a n/a
JP Morgan International Opportunities 1/3/95 19.95 n/a n/a 28.54 3.32 6.25 n/a n/a
MSDW Universal Funds Asian Equity 12/31/91 -46.75 -53.58 n/a 17.03 -7.71 -18.95 -14.23 n/a
MSDW Universal Funds Emerging Markets Debt 2/1/94 21.57 n/a n/a 16.38 -29.33 6.73 n/a n/a
MSDW Universal Funds High Yield 8/31/92 30.08 48.68 n/a 76.70 3.39 9.16 8.26 n/a
MSDW Universal Funds U.S. Real Estate 1/31/95 48.62 n/a n/a 77.71 -12.06 14.12 n/a n/a
Scudder Kemper Value 12/14/92 84.56 159.64 n/a 174.15 16.79 22.66 21.02 n/a
Zweig Asset Allocation 12/14/92 31.70 56.24 n/a 77.02 -3.39 9.61 9.33 n/a
Zweig Equity (Small Cap) 1/4/93 41.45 66.16 n/a 78.00 -1.94 12.25 10.69 n/a
Select Ten Plus Division - June 6/30/98 n/a n/a n/a 4.30 n/a n/a n/a n/a
Select Ten Plus Division - September 9/30/98 n/a n/a n/a 2.60 n/a n/a n/a n/a
Select Ten Plus Division - December 12/31/98 n/a n/a n/a -1.80 n/a n/a n/a n/a
<CAPTION>
CALENDAR YEAR RETURN(2)
-----------------------
LIFE OF
VARIABLE OPTIONS FUND 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
BT Insurance Funds Trust - EAFE Equity Index 8.04% n/a n/a n/a 0.94% 0.40% 19.97%
BT Insurance Funds Trust - Equity 500 Index 17.22 4.55 -3.08 32.15 20.35 26.76 26.98
BT Insurance Funds Trust - Small Cap Index 12.54 n/a n/a n/a 10.76 23.98 -3.50
Fidelity's VIP Equity-Income 12.87 16.70 5.01 34.05 12.73 26.38 10.12
Fidelity's VIP II Contrafund 26.91 n/a n/a 37.86 19.57 22.47 28.23
Fidelity's VIP III Growth & Income 28.11 n/a n/a n/a n/a 28.34 27.84
Fidelity's VIP III Growth Opportunities 24.58 n/a n/a 30.76 16.67 28.20 22.93
Harris Bretall Sullivan & Smith Equity Growth 17.37 -1.38 2.64 29.93 12.42 32.92 33.83
Janus Aspen Series Balanced 17.89 6.77 -.51 23.11 14.60 20.45 32.47
Janus Aspen Series Capital Appreciation 49.58 n/a n/a n/a n/a 25.46 55.98
Janus Aspen Series Worldwide Growth 22.36 18.62 .17 25.66 27.28 20.51 27.18
JP Morgan Bond 6.90 n/a n/a 13.36 .54 7.47 6.55
JP Morgan International Opportunities 6.49 n/a n/a 7.16 11.62 4.01 3.32
MSDW Universal Funds Asian Equity 2.27 102.53 -17.14 5.21 1.88 -43.37 -7.71
MSDW Universal Funds Emerging Markets Debt 3.14 n/a -23.87 25.75 48.64 15.74 -29.33
MSDW Universal Funds High Yield 9.41 18.31 -5.76 21.29 13.10 11.24 3.39
MSDW Universal Funds U.S. Real Estate 16.11 n/a n/a 19.58 37.53 22.89 -12.06
Scudder Kemper Value 18.22 4.86 -2.07 43.65 22.78 28.71 16.79
Zweig Asset Allocation 9.91 13.32 -.92 19.75 13.32 20.30 -3.39
Zweig Equity (Small Cap) 10.11 7.38 -1.97 19.54 16.87 23.42 -1.94
Select Ten Plus Division - June n/a n/a n/a n/a n/a n/a 4.30
Select Ten Plus Division - September n/a n/a n/a n/a n/a n/a 2.60
Select Ten Plus Division - December n/a n/a n/a n/a n/a n/a -1.80
</TABLE>
(1) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling 1.35%. The
calculation assumes the policy is still in force and therefore doesn't take
withdrawal charges into consideration.
(2) Italicized returns are calculated from the inception date through year-end.
(3) 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.
11
<PAGE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. (LIPPER) or the Variable
Annuity Research and Data Service, which are widely used independent research
firms that rank mutual funds and other investment companies by overall
performance, investment objectives, and assets; and (3) the Consumer Price Index
(measure of inflation) to assess the real rate of return from an investment in a
contract. Unmanaged indices may assume the reinvestment of dividends but
generally don't reflect deductions for annuity charges, investment management
costs, brokerage costs and other transaction costs that are normally paid when
directly investing in securities.
Each Option may, from time to time, also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper as having the same or similar investment objectives or by similar
services that monitor the performance of mutual funds. Each Option may also
from time to time compare its performance to average mutual fund performance
figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS. Advertisements or
information furnished to present shareholders or prospective investors may also
include evaluations of an Option published by nationally recognized ranking
services and by financial publications that are nationally recognized such as
BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING TIMES, CONSUMER'S
DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING, FINANCIAL TIMES,
FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S FINANCIAL DIGEST,
INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR MUTUAL FUNDS, THE
NEW YORK TIMES, PERSONAL INVESTOR, STANGE'S INVESTMENT ADVISER, VALUE LINE, THE
WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's units against certain widely recognized standards or
indices for stock and bond market performance. Following are representative
indices against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the total market value
of 500 stocks compared to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The S&P 500 Index represents about 80% of
the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International All Country World Index Free (ex-U.S.)
is an unmanaged index that measures developed and emerging foreign stock market
performance.
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted
issues aren't included in the Lehman Government Index.
12
<PAGE>
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 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 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.
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 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.
Historical data supplied by the research departments of various broker dealers,
analysts or pricing services, including but not limited to First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch and
Bloomberg L.P.
In reports or other communications to shareholders, the Funds may also describe
general economic and market conditions affecting the Portfolios and may compare
the performance of the Portfolios with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
SAI, or (4) data developed by Integrity or any of the sub-advisers derived from
such indices or averages.
13
<PAGE>
For those Variable Account Options which haven't been investment divisions
within the Separate Accounts for one of the quoted periods, the standardized
average annual total return and nonstandardized total return quotations will
show the investment performance those Options would have achieved (reduced by
the applicable charges) if they had been investment divisions within the
Separate Accounts for the period quoted.
14
<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. These illustrations may include, without limitation,
graphs, bar charts and other types of formats presenting the following
information: (i) the historical results of a hypothetical investment in a single
Option; (ii) the historical fluctuation of the value of a single Option (actual
and hypothetical); (iii) the historical results of a hypothetical investment in
more than one Option; (iv) the historical performance of two or more market
indices in relation to one another and/or one or more Options; (v) the
historical performance of two or more market indices in comparison to a single
Option or a group of Options; (vi) a market risk/reward scatter chart showing
the historical risk/reward relationship of one or more mutual funds or Options
to one or more indices and a broad category of similar anonymous variable
annuity subaccounts; and (vii) Option data sheets showing various information
about one or more Options (such as information concerning total return for
various periods, fees and expenses, standard deviation, alpha and beta,
investment objective, inception date and net assets). We can republish figures
independently provided by Morningstar or any similar agency or service.
PART 7 - DETERMINATION OF ACCUMULATION UNIT VALUES
The accumulation unit value of an Option will be determined on each day the New
York Stock Exchange is open for trading. The accumulation units are valued as
of the close of business on the New York Stock Exchange, which currently is 4:00
p.m., Eastern time. Each Option's accumulation unit value is calculated
separately. For all Options other than the Janus Money Market Option, the
accumulation unit value is computed by dividing the value of the securities held
by the Option plus any cash or other assets, less its liabilities, by the number
of outstanding units. For the Janus Money Market Option, accumulation unit
value is computed by dividing the value of the investments and other assets
minus liabilities by the number of units outstanding. Securities are valued
using the amortized cost method of valuation, which approximates market value.
Under this method of valuation, the difference between the acquisition cost and
value at maturity is amortized by assuming a constant (straight-line) accretion
of a discount or amortization of a premium to maturity. Cash, receivables and
current payables are generally carried at their face value.
PART 8 - TAX-FAVORED RETIREMENT PROGRAMS
The contracts described in this Prospectus may be used in connection with
certain tax-favored retirement programs, for groups and for individuals.
Following are brief descriptions of various types of qualified plans in
connection with which Integrity may issue a contract. Integrity reserves the
right to change its administrative rules, such as minimum contribution amounts,
as needed to comply with the Code as to tax-favored retirement programs.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who hasn't reached age 70-1/2 by the end of the tax year may
establish a Traditional IRA and make contributions up to the deadline for filing
his or her federal income tax return for that year (without extensions).
Traditional IRAs are limited on the amount that may be contributed, the persons
who may be eligible, and the time when distributions may begin. An individual
may also roll over amounts distributed from another Traditional IRA or another
tax-favored retirement program to a Traditional IRA contract. Your Traditional
IRA contract will be issued with a rider outlining the special terms of your
contract that apply to Traditional IRAs. The Owner will be deemed to have
consented to any other amendment unless the Owner notifies us that he or she
doesn't consent within 30 days from the date we mail the amendment.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408A of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up to the deadline
for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are limited on
15
<PAGE>
the amount that may be contributed, the persons who are eligible to contribute,
and the time when tax-favored distributions may begin. An individual may also
roll over amounts distributed from another Roth IRA or Traditional IRA to a Roth
IRA contract. Your Roth IRA contract will be issued with a rider outlining the
special terms of your contract that apply to Roth IRAs. Any amendment made to
comply with provisions of the Code and related regulations may be made without
your consent. The Owner will be deemed to have consented to any other amendment
unless the Owner notifies us that he or she doesn't consent within 30 days from
the date we mail the amendment.
SIMPLIFIED EMPLOYEE PENSIONS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAS) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we don't issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(p) of the Code.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by employees of public schools and certain charitable, educational and
scientific organizations described in Section 501(c)(3) of the Code. The
contract isn't intended to accept other than employee contributions. Such
contributions aren't counted as part of the gross income of the employee until
the employee receives distributions from the contract. The amount of
contributions to the TSA is limited to certain maximums imposed by Code sections
403(b), 415 and 402(g). The Code also sets forth additional restrictions
governing such items as transferability, distributions and withdrawals. An
employee under this type of plan should consult a tax adviser as to the tax
treatment and suitability of such an investment. Your contract will be issued
with a rider outlining the special terms that apply to a TSA.
CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals to also establish
tax-favored retirement plans for themselves and their employees. Tax-favored
retirement plans may permit the purchase of the contract to provide benefits
under the plans. Employers intending to use the contract in connection with
tax-favored plans should seek competent advice. The Company can request
documentation to substantiate that a qualified plan exists and is being properly
administered. Integrity doesn't administer these types of plans.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g) provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or annuity contract for the
exclusive benefit of participants and their beneficiaries. Loans to employees
may be permitted under such plans; however, a Section 457 plan isn't required to
allow loans. Contributions to a contract in connection with an eligible
government plan are limited. Those who intend to use the contracts in connection
with such plans should seek competent advice. The Company can request
documentation to substantiate that a qualified plan exists and is being properly
administered. Integrity doesn't administer such plans.
16
<PAGE>
DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMs
Distributions from tax-favored plans are subject to certain restrictions.
Participants in qualified plans, with the exception of five-percent owners, must
begin receiving distributions by April 1 of the calendar year following the
later of either (i) the year in which the employee reaches age 70-1/2, or (ii)
the calendar year in which the employee retires. Participants in Traditional
IRAs must begin receiving distributions by April 1 of the calendar year
following the year in which the employee reaches age 70-1/2. Additional
distribution rules apply after the participant's death. If you don't take
mandatory distributions you may owe a 50% penalty tax on any difference between
the required distribution amount and the amount distributed.
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution of minimum amounts from Roth IRAs when the Owner reaches
age 70-1/2.
Distributions from a tax-favored plan (not including a Traditional IRA or a Roth
IRA) to an employee, surviving spouse, or former spouse who is an alternate
payee under a qualified domestic relations order, in the form of a lump sum
settlement or periodic annuity payments for a fixed period of fewer than 10
years are subject to mandatory income tax withholding of 20% of the taxable
amount of the distribution, unless (1) the payee directs the transfer of the
amounts in cash to another plan or Traditional IRA; or (2) the payment is a
minimum distribution required under the Code. The taxable amount is the amount
of the distribution less the amount allocable to after-tax contributions. All
other types of taxable distributions are subject to withholding unless the payee
doesn't elect to have withholding apply.
We aren't permitted to make distributions from a contract unless you make a
request. It's your responsibility to comply with the minimum distribution
rules. You should consult your tax adviser regarding these rules.
This description of the federal income tax consequences of the different types
of tax-favored retirement plans that can be funded by the contract is only a
brief summary and isn't intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adopting a plan and buying a contract to fund the plan should first
consult a qualified and competent tax adviser, with regard to the suitability of
the contract as an investment vehicle for the plan.
PART 9 - 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 Accounts. Ernst & Young LLP on an annual basis will audit certain
financial statements prepared by management and express an opinion on such
financial statements based on their audits.
The financial statements of Separate Account II and Separate Account Ten as of
December 31, 1998, 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, 1998 and 1997 included herein have been audited by
Ernst & Young LLP as set forth in their reports.
The financial statements of Integrity should be distinguished from the financial
statements of the Separate Accounts and should be considered only as they relate
to the ability of Integrity to meet its obligations under the contracts. They
shouldn't be considered as relating to the investment performance of the assets
held in the Separate Accounts.
17
<PAGE>
Financial Statements
Separate Account II
of
Integrity Life Insurance Company
DECEMBER 31, 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Financial Statements
December 31, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . .1
Audited Financial Statements
Statement of Assets and Liabilities. . . . . . . . . . . . . . . . . . . . . .2
Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Statements of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . . .6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account II of Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account II of Integrity Life Insurance Company (comprising, respectively, the
Zweig Asset Allocation, Harris Bretall Sullivan & Smith Equity Growth, Scudder
Kemper Value, Zweig Equity (Small Cap), EAFE Equity Index, Equity 500 Index,
Small Cap Index, VIP Equity-Income, VIP II Contrafund, VIP III Growth & Income,
VIP III Growth, Janus Aspen Capital Appreciation, Janus Aspen Balanced, Janus
Aspen Worldwide Growth, Janus Aspen Money Market, JPM International
Opportunities, JPM Bond, Morgan Stanley Emerging Markets Debt, Morgan Stanley
High Yield, Morgan Stanley U.S. Real Estate, and Morgan Stanley Asian Equity
Divisions) as of December 31, 1998 and the related statements of operations and
changes in net assets for the periods indicated therein. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of mutual fund shares owned in The Legends Fund, Inc., BT Insurance
Funds Trust, Variable Insurance Products Fund, Variable Insurance Products
Fund II, Variable Insurance Products Fund III, Janus Aspen Series, J.P. Morgan
Series Trust II, and Morgan Stanley Universal Funds, Inc. (collectively the
"Funds") as of December 31, 1998, by correspondence with the transfer agents of
the Funds. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
divisions constituting Separate Account II of Integrity Life Insurance Company
at December 31, 1998, the results of their operations and changes in their net
assets for each of the periods indicated therein, in conformity with generally
accepted accounting principles.
Louisville, Kentucky /s/ ERNST & YOUNG
April 9, 1999
1
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
HARRIS
ZWEIG BRETALL
ASSET SULLIVAN & SMITH SCUDDER ZWEIG EQUITY EAFE EQUITY EQUITY 500
ALLOCATION EQUITY GROWTH KEMPER VALUE (SMALL CAP) INDEX INDEX
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $303,440,179) $ 31,191,369 $ 35,539,893 $ 37,991,022 $ 10,346,590 $ 2,008,101 $ 20,164,616
Receivable from (payable to) the general
account of Integrity (5,173) (1,875) 5,503 247 (46) 8,030
--------------------------------------------------------------------------------------
NET ASSETS $ 31,186,196 $ 35,538,018 $ 37,996,525 $ 10,346,837 $ 2,008,055 $ 20,172,646
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Unit value $ 17.70 $ 26.42 $ 27.42 $ 17.80 $ 11.30 $ 12.90
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Units outstanding 1,761,932 1,345,118 1,385,723 581,283 177,704 1,563,771
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
<CAPTION>
VIP III
SMALL CAP VIP EQUITY- VIP II VIP III GROWTH
INDEX INCOME CONTRAFUND GROWTH & INCOME OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $303,440,179) $ 3,549,139 $ 13,354,532 $ 11,138,907 $ 11,254,421 $ 7,790,296
Receivable from (payable to) the general
account of Integrity 1,019 10,319 2,851 7,701 2,718
------------------------------------------------------------------------
NET ASSETS $ 3,550,158 $ 13,364,851 $ 11,141,758 $ 11,262,122 $ 7,793,014
------------------------------------------------------------------------
------------------------------------------------------------------------
Unit value $ 9.11 $ 11.08 $ 12.47 $ 13.10 $ 12.62
------------------------------------------------------------------------
------------------------------------------------------------------------
Units outstanding 389,699 1,206,214 893,485 859,704 617,513
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1998
<TABLE>
<CAPTION>
JANUS ASPEN JANUS ASPEN JPM
CAPITAL JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL
APPRECIATION BALANCED GROWTH MONEY MARKET OPPORTUNITIES JPM BOND
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $303,440,179) $ 10,519,896 $ 73,168,168 $ 15,979,791 $ 17,912,594 $ 1,310,257 $ 16,285,915
Receivable from (payable to) the general
account of Integrity 553 11,719 5,669 (325) 4,187 (12,282)
-------------------------------------------------------------------------------------
NET ASSETS $ 10,520,449 $ 73,179,887 $ 15,985,460 $ 17,912,269 $ 1,314,444 $ 16,273,633
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Unit value $ 14.77 $ 13.19 $ 12.04 $ 10.48 $ 9.59 $ 10.85
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Units outstanding 712,285 5,548,134 1,327,696 1,709,186 137,064 1,499,874
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
<CAPTION>
MORGAN STANLEY
EMERGING MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY
MARKETS DEBT HIGH YIELD U.S. REAL ESTATE ASIAN EQUITY
DIVISION DIVISION DIVISION DIVISION TOTAL
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $303,440,179) $ 3,970,346 $ 6,048,834 $ 2,256,269 $ 3,677,229 $335,458,185
Receivable from (payable to) the general
account of Integrity (9,387) (3,572) 1,181 43,221 72,258
-------------------------------------------------------------------------------
NET ASSETS $ 3,960,959 $ 6,045,262 $ 2,257,450 $ 3,720,450 $335,530,443
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Unit value $ 6.52 $ 10.45 $ 8.93 $ 7.81
----------------------------------------------------------------
----------------------------------------------------------------
Units outstanding 607,509 578,494 252,794 476,370
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
HARRIS BRETALL
ZWEIG ASSET SULLIVAN & SMITH SCUDDER KEMPER ZWEIG EQUITY EAFE EQUITY EQUITY
ALLOCATION EQUITY GROWTH VALUE (SMALL CAP) INDEX 500 INDEX
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 5,328,845 $ 3,203,222 $ 4,210,088 $ 2,374,578 $ 27,404 $ 533,396
EXPENSES
Mortality and expense risk and
administrative charges 494,294 385,621 471,461 145,729 13,413 134,375
-------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 4,834,551 2,817,601 3,738,627 2,228,849 13,991 399,021
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 2,395,680 2,569,793 4,216,224 929,199 36,558 1,321,174
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 9,197,585 5,303,939 3,271,286 2,206,200 229 211,601
End of period 602,115 8,718,048 724,207 (1,338,045) 97,828 2,008,463
-------------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (8,595,470) 3,414,109 (2,547,079) (3,544,245) 97,599 1,796,862
-------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (6,199,790) 5,983,902 1,669,145 (2,615,046) 134,157 3,118,036
-------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (1,365,239) $ 8,801,503 $ 5,407,772 $ (386,197) $ 148,148 $ 3,517,057
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
<CAPTION>
VIP III VIP III
SMALL CAP VIP EQUITY- VIP II GROWTH & GROWTH
INDEX INCOME CONTRAFUND INCOME OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 68,631 $ 160,081 $ 94,350 $ 11,577 $ 50,361
EXPENSES
Mortality and expense risk and
administrative charges 27,595 100,404 74,267 72,558 51,450
-----------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 41,036 59,677 20,083 (60,981) (1,089)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments (51,131) (29,386) 40,316 28,315 18,272
Net unrealized appreciation
(depreciation) of investments:
Beginning of period (3,373) 32,071 9,019 5,855 20,242
End of period (82,250) 588,535 1,551,494 1,555,137 943,831
-----------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (78,877) 556,464 1,542,475 1,549,282 923,589
-----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (130,008) 527,078 1,582,791 1,577,597 941,861
-----------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (88,972) $ 586,755 $ 1,602,874 $ 1,516,616 $ 940,772
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
JANUS ASPEN JANUS ASPEN JPM
CAPITAL JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL
APRECIATION BALANCED GROWTH MONEY MARKET OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 5,678 $ 2,748,300 $ 295,388 $ 625,901 $ 52,114
EXPENSES
Mortality and expense risk and
administrative charges 49,795 848,900 107,868 163,173 13,893
-------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (44,117) 1,899,400 187,520 462,728 38,221
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 156,476 816,346 164,053 -- (121,252)
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 17,388 741,775 25,860 268 (43,743)
End of period 2,102,262 16,041,640 1,077,814 -- (23,705)
-------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 2,084,874 15,299,865 1,051,954 (268) 20,038
-------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 2,241,350 16,116,211 1,216,007 (268) (101,214)
-------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,197,233 $ 18,015,611 $ 1,403,527 $ 462,460 $ (62,993)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<CAPTION>
MORGAN STANLEY MORGAN STANLEY
EMERGING MORGAN STANLEY U.S. REAL MORGAN STANLEY
JPM BOND MARKETS DEBT HIGH YIELD ESTATE ASIAN EQUITY
DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 611,128 $ 470,978 $ 376,207 $ 61,693 $ 29,757 $ 21,339,677
EXPENSES
Mortality and expense risk and
administrative charges 129,371 72,431 47,328 23,720 47,333 3,474,979
--------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 481,757 398,547 328,879 37,973 (17,576) 17,864,698
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 162,102 (259,162) (32,519) (64,792) (351,346) 11,944,920
Net unrealized appreciation
(depreciation) of investments:
Beginning of period (94,734) 272,291 (33,966) 1,510 (270,549) 20,870,754
End of period (98,685) (1,723,265) (264,977) (192,191) (270,250) 32,018,006
--------------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (3,951) (1,995,556) (231,011) (193,701) 299 11,147,252
--------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 158,151 (2,254,718) (263,530) (258,493) (351,047) 23,092,172
--------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 639,908 $ (1,856,171) $ 65,349 $ (220,520) $ (368,623) $ 40,956,870
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
HARRIS BRETALL
ZWEIG ASSET SULLIVAN & SMITH SCUDDER ZWEIG EQUITY EAFE EQUITY
ALLOCATION EQUITY GROWTH KEMPER VALUE (SMALL CAP) INDEX
DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $ 4,834,551 $ 2,817,601 $ 3,738,627 $ 2,228,849 $ 13,991
(loss)
Net realized gain (loss) on sales of investments 2,395,680 2,569,793 4,216,224 929,199 36,558
Change in net unrealized appreciation/
depreciation during the period (8,595,470) 3,414,109 (2,547,079) (3,544,245) 97,599
--------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (1,365,239) 8,801,503 5,407,772 (386,197) 148,148
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,234,928 4,514,417 7,070,279 924,803 978,249
Contract terminations and benefits (4,025,170) (3,316,966) (3,183,115) (1,408,182) (239,690)
Net transfers among investment options (3,263,051) (27,888) (1,300,018) 470,524 936,226
--------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (6,053,293) 1,169,563 2,587,146 (12,855) 1,674,785
--------------------------------------------------------------------------
Contribution by Integrity -- -- -- -- --
Redemption of contributions by Integrity -- -- -- -- --
Change in amounts retained in Separate
Account II by Integrity -- -- -- -- --
--------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (7,418,532) 9,971,066 7,994,918 (399,052) 1,822,933
Net assets, beginning of year 38,604,728 25,566,952 30,001,607 10,745,889 185,122
--------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 31,186,196 $ 35,538,018 $ 37,996,525 $ 10,346,837 $ 2,008,055
--------------------------------------------------------------------------
--------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 68,159 204,596 279,804 50,952 94,539
Terminations and benefits (234,294) (149,607) (126,122) (79,350) (23,408)
Net transfers (179,122) (5,056) (46,255) 17,621 86,921
--------------------------------------------------------------------------
Net increase (decrease) in units (345,313) 49,933 107,427 (10,777) 158,052
--------------------------------------------------------------------------
--------------------------------------------------------------------------
<CAPTION>
VIP III VIP III
EQUITY 500 SMALL CAP VIP EQUITY- VIP II GROWTH & GROWTH
INDEX INDEX INCOME CONTRAFUND INCOME OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $ 399,021 $ 41,036 $ 59,677 $ 20,083 $ (60,981) $ (1,089)
(loss)
Net realized gain (loss) on
sales of investments 1,321,174 (51,131) (29,386) 40,316 28,315 18,272
Change in net unrealized appreciation/
depreciation during the period 1,796,862 (78,877) 556,464 1,542,475 1,549,282 923,589
----------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 3,517,057 (88,972) 586,755 1,602,874 1,516,616 940,772
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 10,963,980 2,391,039 9,091,118 6,163,372 5,922,478 3,955,196
Contract terminations and benefits (427,670) (50,118) (179,508) (224,727) (176,897) (142,596)
Net transfers among investment options 4,875,813 635,162 2,301,955 2,341,556 2,775,467 2,237,515
----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 15,412,123 2,976,083 11,213,565 8,280,201 8,521,048 6,050,115
Contribution by Integrity -- -- -- -- -- --
Redemption of contributions by Integrity (9,729,547) -- -- -- -- --
Change in amounts retained in Separate
Account II by Integrity 8,690,000 -- -- -- -- --
----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 17,889,633 2,887,111 11,800,320 9,883,075 10,037,664 6,990,887
Net assets, beginning of year 2,283,013 663,047 1,564,531 1,258,683 1,224,458 802,127
----------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $20,172,646 $ 3,550,158 $13,364,851 $11,141,758 $11,262,122 $7,793,014
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 956,008 255,725 855,122 569,423 522,872 353,335
Terminations and benefits (38,163) (6,837) (17,631) (20,472) (21,318) (12,080)
Net transfers 421,220 70,573 213,203 215,173 238,574 198,078
----------------------------------------------------------------------------------
Net increase (decrease) in units 1,339,065 319,461 1,050,694 764,124 740,128 539,333
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
JANUS ASPEN JANUS ASPEN JPM
CAPITAL JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL
APPRECIATION BALANCED GROWTH MONEY MARKET OPPORTUNITIES
DIVISIOM DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income(loss) $ (44,117) $ 1,899,400 $ 187,520 $ 462,728 $ 38,221
Net realized gain (loss) on
sales of investments 156,476 816,346 164,053 -- (121,252)
Change in net unrealized appreciation/
depreciation during the period 2,084,874 15,299,865 1,051,954 (268) 20,038
---------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 2,197,233 18,015,611 1,403,527 462,460 (62,993)
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 4,507,817 4,674,910 9,514,601 11,006,841 1,387,817
Contract terminations and benefits (132,661) (6,671,434) (135,207) (2,330,776) (22,715)
Net transfers among investment options 3,074,983 832,974 3,765,741 2,380,514 (374,307)
---------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 7,450,139 (1,163,550) 13,145,135 11,056,579 990,795
---------------------------------------------------------------------------------
Contribution by Integrity -- -- -- -- --
Redemption of contributions by Integrity -- -- -- -- --
Change in amounts retained in Separate
Account II by Integrity -- -- -- -- --
---------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 9,647,372 16,852,061 14,548,662 11,519,039 927,802
Net assets, beginning of year 873,077 56,327,826 1,436,798 6,393,230 386,642
---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 10,520,449 $ 73,179,887 $ 15,985,460 $ 17,912,269 $ 1,314,444
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 375,465 414,291 857,969 1,068,361 142,087
Terminations and benefits (12,429) (605,433) (16,099) (225,163) (2,410)
Net transfers 257,055 78,188 334,105 231,739 (44,277)
---------------------------------------------------------------------------------
Net increase (decrease) in units 620,091 (112,954) 1,175,975 1,074,937 95,400
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
<CAPTION>
MORGAN
MORGAN STANLEY MORGAN STANLEY
EMERGING STANLEY U.S. REAL MORGAN STANLEY
JPM BOND MARKETS DEBT HIGH YIELD ESTATE ASIAN EQUITY
DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 481,757 $ 398,547 $ 328,879 $ 37,973 $ (17,576) $ 17,864,698
Net realized gain (loss) on
sales of investments 162,102 (259,162) (32,519) (64,792) (351,346) 11,944,920
Change in net unrealized appreciation/
depreciation during the period (3,951) (1,995,556) (231,011) (193,701) 299 11,147,252
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 639,908 (1,856,171) 65,349 (220,520) (368,623) 40,956,870
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 7,908,411 690,761 4,057,709 1,707,287 363,137 99,029,150
Contract terminations and benefits (1,149,660) (557,483) (135,447) (35,824) (292,329) (24,838,175)
Net transfers among investment options 4,678,780 (346,707) 1,351,740 122,833 (77,162) 27,392,650
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 11,437,531 (213,429) 5,274,002 1,794,296 (6,354) 101,583,625
-----------------------------------------------------------------------------------
Contribution by Integrity -- -- -- -- -- --
Redemption of contributions by Integrity (3,976,222) -- -- -- -- (13,705,769)
Change in amounts retained in Separate
Account II by Integrity 3,912,700 -- -- -- -- 12,602,700
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 12,013,917 (2,069,600) 5,339,351 1,573,776 (374,977) 141,437,426
Net assets, beginning of year 4,259,716 6,030,559 705,911 683,674 4,095,427 194,093,017
-----------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 16,273,633 $ 3,960,959 $ 6,045,262 $ 2,257,450 $3,720,450 $335,530,443
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 763,490 75,799 393,649 178,078 46,969
Terminations and benefits (111,482) (70,196) (15,424) (5,455) (38,663)
Net transfers 429,837 (51,459) 130,446 12,814 (16,029)
-----------------------------------------------------------------------------------
Net increase (decrease) in units 1,081.845 (45,856) 508,671 185,437 (7,723)
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1997
<TABLE>
<CAPTION>
HARRIS BRETALL
NICHOLAS- SULLIVAN &
RENAISSANCE ZWEIG ASSET APPLEGATE SMITH EQUITY SCUDDER
BALANCED ALLOCATION BALANCED GROWTH KEMPER VALUE
DIVISION (1) DIVISION DIVISION (1) DIVISION DIVISION
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 2,574,854 $ (53,722) $ 4,736,118 $ 1,359,127 $ 4,607,603
Net realized gain (loss) on sales of
investments 390,362 1,826,513 6,643,936 1,657,678 2,895,358
Change in net unrealized appreciation/
depreciation during the period (1,075,003) 5,146,496 (4,981,432) 2,834,577 (1,407,548)
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,890,213 6,919,287 6,398,622 5,851,382 6,095,413
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 239,307 960,854 553,462 1,849,299 3,061,202
Contract terminations and benefits (1,955,314) (3,276,103) (5,444,946) (2,068,659) (2,362,975)
Net transfers among investment options (19,426,994) (3,072,161) (40,879,178) 2,350,763 2,785,843
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (21,143,001) (5,387,410) (45,770,662) 2,131,403 3,484,070
-----------------------------------------------------------------------------------
Contribution by Integrity - - - - -
Transfer of Integrity contributions - - - - -
Redemption of contributions by Integrity - - - - -
Change in amounts retained in Separate
Account II by Integrity - - - - -
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (19,252,788) 1,531,877 (39,372,040) 7,982,785 9,579,483
Net assets, beginning of year 19,252,788 37,072,851 39,372,040 17,584,167 20,422,124
-----------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ - $ 38,604,728 $ - $ 25,566,952 $ 30,001,607
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 15,583 54,696 30,942 99,659 140,705
Terminations and benefits (134,658) (196,743) (319,281) (114,760) (110,644)
Net transfers (1,295,531) (184,907) (2,268,287) 126,167 128,601
-----------------------------------------------------------------------------------
Net increase (decrease) in units (1,414,606) (326,954) (2,556,626) 111,066 158,662
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
<CAPTION>
ARM CAPITAL MORGAN STANLEY
ZWEIG EQUITY PINNACLE FIXED ADVISORS MORGAN STANLEY WORLDWIDE
(SMALL CAP) INCOME MONEY MARKET ASIAN GROWTH HIGH INCOME
DIVISION DIVISION (1) DIVISION (1) DIVISION (1) DIVISION (1)
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 331,732 $ 585,680 $ 180,215 $ (75,872) $ 1,320,028
Net realized gain (loss) on sales of
investments 581,172 119,741 - (3,580,422) (307,315)
Change in net unrealized appreciation/
depreciation during the period 1,045,228 (178,025) - (643,373) (582,804)
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,958,132 527,396 180,215 (4,299,667) 429,909
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 372,847 99,454 2,377,697 200,769 273,104
Contract terminations and benefits (686,221) (499,685) (1,914,055) (717,549) (404,944)
Net transfers among investment options 385,912 (3,247,591) (4,783,860) (5,457,768) (6,293,754)
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 72,538 (3,647,822) (4,320,218) (5,974,548) (6,425,594)
-----------------------------------------------------------------------------------
Contribution by Integrity - - - - -
Transfer of Integrity contributions - (4,393,502) - - -
Redemption of contributions by Integrity - (829,601) - - -
Change in amounts retained in Separate
Account II by Integrity - 4,889,484 - - -
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2,030,670 (3,454,045) (4,140,003) (10,274,215) (5,995,685)
Net assets, beginning of year 8,715,219 3,454,045 4,140,003 10,274,215 5,995,685
-----------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 10,745,889 $ - $ - $ - $ -
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 21,227 8,404 215,787 20,532 18,520
Terminations and benefits (42,891) (42,854) (173,350) (73,751) (27,984)
Net transfers 21,255 (266,425) (422,952) (927,145) (425,321)
-----------------------------------------------------------------------------------
Net increase (decrease) in units (409) (300,875) (380,515) (980,364) (434,785)
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
<CAPTION>
EAFE EQUITY EQUITY 500 SMALL CAP VIP EQUITY-
INDEX INDEX INDEX INCOME
DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2)
--------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ (237) $ (3,380) $ (1,256) $ (1,962)
Net realized gain (loss) on sales of
investments (1,410) 24,320 (2,087) (1,026)
Change in net unrealized appreciation/
depreciation during the period 229 211,601 (3,373) 32,071
--------------------------------------------------------------------
Net increase (decrease)in net assets
resulting from operations (1,418) 232,541 (6,716) 29,083
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 156,248 1,369,486 412,616 1,086,187
Contract terminations and benefits - (2,233) (1,119) (3,254)
Net transfers among investment options 30,292 873,219 258,266 452,515
--------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 186,540 2,240,472 669,763 1,535,448
--------------------------------------------------------------------
Contribution by Integrity - 10,000,000 - -
Transfer of Integrity contributions - - - -
Redemption of contributions by Integrity - (1,500,000) - -
Change in amounts retained in Separate
Account II by Integrity - (8,690,000) - -
--------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 185,122 2,283,013 663,047 1,564,531
Net assets, beginning of year - - - -
--------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 185,122 $ 2,283,013 $ 663,047 $ 1,564,531
--------------------------------------------------------------------
--------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 16,374 137,771 43,324 110,542
Terminations and benefits - (222) (122) (329)
Net transfers 3,278 87,157 27,036 45,307
--------------------------------------------------------------------
Net increase (decrease) in units 19,652 224,706 70,238 155,520
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
(1) For the period January 1, 1997 to November 14, 1997 (date of substitution)
(2) For the period October 1, 1997 (commencement of operations) to December 31,
1997
SEE ACCOMPANYING NOTES.
