<PAGE>
As filed with the Securities and Exchange Commission on April 28, 2000
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. 14 [X]
--
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 15 [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, 2000) pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on (date) pursuant to paragraph (a)(1) of Rule 485
/ / 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 flexible premium variable annuity contracts offered to
individuals and to groups by Integrity Life Insurance Company, a subsidiary of
The Western and Southern Life Insurance Company (W&S). The contracts
(collectively, a CONTRACT) provide several types of benefits, some of which have
tax-favored status under the Internal Revenue Code of 1986, as amended. Two
separate accounts, Separate Account II and Separate Account Ten, fund the
variable annuity contract. 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: Deutsche
Asset Management VIT Funds (DEUTSCHE VIT FUNDS); Fidelity's Variable
Insurance Products Fund (VIP), Fidelity's Variable Insurance Products Fund II
(VIP II), and Fidelity's Variable Insurance Products Fund III (VIP III),
trust funds of the Fidelity Investments -Registered Trademark- group of
companies; Janus Aspen Series; J.P. Morgan Series Trust II; The Legends Fund,
Inc. (THE LEGENDS FUND); MFS Variable Insurance Trust Funds (MFS FUNDS), and
The Universal Institutional Funds, Inc., managed by Morgan Stanley Asset
Management (MORGAN STANLEY UIF PORTFOLIOS). 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 34 Variable Account Options available under the Separate
Accounts:
<TABLE>
<S> <C>
DEUTSCHE ASSET MANAGEMENT VIT FUNDS THE LEGENDS FUND
Deutsche VIT EAFE -Registered Trademark- Harris Bretall Sullivan & Smith Equity Growth Portfolio
Equity Index Fund
Deutsche VIT Equity 500 Index Fund Scudder Kemper Value Portfolio
Deutsche VIT Small Cap Index Fund Zweig Asset Allocation Portfolio
Zweig Equity (Small Cap) Portfolio
FIDELITY'S VIP FUNDS
VIP Equity-Income Portfolio MFS FUNDS
VIP II Contrafund Portfolio MFS Capital Opportunities Portfolio
VIP III Growth & Income Portfolio MFS Emerging Growth Portfolio
VIP III Growth Opportunities Portfolio MFS Growth With Income Portfolio
VIP Growth Portfolio MFS Mid Cap Growth Portfolio
VIP III Mid Cap Portfolio MFS New Discovery Portfolio
JANUS ASPEN SERIES MORGAN STANLEY UIF PORTFOLIOS
Janus Aspen Aggressive Growth Portfolio Morgan Stanley UIF Asian Equity Portfolio
Janus Aspen Growth Portfolio Morgan Stanley UIF Emerging Markets Debt Portfolio
Janus Aspen Capital Appreciation Portfolio Morgan Stanley UIF High Yield Portfolio
Janus Aspen Balanced Portfolio Morgan Stanley UIF U.S. Real Estate Portfolio
Janus Aspen Worldwide Growth Portfolio
Janus Aspen Money Market Portfolio SELECT TEN PLUS DIVISIONS
Select Ten Plus Division-March
J.P. MORGAN SERIES TRUST II Select Ten Plus Division-June
J.P. Morgan International Opportunities Portfolio Select Ten Plus Division-September
J.P. Morgan Bond Portfolio Select Ten Plus Division-December
</TABLE>
Part I of this prospectus describes the contract and provides background
information about the Separate Accounts. Part II of this prospectus (beginning
on page 36) provides information about the investment activities and operations
of the Select Ten Plus Divisions, including their investment policies.
<PAGE>
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 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 contract that you should know
before investing. You should read this prospectus and any supplements, and
retain them for future reference. This prospectus isn't valid unless provided
with the current Portfolio prospectuses, which you should also read.
For further information and assistance, contact our Administrative Office at
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 us at
1-800-325-8583.
Registration statements relating to the contract, which include a Statement of
Additional Information (SAI) dated May 1, 2000, have been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A free copy of the SAI is available by writing to or calling
our Administrative Office. The table of contents for the SAI is found in
Appendix C.
*NOTE: A CONTRACT ISSUED IN OREGON WILL BE A SINGLE PREMIUM VARIABLE ANNUITY
RATHER THAN A FLEXIBLE PREMIUM VARIABLE ANNUITY. ALL REFERENCES TO FLEXIBLE
CONTRIBUTIONS ARE SINGLE CONTRIBUTIONS FOR ANY CONTRACT ISSUED IN OREGON.
THE CONTRACT IS NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, ANY
BANK, NOR IS IT INSURED BY THE FDIC. IT IS SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
CONTRACT OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
YOU CAN REVIEW AND COPY INFORMATION ABOUT THE CONTRACT AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. FOR HOURS OF OPERATION OF THE PUBLIC
REFERENCE ROOM, PLEASE CALL 1-800-SEC-0330. YOU MAY ALSO OBTAIN INFORMATION
ABOUT THE CONTRACT ON THE SEC'S INTERNET SITE AT http://www.sec.gov. COPIES OF
THAT INFORMATION ARE ALSO AVAILABLE, AFTER PAYING A DUPLICATING FEE, BY
ELECTRONIC REQUEST TO [email protected] OR BY WRITING THE SEC'S PUBLIC
REFERENCE SECTION, WASHINGTON, D.C. 20459-0102.
The date of this prospectus is May 1, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C>
SECTION 1 - SUMMARY
Your Variable Annuity Contract..................................................................1
Your Benefits...................................................................................1
How Your Contract is Taxed......................................................................1
Your Contributions..............................................................................1
Your Investment Options.........................................................................1
Variable Account Options........................................................................1
Account Value, Adjusted Account Value and Cash Value ...........................................2
Transfers.......................................................................................2
Charges and Fees................................................................................2
Withdrawals.....................................................................................2
Your Initial Right to Revoke....................................................................2
Risk/Return Summary: Investments and Risks.....................................................3
Table of Annual Fees and Expenses...............................................................4
Examples........................................................................................7
SECTION 2 - 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
Deutsche Asset Management VIT Funds............................................................10
Fidelity's Variable Insurance Products Funds...................................................10
Janus Aspen Series.............................................................................12
J.P. Morgan Series Trust II....................................................................13
The Legends Fund...............................................................................13
MFS Funds......................................................................................14
Morgan Stanley UIF Portfolios..................................................................15
The Select Ten Plus Divisions of Separate Account Ten..........................................16
Fixed Accounts.................................................................................16
Guaranteed Rate Options..................................................................16
Renewals of GRO Accounts..............................................................17
Market Value Adjustments..............................................................17
Systematic Transfer Option...............................................................18
SECTION 4 - DEDUCTIONS AND CHARGES
Separate Account Charges.......................................................................18
Annual Administrative Charge...................................................................18
Portfolio and Division Charges.................................................................18
Reduction or Elimination of Separate Account or Administrative Charges.........................19
State Premium Tax Deduction....................................................................19
Contingent Withdrawal Charge...................................................................19
Reduction or Elimination of the Contingent Withdrawal Charge...................................19
Transfer Charge................................................................................20
Hardship Waiver................................................................................20
Tax Reserve....................................................................................20
<PAGE>
SECTION 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract..............................................................20
Your Account Value.............................................................................21
Units in Our Separate Accounts.................................................................21
How We Determine Unit Value....................................................................21
Transfers......................................................................................22
Excessive Trading..............................................................................23
Withdrawals....................................................................................23
Assignments....................................................................................23
Death Benefits and Similar Benefit Distributions...............................................24
Annuity Benefits...............................................................................24
Annuities......................................................................................24
Fixed Annuity Payments.........................................................................25
Timing of Payment..............................................................................25
How You Make Requests and Give Instructions....................................................25
SECTION 6 - VOTING RIGHTS
Portfolio Voting Rights........................................................................26
How We Determine Your Voting Shares............................................................26
How Portfolio Shares Are Voted.................................................................26
How Separate Account Ten Interests Are Voted...................................................26
Separate Account Voting Rights.................................................................27
SECTION 7 - TAX ASPECTS OF THE CONTRACT
Introduction...................................................................................27
Your Contract is an Annuity....................................................................27
Taxation of Annuities Generally................................................................27
Distribution-at-Death Rules....................................................................28
Diversification Standards......................................................................29
Tax-Favored Retirement Programs................................................................29
Federal and State Income Tax Withholding.......................................................29
Impact of Taxes on Integrity...................................................................29
Transfers Among Investment Options.............................................................29
SECTION 8 - ADDITIONAL INFORMATION
Systematic Withdrawals.........................................................................29
Income Plus Withdrawal Program.................................................................30
Dollar Cost Averaging..........................................................................30
Systematic Transfer Program....................................................................30
Customized Asset Rebalancing...................................................................31
Callan Asset Allocation and Rebalancing Program................................................31
Systematic Contributions.......................................................................32
Performance Information........................................................................32
SECTION 9 - PRIOR CONTRACTS
Death Benefit Information for Contacts Issued Before January 1, 1997...........................33
Reduction in Charges...........................................................................34
Contingent Withdrawal Charge ..................................................................34
Retirement Date................................................................................35
Contracts Issued to Oregon Residents...........................................................35
Callan Asset Allocation and Rebalancing Program................................................35
Hardship Waivers...............................................................................35
<PAGE>
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............................................................................37
Dow Jones Industrial Average...................................................................38
Risk Factors...................................................................................38
SECTION 2 - PERFORMANCE INFORMATION
Performance History of the Dogs of the Dow Strategy - Comparison of 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....................................................................41
SECTION 4 - MANAGEMENT
The Investment Adviser.........................................................................41
The Sub-Adviser................................................................................42
APPENDIX A - FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNTS..................................43
APPENDIX B - ILLUSTRATION OF A MARKET VALUE ADJUSTMENT.........................................46
APPENDIX C - TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION..........................49
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
<PAGE>
GLOSSARY
ACCOUNT VALUE - the value of your contract, which consists of 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 - the person upon whose life an annuity benefit and death benefit are
based.
BUSINESS DAY - any day that the New York Stock Exchange is open.
CASH VALUE - your Adjusted Account Value reduced by any withdrawal charges
and/or any pro rata annual administrative charges that may apply.
ENHANCED RATE - a higher rate of interest we may declare for the first year of
any GRO Account that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period.
FIXED ACCOUNTS - Guaranteed Rate Options and the Systematic Transfer Option.
GRO - Guaranteed Rate Option, which offer durations of two, three, five, seven
and ten years and lock in a fixed annual effective interest rate.
GRO VALUE - the value of a GRO Account. The GRO Value at the expiration of a GRO
Account, assuming you haven't withdrawn or transferred any amounts, will be the
amount you put in plus interest at the Guaranteed Interest Rate.
GUARANTEE PERIOD -- the duration of your GRO Account.
GUARANTEED INTEREST RATE - a fixed annual effective interest rate that we
declare for the duration of your GRO Account.
INVESTMENT OPTIONS - Variable Account Options and Fixed Accounts, collectively.
MARKET VALUE ADJUSTMENT ("MVA") - an upward or downward adjustment (never below
the Minimum Value) made to the value of your GRO Account for withdrawals,
surrenders, transfers and certain other transactions made before the GRO Account
expires.
MINIMUM VALUE - an amount equal to your net allocation to a GRO Account, less
prior withdrawals (and associated charges), accumulated at 3% interest annually,
less any administrative charge.
PORTFOLIO - an investment portfolio of a mutual fund in which Separate Account
II invests its assets.
RETIREMENT DATE - the date you elect annuity payments to begin. The Retirement
Date can't be later than your 98th birthday, or earlier if required by law.
SEPARATE 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.
<PAGE>
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 (INTEGRITY). When it uses the terms "you" and "your" it
means the Annuitant, who is the person upon whose life the annuity benefit and
the death benefit are based. That person is usually the owner of the contract.
If the Annuitant doesn't own the contract, the owner has all the rights under
the contract until annuity payments begin. If there are joint owners, they share
the contract rights and any changes or transactions must be signed by both of
them. The death of the first joint owner will determine the timing of
distribution.
If you want to invest for retirement by buying a Pinnacle Variable Annuity,
complete a Customer Profile form (unless your state requires an application) and
send it to us along with at least the minimum initial contribution. Because the
premium is flexible, additional contributions can be any amount you choose, as
long as they are above the minimum required contribution discussed below.
YOUR BENEFITS
Your contract has an Account Value, an annuity benefit and a death benefit.
These benefits are described in more detail below.
Your benefits under the annuity contract may be controlled by the usual tax
rules for annuities, including deferral of taxes on your investment growth until
you actually make a withdrawal. You should read Part I, Section 7, "Tax Aspects
of the Contract" for more information, and possibly consult a tax adviser. The
contract can also provide your benefits under tax-favored retirement programs,
which may be subject to special eligibility and contribution rules.
HOW YOUR CONTRACT IS TAXED
Under the current tax laws, any increases in the value of your contributions
won't be considered part of your taxable income until you make a withdrawal.
However, most of the withdrawals you make before you are 59 1/2 years old are
subject to a 10% federal tax penalty on the taxable portion of the amounts
withdrawn.
YOUR CONTRIBUTIONS
The minimum initial contribution is $1,000 ($3,000 in South Carolina and
Pennsylvania). Additional contributions 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 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
1
<PAGE>
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 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
these 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 withdrawals as often as you wish. Each withdrawal must be for at
least $300. You may withdraw up to 10% of your Account Value each contract year
with no withdrawal charges. After the first 10% within a contract year, there
will be a charge for any withdrawals you make, based upon the length of time
your money has been in your account. See 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 certain states. If you cancel your contract, we'll return your Account
Value, which may be more or less than your initial contribution. If your state
requires, upon cancellation we'll return your contribution without any
adjustments. We'll return the amount of any contribution to the Guaranteed Rate
Option upon cancellation.
2
<PAGE>
RISK/RETURN SUMMARY: INVESTMENTS AND RISKS
VARIABLE ANNUITY INVESTMENT GOALS
The investment goals of the Pinnacle Flexible Premium Variable Annuity are
protecting your investment, building for retirement and providing future income.
We strive to achieve these goals through extensive portfolio diversification and
superior portfolio management.
RISKS
An investment in any of the Variable Account Options carries with it certain
risks, including the risk that the value of your investment will decline and you
could lose money. This could happen if one of the issuers of the stocks becomes
financially impaired or if the stock market as a whole declines. Because most of
the Variable Account Options are in common stocks, there's also the inherent
risk that holders of common stock generally are behind creditors and holders of
preferred stock for payments in the event of the bankruptcy of a stock issuer.
The Select Ten Plus Divisions, Janus Aspen Aggressive Growth Portfolio and Janus
Aspen Capital Appreciation Portfolio are non-diversified, which means that they
invest a large amount of their assets in a very small number of issuers. As a
result, an investment in one of these Divisions or Portfolios may experience
greater fluctuations in value than an investment in a diversified Portfolio. In
addition, the non-diversified Divisions or Portfolios may be concentrated in one
or more market sectors. Concentration may involve addition risk because of the
decreased diversification of economic, financial and market risks.
There are certain risks that are specific to certain industries or market
sectors. Examples of this are industries that are highly regulated and could
experience declines due to burdensome regulations and industries such as the
tobacco industry that are the subject of lawsuits and governmental scrutiny.
Some issuers of stock refine, market and transport oil and related petroleum
products. These companies face the risks of price and availability of oil, the
level of demand for the products, refinery capacity and operating costs, the
cost of financing the exploration for oil and the increasing expenses necessary
to comply with environmental and other energy related regulations. Declining
U.S. crude oil production is likely to lead to increased dependence on foreign
sources of oil and to uncertain supply for refiners and the risk of
unpredictable supply disruptions. In addition, future scientific advances with
new energy sources could have a negative impact on the petroleum and natural gas
industries.
For a complete discussion of the risks associated with an investment in any
particular Portfolio, see the prospectus of that Portfolio. For a complete
discussion of the risks associated with an investment in the Divisions, see Part
II of this prospectus.
3
<PAGE>
TABLE OF ANNUAL FEES AND EXPENSES
<TABLE>
<S> <C>
Owner Transaction Expenses
- --------------------------
Sales Load on Purchases........................................................................... $0
Deferred Sales Load (as a percentage of contributions) (1).................................8% Maximum
Exchange Fee (2).................................................................................. $0
Annual Administrative Charge
- ----------------------------
Annual Administrative Charge*..................................................................... $30
* This charge applies only if the Account Value is less than $50,000 at the end of any contract
year before your Retirement Date. See "Annual Administrative Charge" in Part I, Section 4.
Annual Expenses of the Separate Accounts
(As a percentage of separate account value) (3)
- -----------------------------------------------
Mortality and Expense Risk Charge............................................................ 1.20%
Administrative Expenses...................................................................... .15%
-----
Total Separate Account Annual Expenses....................................................... 1.35%
-----
-----
Portfolio Annual Expenses After Waivers/reimbursements
(as a percentage of average net assets)
- ---------------------------------------
<CAPTION>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---- -------- --------
<S> <C> <C> <C>
Deutsche VIT EAFE -Registered Trademark- Equity Index......... 0.26% (4) 0.39% (4) 0.65% (4)
Deutsche VIT Equity 500 Index................................. 0.14% (4) 0.16% (4) 0.30% (4)
Deutsche VIT Small Cap Index.................................. 0.13% (4) 0.32% (4) 0.45% (4)
VIP Equity-Income: Initial Class.............................. 0.48% 0.08% 0.56% (5)
VIP II Contrafund: Initial Class.............................. 0.58% 0.07% 0.65% (5)
VIP III Growth & Income: Initial Class........................ 0.48% 0.11% 0.59% (5)
VIP III Growth Opportunities: Initial Class................... 0.58% 0.10% 0.68% (5)
VIP Growth: Service Class..................................... 0.58% 0.17% (6) 0.75% (5)
VIP III Mid Cap: Service Class................................ 0.57%(7) 0.50% (6) (7) 1.07% (7)
Harris Bretall Sullivan & Smith Equity Growth................. 0.65% 0.31% 0.96%
Scudder Kemper Value.......................................... 0.65% 0.31% 0.96%
Zweig Asset Allocation........................................ 0.90% 0.33% 1.23%
Zweig Equity (Small Cap)...................................... 1.05% 0.49% 1.54% (8)
Janus Aspen Aggressive Growth: Service Shares................. 0.65% (9) 0.27% (9) 0.92% (9)
Janus Aspen Growth: Service Shares............................ 0.65% (9) 0.27% (9) 0.92% (9)
Janus Aspen Capital Appreciation: Institutional Shares........ 0.65% (10) 0.04% (10) 0.69% (10)
Janus Aspen Balanced: Institutional Shares.................... 0.65% (10) 0.02% (10) 0.67% (10)
Janus Aspen Worldwide Growth: Institutional Shares............ 0.65% (10) 0.05% (10) 0.70% (10)
Janus Aspen Money Market: Institutional Shares................ 0.25% (10) 0.18% (10) 0.43% (10)
J.P. Morgan International Opportunities....................... 0.60% 0.60% (11) 1.20% (11)
J.P. Morgan Bond.............................................. 0.30% 0.45% 0.75%
MFS Capital Opportunities: Service Class...................... 0.75% 0.36% (12) (13) 1.11% (13)
MFS Emerging Growth: Service Class............................ 0.75% 0.29% (12) (13) 1.04% (13)
MFS Growth With Income: Service Class......................... 0.75% 0.33% (12) (13) 1.08% (13)
MFS Mid Cap Growth: Service Class............................. 0.75% 0.35% (12) (13) 1.10% (13)
MFS New Discovery: Service Class.............................. 0.90% 0.37% (12) (13) 1.27% (13)
Morgan Stanley UIF Asian Equity............................... 0.00% (14) 1.27% (14) 1.27% (14)
Morgan Stanley UIF Emerging Markets Debt...................... 0.45% (14) 0.98% (14) 1.43% (14)
Morgan Stanley UIF High Yield................................. 0.19% (14) 0.61% (14) 0.80% (14)
Morgan Stanley UIF U.S. Real Estate........................... 0.00% (14) 1.10% (14) 1.10% (14)
4
<PAGE>
Division Annual Expenses After Reimbursement
(as a percentage of average net assets)
- ---------------------------------------
<CAPTION>
Management Fees(15) Other Expenses(16) Total Annual Expenses(16)
------------------- ------------------ -------------------------
<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% .27% .77%
</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 Company for the Deutsche
Asset Management VIT Funds, the Portfolios will pay advisory fees at the
following annual percentage rates of the average daily net assets of each
Portfolio: 0.45% for the EAFE -Registered Trademark- Equity Index Fund, 0.20%
for the Equity 500 Index Fund and 0.35% for the Small Cap Index Fund. These
fees are accrued daily and paid monthly. Deutsche Asset Management has
voluntarily undertaken to waive its fees and to reimburse the Portfolios for
certain expenses so that the EAFE -Registered Trademark- Equity Index Fund,
Equity 500 Index Fund and Small Cap Index Fund Total Annual Expenses will not
exceed 0.65%, 0.30% and 0.45%, respectively. Without the waiver and
reimbursement, Total Annual Expenses for the year ended December 31, 1999
would have been as follows: 1.15% for the EAFE -Registered Trademark- Equity
Index Fund, 0.43% for the Equity 500 Index Fund and 1.18% for the Small Cap
Index Fund.
(5) Part of the brokerage commissions that certain of Fidelity's VIP Funds pay
was used to reduce the Portfolios' expenses. In addition, certain Portfolios, or
FMR on behalf of certain Portfolios, have arranged with their custodian to use
uninvested cash balances to reduce custodian expenses. Without these reductions,
the Total Annual Expenses presented in the table would have been .57% for VIP
Equity-Income Portfolio, .77% for VIP Growth Portfolio, .67% for VIP II
Contrafund Portfolio, .69% for VIP III Growth Opportunities Portfolio, and .60%
for VIP III Growth & Income Portfolio.
(6) The Other Expenses presented in the table reflect the payment of 0.10%
pursuant to a Rule 12b-1 Plan adopted by the underlying Mutual Funds.
(7) The investment adviser agreed to reimburse part of the expenses for the VIP
III Mid Cap Portfolio during the period. Without this reimbursement, the
Management Fee, Other Expenses and Total Annual Expenses would have been .57%,
2.84% (including the payment of .10% pursuant to the Rule 12b-1 Plan), and 3.41%
respectively for the VIP III Mid Cap Portfolio.
(8) Touchstone Advisors has agreed to reimburse each of The Legends Fund
Portfolios for Other Expenses (excluding management fees) above an annual rate
of .50% of average net assets for all Portfolios of The Legends Fund. Without
reimbursements, Total Annual Expenses for the Portfolio's fiscal year ended June
30, 1999 would have been 1.64% for the Zweig Equity (Small Cap) Portfolio.