8
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
VIP III VIP III JANUS ASPEN
VIP II GROWTH & GROWTH CAPITAL JANUS ASPEN
CONTRAFUND INCOME OPPORTUNITIES APPRECIATION BALANCED
DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ (1,911) $ 24,939 $ (1,102) $ 1,441 $ 383,781
Net realized gain (loss) on sales of
investments (1,143) 871 719 (275) 7,630
Change in net unrealized appreciation/
depreciation during the period 9,019 5,855 20,242 17,388 741,775
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 5,965 31,665 19,859 18,554 1,133,186
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 943,451 723,054 496,323 435,970 636,465
Contract terminations and benefits (3,648) (2,262) (1,547) (2,522) (616,133)
Net transfers among investment options 312,915 472,001 287,492 421,075 55,174,308
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 1,252,718 1,192,793 782,268 854,523 55,194,640
--------------------------------------------------------------------------------
Contribution by Integrity - - - - -
Transfer of Integrity contributions - - - - -
Redemption of contributions by Integrity - - - - -
Change in amounts retained in Separate
Account II by Integrity - - - - -
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,258,683 1,224,458 802,127 873,077 56,327,826
Net assets, beginning of year - - - - -
--------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 1,258,683 $ 1,224,458 $ 802,127 $ 873,077 $ 56,327,826
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 98,124 72,438 49,718 47,193 64,763
Terminations and benefits (380) (228) (154) (273) (62,625)
Net transfers 31,617 47,366 28,616 45,274 5,658,950
--------------------------------------------------------------------------------
Net increase (decrease) in units 129,361 119,576 78,180 92,194 5,661,088
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<CAPTION>
JANUS ASPEN JPM
WORLDWIDE JANUS ASPEN INTERNATIONAL
GROWTH MONEY MARKET OPPORTUNITIES JPM BOND
DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2)
---------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 250 $ 34,101 $ 43,908 $ 212,964
Net realized gain (loss) on sales of
investments (6,364) - (3,034) 6,293
Change in net unrealized appreciation/
depreciation during the period 25,860 268 (43,743) (94,734)
---------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 19,746 34,369 (2,869) 124,523
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 1,035,639 939,640 170,010 556,426
Contract terminations and benefits (2,927) (492,006) (1,401) (7,958)
Net transfers among investment options 384,340 5,911,227 220,902 3,647,188
---------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 1,417,052 6,358,861 389,511 4,195,656
---------------------------------------------------------------
Contribution by Integrity - - - -
Transfer of Integrity contributions - - - 4,393,502
Redemption of contributions by Integrity - - - (541,265)
Change in amounts retained in Separate
Account II by Integrity - - - (3,912,700)
---------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,436,798 6,393,230 386,642 4,259,716
Net assets, beginning of year - - - -
---------------------------------------------------------------
NET ASSETS, END OF YEAR $ 1,436,798 $ 6,393,230 $ 386,642 $ 4,259,716
---------------------------------------------------------------
---------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 109,924 93,550 18,674 55,298
Terminations and benefits (310) (48,943) (152) (787)
Net transfers 42,107 589,642 23,142 363,518
---------------------------------------------------------------
Net increase (decrease) in units 151,721 634,249 41,664 418,029
---------------------------------------------------------------
---------------------------------------------------------------
<CAPTION>
MORGAN STANLEY
EMERGING MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY
MARKETS DEBT HIGH YIELD U.S. REAL ESTATE ASIAN EQUITY
DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) TOTAL
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 209,867 $ 42,041 $ 17,346 $ (1,883) $ 16,524,670
Net realized gain (loss) on sales of
investments 15,980 40 (2,302) (9,713) 10,255,522
Change in net unrealized appreciation/
depreciation during the period 272,291 (33,966) 1,510 (270,549) 1,049,860
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 498,138 8,115 16,554 (282,145) 27,830,052
INCREASE (DECREASE) IN NET ASSETS FROM
CONTRACT RELATED TRANSACTIONS
Contributions from contract holders 281,945 547,063 603,425 203,790 20,585,733
Contract terminations and benefits (53,434) (191) (1,043) (31,589) (20,553,718)
Net transfers among investment options 5,303,910 150,924 64,738 4,205,371 531,895
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 5,532,421 697,796 667,120 4,377,572 563,910
--------------------------------------------------------------------------------
Contribution by Integrity - - - - 10,000,000
Transfer of Integrity contributions - - - - -
Redemption of contributions by Integrity - - - - (2,870,866)
Change in amounts retained in Separate
Account II by Integrity - - - - (7,713,216)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 6,030,559 705,911 683,674 4,095,427 27,809,880
Net assets, beginning of year - - - - 166,283,137
--------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 6,030,559 $ 705,911 $ 683,674 $ 4,095,427 $194,093,017
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 31,830 54,841 61,162 22,387
Terminations and benefits (5,948) (19) (105) (3,706)
Net transfers 627,483 15,001 6,300 465,412
--------------------------------------------------------------------------------
Net increase (decrease) in units 653,365 69,823 67,357 484,093
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
(1) For the period January 1, 1997 to November 14, 1997 (date of substitution)
(2) For the period October 1, 1997 (commencement of operations) to December 31,
1997
SEE ACCOMPANYING NOTES.
9
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Integrity Life Insurance Company ("Integrity") established Separate Account II
(the "Separate Account") on May 21, 1992, for the purpose of issuing flexible
premium variable annuity contracts ("contracts"). The Separate Account is a unit
investment trust registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). The operations of the Separate Account are part of Integrity.
Integrity is an indirect wholly owned subsidiary of ARM Financial Group, Inc.
("ARM"). ARM specializes in the growing asset accumulation business with
particular emphasis on retirement savings and investment products.
Contract holders may allocate or transfer their account values to one or more
investment divisions of the Separate Account or to one or more fixed guaranteed
rate options or systematic transfer options of Integrity's Separate Account GPO.
The Separate Account divisions invest in shares of the corresponding portfolios
of the following funds or insurance trust funds ("Funds"): BT Insurance Funds
Trust ("BT Funds Trust"); Variable Insurance Products Fund ("VIP"), Variable
Insurance Products Fund II ("VIP II"), and Variable Insurance Products Fund III
("VIP III"), part of the Fidelity Investments group of companies (collectively,
"Fidelity's VIP Funds"); The Legends Fund, Inc. ("Legends Fund"); Janus Aspen
Series; J.P. Morgan Series Trust II ("JPM Series"); and Morgan Stanley Universal
Funds, Inc. ("Morgan Stanley Universal Funds"). Bankers Trust Global Asset
Management Services, a unit of Bankers Trust Company, is the investment manager
of the BT Funds Trust. Fidelity Management and Research Company serves as
investment adviser to Fidelity's VIP Funds. Integrity Capital Advisors, Inc., a
wholly owned subsidiary of ARM, is the investment adviser of the Legends Fund.
Janus Capital Corporation serves as investment adviser to the Janus Aspen
Series. J.P. Morgan Investment Management Inc. is the investment adviser to the
JPM Series. Morgan Stanley Dean Witter Asset Management Inc. ("MSDW") serves as
investment adviser to the Morgan Stanley Universal Funds except for Morgan
Stanley High Yield Portfolio, for
10
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which Miller Anderson & Sherrerd, LLP serves as investment adviser. MSDW is a
wholly owned subsidiary of Morgan Stanley Dean Witter & Co. ("Morgan Stanley").
Prior to ARM's secondary public offering of its common stock in May, 1998,
Morgan Stanley and ARM were considered affiliates.
On July 23, 1997, Integrity filed an application (amended on October 9, 1997)
with the Securities and Exchange Commission ("SEC") pursuant to Section 26(b) of
the Investment Company Act for an order to approve a substitution of certain
divisions of the Separate Account (the "Substitution"). The Substitution
involved the transfer of assets from a division within the Separate Account to a
new division which invests in shares of corresponding investment portfolios of
an insurance trust mutual fund ("New Division") deemed to have (i) substantially
similar investment strategies and (ii) historically stronger investment
performance and/or lower expense ratios (after waivers and reimbursements). The
Substitution was approved by the SEC on November 14, 1997, and was effected on
that day. The divisions of the Separate Account affected by the Substitution and
the New Divisions which received the assets are as follows:
Original Division New Division
- ----------------- ------------
Renaissance Balanced Janus Aspen Balanced
Nicholas-Applegate Balanced Janus Aspen Balanced
Pinnacle Fixed Income JPM Bond
ARM Capital Advisors Money Market Janus Aspen Money Market
Morgan Stanley Asian Growth Morgan Stanley Asian Equity
Morgan Stanley Worldwide High Income Morgan Stanley Emerging Markets Debt
Units of each division of the Separate Account affected by the Substitution were
redeemed in-kind and the redemption proceeds were used to purchase units of the
New Division. The costs of the Substitution were borne by Integrity, and no
fees, transfer
11
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
charges or sales charges to effect the Substitution were imposed on the Separate
Account or the contract holders. Prior to and immediately following the
Substitution, the account values of contract holders were the same. In addition,
the Substitution did not alter the tax or insurance benefits to contract holders
or the contractual obligation of Integrity.
The contract holder's account value in a Separate Account division will vary
depending on the performance of the corresponding portfolio. The Separate
Account currently has twenty-one investment divisions available. The investment
objective of each division and its corresponding portfolio are the same. Set
forth below is a summary of the investment objectives of the portfolios of the
Funds.
ZWEIG ASSET ALLOCATION PORTFOLIO seeks long term capital appreciation with
investments from the 1,000 most liquid stocks. The Portfolio's sub-adviser
strives to do this while protecting principal and reducing exposure to
market risk. The 1,000 most liquid stocks are those that the sub-adviser
considers comparable to those included in the Standard & Poor's 500
Composite Price Index ("S&P 500"), and that have a minimum of $400 million
market capitalization, average daily trading volume of 50,000 share or $425
million in total assets, and that are traded on the New York Stock Exchange
("NYSE"), American Stock Exchange ("AMEX"), over-the-counter ("OTC") or on
foreign exchanges. Zweig/Glaser Advisers is the sub-adviser to the
Portfolio.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO seeks long-term
capital appreciation. It primarily invests in stocks of established
companies with proven records of superior and consistent growth. The
Portfolio may invest in U.S. government securities, cash and cash
equivalents when that appears to be a better choice in light of the
Portfolio's investment objective or when justified by market conditions.
Harris Bretall Sullivan & Smith, LLC is the sub-adviser to the Portfolio.
SCUDDER KEMPER VALUE PORTFOLIO seeks primarily long-term capital
appreciation with a secondary objective of current income. It invests
principally in a diversified portfolio of securities believed by the sub-
adviser to be undervalued. The sub-adviser's philosophy centers on
identifying stocks of large, well-known companies with solid financial
strength and large dividend payment histories that have low price-
12
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
earnings ratios and have been generally overlooked by the market. Scudder
Kemper Investors, Inc. is sub-adviser to the Portfolio.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation. It
invests primarily in "small company stocks," consistent with preservation
of capital and reduction of portfolio exposure to market risk, as
determined by the sub-adviser. Current income is not an objective. "Small
company stocks" are the 2,000 stock positions immediately after the 1,000
largest stocks ranked in terms of market capitalization and/or trading
volume, and which are traded on the NYSE, AMEX, OTC or on foreign
exchanges. Zweig/Glaser Advisers is the sub-adviser to the Portfolio.
EAFE EQUITY INDEX PORTFOLIO seeks to replicate as closely as possible
(before the deduction of expenses) the total return of the Morgan Stanley
Capital International Europe, Australia, Far East (EAFE) Index, a
capitalization-weighted index containing approximately 1,100 equity
securities of companies located outside the United States. The Portfolio
will be invested primarily in equity securities of business enterprises
organized and domiciled outside of the United States or for which the
principal trading market is outside the United States. Statistical methods
will be employed to replicate the EAFE Index by buying most of the EAFE
Index securities. Securities purchased for the portfolio will generally,
but not necessarily, be traded on a foreign securities exchange. Bankers
Trust Global Asset Management Services is the investment adviser to the
Portfolio.
EQUITY 500 INDEX PORTFOLIO seeks to replicate as closely as possible
(before the deduction of expenses) the total return of the S&P 500, an
index emphasizing large-capitalization stocks. The Portfolio will include
the common stock of those companies included in the S&P 500, other than
Bankers Trust New York Corporation, selected on the basis of computer
generated statistical data, that are deemed representative of the industry
diversification of the entire S&P 500. Bankers Trust Global Asset
Management Services is the investment adviser to the Portfolio.
13
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SMALL CAP INDEX PORTFOLIO seeks to replicate as closely as possible (before
the deduction of expenses) the total return of the Russell 2000 Small Stock
Index (the "Russell 2000"), an index consisting of 2,000
small-capitalization common stocks. The Portfolio will include the common
stock of companies included in the Russell 2000, on the basis of
computer-generated statistical data, that are deemed representative of the
industry diversification of the entire Russell 2000. Bankers Trust Global
Asset Management Services is the investment adviser to the Portfolio.
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily
in income producing equity securities, with the potential for capital
appreciation as a consideration. It normally invests at least 65% of its
assets in income-producing equity securities. Fidelity Management and
Research Company serves as the investment adviser to the Portfolio.
VIP II CONTRAFUND PORTFOLIO seeks long-term capital appreciation. The
Portfolio invests primarily in common stocks and in securities whose value
the sub-adviser believes is not fully recognized by the public. The types
of companies in which the Portfolio may invest include companies
experiencing positive fundamental change such as a new management team or
product launch, a significant cost-cutting initiative, a merger or
acquisition, or a reduction in industry capacity that should lead to
improved pricing; companies whose earnings potential has increased or is
expected to increase more than generally perceived; companies that have
enjoyed recent market popularity but which appear to have temporarily
fallen out of favor for reasons that are considered non-recurring or
short-term; and companies that are undervalued in relation to securities of
other companies in the same industry. Fidelity Management and Research
Company serves as the investment adviser to the Portfolio.
VIP III GROWTH & INCOME PORTFOLIO seeks high total return through a
combination of current income and capital appreciation by investing mainly
in equity securities. It invests primarily in stocks of companies that
offer potential for growth in earnings while paying dividends, but offer
the potential for capital appreciation on future income. The Portfolio may
also invest in bonds, including lower-quality debt securities, as well as
stocks that are not currently paying dividends, but offer prospects for
future income or capital appreciation. Fidelity Management and Research
Company serves as the investment adviser to the Portfolio.
14
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VIP III GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by
investing primarily in common stocks. The Portfolio may also invest in
bonds, lower quality debt securities, as well as stocks that are not
currently paying dividends but offer prospects for future income or capital
appreciation. Fidelity Management and Research Company serves as the
investment adviser to the Portfolio.
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO seeks long-term growth of
capital. It is a non-diversified portfolio that pursues its objective by
investing primarily in common stocks of issuers selected for their growth
potential. The Portfolio may invest in companies of any size, from larger,
well-established companies to smaller emerging growth companies. Janus
Capital Corporation serves as the investment adviser to the Portfolio.
JANUS ASPEN BALANCED PORTFOLIO seeks long-term capital growth, consistent
with current income. It is a diversified portfolio that, under normal
circumstances, pursues its objective by investing 40-60% of its assets in
securities selected primarily for their growth potential and 40-60% of its
assets in securities selected primarily for their income potential. The
portfolio normally invests at least 25% of its assets in fixed-income
senior securities. Janus Capital Corporation serves as the investment
adviser to the Portfolio.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in
a manner consistent with the preservation of capital. It is a diversified
portfolio that pursues its objective primarily through investments in
common stocks of any size throughout the world. Janus Aspen Worldwide
Growth portfolio normally invests in issuers from at least five different
countries, including the United States. The portfolio may at any time
invest in fewer than five countries or even a single country. Janus Capital
Corporation serves as the investment adviser to the Portfolio.
JANUS ASPEN MONEY MARKET PORTFOLIO seeks maximum current income to the
extent consistent with stability of capital. There can be no assurance that
the Portfolio will achieve its investment objective or be able to maintain
a stable net asset value of $1.00 per share. The portfolio will invest only
in eligible high quality, short-term money market instruments that present
minimal credit risks, as determined by Janus Capital Corporation, the
Portfolio's investment adviser, pursuant to procedures.
15
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The portfolio may invest only in United States dollar-denominated
instruments that have a remaining maturity of 397 days or less and will
maintain a dollar-weighted average portfolio maturity of 90 days or less.
Janus Capital Corporation serves as the investment adviser to the
Portfolio.
JPM INTERNATIONAL OPPORTUNITIES PORTFOLIO seeks to provide a high total
return from a portfolio of equity securities of foreign corporations. Total
return will consist of realized and unrealized capital gains and losses
plus income less expenses. The Portfolio is designed for investors with a
long-term investment horizon who want to diversify their investments by
adding international equities and take advantage of investment
opportunities outside the United States. The Portfolio seeks to achieve its
investment objective through country allocation and stock valuation and
selection. J.P. Morgan Investment Management Inc. is the investment adviser
to the Portfolio.
JPM BOND PORTFOLIO seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Total return will
consist of realized and unrealized capital gains and losses plus income
less expenses. Although the net asset value of the portfolio will
fluctuate, the portfolio attempts to preserve the value of its investments
to the extent consistent with its objective. J.P. Morgan Investment
Management Inc. is the investment adviser to the Portfolio.
MORGAN STANLEY ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation
by investing primarily in equity securities of Asian issuers (excluding
Japan) using an approach that is oriented to the selection of individual
stocks that the adviser believes are undervalued. The portfolio intends to
invest primarily in equity securities that are traded on recognized stock
exchanges of countries in Asia and in equity securities of companies
organized under the laws of an Asian country whose business is conducted
principally in Asia. MSDW serves as the investment adviser to the
Portfolio.
MORGAN STANLEY EMERGING MARKETS DEBT PORTFOLIO seeks high total return by
investing primarily in fixed income securities of government and
government-related issuers located in emerging market countries, which
securities provide a high level of current income, while at the same time
striving for investment growth. MSDW serves as the investment adviser to
the Portfolio.
16
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORGAN STANLEY HIGH YIELD PORTFOLIO seeks above-average total return over a
market cycle of three to five years by investing primarily in a diversified
portfolio of high yield securities, including corporate bonds and other
fixed income securities of both U.S. and non-U.S. issuers and derivatives.
High yield securities are rated below investment grade and are commonly
referred to as "junk bonds." The portfolio's average weighted maturity will
ordinarily exceed five years. Miller Anderson & Sherrerd, LLP serves as
the investment adviser to the Portfolio.
MORGAN STANLEY U.S. REAL ESTATE PORTFOLIO seeks above-average current
income and long-term capital appreciation by investing primarily in equity
securities of United States and non-United States companies principally
engaged in the United States real estate industry, including real estate
investment trusts ("REITs") and real estate operating companies. MSDW
serves as the investment adviser to the Portfolio.
The assets of the Separate Account are owned by Integrity. The portion of the
Separate Account's assets supporting the contracts may not be used to satisfy
liabilities arising out of any other business of Integrity.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS
Investments in shares of the Funds are valued at the net asset values of the
respective portfolios, which approximates fair value. The difference between
cost and fair value is reflected as unrealized appreciation and depreciation of
investments.
17
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Share transactions are recorded on the trade date. Realized gains and losses on
sales of the Funds' shares are determined based on the identified cost basis.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends and distributions from the Funds' portfolios are
reinvested in the respective portfolios and are reflected in the unit value of
the divisions of the Separate Account.
UNIT VALUE
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
TAXES
Operations of the Separate Account are included in the income tax return of
Integrity which is taxed as a life insurance company under the Internal Revenue
Code. The Separate Account will not be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code. Under the provisions of the
policies, Integrity has the right to charge the Separate Account for federal
income tax attributable to the Separate Account. No charge is currently being
made against the Separate Account for such tax since, under current tax law,
Integrity pays no tax on investment income and capital gains reflected in
variable life insurance policy reserves. However, Integrity retains the right to
charge for any federal income tax incurred which is attributable to the Separate
Account if the law is changed. Charges for state and local taxes, if any,
attributable to the Separate Account may also be made.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
18
<PAGE>
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1998 and the cost of shares held
at December 31, 1998 for each division were as follows:
<TABLE>
<CAPTION>
DIVISION PURCHASES SALES COST
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Zweig Asset Allocation $ 7,526,711 $ 8,748,810 $ 30,589,254
Harris Bretall Equity Growth 9,358,761 5,371,005 26,821,845
Scudder Kemper Value 19,502,378 13,183,147 37,266,815
Zweig Equity (Small Cap) 5,144,423 2,929,947 11,684,635
EAFE Equity Index 2,101,454 412,621 1,910,273
Equity 500 Index 17,472,745 11,398,207 18,156,153
Small Cap Index 3,781,100 764,879 3,631,389
VIP Equity-Income 11,981,559 718,942 12,765,997
VIP II Contrafund 8,984,949 687,198 9,587,413
VIP III Growth & Income 8,764,172 312,333 9,699,284
VIP III Growth Opportunities 6,372,068 326,148 6,846,465
Janus Aspen Capital Appreciation 8,464,683 1,059,082 8,417,634
Janus Aspen Balanced 8,655,246 7,958,324 57,126,528
Janus Aspen Worldwide Growth 14,332,860 1,005,818 14,901,977
Janus Aspen Money Market 30,080,015 18,562,914 17,912,594
JPM International Opportunities 1,887,704 859,309 1,333,962
JPM Bond 15,759,538 7,801,407 16,384,600
Morgan Stanley Emerging Markets Debt 1,636,884 1,439,790 5,693,611
Morgan Stanley High Yield 7,411,738 1,805,118 6,313,811
Morgan Stanley U.S. Real Estate 2,390,878 560,030 2,448,460
Morgan Stanley Asian Equity 1,258,197 1,350,054 3,947,479
-------------
$ 303,440,179
-------------
-------------
</TABLE>
19
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
3. EXPENSES
Integrity assumes mortality and expense risks and incurs certain administrative
expenses related to the operations of the Separate Account and deducts a charge
from the assets of the Separate Account at an annual rate of 1.20% and 0.15% of
net assets, respectively, to cover these risks and expenses. In addition, an
annual charge of $30 per contract is assessed if the participant's account value
is less than $50,000 at the end of any participation year prior to the
participant's retirement date (as defined by the participant's contract).
4. AMOUNT RETAINED BY INTEGRITY
Integrity may allocate amounts to certain Separate Account divisions to
facilitate the commencement of operations. Such amounts are not subject to
charges for mortality and expense risks and administrative expenses. Amounts
retained in the Separate Account by Integrity may be transferred by Integrity to
its general account.
In 1997, Integrity allocated $10.0 million to the Equity 500 Index Division and,
as a part of the substitution of certain divisions of the Separate Account,
transferred all amounts retained by Integrity in the Pinnacle Fixed Income
Division to the JPM Bond Division. Also during 1997, Integrity transferred to
its general account $1.5 million and $541,265 retained by Integrity in the
Equity 500 Index Division and JPM Bond Division, respectively. During 1998,
Integrity transferred to its general account all amounts retained by Integrity
in the Equity 500 Index Division and the JPM Bond Division.
20
<PAGE>
Financial Statements
Separate Account Ten
DECEMBER 31, 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Report of Independent Auditors
The Unit Holders and Board of Directors
Separate Account Ten of Integrity Life
Insurance Company
We have audited the accompanying statements of assets and liabilities of
Separate Account Ten of Integrity Life Insurance Company (the Separate Account)
(comprised of Select Ten Plus Division-June, Select Ten Plus Division-September
and Select Ten Plus Division-December), including the schedules of investments,
as of December 31, 1998, and the related statements of operations and changes in
net assets and financial highlights for each of the periods indicated therein.
These financial statements and financial highlights are the responsibility of
the Separate Account's management. Our responsibility is to express an opinion
on these financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
at December 31, 1998, by correspondence with the custodian. As to securities
relating to uncompleted transactions, we performed other auditing procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the divisions of the Separate Account at December 31, 1998, and the results
of their operations, changes in their net assets, and financial highlights for
each of the periods indicated therein in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
January 29, 1999
2
<PAGE>
Select Ten Plus Division - June
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
ASSETS
Investments in securities, at value (cost $1,977,918)--See accompanying schedule $ 2,056,681
Cash 12,864
Dividends, interest and other receivables 8,776
-----------------
TOTAL ASSETS 2,078,321
LIABILITIES
Accrued expenses 22,641
Payable for investment securities purchased 12,660
-----------------
TOTAL LIABILITIES 35,301
-----------------
NET ASSETS $ 2,043,020
-----------------
-----------------
UNIT VALUE, offering and redemption price per unit $ 10.43
-----------------
-----------------
Units outstanding 195,841
-----------------
-----------------
<CAPTION>
Statement of Operations
JUNE 30, 1998
(COMMENCEMENT OF
OPERATIONS)
THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
INVESTMENT INCOME - DIVIDENDS $ 26,883
EXPENSES
Mortality and expense risk and administrative charges 13,473
Investment advisory and management fees 4,990
Custody and accounting fees 10,377
Professional fees 3,524
Directors' fees and expenses 3,150
Printing and filing fees 3,312
Other expenses 3,069
-----------------
Total expenses before reimbursement 41,895
Less: expense reimbursement (19,956)
-----------------
Net expenses 21,939
-----------------
Net investment income 4,944
Realized and Unrealized Gain on Investments
Net realized gain on investment securities 925
Unrealized appreciation on investment securities 78,763
-----------------
Net gain on investments 79,688
-----------------
Net increase in net assets resulting from operations $ 84,632
-----------------
-----------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Select Ten Plus Division - June
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
JUNE 30, 1998
(COMMENCEMENT OF
OPERATIONS)
THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 4,944
Net realized gain on investments 925
Change in net unrealized appreciation 78,763
-----------------
Net increase in net assets resulting from operations 84,632
Contract related transactions:
Contributions from contract holders (196,589 units) 1,965,893
Cost of units redeemed (748 units) (7,505)
-----------------
Net increase in net assets resulting from unit transactions 1,958,388
TOTAL INCREASE IN NET ASSETS 2,043,020
NET ASSETS
Beginning of period -
-----------------
End of period $ 2,043,020
-----------------
-----------------
SEE ACCOMPANYING NOTES.
<CAPTION>
Financial Highlights
JUNE 30,1998
(COMMENCEMENT OF
OPERATIONS)
THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
SELECTED PER-UNIT DATA
Unit value, beginning of period $ 10.00
Income from investment operations:
Net investment income 0.03
Net realized and unrealized gain on investments 0.40
-----------------
Total from investment operations 0.43
-----------------
Unit value, end of period $ 10.43
-----------------
-----------------
TOTAL RETURN 4.30%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 2,043
Ratio of net investment income to average net assets 0.50%
Ratio of expenses to average net assets 2.20%
Ratio of net investment income to average net assets before voluntary
expense reimbursement (1.50%)
Ratio of expenses to average net assets before voluntary expense reimbursement 4.20%
Portfolio turnover rate 0.86%
</TABLE>
PERCENTAGE AMOUNTS ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER
RATE.
4
<PAGE>
Select Ten Plus Division - June
Schedule of Investments
December 31, 1998
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (100%)
BASIC MATERIALS (10.6%)
International Paper Company 4,864 $ 217,968
CAPITAL GOODS (18.0%)
Caterpillar, Inc. 4,207 193,522
Minnesota Mining & Manufacturing 2,478 176,248
-----------
369,770
COMMUNICATION SERVICES (13.0%)
AT&T Corporation 3,546 266,836
CONSUMER CYCLICAL (20.5%)
Eastman Kodak Company 2,851 205,272
General Motors Corporation 3,025 216,477
-----------
421,749
CONSUMER STAPLE (13.3 %)
Philip Morris Company, Inc. 5,123 274,080
ENERGY (20.4 %)
Chevron Corporation 2,471 204,939
Exxon Corporation 2,937 214,768
-----------
419,707
FINANCIAL (4.2%)
J.P. Morgan Company, Inc. 824 86,571
-----------
TOTAL COMMON STOCKS (Cost $1,977,918) 2,056,681
-----------
TOTAL INVESTMENTS (100.0%) $ 2,056,681
-----------
-----------
</TABLE>
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
period ended December 31, 1998 aggregated $1,993,850 and $16,857, respectively.