Touchstone Advisors has reserved the right to withdraw or modify its policy of
expense reimbursement for the Portfolios, but doesn't intend to do so during
2000. In The Legends Fund's prospectus, see "Management of the Fund."
(9) Expenses are based on the estimated expenses that the new Service Shares
Class of each Portfolio expects to incur in its initial fiscal year. The Other
Expenses reflect the payment of 0.25% pursuant to a Rule 12b-1 Plan adopted by
the underlying Portfolios. All expenses are shown without the effect of expense
offset arrangements.
5
<PAGE>
(10) Expenses are based on expenses for the fiscal year ended December 31, 1999,
restated to reflect a reduction in the management fee for Aggressive Growth,
Growth, Balanced, Capital Appreciation and Worldwide Growth Portfolios. All
expenses are shown without the effect of expense offset arrangements.
(11) The information in this table has been restated to reflect a voluntary
agreement by Morgan Guaranty Trust Company of New York, an affiliate of JPMIM,
to reimburse the Trust to the extent certain expenses in any fiscal year exceed
1.20% of the average daily net assets of J.P. Morgan International Opportunities
Portfolio. Without this agreement, the Other Expenses and Total Annual Expenses
for the fiscal year ended December 31, 1999 would have been as follows: 1.38%
and 1.98% for the International Opportunities Portfolio.
(12) The Other Expenses reflect the payment of 0.20% pursuant to a Rule 12b-1
Plan adopted by the underlying Portfolios.
(13) MFS has contractually agreed, subject to reimbursement, to bear the
Portfolios' expenses so that the Other Expenses presented in the table do not
exceed 0.15% annually (this reimbursement does not include the 0.20% Rule 12b-1
fee described above or the expense offset arrangement described below). These
contractual fee arrangements will continue until at least May 1, 2001, unless
changed with the consent of the board of trustees that oversees the Portfolios.
In addition, each Portfolio has an expense offset arrangement that reduces its
custodian fee based upon the amount of cash it maintains with its custodian and
dividend disbursing agent. The Portfolios may enter into other similar
arrangements and directed brokerage arrangements, which would also have the
effect of reducing their expenses. The Other Expenses presented in the table do
not take into account these expense offset reductions, and are therefore higher
than the actual expenses of the Portfolios. Without these contractual fee
arrangements and expense offset arrangements, the Total Annual Expenses
presented in the table are estimated to be 1.22% for the Capital Opportunities
Portfolio, 1.41% for the Mid Cap Growth Portfolio, and 2.69% for the New
Discovery Portfolio.
(14) The Portfolios' expenses were voluntarily waived and reimbursed by the
Portfolios' investment advisers. Without the waiver and/or reimbursement, the
Management Fee, Other Expenses and Total Annual Expenses for the fiscal year
ended December 31, 1999 would have been as follows: .80%, 2.23% and 3.03% for
the Asian Equity Portfolio; .80%, 0.98% and 1.78% for the Emerging Markets Debt
Portfolio; .50%, 0.61% and 1.11% for the High Yield Portfolio; and .80%, 1.10%
and 1.90% for the U.S. Real Estate Portfolio. MSAM or Miller Anderson &
Sherrerd, LLP may modify or terminate the waivers or reductions at any time.
(15) Touchstone Advisors will pay a portion of its Management Fee to National
Asset for its services under a sub-advisory agreement at an annual rate of .10%
of the Divisions' average daily net assets up to $100 million and .05% of the
Divisions' average daily net assets in excess of $100 million. Touchstone
Advisors has guaranteed it or an affiliate will pay National Asset an annual
minimum sub-advisory fee of $50,000.
(16) Touchstone Advisors has agreed to reimburse each Division for operating
expenses (excluding management fees) above an annual rate of .35% of each
Division's average net assets. Without that reimbursement, Other Expenses and
Total Annual Expenses would have been .55% and 1.05%, respectively, for the
March Division, .96% and 1.46%, respectively, for the June Division, and .63%
and 1.13%, respectively, for the September Division. The December Division is
not currently receiving an expense reimbursement. Touchstone Advisors reserves
the right to withdraw or modify its policy of expense reimbursement for the
Divisions, but doesn't intend to do so during 2000.
6
<PAGE>
EXAMPLES
The examples below show the expenses on a $1,000 investment, assuming a $60,000
average contract value and a 5% annual rate of return on assets.
CUMULATIVE EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE
END OF THE APPLICABLE PERIOD:
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Deutsche VIT EAFE -Registered Trademark-Equity Index.............. $100.99 $124.75 $150.98 $238.35
Deutsche VIT Equity 500 Index..................................... $ 97.41 $113.87 $132.66 $200.80
Deutsche VIT Small Cap Index...................................... $ 98.94 $118.54 $140.54 $217.06
VIP Equity-Income: Initial Class.................................. $100.07 $121.96 $146.29 $228.82
VIP II Contrafund: Initial Class.................................. $100.99 $124.75 $150.98 $238.35
VIP III Growth & Income: Initial Class............................ $100.38 $122.89 $147.86 $232.01
VIP III Growth Opportunities: Initial Class....................... $101.30 $125.68 $152.54 $241.51
VIP Growth: Service Class......................................... $102.02 $127.84 $156.16 $248.84
VIP III Mid Cap: Service Class.................................... $105.30 $137.70 $172.61 $281.68
Harris Bretall Sullivan & Smith Equity Growth..................... $104.17 $134.32 $166.98 $270.51
Scudder Kemper Value.............................................. $104.17 $134.32 $166.98 $270.51
Zweig Asset Allocation............................................ $106.94 $142.60 $180.74 $297.71
Zweig Equity (Small Cap).......................................... $110.11 $152.05 $196.35 $328.03
Janus Aspen Aggressive Growth: Service Shares..................... $103.76 $133.09 $164.93 $266.42
Janus Aspen Growth: Service Shares................................ $103.76 $133.09 $164.93 $266.42
Janus Aspen Capital Appreciation: Institutional Shares............ $101.40 $125.99 $153.06 $242.56
Janus Aspen Balanced: Institutional Shares ....................... $101.20 $125.37 $152.02 $240.46
Janus Aspen Worldwide Growth: Institutional Shares................ $101.51 $126.30 $153.57 $243.61
Janus Aspen Money Market: Institutional Shares ................... $ 98.74 $117.92 $139.49 $214.90
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
MFS Capital Opportunities: Service Class.......................... $105.71 $138.93 $174.65 $285.72
MFS Emerging Growth: Service Class................................ $104.99 $136.78 $171.08 $278.65
MFS Growth With Income: Service Class............................. $105.40 $138.01 $173.12 $282.69
MFS Mid Cap Growth: Service Class................................. $105.61 $138.62 $174.14 $284.71
MFS New Discovery: Service Class.................................. $107.35 $143.82 $182.77 $301.68
Morgan Stanley UIF Asian Equity................................... $107.35 $143.82 $182.77 $301.68
Morgan Stanley UIF Emerging Markets Debt.......................... $108.99 $148.71 $190.84 $317.38
Morgan Stanley UIF High Yield .................................... $102.53 $129.39 $158.75 $254.04
Morgan Stanley UIF 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 TO ANNUITIZE OR DON'T
SURRENDER YOUR CONTRACT AT THE END OF THE SPECIFIED PERIOD (I.E., NO DEFERRED
SALES LOAD CHARGED):
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Deutsche VIT EAFE -Registered Trademark- Equity Index.....$20.99 $64.75 $110.98 $238.35
Deutsche VIT Equity 500 Index.............................$17.41 $53.87 $ 92.66 $200.80
Deutsche VIT Small Cap Index..............................$18.94 $58.54 $100.54 $217.06
VIP Equity-Income: Initial Class..........................$20.07 $61.96 $106.29 $228.82
VIP II Contrafund: Initial Class..........................$20.99 $64.75 $110.98 $238.35
VIP III Growth & Income: Initial Class....................$20.38 $62.89 $107.86 $232.01
VIP III Growth Opportunities: Initial Class...............$21.30 $65.68 $112.54 $241.51
VIP Growth: Service Class.................................$22.02 $67.84 $116.16 $248.84
VIP III Mid Cap: Service Class............................$25.30 $77.70 $132.61 $281.68
Harris Bretall Sullivan & Smith Equity Growth.............$24.17 $74.32 $126.98 $270.51
Scudder Kemper Value......................................$24.17 $74.32 $126.98 $270.51
Zweig Asset Allocation....................................$26.94 $82.60 $140.74 $297.71
Zweig Equity (Small Cap)..................................$30.11 $92.05 $156.35 $328.03
Janus Aspen Aggressive Growth: Service Shares.............$23.76 $73.09 $124.93 $266.42
Janus Aspen Growth: Service Shares........................$23.76 $73.09 $124.93 $266.42
Janus Aspen Capital Appreciation: Institutional Shares....$21.40 $65.99 $113.06 $242.56
Janus Aspen Balanced: Institutional Shares................$21.20 $65.37 $112.02 $240.46
Janus Aspen Worldwide Growth: Institutional Shares........$21.51 $66.30 $113.57 $243.61
Janus Aspen Money Market: Institutional Shares............$18.74 $57.92 $ 99.49 $214.90
J.P. Morgan International Opportunities...................$26.63 $81.68 $139.22 $294.73
J.P. Morgan Bond..........................................$22.02 $67.84 $116.16 $248.84
MFS Capital Opportunities: Service Class..................$25.71 $78.93 $134.65 $285.72
MFS Emerging Growth: Service Class........................$24.99 $76.78 $131.08 $278.65
MFS Growth With Income: Service Class.....................$25.40 $78.01 $133.12 $282.69
MFS Mid Cap Growth: Service Class.........................$25.61 $78.62 $134.14 $284.71
MFS New Discovery: Service Class..........................$27.35 $83.82 $142.77 $301.68
Morgan Stanley UIF Asian Equity...........................$27.35 $83.82 $142.77 $301.68
Morgan Stanley UIF Emerging Markets Debt..................$28.99 $88.71 $150.84 $317.38
Morgan Stanley UIF High Yield.............................$22.53 $69.39 $118.75 $254.04
Morgan Stanley UIF U.S. Real Estate.......................$25.61 $78.62 $134.14 $284.71
Select Ten Plus Division-March............................$23.04 $70.93 $121.33 $259.22
Select Ten Plus Division-June.............................$23.04 $70.93 $121.33 $259.22
Select Ten Plus Division-September........................$23.04 $70.93 $121.33 $259.22
Select Ten Plus Division-December.........................$23.04 $70.93 $121.33 $259.22
</TABLE>
These examples assume the current charges that are borne by 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. Integrity is a subsidiary of W&S, a mutual life
insurance company originally organized under the laws of the State of Ohio on
February 23, 1888.
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 your contract 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:
X 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;
X register or end the registration of the Separate Accounts under the 1940
Act;
X operate our Separate Accounts under the direction of a committee or
discharge a committee at any time
9
<PAGE>
(the committee may be composed of a majority of persons who are "interested
persons" of Integrity under the 1940 Act);
X restrict or eliminate any voting rights of owners or others who have voting
rights that affect our Separate Accounts;
X cause one or more Options to invest in a mutual fund other than or in
addition to the Portfolios;
X 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. Some of the Portfolios' investment advisers may
compensate us for providing administrative services in connection with the
Portfolios. This compensation is paid from the investment adviser's assets. FOR
A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION ON ANY PORTFOLIO, CALL OUR
ADMINISTRATIVE OFFICE TOLL-FREE AT 1-800-325-8583.
DEUTSCHE ASSET MANAGEMENT VIT FUNDS
The investment adviser for the Deutsche Asset Management VIT Funds is Bankers
Trust Company. Bankers Trust Company is an indirect wholly owned subsidiary of
Deutsche Bank AG. The firm is recognized under the marketing name of Deutsche
Asset Management.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Following is a summary of the
investment objectives of the Deutsche Asset Management VIT Funds. We can't
guarantee that these objectives will be met. YOU SHOULD READ THE DEUTSCHE ASSET
MANAGEMENT VIT FUNDS PROSPECTUSES CAREFULLY BEFORE INVESTING.
DEUTSCHE VIT EAFE -Registered Trademark- EQUITY INDEX FUND
The EAFE -Registered Trademark- Equity Index Fund seeks to replicate, as
closely as possible (before expenses are deducted), the total return of the
Morgan Stanley Capital International (MSCI) Europe, Australasia, and Far East
(EAFE -Registered Trademark- Index, a capitalization-weighted index of common
stock of approximately 1,100 companies located outside of the U.S. The
Portfolio invests primarily in a statistically selected sample of the common
stocks of companies that comprise the EAFE -Registered Trademark-Index that
are determined to represent the industry diversification of the entire EAFE
- -Registered Trademark- Index.
DEUTSCHE VIT EQUITY 500 INDEX FUND
The Equity 500 Index Fund seeks to replicate, as closely as possible (before
expenses are deducted), the total return of the Standard & Poor's 500
Composite Stock Price Index (the S&P 500 -Registered Trademark-, an index
used to portray the performance of common stock of 500 large U.S. companies.
The Portfolio invests primarily in a statistically selected sample of the
common stocks of companies that comprise the S&P 500 -Registered Trademark-
Index that are determined to represent the industry diversification of the
entire S&P 500 -Registered Trademark- Index.
DEUTSCHE VIT SMALL CAP INDEX FUND
The Small Cap Index Fund seeks to replicate, as closely as possible (before
expenses are deducted), the total return of the Russell 2000 Small Stock
Index (the RUSSELL 2000 -Registered Trademark-, an index used to portray the
performance of common stock of 2,000 small U.S. companies. The Portfolio
invests primarily in a statistically selected sample of the common stocks of
companies that comprise the Russell 2000 -Registered Trademark- Index that
are determined to represent the industry diversification of the entire
Russell 2000 -Registered Trademark- Index.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUNDS
Each of Fidelity's VIP Funds is a diversified mutual fund registered with the
SEC. Fidelity Management & Research Company (FMR) serves as the investment
adviser to each Portfolio.
10
<PAGE>
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 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.
11
<PAGE>
JANUS ASPEN SERIES
Each portfolio of the Janus Aspen Series is a mutual fund registered with the
SEC. Janus Capital Corporation serves as the investment adviser to each
Portfolio.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
goals of the Portfolios of the Janus Aspen Series. There are no guarantees that
these objectives will be met. YOU SHOULD READ THE JANUS ASPEN SERIES
PROSPECTUSES CAREFULLY BEFORE INVESTING.
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Janus Aspen Aggressive Growth Portfolio seeks long-term growth of capital. It is
a non-diversified portfolio that pursues its objective by normally investing at
least 50% of its equity assets in securities issued by medium-sized companies.
Medium-sized companies are those whose market capitalizations fall within the
range of companies in the S&P MidCap 400 Index. Market capitalization is a
commonly used measure of the size and value of a company. The market
capitalizations within the Index will vary, but as of December 31, 1999, they
ranged from approximately $170 million to $37 billion.
JANUS ASPEN GROWTH PORTFOLIO
Janus Aspen Growth Portfolio seeks long-term growth of capital in a manner
consistent with the preservation of capital. It is a diversified portfolio that
pursues its objective by investing primarily in common stocks selected for their
growth potential. Although the Portfolio can invest in companies of any size, it
generally invests in larger, more established companies.
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO
Janus Aspen Capital Appreciation Portfolio seeks long-term growth of capital. It
is a non-diversified portfolio that pursues its objective by investing primarily
in common stocks selected for their growth potential. The Portfolio may invest
in companies of any size, from larger, well-established companies to smaller,
emerging growth companies.
JANUS ASPEN BALANCED PORTFOLIO
Janus Aspen Balanced Portfolio seeks long-term capital growth, consistent with
capital preservation and balanced by current income. It is a diversified
portfolio that pursues its objective by normally investing 40-60% of its assets
in securities selected primarily for their growth potential and 40-60% of its
assets in securities selected primarily for their income potential. The
Portfolio normally invests at least 25% of its assets in fixed-income
securities.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Janus Aspen Worldwide Growth Portfolio seeks long-term growth of capital in a
manner consistent with the preservation of capital. It is a diversified
portfolio that pursues its objective by investing primarily in common stocks of
companies of any size throughout the world. The Portfolio normally invests in
issuers from at least five different countries, including the United States. The
Portfolio may at times invest in fewer than five countries or even a single
country.
JANUS ASPEN MONEY MARKET PORTFOLIO
Janus Aspen Money Market Portfolio seeks maximum current income to the extent
consistent with stability of capital. There is no guarantee that the Portfolio
will meet its investment goal or be able to maintain a stable net asset value of
$1.00 per share. The Portfolio will invest in high quality, short-term money
market instruments that present minimal credit risks, as determined by Janus
Capital. The Portfolio may invest only in U.S. dollar-denominated instruments
that have a remaining maturity of 397 days or less (as calculated pursuant to
Rule 2a-7 under the 1940 Act) and will maintain a dollar-weighted average
portfolio maturity of 90 days or less.
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J.P. MORGAN SERIES TRUST II
Each portfolio of the J.P. Morgan Series Trust II is a diversified mutual fund
registered with the SEC. J.P. Morgan Investment Management Inc. is the
investment adviser to the J.P. Morgan Series Trust II.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of the J.P. Morgan Series Trust II. There is no
guarantee that these objectives will be met. YOU SHOULD READ THE PROSPECTUS FOR
J.P. MORGAN SERIES TRUST II CAREFULLY BEFORE INVESTING.
J.P. MORGAN BOND PORTFOLIO
J.P. Morgan Bond Portfolio seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Although the net asset
value of the Portfolio will fluctuate, the Portfolio attempts to preserve the
value of its investments to the extent consistent with its objective.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO
J.P. Morgan International Opportunities Portfolio seeks to provide a high total
return from a portfolio of equity securities of foreign corporations. The
Portfolio is designed for investors who have long-term investment goals and who
want to diversify their investments by adding international equities, taking
advantage of investment opportunities outside the U.S. The Portfolio seeks to
meet its investment goal primarily through stock valuation and selection.
THE LEGENDS FUND
The Legends Fund is an open-end management investment company registered with
the SEC. Touchstone Advisors, Inc. is the investment adviser to The Legends
Fund. Touchstone Advisors has entered into a sub-advisory agreement with a
professional manager to invest the assets of each of its Portfolios. The
sub-adviser for each Portfolio is listed below.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Following is a summary of the
investment objectives of The Legends Fund Portfolios. We can't guarantee that
these objectives will be met. YOU SHOULD READ THE LEGENDS FUND PROSPECTUS
CAREFULLY BEFORE INVESTING.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
Harris Bretall Sullivan & Smith Equity Growth Portfolio seeks long-term capital
appreciation. It invests primarily in stocks of established companies with
proven records of superior and consistent earnings growth. In selecting equity
securities for the Portfolio, the sub-adviser looks for successful companies
that have exhibited superior growth in revenues and earnings, strong product
lines and proven management ability over a variety of business cycles. The
Portfolio may invest all or a portion of its assets in cash and cash equivalents
if the sub-adviser considers the equities markets to be overvalued.
Harris Bretall Sullivan & Smith, LLC is the sub-adviser to the Portfolio.
SCUDDER KEMPER VALUE PORTFOLIO
Scudder Kemper Value Portfolio seeks long-term capital appreciation, with
current income as its secondary objective. It invests primarily in a diversified
portfolio of the stocks of large U.S. companies with a history of delivering
rising earnings and growing dividends that the sub-adviser believes to be
undervalued, or that have a low price to earnings ratio. These companies usually
have a minimum market capitalization of $1 billion. Scudder Kemper Investors,
Inc. is the sub-adviser to the Portfolio.
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ZWEIG ASSET ALLOCATION PORTFOLIO
Zweig Asset Allocation Portfolio seeks long-term capital appreciation and, to a
lesser extent, dividend income, while reducing portfolio exposure to market
risk. The sub-adviser uses a computer-driven stock selection model that ranks
approximately 600 of the most liquid stocks as determined by the sub-adviser
using various measures, including earnings, relative valuation, and changes in
analysts' earnings estimates, and based on those rankings within each industry
group, chooses up to 150 stocks for the Portfolio. Zweig/Glaser Advisers is the
sub-adviser to the Portfolio.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO
Zweig Equity (Small Cap) Portfolio seeks long-term capital appreciation while
striving to limit exposure to market risk. Under normal circumstances, the
Portfolio will invest primarily in small company stocks with market
capitalizations between $250 million and $1.5 billion, but may have some of its
assets invested in larger company stocks. Zweig/Glaser Advisers is the
sub-adviser to the Portfolio.
MFS FUNDS
Each portfolio of the MFS Variable Insurance Trust is a diversified mutual fund
registered with the SEC. Massachusetts Financial Services Company is the
investment adviser to the MFS Funds.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of the MFS Funds. There is no guarantee that these
objectives will be met. YOU SHOULD READ THE PROSPECTUS FOR MFS VARIABLE
INSURANCE TRUST CAREFULLY BEFORE INVESTING.
MFS CAPITAL OPPORTUNITIES PORTFOLIO
MFS Capital Opportunities Portfolio seeks capital appreciation by normally
investing at least 65% of its total assets in common stocks and related
securities. The Portfolio focuses on companies that MFS believes have favorable
growth prospects and attractive valuations based on current and expected
earnings or cash flow.
MFS EMERGING GROWTH PORTFOLIO
MFS Emerging Growth Portfolio seeks long term growth of capital by normally
investing at least 65% of its total assets in common stocks and related
securities of emerging growth companies. Emerging growth companies are companies
that MFS believes are either (1) early in their life cycle but which have the
potential to become major enterprises, or (2) major enterprises whose rates of
earnings growth are expected to accelerate because of special factors, such as
rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment. Emerging growth companies may be of any
size, and MFS would expect these companies to have products, technologies,
management, markets and opportunities that will facilitate earnings growth over
time that is well above the growth rate of the overall economy and the rate of
inflation.
MFS GROWTH WITH INCOME PORTFOLIO
MFS Growth With Income Portfolio seeks to provide reasonable current income and
long-term growth of capital and income by normally investing at least 65% of its
total assets in common stocks and related securities. While the Portfolio may
invest in companies of any size, it generally focuses on companies with larger
market capitalizations that MFS believes have sustainable growth prospects and
attractive valuations based on current and expected earnings or cash flow. The
Portfolio will also seek to generate gross income equal to approximately 90% of
the dividend yield on the Standard & Poor's 500 Composite Index.
MFS MID CAP GROWTH PORTFOLIO
MFS Mid Cap Growth Portfolio seeks long term growth of capital by normally
investing at least 65% of its total assets in common stocks and related
securities of companies with medium market capitalization that MFS believes have
above-average growth potential. Medium market capitalization companies are
defined by the Portfolio as
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companies with market capitalizations equaling or exceeding $250 million but not
exceeding the top of the Russell Midcap Growth Index range at the time of the
Portfolio's investment. Companies whose market capitalizations fall below $250
million or exceed the top of the Russell Midcap Growth Index range after
purchase continue to be considered medium-capitalization companies for purposes
of the Portfolio's 65% investment policy. As of February 29, 2000, the top of
the Russell Midcap Growth Index range was $59.6 billion.