At December 31, 1998, net unrealized appreciation for tax purposes aggregated
$78,763 of which $152,941 related to appreciated investment securities and
$74,178 related to depreciated investment securities. The aggregate cost of
securities is the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
5
<PAGE>
Select Ten Plus Division - September
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
ASSETS
Investments in securities, at value (cost $10,746,149)--See accompanying schedule $ 11,014,215
Dividends, interest and other receivables 30,869
Cash 2,306
-----------------
TOTAL ASSETS 11,047,390
LIABILITIES
Accrued expenses 32,854
Payable for investment securities purchased 2,150
-----------------
TOTAL LIABILITIES 35,004
-----------------
NET ASSETS $ 11,012,386
-----------------
-----------------
UNIT VALUE, offering and redemption price per unit $ 10.26
-----------------
-----------------
Units outstanding 1,072,954
-----------------
-----------------
<CAPTION>
Statement of Operations
SEPTEMBER 30, 1998
(COMMENCEMENT OF
OPERATIONS)
THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
INVESTMENT INCOME - DIVIDENDS $ 78,307
EXPENSES
Mortality and expense risk and administrative charges 38,162
Investment advisory and management fees 14,134
Custody and accounting fees 5,127
Professional fees 3,504
Directors' fees and expenses 3,133
Printing and filing fees 3,294
Other expenses 3,052
-----------------
Total expenses before reimbursement 70,406
Less: expense reimbursement (8,263)
-----------------
Net expenses 62,143
-----------------
Net investment income 16,164
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investment securities 2,620
Unrealized appreciation on investment securities 268,066
-----------------
Net gain on investments 270,686
-----------------
Net increase in net assets resulting from operations $ 286,850
-----------------
-----------------
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
Select Ten Plus Division - September
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
(COMMENCEMENT OF
OPERATIONS)
THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 16,164
Net realized gain on investments 2,620
Change in net unrealized appreciation 268,066
-----------------
Net increase in net assets resulting from operations 286,850
Contract related transactions:
Contributions from contract holders (1,084,432 units) 10,841,972
Cost of units redeemed (11,478 units) (116,436)
-----------------
Net increase in net assets resulting from unit transactions 10,725,536
-----------------
TOTAL INCREASE IN NET ASSETS 11,012,386
NET ASSETS
Beginning of period -
-----------------
End of period $ 11,012,386
-----------------
-----------------
SEE ACCOMPANYING NOTES.
<CAPTION>
Financial Highlights
SEPTEMBER 30, 1998
(COMMENCEMENT OF
OPERATIONS)
THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
SELECTED PER-UNIT DATA
Unit value, beginning of period $ 10.00
Income from investment operations:
Net investment income 0.02
Net realized and unrealized gain on investments 0.24
-----------------
Total from investment operations 0.26
-----------------
Unit value, end of period $ 10.26
-----------------
-----------------
TOTAL RETURN 2.60%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 11,012
Ratio of net investment income to average net assets 0.57%
Ratio of expenses to average net assets 2.20%
Ratio of net investment income to average net assets before voluntary
expense reimbursement 0.28%
Ratio of expenses to average net assets before voluntary expense reimbursement 2.49%
Portfolio turnover rate 1.35%
</TABLE>
PERCENTAGE AMOUNTS ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER
RATE.
7
<PAGE>
Select Ten Plus Division - September
Schedule of Investments
December 31, 1998
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (100%)
BASIC MATERIALS (8.6%)
Du Pont (E.I.) de Nemours and Company 17,921 $ 950,933
CAPITAL GOODS (18.6%)
Caterpillar, Inc. 22,733 1,045,718
Minnesota Mining & Manufacturing 14,134 1,005,281
------------
2,050,999
CONSUMER CYCLICAL (30.6%)
Eastman Kodak Company 13,561 976,392
General Motors Corporation 18,902 1,352,674
The Goodyear Tire & Rubber Company 20,599 1,038,962
------------
3,368,028
CONSUMER STAPLE (11.2%)
Philip Morris Company, Inc. 23,025 1,231,838
ENERGY (19.4%)
Chevron Corporation 12,421 1,030,167
Exxon Corporation 15,104 1,104,480
------------
2,134,647
FINANCIAL (11.6%)
J.P. Morgan Company, Inc. 12,162 1,277,770
------------
TOTAL COMMON STOCKS (Cost $10,746,149) 11,014,215
------------
TOTAL INVESTMENTS (100.0%) $ 11,014,215
------------
------------
</TABLE>
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
period ended December 31, 1998 aggregated $10,891,121 and $147,592,
respectively. At December 31, 1998, net unrealized appreciation for tax
purposes aggregated $268,066 of which $659,286 related to appreciated investment
securities and $391,220 related to depreciated investment securities. The
aggregate cost of securities is the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
8
<PAGE>
Select Ten Plus Division - December
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
ASSETS
Investments in securities, at value (cost $14,784,736)--See accompanying schedule $ 14,519,611
Cash 14,786,409
-----------------
TOTAL ASSETS 29,306,020
LIABILITIES
Payable for investment securities purchased 14,784,736
Accrued expenses 844
-----------------
TOTAL LIABILITIES 14,785,580
-----------------
NET ASSETS $ 14,520,440
-----------------
-----------------
UNIT VALUE, offering and redemption price per unit $ 9.82
-----------------
-----------------
Units outstanding 1,478,641
-----------------
-----------------
<CAPTION>
Statement of Operations
FOR THE ONE DAY
PERIOD ENDED
DECEMBER 31, 1998
(COMMENCEMENT
OF OPERATIONS)
-----------------
<S> <C>
INVESTMENT INCOME - DIVIDENDS $ -
EXPENSES
Mortality and expense risk and administrative charges 537
Investment advisory and management fees 199
Custody and accounting fees 55
Professional fees 14
Directors' fees and expenses 17
Other expenses 22
-----------------
Net expenses 844
-----------------
Net investment loss (844)
Unrealized Loss on Investments
Unrealized depreciation on investment securities (265,125)
-----------------
Net loss on investments (265,125)
-----------------
Net decrease in net assets resulting from operations $ (265,969)
-----------------
-----------------
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
Select Ten Plus Division - December
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE ONE DAY
PERIOD ENDED
DECEMBER 31, 1998
(COMMENCEMENT
OF OPERATIONS)
-----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss $ (844)
Change in net unrealized depreciation (265,125)
-----------------
Net decrease in net assets resulting from operations (265,969)
Contract related transactions:
Contributions from contract holders (1,478,641 units) 14,786,409
-----------------
TOTAL INCREASE IN NET ASSETS 14,520,440
NET ASSETS
Beginning of period -
-----------------
End of period $ 14,520,440
-----------------
-----------------
SEE ACCOMPANYING NOTES.
<CAPTION>
Financial Highlights
FOR THE ONE DAY
PERIOD ENDED
DECEMBER 31, 1998
(COMMENCEMENT
OF OPERATIONS)
-----------------
<S> <C>
SELECTED PER-UNIT DATA
Unit value, beginning of period $ 10.00
Loss from investment operations:
Net investment loss -*
Net realized and unrealized loss on investments (0.18)
-----------------
Total from investment operations (0.18)
-----------------
Unit value, end of period $ 9.82
-----------------
-----------------
TOTAL RETURN (1.80%)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 14,520
Ratio of net investment loss to average net assets (2.12%)
Ratio of expenses to average net assets 2.12%
Portfolio turnover rate -
</TABLE>
* Less than $0.01
PERCENTAGE AMOUNTS ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER
RATE.
10
<PAGE>
Select Ten Plus Division - December
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (100%)
BASIC MATERIALS (19.9%)
Du Pont (E.I.) de Nemours and Company 26,340 $ 1,397,666
International Paper Company 33,360 1,494,945
------------
2,892,611
CAPITAL GOODS (19.7%)
Caterpillar, Inc. 31,425 1,445,550
Minnesota Mining & Manufacturing 19,990 1,421,789
------------
2,867,339
CONSUMER CYCLICAL (30.5%)
Eastman Kodak Company 20,570 1,481,040
General Motors Corporation 20,520 1,468,463
The Goodyear Tire & Rubber Company 29,230 1,474,288
------------
4,423,791
CONSUMER STAPLE (10.0%)
Philip Morris Company, Inc. 27,000 1,444,500
ENERGY (10.0%)
Chevron Corporation 17,520 1,453,065
FINANCIAL (9.9%)
J.P. Morgan Company, Inc. 13,690 1,438,305
------------
TOTAL COMMON STOCKS (Cost $14,784,736) 14,519,611
------------
TOTAL INVESTMENTS (100.0%) $ 14,519,611
------------
------------
</TABLE>
OTHER INFORMATION:
Purchases of securities, excluding short-term securities, for the
period ended December 31, 1998 aggregated $14,784,736. At December
31, 1998, net unrealized depreciation for tax purposes aggregated
$265,125 of which $282,695 related to depreciated investment
securities and $17,570 related to appreciated investment securities.
The aggregate cost of securities is the same for book and tax
purposes.
SEE ACCOMPANYING NOTES.
11
<PAGE>
Separate Account Ten of Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Separate Account Ten of Integrity Life Insurance Company (the "Separate
Account") was formed on February 4, 1998. The Separate Account is registered
under the Investment Company Act of 1940 as a management investment company.
Contributions to the Separate Account are currently limited to PINNACLE contract
holders and SYNDICATED SELECT TEN PLUS contract holders. PINNACLE and
SYNDICATED SELECT TEN PLUS are flexible premium variable annuity products issued
by Integrity Life Insurance Company ("Integrity"). The Separate Account is
currently divided into four divisions: Select Ten Plus Division-March, Select
Ten Plus Division-June, Select Ten Plus Division-September, and Select Ten Plus
Division-December ("Division(s)"). Each Division is a non-diversified
investment company which invests directly in securities. The Divisions seek
total return by acquiring the ten highest yielding stocks in the Dow Jones
Industrial Average ("DJIA") in equal weights and holding them for approximately
twelve months. Each Division is open for new investments on only one day of
each year. The twelve month holding period begins on the last business day of
the month for which the Division is named. For example, the Select Ten Plus
Division-June invests only on the last business day of June each year. As of
December 31, 1998, the March Division was the only Division that did not have
invested assets. The assets of the Separate Account are owned by Integrity.
ARM Securities Corporation ("ARM Securities"), a registered broker-dealer under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc., distributes units of the Separate Account. Integrity
Capital Advisors, Inc. ("Integrity Capital"), an investment adviser registered
under the Investment Advisers Act of 1940, provides management services to the
Separate Account pursuant to a management agreement. National Asset Management
Corporation ("National Asset"), an investment adviser registered under the
Investment Advisers Act of 1940, serves as the sub-adviser of the Divisions
pursuant to a sub-advisory agreement.
ARM Financial Group, Inc. ("ARM") is the ultimate parent of Integrity, Integrity
Capital and ARM Securities. ARM specializes in the growing asset accumulation
business with particular emphasis on retirement savings and investment products.
At December 31, 1998, ARM had approximately $9.9 billion of assets under
management.
12
<PAGE>
Separate Account Ten of Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for investment companies.
SECURITY VALUATION
Common stocks are valued at the last sale price on the exchange on which they
are primarily traded.
SECURITY TRANSACTIONS
Securities transactions are accounted for as of trade date net of brokerage
fees, commissions and transfer fees. Dividend income is recorded on the
ex-dividend date. Interest income is accrued daily. Realized gains and losses
on sales of investments are determined on the basis of the first-in, first-out
method for all of the Divisions.
FEDERAL INCOME TAX MATTERS
Operations of the Separate Account are included in the income tax return of
Integrity, which is taxed as a life insurance company under the Internal Revenue
Code. The Separate Account will not be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code. Under existing federal income
tax law, no taxes are payable on the investment income or on the capital gains
of the Separate Account.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
2. EXPENSES
Integrity assumes mortality and expense risks and incurs certain administrative
expenses related to the operations of the Separate Account and deducts a charge
from the assets of the Divisions at an annual rate of 1.20% and 0.15% of average
daily net assets, respectively, to cover these risks and expenses. In addition,
an annual charge of $30 per contract is assessed if the contract holder's
account value is less than $50,000 at the end of any participation year prior to
the contract holder's retirement date (as defined by the contract).
13
<PAGE>
Separate Account Ten of Integrity Life Insurance Company
Notes to Financial Statement (continued)
3. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES
Integrity Capital serves as investment adviser for the Divisions and National
Asset serves as the sub-adviser for the Divisions. For providing investment
management services to the Divisions, Integrity Capital receives a monthly fee
based on an annual rate of .50% of each Division's average daily net assets.
Integrity Capital, not the Separate Account, pays sub-advisory fees to National
Asset for its services under a sub-advisory agreement at an annual rate of .10%
of the Divisions' average daily net assets up to $100 million, and .05% of the
Divisions' average daily net assets in excess of $100 million. Integrity Capital
has guaranteed it will pay National Asset a minimum sub-advisory fee of $25,000
during the Separate Account's first year of operations. Integrity Capital has
agreed to reimburse each Division for operating expenses (excluding management
fees and mortality and expense charges) above an annual rate of .35% of the
Divisions' average net assets.
Certain officers and directors of the Separate Account are also officers of ARM,
ARM Securities, Integrity Capital, and Integrity. The Separate Account does not
pay any amounts to compensate these individuals.
14
<PAGE>
Financial Statements
(Statutory Basis)
Integrity Life Insurance Company
YEARS ENDED DECEMBER 31, 1998 AND 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1998 and 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors..........................................................................1
Audited Financial Statements
Balance Sheets (Statutory Basis)........................................................................3
Statements of Income (Statutory Basis)..................................................................5
Statements of Changes in Capital and Surplus (Statutory Basis)..........................................6
Statements of Cash Flows (Statutory Basis)..............................................................7
Notes to Financial Statements (Statutory Basis).........................................................9
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
Integrity Life Insurance Company
We have audited the accompanying statutory basis balance sheets of Integrity
Life Insurance Company as of December 31, 1998 and 1997, and the related
statutory basis statements of income, changes in capital and surplus, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Ohio Department of Insurance, which practices differ from
generally accepted accounting principles. The variances between such practices
and generally accepted accounting principles and the effects on the accompanying
financial statements are described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Integrity Life Insurance Company at December 31, 1998 and 1997, or the
results of its operations or its cash flows for the years then ended.
1
<PAGE>
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Integrity Life
Insurance Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting practices prescribed or permitted by the Ohio Department of
Insurance.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 9, 1999
2
<PAGE>
Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------------------------
(In thousands)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds $4,562,340 $3,444,659
Preferred stocks 32,704 58,369
Investment in common stock of subsidiary 59,503 54,028
Mortgage loans 11,719 13,186
Policy loans 102,305 99,531
Cash and short-term investments 412,074 201,242
Other invested assets 53,435 27,591
---------- ----------
Total cash and invested assets 5,234,080 3,898,606
Separate account assets 2,124,250 1,822,557
Accrued investment income 47,091 38,247
Reinsurance balances receivable 1,048 4,837
Other admitted assets 2,097 207
---------- ----------
Total admitted assets $7,408,566 $5,764,454
---------- ----------
---------- ----------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
----------------------------
(In thousands)
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 1,512,538 $ 1,603,893
Funding agreement and GIC deposit fund liabilities 3,508,124 2,039,202
Unpaid claims 120 207
Deposits on policies to be issued, net 83 (1,715)
----------- -----------
Total policy and contract liabilities 5,020,865 3,641,587
Separate account liabilities 2,101,750 1,798,069
Accounts payable and accrued expenses 3,502 2,538
Transfers to separate accounts due or accrued, net (59,632) (42,028)
Reinsurance balances payable 9,194 14,602
Federal income taxes 64 763
Asset valuation reserve 34,578 23,368
Interest maintenance reserve 38,637 42,272
Other liabilities 12,920 71,523
----------- -----------
Total liabilities 7,161,878 5,552,694
Capital and surplus:
Common stock, $2 par value, 1,500,000 shares
authorized, issued and outstanding 3,000 3,000
Paid-in surplus 122,006 113,109
Unassigned surplus 121,682 95,651
----------- -----------
Total capital and surplus 246,688 211,760
----------- -----------
Total liabilities and capital and surplus $ 7,408,566 $ 5,764,454
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
4
<PAGE>
Integrity Life Insurance Company
Statements of Income (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
-------------------------
(In thousands)
<S> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and annuity considerations $ 7,313 $ 13,386
Deposit-type funds 1,868,553 2,191,350
Net investment income 321,469 239,514
Amortization of the interest maintenance reserve 2,243 2,561
Income from separate account seed money investment -- 469
Other revenues 20,409 16,988
---------- ----------
Total premiums and other revenues 2,219,987 2,464,268
Benefits paid or provided:
Death benefits 5,528 5,136
Annuity benefits 240,573 136,630
Surrender benefits 297,863 408,615
Interest on funds left on deposit 162,137 84,652
Payments on supplementary contracts 10,982 10,659
Increase in reserves and deposit fund liabilities 1,216,263 945,161
---------- ----------
Total benefits paid or provided 1,933,346 1,590,853
---------- ----------
Insurance and other expenses:
Commissions 31,144 29,189
General expenses 23,542 15,869
Taxes, licenses and fees 1,483 1,111
Net transfers to separate accounts 186,486 785,374
Other expenses 1,710 3,354
---------- ----------
Total insurance and other expenses 244,365 834,897
---------- ----------
Gain from operations before federal income taxes and
net realized capital gains 42,276 38,518
---------- ----------
Federal income tax expense 5,456 2,871
---------- ----------
Gain from operations before net realized capital gains 36,820 35,647
Net realized capital gains, excluding realized capital
gains (losses), net of tax, transferred to the interest
maintenance reserve (1998-$(1,392); 1997-$6,239) 945 2,512
---------- ----------
Net income $ 37,765 $ 38,159
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
5
<PAGE>
Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN UNASSIGNED CAPITAL AND
STOCK SURPLUS SURPLUS SURPLUS
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 3,000 $ 87,535 $ 73,299 $ 163,834
Net income 38,159 38,159
Net change in unrealized gain
of subsidiary 5,756 5,756
Increase in asset valuation reserve (9,563) (9,563)
Capital contribution, net 25,574 25,574
Dividends to shareholder (12,000) (12,000)
-------- --------- --------- ---------
Balance, December 31, 1997 3,000 113,109 95,651 211,760
Net income 37,765 37,765
Net change in unrealized gain
of subsidiary 5,475 5,475
Net change in nonadmitted
assets and related items 1 1
Increase in asset valuation reserve (11,210) (11,210)
Capital contribution 8,897 8,897
Dividends to shareholder (6,000) (6,000)
-------- --------- --------- ---------
Balance, December 31, 1998 $ 3,000 $ 122,006 $ 121,682 $ 246,688
-------- --------- --------- ---------
-------- --------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
----------------------------
(In thousands)
<S> <C> <C>
OPERATIONS:
Premiums, policy proceeds, and other
considerations received $ 1,875,866 $ 2,204,736
Net investment income received 315,760 230,747
Commission and expense allowances received
on reinsurance ceded 904 3,838
Benefits paid (555,176) (561,208)
Insurance expenses paid (55,204) (46,819)
Other income received net of other expenses paid 17,100 9,092
Net transfers to separate accounts (204,091) (789,869)
Federal income taxes paid (1,814) (5,501)
--------- ---------
Net cash provided by operations 1,393,345 1,045,016
INVESTMENT ACTIVITIES:
Proceeds from sales, maturities, or repayments
of investments:
Bonds 4,854,879 3,407,120
Preferred stocks 86,730 87,435
Mortgage loans 1,467 19,760
Real estate -- 359
Other invested assets 63,054 10,216
Net gains (losses) on cash and short-term investments 580 (24)
Miscellaneous proceeds 1,050 3,436
--------- ---------
Total investment proceeds 5,007,760 3,528,302
Benefits recovered (taxes paid) on capital gains (3,264) 175
--------- ---------
Net proceeds from sales, maturities, or repayments
of investments 5,004,496 3,528,477
</TABLE>
7
<PAGE>
Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
---------------------------
(In thousands)
<S> <C> <C>
Cost of investments acquired:
Bonds 5,980,098 4,376,185
Preferred and common stocks 60,158 101,175
Other invested assets 85,759 31,931
Miscellaneous applications 2,731 --
---------- ---------
Total cost of investments acquired 6,128,746 4,509,291
Net increase in policy loans and premium notes 2,773 1,320
---------- ---------
Net cash used in investment activities (1,127,023) (982,134)
FINANCING AND MISCELLANEOUS ACTIVITIES:
Other cash provided:
Capital and surplus paid-in 8,897 40,000
Other sources 7,631 52,548
---------- ---------
Total other cash provided 16,528 92,548
Other cash applied:
Dividends to shareholder 6,000 12,000
Other applications, net 66,018 29,197
---------- ---------
Total other cash applied 72,018 41,197
---------- ---------
Net cash provided by (used in) financing and
miscellaneous activities (55,490) 51,351
---------- ---------
Net increase in cash and short-term investments 210,832 114,233
Cash and short-term investments at beginning of year 201,242 87,009
---------- ---------
Cash and short-term investments at end of year $ 412,074 $ 201,242
---------- ---------
---------- ---------
</TABLE>
See accompanying notes.
8
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
Integrity Life Insurance Company (the "Company") is an indirect wholly owned
subsidiary of ARM Financial Group, Inc. ("ARM"). ARM acquired the Company and
its wholly owned insurance subsidiary, National Integrity Life Insurance Company
("National Integrity"), on November 26, 1993 from The National Mutual Life
Association of Australasia Limited. The Company is domiciled in the state of
Ohio. The Company, currently licensed in 46 states and the District of Columbia,
and National Integrity specialize in the growing asset accumulation business
with particular emphasis on retirement savings and investment products.
In June 1997, ARM completed an initial public offering of 9.2 million shares of
its common stock of which 5.75 million shares were sold by ARM for net proceeds
of $78.8 million. The remaining 3.45 million shares were sold by certain private
equity funds sponsored by Morgan Stanley Dean Witter & Co. ("Morgan Stanley
Stockholders"). On June 30, 1997, ARM used a portion of such net proceeds to
make a $40 million capital contribution to the Company, thereby strengthening
the Company's capital base to provide for future growth. Simultaneously, the
Company paid a $14.4 million dividend of bonds held by the Company to ARM for a
net capital contribution of $25.6 million.
In May 1998, ARM completed a secondary public offering of approximately 12.4
million shares of common stock held by the Morgan Stanley Stockholders. As a
result of the secondary public offering, the Morgan Stanley Stockholders no
longer own any shares of ARM's outstanding stock.
BASIS OF PRESENTATION
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the Ohio
Department of Insurance. Such practices vary from generally accepted accounting
principles ("GAAP"). The more significant variances from GAAP are as follows:
9
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Investments in bonds and preferred stocks are reported at amortized cost or
fair value based on the National Association of Insurance Commissioners'
("NAIC") rating; for GAAP, such fixed maturity investments are designated
at purchase as held-to-maturity, trading or available-for-sale.
Held-to-maturity fixed investments are reported at amortized cost, and the
remaining fixed maturity investments are reported at fair value with
unrealized holding gains and losses reported in operations for those
designated as trading and as a separate component of shareholder's equity
for those designated as available-for-sale. In addition, fair values of
certain investments in bonds and stocks are based on values specified by
the NAIC, rather than on actual or estimated fair values used for GAAP.
Realized gains and losses are reported in income net of income tax and
transfers to the interest maintenance reserve. Changes between cost and
admitted investment asset amounts are credited or charged directly to
unassigned surplus rather than to a separate surplus account. The Asset
Valuation Reserve is determined by an NAIC prescribed formula and is
reported as a liability rather than unassigned surplus. Under a formula
prescribed by the NAIC, the Company defers the portion of realized gains
and losses on sales of fixed income investments, principally bonds and
mortgage loans, attributable to changes in the general level of interest
rates and amortizes those deferrals over the remaining period to maturity
of the individual security sold using the seriatim method. The net deferral
is reported as the Interest Maintenance Reserve in the accompanying balance
sheets. Under GAAP, realized gains and losses are reported in the income
statement on a pretax basis in the period that the asset giving rise to the
gain or loss is sold and include provisions when there has been a decline
in asset values deemed other than temporary.
SUBSIDIARY
The accounts and operations of the Company's subsidiary are not
consolidated with the accounts and operations of the Company as would be
required under GAAP.
10
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
POLICY ACQUISITION COSTS
Costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to investment-type products, to
the extent recoverable from future gross profits, are amortized
generally in proportion to the emergence of gross profits over the
estimated term of the underlying policies.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally receivables
greater than 90 days past due, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS AND BENEFITS
Revenues include premiums and deposits received and benefits include
death benefits paid and the change in policy reserves. Under GAAP, such
premiums and deposits received are accounted for as a deposit liability
and therefore not recognized as premium revenue; benefits paid equal to
the policy account value are accounted for as a return of deposit
instead of benefit expense.
BENEFIT RESERVES
Certain policy reserves are calculated using statutorily prescribed
interest and mortality assumptions rather than on expected experience or
actual account balances as would be required under GAAP.
FEDERAL INCOME TAXES
Deferred federal income taxes are not provided for differences between
the financial statement amounts and tax bases of assets and liabilities.
11
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF CASH FLOWS
Cash and short-term investments in the statement of cash flows represent
cash balances and investments with initial maturities of one year or
less. Under GAAP, the corresponding captions of cash and cash
equivalents include cash balances and investments with initial
maturities of three months or less.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
----------------------------
(In thousands)
<S> <C> <C>
Net income as reported in the accompanying
statutory basis financial statements $ 37,765 $ 38,159
Deferred policy acquisition costs, net of amortization 22,694 19,174
Adjustments to customer deposits (7,082) (10,224)
Adjustments to invested asset carrying values
at acquisition date (226) (69)
Amortization of value of insurance in force (5,426) (8,423)
Amortization of interest maintenance reserve (2,243) (2,561)
Adjustments for realized investment gains (losses) (4,043) 217
Adjustments for federal income tax expense (4,623) (4,419)
Investment in subsidiary 11,561 6,009
Eliminate dividend income from subsidiary (2,771) -
Other 2,237 3,300
--------- ---------
Net income, GAAP basis $ 47,843 $ 41,163
--------- ---------
--------- ---------
</TABLE>
12
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
----------------------------
(In thousands)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 246,688 $ 211,760
Adjustments to customer deposits (165,471) (150,973)
Adjustments to invested asset carrying values at
acquisition date 436 (2,342)
Asset valuation reserve and interest maintenance reserve 73,215 65,481
Value of insurance in force 27,097 35,924
Goodwill 2,968 3,997
Deferred policy acquisition costs 79,679 54,175
Adjustments to investment in subsidiary
excluding net unrealized gains (losses) 25,497 22,182
Net unrealized gains (losses) on available-for-sale securities (123,124) 21,317
Other 29,517 28,596
--------- ---------
Shareholder's equity, GAAP basis $ 196,502 $ 290,117
--------- ---------
--------- ---------
</TABLE>
Other significant accounting practices are as follows:
INVESTMENTS
Bonds, preferred stocks, common stocks, and short-term investments are stated at
values prescribed by the NAIC, as follows:
Bonds and short-term investments are reported at cost or amortized cost.
The discount or premium on bonds is amortized using the interest method.
For loan-backed bonds and structured securities, anticipated prepayments
are considered when determining the amortization of discount or premium.
Prepayment assumptions for loan-backed bonds and structured securities are
obtained from broker-dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities.
13
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
Preferred stocks are reported at cost.
The Company's investment in its insurance subsidiary is reported at the
equity in the underlying statutory basis of National Integrity's net
assets. Changes in the admitted asset carrying amount of the investment are
credited or charged directly to unassigned surplus.
Short-term investments includes investments with maturities of less than
one year at the date of acquisition.
Mortgage loans and policy loans are reported at unpaid principal balances.
Realized capital gains and losses are determined using the average cost method.
BENEFITS
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum or guaranteed policy cash values or the amounts
required by the Ohio Department of Insurance. The Company waives deduction of
deferred fractional premiums upon the death of life and annuity policy insureds
and does not return any premium beyond the date of death. Surrender values on
policies do not exceed the corresponding benefit reserve. Policies issued
subject to multiple table substandard extra premiums are valued on the standard
reserve basis which recognizes the non-level incidence of the excess mortality
costs. Additional reserves are established when the results of cash flow testing
under various interest rate scenarios indicate the need for such reserves.
Tabular interest, tabular less actual reserve released, and tabular cost have
been determined by formula as prescribed by the NAIC.
Interest on funds left on deposit represents interest credited on funding
agreements and GIC deposit fund liabilities. Interest credited on all other life
and annuity reserves is included as a component of annuity or surrender
benefits.
14
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
REINSURANCE
Reinsurance premiums, benefits and expenses are accounted for on bases
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts. Premiums, benefits and expenses, and the
reserves for policy and contract liabilities are reported net, rather than
gross, of reinsured amounts.
SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying financial
statements represent funds that are separately administered, principally for
variable annuity contracts and institutional funding agreements. Separate
account assets are reported at fair value. Surrender charges collectible by the
general account in the event of variable annuity contract surrenders are
reported as a negative liability rather than an asset pursuant to prescribed
NAIC accounting practices. Policy related activity involving cashflows, such as
premiums and benefits, are reported in the accompanying statements of income in
separate line items combined with related general account amounts. Investment
income and interest credited on deposits held in guaranteed separate accounts
are included in the accompanying statements of income as a net amount included
in net transfers to (from) separate accounts. The Company receives
administrative fees for managing the nonguaranteed separate accounts and other
fees for assuming mortality and certain expense risks. Such fees are included in
other revenues.
USE OF ESTIMATES
The preparation of financial statements in compliance with statutory accounting
practices requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
presentation of the 1998 financial statements. These reclassifications had no
effect on previously reported net income or surplus.
15
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the Ohio Department of
Insurance. "Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. In 1998, both the NAIC and the Ohio Department of
Insurance adopted codified statutory accounting principles ("Codification") with
an effective date of January 1, 2001. Codification will likely change, to some
extent, prescribed statutory accounting practices and may result in changes to
the accounting practices that the Company uses to prepare its statutory-basis
financial statements. The Company has not yet determined the impact of
Codification to its statutory-basis financial statements.
3. INVESTMENTS
The cost or amortized cost and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
At December 31, 1998:
Mortgage-backed securities $ 1,969,989 $ - $ - $ 1,969,989
Corporate securities 1,803,209 5,445 53,873 1,754,781
Asset-backed securities 497,116 - - 497,116
U.S. Treasury securities and
obligations of U.S. government
agencies 258,659 206 741 258,124
Foreign governments 29,412 - 999 28,413
States and political
subdivisions 3,955 158 - 4,113
------------- ------------- ------------- -------------
Total bonds $ 4,562,340 $ 5,809 $ 55,613 $ 4,512,536
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
16
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------------------
(In thousands)
At December 31, 1997:
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 1,606,968 $ - $ - $ 1,606,968
Corporate securities 1,132,531 13,329 7,533 1,138,327
Asset-backed securities 374,841 - - 374,841
U. S. Treasury securities and
obligations of U.S. government
agencies 276,801 714 7 277,508
Foreign governments 49,513 121 437 49,197
States and political subdivisions
4,005 160 - 4,165
------------- ------------- ------------- -------------
Total bonds $ 3,444,659 $ 14,324 $ 7,977 $ 3,451,006
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Fair values are based on published quotations of the Securities Valuation Office
of the NAIC. Fair values generally represent quoted market value prices for
securities traded in the public marketplace, or analytically determined values
using bid or closing prices for securities not traded in the public marketplace.
However, for certain investments for which the NAIC does not provide a value,
the Company uses the amortized cost amount as a substitute for fair value in
accordance with prescribed guidance. As of December 31, 1998 and 1997, the fair
value of investments in bonds includes $3.8 billion and $2.9 billion,
respectively, of bonds that were valued at amortized cost.
17
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
3. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of the Company's
investments in bonds at December 31, 1998, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
------------------------------------
(In thousands)
Years to maturity:
<S> <C> <C>
One or less $ 22,292 $ 22,254
After one through five 131,959 129,762
After five through ten 338,367 326,435
After ten 1,602,617 1,566,980
Asset-backed securities 497,116 497,116
Mortgage-backed securities 1,969,989 1,969,989
------------- -------------
Total $ 4,562,340 $ 4,512,536
------------- -------------
------------- -------------
</TABLE>
The expected maturities in the foregoing table may differ from the contractual
maturities because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties and because
asset-backed and mortgage-backed securities (including floating-rate securities)
provide for periodic payments throughout their life.
Proceeds from the sales of investments in bonds during 1998 and 1997 were $4.1
billion and $2.9 billion; gross gains of $26.5 million and $34.9 million, and
gross losses of $26.8 million and $26.9 million were realized on those sales,
respectively.
At December 31, 1998 and 1997, bonds with an admitted asset value of $7,521,000
and $7,664,000, respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.
18
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
3. INVESTMENTS (CONTINUED)
Unrealized gains and losses on investment in subsidiary are reported directly in
surplus and do not affect operations. The gross unrealized gains and losses on,
and the cost and fair value of, the investment are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Cost Unrealized Unrealized
Gains Losses Fair Value
------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
At December 31, 1998:
Subsidiary $ 17,823 $ 41,680 $ - $ 59,503
--------- --------- ------- ---------
--------- --------- ------- ---------
At December 31, 1997:
Subsidiary $ 17,823 $ 36,205 $ - $ 54,028
--------- --------- ------- ---------
--------- --------- ------- ---------
</TABLE>
The Company's mortgage loan portfolio is primarily comprised of agricultural
loans. The Company made no new investments in mortgage loans during 1998. The
maximum percentage of any one loan to the value of the security at the time of
the loan exclusive of any purchase money mortgages was 75%. Fire insurance is
required on all properties covered by mortgage loans. As of December 31, 1998,
the Company held no mortgages with interest more than one year past due. During
1998, no interest rates of outstanding mortgage loans were reduced. No amounts
have been advanced by the Company.
19
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
3. INVESTMENTS (CONTINUED)
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
-------------------------------
(In thousands)
Income:
<S> <C> <C>
Bonds $ 299,122 $ 216,166
Preferred stocks 3,226 6,042
Dividend from subsidiary 2,771 -
Mortgage loans 1,100 5,619
Real estate - 158
Policy loans 7,544 6,842
Cash and short-term investments 15,335 7,072
Other investment income 2,091 880
------------- -------------
Total investment income 331,189 242,779
Investment expenses (2,807) (3,265)
Interest expense on repurchase agreements (6,913) -
------------- -------------
Net investment income $ 321,469 $ 239,514
------------- -------------
------------- -------------
</TABLE>
4. DERIVATIVE INSTRUMENTS
The Company offers equity-indexed products through its separate accounts that
meet consumer demand for equity investments with downside protection. In
connection with this product the Company acquired 356 S&P 500 futures contracts
during 1998. The Company acquired the futures through the use of a margin
account whereby the Company maintains a minimum cash balance of approximately
$10,000 per contract. Should the S&P 500 fall below the level determined at the
acquisition date, the Company would be required to add additional cash to the
margin account based on the change in the S&P 500's market value. Should the S&P
500 increase from its level at the inception of the contract, cash would be
added by the counterparty to the margin account. Unrealized market value gains
on the futures are recorded in the separate accounts statement of operations to
hedge against the Company's obligation to pay equity-indexed returns to
policyholders. As of December 31, 1998, outstanding futures had unrealized gains
of approximately $5.8 million.
20
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
4. DERIVATIVE INSTRUMENTS (CONTINUED)
During 1998, the Company purchased an interest rate cap for $5,225,000 and sold
an interest rate floor for $1,425,000, each having a contractrual notional
amount of $1.0 billion. The objective for holding these instruments is to limit
exposure to volatility of interest credited payments for variable rate
institutional spread deposits. Both the purchase price of the cap and the
proceeds from the floor will be amortized into operations using the interest
method over the lives of the cap and floor, respectively. Payments received from
the cap or made on the floor are recorded in the statement of operations as an
offset to interest on contract or policy funds.
The Company holds institutional spread deposits in its general account. The
Company uses interest rate swaps to reduce the interest rate exposure arising
from mismatches between the assets and liabilities related to the deposits. The
Company agreed to exchange with other parties a fixed-rate of interest it
receives on certain investment securities for floating-rate interest amounts
calculated by reference to agreed-upon notional principal amounts. On certain
contracts entered into during 1998, the Company received $1,138,750 of
consideration as part of the swaps that will be amortized into operating
earnings over the life of the swaps. A single net payment is made by one
counterparty at each date. The Company has approximately $346 million of
notional principal contracts outstanding in the general account at December 31,
1998.
During 1998, the Company entered into total yield swap transactions with two
affiliates of the Company, 312 Certificate Company ("312CC") and 212 Certificate
Company ("212CC"). 312CC and 212CC were established as special purpose entities
to offer privately placed certificates. These swaps are considered off-balance
sheet items.
The swap transactions generally provide that the Company pays an amount that
approximates the interest credited to be paid to certificate holders plus
outside credit enhancement fees and receives the book income of the 312CC and
212CC investment portfolios, less investment advisory expenses. The Company
accounts for the swap activity in its guaranteed separate account. During 1998,
the Company recorded approximately $962,000 and $414,000 of net investment
income from 312CC and 212CC, respectively, in its separate account summary of
operations.
21
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
4. DERIVATIVE INSTRUMENTS (CONTINUED)
The 312CC swap transaction provides that the Company increase the fair market
value of the 312CC investment portfolio to equal the account value of the
certificate ("account value") if the ratio of the investment portfolio fair
value to account value is less than 97%. The 212CC swap transaction provides
that the Company maintains the fair value of the 212CC investment portfolio to
be no less than 97% of the account value. However, from time to time ARM may
make capital contributions to 312CC and 212CC as necessary to maintain the fair
value of the investment portfolios at or near account value. Such infusions
would serve to mitigate the Company's obligation to make the above payments
under the swaps. During 1998, ARM made a $6 million capital contribution to
312CC.
Certain events may cause the 312CC and 212CC certificates to be paid prior to
their stated maturity dates. If such an event occurs and the fair value of the
312CC or 212CC investment portfolio is less than account value, the swap
transactions provide that the Company contribute the difference.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to the financial instruments, but does not expect any
counterparties to fail to meet their obligations given their high credit
ratings.
5. REINSURANCE
Consistent with prudent business practices and the general practice of the
insurance industry, the Company reinsures risks under certain of its insurance
products with other insurance companies through reinsurance agreements. Through
these reinsurance agreements, substantially all mortality risks associated with
single premium endowment and variable annuity deposits and substantially all
risks associated with variable life business have been reinsured with
non-affiliated insurance companies. A contingent liability exists with respect
to insurance ceded which would become a liability should the reinsurer be unable
to meet the obligations assumed under these reinsurance agreements.
22
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
5. REINSURANCE (CONTINUED)
The effect of reinsurance on premiums, annuity considerations and deposit-type
funds is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
----------------------------
(In thousands)
<S> <C> <C>
Direct premiums and amounts assessed
against policyholders $ 421,637 $ 1,005,583
Reinsurance assumed 1,474,079 1,217,681
Reinsurance ceded (19,850) (18,528)
---------- -----------
Net premiums, annuity considerations and
deposit-type funds $ 1,875,866 $ 2,204,736
----------- -----------
----------- -----------
</TABLE>
In 1998 and 1997, the Company assumed $1.5 billion and $1.1 billion,
respectively, in funding agreement and GIC deposits through a 50% coinsurance
agreement with General American Life Insurance Company.
6. FEDERAL INCOME TAXES
The Company files a consolidated return with National Integrity. The method of
allocation between the companies is based on separate return calculations with
current benefit being given for the use of National Integrity's losses and
credits in the consolidated return.
Income before income taxes differs from taxable income principally due to value
of insurance in force, interest maintenance reserves, and differences in policy
and contract liabilities and investment income for tax and financial reporting
purposes.
The prior year tax provision was calculated including a consolidated net
operating loss carryover benefit of $12.4 million.
23
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
7. SURPLUS
The ability of the Company to pay dividends is limited by state insurance laws.
Under Ohio insurance laws, the Company may pay dividends, without the approval
of the Ohio Director of Insurance, only from earned surplus and those dividends
may not exceed (when added to other dividends paid in the proceeding 12 months)
the greater of (i) 10% of the Company's statutory capital and surplus as of the
preceding December 31, or (ii) the Company's statutory net income for the
preceding year. The maximum dividend payments that may be made by the Company to
ARM during 1999 are $37.8 million.
Under New York insurance laws, National Integrity may pay dividends to the
Company only out of its earnings and surplus, subject to at least thirty days
prior notice to the New York Insurance Superintendent and no disapproval from
the Superintendent prior to the date of such dividend. The Superintendent may
disapprove a proposed dividend if the Superintendent finds that the financial
condition of National Integrity does not warrant such distribution. During 1998,
the Company received dividends of $2.8 million from National Integrity.
The NAIC's Risk-Based Capital ("RBC") requirements attempt to evaluate the
adequacy of a life insurance company's adjusted statutory capital and surplus in
relation to investment, insurance and other business risks. The RBC formula is
used by the states as an early warning tool to identify possible
under-capitalized companies for the purpose of initiating regulatory action and
is not designed to be a basis for ranking the financial strength of insurance
companies. In addition, the formula defines a new minimum capital standard which
supplements the previous system of low fixed minimum capital and surplus
requirements. The RBC requirements provide for four different levels of
regulatory attention depending on the ratio of the company's adjusted capital
and surplus to its RBC. As of December 31, 1998 and 1997, the adjusted capital
and surplus of the Company is substantially in excess of the minimum level of
RBC that would require regulatory response.
24
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
8. ANNUITY RESERVES
At December 31, 1998 and 1997, the Company's general and separate account
annuity reserves and deposit fund liabilities that are subject to discretionary
withdrawal (with adjustment), subject to discretionary withdrawal without
adjustment, and not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
Amount Percent
----------------------------
(In thousands)
<S> <C> <C>
At December 31, 1998:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 404,623 6.0%
At book value less surrender charge of 5% or more 215,430 3.2
At market value 1,019,880 15.1
---------- ----------
Total with adjustment or at market value 1,639,933 24.3
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 4,500,408 66.7
Not subject to discretionary withdrawal 607,460 9.0
---------- ----------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 6,747,801 100.0%
----------
----------
Less reinsurance ceded (28,045)
----------
Net annuity reserves and deposit fund liabilities $6,719,756
----------
----------
At December 31, 1997:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 348,451 7.0%
At book value less surrender charge of 5% or more 235,360 4.7
At market value 711,105 14.3
---------- ----------
Total with adjustment or at market value 1,294,916 26.0
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 3,095,701 62.1
Not subject to discretionary withdrawal 594,781 11.9
---------- ----------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 4,985,398 100.0%
----------
----------
Less reinsurance ceded (34,721)
----------
Net annuity reserves and deposit fund liabilities $4,950,677
----------
----------
</TABLE>
25
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
9. SEPARATE ACCOUNTS
The Company's guaranteed separate accounts include indexed products (i.e.,
equity-indexed annuities and an institutional funding agreement) and non-indexed
products and options (i.e., guaranteed rate options and systematic transfer
options). The guaranteed rate options are sold as a fixed annuity product or as
an investment option within the Company's variable annuity products. The
Company's equity-indexed annuities provide participation in the S&P 500 Price
Index.
The Company's nonguaranteed separate accounts primarily include variable
annuities. The net investment experience of variable annuities is credited
directly to the policyholder and can be positive or negative. Assets held in
separate accounts are carried at estimated fair values. Information regarding
the separate accounts of the Company as of and for the year ended December 31,
1998 is as follows:
<TABLE>
<CAPTION>
Separate Accounts With
Guarantees
---------------------------------
Nonindexed Nonguaranteed
Guaranteed Separate
Indexed More Than 4% Accounts Total
---------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Premiums, deposits and other
considerations $ 33,456 $ 132,280 $ 185,181 $ 350,917
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Reserves for separate accounts with
assets at fair value $ 587,033 $ 409,143 $ 1,053,699 $ 2,049,875
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Reserves for separate accounts
by withdrawal characteristics:
Subject to discretionary withdrawal
(with adjustment):
With market adjustment $ 45,784 $ 358,839 $ - $ 404,623
At book value without market
value adjustment and with
current surrender charge of
5% or more - 50,304 - 50,304
At market value - - 1,053,699 1,053,699
------------- ------------- ------------- -------------
Total with adjustment or at market
value 45,784 409,143 1,053,699 1,508,626
Not subject to discretionary
withdrawal 541,249 - - 541,249
------------- ------------- ------------- -------------
Total separate accounts reserves $ 587,033 $ 409,143 $ 1,053,699 $ 2,049,875
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
26
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
9. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of the amounts transferred to and from the separate accounts
for the years ended December 31, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
1998 1997
----------------------------
(In thousands)
<S> <C> <C>
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $ 350,917 $ 874,585
Transfers from separate accounts (166,508) (91,038)
--------- ---------
Net transfers to separate accounts 184,409 783,547
Reconciling adjustments:
Policy deductions and other expense reported as
other revenues 2,077 1,827
--------- ---------
Transfers as reported in the Summary of Operations
of the Life, Accident and Health Annual Statement $ 186,486 $ 785,374
--------- ---------
--------- ---------
</TABLE>
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value
information about all financial instruments, including insurance liabilities
classified as investment contracts, unless specifically exempted. The fair value
of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of such instruments. For financial
instruments not separately disclosed below, the carrying amount is a reasonable
estimate of fair value.
27
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-----------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------------------
(In thousands)
Assets:
<S> <C> <C> <C> <C>
Bonds $ 4,562,340 $ 4,390,941 $ 3,444,659 $ 3,484,364
Preferred stocks 32,704 32,643 58,369 59,964
Mortgage loans 11,719 11,719 13,186 13,186
Cash and short-term investments 412,074 412,074 201,242 201,242
Liabilities:
Life and annuity reserves for
investment-type contracts and deposit
fund liabilities $ 4,705,091 $ 4,669,365 $ 3,320,869 $ 3,379,388
Separate accounts annuity reserves
2,016,056 2,001,161 1,630,787 1,607,081
</TABLE>
BONDS AND PREFERRED STOCKS
Fair values for bonds and preferred stocks are based on quoted market prices
where available. For bonds and preferred stocks for which a quoted market price
is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable investments.
MORTGAGE LOANS AND CASH AND SHORT-TERM INVESTMENTS
The carrying amount of mortgage loans and cash and short-term investments
approximates their fair value.
LIFE AND ANNUITY RESERVES FOR INVESTMENT-TYPE CONTRACTS AND DEPOSIT FUND
LIABILITIES
The fair value of single premium immediate annuity reserves are based on
discounted cash flow calculations using a market yield rate for assets with
similar durations. The fair value amount of institutional deposits represents
the estimated present value of cash flows using current market rates and the
duration of the liabilities. The fair value amounts of deposit fund
28
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
liabilities and the remaining annuity reserves are primarily based on the cash
surrender values of the underlying contracts.
SEPARATE ACCOUNTS ANNUITY RESERVES
The fair value of separate accounts annuity reserves for investment-type
products equals the cash surrender values.
11. RELATED PARTY TRANSACTIONS
Effective January 1, 1995, the Company entered into an Administrative Services
and an Investment Services Agreement with ARM. ARM performs certain
administrative and special services for the Company to assist with its business
operations. The services include policyholder services; accounting, tax and
auditing; underwriting; marketing and product development; functional support
services; payroll functions; personnel functions; administrative support
services; and investment functions. During 1998 and 1997, the Company was
charged $27.2 million and $19.3 million, respectively, for these services in
accordance with the requirements of applicable insurance law and regulations.
12. YEAR 2000 (UNAUDITED)
ARM has undertaken a Year 2000 project that includes all of its subsidiaries,
including the Company. ARM's Year 2000 compliance project, as it relates to the
Company, is provided for under the Investment Services Agreement and
Administrative Services Agreement between ARM and the Company. The cost of ARM's
Year 2000 initiatives is not expected to be material to ARM's results of
operations or financial condition. Likewise, any cost to the Company related to
Year 2000 compliance is not expected to be material to the Company's results of
operations or financial condition.
ARM has completed the assessment phase of the project for all production
applications, hardware (personal computers and servers), system software,
vendors, and business partners. Although ARM is still receiving information from
a few vendors and business partners and assessing various logistic concerns with
its facilities, ARM's major production systems are substantially Year 2000
compliant. Where Year 2000 problems were found, the necessary upgrades and
repairs have begun and are scheduled for completion no later than May 31, 1999.
29
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)(continued)
12. YEAR 2000 (UNAUDITED) (CONTINUED)
As well as assessing its facilities, ARM is also in the repair and certification
testing phase of its project. The testing phase will serve to verify the results
of repairs and assessments. Steps needed to correct any problems uncovered
during testing will begin immediately at that time. ARM's Year 2000 project is
well underway and because management believes that it will be Year 2000
compliant by May 31, 1999, it currently has no contingency plans for system
issues in place beyond its normal disaster recovery procedures. As a precaution,
ARM is developing a contingency and business resumption plan to address various
logistic concerns with its facilities. The contingency and business resumption
plan is scheduled for completion no later than September 30, 1999.
Although ARM anticipates no major interruption of business activities, that will
depend, in part, upon the activity of third parties. Even though ARM has
assessed and continues to assess third party issues, it has no direct ability to
influence the compliance actions of such parties. Accordingly, while ARM
believes its actions in this regard should have the effect of reducing Year 2000
risks, it is unable to eliminate them or to estimate the ultimate effect Year
2000 risks will have on the Company's operations.
The estimated date on which ARM believes it will complete its Year 2000
compliance efforts, and the expenses related to ARM's Year 2000 compliance
efforts are based upon management's best estimates, which were based on
assumptions of future events, including the availability of certain resources,
third party modification plans and other factors. There can be no assurance that
these results and estimates will be achieved, and the actual results could
materially differ from those anticipated.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
Part 1 - Financial Information
FINANCIAL STATEMENTS INCLUDED IN PART B:
SEPARATE ACCOUNT II:
Report of Independent Auditors
Statement of Assets and Liabilities as of December 31, 1998
Statement of Operations for the Year Ended December 31, 1998
Statements of Changes in Net Assets for the Years Ended December 31,
1998 and 1997
Notes to Financial Statements
SEPARATE ACCOUNT TEN:
Report of Independent Auditors
Statement of Assets and Liabilities as of December 31, 1998
Statement of Operations for the Year Ended December 31, 1998
Statement of Changes in Net Assets for the Year Ended December 31,
1998
Notes to Financial Statements
INTEGRITY LIFE INSURANCE COMPANY:
Report of Independent Auditors
Balance Sheets (Statutory Basis) as of December 31, 1998 and 1997
Statements of Income (Statutory Basis) for the Years Ended
December 31, 1998 and 1997
Statements of Changes in Capital and Surplus (Statutory Basis) for the
Years Ended December 31, 1998 and 1997
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1998 and 1997
Notes to Financial Statements (Statutory Basis)
(b) EXHIBITS:
The following exhibits are filed herewith:
1. Resolutions of the Board of Directors of Integrity Life
Insurance Company (INTEGRITY) and Certification of the Chief
Executive Officer authorizing the establishment of Separate
Account II, the Registrant. Incorporated by reference to
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 to
Registrant's Form N-4 registration statement (File
1
<PAGE>
No. 33-51268) on May 1, 1996.
4.(a) Form of trust agreement. Incorporated by reference to
Registrant's Form N-4 registration statement filed on
August 24, 1992.
4.(b) Form of group variable annuity contract. Incorporated by
reference to 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 to Registrant's N-4 registration statement filed on
August 24, 1992.
4.(d) Form of individual variable annuity contract. Incorporated by
reference to 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 to 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 to
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 to 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 to Registrant's Form N-4 registration
statement (File No. 33-51268) on May 1, 1996.
8.(a) 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 (File No. 33-51268) filed
August 24, 1992.
8.(b) Participation Agreement Among Variable Insurance Products Fund,
Fidelity Distributors Corporation ("FDC") and Integrity, dated
November 20, 1990. Incorporated by reference from
post-effective amendment no. 5 to Form N-4 registration
statement of Separate Account I of Integrity (File
No. 33-8903), filed on February 28, 1992.
8.(c) Participation Agreement Among Variable Insurance Products
Fund II, FDC and Integrity, dated November 20, 1990.
Incorporated by reference from post-effective amendment no. 5
to Form N-4 registration statement of Separate Account I of
Integrity (File No. 33-8903), filed on February 28, 1992.
8.(d) Amendment No. 1 to Participation Agreements Among Variable
Insurance Products Fund,
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Variable Insurance Products Fund II, FDC, and Integrity.
Incorporated by reference from Form N-4 registration statement
of Separate Account I of Integrity (File No. 33-56654), filed
on May 1, 1996.
8.(e) Participation Agreement Among Variable Insurance Products
Fund III, FDC and Integrity, dated February 1, 1997.
Incorporated by reference from Form N-4 registration statement
of Separate Account I of Integrity (File No. 33-56658), filed
on May 1, 1997.
8.(f) Form of Participation Agreement Among BT Insurance Funds Trust,
Bankers Trust Company and Integrity.
8.(g) Form of Participation Agreement Among Insurance Series,
Federated Securities Corp. and Integrity.
8.(h) Form of Participation Agreement Between Janus Aspen Series and
Integrity.
8.(i) Form of Participation Agreement Between JPM Series Trust II and
Integrity.
8.(j) Form of Participation Agreement Between Morgan Stanley
Universal Funds, Inc., Morgan Stanley Asset Management Inc.,
Miller Anderson & Sherrerd, LLP and Integrity.
9. Opinion and Consent of Kevin L. Howard, incorporated by
reference to Registrant's registration statement on Form N-4
(File No. 33-51268) filed October 22, 1997.
10. Consents of Ernst & Young LLP.
11. Not applicable.
12. Not applicable.
13. Schedule for computation of performance quotations.
Incorporated by reference to Registrant's Form N-4 registration
statement (File No. 33-51268) on May 1, 1996.
14. Not applicable.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Set forth below is information regarding the directors and principal
officers of Integrity, the Depositor:
Directors:
- ----------
Name and Principal Business Address Position and Offices with Depositor
- ----------------------------------- -----------------------------------
Mark A. Adkins Director and Operations Control Officer
Integrity Life Insurance Company
200 East Wilson Bridge Road
Worthington, OH 43085
John R. Lindholm Director and President
Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
Susan M. McEntire Director
Integrity Life Insurance Company
200 East Wilson Bridge Road
Worthington, OH 43085
3
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John R. McGeeney Director
Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
William H. Guth Director and Product Administration
Integrity Life Insurance Company Officer
515 West Market Street
Louisville, KY 40202
Martin H. Ruby Director, Chairman of the Board and
Integrity Life Insurance Company Chief Executive Officer
515 West Market Street
Louisville, KY 40202
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
- ----------------------------------- -----------------------------------
Martin H. Ruby Chairman of the Board, Chief Executive
Officer
John R. Lindholm President
John R. McGeeney Executive Vice President and General
Counsel
Dennis L. Carr Executive Vice President and Chief
Actuary
David E. Ferguson Executive Vice President and Chief
Technology Officer
William H. Panning Executive Vice President and Chief
Investment Officer
Edward L. Zeman Executive Vice President and Chief
Financial Officer
Michael A. Cochran Tax Officer
Peter S. Resnik Treasurer
Barry G. Ward Controller
Patricia L. Tackett Secretary
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)
Integrity Capital Advisors, Inc., a New York corporation
4
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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
"IPO") of 9.2 million shares of common stock, of which 5.75 million shares were
sold by ARM Financial and 3.45 million shares were sold by investment funds
sponsored by Morgan Stanley, Dean Witter, Discover & Co. (the "MSDW Funds").
Following the IPO, the MSDW Funds owned in the aggregate approximately 53% of
the outstanding shares of common stock of ARM Financial. On May 8, 1998, the
MSDW Funds sold their entire remaining interest in ARM Financial pursuant to a
secondary public offering of shares of common stock. As a result, ARM Financial
is 100% publicly owned.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of December 31, 1998 there were 4,626 contract owners 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 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;
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(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 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.
6
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(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).
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, III and Ten
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, III, Ten 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
- ----------------------------------- ----------------------------------------
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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
Dale C. Bauman Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Robert Bryant Vice President
1550 East Shaw #120
Fresno, California 93710
Ronald Geiger Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Barry G. Ward Controller
515 West Market Street
Louisville, Kentucky 40202
Michael A. Cochran Tax Officer
515 West Market Street
Louisville, Kentucky 40202
William H. Guth Operations Officer
515 West Market Street
Louisville, Kentucky 40202
David L. Anders Marketing Officer
515 West Market Street
Louisville, Kentucky 40202
(c) Not applicable.
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
8
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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.
9
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SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant and the Depositor have duly caused this amendment to the
Registration Statement to be signed on their behalf, in the City of Louisville
and State of Kentucky on this 21st day of April, 1999.
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
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SIGNATURES
As required by the Securities Act of 1933, this amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
PRINCIPAL EXECUTIVE OFFICER: /s/ John R. Lindholm
------------------------------------------
John R. Lindholm, President
Date: 04/21/99
PRINCIPAL FINANCIAL OFFICER: /s/ Edward L. Zeman
------------------------------------------
Edward L. Zeman, Executive Vice President-
Chief Financial Officer
Date: 04/21/99
PRINCIPAL ACCOUNTING OFFICER: /s/ Barry G. Ward
------------------------------------------
Barry G. Ward, Controller
Date: 04/21/99
DIRECTORS:
/s/ Mark A. Adkins /s/ Susan M. McEntire
- ------------------------------ ------------------------------------------
Mark A. Adkins Susan M. McEntire
Date: 04/21/99 Date: 04/21/99
/s/ Paul E. Williams /s/ Martin H. Ruby
- ------------------------------ ------------------------------------------
Paul E. Williams Martin H. Ruby
Date: 04/21/99 Date: 04/21/99
/s/ John R. Lindholm
- ------------------------------
John R. Lindholm
Date: 04/21/99
/s/ John McGeeney
- ------------------------------
John R. McGeeney
Date: 04/21/99
/s/ William H. Guth
- ------------------------------
William H. Guth
Date: 04/21/99
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EXHIBIT INDEX
Exhibit No.
8.(f) Form of Participation Agreement Among BT Insurance Funds
Trust, Bankers Trust Company and Integrity.
8.(g) Form of Participation Agreement Among Insurance Series,
Federated Securities Corp. and Integrity.
8.(h) Form of Participation Agreement Between Janus Aspen Series
and Integrity.
8.(i) Form of Participation Agreement Between JPM Series Trust II
and Integrity.
8.(j) Form of Participation Agreement Between Morgan Stanley
Universal Funds, Inc., Morgan Stanley Asset Management Inc.,
Miller Anderson & Sherrerd, LLP and Integrity.
10. Consents of Ernst & Young LLP.
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FUND PARTICIPATION AGREEMENT
THIS AGREEMENT made as of the ____ day of _____________, 199__ by and among
BT Insurance Funds Trust ("TRUST"), a Massachusetts business trust, Bankers
Trust Company ("ADVISER"), a New York banking corporation, and ______________
("LIFE COMPANY"), a life insurance company organized under the laws of the State
of _____________.
WHEREAS, TRUST is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "'40 Act"), as
an open-end, diversified management investment company; and
WHEREAS, TRUST is comprised of several series funds (each a "Portfolio"),
with those Portfolios currently available being listed on Appendix A hereto; and
WHEREAS, TRUST was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable Contracts")
offered by life insurance companies through separate accounts ("Separate
Accounts") of such life insurance companies ("Participating Insurance
Companies"); and
WHEREAS, TRUST may also offer its shares to certain qualified pension and
retirement plans ("Qualified Plans"); and
WHEREAS, TRUST has received an order from the SEC, granting Participating
Insurance Companies and their separate accounts exemptions from the provisions
of Sections 9(a), 13(a), 15(a) and 15(b) of the '40 Act, and Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios of the TRUST to be sold to and held by Variable Contract Separate
Accounts of both affiliated and unaffiliated Participating Insurance Companies
and Qualified Plans ("Exemptive Order"); and
WHEREAS, LIFE COMPANY has established or will establish one or more
Separate Accounts to offer Variable Contracts and is desirous of having TRUST as
one of the underlying funding vehicles for such Variable Contracts; and
WHEREAS, ADVISER is a "bank" as defined in the Investment Advisers Act of
1940, as amended (the "Advisers Act") and as such is excluded from the
definition of "Investment Adviser" and is not required to register as an
investment adviser pursuant to the Advisers Act; and
WHEREAS, ADVISER serves as the TRUST's investment adviser; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, LIFE COMPANY intends to purchase shares of TRUST to fund the
aforementioned Variable Contracts and TRUST is authorized to sell such shares to
LIFE COMPANY at such shares' net asset value;
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NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY,
TRUST, and ADVISER agree as follows:
Article I. SALE OF TRUST SHARES
1.1 TRUST agrees to make available to the Separate Accounts of LIFE
COMPANY shares of the selected Portfolios as listed on Appendix B for investment
of purchase payments of Variable Contracts allocated to the designated Separate
Accounts as provided in TRUST's Registration Statement.
1.2 TRUST agrees to sell to LIFE COMPANY those shares of the selected
Portfolios of TRUST which LIFE COMPANY orders, executing such orders on a daily
basis at the net asset value next computed after receipt by TRUST or its
designee of the order for the shares of TRUST. For purposes of this Section
1.2, LIFE COMPANY shall be the designee of TRUST for receipt of such orders from
the designated Separate Account and receipt by such designee shall constitute
receipt by TRUST; provided that LIFE COMPANY receives the order by 4:00 p.m. New
York time and TRUST receives notice from LIFE COMPANY by telephone or facsimile
(or by such other means as TRUST and LIFE COMPANY may agree in writing) of such
order by 8:00 a.m. New York time on the next Business Day. "Business Day"
shall mean any day on which the New York Stock Exchange is open for trading and
on which TRUST calculates its net asset value pursuant to the rules of the SEC.
1.3 TRUST agrees to redeem on LIFE COMPANY's request, any full or
fractional shares of TRUST held by LIFE COMPANY, executing such requests on a
daily basis at the net asset value next computed after receipt by TRUST or its
designee of the request for redemption, in accordance with the provisions of
this Agreement and TRUST's Registration Statement. (In the event of a conflict
between the provisions of this Agreement and the Trust's Registration Statement,
the provisions of the Registration Statement shall govern.) For purposes of
this Section 1.3, LIFE COMPANY shall be the designee of TRUST for receipt of
requests for redemption from the designated Separate Account and receipt by such
designee shall constitute receipt by TRUST; provided that LIFE COMPANY receives
the request for redemption by 4:00 p.m. New York time and TRUST receives notice
from LIFE COMPANY by telephone or facsimile (or by such other means as TRUST and
LIFE COMPANY may agree in writing) of such request for redemption by 9:00 a.m.
New York time on the next Business Day.
1.4 TRUST shall furnish, on or before each ex-dividend date, notice to
LIFE COMPANY of any income dividends or capital gain distributions payable on
the shares of any Portfolio of TRUST. LIFE COMPANY hereby elects to receive all
such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. TRUST shall notify
LIFE COMPANY or its designee of the number of shares so issued as payment of
such dividends and distributions.
1.5 TRUST shall make the net asset value per share for the selected
Portfolio(s) available to LIFE COMPANY on a daily basis as soon as reasonably
practicable after the net asset value per share is calculated but shall use its
best efforts to make such net asset value available by 6:30
2
<PAGE>
p.m. New York time. If TRUST provides LIFE COMPANY with materially incorrect
share net asset value information through no fault of LIFE COMPANY, LIFE COMPANY
on behalf of the Separate Accounts, shall be entitled to an adjustment to the
number of shares purchased or redeemed to reflect the correct share net asset
value. Any material error in the calculation of net asset value per share,
dividend or capital gain information shall be reported promptly upon discovery
to LIFE COMPANY.
1.6 At the end of each Business Day, LIFE COMPANY shall use the
information described in Section 1.5 to calculate Separate Account unit values
for the day. Using these unit values, LIFE COMPANY shall process each such
Business Day's Separate Account transactions based on requests and premiums
received by it by the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m. New York time) to determine the net dollar amount
of TRUST shares which shall be purchased or redeemed at that day's closing net
asset value per share. The net purchase or redemption orders so determined
shall be transmitted to TRUST by LIFE COMPANY by 8:00 a.m. New York Time on the
Business Day next following LIFE COMPANY's receipt of such requests and premiums
in accordance with the terms of Sections 1.2 and 1.3 hereof.
1.7 If LIFE COMPANY's order requests the purchase of TRUST shares, LIFE
COMPANY shall pay for such purchase by wiring federal funds to TRUST or its
designated custodial account on the day the order is transmitted by LIFE
COMPANY. If LIFE COMPANY's order requests a net redemption resulting in a
payment of redemption proceeds to LIFE COMPANY, TRUST shall use its best efforts
to wire the redemption proceeds to LIFE COMPANY by the next Business Day, unless
doing so would require TRUST to dispose of Portfolio securities or otherwise
incur additional costs. In any event, proceeds shall be wired to LIFE COMPANY
within the time period permitted by the '40 Act or the rules, orders or
regulations thereunder, and TRUST shall notify the person designated in writing
by LIFE COMPANY as the recipient for such notice of such delay by 3:00 p.m. New
York Time on the same Business Day that LIFE COMPANY transmits the redemption
order to TRUST. If LIFE COMPANY's order requests the application of redemption
proceeds from the redemption of shares to the purchase of shares of another Fund
advised by ADVISER, TRUST shall so apply such proceeds on the same Business Day
that LIFE COMPANY transmits such order to TRUST.