MFS NEW DISCOVERY PORTFOLIO
MFS New Discovery Portfolio seeks capital appreciation by normally investing at
least 65% of its total assets in common stocks and related securities of
emerging growth companies. Emerging growth companies are companies that MFS
believes offer superior prospects for growth and are either (1) early in their
life cycle but which have the potential to become major enterprises, or (2)
major enterprises whose rates of earnings growth are expected to accelerate
because of special factors, such as rejuvenated management, new products,
changes in consumer demand, or basic changes in the economic environment. While
emerging growth companies may be of any size, the Portfolio will generally focus
on smaller cap emerging growth companies that are early in their life cycle. MFS
would expect these companies to have products, technologies, management, markets
and opportunities that will facilitate earnings growth over time that is well
above the growth rate of the overall economy and the rate of inflation.
MORGAN STANLEY UIF PORTFOLIOS
Each of the Morgan Stanley UIF Portfolios is a diversified mutual fund
registered with the SEC. Morgan Stanley Dean Witter Investment Management, Inc.
(MSDW INVESTMENT MANAGEMENT) is the investment adviser for the Emerging Markets
Debt, U.S. Real Estate, and Asian Equity Portfolios. MSDW Investment Management
changed its name from Morgan Stanley Asset Management (MSAM) on December 1,
1998, but continues to do business in certain instances using the name Morgan
Stanley Asset Management. Miller Anderson & Sherrerd, LLP (MAS) is the
investment adviser for the High Yield Portfolio. MSAM and MAS are subsidiaries
of Morgan Stanley Dean Witter & Co.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Morgan Stanley UIF Portfolios. There is no guarantee that
these objectives will be met. YOU SHOULD READ THE MORGAN STANLEY UIF PROSPECTUS
CAREFULLY BEFORE INVESTING.
MORGAN STANLEY UIF ASIAN EQUITY PORTFOLIO
Morgan Stanley UIF Asian Equity Portfolio seeks long-term capital appreciation
by investing primarily in a diversified portfolio of equity securities of Asian
issuers (excluding Japan). The adviser employs a disciplined, value-oriented
approach to security selection, focusing on larger companies with strong
management teams. The adviser evaluates top-down country risk factors and
opportunities when determining position sizes and overall exposure to individual
markets.
MORGAN STANLEY UIF EMERGING MARKETS DEBT PORTFOLIO
Morgan Stanley UIF Emerging Markets Debt Portfolio seeks high total return by
investing primarily in fixed income securities of government and
government-related issuers and, to a lesser extent, of corporate issuers in
emerging market countries. The adviser seeks high total return by investing in a
portfolio of emerging market debt that offers low correlation to many other
asset classes. Using macroeconomic and fundamental analysis, the adviser seeks
to identify developing countries that are undervalued and have attractive or
improving fundamentals. After the country allocation is determined, the sector
and security selection is made within each country.
MORGAN STANLEY UIF HIGH YIELD PORTFOLIO
Morgan Stanley UIF High Yield Portfolio seeks above-average total return over a
market cycle of three to five years by investing primarily in high yield
securities (commonly referred to as "junk bonds"). The Portfolio may also invest
in investment grade fixed income securities, including U.S. government
securities, corporate bonds and
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mortgage securities. The Portfolio may invest to a limited extent in foreign
fixed income securities, including emerging market securities.
MORGAN STANLEY UIF U.S. REAL ESTATE PORTFOLIO
Morgan Stanley UIF U.S. Real Estate Portfolio seeks to achieve above-average
current income and long-term capital appreciation by investing primarily in
equity securities of U.S. and non-U.S. companies in the U.S. real estate
industry, including real estate investment trusts ("REITs") and real estate
operating companies.
THE SELECT TEN PLUS 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 under the contract offered by this prospectus.
Touchstone 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."
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.
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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 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.
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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 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 your Account Value in the Variable Account Options. This
daily expense rate can't be increased without your consent. Of the 1.35% total
charge, .15% is used to reimburse us for administrative expenses not covered by
the annual administrative charge described below. We deduct the remaining 1.20%
for assuming the expense risk (.85%) and the mortality risk (.35%) under the
contract. The expense risk is the risk that our actual expenses of administering
the contract will exceed the annual administrative expense charge. Mortality
risk, as used here, refers to the risk we take that annuitants, as a class of
persons, will live longer than estimated and we will be required to pay out more
annuity benefits than anticipated. The relative proportion of the mortality and
expense risk charge may be changed, but the total 1.20% effective annual risk
charge can't be increased.
We may realize a gain from these daily charges to the extent they aren't needed
to meet the actual expenses incurred.
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
before your Retirement Date, we charge an annual administrative charge of $30.
This charge is deducted pro rata from your Account Value in each Investment
Option. The part of the charge deducted from the Variable Account Options
reduces the number of Units we credit to you. The part of the charge deducted
from the Fixed Accounts is withdrawn in dollars. The annual administrative
charge is pro-rated in the event of the Annuitant's retirement, death,
annuitization or contract termination during a contract year.
PORTFOLIO 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.
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REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
We can reduce or eliminate the separate account or administrative charges for
individuals or groups of individuals if we anticipate expense savings. We may do
this based on the size and type of the group or the amount of the contribution.
We won't unlawfully discriminate against any person or group if we reduce or
eliminate these charges.
STATE PREMIUM TAX DEDUCTION
We won't deduct state premium taxes from your contributions before investing
them in the Investment Options, unless required by your state law. If the
Annuitant elects an annuity benefit, we'll deduct any applicable state premium
taxes from the amount available for the annuity benefit. State premium taxes
currently range up to 4%.
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 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
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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.
HARDSHIP WAIVER
We can waive contingent withdrawal charges on full or partial withdrawal
requests of $1,000 or more under a hardship circumstance. We can also waive the
Market Value Adjustment on any amounts withdrawn from the GRO Accounts. Hardship
circumstances include the owner's (1) confinement to a nursing home, hospital or
long term care facility, (2) diagnosis of terminal illness with any medical
condition that would result in death or total disability, and (3) unemployment.
We can require reasonable notice and documentation including, but not limited
to, a physician's certification and Determination Letter from a State Department
of Labor. Some of the hardship circumstances listed above may not apply in some
states, and, in other states, may not be available at all. The waivers of
withdrawal charges and Market Value Adjustment apply to the owner, not to the
Annuitant. If there are joint owners, the waivers apply to the primary owner. If
no primary owner can be determined, the waivers will apply to the youngest
owner.
TAX RESERVE
We can make a charge in the future for taxes or for reserves set aside for
taxes, which will reduce the investment performance of the Variable Account
Options.
SECTION 5 - TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, can't be less than $1,000
($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 a contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach nine years
before your Retirement Date, we may refuse to accept any contribution.
Contributions may also be limited by various laws or prohibited by us for all
annuitants under the contract. If your contributions are made under a
tax-favored retirement program, we won't measure them against the maximum limits
set by law.
Contributions are applied to the various Investment Options you select and are
used to pay annuity and death benefits. Each contribution is credited as of the
date we have received (as defined below) at our Administrative Office both the
contribution and instructions for allocation among the Investment Options,
PROVIDED THAT AT ANY TIME YOU MAY NOT HAVE AMOUNTS IN MORE THAN NINE INVESTMENT
OPTIONS. In determining the nine Investment Options, each of your GRO Accounts
counts as one Investment Option. Wire transfers of federal funds are deemed
received on the day of transmittal if credited to our account by 3 p.m. Eastern
Time, otherwise they are deemed received on the next Business Day. Contributions
by check or mail are deemed received when they are delivered in good order to
our Administrative Office. Contributions to the Select Ten Plus Divisions are
subject to special rules described in 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
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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."
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
isn'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 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
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charge is an amount equal to an effective annual rate of 1.35%. This charge
is for the mortality risk, administrative expenses and expense risk we
assumed under the contract.
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 we assumed
under the contract.
Generally, this means that we adjust Unit Values to reflect what happens to the
Portfolios and the Divisions and for the mortality and expense risk charge and
any charge for administrative expenses or taxes.
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to our transfer restrictions. You can't make a transfer into the
STO. Transfers to a GRO must be to a newly elected GRO (that is, to a GRO that
you haven't already purchased) at the then-current Guaranteed Interest Rate,
unless we agree otherwise. Unless you make a transfer from a GRO within 30 days
before the expiration date of a GRO Account, 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.
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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
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.
EXCESSIVE TRADING
We reserve the right to limit the number of transfers in any contract year or to
refuse any transfer request for an owner or certain owners if: (a) we believe in
our sole discretion that excessive trading by the owner or owners or a specific
transfer request or group of transfer requests may have a detrimental effect on
Unit Values or the share prices of the underlying mutual funds; or (b) we are
informed by one or more of the underlying mutual funds that the purchase or
redemption of shares is to be restricted because of excessive trading, or that a
specific transfer or group of transfers is expected to have a detrimental effect
on share prices of affected underlying mutual funds. We also have the right,
which may be exercised in our sole discretion, to prohibit transfers occurring
on consecutive Business Days.
We will notify you or your designated representative if your requested transfer
is not made. Current SEC rules preclude us from processing your request at a
later date if it is not made when initially requested. ACCORDINGLY, YOU WILL
NEED TO SUBMIT A NEW TRANSFER REQUEST IN ORDER TO MAKE A TRANSFER THAT WAS NOT
MADE BECAUSE OF THESE LIMITATIONS.
WITHDRAWALS
You may make withdrawals as often as you wish. Each withdrawal must be at least
$300. The money will be taken from your Investment Options pro rata, in the same
proportion their value bears to your total Account Value. For example, if your
Account Value is divided in equal 25% shares among four Investment Options, when
you make a withdrawal, 25% of the money withdrawn will come from each of your
Investment Options. You can tell us if you want your withdrawal handled
differently. During the first seven years of your contract, there is a
contingent withdrawal charge for any withdrawals other than free withdrawals
(discussed below). The charge starts at 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 Contract" 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 Contract." We won't be
bound by an assignment unless it is in writing and is received at our
Administrative Office in a form acceptable to us.
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DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
We'll pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
contract's 10th anniversary date, if later), the death benefit is the Account
Value at the end of the Business Day when we receive proof of death. Similarly,
if the contract was issued on or after the youngest Annuitant's 86th birthday,
the death benefit is the Account Value at the end of the Business Day when we
receive proof of death.
For contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the contract's 10th anniversary date, if later) and before
annuity payments have started, the death benefit is the highest of:
(a) your highest Account Value on any contract anniversary (before age
81), plus subsequent contributions and minus subsequent withdrawals
(after being adjusted for associated charges and adjustments);
(b) total contributions, minus subsequent withdrawals (after being
adjusted for associated charges and adjustments); or
(c) your current Account Value.
The reductions in death benefit described in (a) and (b) above for subsequent
withdrawals will be calculated on a pro rata basis with respect to Account Value
at the time of withdrawal. We'll also adjust the death benefit for any
applicable Market Value Adjustments and/or charges.
Death benefits and benefit distributions required because of a separate owner's
death can be paid in a lump sum or as an annuity. If a benefit option hasn't
been selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The owner selects the beneficiary of the death benefit. An owner may change
beneficiaries by submitting the appropriate form to the Administrative Office.
If an Annuitant's beneficiary doesn't survive the Annuitant, then the death
benefit is generally paid to the Annuitant's estate. A death benefit won't be
paid after the Annuitant's death if there is a contingent Annuitant. In that
case, the contingent Annuitant becomes the new Annuitant under the contract.
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.
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We currently offer the following types of annuities:
A LIFE AND TEN YEARS CERTAIN ANNUITY is a fixed life income annuity with 10
years of payments guaranteed, funded through our general account.
A PERIOD CERTAIN ANNUITY provides for fixed payments to the Annuitant or the
Annuitant's beneficiary for a fixed period. The amount is determined by the
period selected. If the Annuitant dies before the end of the period selected,
the Annuitant's beneficiary can choose to receive the total present value of
future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed payments for at least the
period selected and after that for the life of the Annuitant, or for the lives
of the Annuitant and another annuitant under a joint and survivor annuity. If
the Annuitant (or the Annuitant and the other annuitant under a joint and
survivor annuity) dies before the period selected ends, the remaining payments
will go to the Annuitant's beneficiary. The Annuitant's beneficiary can redeem
the annuity and receive the present value of future guaranteed payments in a
lump sum.
A LIFE INCOME ANNUITY provides fixed payments to the Annuitant for the life of
the Annuitant, or until the last annuitant dies under a joint and survivor
annuity.
FIXED ANNUITY PAYMENTS
Fixed annuity payments won't change and are based upon annuity rates provided in
your contract. The size of payments will depend on the form of annuity that was
chosen and, in the case of a life income annuity, on the Annuitant's age (or
Annuitant and a joint annuitant in the case of a joint and survivor annuity) and
sex (except under most tax-favored retirement programs). If our current annuity
rates would provide a larger payment, those current rates will apply instead of
the contract rates.
If the age or sex of an annuitant has been misstated, any benefits will be those
which would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we'll deduct the overpayment from the next payment or payments
due. We add underpayments to the next payment.
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 cover page
of this prospectus. We can't honor your request or instruction unless it's
proper and complete. Whenever possible, use one of our printed forms, which may
be obtained from our Administrative Office.
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SECTION 6 - VOTING RIGHTS
PORTFOLIO VOTING RIGHTS
We are the legal owner of the shares of the Portfolios held by Separate Account
II and, therefore, have the right to vote on certain matters. Among other
things, we may vote to elect a Portfolio's Board of Directors, to ratify the
selection of independent auditors for a Portfolio, and on any other matters
described in a Portfolio's current prospectus or requiring a vote by
shareholders under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We'll send you Portfolio proxy materials and a form for giving us
voting instructions.
If we don't receive instructions in time from all owners, we'll vote shares in a
Portfolio for which we have not received instructions in the same proportion as
we vote shares for which we have received instructions. Under eligible deferred
compensation plans and certain qualified plans, your voting instructions must be
sent to us indirectly, through your employer, but we aren't responsible for any
failure by your employer to solicit your instructions or to send your
instructions to us. We'll vote any Portfolio shares that we're entitled to vote
directly, because of amounts we have accumulated in Separate Account II, in the
same proportion that other owners vote. If the federal securities laws or
regulations or interpretations of them change so that we're permitted to vote
shares of a Portfolio on our behalf or to restrict owner voting, we may do so.
HOW WE DETERMINE YOUR VOTING SHARES
You vote only on matters concerning the Portfolios in which your contributions
are invested. We determine the number of Portfolio shares in each Variable
Account Option under your contract by dividing your Account Value allocated to
that Option by the net asset value of one share of the corresponding Portfolio
on the record date set by a Portfolio's Board for its shareholders' meeting. For
this purpose, the record date can't be more than 60 days before the meeting of a
Portfolio. We count fractional shares. After annuity payments have commenced,
voting rights are calculated in a similar manner based on the actuarially
determined value of your interest in each Variable Account Option.
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.
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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." We'll cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by owners.
SECTION 7 - TAX ASPECTS OF THE CONTRACT
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the owner, Annuitant, and the
beneficiary or other payee may depend on several factors. These factors may
include 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
is based upon our understanding of the federal income tax laws as currently
interpreted by the Internal Revenue Service (IRS) and various courts. We cannot
guarantee that the IRS or the courts won't change their views on the treatment
of these contracts. Future legislation could affect annuity contracts adversely.
Moreover, we have not 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 DOES
NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS, FEDERAL, STATE, OR LOCAL, OF
ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACT.
YOUR CONTRACT IS AN ANNUITY
Under federal tax law, anyone can purchase an annuity with after-tax dollars.
Earnings under the contract won't generally be taxed until you make a
withdrawal. An individual (or employer) may also purchase the annuity to fund a
tax-favored retirement program (contributions are with pre-tax dollars), such as
an IRA or qualified plan. Finally, an individual (or employer) may purchase the
annuity to fund a Roth IRA (contributions are with after-tax dollars and
earnings may be excluded from taxable income at distribution).
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars (a nonqualified annuity), and some of the
special tax rules that apply to an annuity purchased to fund a tax-favored
retirement program (a qualified annuity). A qualified annuity may restrict your
rights and benefits to qualify for its special treatment under federal tax law.
TAXATION OF ANNUITIES GENERALLY
Section 72 of the Internal Revenue Code of 1986, as amended (the CODE) governs
the taxation of annuities. In general, contributions you put into the annuity
(your "basis" or "investment" in the contract) will not be taxed when you
receive the amounts back in a distribution. Also, an owner generally isn't taxed
on the annuity's earnings (increases in Account Value) until some form of
withdrawal or distribution is made under the contract. However, under certain
circumstances, the increase in value may be subject to current federal income
tax. For example, 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.
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You can take withdrawals from the contract or you can wait to annuitize it when
the annuitant reaches a certain age. The tax implications are different for each
type of distribution. Section 72 of the Code states that the proceeds of a full
or partial withdrawal from a contract before annuity payments begin are treated
first as taxable income, but only to the extent of the increase of the Account
Value. The rest of the withdrawal, representing your basis in the annuity, is
not taxable. Generally, the investment or basis in the contract equals the
contributions made by you or on your behalf, minus any amounts previously
withdrawn that weren't treated as taxable income. Special rules may apply if the
contract includes contributions made before August 14, 1982 that were rolled
over to the contract in a tax-free exchange.
If you take annuity payments over the lifetime of the annuitant, part of each
payment is considered to be a tax-free return of your investment. This tax-free
portion of each payment is determined using a ratio of the owner's investment to
his or her expected return under the contract (exclusion ratio). The rest of
each payment will be ordinary income. When all of these tax-free portions add up
to your investment in the annuity, future payments are entirely ordinary income.
If the Annuitant dies before recovering the total investment, a deduction for
the remaining basis will generally be allowed on the owner's final federal
income tax return.
We may be required to withhold federal income taxes on all distributions unless
the eligible recipients elect not to have any amounts withheld and properly
notify us of that election.
The taxable portion of a distribution is taxed at ordinary income tax rates. In
addition, you may be subject to a 10% penalty on the taxable portion of a
distribution unless it is:
(1) on or after the date on which the taxpayer attains age 59 1/2;
(2) as a result of the owner's death;
(3) part of a series of "substantially equal periodic payments" (paid at
least annually) for the life (or life expectancy) of the taxpayer or
joint lives (or joint life expectancies) of the taxpayer and
beneficiary;
(4) a result of the taxpayer becoming disabled within the meaning of Code
Section 72(m)(7);
(5) from certain qualified plans (note, however, other penalties may
apply);
(6) under a qualified funding asset (as defined in Section 130(d) of the
Code);
(7) purchased by an employer on termination of certain types of qualified
plans and held by the employer until the employee separates from
service;
(8) under an immediate annuity as defined in Code Section 72(u)(4);
(9) for the purchase of a first home (distribution up to $10,000);
(10) for certain higher education expenses; or
(11) to cover certain deductible medical expenses.
Please note that items (9), (10) and (11) apply to IRAs only.
Any withdrawal provisions of your contract will also apply. See "Withdrawals" in
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 beneficiary may be annuitized over the life of that
beneficiary, as long as distributions begin within one year after the owner
dies. If the beneficiary is the owner's spouse, the contract (along with the
deferred tax status) may be continued in the spouse's name as the owner.
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DIVERSIFICATION STANDARDS
We manage the investments in the annuities under Section 817(h) of the Code to
ensure that you will be taxed as described above.
TAX-FAVORED RETIREMENT PROGRAMS
An owner can use this annuity with certain types of retirement plans that
receive favorable tax treatment under the Code. Numerous tax rules apply to the
participants in these qualified plans and to the contracts used in connection
with those qualified plans. These tax rules vary according to the type of plan
and the terms and conditions of the plan itself. Owners, Annuitants, and
beneficiaries are cautioned that the rights of any person to any benefits under
qualified plans may be subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the contract. In addition,
loans from qualified contracts, where allowed, are subject to a variety of
limitations, including restrictions on the amount that may be borrowed, the
duration of the loan, and repayment of the loan. (Owners should always consult
their tax advisors and retirement plan fiduciaries before taking any loans from
the plan.) Also, special rules apply to the time at which distributions must
begin and the form in which the distributions must be paid. THE SAI CONTAINS
GENERAL INFORMATION ABOUT THE USE OF CONTRACTS WITH THE VARIOUS TYPES OF
QUALIFIED PLANS.
FEDERAL AND STATE INCOME TAX WITHHOLDING
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES ON INTEGRITY
The contract allows 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 WITHDRAWAL AND TO INCOME
TAXATION. See Part I, Section 7, "Tax Aspects of the Contract."
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<PAGE>
INCOME PLUS WITHDRAWAL PROGRAM
We offer an Income Plus Withdrawal Program that allows you to pre-authorize
equal periodic withdrawals, based on your life expectancy, from your contract
before you reach age 59 1/2. You won't have to pay any tax penalty for these
withdrawals, but they will be subject to ordinary income tax. See "Taxation of
Annuities Generally," in Section 7. Once you begin receiving distributions, they
shouldn't be changed or stopped until the later of:
|X| the date you reach age 59 1/2; or
|X| five years from the date of the first distribution.
If you change or stop the distribution or take an additional withdrawal, you may
have to pay a 10% penalty tax that would have been due on all prior
distributions made under the Income Plus Withdrawal Program, plus any interest.
You can choose the Income Plus Withdrawal Program at any time if you're younger
than 59 1/2. You can elect this option by sending the election form to our
Administrative Office. You can choose to have withdrawals made monthly,
quarterly, semi-annually or annually and can specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is made. We'll calculate
the amount of the distribution under a method you select, subject to a minimum,
which is currently $100. You must also specify an account for direct deposit of
your withdrawals.
To enroll in our Income Plus Withdrawal Program, send the appropriate form to
our Administrative Office. Your withdrawals will begin at least one Business Day
after we receive your form. You may end your participation in the program upon
seven Business Days prior written notice, and we may end or change the Income
Plus Withdrawal Program at any time. If on any withdrawal date you don't have
enough money in your accounts to make all of the withdrawals you have specified,
no withdrawal will be made and your enrollment in the program will end. This
program isn't available in connection with the Systematic Withdrawal Program,
Dollar Cost Averaging, Systematic Transfer Option or Callan Asset Allocation and
Rebalancing Program.
If you haven't used up your free withdrawals in any given contract year, amounts
you withdraw under the Income Plus Withdrawal Program may be within the free
withdrawal amount. If they are, no contingent withdrawal charge or Market Value
Adjustment will be made. See "Contingent Withdrawal Charge" in Part 4. AMOUNTS
WITHDRAWN UNDER THE INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS OF THE FREE
WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE AND A MARKET
VALUE ADJUSTMENT IF APPLICABLE.
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which we transfer contributions
allocated to the Janus Money Market Option to one or more other Variable Account
Options on a monthly, quarterly, semi-annual or annual basis. You must tell us
how much you want to be transferred into each Variable Account Option. The
current minimum transfer to each Option is $250. We won't charge a transfer
charge under our dollar cost averaging program, and these transfers won't count
towards the twelve free transfers you may make in a contract year. The Select
Ten Plus Divisions aren't eligible for the dollar cost averaging program.