1.8 TRUST agrees that all shares of the Portfolios of TRUST will be sold
only to Participating Insurance Companies which have agreed to participate in
TRUST to fund their Separate Accounts and/or to Qualified Plans, all in
accordance with the requirements of Section 817(h)(4) of the Internal Revenue
Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of the
TRUST's Portfolios will not be sold directly to the general public.
1.9 TRUST may refuse to sell shares of any Portfolio to any person, or
suspend or terminate the offering of the shares of or liquidate any Portfolio of
TRUST if such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board of Trustees of the TRUST
(the "Board"), acting in good faith and in light of its duties under federal and
any applicable state laws, deemed necessary, desirable or appropriate and in the
best interests of the shareholders of such Portfolios.
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1.10 Issuance and transfer of Portfolio shares will be by book entry only.
Stock certificates will not be issued to LIFE COMPANY or the Separate Accounts.
Shares ordered from Portfolio will be recorded in appropriate book entry titles
for the Separate Accounts.
Article II. REPRESENTATIONS AND WARRANTIES
2.1 LIFE COMPANY represents and warrants that it is an insurance company
duly organized and in good standing under the laws of ___________________ and
that it has legally and validly established each Separate Account as a
segregated asset account under such laws, and that ___________________, the
principal underwriter for the Variable Contracts, is registered as a
broker-dealer under the Securities Exchange Act of 1934 (the "'34 Act").
2.2 LIFE COMPANY represents and warrants that it has registered or, prior
to any issuance or sale of the Variable Contracts, will register each Separate
Account as a unit investment trust ("UIT") in accordance with the provisions of
the '40 Act and cause each Separate Account to remain so registered to serve as
a segregated asset account for the Variable Contracts, unless an exemption from
registration is available.
2.3 LIFE COMPANY represents and warrants that the Variable Contracts will
be registered under the Securities Act of 1933 (the "'33 Act") unless an
exemption from registration is available prior to any issuance or sale of the
Variable Contracts, and that the Variable Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
(including all applicable blue sky laws) and further that the sale of the
Variable Contracts shall comply in all material respects with applicable state
insurance law suitability requirements.
2.4 LIFE COMPANY represents and warrants that the Variable Contracts are
currently and at the time of issuance will be treated as life insurance,
endowment or annuity contracts under applicable provisions of the Code, that it
will maintain such treatment and that it will notify TRUST immediately upon
having a reasonable basis for believing that the Variable Contracts have ceased
to be so treated or that they might not be so treated in the future.
2.5 TRUST represents and warrants that the Fund shares offered and sold
pursuant to this Agreement will be registered under the '33 Act and sold in
accordance with all applicable federal laws, and TRUST shall be registered under
the '40 Act prior to and at the time of any issuance or sale of such shares.
TRUST, subject to Section 1.9 above, shall amend its registration statement
under the '33 Act and the '40 Act from time to time as required in order to
effect the continuous offering of its shares. TRUST shall register and qualify
its shares for sale in accordance with the laws of the various states only if
and to the extent deemed advisable by TRUST.
2.6 TRUST represents and warrants that each Portfolio will comply with the
diversification requirements set forth in Section 817(h) of the Code, and the
rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and will notify LIFE COMPANY immediately upon having a
reasonable basis for believing any Portfolio has ceased to comply and
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will immediately take all reasonable steps to adequately diversify the Portfolio
to achieve compliance.
2.7 TRUST represents and warrants that each Portfolio invested in by the
Separate Account will be treated as a "regulated investment company" under
Subchapter M of the Code, and will notify LIFE COMPANY immediately upon having a
reasonable basis for believing it has ceased to so qualify or might not so
qualify in the future.
2.8 ADVISER represents and warrants that it shall perform its obligations
hereunder in compliance in all material respects with any applicable state and
federal laws.
Article III. PROSPECTUS AND PROXY STATEMENTS
3.1 TRUST shall prepare and be responsible for filing with the SEC and any
state regulators requiring such filing all shareholder reports, notices, proxy
materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of TRUST.
TRUST shall bear the costs of registration and qualification of shares of the
Portfolios, preparation and filing of the documents listed in this Section 3.1
and all taxes and filing fees to which an issuer is subject on the issuance and
transfer of its shares.
3.2 TRUST or its designee shall provide LIFE COMPANY, free of charge,
with as many copies of the current prospectus (or prospectuses), statements
of additional information, annual and semi-annual reports and proxy
statements for the shares of the Portfolios as LIFE COMPANY may reasonably
request for distribution to existing Variable Contract owners whose Variable
Contracts are funded by such shares. TRUST or its designee shall provide LIFE
COMPANY, at LIFE COMPANY's expense, with as many copies of the current
prospectus (or prospectuses) for the shares as LIFE COMPANY may reasonably
request for distribution to prospective purchasers of Variable Contracts. If
requested by LIFE COMPANY, TRUST or its designee shall provide such
documentation (including a "camera ready" copy of the current prospectus (or
prospectuses) as set in type or, at the request of LIFE COMPANY, as a
diskette in the form sent to the financial printer) and other assistance as
is reasonably necessary in order for the parties hereto once a year (or more
frequently if the prospectus (or prospectuses) for the shares is supplemented
or amended) to have the prospectus for the Variable Contracts and the
prospectus (or prospectuses) for the TRUST shares printed together in one
document. The expenses of such printing will be apportioned between LIFE
COMPANY and TRUST in proportion to the number of pages of the Variable
Contract and TRUST prospectus, taking account of other relevant factors
affecting the expense of printing, such as covers, columns, graphs and
charts; TRUST shall bear the cost of printing the TRUST prospectus portion of
such document for distribution only to owners of existing Variable Contracts
funded by the TRUST shares and LIFE COMPANY shall bear the expense of
printing the portion of such documents relating to the Separate Account;
provided, however, LIFE COMPANY shall bear all printing expenses of such
combined documents where used for distribution to prospective purchasers or
to owners of existing Variable Contracts not funded by the shares. In the
event that LIFE COMPANY requests that TRUST or its designee provide TRUST's
prospectus in a "camera ready" or diskette format, TRUST shall be responsible
for providing the rospectus (or
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prospectuses) in the format in which it is accustomed to formatting prospectuses
and shall bear the expense of providing the prospectus (or prospectuses) in such
format (e.g. typesetting expenses), and LIFE COMPANY shall bear the expense of
adjusting or changing the format to conform with any of its prospectuses.
3.3 TRUST will provide LIFE COMPANY with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to the Portfolios promptly after the
filing of each such document with the SEC or other regulatory authority. LIFE
COMPANY will provide TRUST with at least one complete copy of all prospectuses,
statements of additional information, annual and semi-annual reports, proxy
statements, exemptive applications and all amendments or supplements to any of
the above that relate to a Separate Account promptly after the filing of each
such document with the SEC or other regulatory authority.
Article IV. SALES MATERIALS
4.1 LIFE COMPANY will furnish, or will cause to be furnished, to TRUST and
ADVISER, each piece of sales literature or other promotional material in which
TRUST or ADVISER is named, at least fifteen (15) Business Days prior to its
intended use. No such material will be used if TRUST or ADVISER objects to its
use in writing within ten (10) Business Days after receipt of such material.
4.2 TRUST and ADVISER will furnish, or will cause to be furnished, to LIFE
COMPANY, each piece of sales literature or other promotional material in which
LIFE COMPANY or its Separate Accounts are named, at least fifteen (15) Business
Days prior to its intended use. No such material will be used if LIFE COMPANY
objects to its use in writing within ten (10) Business Days after receipt of
such material.
4.3 TRUST and its affiliates and agents shall not give any information or
make any representations on behalf of LIFE COMPANY or concerning LIFE COMPANY,
the Separate Accounts, or the Variable Contracts issued by LIFE COMPANY, other
than the information or representations contained in a registration statement or
prospectus for such Variable Contracts, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports of
the Separate Accounts or reports prepared for distribution to owners of such
Variable Contracts, or in sales literature or other promotional material
approved by LIFE COMPANY or its designee, except with the written permission of
LIFE COMPANY.
4.4 LIFE COMPANY and its affiliates and agents shall not give any
information or make any representations on behalf of TRUST or concerning TRUST
other than the information or representations contained in a registration
statement or prospectus for TRUST, as such registration statement and prospectus
may be amended or supplemented from time to time, or in sales literature or
other promotional material approved by TRUST or its designee, except with the
written permission of TRUST.
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4.5 For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without limitation,
advertisements (such as material published, or designed for use, in a newspaper,
magazine or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures or other public media),
sales literature (such as any written communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, or reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees, registration statements,
prospectuses, statements of additional information, shareholder reports and
proxy materials, and any other material constituting sales literature or
advertising under National Association of Securities Dealers, Inc. ("NASD")
rules, the '40 Act, the '33 Act or rules thereunder.
Article V. POTENTIAL CONFLICTS
5.1 The parties acknowledge that TRUST has received an order from the SEC
granting relief from various provisions of the '40 Act and the rules thereunder
to the extent necessary to permit TRUST shares to be sold to and held by
Variable Contract separate accounts of both affiliated and unaffiliated
Participating Insurance Companies and Qualified Plans. The Exemptive Order
requires TRUST and each Participating Insurance Company to comply with
conditions and undertakings substantially as provided in this Section 5. The
TRUST will not enter into a participation agreement with any other Participating
Insurance Company unless it imposes the same conditions and undertakings as are
imposed on LIFE COMPANY hereby.
5.2 The Board will monitor TRUST for the existence of any material
irreconcilable conflict between the interests of Variable Contract owners of all
separate accounts and with participants of Qualified Plans investing in TRUST.
An irreconcilable material conflict may arise for a variety of reasons, which
may include: (a) an action by any state insurance regulatory authority; (b) a
change in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling or any similar action by
insurance, tax or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of TRUST are being managed; (e) a difference in voting instructions
given by Variable Contract owners; (f) a decision by a Participating Insurance
Company to disregard the voting instructions of Variable Contract owners and (g)
if applicable, a decision by a Qualified Plan to disregard the voting
instructions of plan participants.
5.3 LIFE COMPANY will report any potential or existing conflicts of which
it becomes aware to the Board. LIFE COMPANY will be responsible for assisting
the Board in carrying out its duties in this regard by providing the Board with
all information reasonably necessary for the Board to consider any issues
raised. The responsibility includes, but is not limited to, an obligation by
the LIFE COMPANY to inform the Board whenever it has determined to disregard
Variable Contract owner voting instructions. These responsibilities of LIFE
COMPANY will be carried out with a view only to the interests of the Variable
Contract owners.
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5.4 If a majority of the Board or majority of its disinterested Trustees,
determines that a material irreconcilable conflict exists affecting LIFE
COMPANY, LIFE COMPANY, at its expense and to the extent reasonably practicable
(as determined by a majority of the Board's disinterested Trustees), will take
any steps necessary to remedy or eliminate the irreconcilable material conflict,
including; (a) withdrawing the assets allocable to some or all of the Separate
Accounts from TRUST or any Portfolio thereof and reinvesting those assets in a
different investment medium, which may include another Portfolio of TRUST, or
another investment company; (b) submitting the question as to whether such
segregation should be implemented to a vote of all affected Variable Contract
owners and as appropriate, segregating the assets of any appropriate group
(i.e., variable annuity or variable life insurance Contract owners of one or
more Participating Insurance Companies) that votes in favor of such segregation,
or offering to the affected Variable Contract owners the option of making such a
change; and (c) establishing a new registered management investment company (or
series thereof) or managed separate account. If a material irreconcilable
conflict arises because of LIFE COMPANY's decision to disregard Variable
Contract owner voting instructions, and that decision represents a minority
position or would preclude a majority vote, LIFE COMPANY may be required, at the
election of TRUST, to withdraw the Separate Account's investment in TRUST, and
no charge or penalty will be imposed as a result of such withdrawal. The
responsibility to take such remedial action shall be carried out with a view
only to the interests of the Variable Contract owners.
For the purposes of this Section 5.4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
TRUST or ADVISER (or any other investment adviser of TRUST) be required to
establish a new funding medium for any Variable Contract. Further, LIFE COMPANY
shall not be required by this Section 5.4 to establish a new funding medium for
any Variable Contracts if any offer to do so has been declined by a vote of a
majority of Variable Contract owners materially and adversely affected by the
irreconcilable material conflict.
5.5 The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to LIFE COMPANY.
5.6 No less than annually, LIFE COMPANY shall submit to the Board such
reports, materials or data as the Board may reasonably request so that the Board
may fully carry out its obligations. Such reports, materials, and data shall be
submitted more frequently if deemed appropriate by the Board.
Article VI. VOTING
6.1 LIFE COMPANY will provide pass-through voting privileges to all
Variable Contract owners so long as the SEC continues to interpret the '40 Act
as requiring pass-through voting privileges for Variable Contract owners.
Accordingly, LIFE COMPANY, where applicable, will vote shares of the Portfolio
held in its Separate Accounts in a manner consistent with voting instructions
timely received from its Variable Contract owners. LIFE COMPANY will be
responsible for assuring that each of its Separate Accounts that participates in
TRUST calculates
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voting privileges in a manner consistent with other Participating Insurance
Companies. LIFE COMPANY will vote shares for which it has not received timely
voting instructions, as well as shares it owns, in the same proportion as its
votes those shares for which it has received voting instructions.
6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the '40
Act or the rules thereunder with respect to mixed and shared funding on terms
and conditions materially different from any exemptions granted in the Exemptive
Order, then TRUST, and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rule 6e-2
and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
Rules are applicable.
Article VII. INDEMNIFICATION
7.1 INDEMNIFICATION BY LIFE COMPANY. LIFE COMPANY agrees to indemnify and
hold harmless TRUST, ADVISER and each of their Trustees, directors, principals,
officers, employees and agents and each person, if any, who controls TRUST or
ADVISER within the meaning of Section 15 of the '33 Act (collectively, the
"Indemnified Parties") against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of LIFE COMPANY,
which consent shall not be unreasonably withheld) or litigation or threatened
litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of TRUST's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement or prospectus for the Variable Contracts or contained in the
Variable Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished in writing to
LIFE COMPANY by or on behalf of TRUST for use in the registration statement
or prospectus for the Variable Contracts or in the Variable Contracts or
sales literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Variable Contracts or TRUST shares; or
(b) arise out of or result from (i) statements or representations
(other than statements or representations contained in the registration
statement, prospectus or sales literature of TRUST not supplied by LIFE
COMPANY, or persons under its control) or (ii) wrongful conduct of LIFE
COMPANY or persons under its control, with respect to the sale or
distribution of the Variable Contracts or TRUST shares; or
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(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, prospectus, or sales
literature of TRUST or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with information
furnished in writing to TRUST by or on behalf of LIFE COMPANY; or
(d) arise as a result of any failure by LIFE COMPANY to provide
substantially the services and furnish the materials under the terms of
this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by LIFE COMPANY in this Agreement or
arise out of or result from any other material breach of this Agreement by
LIFE COMPANY.
7.2 LIFE COMPANY shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party to the extent that such losses, claims,
damages, liabilities or litigation are attributable to such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement.
7.3 LIFE COMPANY shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified LIFE COMPANY in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify LIFE COMPANY of any
such claim shall not relieve LIFE COMPANY from any liability which it may have
to the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against an Indemnified Party, LIFE COMPANY shall be entitled to participate at
its own expense in the defense of such action. LIFE COMPANY also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from LIFE COMPANY to such party of LIFE
COMPANY's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and LIFE
COMPANY will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
7.4 INDEMNIFICATION BY TRUST. TRUST agrees to indemnify and hold harmless
LIFE COMPANY and each of its directors, officers, employees, and agents and each
person, if any, who controls LIFE COMPANY within the meaning of Section 15 of
the '33 Act (collectively, the "Indemnified Parties") against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of TRUST which consent shall not be unreasonably withheld)
or litigation or threatened litigation (including legal and other expenses)
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to which the Indemnified Parties may become subject under any statute, or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements are
related to the sale or acquisition of TRUST's shares or the Variable Contracts
and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration
statement or prospectus or sales literature of TRUST (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as to
any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished in writing to ADVISER or TRUST by or on behalf of
LIFE COMPANY for use in the registration statement or prospectus for TRUST
or in sales literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Variable Contracts or TRUST shares;
or
(b) arise out of or result from (i) statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Variable Contracts not supplied by ADVISER or TRUST or persons under
its control) or (ii) gross negligence or wrongful conduct or willful
misfeasance of TRUST or persons under its control, with respect to the
sale or distribution of the Variable Contracts or TRUST shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a registration statement, prospectus,
or sales literature covering the Variable Contracts, or any amendment
thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished in
writing to LIFE COMPANY for inclusion therein by or on behalf of
TRUST; or
(d) arise as a result of (i) a failure by TRUST to provide
substantially the services and furnish the materials under the terms
of this Agreement; or (ii) a failure by a Portfolio(s) invested in by
the Separate Account to comply with the diversification requirements
of Section 817(h) of the Code; or (iii) a failure by a Portfolio(s)
invested in by the Separate Account to qualify as a "regulated
investment company" under Subchapter M of the Code; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by TRUST in this Agreement or
arise out of or result from any other material breach of this
Agreement by TRUST.
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7.5 TRUST shall not be liable under this indemnification provision with
respect to any losses, claims, damages, liabilities or litigation incurred or
assessed against an Indemnified Party to the extent that such losses, claims,
damages, liabilities or litigation are attributable to such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations and duties under this Agreement.
7.6 TRUST shall not be liable under this indemnification provision with
respect to any claim made against an Indemnified Party unless such Indemnified
Party shall have notified TRUST in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify TRUST of any such claim shall not relieve TRUST
from any liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified Parties, TRUST shall
be entitled to participate at its own expense in the defense thereof. TRUST
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from TRUST to such party of
TRUST's election to assume the defense thereof, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and TRUST will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
Article VIII. TERM; TERMINATION
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of LIFE COMPANY or TRUST at any time from the date
hereof upon 180 days' notice, unless a shorter time is agreed to by the
parties;
(b) At the option of LIFE COMPANY, if TRUST shares are not reasonably
available to meet the requirements of the Variable Contracts as determined
by LIFE COMPANY. Prompt notice of election to terminate shall be furnished
by LIFE COMPANY, said termination to be effective ten days after receipt of
notice unless TRUST makes available a sufficient number of shares to
reasonably meet the requirements of the Variable Contracts within said
ten-day period;
(c) At the option of LIFE COMPANY, upon the institution of formal
proceedings against TRUST by the SEC, the NASD, or any other regulatory
body, the expected or anticipated ruling, judgment or outcome of which
would, in LIFE COMPANY's reasonable judgment, materially impair TRUST's
ability to meet and perform TRUST's obligations and duties hereunder.
Prompt notice of election to terminate
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shall be furnished by LIFE COMPANY with said termination to be effective
upon receipt of notice;
(d) At the option of TRUST, upon the institution of formal proceedings
against LIFE COMPANY and/or its broker-dealer affiliates by the SEC, the
NASD, or any other regulatory body, the expected or anticipated ruling,
judgment or outcome of which would, in TRUST's reasonable judgment,
materially impair LIFE COMPANY's ability to meet and perform its
obligations and duties hereunder. Prompt notice of election to terminate
shall be furnished by TRUST with said termination to be effective upon
receipt of notice;
(e) In the event TRUST's shares are not registered, issued or sold in
accordance with applicable state or federal law, or such law precludes the
use of such shares as the underlying investment medium of Variable
Contracts issued or to be issued by LIFE COMPANY. Termination shall be
effective upon such occurrence without notice;
(f) At the option of TRUST if the Variable Contracts cease to qualify
as annuity contracts or life insurance contracts, as applicable, under the
Code, or if TRUST reasonably believes that the Variable Contracts may fail
to so qualify. Termination shall be effective upon receipt of notice by
LIFE COMPANY;
(g) At the option of LIFE COMPANY, upon TRUST's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of LIFE COMPANY within ten days after written notice of such
breach is delivered to TRUST;
(h) At the option of TRUST, upon LIFE COMPANY's breach of any material
provision of this Agreement, which breach has not been cured to the
satisfaction of TRUST within ten days after written notice of such breach
is delivered to LIFE COMPANY;
(i) At the option of TRUST, if the Variable Contracts are not
registered, issued or sold in accordance with applicable federal and/or
state law. Termination shall be effective immediately upon such occurrence
without notice;
In the event this Agreement is assigned without the prior written consent
of LIFE COMPANY, TRUST, and ADVISER, termination shall be effective immediately
upon such occurrence without notice.
8.3 Notwithstanding any termination of this Agreement pursuant to
Section 8.2 hereof, TRUST at its option may elect to continue to make available
additional TRUST shares, as provided below, for so long as TRUST desires
pursuant to the terms and conditions of this Agreement, for all Variable
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically, without
limitation, if
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TRUST so elects to make additional TRUST shares available, the owners of the
Existing Contracts or LIFE COMPANY, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in TRUST, redeem investments in
TRUST and/or invest in TRUST upon the payment of additional premiums under the
Existing Contracts. In the event of a termination of this Agreement pursuant to
Section 8.2 hereof, TRUST and ADVISER, as promptly as is practicable under the
circumstances, shall notify LIFE COMPANY whether TRUST elects to continue to
make TRUST shares available after such termination. If TRUST shares continue to
be made available after such termination, the provisions of this Agreement shall
remain in effect and thereafter either TRUST or LIFE COMPANY may terminate the
Agreement, as so continued pursuant to this Section 8.3, upon sixty (60) days'
prior written notice to the other party.
8.4 Except as necessary to implement Variable Contract owner initiated
transactions, or as required by state insurance laws or regulations, LIFE
COMPANY shall not redeem the shares attributable to the Variable Contracts (as
opposed to the shares attributable to LIFE COMPANY's assets held in the Separate
Accounts), and LIFE COMPANY shall not prevent Variable Contract owners from
allocating payments to a Portfolio that was otherwise available under the
Variable Contracts until thirty (30) days after the LIFE COMPANY shall have
notified TRUST of its intention to do so.
Article IX. NOTICES
Any notice hereunder shall be given by registered or certified mail return
receipt requested to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to TRUST:
BT Insurance Funds Trust
c/o First Data Investor Services Group, Inc.
One Exchange Place
53 State Street, Mail Stop BOS 865
Boston, MA 02109
Attn: Elizabeth Russell, Legal Dep't
AND
c/o BT Alex. Brown
One South Street, Mail Stop 1-18-6
Baltimore, MD 21202
Attn: Brian Wixsted, Mutual Fund Services
If to ADVISER:
Bankers Trust Company - U.S. Investment Management
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<PAGE>
130 Liberty Street
New York, NY 10006
Attn.: Vinay Mendiratta, Mail Stop 2355
If to LIFE COMPANY:
Notice shall be deemed given on the date of receipt by the addressee as
evidenced by the return receipt.
Article X. MISCELLANEOUS
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting exemptive
relief therefrom and the conditions of such orders.
10.5 It is understood and expressly stipulated that neither the
shareholders of shares of any Portfolio nor the Trustees or officers of TRUST or
any Portfolio shall be personally liable hereunder. No Portfolio shall be
liable for the liabilities of any other Portfolio. All persons dealing with
TRUST or a Portfolio must look solely to the property of TRUST or that
Portfolio, respectively, for enforcement of any claims against TRUST or that
Portfolio. It is also understood that each of the Portfolios shall be deemed to
be entering into a separate Agreement with LIFE COMPANY so that it is as if each
of the Portfolios had signed a separate Agreement with LIFE COMPANY and that a
single document is being signed simply to facilitate the execution and
administration of the Agreement.
10.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
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<PAGE>
10.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
10.8 If the Agreement terminates, the parties agree that Article 7 and
Sections 10.5, 10.6 and 10.7 shall remain in effect after termination.
10.9 No provision of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by TRUST,
ADVISER and the LIFE COMPANY.
10.10 No failure or delay by a party in exercising any right or remedy
under this Agreement will operate as a waiver thereof and no single or partial
exercise of rights shall preclude a further or subsequent exercise. The rights
and remedies provided in this Agreement are cumulative and not exclusive of any
rights or remedies provided by law.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Fund Participation Agreement as of the date and year first above
written.
BT INSURANCE FUNDS TRUST
By:
---------------------------------------
Name:
Title:
BANKERS TRUST COMPANY
By:
---------------------------------------
Name:
Title:
[Insert Name of LIFE COMPANY]
By:
---------------------------------------
Name:
Title:
16
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APPENDIX A
To Participation Agreement by and among _______________, ________________ and
______________________.
List of portfolios:
<PAGE>
APPENDIX B
To Participation Agreement by and among ________________, _______________ and
______________________.
List of variable separate accounts:
<PAGE>
FUND PARTICIPATION AGREEMENT
This AGREEMENT is made this day of ____________, 199_, by and between
_______________________(the "Insurer"), a life insurance company domiciled in
_________________, on its behalf and on behalf of the segregated asset accounts
of the Insurer listed on Exhibit A to this Agreement (the "Separate Accounts");
Insurance Series (the "Fund"), a Massachusetts business trust; and Federated
Securities Corp. (the "Distributor"), a Pennsylvania corporation.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission
("SEC") as an open-end management investment company under the Investment
Company Act of 1940, as amended ("1940 Act") and the Fund is authorized to issue
separate classes of shares of beneficial interest ("shares"), each representing
an interest in a separate portfolio of assets known as a "portfolio" and each
portfolio has its own investment objective, policies, and limitations; and
WHEREAS, the Fund is available to offer shares of one or more of its
portfolios to separate accounts of insurance companies that fund variable
annuity contracts ("Variable Contracts") and to serve as an investment medium
for Variable Contracts offered by insurance companies that have entered into
participation agreements substantially similar to this agreement ("Participating
Insurance Companies"), and the Fund will be made available in the future to
offer shares of one or more of its portfolios to separate accounts of insurance
companies that fund variable life insurance policies (at which time such
policies would also be "Variable Contracts" hereunder), and
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WHEREAS, the Fund is currently comprised of eight separate portfolios, and
other portfolios may be established in the future; and
WHEREAS, the Fund has obtained an order from the SEC dated December 29,
1993 (File No. 812-8620), granting Participating Insurance Companies and
variable annuity and variable life insurance separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by variable annuity and
variable life insurance separate accounts of life insurance companies that may
or may not be affiliated with one another (hereinafter the "Mixed and Shared
Funding Exemptive Order"); and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended ("1934 Act"), and is a
member in good standing of the National Association of Securities Dealers, Inc.
("NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Insurer wishes to purchase shares of one or more of the Fund's
portfolios on behalf of its Separate Accounts to serve as an investment medium
for Variable Contracts funded by the Separate Accounts, and the Distributor is
authorized to sell shares of the Fund's portfolios;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and covenants hereinafter set forth, the parties hereby agree as follows:
ARTICLE I. SALE OF FUND SHARES
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<PAGE>
1.1 The Distributor agrees to sell to the Insurer those shares of the
portfolios offered and made available by the Fund and identified on Exhibit B
("Portfolios") that the Insurer orders on behalf of its Separate Accounts, and
agrees to execute such orders on each day on which the Fund calculates its net
asset value pursuant to rules of the SEC ("business day") at the net asset value
next computed after receipt and acceptance by the Fund or its agent of the order
for the shares of the Fund.
1.2 The Fund agrees to make available on each business day shares of the
Portfolios for purchase at the applicable net asset value per share by the
Insurer on behalf of its Separate Accounts; provided, however, that the Board of
Trustees of the Fund may refuse to sell shares of any Portfolio to any person,
or suspend or terminate the offering of shares of any Portfolio, if such action
is required by law or by regulatory authorities having jurisdiction or is, in
the sole discretion of the Trustees, acting in good faith and in light of the
Trustees' fiduciary duties under applicable law, necessary in the best interests
of the shareholders of any Portfolio.
1.3 The Fund and the Distributor agree that shares of the Portfolios of
the Fund will be sold only to Participating Insurance Companies, their separate
accounts, and other persons consistent with each Portfolio being adequately
diversified pursuant to Section 817(h) of the Internal Revenue Code of 1986, as
amended ("Code"), and the regulations thereunder. No shares of any Portfolio
will be sold directly to the general public to the extent not permitted by
applicable tax law.
1.4 The Fund and the Distributor will not sell shares of the Portfolios to
any insurance company or separate account unless an agreement containing
provisions
3
<PAGE>
substantially the same as the provisions in Article IV of this Agreement is in
effect to govern such sales.
1.5 Upon receipt of a request for redemption in proper form from the
Insurer, the Fund agrees to redeem any full or fractional shares of the
Portfolios held by the Insurer, ordinarily executing such requests on each
business day at the net asset value next computed after receipt and acceptance
by the Fund or its agent of the request for redemption, except that the Fund
reserves the right to suspend the right of redemption, consistent with Section
22(e) of the 1940 Act and any rules thereunder. Such redemption shall be paid
consistent with applicable rules of the SEC and procedures and policies of the
Fund as described in the current prospectus.
1.6 For purposes of Sections 1.2 and 1.5, the Insurer shall be the agent
of the Fund for the limited purpose of receiving and accepting purchase and
redemption orders from each Separate Account and receipt of such orders by 4:00
p.m. Eastern time by the Insurer shall be deemed to be receipt by the Fund for
purposes of Rule 22c-1 of the 1940 Act; provided that the Fund receives notice
of such orders on the next following business day prior to 4:00 p.m. Eastern
time on such day, although the Insurer will use its best efforts to provide such
notice by 9:00 a.m. Eastern time.
1.7 The Insurer agrees to purchase and redeem the shares of each Portfolio
in accordance with the provisions of the current prospectus for the Fund.
1.8 The Insurer shall pay for shares of the Portfolio on the next business
day after it places an order to purchase shares of the Portfolio. Payment shall
be in federal funds transmitted by wire.
4
<PAGE>
1.9 Issuance and transfer of shares of the Portfolios will be by book
entry only unless otherwise agreed by the Fund. Stock certificates will not be
issued to the Insurer or the Separate Accounts unless otherwise agreed by the
Fund. Shares ordered from the Fund will be recorded in an appropriate title for
the Separate Accounts or the appropriate subaccounts of the Separate Accounts.
1.10 The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Insurer of any income dividends or capital gain
distributions payable on the shares of the Portfolios. The Insurer hereby
elects to reinvest in the Portfolio all such dividends and distributions as are
payable on a Portfolio's shares and to receive such dividends and distributions
in additional shares of that Portfolio. The Insurer reserves the right to
revoke this election in writing and to receive all such dividends and
distributions in cash. The Fund shall notify the Insurer of the number of
shares so issued as payment of such dividends and distributions.
1.11 The Fund shall instruct its recordkeeping agent to advise the Insurer
on each business day of the net asset value per share for each Portfolio as soon
as reasonably practical after the net asset value per share is calculated and
shall use its best efforts to make such net asset value per share available by
7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Insurer represents and warrants that it is an insurance company
duly organized and in good standing under applicable law and that it is taxed as
an insurance company under Subchapter L of the Code.
5
<PAGE>
2.2 The Insurer represents and warrants that it has legally and validly
established each of the Separate Accounts as a segregated asset account under
the ____________________ Insurance Code, and that each of the Separate Accounts
is a validly existing segregated asset account under applicable federal and
state law.
2.3 The Insurer represents and warrants that the Variable Contracts issued
by the Insurer or interests in the Separate Accounts under such Variable
Contracts (1) are or, prior to issuance, will be registered as securities under
the Securities Act of 1933 ("1933 Act") or, alternatively, (2) are not
registered because they are properly exempt from registration under the 1933 Act
or will be offered exclusively in transactions that are properly exempt from
registration under the 1933 Act.
2.4 The Insurer represents and warrants that each of the Separate Accounts
(1) has been registered as a unit investment trust in accordance with the
provisions of the 1940 Act or, alternatively, (2) has not been registered in
proper reliance upon an exclusion from registration under the 1940 Act.
2.5 The Insurer represents that it believes, in good faith, that the
Variable Contracts issued by the Insurer are currently treated as annuity
contracts or life insurance policies (which may include modified endowment
contracts), whichever is appropriate, under applicable provisions of the Code.