To enroll under our dollar cost averaging program, send the appropriate form to
our Administrative Office. You may end your participation in the program upon
one day's prior written notice, and we may end or change the dollar cost
averaging program at any time. If you don't have enough money in the Janus Money
Market Option to transfer to each Variable Account Option specified, no transfer
will be made and your enrollment in the program will end.
SYSTEMATIC TRANSFER PROGRAM
We also offer a systematic transfer program under which we transfer
contributions allocated to the STO to one or more other Investment Options on a
monthly or quarterly basis, as you determine. See 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
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<PAGE>
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 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.
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<PAGE>
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. 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.
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.
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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 over the course of several years. The information
is historical and reflects a hypothetical investment, and shouldn't be used as
an indicator of future performance. In some years, the strategy outperformed the
Dow Jones index, and in some years, it didn't. The performance of this strategy
depends both on stock prices, which will fluctuate, and dividend payments, which
may increase, decrease or be eliminated. There are no guarantees that this
strategy will outperform the Dow Jones Industrial Average over any given period
of time.
SECTION 9 - PRIOR CONTRACTS
DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997
This section shows the Death Benefit information for contracts issued before
January 1, 1997. It may be different from other provisions in this prospectus.
For contracts issued before 1997, the following provisions apply:
For contracts issued before January 1, 1995, the amount of the death benefit is
the greatest of:
- your 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
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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 February 1,
1997, the effective annual rate of mortality, expense and administrative charges
will reduce to 1.10% after your contract has been in effect for six years.
CONTINGENT WITHDRAWAL CHARGE
For contracts issued before February 15, 1997 (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 contract. We don't expect revenues from contingent withdrawal
charges to cover all of those costs. Any shortfall will be made up from our
General Account assets, which may include profits from other charges under the
contract.
<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.
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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.
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 under the contract offered by 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.
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<PAGE>
INVESTMENT STRATEGY
The Divisions seek total return by buying the ten highest yielding stocks in the
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:
<TABLE>
<CAPTION>
Division Investment Date
-------- ---------------
<S> <C>
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
</TABLE>
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."
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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, 2000. The ten highest yielding stocks in the DJIA are
commonly known as the "Dogs of the Dow":
<TABLE>
<S> <C>
AT&T Honeywell
Aluminum Co. of America IBM
American Express Intel
Boeing International Paper*
Caterpillar* Johnson & Johnson
Citigroup J.P. Morgan*
Coca-Cola McDonald's
Disney Merck
DuPont* Microsoft
Eastman Kodak* Minnesota Mining & Manufacturing*
Exxon Mobil* Philip Morris*
General Electric Proctor & Gamble
General Motors* SBC Communications*
Hewlett-Packard United Technologies
Home Depot Wal-Mart
</TABLE>
The designations "Dow Jones-Registered Trademark-", "Dow Jones Industrial
Average SM" and "DJIA SM" are the property of Dow Jones & Company, Inc.
(DOW JONES). Dow Jones isn't affiliated with the Divisions, hasn't
participated in any way in the creation of the Divisions or in the selection
of stocks included in the Divisions and hasn't reviewed or approved any
information included in this prospectus. The Divisions aren't sponsored,
endorsed, sold or promoted by Dow Jones, and Dow Jones has no relationship at
all with the Divisions. Dow Jones isn't responsible for and doesn't
participate in determining the timing, price, or quantity of the Divisions'
shares to be issued or redeemed. Dow Jones doesn't have any obligation or
liability in connection with the administration or marketing of the Divisions.
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.
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SECTION 2 - PERFORMANCE INFORMATION
The performance of the investment strategy for the Divisions relative to other
investment strategies can be shown using historical data. The returns shown in
the following tables reflect the historical performance of a hypothetical
investment in the ten highest yielding stocks in the DJIA and the performance of
the DJIA, and not the performance of any Division. They don't guarantee future
performance or predict any Division's returns. Stock prices (which will
fluctuate in value) and dividends (which may be increased, reduced or
eliminated) can affect the returns. The strategy has underperformed the DJIA in
certain years. Accordingly, we can't guarantee that any Division will outperform
the DJIA over the life of the Division.
An investor in a Division might not receive as high a total return on an
investment in the Divisions that the hypothetical returns are based on because
(1) the total return figures shown don't reflect Division expenses or brokerage
commissions and (2) the Divisions are established at different times of the
year. If these charges were reflected in the hypothetical returns, the returns
would be lower than those shown here.
PERFORMANCE HISTORY OF THE DOGS OF THE DOW STRATEGY -
COMPARISON OF HISTORICAL TOTAL RETURN (1)
<TABLE>
<CAPTION>
Ten Highest Dividend
Year Yielding Stocks (2) DJIA
---- ------------------- ----
<S> <C> <C>
1973 3.9% (13.1)%
1974 (1.3)% (23.1)%
1975 55.9% 44.4%
1976 34.8% 22.7%
1977 0.9% (12.7)%
1978 (0.1)% 2.7%
1979 12.4% 10.5%
1980 27.2% 21.5%
1981 5.0% (3.4)%
1982 23.6% 25.8%
1983 38.7% 25.7%
1984 7.6% 1.1%
1985 29.5% 32.8%
1986 32.1% 26.9%
1987 6.1% 6.0%
1988 22.9% 16.0%
1989 26.5% 31.7%
1990 (7.6)% (0.4)%
1991 39.3% 23.9%
1992 7.9% 7.4%
1993 27.3% 16.8%
1994 4.1% 4.9%
1995 36.7% 36.4%
1996 27.9% 28.9%
1997 21.9% 24.9%
1998 10.7% 18.1%
1999 4.0% 27.2%
Cumulative 7,566% 3,092%
</TABLE>
- ----------------------------------
(1) Total return is the sum of (1) the percentage change in market value of
each group of stocks between the first and last trading days of a
period and (2) the total dividends paid on each group of stocks during
the period, divided by the opening market value of each group of stocks
as of the first trading day of a period. Total return doesn't take into
consideration any expenses or commissions. Over the course of the years
39
<PAGE>
listed above, the ten highest dividend yielding stocks in the DJIA
achieved an average annual total return of 17.4%. Over this period, the
strategy achieved a greater average annual total return than that of
the DJIA, which was 13.6%. Although each Division seeks to achieve a
better performance than the DJIA as a whole, we can't guarantee that a
Division will achieve a better performance. Performance may also be
compared to the performance of the S&P 500 Composite Price Stock Index
or performance data from publications such as Morningstar Publications,
Inc. Source for years 1973-1997: BEATING THE DOW, by Michael O'Higgins
with John Downes, published by Harper Perennial, 1992, and "Beating the
Dow," edited by John Downes, published by the Hirsch Organization. Used
with permission of the authors. Source for 1998 and 1999:
www.dogsofthedow.com.
(2) The ten highest dividend yielding stocks in the DJIA for any given year
were selected by ranking the dividend yields for each of the stocks in
the index at the beginning of that year, based upon an annualization of
the last quarterly or semi-annual regular dividend distribution (which
would have been declared in the preceding year), divided by that
stock's market value on the first trading day on the NYSE in that year.
PERFORMANCE HISTORY OF THE DOGS OF THE DOW STRATEGY -
$10,000 HYPOTHETICAL INVESTMENT
<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
1999 766,572 319,152
</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, 1999. 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 $458,000 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%.
40
<PAGE>
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.
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
Touchstone Advisors Inc. serves as the investment adviser to the Select Ten Plus
Divisions. Touchstone Advisors is part of The Western-Southern Enterprise, which
is a family of companies that provides life insurance, annuities, mutual funds,
asset management and other related financial services to millions of consumers
nationwide. As of December 31, 1999, The Western-Southern Enterprise owned or
managed assets of approximately $20 billion and Touchstone Advisors managed
assets of approximately $440 million. Touchstone Advisors is located at 311 Pike
Street, Cincinnati, Ohio 45202.
Touchstone 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, Touchstone 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
41
<PAGE>
- 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.
Touchstone 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, Touchstone
Advisors receives a monthly fee based on an annual rate of .50% of each
Division's average daily net assets. Touchstone Advisors will then pay an
advisory fee to the subadviser. Touchstone Advisors has guaranteed it or an
affiliate would pay National Asset a minimum annual sub-advisory fee of $50,000.
Touchstone 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. Touchstone Advisors can change or terminate its expense
reimbursement policy for the Divisions, but doesn't currently intend to do so.
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, 1999, National Asset managed approximately $13.2 billion in assets.
42
<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
1999 1998 1997 1996 1995 1994 1993 1992 INCEPTION*
---- ---- ---- ---- ---- ---- ---- ---- ---------
SCUDDER KEMPER VALUE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value at beginning of period..... $27.42 $23.47 $18.24 $14.85 $10.34 $10.56 $10.07 - $10.00
Unit value at end of period........... $23.76 $27.42 $23.47 $18.24 $14.85 $10.34 $10.56 $10.07
Number of units outstanding at end of 930,696 1,385,723 1,278,296 1,119,634 806,752 733,336 547,498 3,540
period................................
HARRIS BRETALL SULLIVAN & SMITH EQUITY
GROWTH $26.42 $19.74 $14.85 $13.21 $10.17 $9.91 $10.05 - $10.00
Unit value at beginning of period..... $35.32 $26.42 $19.74 $14.85 $13.21 $10.17 $9.91 $10.05
Unit value at end of period........... 1,214,898 1,345,118 1,295,185 1,184,119 1,342,971 1,014,016 830,307 18,906
Number of units outstanding at end of
period...............................
ZWEIG ASSET ALLOCATION
Unit value at beginning of period.... $17.70 $18.32 $15.23 $13.44 $11.23 $11.33 $9.99 - $10.00
Unit value at end of period.......... $18.45 $17.70 $18.32 $15.23 $13.44 $11.23 $11.33 $9.99
Number of units outstanding at end of 804,931 1,761,932 2,107,245 2,434,199 2,541,023 2,558,692 1,518,39 11,385
period...............................
ZWEIG EQUITY (SMALL CAP)
Unit value at beginning of period.... $17.80 $18.15 $14.71 $12.58 $10.53 $10.74 - - $10.00
Unit value at end of period.......... $17.10 $17.80 $18.15 $14.71 $12.58 $10.53 $10.74 -
Number of units outstanding at end of 332,006 581,283 592,060 592,469 587,830 567,827 425,500 -
period...............................
DEUTSCHE VIT EAFE' EQUITY INDEX
Unit value at beginning of period.... $11.30 $9.42 - - - - - $10.00
Unit value at end of period.......... $14.22 $11.30 $9.42
Number of units outstanding at end of 240,439 177,704 19,652
period...............................
DEUTSCHE VIT EQUITY 500 INDEX
Unit value at beginning of period.... $12.90 $10.16 - - - - - $10.00
Unit value at end of period.......... $15.32 $12.90 $10.16
Number of units outstanding at end of 2,454,241 1,563,771 224,706
period...............................
DEUTSCHE VIT SMALL CAP INDEX
Unit value at beginning of period.... $9.11 $9.44 - - - - - $10.00
Unit value at end of period.......... $10.80 $9.11 $9.44
Number of units outstanding at end of 456,819 389,699 70,238
period...............................
VIP EQUITY-INCOME
Unit value at beginning of period.... $11.08 $10.06 - - - - - $10.00
Unit value at end of period.......... $11.62 $11.08 $10.06
Number of units outstanding at end of 1,571,231 1,206,214 155,520
period...............................
VIP II CONTRAFUND
Unit value at beginning of period.... $12.47 $9.73 - - - - - $10.00
Unit value at end of period.......... $15.29 $12.47 $9.73
Number of units outstanding at end of 1,652,352 893,485 129,361
period...............................
VIP III GROWTH & INCOME
Unit value at beginning of period.... $13.10 $10.24 - - - - - $10.00
Unit value at end of period.......... $14.11 $13.10 $10.24
Number of units outstanding at end of 1,291,885 859,704 119,576
period...............................
VIP III GROWTH OPPORTUNITIES
Unit value at beginning of period....... $12.62 $10.26 - - - - - $10.00
Unit value at end of period............. $12.98 $12.62 $10.26
Number of units outstanding at end of 948,352 617,513 78,180
period..................................
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997 1996 1995 1994 1993 1992 INCEPTION*
---- ---- ---- ---- ---- ---- ---- ---- ---------
VIP GROWTH
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value at beginning of period......
Unit value at end of period............ $12.63
Number of units outstanding at end of
period................................. 54,439
VIP III MID CAP
Unit value at beginning of period......
Unit value at end of period............ $12.96
Number of units outstanding at end of
period................................. 82,924
JANUS ASPEN CAPITAL APPRECIATION
Unit value at beginning of period...... $14.77 $9.47 - - - - - $10.00
Unit value at end of period............ $24.33 $14.77 $9.47
Number of units outstanding at end of
period................................. 1,953,906 712,285 92,194
JANUS ASPEN BALANCED
Unit value at beginning of period...... $13.19 $9.95 - - - - - $10.00
Unit value at end of period............ $16.49 $13.19 $9.95
Number of units outstanding at end of
period................................. 3,904,271 5,548,134 5,661,088
JANUS ASPEN WORLDWIDE GROWTH
Unit value at beginning of period...... $12.04 $9.47 - - - - - $10.00
Unit value at end of period............ $19.54 $12.04 $9.47
Number of units outstanding at end of
period................................. 2,314,085 1,327,696 151,721
JANUS ASPEN MONEY MARKET
Unit value at beginning of period...... $10.48 $10.08 - - - - - $10.00
Unit value at end of period............ $10.85 $10.48 $10.08
Number of units outstanding at end of
period................................. 2,017,825 1,709,186 634,249
J.P. MORGAN INTERNATIONAL OPPORTUNITIES
Unit value at beginning of period...... $9.59 $9.28 - - - - - $10.00
Unit value at end of period............ $12.93 $9.59 $9.28
Number of units outstanding at end of
period................................. 345,201 137,064 41,664
J.P. MORGAN BOND
Unit value at beginning of period...... $10.85 $10.19 - - - - - $10.00
Unit value at end of period............ $10.60 $10.85 $10.19
Number of units outstanding at end of
period................................. 1,890,368 1,499,874 418,029
UNIVERSAL FUNDS ASIAN EQUITY
Unit value at beginning of period...... $7.81 $8.46 - - - - - $10.00
Unit value at end of period............ $13.83 $7.81 $8.46
Number of units outstanding at end of
period................................. 320,760 476,370 484,093
UNIVERSAL FUNDS EMERGING MARKETS DEBT
Unit value at beginning of period...... $6.52 $9.23 - - - - - $10.00
Unit value at end of period............ $8.32 $6.52 $9.23
Number of units outstanding at end of
period................................. 310,684 607,509 653,365
UNIVERSAL FUNDS HIGH YIELD
Unit value at beginning of period...... $10.45 $10.11 - - - - - $10.00
Unit value at end of period............ $11.04 $10.45 $10.11
Number of units outstanding at end of
period................................. 856,371 578,494 69,823
UNIVERSAL FUNDS U.S. REAL ESTATE
Unit value at beginning of period...... $8.93 $10.15 - - - - - $10.00
Unit value at end of period............ $8.68 $8.93 $10.15
Number of units outstanding at end of
period................................. 234,609 252,794 67,357
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997 1996 1995 1994 1993 1992 INCEPTION*
---- ---- ---- ---- ---- ---- ---- ---- ---------
SELECT TEN PLUS DIVISION-MARCH
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income.......................... $0.25
Expenses................................... $0.21
Net investment income...................... $0.04
Net realized and unrealized gains (losses)
on securities.............................. $0.20
Net increase (decrease) in unit value...... $0.24
Unit value at beginning of period.......... $10.00
Unit value at end of period................ $10.24
Expenses to average net assets............. 2.20%
Portfolio turnover rate.................... 22.04%
Number of units outstanding at end of
period..................................... 664,381
SELECT TEN PLUS DIVISION-JUNE
Investment income.......................... $0.21 $0.14
Expenses................................... $0.17 $0.11 - - - - - -
Net investment income...................... $0.02 $0.03
Net realized and unrealized gains (losses)
on securities.............................. ($0.31) $0.40
Net increase (decrease) in unit value...... ($0.29) $0.43
Unit value at beginning of period.......... $10.43 $10.00 $10.00
Unit value at end of period................ $10.14 $10.43
Expenses to average net assets............. 2.20% 2.20%
Portfolio turnover rate.................... 42.96% .86%
Number of units outstanding at end of
period..................................... 634,209 195,841
SELECT TEN PLUS DIVISION-SEPTEMBER
Investment income.......................... $0.29 $0.07
Expenses................................... $0.23 $0.06 - - - - - -
Net investment income...................... $0.05 $0.02
Net realized and unrealized gains (losses)
on securities.............................. ($0.20) $0.24
Net increase (decrease) in unit value...... ($0.15) $0.26
Unit value at beginning of period.......... $10.26 $10.00 $10.00
Unit value at end of period................ $10.11 $10.26
Expenses to average net assets............. 2.20% 2.20%
Portfolio turnover rate.................... 50.49% 1.35%
Number of units outstanding at end of
period..................................... 1,111,983 1,072,954
SELECT TEN PLUS DIVISION-DECEMBER
Investment income.......................... $0.30 $ -
Expenses................................... $0.24 $ - * - - - - - -
Net investment loss........................ $0.05 ($ - *)
Net realized and unrealized gains (losses)
on securities.............................. $0.28 ($0.18)
Net increase (decrease) in unit value...... $0.33 ($0.18)
Unit value at beginning of period.......... $9.82 $10.00 $10.00
Unit value at end of period................ $10.15 $9.82
Expenses to average net assets............. 2.12% 2.12%
Portfolio turnover rate.................... 35.78% -
Number of units outstanding at end of
period..................................... 1,291,739 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 VIPIII Mid Cap Portfolio is May 1, 1999.
The inception date for the Janus Aspen Aggressive Growth, Janus Aspen Growth,
MFS Capital Opportunities, MFS Emerging Growth, MFS Growth With Income, MFS Mid
Cap Growth, and MFS New Discovery Portfolios is May 1, 2000. Because the Janus
Aspen Aggressive Growth, Janus Aspen Growth, MFS Capital Opportunities, MFS
Emerging Growth, MFS Growth With Income, MFS Mid Cap Growth, and MFS New
Discovery Portfolios had not yet begun operations as of the end of 1999, we have
provided no data for these Variable Account Options.
45
<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
46
<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
47
<PAGE>
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $ 5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$413.41 = .0290890 X $14,211.87
The withdrawal charge would be:
$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.
48
<PAGE>
APPENDIX C - TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Part 1 - Integrity and Custodian
Part 2 - Distribution of the Contract
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:
----------------- ---------- ---------------
49
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
FOR
PINNACLE
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT II
AND ITS
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.....................................................................8
Part 6 - Performance Information.................................................................................10
Part 7 - Determination of Accumulation Unit Values...............................................................17
Part 8 - Tax-Favored Retirement Programs.........................................................................17
Part 9 - Financial Statements....................................................................................19
</TABLE>
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for the contracts, dated May 1, 2000.
For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at 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 The Western and Southern Life Insurance Company
(W&S), a mutual life insurance company originally organized under the laws of
the State of Ohio on February 23, 1888. Until March 3, 2000, Integrity was an
indirect wholly owned subsidiary of ARM Financial Group, Inc. (ARM).
ARM provided substantially all of the services required to be performed on
behalf of Separate Account II since 1994, 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 1997 were $19,307,552, in 1998 were $27,158,002, and in 1999
were $32,545,976.
Integrity is the custodian for the shares of Portfolios owned by Separate
Account II. State Street KC 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 "AAA"
(Extremely Strong) from Standard & Poor's Corporation, "Aa2" (Excellent) from
Moody's Investors Service, Inc., and "AAA" (Highest) from Duff and Phelps Credit
Rating Company. However, Integrity doesn't guarantee the investment performance
of the portfolios, and these ratings don't reflect protection against investment
risk.
During 1999, prior to acquisition by W&S, the following actions were taken by
state insurance departments: 1) Integrity's Hawaii certificate of authority was
cancelled September 16, 1999 and was reinstated during the fourth quarter of
1999; 2) Integrity agreed effective September 8, 1999 that it would not accept
new applications from residents of the state of Colorado without the approval of
the Commissioner of the Colorado Division of Insurance; 3) Integrity agreed
effective January 20, 2000 that it would not write any general account or
guaranteed separate account business in the State of California, and that upon
the closing of the W&S acquisition that Integrity would request the consent of
the California Insurance Commissioner prior to resumption of writing such
business in California; 4) Integrity's certificate of authority was suspended in
the State of Nevada effective September 21, 1999; however, the Nevada Division
of Insurance advised of the rescission of such Order on March 10, 2000 and a
formal Order rescinding such suspension is expected; 5) Integrity agreed
effective January 7, 2000 that it would not write any general account business
in the State of Florida until the closing of the acquisition by W&S and upon
meeting certain statutory surplus requirements; (6) Integrity's North Carolina
certificate of authority was restricted to "no new business" effective
September 29, 1999. Integrity expects all such remaining restrictions to be
lifted once the state insurance departments involved have completed their review
of the W&S acquisition of Integrity.
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
Touchstone Securities, Inc., an indirect wholly owned subsidiary of W&S, is the
principal underwriter of the contracts. Touchstone Securities is registered with
the SEC as a broker-dealer and is a member in good standing of the National
Association of Securities Dealers, Inc. Touchstone Securities' address is 311
Pike Street, Cincinnati, Ohio 45202. The contracts are offered through
Touchstone Securities on a continuous basis.
2
<PAGE>
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 $11,028,481 for
the year ended December 31, 1999, $12,537,715 for the year ended December 31,
1998, and $1,570,251 for the year ended December 31, 1997. Distribution
allowances weren't retained by ARM Securities Corporation, the principal
underwriter for the contracts prior to March 3, 2000, during these years.
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.
4. Purchase securities of other investment companies except in compliance with
the 1940 Act and applicable state law.
3
<PAGE>
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 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.
4
<PAGE>
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.
<TABLE>
<CAPTION>
Name, Age, and Address of Manager Principal Occupation(s) During Past 5 Years
- --------------------------------- -------------------------------------------
<S> <C>
John R. Lindholm (51)* President of Integrity since November 1993; President of National
515 West Market Street Integrity since September 1997; Vice President-Chief Marketing
Louisville, KY 40202 Officer of National Integrity from November 1993 to September
1997; Executive Vice President-Chief Marketing Officer of ARM
Financial Group, Inc. from July 1993 to March 2000. 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 (61) Managing partner, Associated Mezzanine Investors, LLC since March
10 Hemlock Road 2000; Director, Nations Flooring, Inc. since March 1998;
Hartsdale, NY 10530 investment banker since January 1991. 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 (72) President, William Faulkner & Associates LLC (international trade
825 Goodrich Ave. business) since 1986; Manager, Carroll Family, LLC (commercial
St. Paul, MN 55105 land development business) since 1996. Director of The Legends
Fund, Inc. since November 1995. Director of the mutual funds in
the State Bond Group of mutual funds from 1980 to December 1996.
Chris LaVictoire Mahai (44) Chief Executive Officer, Aveus (an interactive strategy and
425 Portland Avenue development firm) since July 1999; President, clavm, inc. (a
Minneapolis, MN 55488 management consulting group) since June 1998; Fellow, Poynter
Institute for Media Studies, since June 1998; 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 1998; Director of the mutual funds in
the State Bond Group of mutual funds, June 1984 to December 1996.
Irvin W. Quesenberry, Jr. (51) Retired; Founder and Managing Director of National Asset
2939 Rainbow Drive Management Corporation (investment counseling firm) from 1979 to
Louisville, KY 40206 1995**; Member of Louisville Community Foundation Investment
Committee; Board member, Louisville Water Company, since 1986.
</TABLE>
- - Mr. Lindholm is an INTERESTED PERSON, as defined in the 1940 Act, by virtue
of his position with ARM Financial Group, Inc.
** Mr. Quesenberry no longer has any interest in National Asset Management
Corporation.
<TABLE>
<CAPTION>
Officers:
- ---------
Name, Age & Address Position With Principal Occupation(s) During Past 5 Years
- ------------------- ------------- -------------------------------------------
Separate Account
----------------
<S> <C> <C>
Edward J. Haines (53) President Senior Vice President of Marketing of Integrity Life
515 W. Market Street Insurance Company since March 2000; Senior Vice
Louisville, KY 40202 President of Marketing of ARM Financial Group, Inc.
from December 1993 until March 2000.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C>
Kevin L. Howard (35) Secretary Senior Vice President and Counsel of Integrity Life
515 W. Market Street Insurance Company since March 2000; Senior Vice
Louisville, KY 40202 President and Counsel of ARM Financial Group, Inc.
from October 1998 until March 2000; Assistant
General Counsel of ARM Financial Group, Inc. from
January 1994 until October 1998.
Don W. Cummings (36) Controller Chief Financial Officer of Integrity Life Insurance
515 W. Market Street Company since March, 2000; Chief Financial Officer,
Louisville, KY 40202 Retail Business Division of ARM Financial Group,
Inc. from November, 1996 until March, 2000;
Strategic Initiatives Officer of ARM Financial
Group, Inc. from April, 1996 until November, 1996;
Controller of ARM Financial Group, Inc. from
November, 1993 until April, 1996.
Meredith Hettinger (28) Assistant Secretary Financial Manager of Integrity Life Insurance
515 W. Market Street Company since March, 2000; Financial Manager of ARM
Louisville, KY 40202 Financial Group Inc. from April, 1998 until March,
2000; Financial Analyst of ARM Financial Group, Inc.
from June, 1995 until April, 1998.
Hope Oliver (24) Assistant Secretary Financial Analyst of Integrity Life Insurance
515 W. Market Street Company since March, 2000; Financial Analyst of
Louisville, KY 40202 ARM Financial Group Inc. from August, 1998 until
March, 2000;
Staff Accountant of McCauley, Nicolas & Company, LLC
from January, 1997 until August, 1998.
Kay Dieterlen (37) Assistant Secretary Legal Specialist of Integrity Life Insurance
515 W. Market Street Company since March, 2000; Legal Specialist of ARM
Louisville, KY 40202 Financial Group, Inc. from November, 1993 until
March, 2000.
</TABLE>
Separate Account Ten pays Managers who are not interested persons of the Fund
Independent Managers fees for serving as Managers. During the fiscal year ended
December 31, 1999, Separate Account Ten paid the Independent Managers a combined
total of $14,500 exclusive of expenses. Because the investment adviser and the
sub-adviser perform substantially all of the services necessary for the
operation of Separate Account Ten, Separate Account Ten requires no employees.
No officer, director or employee of Integrity Life Insurance Company, National
Integrity Life Insurance Company, the investment adviser or the sub-adviser
receives any compensation from Separate Account Ten for acting as a Manager.
The following individual owns 5% or more of one of the Divisions units as of
April 3, 2000:
Select Ten Plus Division - September
- ------------------------------------
<TABLE>
<CAPTION>
Name Address Percentage Ownership
- ---- ------- --------------------
<S> <C> <C>
David V. Wise 128 Forestmere Circle 6.11%
Butler, PA 16002
</TABLE>
6
<PAGE>
The following table sets forth for the fiscal year ended December 31, 1999, the
compensation to be paid by Separate Account Ten to the Independent Managers.
Managers who are interested persons, as defined in the 1940 Act, receive no
compensation from Separate Account Ten.
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement Benefits Estimated Annual From Separate
Compensation Accrued as Part of Benefits Upon Account Ten
Name of Manager From Separate Separate Account Retirement Paid to
- --------------- Account Ten Ten Expense ---------- Managers
----------- ----------- --------
<S> <C> <C> <C> <C>
William B. Faulkner $5,000 None N/A $5,000
John Katz $5,000 None N/A $5,000
Chris L. Mahai $4,500 None N/A $4,500
</TABLE>
As of December 31, 1999, the Managers of Separate Account Ten as a group, owned
less than 1% of the outstanding membership interests of the Fund.
The Managers are also managers of Select Ten Plus Fund, LLC, a management
investment company, and of the Board of Directors of The Legends Fund, Inc., an
open-end management investment company, both of which have the same investment
adviser as the Fund.
Separate Account Ten, its investment adviser and principal underwriter have
adopted codes of ethics under rule 17j-1 of the 1940 Act, and personnel subject
to these codes are permitted, in certain circumstances, to invest in securities,
including securities that may be purchased or held by Separate Account Ten.
THE INVESTMENT ADVISER
Touchstone Advisors is the investment adviser to Separate Account Ten under an
investment advisory agreement. Touchstone Advisors is an indirect wholly owned
subsidiary of W&S and is registered as an investment adviser under the
Investment Advisers Act of 1940. Its offices are located at 311 Pike Street,
Cincinnati, Ohio 45202.
Subject to the direction of the Board of Managers, Touchstone 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 Touchstone 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 Touchstone 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 Touchstone Advisors are described
in the prospectus.
7
<PAGE>
Touchstone 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,
Touchstone 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 Touchstone Advisors a monthly
fee based on an annual rate of .50% of the Division's average daily net assets.
Touchstone 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. Touchstone Advisers has guaranteed that it or an affiliate will
pay an annual minimum sub-advisory fee of $50,000 to National Asset.
Touchstone 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. Touchstone 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 tables show the amount of advisory fees the Divisions paid to
Integrity Capital Advisors, Separate Account Ten's investment adviser until
March 3, 2000, and the amount of sub-advisory fees Integrity Capital Advisors
paid to National Asset, for the periods ended December 31, 1998 and December 31,
1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Period ended December 31, 1998 Amount Division Paid to Integrity Amount Integrity Capital Advisors
Capital Advisors Paid to National Asset
<S> <C> <C>
Select Ten Plus Division-March $0 $0
- ----------------------------------------------------------------------------------------------------------------------
Select Ten Plus Division-June $4,990.01 $3,992.04
- ----------------------------------------------------------------------------------------------------------------------
Select Ten Plus Division-September $14,134.01 $2,826.84
- ----------------------------------------------------------------------------------------------------------------------
Select Ten Plus Division-December $199 $0
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Period ended December 31, 1999 Amount Division Paid to Integrity Amount Integrity Capital Advisors
Capital Advisors Paid to National Asset
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Select Ten Plus Division-March $31,558.49 $6,311.65
- ----------------------------------------------------------------------------------------------------------------------
Select Ten Plus Division-June $24,047.31 $4,809.47
- ----------------------------------------------------------------------------------------------------------------------
Select Ten Plus Division-September $57,325.43 $11,465.11
- ----------------------------------------------------------------------------------------------------------------------
Select Ten Plus Division-December $72,975.62 $14,594.85
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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 Touchstone 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. Touchstone Advisers has guaranteed it or an
affiliate will pay a minimum annual sub-advisory fee of $50,000 to National
Asset, beginning March 3, 2000. The tables above show actual sub-advisory fee
amounts paid during 1998 and 1999.
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 Touchstone
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
8
<PAGE>
transactions, the various allocation methods used by National Asset, and the
results of those allocations, are subject to the periodic review by Touchstone
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 Touchstone 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,
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.
9
<PAGE>
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 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
10
<PAGE>
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = {(Base Period Return) + 1) TO THE POWER OF 365/7} - 1
11
<PAGE>
<TABLE>
<CAPTION>
SEC STANDARDIZED AVERAGE ANNUAL RETURN (1). All figures are unaudited.
-----------------------------------------------------------------------
FOR THE PERIOD ENDING: 12/31/99 ACCOUNT
VARIABLE OPTIONS INCEPTION LIFE OF
DATE (2) 1 YEAR 5 YEAR 10 YEAR ACCOUNT
<S> <C> <C> <C> <C> <C>
Deutsche VIT Funds - EAFE Equity Index 10/22/97 18.88% n/a n/a 15.17%
Deutsche VIT Funds - Equity 500 Index 10/1/97 11.76 n/a n/a 18.75
Deutsche VIT Funds - Small Cap Index 10/7/97 11.54 n/a n/a 0.88
Fidelity's VIP Equity-Income 10/2/97 -2.10 n/a n/a 4.43
Fidelity's VIP II Contrafund 10/2/97 15.58 n/a n/a 18.68
Fidelity's VIP III Growth & Income 10/2/97 0.70 n/a n/a 14.32
Fidelity's VIP III Growth Opportunities 10/2/97 -4.13 n/a n/a 9.98
Fidelity's VIP III Mid Cap: Service Class 6/1/99 n/a n/a n/a 39.80
Fidelity's VIP Growth: Service Class 6/1/99 n/a n/a n/a 33.36
Harris Bretall Sullivan & Smith Equity Growth 12/7/92 26.70 28.04% n/a 19.51
Growth
Janus Aspen Series Balanced 10/9/97 18.05 n/a n/a 23.12
Janus Aspen Series Capital Appreciation 10/10/97 57.75 n/a n/a 47.51
Janus Aspen Series Worldwide Growth 10/2/97 55.24 n/a n/a 32.91
JP Morgan Bond 10/2/97 -9.37 n/a n/a -.02
JP Morgan International Opportunities 10/2/97 27.82 n/a n/a 9.76
Morgan Stanley UIF Asian Equity 10/22/97 70.20 n/a n/a 13.64
Morgan Stanley UIF Emerging Markets Debt 10/3/97 20.63 n/a n/a -10.89
Debt
Morgan Stanley UIF High Yield 10/16/97 -1.34 n/a n/a 1.98
Morgan Stanley UIF U.S. Real Estate 10/16/97 -9.80 n/a n/a -9.23
Scudder Kemper Value 12/21/92 -20.35 17.74 n/a 13.04
Zweig Asset Allocation 12/14/92 -2.76 10.05 n/a 9.00
Zweig Equity (Small Cap) 1/4/93 -10.91 9.94 n/a 7.80
Select Ten Plus June 6/30/98 -9.78 n/a n/a -3.76
Select Ten Plus September 9/30/98 -8.41 n/a n/a -4.70
Select Ten Plus December 12/31/98 -8.41 n/a n/a -4.70
Select Ten Plus March 3/30/99 n/a n/a n/a -7.41
</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.
12
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING: 12/31/99 NON-STANDARD RETURNS
RETURNS WITHOUT SURRENDER CHARGES (1)
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
----------------------------- ----------------------------
FUND
INCEPTION LIFE OF LIFE OF
VARIABLE OPTIONS DATE (3) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deutsche VIT Funds - EAFE Equity Index 6/21/96 51.62 n/a n/a 53.05 25.88 14.88 n/a n/a 12.82
Deutsche VIT Funds - Equity 500 Index 12/31/92 91.16 204.03 n/a 208.07 18.76 24.11 24.91 n/a 17.43
Deutsche VIT Funds - Small Cap Index 8/13/96 41.82 n/a n/a 57.08 18.54 12.35 n/a n/a 14.28
Fidelity's VIP Equity-Income 10/9/86 45.99 120.61 237.77 361.17 4.90 13.44 17.15 12.94 12.24
Fidelity's VIP II Contrafund 1/3/95 92.49 n/a n/a 217.32 22.58 24.40 n/a n/a 26.01
Fidelity's VIP III Growth & Income 12/31/96 76.70 n/a n/a 76.70 7.70 20.90 n/a n/a 20.90
Fidelity's VIP III Growth Opportunities 1/3/95 62.12 n/a n/a 147.31 2.87 17.47 n/a n/a 19.88
Fidelity's VIP III Mid Cap 12/28/98 n/a n/a n/a 51.48 46.94 n/a n/a n/a 50.96
Fidelity's VIP Growth 10/9/86 n/a n/a n/a 711.61 35.44 n/a n/a n/a 17.14
Harris Bretall Sullivan & Smith Equity 12/7/92 137.84 247.15 n/a 253.23 33.70 33.48 28.26 n/a 19.55
Growth
Janus Aspen Series Balanced 9/13/93 99.54 181.53 n/a 199.05 25.05 25.90 23.00 n/a 18.99
Janus Aspen Series Capital Appreciation 5/1/97 n/a n/a n/a 222.40 64.75 n/a n/a n/a 55.07
Janus Aspen Series Worldwide Growth 9/13/93 148.65 297.70 n/a 372.53 62.24 35.48 31.80 n/a 27.95
JP Morgan Bond 1/3/95 11.79 n/a n/a 27.41 -2.37 3.79 n/a n/a 4.97
JP Morgan International Opportunities 1/3/95 44.88 n/a n/a 73.29 34.82 13.15 n/a n/a 11.64
Morgan Stanley UIF Asian Equity 12/31/91 -7.39 -0.73 n/a 107.38 77.20 -2.53 -0.15 n/a 9.54
Morgan Stanley UIF Emerging Markets Debt 2/1/94 4.39 95.12 n/a 48.54 27.63 1.44 14.30 n/a 6.92
Morgan Stanley UIF High Yield 8/31/92 21.52 66.70 n/a 86.70 5.66 6.71 10.76 n/a 8.88
Morgan Stanley UIF U.S. Real Estate 2/24/95 5.04 n/a n/a 72.74 -2.80 1.65 n/a n/a 11.92
Scudder Kemper Value 12/21/92 30.25 129.24 n/a 137.55 -13.35 9.21 18.05 n/a 13.10
Zweig Asset Allocation 12/14/92 21.14 64.39 n/a 84.53 4.24 6.60 10.45 n/a 9.08
<CAPTION>
FOR THE PERIOD ENDING: 12/31/99
RETURNS WITHOUT SURRENDER CHARGES (1)
Alll figures are unaudited
CALENDAR YEAR RETURN(2)
----------------------------------
VARIABLE OPTIONS 1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Deutsche VIT Funds - EAFE Equity Index n/a n/a n/a 0.94 0.40% 19.97 25.88
Deutsche VIT Funds - Equity 500 Index 4.55 -3.08 32.15 20.35 26.76 26.98 18.76
Deutsche VIT Funds - Small Cap Index n/a n/a n/a 10.76 23.98 -3.50 18.54
Fidelity's VIP Equity-Income 16.70 5.01 34.05 12.73 26.38 10.12 4.90
Fidelity's VIP II Contrafund n/a n/a 37.86 19.57 22.47 28.23 22.58
Fidelity's VIP III Growth & Income n/a n/a n/a n/a 28.34 27.84 7.70
Fidelity's VIP III Growth Opportunities n/a n/a 30.76 16.67 28.20 22.93 2.87
Fidelity's VIP III Mid Cap n/a n/a n/a n/a n/a n/a 46.94
Fidelity's VIP Growth -1.16 33.54 13.14 21.82 37.61 35.44
Harris Bretall Sullivan & Smith Equity -1.38 2.64 29.93 12.42 32.92 33.83 33.70
Growth
Janus Aspen Series Balanced 6.77 -.51 23.11 14.60 20.45 32.47 25.05
Janus Aspen Series Capital Appreciation n/a n/a n/a n/a 25.46 55.98 64.75
Janus Aspen Series Worldwide Growth 18.62 .17 25.66 27.28 20.51 27.18 62.24
JP Morgan Bond n/a n/a 13.36 .54 7.47 6.55 -2.37
JP Morgan International Opportunities n/a n/a 7.16 11.62 4.01 3.32 34.82
Morgan Stanley UIF Asian Equity 102.53 -17.14 5.21 1.88 -43.37 -7.71 77.20
Morgan Stanley UIF Emerging Markets Debt n/a -23.87 25.75 48.64 15.74 -29.33 27.63
Morgan Stanley UIF High Yield 18.31 -5.76 21.29 13.10 11.24 3.39 5.66
Morgan Stanley UIF U.S. Real Estate n/a n/a 19.58 37.53 22.89 -12.06 -2.80
Scudder Kemper Value 4.86 -2.07 43.65 22.78 28.71 16.79 -13.35
Zweig Asset Allocation 13.32 -.92 19.75 13.32 20.30 -3.39 4.24
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING: 12/31/99 NON-STANDARD RETURNS
RETURNS WITHOUT SURRENDER CHARGES (1)
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
----------------------------- ----------------------------
FUND
INCEPTION LIFE OF LIFE OF
VARIABLE OPTIONS DATE (3) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Zweig Equity (Small Cap) 1/4/93 16.30 63.63 n/a 71.04 -3.91 5.16 10.35 n/a 7.98
Select Ten Plus Division - June 6/30/98 n/a n/a n/a 1.40 -2.78 n/a n/a n/a n/a
Select Ten Plus Division - September 9/30/98 n/a n/a n/a 1.15 -1.41 n/a n/a n/a n/a
Select Ten Plus Division - December 12/30/98 n/a n/a n/a 1.95 3.82 n/a n/a n/a n/a
Select Ten Plus Division - March 3/30/99 n/a n/a n/a 2.35 n/a n/a n/a n/a n/a
<CAPTION>
FOR THE PERIOD ENDING: 12/31/99
RETURNS WITHOUT SURRENDER CHARGES (1)
Alll figures are unaudited
CALENDAR YEAR RETURN(2)
----------------------------------
VARIABLE OPTIONS 1993 1994 1995 1996 1997 1998 1999
Zweig Equity (Small Cap) 7.38 -1.97 19.54 16.87 23.42 -1.94 -3.91
Select Ten Plus Division - June n/a n/a n/a n/a n/a 4.30 -2.78
Select Ten Plus Division - September n/a n/a n/a n/a n/a 2.60 -1.41
Select Ten Plus Division - December n/a n/a n/a n/a n/a -1.80 3.82
Select Ten Plus Division - March n/a n/a n/a n/a n/a n/a n/a
</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. Non-standard performance is since
the portfolio inception date, which may predate the separate account.
(2) Italicized returns are calculated from the inception date through year-end.
(3) 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.
14
<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.
<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.
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
<PAGE>
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.
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
<PAGE>
deadline for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are limited on 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. 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. Integrity doesn't administer such
plans.
<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 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, 1999, 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, 1999 and 1998 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.