2.6 The Fund represents and warrants that it is duly organized as a
business trust under the laws of the Commonwealth of Massachusetts, and is in
good standing under applicable law.
6
<PAGE>
2.7 The Fund represents and warrants that the shares of the Portfolios are
duly authorized for issuance in accordance with applicable law and that the Fund
is registered as an open-end management investment company under the 1940 Act.
2.8 The Fund represents that it believes, in good faith, that the
Portfolios currently comply with the diversification provisions of Section
817(h) of the Code and the regulations issued thereunder relating to the
diversification requirements for variable life insurance policies and variable
annuity contracts.
2.9 The Distributor represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC.
ARTICLE III. GENERAL DUTIES
3.1 The Fund shall take all such actions as are necessary to permit the
sale of the shares of each Portfolio to the Separate Accounts, including
maintaining its registration as an investment company under the 1940 Act, and
registering the shares of the Portfolios sold to the Separate Accounts under the
1933 Act for so long as required by applicable law. The Fund shall amend its
Registration Statement filed with the SEC under the 1933 Act and the 1940 Act
from time to time as required in order to effect the continuous offering of the
shares of the Portfolios. The Fund shall register and qualify the shares for
sale in accordance with the laws of the various states to the extent deemed
necessary by the Fund or the Distributor.
3.2 The Fund shall make every effort to maintain qualification of each
Portfolio as a Regulated Investment Company under Subchapter M of the Code (or
any successor or similar provision) and shall notify the Insurer immediately
upon having a
7
<PAGE>
reasonable basis for believing that a Portfolio has ceased to so qualify or that
it might not so qualify in the future.
3.3 The Fund shall make every effort to enable each Portfolio to comply
with the diversification provisions of Section 817(h) of the Code and the
regulations issued thereunder relating to the diversification requirements for
variable life insurance policies and variable annuity contracts and any
prospective amendments or other modifications to Section 817 or regulations
thereunder, and shall notify the Insurer immediately upon having a reasonable
basis for believing that any Portfolio has ceased to comply.
3.4 The Insurer shall take all such actions as are necessary under
applicable federal and state law to permit the sale of the Variable Contracts
issued by the Insurer, including registering each Separate Account as an
investment company to the extent required under the 1940 Act, and registering
the Variable Contracts or interests in the Separate Accounts under the Variable
Contracts to the extent required under the 1933 Act, and obtaining all necessary
approvals to offer the Variable Contracts from state insurance commissioners.
3.5 The Insurer shall make every effort to maintain the treatment of the
Variable Contracts issued by the Insurer as annuity contracts or life insurance
policies, whichever is appropriate, under applicable provisions of the Code, and
shall notify the Fund and the Distributor immediately upon having a reasonable
basis for believing that such Variable Contracts have ceased to be so treated or
that they might not be so treated in the future.
8
<PAGE>
3.6 The Insurer shall offer and sell the Variable Contracts issued by the
Insurer in accordance with applicable provisions of the 1933 Act, the 1934 Act,
the 1940 Act, the NASD Rules of Fair Practice, and state law respecting the
offering of variable life insurance policies and variable annuity contracts.
3.7 The Distributor shall sell and distribute the shares of the Portfolios
of the Fund in accordance with the applicable provisions of the 1933 Act, the
1934 Act, the 1940 Act, the NASD Rules of Fair Practice, and state law.
3.8 During such time as the Fund engages in Mixed Funding or Shared
Funding, a majority of the Board of Trustees of the Fund shall consist of
persons who are not "interested persons" of the Fund ("disinterested Trustees"),
as defined by Section 2(a)(19) of the 1940 Act and the rules thereunder, and as
modified by any applicable orders of the SEC, except that if this provision of
this Section 3.8 is not met by reason of the death, disqualification, or bona
fide resignation of any Trustee or Trustees, then the operation of this
provision shall be suspended (a) for a period of 45 days if the vacancy or
vacancies may be filled by the Fund's Board; (b) for a period of 60 days if a
vote of shareholders is required to fill the vacancy or vacancies; or (c) for
such longer period as the SEC may prescribe by order upon application.
3.9 The Insurer and its agents will not in any way recommend any proposal
or oppose or interfere with any proposal submitted by the Fund at a meeting of
owners of Variable Contracts or shareholders of the Fund, and will in no way
recommend, oppose, or interfere with the solicitation of proxies for Fund shares
held by Contract Owners, without the prior written consent of the Fund, which
consent may be withheld in the Fund's sole discretion.
9
<PAGE>
3.10 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities having jurisdiction (including, without
limitation, the SEC, the NASD, and state insurance regulators) and shall permit
such authorities reasonable access to its books and records in connection with
any investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
ARTICLE IV. POTENTIAL CONFLICTS
4.1 During such time as the Fund engages in Mixed Funding or Shared
Funding, the parties hereto shall comply with the conditions in this Article IV.
4.2 The Fund's Board of Trustees shall monitor the Fund for the existence
of any material irreconcilable conflict (1) between the interests of owners of
variable annuity contracts and variable life insurance policies, and (2) between
the interests of owners of Variable Contracts ("Variable Contract Owners")
issued by different Participating Life Insurance Companies that invest in the
Fund. A material irreconcilable conflict may arise for a variety of reasons,
including: (a) an action by any state insurance regulatory authority; (b) a
change in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretive letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio of
the Fund are being managed; (e) a difference in voting instructions given by
variable annuity and variable life insurance contract owners; or (f) a decision
by a Participating Insurance Company to disregard the voting instructions of
Variable Contract Owners.
10
<PAGE>
4.3 The Insurer agrees that it shall report any potential or existing
conflicts of which it is aware to the Fund's Board of Trustees. The Insurer
will be responsible for assisting the Board of Trustees of the Fund in carrying
out its responsibilities under the Mixed and Shared Funding Exemptive Order, or,
if the Fund is engaged in Mixed Funding or Shared Funding in reliance on Rule
6e-2, 6e-3(T), or any other regulation under the 1940 Act, the Insurer will be
responsible for assisting the Board of Trustees of the Fund in carrying out its
responsibilities under such regulation, by providing the Board with all
information reasonably necessary for the Board to consider any issues raised.
This includes, but is not limited to, an obligation by the Insurer to inform the
Board whenever Variable Contract Owner voting instructions are disregarded. The
Insurer shall carry out its responsibility under this Section 4.3 with a view
only to the interests of the Variable Contract Owners.
4.4 The Insurer agrees that in the event that it is determined by a
majority of the Board of Trustees of the Fund or a majority of the Fund's
disinterested Trustees that a material irreconcilable conflict exists, the
Insurer shall, at its expense and to the extent reasonably practicable (as
determined by a majority of the disinterested Trustees of the Board of the
Fund), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the Separate Accounts from the Fund or any
Portfolio and reinvesting such assets in a different investment medium,
including another portfolio of the Fund, or submitting the question as to
whether such segregation should be implemented to a vote of all affected
Variable Contract Owners and, as appropriate, segregating the assets of any
appropriate group (I.E., annuity contract owners or life insurance contract
owners of contracts issued by one or more Participating Insurance Companies),
that votes in favor of such segregation, or offering to the affected Variable
Contract Owners the option of making such a change; and (2) establishing a
11
<PAGE>
new registered management investment company or managed separate account. If a
material irreconcilable conflict arises because of the Insurer's decision to
disregard Variable Contract Owners' voting instructions and that decision
represents a minority position or would preclude a majority vote, the Insurer
shall be required, at the Fund's election, to withdraw the Separate Accounts'
investment in the Fund, provided, however, that such withdrawal and termination
shall be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees, and no
charge or penalty will be imposed as a result of such withdrawal. These
responsibilities shall be carried out with a view only to the interests of the
Variable Contract Owners. A majority of the disinterested Trustees of the Fund
shall determine whether or not any proposed action adequately remedies any
material irreconcilable conflict, but in no event will the Fund or its
investment adviser or the Distributor be required to establish a new funding
medium for any Variable Contract. The Insurer shall not be required by this
Section 4.4 to establish a new funding medium for any Variable Contract if any
offer to do so has been declined by vote of a majority of Variable Contract
Owners materially adversely affected by the material irreconcilable conflict.
4.5 The Insurer, at least annually, shall submit to the Fund's Board of
Trustees such reports, materials, or data as the Board reasonably may request so
that the Trustees of the Fund may fully carry out the obligations imposed upon
the Board by the conditions contained in the application for the Mixed and
Shared Funding Exemptive Order and said reports, materials, and data shall be
submitted more frequently if deemed appropriate by the Board.
4.6 All reports of potential or existing conflicts received by the Fund's
Board of Trustees, and all Board action with regard to determining the existence
of a
12
<PAGE>
conflict, notifying Participating Insurance Companies of a conflict, and
determining whether any proposed action adequately remedies a conflict, shall be
properly recorded in the minutes of the Board of Trustees of the Fund or other
appropriate records, and such minutes or other records shall be made available
to the SEC upon request.
4.7 The Board of Trustees of the Fund shall promptly notify the Insurer in
writing of its determination of the existence of an irreconcilable material
conflict and its implications.
ARTICLE V. PROSPECTUSES AND PROXY STATEMENTS; VOTING
5.1 The Insurer shall distribute such prospectuses, proxy statements and
periodic reports of the Fund to the owners of Variable Contracts issued by the
Insurer as required to be distributed to such Variable Contract Owners under
applicable federal or state law.
5.2 The Distributor shall provide the Insurer with as many copies of the
current prospectus of the Fund as the Insurer may reasonably request. If
requested by the Insurer in lieu thereof, the Fund shall provide such
documentation (including a final copy of the Fund's prospectus as set in type or
in camera-ready copy) and other assistance as is reasonably necessary in order
for the Insurer to either print a stand-alone document or print together in one
document the current prospectus for the Variable Contracts issued by the
Insurer and the current prospectus for the Fund, or a document combining the
Fund prospectus with prospectuses of other funds in which the Variable Contracts
may be invested. The Fund shall bear the expense of printing copies of its
current prospectus that will be distributed to existing Variable Contract
Owners, and the Insurer shall bear the expense of printing copies of the Fund's
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<PAGE>
prospectus that are used in connection with offering the Variable Contracts
issued by the Insurer.
5.3 The Fund and the Distributor shall provide, at the Fund's expense,
such copies of the Fund's current Statement of Additional Information ("SAI") as
may reasonably be requested, to the Insurer and to any owner of a Variable
Contract issued by the Insurer who requests such SAI.
5.4 The Fund, at its expense, shall provide the Insurer with copies of its
proxy materials, periodic reports to shareholders, and other communications to
shareholders in such quantity as the Insurer shall reasonably require for
purposes of distributing to owners of Variable Contracts issued by the Insurer.
The Fund, at the Insurer's expense, shall provide the Insurer with copies of its
periodic reports to shareholders and other communications to shareholders in
such quantity as the Insurer shall reasonably request for use in connection with
offering the Variable Contracts issued by the Insurer. If requested by the
Insurer in lieu thereof, the Fund shall provide such documentation (including a
final copy of the Fund's proxy materials, periodic reports to shareholders, and
other communications to shareholders, as set in type or in camera-ready copy)
and other assistance as reasonably necessary in order for the Insurer to print
such shareholder communications for distribution to owners of Variable Contracts
issued by the Insurer.
5.5 For so long as the SEC interprets the 1940 Act to require pass-through
voting by Participating Insurance Companies whose Separate Accounts are
registered as investment companies under the 1940 Act, the Insurer shall vote
shares of each Portfolio of the Fund held in a Separate Account or a subaccount
thereof, whether or not registered under the 1940 Act, at regular and special
meetings of the Fund in
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<PAGE>
accordance with instructions timely received by the Insurer (or its designated
agent) from owners of Variable Contracts funded by such Separate Account or
subaccount thereof having a voting interest in the Portfolio. The Insurer shall
vote shares of a Portfolio of the Fund held in a Separate Account or a
subaccount thereof that are attributable to the Variable Contracts as to which
no timely instructions are received, as well as shares held in such Separate
Account or subaccount thereof that are not attributable to the Variable
Contracts and owned beneficially by the Insurer (resulting from charges against
the Variable Contracts or otherwise), in the same proportion as the votes cast
by owners of the Variable Contracts funded by that Separate Account or
subaccount thereof having a voting interest in the Portfolio from whom
instructions have been timely received. The Insurer shall vote shares of each
Portfolio of the Fund held in its general account, if any, in the same
proportion as the votes cast with respect to shares of the Portfolio held in all
Separate Accounts of the Insurer or subaccounts thereof, in the aggregate.
5.6 During such time as the Fund engages in Mixed Funding or Shared
Funding, the Fund shall disclose in its prospectus that (1) the Fund is intended
to be a funding vehicle for variable annuity and variable life insurance
contracts offered by various insurance companies, (2) material irreconcilable
conflicts possibly may arise, and (3) the Board of Trustees of the Fund will
monitor events in order to identify the existence of any material irreconcilable
conflicts and to determine what action, if any, should be taken in response to
any such conflict. The Fund hereby notifies the Insurer that prospectus
disclosure may be appropriate regarding potential risks of offering shares of
the Fund to separate accounts funding both variable annuity contracts and
variable life insurance policies and to separate accounts funding Variable
Contracts of unaffiliated life insurance companies.
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<PAGE>
ARTICLE VI. SALES MATERIAL AND INFORMATION
6.1 The Insurer shall furnish, or shall cause to be furnished, to the Fund
or its designee, each piece of sales literature or other promotional material in
which the Fund (or any Portfolio thereof) or its investment adviser or the
Distributor is named at least 15 days prior to the anticipated use of such
material, and no such sales literature or other promotional material shall be
used unless the Fund and the Distributor or the designee of either approve the
material or do not respond with comments on the material within 10 days from
receipt of the material.
6.2 The Insurer agrees that neither it nor any of its affiliates or agents
shall give any information or make any representations or statements on behalf
of the Fund or concerning the Fund other than the information or representations
contained in the Registration Statement or prospectus for the Fund shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund or its designee
and by the Distributor or its designee, except with the permission of the Fund
or its designee and the Distributor or its designee.
6.3 The Fund or the Distributor or the designee of either shall furnish to
the Insurer or its designee, each piece of sales literature or other promotional
material in which the Insurer or its Separate Accounts are named at least 15
days prior to the anticipated use of such material, and no such material shall
be used unless the Insurer or its designee approves the material or does not
respond with comments on the material within 10 days from receipt of the
material.
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<PAGE>
6.4 The Fund and the Distributor agree that each and the affiliates and
agents of each shall not give any information or make any representations on
behalf of the Insurer or concerning the Insurer, the Separate Accounts, or the
Variable Contracts issued by the Insurer, other than the information or
representations contained in a registration statement or prospectus for such
Variable Contracts, as such registration statement and prospectus may be amended
or supplemented from time to time, or in reports for the Separate Accounts or
prepared for distribution to owners of such Variable Contracts, or in sales
literature or other promotional material approved by the Insurer or its
designee, except with the permission of the Insurer.
6.5 The Fund will provide to the Insurer at least one complete copy of the
Mixed and Shared Funding Exemptive Application and any amendments thereto, all
prospectuses, Statements of Additional Information, reports, proxy statements
and other voting solicitation materials, and all amendments and supplements to
any of the above, that relate to the Fund or its shares, promptly after the
filing of such document with the SEC or other regulatory authorities.
6.6 The Insurer will provide to the Fund all prospectuses (which shall
include an offering memorandum if the Variable Contracts issued by the Insurer
or interests therein are not registered under the 1933 Act), Statements of
Additional Information, reports, solicitations for voting instructions relating
to the Fund, and all amendments or supplements to any of the above that relate
to the Variable Contracts issued by the Insurer or the Separate Accounts which
utilize the Fund as an underlying investment medium, promptly after the filing
of such document with the SEC or other regulatory authority.
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<PAGE>
6.7 For purposes of this Article VI, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use, in a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, computerized media, or other public
media), sales literature (I.E., any written communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees.
ARTICLE VII. INDEMNIFICATION
7.1 INDEMNIFICATION BY THE INSURER
7.1(a) The Insurer agrees to indemnify and hold harmless the Fund,
each of its Trustees and officers, any affiliated person of the Fund within the
meaning of Section 2(a)(3) of the 1940 Act, and the Distributor (collectively,
the "Indemnified Parties" for purposes of this Section 7.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Insurer) or litigation expenses (including legal and
other expenses), to which the Indemnified Parties may become subject under any
statute or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or litigation expenses are related to the sale or
acquisition of the Fund's shares or the Variable Contracts issued by the Insurer
and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
registration statement or prospectus (which shall include an offering
memorandum) for the Variable Contracts issued by the Insurer or sales
literature for
18
<PAGE>
such Variable Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Insurer by or on behalf
of the Fund for use in the registration statement or prospectus for
the Variable Contracts issued by the Insurer or sales literature (or
any amendment or supplement) or otherwise for use in connection with
the sale of such Variable Contracts or Fund shares; or
(ii) arise out of or as a result of any statement or
representation (other than statements or representations contained in
the registration statement, prospectus or sales literature of the Fund
not supplied by the Insurer or persons under its control) or wrongful
conduct of the Insurer or any of its affiliates, employees or agents
with respect to the sale or distribution of the Variable Contracts
issued by the Insurer or the Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund or any amendment thereof
or supplement thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading if such a statement or
omission was made in reliance upon information furnished to the Fund
by or on behalf of the Insurer; or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by the Insurer in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Insurer;
except to the extent provided in Sections 7.1(b) and 7.1(c) hereof.
7.1(b) The Insurer shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation expenses to which an Indemnified
19
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Party would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of the Indemnified Party's
duties or by reason of the Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to the Fund.
7.1(c) The Insurer shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Party shall have notified the Insurer in
writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Party shall have received
notice of such service on any designated agent), but failure to notify the
Insurer of any such claim shall not relieve the Insurer from any liability
which it may have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification provision. In
case any such action is brought against the Indemnified Parties, the
Insurer shall be entitled to participate, at its own expense, in the
defense of such action. The Insurer also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Insurer to such party of the Insurer's
election to assume the defense thereof, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and the
Insurer will not be liable to such party under this Agreement for any legal
or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
7.1(d) The Indemnified Parties shall promptly notify the Insurer
of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund shares or the Variable
Contracts issued by the Insurer or the operation of the Fund.
7.2 INDEMNIFICATION BY THE DISTRIBUTOR
20
<PAGE>
7.2(a) The Distributor agrees to indemnify and hold harmless the
Insurer, its affiliated principal underwriter of the Variable Contracts,
and each of their directors and officers and any affiliated person of the
Insurer within the meaning of Section 2(a)(3) of the 1940 Act
(collectively, the "Indemnified Parties" for purposes of this Section 7.2)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Distributor) or
litigation expenses (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages,
liabilities or litigation expenses are related to the sale or acquisition
of the Fund's shares or the Variable Contracts issued by the Insurer and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
registration statement or prospectus or sales literature of the
Fund (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to the Distributor
or the Fund or the designee of either by or on behalf of the
Insurer for use in the registration statement or prospectus for
the Fund or in sales literature (or any amendment or supplement)
or otherwise for use in the registration statement or prospectus
for the Fund or in sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of
the Variable Contracts issued by the Insurer or Fund shares; or
(ii) arise out of or as a result of any statement or
representations (other than statements or representations
contained in the registration statement, prospectus or sales
literature for the Variable Contracts not supplied by the
Distributor or any employees or agents thereof) or wrongful
conduct of the Fund or Distributor, or the affiliates, employees,
or agents of the Fund or the Distributor with respect to the sale
or distribution of the Variable Contracts issued by the Insurer
or Fund shares; or
21
<PAGE>
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature covering the Variable
Contracts issued by the Insurer, or any amendment thereof or
supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statement or statements therein not
misleading, if such statement or omission was made in reliance
upon information furnished to the Insurer by or on behalf of the
Fund; or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by the Distributor in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Distributor;
except to the extent provided in Sections 7.2(b) and 7.2(c) hereof.
7.2(b) The Distributor shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation expenses to which an Indemnified Party would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence in
the performance of the Indemnified Party's duties or by reason of the
Indemnified Party's reckless disregard of obligations or duties under this
Agreement or to the Insurer or the Separate Accounts.
7.2(c) The Distributor shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Party shall have notified the Distributor in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Party shall have received notice of such
service on any designated agent), but failure to notify the Distributor of any
such claim shall not relieve the Distributor from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the
22
<PAGE>
Indemnified Parties, the Distributor will be entitled to participate, at is own
expense, in the defense thereof. The Distributor also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Distributor to such party of the Distributor's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Distributor
will not be liable to such party under this Agreement for any legal or other
expense subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
7.2(d) The Insurer shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Contracts
issued by the Insurer or the operation of the Separate Accounts.
7.3 INDEMNIFICATION BY THE FUND
7.3(a) The Fund agrees to indemnify and hold harmless the Insurer,
its affiliated principal underwriter of the Variable Contracts, and each of
their directors and officers and any affiliated person of the Insurer within the
meaning of Section 2(a)(3) of the 1940 Act (collectively, the "Indemnified
Parties" for purposes of this Section 7.3) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Fund) or litigation expenses (including legal and other expenses)
to which the Indemnified Parties may become subject under any statute or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or litigation expenses are related to the sale or acquisition of the
Fund's shares or the Variable Contracts issued by the Insurer and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
registration statement or prospectus or sales literature of the Fund
(or any
23
<PAGE>
amendment or supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to the
Distributor or the Fund or the designee of either by or on behalf of
the Insurer for use in the registration statement or prospectus for
the Fund or in sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Variable
Contracts issued by the Insurer or Fund shares; or
(ii) arise out of or as a result of any statement or
representation (other than statements or representations contained in
the registration statement, prospectus or sales literature for the
Variable Contracts not supplied by the Distributor or any employees or
agents thereof) or wrongful conduct of the Fund, or the affiliates,
employees, or agents of the Fund, with respect to the sale or
distribution of the Variable Contracts issued by the Insurer or Fund
shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement,
prospectus or sales literature covering the Variable Contracts issued
by the Insurer, or any amendment thereof or supplement thereto, or the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statement or statements
therein not misleading, if such statement or omission was made in
reliance upon information furnished to the Insurer by or on behalf of
the Fund; or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this
Agreement by the Fund;
except to the extent provided in Sections 7.3(b) and 7.3(c) hereof.
7.3(b) The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
expenses to which an Indemnified Party would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of the
Indemnified Party's duties or by
24
<PAGE>
reason of the Indemnified Party's reckless disregard of obligations or duties
under this Agreement or to the Insurer or the Separate Accounts.
7.3(c) The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such party shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon such Indemnified Party (or after such
Party shall have received notice of such service on any designated agent), but
failure to notify the Fund of any such claim shall not relieve the Fund from any
liability which it may have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the Fund will be
entitled to participate, at its own expense, in the defense thereof. The Fund
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from the Fund to such party of
the Fund's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Fund will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
7.3(d) The Insurer shall promptly notify the Fund of the
com-mencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Contracts
issued by the Insurer or the sale of the Fund's shares.
ARTICLE VIII. APPLICABLE LAW
25
<PAGE>
8.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Pennsylvania.
8.2 This Agreement shall be subject to the provisions of the 1933, 1934,
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the SEC may grant
(including, but not limited to, the Mixed and Shared Funding Exemptive Order),
and the terms hereof shall be interpreted and construed in accordance therewith.
ARTICLE IX. TERMINATION
9.1 This Agreement shall terminate:
(a) at the option of any party upon 180 days advance written notice
to the other parties; or
(b) at the option of the Insurer if shares of the Portfolios are not
reasonably available to meet the requirements of the Variable Contracts issued
by the Insurer, as determined by the Insurer, and upon prompt notice by the
Insurer to the other parties; or
(c) at the option of the Fund or the Distributor upon institution of
formal proceedings against the Insurer or its agent by the NASD, the SEC, or any
state securities or insurance department or any other regulatory body regarding
the Insurer's duties under this Agreement or related to the sale of the Variable
Contracts issued by the Insurer, the operation of the Separate Accounts, or the
purchase of the Fund shares; or
26
<PAGE>
(d) at the option of the Insurer upon institution of formal
proceedings against the Fund or the Distributor by the NASD, the SEC, or any
state securities or insurance department or any other regulatory body; or
(e) upon requisite vote of the Variable Contract Owners having an
interest in the Separate Accounts (or any subaccounts thereof) to substitute the
shares of another investment company for the corresponding shares of the Fund or
a Portfolio in accordance with the terms of the Variable Contracts for which
those shares had been selected or serve as the underlying investment media; or
(f) in the event any of the shares of a Portfolio are not registered,
issued or sold in accordance with applicable state and/or federal law, or such
law precludes the use of such shares as the underlying investment media of the
Variable Contracts issued or to be issued by the Insurer; or
(g) by any party to the Agreement upon a determination by a majority
of the Trustees of the Fund, or a majority of its disinterested Trustees, that
an irreconcilable conflict, as described in Article IV hereof, exists; or
(h) at the option of the Insurer if the Fund or a Portfolio fails to
meet the requirements under Subchapter M of the Code for qualification as a
Regulated Investment Company specified in Section 3.2 hereof or the
diversi-fication requirements specified in Section 3.3 hereof.
9.2 Each party to this Agreement shall promptly notify the other parties
to the Agreement of the institution against such party of any such formal
proceedings as
27
<PAGE>
described in Sections 9.1(c) and (d) hereof. The Insurer shall give 60 days
prior written notice to the Fund of the date of any proposed vote of Variable
Contract Owners to replace the Fund's shares as described in Section 9.1(e)
hereof.
9.3 Except as necessary to implement Variable Contract Owner initiated
transactions, or as required by state insurance laws or regulations, the Insurer
shall not redeem Fund shares attributable to the Variable Contracts issued by
the Insurer (as opposed to Fund shares attributable to the Insurer's assets held
in the Separate Accounts), and the Insurer shall not prevent Variable Contract
Owners from allocating payments to a Portfolio, until 60 days after the Insurer
shall have notified the Fund or Distributor of its intention to do so.
9.4 Notwithstanding any termination of this Agreement, the Fund and the
Distributor shall at the option of the Insurer continue to make available
additional shares of the Fund pursuant to the terms and conditions of this
Agreement, for all Variable Contracts in effect on the effective date of
termination of this Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, based upon instructions from the owners of the
Existing Contracts, the Separate Accounts shall be permitted to reallocate
investments in the Portfolios of the Fund and redeem investments in the
Portfolios, and shall be permitted to invest in the Portfolios in the event that
owners of the Existing Contracts make additional purchase payments under the
Existing Contracts. If this Agreement terminates, the parties agree that
Sections 3.10, 7.1, 7.2, 7.3, 8.1, and 8.2, and, to the extent that all or a
portion of the assets of the Separate Accounts continue to be invested in the
Fund or any Portfolio of the Fund, Articles I, II, and IV and Sections 5.5 and
5.6 will remain in effect after termination.
28
<PAGE>
ARTICLE X. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Fund:
Insurance Series
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Attn.: John W. McGonigle
If to the Distributor:
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Attn.: John W. McGonigle
If to the Insurer:
ARTICLE XI: MISCELLANEOUS
11.1 The Fund and the Insurer agree that if and to the extent Rule 6e-2 or
Rule 6e-3(T) under the 1940 Act is amended or if Rule 6e-3 is adopted in final
form, to the extent applicable, the Fund and the Insurer shall each take such
steps as may be necessary to comply with the Rule as amended or adopted in final
form.
29
<PAGE>
11.2 A copy of the Fund's Agreement and Declaration of Trust is on file
with the Secretary of the Commonwealth of Massachusetts and notice is hereby
given that any agreements that are executed on behalf of the Fund by any Trustee
or officer of the Fund are executed in his or her capacity as Trustee or officer
and not individually. The obligations of this Agreement shall only be binding
upon the assets and property of the Fund and shall not be binding upon any
Trustee, officer or shareholder of the Fund individually.
11.3 Nothing in this Agreement shall impede the Fund's Trustees or
shareholders of the shares of the Fund's Portfolios from exercising any of the
rights provided to such Trustees or shareholders in the Fund's Agreement and
Declaration of Trust, as amended, a copy of which will be provided to the
Insurer upon request.
11.4 Administrative services to Variable Contract Owners shall be the
responsibility of Insurer. Insurer, on behalf of its separate accounts will be
the sole shareholder of record of Fund shares. Fund and Distributor recognize
that they will derive a substantial savings in administrative expense by virtue
of having a sole shareholder rather than multiple shareholders. In
consideration of the administrative savings resulting from having a sole
shareholder rather than multiple shareholders, Distributor agrees to pay to
Insurer an amount computed at an annual rate of .25 of 1% of the average daily
net asset value of shares held in subaccounts for which Insurer provides
administrative services. Distributor's payments to Insurer are for
administrative services only and do not constitute payment in any manner for
investment advisory services.
11.5 It is understood that the name "Federated" or any derivative thereof
or logo associated with that name is the valuable property of the Distributor
and its
30
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affiliates, and that the Insurer has the right to use such name (or derivative
or logo) only so long as this Agreement is in effect. Upon termination of this
Agreement the Insurer shall forthwith cease to use such name (or derivative or
logo).
11.6 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
11.7 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
11.8 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
11.9 This Agreement may not be assigned by any party to the Agree-ment
except with the written consent of the other parties to the Agreement.
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
INSURANCE SERIES
ATTEST: BY:
---------------------------- --------------------------------
Name: Name:
------------------------------ ------------------------------
Title: Title:
------------------------------ -----------------------------
FEDERATED SECURITIES CORP.
ATTEST: BY:
---------------------------- --------------------------------
Name: Name:
------------------------------ ------------------------------
Title: Title:
------------------------------ -----------------------------
[INSURER NAME]
ATTEST: BY:
---------------------------- --------------------------------
Name: Name:
------------------------------ ------------------------------
Title: Title:
------------------------------ -----------------------------
32
<PAGE>
JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this ___ day of _______, 199_, between JANUS ASPEN
SERIES, an open-end management investment company organized as a Delaware
business trust (the "Trust"), and ___________ Life Insurance Company, a life
insurance company organized under the laws of the State of ________ (the
"Company"), on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A, as may be amended from time to time (the
"Accounts").
W I T N E S S E T H:
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered the offer
and sale of its shares under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has received an order from the Securities and Exchange
Commission granting Participating Insurance Companies and their separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the
extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) certain variable life insurance policies
and/or variable annuity contracts under the 1933 Act (the "Contracts"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) each Account as a unit investment trust
under the 1940 Act; and
WHEREAS, the Company desires to utilize shares of one or more Portfolios as
an investment vehicle of the Accounts;
<PAGE>
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I
SALE OF TRUST SHARES
1.1 The Trust shall make shares of its Portfolios available to the
Accounts at the net asset value next computed after receipt of such purchase
order by the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust. Shares of a particular
Portfolio of the Trust shall be ordered in such quantities and at such times as
determined by the Company to be necessary to meet the requirements of the
Contracts. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, necessary in the best interests of the shareholders of such
Portfolio.
1.2 The Trust will redeem any full or fractional shares of any Portfolio
when requested by the Company on behalf of an Account at the net asset value
next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints
the Company as its agent for the limited purpose of receiving and accepting
purchase and redemption orders resulting from investment in and payments under
the Contracts. Receipt by the Company shall constitute receipt by the Trust
provided that i) such orders are received by the Company in good order prior to
the time the net asset value of each Portfolio is priced in accordance with its
prospectus and ii) the Trust receives notice of such orders by 11:00 a.m. New
York time on the next following Business Day. "Business Day" shall mean any day
on which the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for no later than 12:00 noon New York time on the same
Business Day that the Trust receives notice of the order. Payments shall be
made in federal funds transmitted by wire.
1.5 Issuance and transfer of the Trust's shares will be by book entry
only. Stock certificates will not be issued to the Company or the Account.
Shares ordered from the Trust will be recorded in the appropriate title for each
Account or the appropriate subaccount of each Account.
-2-
<PAGE>
1.6 The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional shares of
that Portfolio. The Trust shall notify the Company of the number of shares so
issued as payment of such dividends and distributions.
1.7 The Trust shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6 p.m. New York time.
1.8 The Trust agrees that its shares will be sold only to Participating
Insurance Companies and their separate accounts and to certain qualified pension
and retirement plans to the extent permitted by the Exemptive Order. No shares
of any Portfolio will be sold directly to the general public. The Company
agrees that Trust shares will be used only for the purposes of funding the
Contracts and Accounts listed in Schedule A, as amended from time to time.