<PAGE>
Financial Statements
(Statutory Basis)
Integrity Life
Insurance Company
YEARS ENDED DECEMBER 31, 1999 AND 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1999 and 1998
CONTENTS
Report of Independent Auditors................................................1
Audited Financial Statements
Balance Sheets (Statutory Basis)..............................................2
Statements of Operations (Statutory Basis)....................................4
Statements of Changes in Capital and Surplus (Statutory Basis)................5
Statements of Cash Flows (Statutory Basis)....................................6
Notes to Financial Statements (Statutory Basis)...............................8
<PAGE>
Report of Independent Auditors
Board of Directors
Integrity Life Insurance Company
We have audited the accompanying statutory basis balance sheets of Integrity
Life Insurance Company as of December 31, 1999 and 1998, and the related
statutory basis statements of operations, changes in capital and surplus, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Ohio Insurance Department, which practices differ from
accounting principles generally accepted in the United States. The variances
between such practices and accounting principles generally accepted in the
United States and the effects on the accompanying financial statements are
described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States,
the financial position of Integrity Life Insurance Company at December 31, 1999
and 1998, or the results of its operations or its cash flows for the years then
ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Integrity Life
Insurance Company at December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting practices prescribed or permitted by the Ohio Insurance Department.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 31, 2000
1
<PAGE>
Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds $ 1,363,174 $ 4,562,340
Preferred stocks and non-affiliated common stock 75,828 32,704
Investment in common stock of subsidiary 55,179 59,503
Mortgage loans 8,935 11,719
Policy loans 104,194 102,305
Cash and short-term investments 177,279 412,074
Other invested assets 50,405 53,435
---------------------------------
Total cash and invested assets 1,834,994 5,234,080
Separate account assets 1,657,370 2,124,250
Accrued investment income 35,912 47,091
Reinsurance balances receivable 101 1,048
Other admitted assets 14,769 2,097
---------------------------------
Total admitted assets $ 3,543,146 $ 7,408,566
=================================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 1,712,587 $ 1,512,538
Funding agreement and GIC deposit fund liabilities - 3,508,124
Unpaid claims 120 120
Deposits on policies to be issued, net 766 83
-------------------------------
Total policy and contract liabilities 1,713,473 5,020,865
Separate account liabilities 1,657,370 2,101,750
Accounts payable and accrued expenses 2,009 3,502
Transfers to separate accounts due or (accrued), net (34,299) (59,632)
Reinsurance balances payable 1,561 9,194
Federal income taxes - 64
Asset valuation reserve 24,942 34,578
Interest maintenance reserve 26,706 38,637
Other liabilities 66,772 12,920
-------------------------------
Total liabilities 3,458,534 7,161,878
Capital and surplus:
Common stock, $2 par value, 1,500,000 shares
authorized, issued and outstanding 3,000 3,000
Paid-in surplus 173,506 122,006
Unassigned surplus (deficit) (91,894) 121,682
-------------------------------
Total capital and surplus 84,612 246,688
-------------------------------
Total liabilities and capital and surplus $ 3,543,146 $ 7,408,566
===============================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Integrity Life Insurance Company
Statements of Operations (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 19,316 $ 7,313
Deposit-type funds 576,356 1,868,553
Net investment income 250,298 321,469
Amortization of the interest maintenance reserve 2,080 2,243
Income from separate account seed money investment 26,600 -
Reserve adjustments on reinsurance ceded 210,442 1,033
Other revenues 39,098 19,376
--------------------------------
Total premiums and other revenues 1,124,190 2,219,987
Benefits paid or provided:
Death benefits 6,588 5,528
Annuity benefits 183,245 240,573
Surrender benefits 1,245,928 297,863
Interest on funds left on deposit 92,441 162,137
Payments on supplementary contracts 13,155 10,982
Increase in reserves and deposit fund liabilities 32,323 1,216,263
--------------------------------
Total benefits paid or provided 1,573,680 1,933,346
Insurance and other expenses:
Commissions 34,299 31,144
General expenses 28,602 23,542
Taxes, licenses and fees 2,627 1,483
Net transfers to (from) separate accounts (511,329) 186,486
Other expenses 192,588 1,710
--------------------------------
Total insurance and other expenses (253,213) 244,365
--------------------------------
Gain (loss) from operations before federal income taxes and
net realized capital gains (196,277) 42,276
Federal income tax expense 2,706 5,456
--------------------------------
Gain (loss) from operations before net realized capital gains (198,983) 36,820
Net realized capital gains, excluding realized capital
gains (losses), net of tax, transferred to the interest
maintenance reserve (1999-$(137,773); 1998-$(1,392)) 8,284 945
--------------------------------
Net income (loss) $ (190,699) $ 37,765
================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS CAPITAL AND
STOCK SURPLUS (DEFICIT) SURPLUS
----------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $ 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, net 8,897 8,897
Dividends to shareholder (6,000) (6,000)
-----------------------------------------------------------
Balance, December 31, 1998 3,000 122,006 121,682 246,688
Net loss (190,699) (190,699)
Net change in unrealized gain
of subsidiary (4,324) (4,324)
Net change in nonadmitted
assets and related items (589) (589)
Change in reserve (change
in valuation basis) 3,000 3,000
Decrease in asset valuation reserve 9,636 9,636
Change in surplus in
separate accounts (26,600) (26,600)
Capital contribution 51,500 51,500
Dividends to shareholder (4,000) (4,000)
-----------------------------------------------------------
Balance, December 31, 1999 $ 3,000 $ 173,506 $ (91,894) $ 84,612
===========================================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATIONS:
Premiums, policy proceeds, and other
considerations received $ 595,672 $ 1,875,866
Net investment income received 261,225 315,760
Commission and expense allowances received
on reinsurance ceded 222,417 904
Benefits paid (1,449,145) (555,176)
Insurance expenses paid (67,022) (55,204)
Other income received net of other expenses paid 2,080 17,100
Net transfers from (to) separate accounts 536,663 (204,091)
Federal income taxes paid (10,689) (1,814)
---------------------------------
Net cash provided by operations 91,201 1,393,345
INVESTMENT ACTIVITIES:
Proceeds from sales, maturities, or repayments
of investments:
Bonds 1,195,883 4,854,879
Preferred stocks 34,428 86,730
Mortgage loans 2,784 1,467
Other invested assets 19,918 63,054
Net gains (losses) on cash and short-term investments 18 580
Profit on sale or maturity of derivative instruments 13,633 -
Miscellaneous proceeds 2,676 1,050
---------------------------------
Total investment proceeds 1,269,340 5,007,760
Benefits recovered (taxes paid) on capital gains 1,077 (3,264)
---------------------------------
Net proceeds from sales, maturities, or repayments
of investments 1,270,417 5,004,496
</TABLE>
6
<PAGE>
Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
Cost of investments acquired:
Bonds 1,589,428 5,980,098
Preferred and common stocks 70,728 60,158
Other invested assets 19,112 85,759
Miscellaneous applications 813 2,731
--------------------------------
Total cost of investments acquired 1,680,081 6,128,746
Net increase in policy loans and premium notes 1,889 2,773
--------------------------------
Net cash used in investment activities (411,553) (1,127,023)
FINANCING AND MISCELLANEOUS ACTIVITIES:
Other cash provided:
Capital and surplus paid-in 51,500 8,897
Seed redemption from separate account 22,500 -
Cash from term loans 19,152 -
Other sources 13,263 7,631
--------------------------------
Total other cash provided 106,415 16,528
Other cash applied:
Dividends to shareholder 4,000 6,000
Other applications, net 16,858 66,018
--------------------------------
Total other cash applied 20,858 72,018
--------------------------------
Net cash provided by (used in) financing and
miscellaneous activities 85,557 (55,490)
--------------------------------
Net increase (decrease) in cash and short-term investments (234,795) 210,832
Cash and short-term investments at beginning of year 412,074 201,242
--------------------------------
Cash and short-term investments at end of year $ 177,279 $ 412,074
================================
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
Integrity Life Insurance Company (the "Company") and its wholly-owned insurance
subsidiary, National Integrity Life Insurance Company ("National Integrity") are
indirect wholly owned subsidiaries of ARM Financial Group, Inc. ("ARM"). The
Company is domiciled in the state of Ohio. The Company is currently licensed in
46 states and the District of Columbia, and National Integrity specialize in the
asset accumulation business with particular emphasis on retirement savings and
investment products.
On December 17, 1999, ARM entered into a Purchase Agreement (the "Purchase
Agreement") with The Western and Southern Life Insurance Company ("W&S") whereby
W&S agreed to acquire ARM's insurance subsidiaries, Integrity and National
Integrity, the ("Insurance Subsidiaries").
On March 3, 2000, ARM closed the transaction contemplated by the Purchase
Agreement (the "Closing"). Under the terms of the Purchase Agreement, the
purchase price of $119.3 million is subject to a number of downward price
adjustments (see below) and was placed in an escrow account. ARM does not expect
any remaining proceeds in the escrow (after any such downward adjustments) to be
distributed from the escrow prior to the 12 month anniversary of the Closing.
The $119.3 million purchase price may be decreased to the extent that the sum of
the Insurance Subsidiaries' statutory surplus and asset valuation reserves set
forth on the Insurance Subsidiaries' final February 29, 2000 balance sheet (less
certain enumerated items) is more than $1 million less than the sum of the
Insurance Subsidiaries' statutory surplus and asset valuation reserves set forth
in the Insurance Subsidiaries September 30, 1999 statutory financial statements
plus $2.2 million. The purchase price may be increased to the extent that the
sum of the Insurance Subsidiaries' statutory surplus and asset valuation
reserves set forth on the Insurance Subsidiaries' final February 29, 2000
balance sheet (less certain enumerated items) is more than $1 million greater
than the sum of the Insurance Subsidiaries' statutory surplus and asset
valuation reserves set forth on the Insurance Subsidiaries' September 30, 1999
statutory financial statements plus $2.2 million.
8
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
Subject to certain specified limitations, the purchase price may also be
decreased to the extent of any losses by W&S arising out of any inaccuracy in or
breach of any of ARM's representations, warranties or covenants.
The purchase price may be further decreased to the extent of any "losses" from
the sales or deemed sales of certain securities owned by the Insurance
Subsidiaries (the "Securities"). The Securities, which the parties have agreed
are to be sold, are set forth on a confidential list. "Losses" are calculated as
the aggregate amount by which the "carrying value" of the Securities exceeds the
aggregate net sale proceeds from the sales or deemed sales of the Securities.
The aggregate "carrying value" of the Securities as of February 29, 2000 was
$453.5 million. Losses of $4.7 million have been recognized on securities sold
subsequent to entering into the sale transaction.
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 accounting principles
generally accepted in the United States ("GAAP"). The more significant variances
from GAAP are as follows:
INVESTMENTS
Investments in bonds and preferred stocks are reported at amortized cost or fair
value based on the National Association of Insurance Commissioners' ("NAIC")
rating; for GAAP, such fixed maturity investments are designated at purchase as
held-to-maturity, trading or available-for-sale. Held-to-maturity fixed
investments are reported at amortized cost, and the remaining fixed maturity
investments are reported at fair value with unrealized holding gains and losses
reported in operations for those designated as trading and as a separate
component of shareholder's equity for those designated as available-for-sale. In
addition, fair values of certain investments in bonds and stocks are based on
values specified by the NAIC, rather than on actual or estimated fair values
used for GAAP.
Realized gains and losses are reported in income net of income tax and transfers
to the interest maintenance reserve. Changes between cost and admitted
investment asset amounts are credited or charged directly to unassigned surplus
rather than to a separate surplus account. The Asset Valuation Reserve is
determined by an NAIC prescribed formula and is reported as
9
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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.
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.
10
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
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.
STATEMENT OF CASH FLOWS
Cash and short-term investments in the statement of cash flows represent cash
balances and investments with initial maturities of one year or less. Under
GAAP, the corresponding captions of cash and cash equivalents include cash
balances and investments with initial maturities of three months or less.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
Net income (loss) as reported in the accompanying
statutory basis financial statements $ (190,699) $ 37,765
Deferred policy acquisition costs, net of amortization 12,357 22,694
Adjustments to customer deposits (10,053) (7,082)
Adjustments to invested asset carrying values at
acquisition date (810) (226)
Amortization of value of insurance in force (5,629) (5,426)
Amortization of interest maintenance reserve (2,080) (2,243)
Adjustments for realized investment losses (79,279) (4,043)
Adjustments for federal income tax expense (45,797) (4,623)
Investment in subsidiary (1,500) 11,561
Eliminate dividend income from subsidiary - (2,771)
Other 36,732 2,237
--------------------------------
Net income (loss), GAAP basis $ (286,758) $ 47,843
================================
</TABLE>
11
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
------------------------------
(IN THOUSANDS)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 84,612 $ 246,688
Adjustments to customer deposits (151,448) (165,471)
Adjustments to invested asset carrying values at
acquisition date (25,667) 436
Asset valuation reserve and interest maintenance reserve 51,648 73,215
Value of insurance in force 24,193 27,097
Goodwill - 2,968
Deferred policy acquisition costs 93,762 79,679
Adjustments to investment in subsidiary excluding net
unrealized gains (losses) 28,321 25,497
Net unrealized gains (losses) on available-for-sale
securities (202,554) (123,124)
Other (25,054) 29,517
------------------------------
Shareholder's equity (deficit), GAAP basis $ (122,187) $ 196,502
==============================
Other significant accounting practices are as follows:
</TABLE>
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.
12
<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 include 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.
13
<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 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.
14
<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, 1999:
Mortgage-backed securities $ 351,180 $ 382 $ - $ 351,562
Corporate securities 827,300 3,932 47,704 783,529
Asset-backed securities 131,566 - 4,010 127,556
U.S. Treasury securities and
obligations of U.S. government
agencies 41,562 360 1,638 40,284
Foreign governments 7,671 - 371 7,300
States and political
subdivisions 3,895 159 - 4,054
------------------------------------------------------------
Total bonds $1,363,174 $ 4,834 $ 53,723 $1,314,285
============================================================
</TABLE>
15
<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)
<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>
Fair values are based on published quotations of the Securities Valuation Office
of the NAIC. Fair values generally represent quoted market value prices for
securities traded in the public marketplace, or analytically determined values
using bid or closing prices for securities not traded in the public marketplace.
However, for certain investments for which the NAIC does not provide a value,
the Company uses the amortized cost amount as a substitute for fair value in
accordance with prescribed guidance. As of December 31, 1999 and 1998, the fair
value of investments in bonds includes $0.9 billion and $3.8 billion,
respectively, of bonds that were valued at amortized cost.
16
<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, 1999, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
----------------------------------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less $ - $ -
After one through five 52,155 49,654
After five through ten 140,261 135,928
After ten 688,012 649,584
Asset-backed securities 131,566 127,556
Mortgage-backed securities 351,180 351,563
----------------------------------
Total $1,363,174 $1,314,285
==================================
</TABLE>
The expected maturities in the foregoing table may differ from the contractual
maturities because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties and because
asset-backed and mortgage-backed securities (including floating-rate securities)
provide for periodic payments throughout their life.
Proceeds from the sales of investments in bonds during 1999 and 1998 were $4.6
billion, which includes $3.4 billion of assets recaptured by General American
(see Note 5), and $4.1 billion; gross gains of $6.9 million and $26.5 million,
and gross losses of $202.2 million and $26.8 million were realized on those
sales, respectively.
At December 31, 1999 and 1998, bonds with an admitted asset value of $5,651,000
and $7,521,000, respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.
17
<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
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1999:
Subsidiary $ 17,943 $ 37,356 $ - $ 55,299
===========================================================
At December 31, 1998:
Subsidiary $ 17,823 $ 41,680 $ - $ 59,503
===========================================================
</TABLE>
The Company's mortgage loan portfolio is primarily comprised of agricultural
loans. The Company made no new investments in mortgage loans during 1999. The
maximum percentage of any one loan to the value of the security at the time of
the loan exclusive of any purchase money mortgages was 75%. Fire insurance is
required on all properties covered by mortgage loans. As of December 31, 1999,
the Company held no mortgages with interest more than one year past due. During
1999, no interest rates of outstanding mortgage loans were reduced. No amounts
have been advanced by the Company.
18
<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,
1999 1998
----------------------------
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds $ 229,082 $ 299,122
Preferred stocks 5,027 3,226
Dividend from subsidiary - 2,771
Mortgage loans 850 1,100
Policy loans 7,873 7,544
Cash and short-term investments 8,697 15,335
Other investment income 2,760 2,091
----------------------------
Total investment income 254,289 331,189
Investment expenses (2,977) (2,807)
Interest expense on repurchase agreements (1,014) (6,913)
----------------------------
Net investment income $ 250,298 $ 321,469
============================
</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 has 215 S&P 500 futures contracts
outstanding as of December 31, 1999 from the Chicago Mercantile Exchange. 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 recorded in
the separate accounts statement of operations to hedge against the Company's
obligation to pay equity-indexed returns to policy holders.
19
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
4. DERIVATIVE INSTRUMENTS (CONTINUED)
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 institutional face-amount 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 1999,
the Company recorded approximately $2.3 million and $1.4 million of net
investment income from 312CC and 212CC, respectively in its separate account
summary of operations.
During 1999, certain events caused the 312CC and 212CC institutional face-amount
certificates to be paid prior to their stated maturity dates. At the payment
dates, the fair value of the 312CC and 212CC investment portfolios were less
than account value, as such, the swap transactions provided that the Company
contribute the difference. Accordingly, expense charges of approximately $13.8
million and $23.7 million were recognized to terminate the swap transactions
with 312CC and 212CC, respectively. As of December 31, 1999, the company had
notes payable outstanding of $7.8 million and $16.4 million for the above
described swap transactions for 312CC and 212CC, respectively. Pursuant to the
sale of the Company, the $7.8 million note will be reduced to $6.0 million and
the $16.4 million note will be reduced to $12 million. The notes accrue interest
at a rate based on LIBOR until paid in full.
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
20
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
5. REINSURANCE (CONTINUED)
annuity deposits and substantially all risks associated with variable life
business have been reinsured with non-affiliated insurance companies. A
contingent liability exists with respect to insurance ceded which would become a
liability should the reinsurer be unable to meet the obligations assumed under
these reinsurance agreements.
The effect of reinsurance on premiums, annuity considerations and deposit-type
funds is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------
(IN THOUSANDS)
<S> <C> <C>
Direct premiums and amounts assessed
against policyholders $ 562,982 $ 421,637
Reinsurance assumed 271,144 1,474,079
Reinsurance ceded (238,454) (19,850)
----------------------------
Net premiums, annuity considerations and
deposit-type funds $ 595,672 $1,875,866
============================
</TABLE>
In 1999 and 1998, the Company assumed $271.0 million and $1.5 billion,
respectively, in funding agreement and GIC deposits through a 50% coinsurance
agreement with General American Life Insurance Company.
REINSURANCE AND FUNDING AGREEMENT RECAPTURE
As part of an institutional restructuring, on August 3, 1999, the Company and
General American Life Insurance Company ("General American") completed a
transaction whereby General American recaptured approximately $3.4 billion of
assets and related liabilities (GICs and funding agreements) previously ceded
through a reinsurance agreement to the Company (the "Transaction"). The
Transaction, which terminated the reinsurance and related agreements, including
a marketing partnership agreement, was effective as of July 26, 1999. These
assets and related liabilities were part of a joint product development,
marketing and reinsurance relationship with General American involving funding
agreements and GICs.
21
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
5. REINSURANCE (CONTINUED)
As a result of the Transaction, the Company recorded a loss on reinsurance
recapture of approximately $146 million during the third quarter of 1999
primarily due to interest rate related decreases in the fair value of investment
securities recaptured by General American. Surplus was reduced by approximately
$95 million on this transaction as a $51.5 million capital contribution was made
by ARM to the Company as part of the Transaction. In addition, the Company
recorded a loss and reduction in surplus of approximately $40 million to
discharge an institutional liability in its separate accounts. The Company does
not intend to pursue additional institutional spread or institutional fee
business, nor does the Company have any remaining institutional business
outstanding.
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.
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 Company may not pay any dividends during 2000 without prior
approval.
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 1999,
the Company did not receive any dividends from National Integrity.
22
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
7. SURPLUS (CONTINUED)
The NAIC's Risk-Based Capital ("RBC") requirements attempt to evaluate the
adequacy of a life insurance company's adjusted statutory capital and surplus in
relation to investment, insurance and other business risks. The RBC formula is
used by the states as an early warning tool to identify possible
under-capitalized companies for the purpose of initiating regulatory action and
is not designed to be a basis for ranking the financial strength of insurance
companies. In addition, the formula defines a new minimum capital standard which
supplements the previous system of low fixed minimum capital and surplus
requirements. The RBC requirements provide for four different levels of
regulatory attention depending on the ratio of the company's adjusted capital
and surplus to its RBC. As of December 31, 1999 and 1998, the adjusted capital
and surplus of the Company is in excess of the minimum level of RBC that would
require regulatory response.
8. ANNUITY RESERVES
At December 31, 1999 and 1998, the Company's general and separate account
annuity reserves and deposit fund liabilities that are subject to discretionary
withdrawal (with adjustment), subject to discretionary withdrawal without
adjustment, and not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------------------------------
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1999:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 391,598 12.9%
At book value less surrender charge of 5% or more 444,529 14.7
At market value 1,116,396 36.8
------------------------------
Total with adjustment or at market value 1,952,523 64.4
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 449,887 14.8
Not subject to discretionary withdrawal 629,132 20.8
------------------------------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 3,031,542 100.0%
=============
Less reinsurance ceded (35,631)
--------------
Net annuity reserves and deposit fund liabilities $2,995,911
==============
</TABLE>
23
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
8. ANNUITY RESERVES (CONTINUED)
<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
============
</TABLE>
24
<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,
1999 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 $ 9,177 $ 84,662 $ 142,145 $ 235,984
=============================================================
Reserves for separate accounts with
assets at fair value $ 107,197 $ 364,996 $ 1,150,849 $ 1,623,042
=============================================================
Reserves for separate accounts by
withdrawal characteristics:
Subject to discretionary
withdrawal (with adjustment):
With market adjustment $ 58,373 $ 333,225 $ - $ 391,598
At book value without
market value adjustment
and with current surrender
charge of 5% or more - 31,771 - 31,771
At market value - - 1,150,849 1,150,849
-------------------------------------------------------------
Total with adjustment or at
market value 58,373 364,996 1,150,849 1,574,218
Not subject to discretionary
withdrawal 48,824 - - 48,824
-------------------------------------------------------------
Total separate accounts reserves $ 107,197 $ 364,996 $ 1,150,849 $ 1,623,042
=============================================================
</TABLE>
25
<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, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
1999 1998
-------------------------------
(IN THOUSANDS)
<S> <C> <C>
Transfers as reported in the Summary of Operations of
the Separate Accounts Statement:
Transfers to separate accounts $ 235,977 $ 350,917
Transfers from separate accounts (748,943) (166,508)
--------------------------------
Net transfers to separate accounts (512,966) 184,409
Reconciling adjustments:
Policy deductions and other expense reported as other
revenues 1,637 2,077
-------------------------------
Transfers as reported in the Summary of Operations of
the Life, Accident and Health Annual Statement $ (511,329) $ 186,486
===============================
</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.
26
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Bonds $1,363,174 $1,171,131 $4,562,340 $4,390,941
Preferred stocks 75,828 66,369 32,704 32,643
Mortgage loans 8,935 8,935 11,719 11,719
Cash and short-term investments 177,279 177,279 412,074 412,074
Liabilities:
Life and annuity reserves for
investment-type contracts and
deposit fund liabilities $1,408,722 $1,397,952 $4,705,091 $4,669,365
Separate accounts annuity reserves 1,588,589 1,573,192 2,016,056 2,001,161
</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 of institutional deposits represents the
estimated present value of cash flows using current market rates and the
duration of the liabilities. The fair value of deposit fund
27
<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 1999 and 1998, the Company was
charged $32.5 million and $27.2 million, respectively, for these services in
accordance with the requirements of applicable insurance law and regulations. In
conjunction with the Closing, such agreements were terminated.
12. CONCENTRATION OF CREDIT RISK
At December 31, 1999, the Company held unrated or less-than-investment grade
bonds of $157 million with an aggregate fair value of $117 million. Those
holdings amounted to 10% of the Company's investments in bonds and less than 5%
of the Company's total admitted assets. The Company performs periodic
evaluations of the relative credit standing of the issuers of these bonds. These
evaluations are considered by the Company.
28
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
13. DIRECT PREMIUMS WRITTEN BY MANAGING GENERAL AGENTS/THIRD PARTY
ADMINISTRATORS
The Company issued business through the following managing general agents
in 1999:
<TABLE>
<CAPTION>
Total
Exclusive Type of Authority Premiums
Name and Address EIN Contract Business Written Granted Written
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Signature Financial Services
550 Pinetown Rd., Suite 208 ###-##-#### No Fixed Annuities Writing premium $ 79,562,426
Ft. Washington, PA 19034
Ann Arbor Annuity Exchange
2350 Washtenaw, Suite 8
Ann Arbor, MI 48104 ###-##-#### No Fixed Annuities Writing premium 56,774,536
Prideaux Agency Inc.
4930 Lincoln Drive
Edina, MN 55436 ###-##-#### No Fixed Annuities Writing premium 8,672,723
Consumer Insurance Group
232 F Street
Salida, CO 81201 ###-##-#### No Fixed Annuities Writing premium 8,308,482
Platinum
111 W Micheltorena St., #300
Santa Barbara, CA 93101 ###-##-#### No Fixed Annuities Writing premium 4,143,218
Sentry Financial Group
10 W Bergen Place ###-##-#### No Fixed Annuities Writing premium 2,901,395
Red Bank, NJ 07701
</TABLE>
The aggregate remaining premiums written by other managing general agents for
1999 was $2,864,812.
29
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
14. SUPERVISION ORDER
On August 20, 1999, the Ohio Department of Insurance issued a Supervision Order
with respect to the Company. Under the terms of the Supervision Order, the
Company has continued payments of death benefits, previously scheduled
systematic withdrawals, previously scheduled immediate annuity payments, and
agent commissions, but must receive written consent from the Ohio Department of
Insurance for other payments including dividends to ARM. The Supervision Order
also suspended the processing of surrenders of policies except in the cases of
approved hardship. On August 31, 1999, the Supervision Order was amended to
allow the Company to resume processing surrender requests from its variable life
and annuity policyholders. The Supervision Order was automatically extended
until March 2, 2000, when it was released upon the close of the Sale of the
Company.
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
Total admitted assets, net loss and total capital and surplus at December 31,
1999, as reported in the accompanying audited statutory basis financial
statements, differ from the amount reported in the 1999 NAIC Annual Statement
filed with insurance regulatory authorities as follows:
<TABLE>
<CAPTION>
TOTAL
ADMITTED CAPITAL AND
ASSETS NET LOSS SURPLUS
---------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance as of December 31, 1999 as reported
in the NAIC Annual Statement $ 3,543,146 $ 190,699 $ 84,612
Reduction in federal income tax recoverable (2,211) 2,211 2,211
----------------------------------------
Balance as of December 31, 1999 as reported
in the accompanying audited financial
statements $ 3,545,357 $ 188,488 $ 86,823
========================================
</TABLE>
30
<PAGE>
Financial Statements
Separate Account II
of
Integrity Life Insurance Company
DECEMBER 31, 1999
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Financial Statements
December 31, 1999
CONTENTS
Report of Independent Auditors.................................................1
Audited Financial Statements
Statement of Assets and Liabilities............................................2
Statement of Operations........................................................4
Statements of Changes in Net Assets............................................6
Notes to Financial Statements.................................................10
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account II of 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 Opportunities, Janus Aspen Capital Appreciation, Janus Aspen
Balanced, Janus Aspen Worldwide Growth, Janus Aspen Money Market, JPM
International Opportunities, JPM Bond, Morgan Stanley Emerging Markets Debt,
Morgan Stanley High Yield, Morgan Stanley U.S. Real Estate, Morgan Stanley Asian
Equity, VIP Growth Service Class, and VIP III Mid Cap Service Class Divisions)
as of December 31, 1999 and the related statements of operations and changes in
net assets for the periods indicated therein. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of mutual fund shares owned in The Legends
Fund, Inc., Deutsche Asset Management VIT Funds, Variable Insurance Products
Fund, Variable Insurance Products Fund II, Variable Insurance Products Fund III,
Janus Aspen Series, J.P. Morgan Series Trust II, and Morgan Stanley Universal
Funds, Inc. (collectively the "Funds") as of December 31, 1999, by
correspondence with the transfer agents of the Funds. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
divisions constituting Separate Account II of Integrity Life Insurance Company
at December 31, 1999, the results of their operations and changes in their net
assets for each of the periods indicated therein, in conformity with accounting
principles generally accepted in the United States.
Louisville, Kentucky /s/ Ernst & Young LLP
April 12, 2000
1
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
HARRIS BRETALL
SULLIVAN &
ZWEIG ASSET SMITH EQUITY SCUDDER ZWEIG EQUITY EAFE EQUITY EQUITY 500
ALLOCATION 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 $368,132,530) $ 14,853,493 $ 42,913,338 $ 22,108,280 $ 5,678,747 $ 3,420,103 $ 37,586,409
Receivable from (payable to) the
general account of Integrity (2,516) (3,141) 5,057 (1,444) (1,060) 12,563
-----------------------------------------------------------------------------------------
NET ASSETS $ 14,850,977 $ 42,910,197 $ 22,113,337 $ 5,677,303 $ 3,419,043 $ 37,598,972
=========================================================================================
Unit value $ 18.45 $ 35.32 $ 23.76 $ 17.10 $ 14.22 $ 15.32
=========================================================================================
Units outstanding 804,931 1,214,898 930,696 332,006 240,439 2,454,241
=========================================================================================
<CAPTION>
VIP III VIP III JANUS ASPEN
SMALL CAP VIP EQUITY- VIP II GROWTH & GROWTH CAPITAL
INDEX INCOME CONTRAFUND INCOME OPPORTUNITIES APPRECIATION
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $368,132,530) $ 4,932,334 $ 18,262,048 $ 25,263,806 $ 18,221,426 $ 12,310,225 $ 47,542,348
Receivable from (payable to) the
general account of Integrity 1,311 (4,344) 656 7,071 (616) (3,815)
-------------------------------------------------------------------------------------------
NET ASSETS $ 4,933,645 $ 18,257,704 $ 25,264,462 $ 18,228,497 $ 12,309,609 $ 47,538,533
===========================================================================================
Unit value $ 10.80 $ 11.62 $ 15.29 $ 14.11 $ 12.98 $ 24.33
===========================================================================================
Units outstanding 456,819 1,571,231 1,652,352 1,291,885 948,352 1,953,906
===========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1999
<TABLE>
<CAPTION>
JANUS ASPEN JPM MORGAN STANLEY
JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL EMERGING
BALANCED GROWTH MONEY MARKET OPPORTUNITIES JPM BOND MARKETS DEBT
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $368,132,530) $ 64,372,566 $ 45,215,819 $ 21,895,244 $ 4,461,899 $ 20,029,502 $ 2,585,253
Receivable from (payable to) the
general account of Integrity 8,863 1,402 (1,843) 1,550 8,399 (362)
----------------------------------------------------------------------------------------
NET ASSETS $ 64,381,429 $ 45,217,221 $ 21,893,401 $ 4,463,449 $ 20,037,901 $ 2,584,891
========================================================================================
Unit value $ 16.49 $ 19.54 $ 10.85 $ 12.93 $ 10.60 $ 8.32
========================================================================================
Units outstanding 3,904,271 2,314,085 2,017,825 345,201 1,890,368 310,684
========================================================================================
<CAPTION>
MORGAN STANLEY VIP III
MORGAN STANLEY U.S. REAL MORGAN STANLEY VIP GROWTH MID CAP
HIGH YIELD ESTATE ASIAN EQUITY SERVICE CLASS SERVICE CLASS
DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(aggregate cost of $368,132,530) $ 9,455,647 $ 2,035,574 $ 4,436,958 $ 687,453 $ 1,074,519 $ 429,342,991
Receivable from (payable to) the
general account of Integrity (1,311) 832 (847) 112 176 26,693
-------------------------------------------------------------------------------------------
NET ASSETS $ 9,454,336 $ 2,036,406 $ 4,436,111 $ 687,565 $ 1,074,695 $ 429,369,684
===========================================================================================
Unit value $ 11.04 $ 8.68 $ 13.83 $ 12.63 $ 12.96
===========================================================================================
Units outstanding 856,371 234,609 320,760 54,439 82,924
===========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
HARRIS BRETALL
SULLIVAN &
ZWEIG ASSET SMITH EQUITY SCUDDER ZWEIG EQUITY
ALLOCATION GROWTH KEMPER VALUE (SMALL CAP)
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 5,205,715 $ 862,062 $ 5,725,568 $ 64,635
EXPENSES
Mortality and expense risk and
administrative charges 319,893 546,403 472,809 106,288
-------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 4,885,822 315,659 5,252,759 (41,653)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments (887,327) 6,694,747 (1,350,260) (783,323)
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 602,115 8,718,048 724,207 (1,338,045)
End of period (2,733,001) 12,911,247 (7,382,314) (1,032,299)
-------------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (3,335,116) 4,193,199 (8,106,521) 305,746
-------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (4,222,443) 10,887,946 (9,456,781) (477,577)
-------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 663,379 $ 11,203,605 $ (4,204,022) $ (519,230)
=====================================================================================
<CAPTION>
EAFE EQUITY EQUITY 500 SMALL CAP VIP EQUITY-
INDEX INDEX INDEX INCOME
DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 149,063 $ 353,608 $ 182,169 $ 668,809
EXPENSES
Mortality and expense risk and
administrative charges 34,932 421,449 57,610 230,519
---------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 114,131 (67,841) 124,559 438,290
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 55,557 1,320,760 (112,135) 168,781
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 97,828 2,008,463 (82,250) 588,535
End of period 589,635 6,077,220 700,675 549,260
---------------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 491,807 4,068,757 782,925 (39,275)
---------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 547,364 5,389,517 670,790 129,506
---------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 661,495 $ 5,321,676 $ 795,349 $ 567,796
=======================================================================================
<CAPTION>
VIP III VIP III JANUS ASPEN
VIP II GROWTH & GROWTH CAPITAL
CONTRAFUND INCOME OPPORTUNITIES APPRECIATION
DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 500,698 $ 234,929 $ 254,980 $ 143,344
EXPENSES
Mortality and expense risk and
administrative charges 254,974 224,121 151,198 365,107
----------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 245,724 10,808 103,782 (221,763)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 610,842 684,280 229,705 1,308,844
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 1,551,494 1,555,137 943,831 2,102,262
End of period 4,769,564 1,952,059 897,531 15,691,640
----------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 3,218,070 396,922 (46,300) 13,589,378
----------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 3,828,912 1,081,202 183,405 14,898,222
----------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 4,074,636 $ 1,092,010 $ 287,187 $ 14,676,459
==================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
JANUS ASPEN JPM
JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL
BALANCED GROWTH MONEY MARKET OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 1,544,050 $ 50,135 $ 1,127,544 $ 125,581
EXPENSES
Mortality and expense risk and
administrative charges 1,030,793 359,550 312,366 27,656
--------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 513,257 (309,415) 815,178 97,925
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 10,821,666 8,804,845 - 272,170
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 16,041,640 1,077,814 - (23,705)
End of period 20,096,588 8,565,849 2 400,395
--------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 4,054,948 7,488,035 2 424,100
--------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 14,876,614 16,292,880 2 696,270
--------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 15,389,871 $ 15,983,465 $ 815,180 $ 794,195
================================================================================
<CAPTION>
MORGAN STANLEY MORGAN STANLEY
EMERGING MORGAN STANLEY U.S. REAL
JPM BOND MARKETS DEBT HIGH YIELD ESTATE
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 536,094 $ 325,538 $ 723,171 $ 113,980
EXPENSES
Mortality and expense risk and
administrative charges 263,890 45,029 112,354 30,035
------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 272,204 280,509 610,817 83,945
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments (66,862) (1,007,934) (116,239) (167,853)
Net unrealized appreciation
(depreciation) of investments:
Beginning of period (98,685) (1,723,265) (264,977) (192,191)
End of period (739,119) (266,111) (324,383) (192,641)
Change in net unrealized appreciation/ ------------------------------------------------------------------------------------
depreciation during the period (640,434) 1,457,154 (59,406) (450)
------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (707,296) 449,220 (175,645) (168,303)
------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (435,092) $ 729,729 $ 435,172 $ (84,358)
====================================================================================
<CAPTION>
VIP III
MORGAN STANLEY VIP GROWTH MID CAP
ASIAN EQUITY SERVICE CLASS SERVICE CLASS
DIVISION DIVISION (1) DIVISION (1) TOTAL
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends $ 21,426 $ - $ 7,702 $ 18,920,801
EXPENSES
Mortality and expense risk and
administrative charges 54,053 2,686 3,928 5,427,643
------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (32,627) (2,686) 3,774 13,493,158
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales
of investments 1,698,479 1,783 765 28,181,291
Net unrealized appreciation
(depreciation) of investments:
Beginning of period (270,250) - - 32,018,006
End of period 386,728 99,879 192,057 61,210,461
------------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 656,978 99,879 192,057 29,192,455
------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 2,355,457 101,662 192,822 57,373,746
------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,322,830 $ 98,976 $ 196,596 $ 70,866,904
==============================================================================
</TABLE>
(1) For the period June 1, 1999 (commencement of operations) to December 31,
1999
SEE ACCOMPANYING NOTES.
5
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1999
<TABLE>
<CAPTION>
HARRIS BRETALL
SULLIVAN & SMITH SCUDDER
ZWEIG ASSET EQUITY KEMPER ZWEIG EQUITY
ALLOCATION GROWTH VALUE (SMALL CAP)
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 4,885,822 $ 315,659 $ 5,252,759 $ (41,653)
Net realized gain (loss) on sales of investments (887,327) 6,694,747 (1,350,260) (783,323)
Change in net unrealized appreciation/
depreciation during the period (3,335,116) 4,193,199 (8,106,521) 305,746
------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 663,379 11,203,605 (4,204,022) (519,230)
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 183,155 5,925,254 3,052,325 440,132
Contract terminations and benefits (11,510,357) (14,030,877) (12,798,757) (3,772,818)
Net transfers among investment options (5,671,396) 4,274,197 (1,932,734) (817,618)
------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (16,998,598) (3,831,426) (11,679,166) (4,150,304)
------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (16,335,219) 7,372,179 (15,883,188) (4,669,534)
Net assets, beginning of year $31,186,196 $35,538,018 $37,996,525 $10,346,837
------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 14,850,977 $ 42,910,197 $ 22,113,337 $ 5,677,303
==============================================================================
UNIT TRANSACTIONS
Contributions 10,283 203,629 108,800 25,979
Terminations and benefits (650,890) (476,172) (486,249) (225,873)
Net transfers (316,394) 142,323 (77,578) (49,383)
------------------------------------------------------------------------------
Net increase (decrease) in units (957,001) (130,220) (455,027) (249,277)
==============================================================================
<CAPTION>
EQUITY SMALL
EAFE EQUITY 500 CAP VIP
INDEX INDEX INDEX EQUITY-INCOME
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 114,131 $ (67,841) $ 124,559 $ 438,290
Net realized gain (loss) on sales of investments 55,557 1,320,760 (112,135) 168,781
Change in net unrealized appreciation/
depreciation during the period 491,807 4,068,757 782,925 (39,275)
------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 661,495 5,321,676 795,349 567,796
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 730,902 12,114,245 640,962 3,247,899
Contract terminations and benefits (416,725) (4,524,070) (626,417) (2,154,317)
Net transfers among investment options 435,316 4,514,475 573,593 3,231,475
------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 749,493 12,104,650 588,138 4,325,057
------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,410,988 17,426,326 1,383,487 4,892,853
Net assets, beginning of year $2,008,055 $20,172,646 $3,550,158 $13,364,851
------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 3,419,043 $ 37,598,972 $ 4,933,645 $ 18,257,704
==============================================================================
UNIT TRANSACTIONS
Contributions 63,040 893,996 71,828 276,432
Terminations and benefits (35,343) (336,333) (68,568) (188,156)
Net transfers 35,038 332,807 63,859 276,741
------------------------------------------------------------------------------
Net increase (decrease) in units 62,735 890,470 67,119 365,017
==============================================================================
<CAPTION>
VIP
III VIP III JANUS ASPEN
VIP II GROWTH & GROWTH CAPITAL
CONTRAFUND INCOME OPPORTUNITIES APPRECIATION
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 245,724 $ 10,808 $ 103,782 $ (221,763)
Net realized gain (loss) on sales of
investments 610,842 684,280 229,705 1,308,844
Change in net unrealized appreciation/
depreciation during the period 3,218,070 396,922 (46,300) 13,589,378
------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 4,074,636 1,092,010 287,187 14,676,459
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 7,629,814 5,610,473 3,329,042 14,478,003
Contract terminations and benefits (2,042,215) (2,914,365) (1,525,950) (3,619,586)
Net transfers among investment options 4,460,469 3,178,257 2,426,316 11,483,208
------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 10,048,068 5,874,365 4,229,408 22,341,625
------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 14,122,704 6,966,375 4,516,595 37,018,084
Net assets, beginning of year $11,141,758 $11,262,122 $7,793,014 $10,520,449
------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 25,264,462 $ 18,228,497 $ 12,309,609 $ 47,538,533
==================================================================
UNIT TRANSACTIONS
Contributions 577,618 415,786 262,997 820,762
Terminations and benefits (155,990) (217,419) (121,867) (201,603)
Net transfers 337,239 233,814 189,709 622,462
------------------------------------------------------------------
Net increase (decrease) in units 758,867 432,181 330,839 1,241,621
==================================================================
</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, 1999
<TABLE>
<CAPTION>
JANUS ASPEN JPM
JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL
BALANCED GROWTH MONEY MARKET OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 513,257 $ (309,415) $ 815,178 $ 97,925
Net realized gain (loss) on sales of investments 10,821,666 8,804,845 - 272,170
Change in net unrealized appreciation/
depreciation during the period 4,054,948 7,488,035 2 424,100
-------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 15,389,871 15,983,465 815,180 794,195
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 10,217,054 8,504,360 7,363,257 147,261
Contract terminations and benefits (38,503,325) (2,220,245) (13,801,952) (242,586)
Net transfers among investment options 4,097,942 6,964,181 9,604,647 2,450,135
-------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (24,188,329) 13,248,296 3,165,952 2,354,810
-------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (8,798,458) 29,231,761 3,981,132 3,149,005
Net assets, beginning of year 73,179,887 15,985,460 17,912,269 1,314,444
-------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 64,381,429 $ 45,217,221 $ 21,893,401 $ 4,463,449
=========================================================================
UNIT TRANSACTIONS
Contributions 723,318 651,526 721,406 13,986
Terminations and benefits (2,653,147) (154,494) (1,319,169) (22,379)
Net transfers 285,966 489,357 906,402 216,530
-------------------------------------------------------------------------
Net increase (decrease) in units (1,643,863) 986,389 308,639 208,137
=========================================================================
<CAPTION>
MORGAN
MORGAN STANLEY
STANLEY MORGAN U.S.
EMERGING STANLEY HIGH REAL
JPM BOND MARKETS DEBT YIELD ESTATE
DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 272,204 $ 280,509 $ 610,817 $ 83,945
Net realized gain (loss) on sales of investments (66,862) (1,007,934) (116,239) (167,853)
Change in net unrealized appreciation/
depreciation during the period (640,434) 1,457,154 (59,406) (450)
-----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (435,092) 729,729 435,172 (84,358)
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 3,171,520 142,802 1,410,425 215,887
Contract terminations and benefits (3,660,397) (1,291,953) (643,920) (322,731)
Net transfers among investment options 4,688,237 (956,646) 2,207,397 (29,842)
-----------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 4,199,360 (2,105,797) 2,973,902 (136,686)
-----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 3,764,268 (1,376,068) 3,409,074 (221,044)
Net assets, beginning of year 16,273,633 3,960,959 6,045,262 2,257,450
-----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 20,037,901 $ 2,584,891 $ 9,454,336 $ 2,036,406
=============================================================================
UNIT TRANSACTIONS
Contributions 296,836 20,580 131,432 23,954
Terminations and benefits (345,524) (175,054) (60,092) (36,678)
Net transfers 439,182 (142,351) 206,537 (5,461)
-----------------------------------------------------------------------------
Net increase (decrease) in units 390,494 (296,825) 277,877 (18,185)
=============================================================================
<CAPTION>
VIP III
MORGAN MID CAP
STANLEY ASIAN VIP GROWTH SERVICE
EQUITY SERVICE CLASS CLASS
DIVISION DIVISION (1) DIVISION (1) TOTAL
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ (32,627) $ (2,686) $ 3,774 $ 13,493,158
Net realized gain (loss) on sales of investments 1,698,479 1,783 765 28,181,291
Change in net unrealized appreciation/
depreciation during the period 656,978 99,879 192,057 29,192,455
-----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 2,322,830 98,976 196,596 70,866,904
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 294,870 390,263 22,560 89,262,465
Contract terminations and benefits (1,207,716) (10,325) (73,768) (121,915,372)
Net transfers among investment options (694,323) 208,651 929,307 55,625,244
-----------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (1,607,169) 588,589 878,099 22,972,337
-----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 715,661 687,565 1,074,695 93,839,241
Net assets, beginning of year 3,720,450 - - 335,530,443
-----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 4,436,111 $ 687,565 $ 1,074,695 $ 429,369,684
=============================================================================
UNIT TRANSACTIONS
Contributions 30,068 39,136 3,042
Terminations and benefits (109,912) (2,950) (8,039)
Net transfers (75,766) 18,253 87,921
--------------------------------------------------------
Net increase (decrease) in units (155,610) 54,439 82,924
========================================================
</TABLE>
(1) For the period June 1, 1999 (commencement of operations) to December 31,
1999
SEE ACCOMPANYING NOTES.
7
<PAGE>
Separate Account II of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
HARRIS BRETALL
SULLIVAN & SCUDDER
ZWEIG ASSET SMITH EQUITY KEMPER ZWEIG EQUITY
ALLOCATION GROWTH VALUE (SMALL CAP)
DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 4,834,551 $ 2,817,601 $ 3,738,627 $ 2,228,849
Net realized gain (loss) on sales of investments 2,395,680 2,569,793 4,216,224 929,199
Change in net unrealized appreciation/
depreciation during the period (8,595,470) 3,414,109 (2,547,079) (3,544,245)
--------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (1,365,239) 8,801,503 5,407,772 (386,197)
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,234,928 4,514,417 7,070,279 924,803
Contract terminations and benefits (4,025,170) (3,316,966) (3,183,115) (1,408,182)
Net transfers among investment options (3,263,051) (27,888) (1,300,018) 470,524
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (6,053,293) 1,169,563 2,587,146 (12,855)
--------------------------------------------------------------------------------
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)
Net assets, beginning of year 38,604,728 25,566,952 30,001,607 10,745,889
--------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 31,186,196 $ 35,538,018 $ 37,996,525 $ 10,346,837
================================================================================
UNIT TRANSACTIONS
Contributions 68,159 204,596 279,804 50,952
Terminations and benefits (234,294) (149,607) (126,122) (79,350)
Net transfers (179,178) (5,056) (46,255) 17,621
--------------------------------------------------------------------------------
Net increase (decrease) in units (345,313) 49,933 107,427 (10,777)
================================================================================
<CAPTION>
VIP
EAFE EQUITY EQUITY 500 SMALL CAP EQUITY-INCOME
INDEX DIVISION INDEX DIVISION INDEX DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 13,991 $ 399,021 $ 41,036 $ 59,677
Net realized gain (loss) on sales of investments 36,558 1,321,174 (51,131) (29,386)
Change in net unrealized appreciation/
depreciation during the period 97,599 1,796,862 (78,877) 556,464
----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 148,148 3,517,057 (88,972) 586,755
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 978,249 10,963,980 2,391,039 9,091,118
Contract terminations and benefits (239,690) (427,670) (50,118) (179,508)
Net transfers among investment options 936,226 4,875,813 635,162 2,301,955
----------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 1,674,785 15,412,123 2,976,083 11,213,565
----------------------------------------------------------------------------
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 1,822,933 17,889,633 2,887,111 11,800,320
Net assets, beginning of year 185,122 2,283,013 663,047 1,564,531
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 2,008,055 $ 20,172,646 $ 3,550,158 $ 13,364,851
============================================================================
UNIT TRANSACTIONS
Contributions 94,539 956,008 255,725 855,122
Terminations and benefits (23,408) (38,163) (6,837) (17,631)
Net transfers 86,921 421,220 70,573 213,203
----------------------------------------------------------------------------
Net increase (decrease) in units 158,052 1,339,065 319,461 1,050,694
============================================================================
<CAPTION>
VIP III VIP III
VIP II GROWTH & GROWTH
CONTRAFUND INCOME OPPORTUNITIES
DIVISION DIVISION DIVISION
---------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 20,083 $ (60,981) $ (1,089)
Net realized gain (loss) on sales of investment 40,316 28,315 18,272
Change in net unrealized appreciation/
depreciation during the period 1,542,475 1,549,282 923,589
---------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 1,602,874 1,516,616 940,772
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 6,163,372 5,922,478 3,955,196
Contract terminations and benefits (224,727) (176,897) (142,596)
Net transfers among investment options 2,341,556 2,775,467 2,237,515
---------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 8,280,201 8,521,048 6,050,115
-----------------------------------------------------
Contribution by Integrity - - -
Redemption of contributions by Integrity - - -
Change in amounts retained in Separate
Account II by Integrity - - -
---------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 9,883,075 10,037,664 6,990,887
Net assets, beginning of year 1,258,683 1,224,458 802,127
---------------------------------------------------------
NET ASSETS, END OF YEAR $ 11,141,758 $ 11,262,122 $ 7,793,014
=========================================================
UNIT TRANSACTIONS
Contributions 569,423 522,872 353,335
Terminations and benefits (20,472) (21,318) (12,080)
Net transfers 215,173 238,574 198,078
---------------------------------------------------------
Net increase (decrease) in units 764,124 740,128 539,333
=========================================================
</TABLE>
SEE ACCOMPANYING NOTES.