1.9 The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and conflicts
of interest corresponding to those contained in Section 2.8 and Article IV of
this Agreement.
ARTICLE II
OBLIGATIONS OF THE PARTIES
2.1 The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and statements
of additional information of the Trust. The Trust shall bear the costs of
registration and qualification of its shares, preparation and filing of the
documents listed in this Section 2.1 and all taxes to which an issuer is subject
on the issuance and transfer of its shares.
2.2 At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
as the Company shall reasonably request; or (b) provide the Company with a
camera ready copy of such documents in a form suitable for printing. The Trust
shall provide the Company with a copy of its statement of additional information
in a form suitable for duplication by the Company. The Trust (at its expense)
shall provide the Company with copies of any Trust-sponsored proxy materials in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
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2.3 The Company shall bear the costs of printing and distributing the
Trust's prospectus, statement of additional information, shareholder reports and
other shareholder communications to owners of and applicants for policies for
which the Trust is to serve as an investment vehicle. The Company shall bear the
costs of distributing proxy materials (or similar materials such as voting
solicitation instructions) to Contract owners. The Company assumes sole
responsibility for ensuring that such materials are delivered to Contract owners
in accordance with applicable federal and state securities laws, provided that
Trust provides such materials in a prompt manner and in a form and format in
accordance with applicable federal and state securities laws.
2.4 The Company agrees and acknowledges that the Trust's adviser, Janus
Capital Corporation ("Janus Capital"), is the sole owner of the name and mark
"Janus" and that all use of any designation comprised in whole or part of Janus
(a "Janus Mark") under this Agreement shall inure to the benefit of Janus
Capital. Except as provided in Section 2.5, the Company shall not use any Janus
Mark on its own behalf or on behalf of the Accounts or Contracts in any
registration statement, advertisement, sales literature or other materials
relating to the Accounts or Contracts without the prior written consent of Janus
Capital. Upon termination of this Agreement for any reason, the Company shall
cease all use of any Janus Mark(s) as soon as reasonably practicable.
2.5 The Company shall furnish, or cause to be furnished, to the Trust or
its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or its investment adviser is named prior to the
filing of such document with the Securities and Exchange Commission. The
Company shall furnish, or shall cause to be furnished, to the Trust or its
designee, each piece of sales literature or other promotional material in which
the Trust or its investment adviser is named, at least fifteen Business Days
prior to its use. No such material shall be used if the Trust or its designee
reasonably objects to such use within fifteen Business Days after receipt of
such material.
2.6 The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or its investment
adviser in connection with the sale of the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Trust shares (as such registration statement and
prospectus may be amended or supplemented from time to time), reports of the
Trust, Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as required
by legal process or regulatory authorities or with the written permission of the
Trust or its designee.
2.7 The Trust shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company or its
affiliates, the Accounts or the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Contracts (as such registration statement and
prospectus may be amended or supplemented from time to time), or in materials
approved by the
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Company for distribution including sales literature or other promotional
materials, except as required by legal process or regulatory authorities or with
the written permission of the Company.
2.8 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner as reasonably established by the Trust. With respect to each
Account, the Company will vote shares of the Trust held by the Account and for
which no timely voting instructions from policyowners are received as well as
shares it owns that are held by that Account, in the same proportion as those
shares for which voting instructions are received. The Company and its agents
will in no way recommend or oppose or interfere with the solicitation of proxies
for Trust shares held by Contract owners without the prior written consent of
the Trust, which consent may be withheld in the Trust's sole discretion.
2.9 The Company shall notify the Trust of any applicable state insurance
laws that restrict the Portfolios' investments or otherwise affect the operation
of the Trust and shall notify the Trust of any changes in such laws.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of _________ and
that it has legally and validly established each Account as a segregated asset
account under such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that each Account (1) has been
registered or, prior to any issuance or sale of the Contracts, will be
registered as a unit investment trust in accordance with the provisions of the
1940 Act or, alternatively (2) has not been registered in proper reliance upon
an exclusion from registration under the 1940 Act.
3.3 The Company represents and warrants that the Contracts or interests in
the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that the Contracts will
be issued and sold in compliance in all material respects with all applicable
federal and state laws; and the sale of the Contracts shall comply in all
material respects with state insurance suitability requirements.
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3.4 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Delaware.
3.5 The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust shall be registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Trust shall register and qualify its
shares for sale in accordance with the laws of the various states only if and to
the extent deemed advisable by the Trust.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder.
ARTICLE IV
POTENTIAL CONFLICTS
4.1 The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a
variety of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Trustees shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of
its disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined
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by the Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing
the assets allocable to some or all of the Accounts from the Trust or any
Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Trust, or submitting the
question of whether or not such segregation should be implemented to a vote of
all affected Contract owners and, as appropriate, segregating the assets of any
appropriate group (I.E., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
Contract owners the option of making such a change; and (b) establishing a new
registered management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested Trustees. Any such withdrawal and
termination must take place within six (6) months after the Trust gives written
notice that this provision is being implemented. Until the end of such six (6)
month period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Trust and terminate this Agreement with
respect to such Account within six (6) months after the Trustees inform the
Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
Trustees. Until the end of such six (6) month period, the Trust shall continue
to accept and implement orders by the Company for the purchase and redemption of
shares of the Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and
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termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested
Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate as reasonably determined by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Exemptive Order) on terms and conditions materially different
from those contained in the Exemptive Order, then the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3,
as adopted, to the extent such rules are applicable.
ARTICLE V
INDEMNIFICATION
5.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless the Trust and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Trust within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts themselves or
in sales literature generated or approved by the Company on behalf of the
Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article V), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance upon
and was accurately derived from written information furnished to the
Company by or on behalf of the Trust for use in Company Documents or
otherwise for use in connection with the sale of the Contracts or Trust
shares; or
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(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Trust Documents as defined in Section 5.2(a)) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Trust Documents as defined
in Section 5.2(a) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished to
the Trust by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company.
5.2 INDEMNIFICATION BY THE TRUST. The Trust agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Trust or in sales literature generated or
approved by the Trust or its investment adviser on behalf of the Trust (or
any amendment or supplement thereto), (collectively, "Trust Documents" for
the purposes of this Article V), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this indemnity shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and was accurately derived from
written information furnished to the Trust by or on behalf of the Company
for use in Trust Documents or otherwise for use in connection with the sale
of the Contracts or Trust shares; or
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(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Company Documents) or wrongful conduct of the Trust or persons under its
control, with respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Company Documents or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance upon and
accurately derived from written information furnished to the Company by or
on behalf of the Trust; or
(d) arise out of or result from any failure by the Trust to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this Agreement or arise
out of or result from any other material breach of this Agreement by the
Trust.
5.3 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or gross negligence in
the performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or duties under this
Agreement.
5.4 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice of
service upon or other notification to any designated agent), but failure to
notify the party against whom indemnification is sought of any such claim shall
not relieve that party from any liability which it may have to the Indemnified
Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties,
the indemnifying party shall be entitled to participate, at its own expense, in
the defense of such action. The indemnifying party also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the indemnifying party to the
Indemnified Party of an election to assume such defense, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently
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incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
ARTICLE VI
TERMINATION
6.1 This Agreement may be terminated by either party for any reason by one
hundred eighty (180) days advance written notice delivered to the other party.
6.2 Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares of the
Trust (or any Portfolio) pursuant to the terms and conditions of this Agreement
for all Contracts in effect on the effective date of termination of this
Agreement, provided that the Company continues to pay the costs set forth in
Section 2.3.
6.3 The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
ARTICLE VII
NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
Janus Aspen Series
100 Fillmore Street
Denver, Colorado 80206
Attention: General Counsel
If to the Company:
____________ Life Insurance Company
515 West Market Street, 8th Floor
Louisville, KY 40202
Attention: General Counsel - Retail Business Division
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ARTICLE VIII
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of State of Colorado.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust and/or the Accounts arising, directly or indirectly,
under this Agreement, of any and every nature whatsoever, shall be satisfied
solely out of the assets of the Trust and/or the Accounts and that no Trustee,
officer, agent or holder of shares of beneficial interest of the Trust or the
Accounts shall be personally liable for any such liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
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IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
JANUS ASPEN SERIES
By: /s/ Bonnie Howe
-----------------------------
Name: Bonnie Howe
---------------------------
Title: Assistant Vice President
--------------------------
LIFE INSURANCE COMPANY
By: /s/ John R. Lindholm
-----------------------------
Name: John R. Lindholm
---------------------------
Title: President
--------------------------
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SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
Name of Separate Account and Contracts Funded
Date Established by Board of Directors By Separate Account
- -------------------------------------- -------------------
Separate Account II Pinnacle Flexible Premium Variable
May 21, 1992 Annuity
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FUND PARTICIPATION AGREEMENT
This Agreement is entered into as of the ___ day of ______, 199_, between
__________ ("Insurance Company"), a life insurance company organized under the
laws of the State of __________, and JPM Series Trust II ("Fund"), a business
trust organized under the laws of Delaware, with respect to the Fund's portfolio
or portfolios set forth on Schedule 1 hereto, as such Schedule may be revised
from time to time (the "Series"; if there are more than one Series to which this
Agreement applies, the provisions herein shall apply severally to each such
Series).
ARTICLE I 1.
DEFINITIONS
1.1 "Act" shall mean the Investment Company Act of 1940, as amended.
1.2 "Board" shall mean the Board of Trustees of the Fund having the
responsibility for management and control of the Fund.
1.3 "Business Day" shall mean any day for which the Fund calculates net asset
value per share as described in the Fund's Prospectus.
1.4 "Commission" shall mean the Securities and Exchange Commission.
1.5 "Contract" shall mean a variable annuity or variable life insurance
contract that uses the Fund as an underlying investment medium.
Individuals who participate under a group Contract are "Participants".
1.6 "Contractholder" shall mean any entity that is a party to a Contract with
a Participating Company.
1.7 "Disinterested Board Members" shall mean those members of the Board that
are not deemed to be "interested persons" of the Fund, as defined by the
Act.
1.8 "Participating Companies" shall mean any insurance company (including
Insurance Company), which offers variable annuity and/or variable life
insurance contracts to the public and which has entered into an agreement
with the Fund for the purpose of making Fund shares available to serve as
the underlying investment medium for the aforesaid Contracts.
1.9 "Plans" shall mean qualified pension and retirement benefit plans.
1.10 "Prospectus" shall mean the Fund's current prospectus and statement of
additional information, as most recently filed with the Commission, with
respect to the Series.
1.11 "Separate Account" shall mean Separate Account II Company Variable
Annuity Separate Account, a separate account established by Insurance
Company in accordance with the laws of the State of __________.
1.12 "Software Program" shall mean the software program used by the Fund for
providing Fund and account balance information including net asset value
per share.
1.13 "Insurance Company's General Account(s)" shall mean the general
account(s) of Insurance Company and its affiliates which invest in the
Fund.
<PAGE>
ARTICLE II 2.
REPRESENTATIONS
1.14 Insurance Company represents and warrants that (a) it is an insurance
company duly organized and in good standing under applicable law; (b) it
has legally and validly established the Separate Account pursuant to the
______________ Insurance Code for the purpose of offering to the public
certain individual variable annuity contracts; (c) it has registered the
Separate Account as a unit investment trust under the Act to serve as the
segregated investment account for the Contracts; (d) each Separate
Account is eligible to invest in shares of the Fund without such
investment disqualifying the Fund as an investment medium for insurance
company separate accounts supporting variable annuity contracts or
variable life insurance contracts; and (e) each Separate Account shall
comply with all applicable legal requirements.
1.15 Insurance Company represents and warrants that (a) the Contracts will be
described in a registration statement filed under the Securities Act of
1933, as amended ("1933 Act"); (b) the Contracts will be issued and sold
in compliance in all material respects with all applicable federal and
state laws; and (c) the sale of the Contracts shall comply in all
material respects with state insurance law requirements. Insurance
Company agrees to inform the Fund promptly of any investment restrictions
imposed by state insurance law and applicable to the Fund.
1.16 Insurance Company represents and warrants that the income, gains and
losses, whether or not realized, from assets allocated to the Separate
Account are, in accordance with the applicable Contracts, to be credited
to or charged against such Separate Account without regard to other
income, gains or losses from assets allocated to any other accounts of
Insurance Company. Insurance Company represents and warrants that the
assets of the Separate Account are and will be kept separate from
Insurance Company's General Account and any other separate accounts
Insurance Company may have, and will not be charged with liabilities from
any business that Insurance Company may conduct or the liabilities of any
companies affiliated with Insurance Company.
1.17 Fund represents and warrants that the Fund is registered with the
Commission under the Act as an open-end management investment company and
possesses, and shall maintain, all legal and regulatory licenses,
approvals, consents and/or exemptions required for the Fund to operate
and offer its shares as an underlying investment medium for Participating
Companies. The Fund has established five portfolios and may in the
future establish other portfolios.
1.18 Fund represents and warrants that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), and that it will make every effort
to maintain such qualification (under Subchapter M or any successor or
similar provision) and that it will notify Insurance Company immediately
upon having a reasonable basis for believing that it has ceased to so
qualify or that it might not so qualify in the future.
1.19 Insurance Company represents and agrees that the Contracts are currently,
and at the time of issuance will be, treated as life insurance policies
or annuity contracts, whichever is appropriate, under applicable
provisions of the Code, and that it will make every effort to maintain
such treatment and that it will notify the Fund and its investment
adviser immediately upon having a reasonable basis for believing that
the Contracts have ceased to be so treated or that they might not be so
treated in the future. Insurance Company agrees that any prospectus
offering a Contract that is a "modified endowment contract," as that term
is defined in Section 7702A of the Code, will identify such Contract as a
modified endowment contract (or policy).
1.20 Fund represents and warrants that the Fund's assets shall be managed and
invested in a manner that complies with the requirements of Section
817(h) of the Code.
1.21 Insurance Company agrees that the Fund shall be permitted (subject to the
other terms of this Agreement) to make Series' shares available to other
Participating Companies and contractholders and to Plans.
<PAGE>
1.22 Fund represents and warrants that any of its trustees, officers,
employees, investment advisers, and other individuals/entities who deal
with the money and/or securities of the Fund are and shall continue to be
at all times covered by a blanket fidelity bond or similar coverage in an
amount not less than that required by Rule 17g-1 under the Act. The
aforesaid Bond shall include coverage for larceny and embezzelement and
shall be issued by a reputable bonding company.
1.23 Insurance Company represents and warrants that all of its employees and
agents who deal with the money and/or securities of the Fund are and
shall continue to be at all times covered by a blanket fidelity bond or
similar coverage in an amount not less than $5,000,000. The aforesaid
Bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company.
1.24 Insurance Company agrees that the Fund's investment adviser shall be
deemed a third party beneficiary under this Agreement and may enforce any
and all rights conferred by virtue of this Agreement.
ARTICLE III 3.
FUND SHARES
1.25 The Contracts funded through the Separate Account will provide for the
investment of certain amounts in the Series' shares.
1.26 Fund agrees to make the shares of its Series available for purchase at
the then applicable net asset value per share by Insurance Company and
the Separate Account on each Business Day pursuant to rules of the
Commission. Notwithstanding the foregoing, the Fund may refuse to sell
the shares of any Series to any person, or suspend or terminate the
offering of the shares of any Series if such action is required by law or
by regulatory authorities having jurisdiction or is, in the sole
discretion of the Board, acting in good faith and in light of its
fiduciary duties under federal and any applicable state laws, necessary
and in the best interests of the shareholders of such Series.
1.27 Fund agrees that shares of the Fund will be sold only to Participating
Companies and their separate accounts and to the general accounts of
those Participating Companies and their affiliates and to Plans. No
shares of any Series will be sold to the general public.
1.28 Fund shall use its best efforts to provide closing net asset value,
dividend and capital gain information for each Series available on a
per-share and Series basis to Insurance Company by 6:30 p.m. Eastern Time
on each Business Day. Any material errors in the calculation of net
asset value, dividend and capital gain information shall be reported
immediately upon discovery to Insurance Company. Non-material errors
will be corrected in the next Business Day's net asset value per share
for the Series in question.
1.29 At the end of each Business Day, Insurance Company will use the
information described in Sections 3.2 and 3.4 to calculate the Separate
Account unit values for the day. Using this unit value, Insurance
Company will process the day's Separate Account transactions received by
it by the close of trading on the floor of the New York Stock Exchange
(currently 4:00 p.m. Eastern time) to determine the net dollar amount of
Series shares which will be purchased or redeemed at that day's closing
net asset value per share for such Series. The net purchase or
redemption orders will be transmitted to the Fund by Insurance Company by
9:00 a.m. Eastern Time on the Business Day next following Insurance
Company's receipt of that information. Subject to Sections 3.6 and 3.8,
all purchase and redemption orders for Insurance Company's General
Accounts shall be effected at the net asset value per share of the
relevant Series next calculated after receipt of the order by the Fund or
its Transfer Agent.
1.30 Fund appoints Insurance Company as its agent for the limited purpose of
accepting orders for the purchase and redemption of shares of each Series
for the Separate Account. Fund will execute orders for any Series at the
applicable net asset value per share determined as of the close of
trading on the day of receipt of such orders by Insurance Company acting
as agent ("effective trade date"), provided that the Fund receives notice
of such orders by 9:00 a.m. Eastern Time on the next following Business
Day and, if such orders request the purchase of Series shares, the
conditions specified in Section 3.8, as applicable, are satisfied. A
redemption or purchase request for any Series that does not satisfy the
conditions specified above and in Section 3.8, as applicable, will be
effected at the net asset value computed for such Series on the Business
Day immediately preceding the next following Business Day upon which such
conditions have been satisfied.
<PAGE>
1.31 Insurance Company will make all reasonable efforts to notify Fund in
advance of any unusually large purchase or redemption orders.
1.32 If Insurance Company's order requests the purchase of Series shares,
Insurance Company will pay for such purchases by wiring Federal Funds to
Fund or its designated custodial account on the day the order is
transmitted. Insurance Company shall make all reasonable efforts to
transmit to the Fund payment in Federal Funds by 12:00 noon Eastern Time
on the Business Day the Fund receives the notice of the order pursuant to
Section 3.5. Fund will execute such orders at the applicable net asset
value per share determined as of the close of trading on the effective
trade date if Fund receives payment in Federal Funds by 12:00 midnight
Eastern Time on the Business Day the Fund receives the notice of the
order pursuant to Section 3.5. If payment in Federal Funds for any
purchase is not received or is received by the Fund after 12:00 noon
Eastern Time on such Business Day, Insurance Company shall promptly upon
the Fund's request, reimburse the Fund for any charges, costs, fees,
interest or other expenses incurred by the Fund in connection with any
advances to, or borrowings or overdrafts by, the Fund, or any similar
expenses incurred by the Fund, as a result of portfolio transactions
effected by the Fund based upon such purchase request. If Insurance
Company's order requests the redemption of Series shares valued at or
greater than $1 million dollars, the Fund may wire such amount to
Insurance Company within seven days of the order or as required by law,
whichever is sooner.
1.33 Fund has the obligation to ensure that Series shares are registered with
applicable federal and state agencies at all times.
1.34 Fund will confirm each purchase or redemption order made by Insurance
Company. Transfer of Series shares will be by book entry only. No share
certificates will be issued to Insurance Company. Insurance Company will
record shares ordered from Fund in an appropriate title for the
corresponding account.
1.35 Fund shall credit Insurance Company with the appropriate number of
shares.
1.36 On each ex-dividend date of the Fund or, if not a Business Day, on the
first Business Day thereafter, Fund shall communicate to Insurance
Company the amount of dividend and capital gain, if any, per share of
each Series. All dividends and capital gains of any Series shall be
automatically reinvested in additional shares of the relevant Series at
the applicable net asset value per share of such Series on the payable
date. Fund shall, on the day after the payable date or, if not a
Business Day, on the first Business Day thereafter, notify Insurance
Company of the number of shares so issued.
ARTICLE IV 4.
STATEMENTS AND REPORTS
1.37 Fund shall provide monthly statements of account as of the end of each
month for all of Insurance Company's accounts by the fifteenth (15th)
Business Day of the following month.
1.38 Fund shall distribute to Insurance Company copies of the Fund's
Prospectuses, proxy materials, notices, periodic reports and other
printed materials (which the Fund customarily provides to its
shareholders) in quantities as Insurance Company may reasonably request
for distribution to each Contractholder and Participant.
1.39 Fund will provide to Insurance Company at least one complete copy of all
registration statements, Prospectuses, reports, proxy statements, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above,
that relate to the Fund or its shares, contemporaneously with the filing
of such document with the Commission or other regulatory authorities.
1.40 Insurance Company will provide to the Fund at least one copy of all
registration statements, Prospectuses, reports, proxy statements, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above,
that relate to the Contracts or the Separate Account, contemporaneously
with the filing of such document with the Commission.
<PAGE>
ARTICLE V 5.
EXPENSES
1.41 The charge to the Fund for all expenses and costs of the Series,
including but not limited to management fees, administrative expenses and
legal and regulatory costs, will be made in the determination of the
relevant Series' daily net asset value per share so as to accumulate to
an annual charge at the rate set forth in the Fund's Prospectus.
Excluded from the expense limitation described herein shall be brokerage
commissions and transaction fees and extraordinary expenses.
1.42 Except as provided in this Article V and, in particular in the next
sentence, Insurance Company shall not be required to pay directly any
expenses of the Fund or expenses relating to the distribution of its
shares. Insurance Company shall pay the following expenses or costs:
a. Such amount of the production expenses of any Fund materials,
including the cost of printing the Fund's Prospectus, or
marketing materials for prospective Insurance Company
Contractholders and Participants as the Fund's investment
adviser and Insurance Company shall agree from time to time.
b. Distribution expenses of any Fund materials or marketing
materials for prospective Insurance Company Contractholders
and Participants.
c. Distribution expenses of Fund materials or marketing materials
for Insurance Company Contractholders and Participants.
2. Except as provided herein, all other Fund expenses shall not be borne by
Insurance Company.
ARTICLE VI 6.
EXEMPTIVE RELIEF
2.1 Insurance Company has reviewed a copy of the order dated December, 1996
of the Securities and Exchange Commission under Section 6(c) of the Act
and, in particular, has reviewed the conditions to the relief set forth
in the related Notice. As set forth therein, Insurance Company agrees to
report any potential or existing conflicts promptly to the Board, and in
particular whenever contract voting instructions are disregarded, and
recognizes that it will be responsible for assisting the Board in
carrying out its responsibilities under such application. Insurance
Company agrees to carry out such responsibilities with a view to the
interests of existing Contractholders.
2.2 If a majority of the Board, or a majority of Disinterested Board Members,
determines that a material irreconcilable conflict exists with regard to
Contractholder investments in the Fund, the Board shall give prompt
notice to all Participating Companies. If the Board determines that
Insurance Company is responsible for causing or creating said conflict,
Insurance Company shall at its sole cost and expense, and to the extent
reasonably practicable (as determined by a majority of the Disinterested
Board Members), take such action as is necessary to remedy or eliminate
the irreconcilable material conflict. Such necessary action may include,
but shall not be limited to:
a. Withdrawing the assets allocable to the Separate Account from
the Series and reinvesting such assets in a different
investment medium, or submitting the question of whether such
segregation should be implemented to a vote or all affected
Contractholders; and/or
b. Establishing a new registered management investment company.
2.3 If a material irreconcilable conflict arises as a result of a decision by
Insurance Company to disregard Contractholder voting instructions and
said decision represents a minority position or would preclude a majority
vote by all Contractholders having an interest in the Fund, Insurance
Company may be required, at the Board's election, to withdraw the
Separate Account's investment in the Fund.
<PAGE>
2.4 For the purpose of this Article, a majority of the Disinterested Board
Members shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict, but in no event will the
Fund be required to bear the expense of establishing a new funding medium
for any Contract. Insurance Company shall not be required by this
Article to establish a new funding medium for any Contract if an offer to
do so has been declined by vote of a majority of the Contractholders
materially adversely affected by the irreconcilable material conflict.
2.5 No action by Insurance Company taken or omitted, and no action by the
Separate Account or the Fund taken or omitted as a result of any act or
failure to act by Insurance Company pursuant to this Article VI shall
relieve Insurance Company of its obligations under, or otherwise affect
the operation of, Article V.
ARTICLE VII 7.
VOTING OF FUND SHARES
2.6 Fund shall provide Insurance Company with copies at no cost to Insurance
Company, of the Fund's proxy material, reports to shareholders and other
communications to shareholders in such quantity as Insurance Company
shall reasonably require for distributing to Contractholders or
Participants.
Insurance Company shall:
(a) solicit voting instructions from Contractholders or
Participants on a timely basis and in accordance with
applicable law;
(b) vote the Series shares in accordance with instructions
received from Contractholders or Participants; and
(c) vote Series shares for which no instructions have been
received in the same proportion as Series shares for which
instructions have been received.
Insurance Company agrees at all times to vote its General Account
shares in the same proportion as Series shares for which
instructions have been received from Contractholders or
Participants. Insurance Company further agrees to be responsible
for assuring that voting Series shares for the Separate Account is
conducted in a manner reasonably consistent with other
Participating Companies.
2.7 Insurance Company agrees that it shall not, without the prior written
consent of the Fund and its investment adviser, solicit, induce or
encourage Contractholders to (a) change or supplement the Fund's current
investment adviser or (b) change, modify, substitute, add to or delete
the Fund from the current investment media for the Contracts.
ARTICLE VIII 8.
MARKETING AND REPRESENTATIONS
2.8 The Fund or its underwriter shall periodically furnish Insurance Company
with the following documents, in quantities as Insurance Company may
reasonably request:
a. Current Prospectus and any supplements thereto;
b. other marketing materials, including (to the extent available)
but not limited to performance summaries, market outlooks and
portfolio highlight sheets.
Expenses for the production of such documents shall be borne by
Insurance Company in accordance with Section 5.2 of this
Agreement.
<PAGE>
2.9 Insurance Company shall designate certain persons or entities which shall
have the requisite licenses to solicit applications for the sale of
Contracts. No representation is made as to the number or amount of
Contracts that are to be sold by Insurance Company. Insurance Company
shall make reasonable efforts to market the Contracts and shall comply in
all material respects with all applicable federal and state laws in
connection therewith.
2.10 Insurance Company shall furnish, or shall cause to be furnished, to the
Fund, each piece of sales literature or other promotional material in
which the Fund, its investment adviser or the administrator is named, at
least fifteen Business Days prior to its use. No such material shall be
used unless the Fund approves such material. Such approval (if given)
must be in writing and shall be presumed not given if not received within
ten Business Days after receipt of such material. The Fund shall use all
reasonable efforts to respond within ten days of receipt.
2.11 Insurance Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the
Fund or any Series in connection with the sale of the Contracts other
than the information or representations contained in the registration
statement or Prospectus, as may be amended or supplemented from time to
time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund.
2.12 Fund shall furnish, or shall cause to be furnished, to Insurance Company,
each piece of the Fund's sales literature or other promotional material
in which Insurance Company or the Separate Account is named, at least
fifteen Business Days prior to its use. No such material shall be used
unless Insurance Company approves such material. Such approval (if
given) must be in writing and shall be presumed not given if not received
within ten Business Days after receipt of such material. Insurance
Company shall use all reasonable efforts to respond within ten days of
receipt.
2.13 Fund shall not, in connection with the sale of Series shares, give any
information or make any representations on behalf of Insurance Company or
concerning Insurance Company, the Separate Account, or the Contracts
other than the information or representations contained in a registration
statement or prospectus for the Contracts, as may be amended or
supplemented from time to time, or in published reports for the Separate
Account which are in the public domain or approved by Insurance Company
for distribution to Contractholders or Participants, or in sales
literature or other promotional material approved by Insurance Company.
2.14 For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for
use, in a newspaper, magazine or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards,
motion pictures or other public media), sales literature (such as any
written communication distributed or made generally available to
customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, or reprints or
excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications
distributed or made generally available to some or all agents or
employees, registration statements, prospectuses, statements of
additional information, shareholder reports and proxy materials, and any
other material constituting sales literature or advertising under
National Association of Securities Dealers, Inc. rules, the Act or the
1933 Act.
<PAGE>
ARTICLE IX 9.
INDEMNIFICATION
2.15 Insurance Company agrees to indemnify and hold harmless the Fund, its
investment adviser, any sub-investment adviser of a Series, and their
affiliates, and each of their directors, trustees, officers, employees,
agents and each person, if any, who controls or is associated with any of
the foregoing entities or persons within the meaning of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of Section 9.1),
against any and all losses, claims, damages or liabilities joint or
several (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in settlement of, any
action, suit or proceeding or any claim asserted) for which the
Indemnified Parties may become subject, under the 1933 Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect to thereof) (i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
information furnished by Insurance Company for use in the registration
statement or Prospectus or sales literature or advertisements of the Fund
or with respect to the Separate Account or Contracts, or arise out of or
are based upon the omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading; (ii) arise out of Insurance Company's incorrect calculation
and/or untimely reporting of net purchase or redemption orders; provided
that Insurance Company shall have no obligation to indemnify and hold
harmless the Indemnified Parties if the incorrect calculation or
incorrect or untimely reporting was the result of incorrect information
furnished by the Indemnified Parties or information furnished untimely by
the Indemnified Parties or otherwise as a result of or relating to a
breach of this Agreement by the Indemnified Parties; and provided,
further, that Insurance Company shall not be liable for special,
consequential or incidental damages; or (iii) arise out of any breach by
Insurance Company of a material term of this Agreement or as a result of
any failure by Insurance Company to provide the services and furnish the
materials or to make any payments provided for in this Agreement.
Insurance Company will reimburse any legal or other expenses reasonably
incurred in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that Insurance
Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any
untrue statement or omission or alleged omission made in such
registration statement, prospectus, sales literature, or advertisement in
conformity with written information furnished to Insurance Company by the
Fund specifically for use therein. This indemnity agreement will be in
addition to any liability which Insurance Company may otherwise have.
2.16 The Fund agrees to indemnify and hold harmless Insurance Company and each
of its affiliates, directors, officers, employees, agents and each
person, if any, who controls or is associated with any of the foregoing
entities and persons within the meaning of the 1933 Act against any and
all losses, claims, damages or liabilities to which Insurance Company or
any such director, officer, employee, agent or controlling person may
become subject, under the 1933 Act or otherwise, insofar as such losses,
claims, damages or liabilities joint or several (including any
investigative, legal and other expenses reasonably incurred in connection
with, and any amounts paid in settlement of, any action, suit or
proceeding or any claim asserted) for which the Indemnified Parties may
become subject, under the 1933 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) (1) arise
out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in information furnished by Fund or its
investment adviser or sub-adviser for use in the registration statement
or Prospectus or sales literature or advertisements of the Fund or with
respect to the Separate Account or Contracts; (2) arise out of or are
based upon the omission to state in the registration statement or
Prospectus or sales literature or advertisements of the Fund any material
fact required to be stated therein or necessary to make the statements
therein not misleading; (3) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
the registration statement or Prospectus or sales literature or
advertisements with respect to the Separate Account or the Contracts and
such statements were based on information provided to Insurance Company
by the Fund, or (4) arise out of any breach by the Fund of a material
term of this Agreement or as a result of any failure by the Fund to
provide the services and furnish the materials or to make any payments
provided for in or related to this Agreement; and the Fund will reimburse
any legal or other expenses reasonably incurred by Insurance Company or
any such affiliate, director, officer, employee, agent or controlling
person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Fund will
not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
omission or alleged omission made in such Registration Statement,
Prospectus, sales literature or advertisements in conformity with written
information furnished to the Fund by Insurance Company specifically for
use therein; and provided, further, that the
<PAGE>
Fund shall not be liable for special, consequential or incidental
damages. This indemnity agreement will be in addition to any liability
which the Fund may otherwise have.
2.17 The Fund shall indemnify and hold Insurance Company harmless against any
and all liability, loss, damages, costs or expenses which Insurance
Company may incur, suffer or be required to pay due to the Fund's (1)
incorrect calculation of the daily net asset value, dividend rate or
capital gain distribution rate of a Series; (2) incorrect reporting of
the daily net asset value, dividend rate or capital gain distribution
rate; and (3) untimely reporting of the net asset value, dividend rate or
capital gain distribution rate; provided that the Fund shall have no
obligation to indemnify and hold harmless Insurance Company if the
incorrect calculation or incorrect or untimely reporting was the result
of incorrect information furnished by Insurance Company or information
furnished untimely by Insurance Company or otherwise as a result of or
relating to a breach of this Agreement by Insurance Company; and
provided, further, that the Fund shall not be liable for special,
consequential or incidental damages.
2.18 Promptly after receipt by an indemnified party under this Article of
notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party
under this Article, notify the indemnifying party of the commencement
thereof. The omission to so notify the indemnifying party will not
relieve the indemnifying party from any liability under this Article IX,
except to the extent that the omission results in a failure of actual
notice to the indemnifying party and such indemnifying party is damaged
solely as a result of the failure to give such notice. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein and, to the extent that it may
wish, assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party, and to the extent that the indemnifying party has
given notice to such effect to the indemnified party and is performing
its obligations under this Article, the indemnifying party shall not be
liable for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof.
Notwithstanding the foregoing, in any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified
party unless (i) the indemnifying party and the indemnified party shall
have mutually agreed to the retention of such counsel or (ii) the named
parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation
of both parties by the same counsel would be inappropriate due to actual
or potential differing interests between them. The indemnifying party
shall not be liable for any settlement of any proceeding effected without
its written consent.
A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this
Article IX.
2.19 Insurance Company shall indemnify and hold the Fund, its investment
adviser and any sub-investment adviser of a Series harmless against any
tax liability incurred by the Fund under Section 851 of the Code arising
from purchases or redemptions by Insurance Company's General Accounts or
the account of its affiliates, except to the extent such liability is
attributable to the negligence or conduct of the Fund, its investment
adviser or any sub-investment adviser.
9.6 The Fund shall indemnify and hold Insurance Company harmless against any
tax liability incurred by the Insurance Company or the Separate Account
under Section 817(h) or Subchapter M of the Code, except to the extent
such liability is attributable to the negligence or conduct of the
Insurance Company or the Separate Account .
ARTICLE X 10.
COMMENCEMENT AND TERMINATION
2.20 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions
herein.
2.21 This Agreement shall terminate without penalty as to one or more Series
at the option of the terminating party:
<PAGE>
a. At the option of Insurance Company or the Fund at any time
from the date hereof upon 180 days' notice, unless a shorter
time is agreed to by the parties;
b. At the option of Insurance Company, if shares of any Series
are not reasonably available to meet the requirements of the
Contracts as determined by Insurance Company. Prompt notice
of election to terminate shall be furnished by Insurance
Company, said termination to be effective ten days after
receipt of notice unless the Fund makes available a sufficient
number of shares to meet the requirements of the Contracts
within said ten-day period;
c. At the option of Insurance Company, upon the institution of
formal proceedings against the Fund by the Commission,
National Association of Securities Dealers or any other
regulatory body, the expected or anticipated ruling, judgment
or outcome of which would, in Insurance Company's reasonable
judgment, materially impair the Fund's ability to meet and
perform the Fund's obligations and duties hereunder. Prompt
notice of election to terminate shall be furnished by
Insurance Company with said termination to be effective upon
receipt of notice;
d. At the option of the Fund, upon the institution of formal
proceedings against Insurance Company by the Commission,
National Association of Securities Dealers or any other
regulatory body, the expected or anticipated ruling, judgment
or outcome of which would, in the Fund's reasonable judgment,
materially impair Insurance Company's ability to meet and
perform Insurance Company's obligations and duties hereunder.
Prompt notice of election to terminate shall be furnished by
the Fund with said termination to be effective upon receipt of
notice;
e. At the option of either party, if such party shall determine,
in its sole judgment reasonably exercised in good faith, that
the Insurance Company, on the one hand, or the Fund, on the
other hand, has suffered a material adverse change in its
business or financial condition or is the subject of material
adverse publicity and such material adverse change or material
adverse publicity is likely to have a material adverse impact
upon the business and operation of the Insurance Company, on
the one hand, or the Fund or its investment adviser, on the
other hand, such party shall notify the other party in writing
of such determination and its intent to terminate this
Agreement, and after considering the actions taken by the
Insurance Company or the Fund, as the case may be, and any
other changes in circumstances since the giving of such
notice, such determination shall continue to apply on the
sixtieth (60th) day following the giving of such notice, which
sixtieth day shall be the effective date of termination;
f. Upon termination of the Investment Advisory Agreement between
the Fund and its investment adviser or its successors unless
Insurance Company specifically approves the selection of a new
Fund investment adviser. The Fund shall immediately furnish
notice of such termination to Insurance Company;
g. In the event the Fund's shares are not registered, issued or
sold in accordance with applicable federal law, or such law
precludes the use of such shares as the underlying investment
medium of Contracts issued or to be issued by Insurance
Company. Termination shall be effective immediately upon such
occurrence, and notice shall be provided immediately to
Company.
h. At the option of the Fund upon a determination by the Board in
good faith that it is no longer advisable and in the best
interests of shareholders for the Fund to continue to operate
pursuant to this Agreement. Termination pursuant to this
Subsection (h) shall be effective upon notice by the Fund to
Insurance Company of such termination;
i. At the option of the Fund if the Contracts cease to qualify as
annuity contracts or life insurance policies, as applicable,
under the Code, or if the Fund reasonably believes in judgment
exercised in good faith that the Contracts may fail to so
qualify;
j. At the option of either party to this Agreement, upon another
party's breach of any material provision of this Agreement;
k. At the option of the Fund, if the Contracts are not
registered, issued or sold in accordance with applicable
federal and/or state law; or
<PAGE>
l. Upon assignment of this Agreement, unless made with the
written consent of the non-assigning party.
Any such termination pursuant to Section 10.2a, 10.2d, 10.2e,
10.2f or 10.2k herein shall not affect the operation of Article V
of this Agreement. Any termination of this Agreement shall not
affect the operation of Article IX of this Agreement.
2.22 Notwithstanding any termination of this Agreement pursuant to
Section 10.2 hereof, the Fund and its investment adviser may, at the
option of the Fund, continue to make available additional Series shares
for so long as the Fund desires pursuant to the terms and conditions of
this Agreement as provided below, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to
as "Existing Contracts"). Specifically, without limitation, if the Fund
so elects to make additional Series shares available, the owners of the
Existing Contracts or Insurance Company, whichever shall have legal
authority to do so, shall be permitted to reallocate investments in the
Series, redeem investments in the Fund and/or invest in the Fund upon the
making of additional purchase payments under the Existing Contracts. In
the event of a termination of this Agreement pursuant to Section 10.2
hereof, the Fund, as promptly as is practicable under the circumstances,
shall notify Insurance Company whether the Fund will continue to make
Series shares available after such termination. If Series shares
continue to be made available after such termination, the provisions of
this Agreement shall remain in effect and thereafter either the Fund or
Insurance Company may terminate the Agreement, as so continued pursuant
to this Section 10.3, upon prior written notice to the other party, such
notice to be for a period that is reasonable under the circumstances but,
if given by the Fund, need not be for more than six months.
ARTICLE XI 11.
AMENDMENTS
2.23 Any other changes in the terms of this Agreement shall be made by
agreement in writing between Insurance Company and Fund.
ARTICLE XII 12.
NOTICE
2.24 Each notice required by this Agreement shall be given by certified mail,
return receipt requested, to the appropriate parties at the following
addresses:
Insurance Company:
Attn:
Fund:
JPM Series Trust II
c/o Morgan Guaranty Trust Company
522 Fifth Avenue
New York, New York 10036
Attention: Sharon J. Weinberg
Notice shall be deemed to be given on the date of receipt by the
addresses as evidenced by the return receipt.
<PAGE>
ARTICLE XIII 13.
MISCELLANEOUS
2.25 This Agreement has been executed on behalf of the Fund by the undersigned
officer of the Fund in his capacity as an officer of the Fund. The
obligations of this Agreement shall only be binding upon the assets and
property of the Fund and shall not be binding upon any Trustee, officer
or shareholder of the Fund individually.
ARTICLE XIV 14.
LAW
2.26 This Agreement shall be construed in accordance with the internal laws of
the State of New York, without giving effect to principles of conflict of
laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be duly
executed and attested as of the date first above written.
[Insurance Company]
By:
-------------------------------
Its:
------------------------------
JPM SERIES TRUST II
By:
-------------------------------
Its:
------------------------------
<PAGE>
SCHEDULE 1
Name of Series
- --------------
JPM Bond Portfolio
JPM International Equity Portfolio
<PAGE>
PARTICIPATION AGREEMENT
AMONG
MORGAN STANLEY UNIVERSAL FUNDS, INC.,
MORGAN STANLEY ASSET MANAGEMENT INC.
MILLER ANDERSON & SHERRERD, LLP
AND
_______________ LIFE INSURANCE COMPANY
DATED AS OF
________________, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I. Purchase of Fund Shares 2
ARTICLE II Representations and Warranties 4
ARTICLE III. Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV. Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI. Diversification 10
ARTICLE VII. Potential Conflicts 10
ARTICLE VIII. Indemnification 12
ARTICLE IX. Applicable Law 18
ARTICLE X. Termination 18
ARTICLE XI. Notices 20
ARTICLE XII. Miscellaneous 21
SCHEDULE A Separate Accounts and Contracts A-1
SCHEDULE B Portfolios of Morgan Stanley Universal Funds, Inc. B-1
SCHEDULE C Proxy Voting Procedures C-1
</TABLE>
<PAGE>
THIS AGREEMENT, made and entered into as of the ___ day of _____, 1997
by and among _________ LIFE INSURANCE COMPANY (hereinafter the "Company"),
an ____ corporation, on its own behalf and on behalf of each separate
account of the Company set forth on Schedule A hereto as may be amended
from time to time (each such account hereinafter referred to as the
"Account"), and MORGAN STANLEY UNIVERSAL FUNDS, INC. (hereinafter the
"Fund"), a Maryland corporation, and MORGAN STANLEY ASSET MANAGEMENT INC.
and MILLER ANDERSON & SHERRERD, LLP (hereinafter collectively the
"Advisers" and individually the "Adviser"), a Delaware corporation and a
Pennsylvania limited liability partnership, respectively.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Insurance Products") and (ii) the investment vehicle for certain
qualified pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an investment
vehicle under their Variable Insurance Contracts enter into participation
agreements with the Fund and the Advisers (the "Participating Insurance
Companies");
WHEREAS, shares of the Fund are divided into several series of shares, each
representing the interest in a particular managed portfolio of securities and
other assets, any one or more of which may be made available under this
Agreement, as may be amended from time to time by mutual agreement of the
parties hereto (each such series hereinafter referred to as a "Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated September 19, 1996 (File No. 812-10118), granting
Participating Insurance Companies and Variable Insurance Product separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended (hereinafter the "1940
Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by Variable
Annuity Product separate accounts of both affiliated and unaffiliated life
insurance companies and Qualified Plans (hereinafter the "Shared Funding
Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
<PAGE>
WHEREAS, each Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws; and
WHEREAS, each Adviser manages certain Portfolios of the Fund; and
WHEREAS, Morgan Stanley & Co. Incorporated (the "Underwriter") is
registered as a broker/dealer under the Securities Exchange Act of 1934, as
amended (hereinafter the "1934 Act"), is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD") and serves
as principal underwriter of the shares of the Fund; and
WHEREAS, the Company has registered or will register certain Variable
Insurance Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, on the date shown for such Account on Schedule A
hereto, to set aside and invest assets attributable to the aforesaid Variable
Insurance Product; and
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Underwriter is
authorized to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company shares
of the Fund and shall execute orders placed for each Account on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
such order. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee shall constitute receipt by the Fund; provided that the Fund receives
notice of such order by 10:00 a.m. Eastern time on the next following Business
Day. "Business Day" shall mean any day on which
2
<PAGE>
the New York Stock Exchange is open for trading and on which the Fund calculates
its net asset value pursuant to the rules of the Securities and Exchange
Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make its
shares available indefinitely for purchase at the applicable net asset value per
share by the Company and its Accounts on those days on which the Fund calculates
its net asset value pursuant to rules of the Securities and Exchange Commission
and the Fund shall use all reasonable efforts to calculate such net asset value
on each day which the New York Stock Exchange is open for trading.
Notwithstanding the foregoing, the Board of Directors of the Fund (hereinafter
the "Board") may refuse to permit the Fund to sell shares of any Portfolio to
any person, or suspend or terminate the offering of shares of any Portfolio if
such action is required by law or by regulatory authorities having jurisdiction
or is, in the sole discretion of the Board acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund, provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.5. The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus. The Variable Insurance Products issued
by the Company, under which amounts may be invested in the Fund (hereinafter the
"Contracts"), are listed on Schedule A attached hereto and incorporated herein
by reference, as such Schedule A may be amended from time to time by mutual
written agreement of all of the parties hereto.
1.6. The Company shall pay for Fund shares on the next Business Day after
an order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire no
later than 2:30 p.m. For purposes of Section 2.10 and 2.11, upon receipt by the
Fund of the federal funds so wired, such funds shall cease to be the
responsibility of the Company and shall become the responsibility of the Fund.
3
<PAGE>
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.8. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.9. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a segregated asset account
under applicable _____ law and has registered or, prior to any issuance or sale
of the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Maryland and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the registration
statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund.
4
<PAGE>
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated as
life insurance policies or annuity contracts, under applicable provisions of the
Code and that it will make every effort to maintain such treatment and that it
will notify the Fund immediately upon having a reasonable basis for believing
that the Contracts have ceased to be so treated or that they might not be so
treated in the future.
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have a board of directors, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Maryland and the Fund represents that their respective operations are
and shall at all times remain in material compliance with the laws of the State
of Maryland to the extent required to perform this Agreement.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and will
comply in all material respects with the 1940 Act.
2.8. Each Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9. The Fund represents and warrants that its directors, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include
5
<PAGE>
coverage for larceny and embezzlement and shall be issued by a reputable bonding
company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid
includes coverage for larceny and embezzlement is issued by a reputable bonding
company. The Company agrees to make all reasonable efforts to see that this
bond or another bond containing these provisions is always in effect, and agrees
to notify the Fund and the Underwriter in the event that such coverage no longer
applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Contracts and the Fund's prospectus printed together
in one document, and to have the statement of additional information for the
Fund and the statement of additional information for the Contracts printed
together in one document. Alternatively, the Company may print the Fund's
prospectus and/or its statement of additional information in combination with
other fund companies' prospectuses and statements of additional information.
3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Fund prospectuses and statements of additional information shall be
the expense of the Company. For prospectuses and statements of additional
information provided by the Company to its existing owners of Contracts who
currently own shares of one or more of the Fund's Portfolios, in order to update
disclosure as required by the 1933 Act and/or the 1940 Act, the cost of printing
shall be borne by the Fund. If the Company chooses to receive camera-ready film
or computer diskettes in lieu of receiving printed copies of the Fund's
prospectus, the Fund will reimburse the Company in an amount equal to the
product of x and y where x is the number of such prospectuses distributed to
owners of the Contracts who currently own shares of one or more of the Fund's
Portfolios, and y is the Fund's per unit cost of typesetting and printing the
Fund's prospectus. The same procedures shall be followed with respect to the
Fund's statement of additional information. The Company agrees to provide the
Fund or its designee with such information as may be reasonably requested by the
6
<PAGE>
Fund to assure that the Fund's expenses do not include the cost of printing any
prospectuses or statements of additional information other than those actually
distributed to existing owners of the Contracts.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
Portfolio for which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. The Fund and the Company shall follow the procedures, and
shall have the corresponding responsibilities, for the handling of proxy and
voting instruction solicitations, as set forth in Schedule C attached hereto and
incorporated herein by reference. Participating Insurance Companies shall be
responsible for ensuring that each of their separate accounts participating in
the Fund calculates voting privileges in a manner consistent with the standards
set forth on Schedule C, which standards will also be provided to the other
Participating Insurance Companies.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act
in accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect
7
<PAGE>
to periodic elections of directors and with whatever rules the Commission may
promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least ten Business
Days prior to its use. No such material shall be used if the Fund or its
designee reasonably objects to such use within ten Business Days after receipt
of such material. The Fund agrees to use its best efforts to provide all
comments on such material within ten Business Days.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least ten Business Days prior to its use. No such material shall be
used if the Company or its designee reasonably objects to such use within ten
Business Days after receipt of such material. The Company agrees to use its
best efforts to provide all comments on such material within ten Business Days.
4.4. The Fund and the Advisers shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Contracts, other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
8
<PAGE>
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, which are relevant
to the Company or the Contracts.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Contracts.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-1 to finance distribution expenses, then the
Underwriter may make payments to the Company or to the underwriter for the
Contracts if and in amounts agreed to by the Underwriter in writing.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund. The Fund shall see to it that all its shares are
registered and authorized for issuance in accordance with applicable federal law
and, if and to the extent deemed advisable by the Fund, in accordance with
applicable state laws prior to their sale. The Fund shall bear the expenses for
the cost of registration and qualification of the Fund's shares, preparation and
filing of the Fund's prospectus and registration statement, proxy materials and
reports, setting the prospectus in type, setting in type
9
<PAGE>
and printing the proxy materials and reports to shareholders (including the
costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund represents and warrants that it will at all times invest
money from the Contracts in such a manner as to ensure that the Contracts will
be treated as variable contracts under the Code and the regulations issued
thereunder. Without limiting the scope of the foregoing, the Fund will at all
times comply with Section 817(h) of the Code and Treasury Regulation 1.817-5,
relating to the diversification requirements for variable annuity, endowment, or
life insurance contracts and any amendments or other modifications to such
Section or Regulations. In the event of a breach of this Article VI by the
Fund, it will take all reasonable steps (a) to notify Company of such breach and
(b) to adequately diversify the Fund so as to achieve compliance within the
grace period afforded by Regulation 817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by Variable Insurance Product owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised.
10
<PAGE>
This includes, but is not limited to, an obligation by the Company to inform the
Board whenever contract owner voting instructions are disregarded.
7.3. If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested directors), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (I.E., annuity contract owners, life insurance policy
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action
11
<PAGE>
adequately remedies any irreconcilable material conflict, but in no event will
the Fund be required to establish a new funding medium for the Contracts. The
Company shall not be required by Section 7.3 to establish a new funding medium
for the Contracts if an offer to do so has been declined by vote of a majority
of Contract owners materially adversely affected by the irreconcilable material
conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a) The Company agrees to indemnify and hold harmless the Fund and each
member of the Board and officers, and each Adviser and each director, officer
and employee of each Adviser, and each person, if any, who controls the Fund or
the Adviser within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" and individually, "Indemnified Party," for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue
statements or alleged untrue statements of any material fact contained
in the registration statement or prospectus for the Contracts or
contained in the Contracts or sales literature for the Contracts (or
any amendment or supplement to any of the foregoing), or arise out of
or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not
12
<PAGE>
misleading, provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on behalf
of the Fund for use in the registration statement or prospectus for
the Contracts or in the Contracts or sales literature (or any
amendment or supplement) or otherwise for use in connection with the
sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained in
the registration statement, prospectus or sales literature of the Fund
not supplied by the Company, or persons under its control and other
than statements or representations authorized by the Fund or an
Adviser) or unlawful conduct of the Company or persons under its
control, with respect to the sale or distribution of the Contracts or
Fund shares; or
(iii) arise out of or as a result of any untrue
statement or alleged untrue statement of a material fact contained in
a registration statement, prospectus, or sales literature of the Fund
or any amendment thereof or supplement thereto or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading if such a statement or omission was made in reliance upon
and in conformity with information furnished to the Fund by or on
behalf of the Company; or
(iv) arise as a result of any failure by the Company
to provide the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result from any material breach of
any representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Company, as limited by and in accordance with
the provisions of Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation incurred or assessed against an Indemnified
Party as such may arise from such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations or duties under this Agreement.
13
<PAGE>
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified
the Company in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on
any designated agent), but failure to notify the Company of any such
claim shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the
Company shall be entitled to participate, at its own expense, in the
defense of such action. The Company also shall be entitled to assume
the defense thereof, with counsel satisfactory to the party named in
the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel
retained by it, and the Company will not be liable to such party under
this Agreement for any legal or other expenses subsequently incurred
by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company
of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund shares or the
Contracts or the operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISERS
8.2(a). Each Adviser agrees, with respect to each Portfolio that
it manages, to indemnify and hold harmless the Company and each of its
directors, officers and employees and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" and individually,
"Indemnified Party," for purposes of this Section 8.2) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Adviser) or litigation
(including legal and other expenses) to which the Indemnified Parties
may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to
the sale or acquisition of shares of the Portfolio that it manages or
the Contracts and:
14
<PAGE>
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in the registration statement or prospectus or
sales literature of the Fund (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon
the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that
this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and
in conformity with information furnished to the Fund by or
on behalf of the Company for use in the registration
statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Portfolio
shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus or sales
literature for the Contracts not supplied by the Fund or
persons under its control and other than statements or
representations authorized by the Company) or unlawful
conduct of the Fund, Adviser(s) or Underwriter or persons
under their control, with respect to the sale or
distribution of the Contracts or Portfolio shares; or
(iii) arise out of or as a result of any untrue
statement or alleged untrue statement of a material fact
contained in a registration statement, prospectus, or sales
literature covering the Contracts, or any amendment thereof
or supplement thereto, or the omission or alleged omission
to state therein a material fact required to be stated
therein or necessary to make the statement or statements
therein not misleading, if such statement or omission was
made in reliance upon information furnished to the Company
by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to
provide the services and furnish the materials under the
terms of this Agreement; or
15
<PAGE>
(v) arise out of or result from any material breach of
any representation and/or warranty made by the Adviser in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Adviser; as limited
by and in accordance with the provisions of Sections 8.2(b)
and 8.2(c) hereof.
8.2(b). An Adviser shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation incurred or assessed against an Indemnified
Party as such may arise from such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
8.2(c). An Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Adviser in
writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have
been served upon such Indemnified Party (or after such Indemnified
Party shall have received notice of such service on any designated
agent), but failure to notify the Adviser of any such claim shall not
relieve the Adviser from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action
is brought against the Indemnified Parties, the Adviser will be
entitled to participate, at its own expense, in the defense thereof.
The Adviser also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice
from the Adviser to such party of the Adviser's election to assume the
defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser
will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the
Contracts or the operation of each Account.
16
<PAGE>
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the
Company, and each of its directors, officers and employees and each
person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (hereinafter collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this
Section 8.3) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Fund) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation,
at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements
result from the gross negligence, bad faith or willful misconduct of
the Board or any member thereof or any officer of the Fund, are
related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund
to provide the services and furnish the materials under the terms
of this Agreement; or
(ii) arise out of or result from any material
breach of any representation and/or warranty made by the
Fund in this Agreement or arise out of or result from any
other material breach of this Agreement by the Fund;
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as may
arise from such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of
obligations and duties under this Agreement.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Fund in writing
within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent),
but failure to notify the Fund of any such claim shall not relieve the
Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification
17
<PAGE>
provision. In case any such action is brought against the Indemnified
Parties, the Fund will be entitled to participate, at its own expense,
in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's
election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it,
and the Fund will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the
commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement,
the issuance or sale of the Contracts, with respect to the operation
of either Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New
York.
9.2. This Agreement shall be subject to the provisions of the
1933, 1934 and 1940 Acts, and the rules and regulations and rulings
thereunder, including such exemptions from those statutes, rules and
regulations as the Securities and Exchange Commission may grant
(including, but not limited to, the Shared Funding Exemptive Order)
and the terms hereof shall be interpreted and construed in accordance
therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect
until the first to occur of:
(a) termination by any party for any reason by sixty (60) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio is not reasonably
available to meet the requirements of the Contracts; or
18
<PAGE>
(c) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or such law precludes the use
of such shares as the underlying investment media of the Contracts
issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company under
Subchapter M of the Code or under any successor or similar provision,
or if the Company reasonably believes that the Fund may fail to so
qualify; or
(e) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event that such
Portfolio falls to meet the diversification requirements specified in
Article VI hereof; or
(f) termination by either the Fund by written notice to the
Company if the Fund shall determine, in its sole judgment exercised in
good faith, that the Company and/or its affiliated companies has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity, or
(g) termination by the Company by written notice to the Fund and
the Adviser, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Adviser has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity; or
10.2. Notwithstanding any termination of this Agreement, the
Fund shall at the option of the Company, continue to make available
additional shares of the Fund pursuant to the terms and conditions of
this Agreement, for all Contracts in effect on the effective date of
termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the
Existing Contracts shall be permitted to direct reallocation of
investments in the Fund, redemption of investments in the Fund and/or
investment in the Fund upon the making of additional purchase payments
under the Existing Contracts.
19
<PAGE>
The parties agree that this Section 10.2 shall not apply to any
terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement.
10.3. The Company shall not redeem Fund shares attributable to
the Contracts (as distinct from Fund shares attributable to the
Company's assets held in the Account) except (i) as necessary to
implement Contract Owner initiated or approved transactions, or (ii)
as required by state and/or federal laws or regulations or judicial or
other legal precedent of general application (hereinafter referred to
as a "Legally Required Redemption") or (iii) as permitted by an order
of the Securities and Exchange Commission pursuant to Section 26(b) of
the 1940 Act. Upon request, the Company will promptly furnish to the
Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the
Contracts, the Company shall not prevent Contract Owners from
allocating payments to a Portfolio that was otherwise available under
the Contracts without first giving the Fund 90 days prior written
notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to
time specify in writing to the other party.
If to the Fund:
Morgan Stanley Universal Funds, Inc.
c/o Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
If to Adviser:
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
20
<PAGE>
If to Adviser:
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, Pennsylvania 19428
Attention: Lorraine Truten
If to the Company:
__________ Life Insurance Company
515 West Market Street, 8th Floor
Louisville, Kentucky 40202
Attention: Kevin L. Howard, Esq.
ARTICLE XII. MISCELLANEOUS
12.1. All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the
Fund as neither the Board, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Fund.
12.2. Subject to the requirements of legal process and
regulatory authority, each party hereto shall treat as confidential
the names and addresses of the owners of the Contracts and all
information reasonably identified as confidential in writing by any
other party hereto and, except as permitted by this Agreement, shall
not disclose, disseminate or utilize such names and addresses and
other confidential information until such time as it may come into the
public domain without the express written consent of the affected
party.
12.3. The captions in this Agreement are included for
convenience of reference only and in no way define or delineate any of
the provisions hereof or otherwise affect their construction or
effect.
12.4. This Agreement may be executed simultaneously in two or
more counterparts, each of which taken together shall constitute one
and the same instrument.
12.5. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder
of the Agreement shall not be affected thereby.
21
<PAGE>
12.6. Each party hereto shall cooperate with each other party
and all appropriate governmental authorities (including without
limitation the Securities and Exchange Commission, the National
Association of Securities Dealers and state insurance regulators) and
shall permit such authorities reasonable access to its books and
records in connection with any investigation or inquiry relating to
this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto
further agrees to furnish the California Insurance Commissioner with
any information or reports in connection with services provided under
this Agreement which such Commissioner may request in order to
ascertain whether the insurance operations of the Company are being
conducted in a manner consistent with the California Insurance
Regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights,
remedies and obligations at law or in equity, which the parties hereto
are entitled to under state and federal laws.
12.8. This Agreement or any of the rights and obligations
hereunder may not be assigned by any party without the prior written
consent of all parties hereto; provided, however, that an Adviser may
assign this Agreement or any rights or obligations hereunder to any
affiliate of or company under common control with the Adviser, if such
assignee is duly licensed and registered to perform the obligations of
the Adviser under this Agreement and such assignment would not cause a
termination of this Agreement under the 1940 Act.
12. 9 The Company shall furnish, or shall cause to be furnished,
to the Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under
statutory accounting principles) and annual report (prepared
under generally accepted accounting principles ("GAAP"), if any),
as soon as practical and in any event within 90 days after the
end of each fiscal year;
(b) the Company's quarterly statements (statutory) (and
GAAP, if any), as soon as practical and in any event within 45
days after the end of each quarterly period:
22
<PAGE>
(c) any financial statement, proxy statement, notice or
report of the Company sent to stockholders and/or policyholders,
as soon as practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and
financial reports of the Company filed with the Securities and
Exchange Commission or any state insurance regulator, as soon as
practical after the filing thereof;
(e) any other publicly available reports submitted to the
Company by independent accountants in connection with any annual,
interim or special audit made by them of the books of the
Company, as soon as practical after the receipt thereof.
12. 10 The Fund shall, upon request of the Company, furnish, or
cause to be furnished, to Company or its designee copies of the
following reports:
(a) any registration statement (without exhibits) and
financial reports of the Fund filed with the Securities and
Exchange Commission or any state securities regulator, as soon as
practical after the filing thereof with the Securities and
Exchange Commission;
(b) any financial statement, proxy statement, notice or
report of the Fund sent to shareholders relating to any of the
Portfolios of the Fund listed on Schedule B, as soon as practical
after filing with the Securities and Exchange Commission; and
(c) any other publicly available reports submitted to the
Fund by independent accountants in connection with any annual,
interim or special audit made by them of the books of the company
as soon as practical after the receipt thereof.
23
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly
authorized representative and its seal to be hereunder affixed hereto
as of the date specified above.
LIFE INSURANCE COMPANY
By:
------------------------------
NAME:
TITLE:
MORGAN STANLEY UNIVERSAL FUNDS, INC.
By:
------------------------------
NAME:
TITLE:
MORGAN STANLEY ASSET MANAGEMENT INC.
By:
------------------------------
NAME:
TITLE:
MILLER ANDERSON & SHERRERD, LLP
By:
------------------------------
NAME:
TITLE:
24
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND CONTRACTS
NAME OF SEPARATE ACCOUNT AND FORM NUMBER AND NAME OF CONTRACT
DATE ESTABLISHED BY BOARD OF DIRECTORS FUNDED BY SEPARATE ACCOUNT
- -------------------------------------- --------------------------
Separate Account II Pinnacle Flexible Premium Variable
established May 21, 1992 Annuity
File No. 811-7134
A-1
<PAGE>
SCHEDULE B
PORTFOLIOS OF MORGAN STANLEY
UNIVERSAL FUNDS, INC.
Emerging Markets Debt Portfolio
High Yield Portfolio
U.S. Real Estate Portfolio
Asian Equity Portfolio
B-1
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
- - The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
- - Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in this Step #2. The Company will use its best efforts to call
in the number of Customers to the Fund , as soon as possible, but no later
than two weeks after the Record Date.
- - The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting,
instruction solicitation material. The Fund will provide the last Annual
Report to the Company pursuant to the terms of Section 3.3 of the Agreement
to which this Schedule relates.
- - The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
C-1
<PAGE>
- name (legal name as found on account registration)
- address
- fund or account number
- coding to state number of units
- individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
- - During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
- Voting Instruction Card(s)
- One proxy notice and statement (one document)
- return envelope (postage pre-paid by Company) addressed to the Company
or its tabulation agent
- "urge buckslip" - optional, but recommended. (This is a small, single
sheet of paper that requests Customers to vote as quickly as possible
and that their vote is important. One copy will be supplied by the
Fund.)
- cover letter - optional, supplied by Company and reviewed and approved
in advance by the Fund.
- - The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
- - Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation
time is calculated as calendar days from (but NOT including,) the
meeting, counting backwards.
- - Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
C-2
<PAGE>
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
- - Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
- - If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
- - There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
- - The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of SHARES.) The Fund must review
and approve tabulation format.
- - Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 a.m. Eastern time. The
Fund may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.
- - A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
C-3
<PAGE>
- - The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
- - All approvals and "signing-off' may be done orally, but must always be
followed up in writing.
C-4
<PAGE>
Exhibit 10
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
in Post-Effective Amendment No. 13 to the Registration Statement (Form N-4 No.
33-51268) and Amendment No. 14 to the Registration Statement (Form N-4 No.
811-7134) and related Prospectuses of Separate Account II of Integrity Life
Insurance Company and to the use of our reports (a) dated February 9, 1999, with
respect to the statutory basis financial statements of Integrity Life Insurance
Company, and (b) dated April 9, 1999, 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 1998 filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 21, 1999
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
in Post-Effective Amendment No. 13 to the Registration Statement (Form N-4 No.
33-51268) and Amendment No. 14 to the Registration Statement (Form N-4 No.
811-7134) and related Prospectus of Separate Account Ten of Integrity Life
Insurance Company and to the use of our report dated January 29, 1999, with
respect to the financial statements of Separate Account Ten included in the
Registration Statement (Form N-4) for 1998 filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Kansas City, Missouri
April 21, 1999