8
<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
CAPITAL JANUS ASPEN WORLDWIDE JANUS ASPEN
APPRECIATION BALANCED GROWTH MONEY MARKET
DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ (44,117) $ 1,899,400 $ 187,520 $ 462,728
Net realized gain (loss) on sales of investments 156,476 816,346 164,053 -
Change in net unrealized appreciation/
depreciation during the period 2,084,874 15,299,865 1,051,954 (268)
--------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 2,197,233 18,015,611 1,403,527 462,460
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
Contract terminations and benefits (132,661) (6,671,434) (135,207) (2,330,776)
Net transfers among investment options 3,074,983 832,974 3,765,741 2,380,514
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 7,450,139 (1,163,550) 13,145,135 11,056,579
--------------------------------------------------------------------------------
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
Net assets, beginning of year 873,077 56,327,826 1,436,798 6,393,230
--------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 10,520,449 $ 73,179,887 $ 15,985,460 $ 17,912,269
================================================================================
UNIT TRANSACTIONS
Contributions 375,465 414,291 857,969 1,068,361
Terminations and benefits (12,429) (605,433) (16,099) (225,163)
Net transfers 257,055 78,188 334,105 231,739
--------------------------------------------------------------------------------
Net increase (decrease) in units 620,091 (112,954) 1,175,975 1,074,937
================================================================================
<CAPTION>
JPM MORGAN STANLEY MORGAN STANLEY
INTERNATIONAL EMERGING HIGH
OPPORTUNITIES JPM BOND MARKETS DEBT YIELD
DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 38,221 $ 481,757 $ 398,547 $ 328,879
Net realized gain (loss) on sales of investments (121,252) 162,102 (259,162) (32,519)
Change in net unrealized appreciation/
depreciation during the period 20,038 (3,951) (1,995,556) (231,011)
---------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (62,993) 639,908 (1,856,171) 65,349
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,387,817 7,908,411 690,761 4,057,709
Contract terminations and benefits (22,715) (1,149,660) (557,483) (135,447)
Net transfers among investment options (374,307) 4,678,780 (346,707) 1,351,740
---------------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 990,795 11,437,531 (213,429) 5,274,002
---------------------------------------------------------------------------
Contribution by Integrity - - - -
Redemption of contributions by Integrity - (3,976,222) - -
Change in amounts retained in Separate
Account II by Integrity - 3,912,700 - -
---------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 927,802 12,013,917 (2,069,600) 5,339,351
Net assets, beginning of year 386,642 4,259,716 6,030,559 705,911
---------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 1,314,444 $ 16,273,633 $ 3,960,959 $ 6,045,262
===========================================================================
UNIT TRANSACTIONS
Contributions 142,087 763,490 75,799 393,649
Terminations and benefits (2,410) (111,482) (70,196) (15,424)
Net transfers (44,277) 429,837 (51,459) 130,446
---------------------------------------------------------------------------
Net increase (decrease) in units 95,400 1,081,845 (45,856) 508,671
===========================================================================
<CAPTION>
MORGAN STANLEY
U.S. REAL MORGAN STANLEY
ESTATE ASIAN EQUITY
DIVISION DIVISION TOTAL
------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $ 37,973 $ (17,576) $ 17,864,698
Net realized gain (loss) on sales of investments (64,792) (351,346) 11,944,920
Change in net unrealized appreciation/
depreciation during the period (193,701) 299 11,147,252
------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (220,520) (368,623) 40,956,870
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,707,287 363,137 99,029,150
Contract terminations and benefits (35,824) (292,329) (24,838,175)
Net transfers among investment options 122,833 (77,162) 27,392,650
------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 1,794,296 (6,354) 101,583,625
------------------------------------------------------
Contribution by Integrity - - -
Redemption of contributions by Integrity - - (13,705,769)
Change in amounts retained in Separate
Account II by Integrity - - 12,602,700
------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,573,776 (374,977) 141,437,426
Net assets, beginning of year 683,674 4,095,427 194,093,017
------------------------------------------------------
NET ASSETS, END OF YEAR $ 2,257,450 $ 3,720,450 $ 335,530,443
======================================================
UNIT TRANSACTIONS
Contributions 178,078 46,969
Terminations and benefits (5,455) (38,663)
Net transfers 12,814 (16,029)
------------------------------------------------------
Net increase (decrease) in units 185,437 (7,723)
======================================================
</TABLE>
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.
Prior to March 3, 2000, Integrity was an indirect wholly owned subsidiary of ARM
Financial Group, Inc. ("ARM"). Effective March 3, 2000, Integrity and its wholly
owned subsidiary, National Integrity Life Insurance Company ("National
Integrity"), were acquired by the Western and Southern Life Insurance Company
("W&S."). (See Note 5 of Notes to Financial Statements.)
Contract holders may allocate or transfer their account values to one or more
investment divisions of the Separate Account or to one or more fixed guaranteed
rate options or systematic transfer options of Integrity's Separate Account GPO.
The Separate Account divisions invest in shares of the corresponding portfolios
of the following funds or insurance trust funds ("Funds"): Deutsche Asset
Management VIT Funds ("Deutsche Funds"); Variable Insurance Products Fund
("VIP"), Variable Insurance Products Fund II ("VIP II"), and Variable Insurance
Products Fund III ("VIP III"), part of the Fidelity Investments group of
companies (collectively, "Fidelity's VIP Funds"); The Legends Fund, Inc.
("Legends Fund"); Janus Aspen Series; J.P. Morgan Series Trust II ("JPM
Series"); and Morgan Stanley Universal Funds, Inc. ("Morgan Stanley Universal
Funds"). Bankers Trust Global Asset Management Services, a unit of Bankers Trust
Company, is the investment manager of the Deutsche Funds. Fidelity Management
and Research Company serves as investment adviser to Fidelity's VIP Funds.
Integrity Capital Advisors, Inc., a wholly owned subsidiary of ARM, was the
investment adviser of the Legends Fund until March 3, 2000, when it changed to
Touchstone Advisors, Inc. Janus Capital Corporation serves as investment adviser
to the Janus Aspen Series. J.P. Morgan Investment Management Inc. is the
investment adviser to the JPM Series. Morgan Stanley Dean Witter Asset
Management Inc. ("MSDW") serves as investment adviser to the Morgan Stanley
Universal Funds except for Morgan Stanley High Yield Portfolio, for which Miller
Anderson & Sherrerd, LLP serves as investment adviser.
10
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MSDW is a wholly owned subsidiary of Morgan Stanley Dean Witter & Co. ("Morgan
Stanley"). Prior to ARM's secondary public offering of its common stock in May,
1998, Morgan Stanley and ARM were considered affiliates.
The contract holder's account value in a Separate Account division will vary
depending on the performance of the corresponding portfolio. The Separate
Account currently has twenty-three investment divisions available. The
investment objective of each division and its corresponding portfolio are the
same. Set forth below is a summary of the investment objectives of the
portfolios of the Funds.
ZWEIG ASSET ALLOCATION PORTFOLIO seeks long-term capital appreciation and,
to a lesser extent, dividend income, while reducing portfolio exposure to
market risk. The sub-advisor uses a computer-driven stock selection model
that ranks approximately 600 of the most liquid stocks as determined by the
sub-advisor using various measures, including earnings, relative valuation,
and changes in analysts' earnings estimates, and based on those rankings
within each industry group, chooses up to 150 stocks for the Portfolio.
Zweig/Glaser Advisers is the sub-adviser to the Portfolio.
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO seeks long-term
capital appreciation. It invests primarily in stocks of established
companies with proven records of superior and consistent earnings growth.
In selecting equity securities for the Portfolio, the sub-adviser looks for
successful companies that have exhibited superior growth in revenues and
earnings, strong product lines and proven management ability over a variety
of business cycles. The Portfolio may invest all or a portion of its assets
in cash and cash equivalents if the sub-adviser considers the equities
markets to be overvalued. Harris Bretall Sullivan & Smith, LLC is the
sub-adviser to the Portfolio.
SCUDDER KEMPER VALUE PORTFOLIO seeks long-term capital appreciation, with
current income as its secondary objective. It invests primarily in a
diversified portfolio of the stocks of large U.S. companies with a history
of delivering rising earnings and growing dividends that are believed to be
undervalued, or that have a low price to earnings ratio. These companies
usually have a minimum market capitalization of $1 billion. Scudder Kemper
Investors, Inc. is sub-adviser to the Portfolio.
11
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation
while striving to limit exposure to market risk. Under normal
circumstances, the Portfolio will invest primarily in small company stocks
with market capitalizations between $250 million and $1.5 billion, but may
have some of its assets invested in larger company stocks. Zweig/Glaser
Advisers is the sub-adviser to the Portfolio.
EAFE EQUITY INDEX PORTFOLIO seeks to replicate, as closely as possible
(before expenses are deducted), the total return of the Morgan Stanley
Capital International Europe, Australia, Far East (EAFE) Index, a
capitalization-weighted index of common stock of approximately 1,100
companies located outside the United States. The Portfolio invests
primarily in a statistically selected sample of the common stocks that
comprise the EAFE Index that are determined to represent the industry
diversification of the entire EAFE Index. Bankers Trust Global Asset
Management Services is the investment adviser to the Portfolio.
EQUITY 500 INDEX PORTFOLIO seeks to replicate, as closely as possible
(before expenses are deducted), the total return of the S&P 500, an index
used to portray the performance of common stock of 500 large U.S.
companies. The Portfolio invests primarily in a statistically selected
sample of the common stocks of companies that comprise the S & P 500 Index
that are determined to represent the industry diversification of the entire
S & P 500 Index. Bankers Trust Global Asset Management Services is the
investment adviser to the Portfolio.
SMALL CAP INDEX PORTFOLIO seeks to replicate, as closely as possible
(before expenses are deducted), the total return of the Russell 2000 Small
Stock Index (the "Russell 2000"), an index used to portray the performance
of common stock of 2000 small U.S. companies. The Portfolio invests
primarily in a statistically selected sample of the common stocks of
companies that comprise the Russell 2000 Index that are determined to
represent the industry diversification of the entire Russell 2000 Index.
Bankers Trust Global Asset Management Services is the investment adviser to
the Portfolio.
12
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily
in income producing equity securities, with the potential for capital
appreciation as a consideration. The Portfolio seeks a yield which exceeds
the composite yield on the securities comprising the S&P 500. It normally
invests at least 65% of its assets in income-producing equity securities.
Fidelity Management and Research Company serves as the investment adviser
to the Portfolio.
VIP II CONTRAFUND PORTFOLIO seeks long-term capital appreciation. The
Portfolio invests primarily in common stocks and in securities whose value
the sub-adviser believes is not fully recognized by the public. The types
of companies in which the Portfolio may invest include companies
experiencing positive fundamental change such as a new management team or
product launch, a significant cost-cutting initiative, a merger or
acquisition, or a reduction in industry capacity that should lead to
improved pricing; companies whose earnings potential has increased or is
expected to increase more than generally perceived; companies that have
enjoyed recent market popularity but which appear to have temporarily
fallen out of favor for reasons that are considered non-recurring or
short-term; and companies that are undervalued in relation to securities of
other companies in the same industry. Fidelity Management and Research
Company serves as the investment adviser to the Portfolio.
VIP III GROWTH & INCOME PORTFOLIO seeks high total return through a
combination of current income and capital appreciation by investing mainly
in common stocks with a focus on those that pay current dividends and show
potential for capital appreciation. The Portfolio may also invest in bonds,
including lower-quality debt securities, as well as stocks that are not
currently paying dividends, but offer prospects for future income or
capital appreciation. Fidelity Management and Research Company serves as
the investment adviser to the Portfolio.
VIP III GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by
investing primarily in common stocks. The Portfolio may also invest in
other types of securities, including bonds which may be lower-quality debt
securities. Fidelity Management and Research Company serves as the
investment adviser to the Portfolio.
13
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO seeks long-term growth of
capital. It is a non-diversified portfolio that pursues its objective by
investing primarily in common stocks of issuers selected for their growth
potential. The Portfolio may invest in companies of any size, from larger,
well-established companies to smaller emerging growth companies. Janus
Capital Corporation serves as the investment adviser to the Portfolio.
JANUS ASPEN BALANCED PORTFOLIO seeks long-term capital growth, consistent
with capital preservation and balanced by current income. It is a
diversified portfolio that pursues its objective by normally investing
40-60% of its assets in securities selected primarily for their growth
potential and 40-60% of its assets in securities selected primarily for
their income potential. The Portfolio normally invests at least 25% of its
assets in fixed-income securities. Janus Capital Corporation serves as the
investment adviser to the Portfolio.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in
a manner consistent with the preservation of capital. It is a diversified
portfolio that pursues its objective by investing primarily in common
stocks of companies of any size throughout the world. The Portfolio
normally invests in issuers from at least five different countries,
including the United States. The Portfolio may at any time invest in fewer
than five countries or even a single country. Janus Capital Corporation
serves as the investment adviser to the Portfolio.
JANUS ASPEN MONEY MARKET PORTFOLIO seeks maximum current income to the
extent consistent with stability of capital. There is no guarantee that the
Portfolio will meet its investment goal or be able to maintain a stable net
asset value of $1.00 per share. The Portfolio will invest in high quality,
short-term money market instruments that present minimal credit risks, as
determined by Janus Capital Corporation, the Portfolio's investment
adviser. The Portfolio may invest only in United States dollar-denominated
instruments that have a remaining maturity of 397 days or less and will
maintain a dollar-weighted average portfolio maturity of 90 days or less.
Janus Capital Corporation serves as the investment adviser to the
Portfolio.
14
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
JPM INTERNATIONAL OPPORTUNITIES PORTFOLIO seeks to provide a high total
return from a portfolio of equity securities of foreign corporations. The
Portfolio is designed for investors who have long-term investment goals and
who want to diversify their investments by adding international equities,
taking advantage of investment opportunities outside the U.S. The Portfolio
seeks to meet its investment goal primarily through stock valuation and
selection. J.P. Morgan Investment Management Inc. is the investment adviser
to the Portfolio.
JPM BOND PORTFOLIO seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Although the net
asset value of the Portfolio will fluctuate, the Portfolio attempts to
preserve the value of its investments to the extent consistent with its
objective. J.P. Morgan Investment Management Inc. is the investment adviser
to the Portfolio.
MORGAN STANLEY EMERGING MARKETS DEBT PORTFOLIO seeks high total return by
investing primarily in fixed income securities of government and
government-related issuers and, to a lesser extent, of corporate issuers in
emerging market countries. MSDW serves as the investment adviser to the
Portfolio.
MORGAN STANLEY HIGH YIELD PORTFOLIO seeks above-average total return over a
market cycle of three to five years by investing primarily in a diversified
portfolio of high yield securities of both U.S. and non-U.S. issuers. The
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. Miller Anderson & Sherrerd, LLP serves as the investment adviser to
the Portfolio.
MORGAN STANLEY U.S. REAL ESTATE PORTFOLIO seeks above-average current
income and long-term capital appreciation by investing primarily in equity
securities of U.S. and non-U.S. companies in the U.S. real estate industry,
including real estate investment trusts ("REITs") and real estate operating
companies. MSDW serves as the investment adviser to the Portfolio.
MORGAN STANLEY ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation
by investing primarily in a diversified portfolio of equity securities of
Asian issuers (excluding Japan). The adviser employs a disciplined,
value-oriented approach to security selection, focusing on larger companies
with strong management teams. The
15
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
adviser evaluates top-down country risk factors and opportunities when
determining position sizes and overall exposure to individual markets. MSDW
serves as the investment adviser to the Portfolio.
VIP GROWTH SERVICE CLASS PORTFOLIO seeks capital appreciation through
investing in companies believed to have above-average growth potential.
Growth may be measured by factors such as earnings 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. Fidelity Management and
Research Company serves as the investment adviser to the Portfolio.
VIP III MID-CAP SERVICE CLASS PORTFOLIO invests primarily in common stocks.
The Portfolio normally invests at least 65% in securities of companies with
medium market capitalizations. Medium market capitalization companies are
those whose market capitalization is similar to the capitalization of
companies in the S&P Mid Cap 400 at the time of the investment. Companies
whose capitalization no longer meets this definition after purchase
continue to be considered to have a medium market capitalization for
purposes of the 65% policy. Fidelity Management and Research Company serves
as the investment advisor to the Portfolio.
The assets of the Separate Account are owned by 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
accounting principles generally accepted in the United States for unit
investment trusts.
16
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Investments in shares of the Funds are valued at the net asset values of the
respective portfolios, which approximates fair value. The difference between
cost and fair value is reflected as unrealized appreciation and depreciation of
investments.
Share transactions are recorded on the trade date. Realized gains and losses on
sales of the Funds' shares are determined based on the identified cost basis.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends and distributions from the Funds' portfolios are
reinvested in the respective portfolios and are reflected in the unit value of
the divisions of the Separate Account.
UNIT VALUE
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
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.
17
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during 1999 and the cost of shares held at December 31, 1999 for
each division were as follows:
<TABLE>
<CAPTION>
DIVISION PURCHASES SALES COST
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Zweig Asset Allocation $ 5,669,285 $ 17,784,718 $ 17,586,494
Harris Bretall Sullivan & Smith Equity Growth 11,335,298 14,849,799 30,002,091
Scudder Kemper Value 10,112,700 16,538,661 29,490,594
Zweig Equity (Small Cap) 699,276 4,889,542 6,711,046
EAFE Equity Index 1,496,901 632,263 2,830,468
Equity 500 Index 17,976,825 5,944,549 31,509,189
Small Cap Index 2,563,676 1,851,271 4,231,659
VIP Equity-Income 7,484,067 2,706,057 17,712,788
VIP II Contrafund 13,015,701 2,719,714 20,494,242
VIP III Growth & Income 8,871,485 2,985,682 16,269,367
VIP III Growth Opportunities 6,025,341 1,688,817 11,412,694
Janus Aspen Capital Appreciation 25,265,698 3,141,468 31,850,708
Janus Aspen Balanced 11,428,592 35,100,808 44,275,978
Janus Aspen Worldwide Growth 66,526,976 53,583,828 36,649,970
Janus Aspen Money Market 91,838,516 87,855,868 21,895,242
JPM International Opportunities 13,080,628 10,625,256 4,061,504
JPM Bond 10,260,872 5,809,989 20,768,621
Morgan Stanley Emerging Markets Debt 811,292 2,645,605 2,851,364
Morgan Stanley High Yield 6,660,303 3,077,845 9,780,030
Morgan Stanley U.S. Real Estate 1,063,788 1,116,180 2,228,215
Morgan Stanley Asian Equity 9,173,827 10,769,555 4,050,230
VIP Growth Service Class 607,827 22,036 587,574
VIP III Mid Cap Service Class 989,861 108,164 882,462
---------------------
$ 368,132,530
=====================
</TABLE>
18
<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.
During 1998, Integrity transferred to its general account all amounts retained
by Integrity in the Equity 500 Index Division and the JPM Bond Division.
5. EVENTS RELATING TO INTEGRITY AND ARM
On July 29, 1999, ARM announced that it was restructuring its institutional
business and positioning its retail business and technology operations for the
sale of ARM or its businesses or its assets. Following the July 29, 1999
announcement, the ratings of ARM and Integrity were significantly lowered
several times by four major rating agencies, materially and adversely affecting
Integrity's ability to market retail products and adversely affecting the
persistency of its existing business during the remainder of 1999.
In order to preserve and maximize value for policyholders, the Integrity
requested supervision from the Ohio Department of Insurance, its domiciliary
regulator. On August 20, 1999, the Ohio Department of Insurance issued a
Supervision Order. Under the terms of the Supervision Order, the Integrity
continued payments of death benefits, previously scheduled systematic
withdrawals, previously scheduled immediate annuity payments, and agent
commissions, but could not make other payments without approval from the Ohio
Department of Insurance. The Supervision Order also suspended the processing of
surrenders of fixed annuity policies except in cases of approved hardship. The
Supervision Order did not affect the surrender of variable annuity contracts,
including the contracts through which the Divisions of the Separate Account are
offered.
19
<PAGE>
Separate Account II
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
5. EVENTS RELATING TO INTEGRITY AND ARM (CONTINUED)
On December 17, 1999, ARM entered into a Purchase Agreement among W&S, ARM and
Integrity Holdings, Inc., whereby W&S agreed to acquire ARM's insurance
subsidiaries, Integrity and Integrity's wholly-owned subsidiary, National
Integrity. On March 3, 2000, ARM closed the transaction contemplated by the
Purchase Agreement (the "Closing"). As a result of the Closing, the Supervision
Order issued by the Ohio Department of Insurance that had been automatically
extended since August 20, 1999, was released, effective March 2, 2000.
Integrity has been assigned a AAA (Extremely Strong) rating for financial
strength by Standard & Poor's, AAA (Highest) for claims paying ability from Duff
& Phelps' and A (Excellent) for financial strength from A.M. Best.
It is expected that Moody's will assign similar ratings to Integrity.
W&S is part of the Western-Southern Enterprise, a financial services group which
also includes Western-Southern Life Assurance Company, Columbus Life Insurance
Company, Touchstone Advisors, Inc., Fort Washington Investment Advisors, Inc.,
Todd Investment Advisors, Inc., Countrywide Financial Services, Capital Analysts
Incorporated and Eagle Realty Group, Inc. Assets owned or under management by
the group exceed $20 billion. Western and Southern is rated A++ (Superior) by
A.M. Best, AAA (Highest) by Duff & Phelps, AAA (Extremely Strong) by Standard &
Poor's, and Aa2 (Excellent) by Moody's.
20
<PAGE>
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-March, 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,
1999, 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements 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, 1999, by correspondence with
the custodian and broker. As to certain 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 audits provide 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, 1999, and the results
of their operations, changes in their net assets, and financial highlights for
each of the periods indicated therein in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
Kansas City, Missouri
January 28, 2000
18
<PAGE>
Select Ten Plus Division - March
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------
ASSETS
<S> <C>
Investments in securities, at value (cost $6,753,216)--See accompanying schedule $ 6,812,742
Due from investment advisor 1,846
Dividends receivable 19,644
------------------------
TOTAL ASSETS 6,834,232
LIABILITIES
Cash overdraft 6,697
Accrued expenses 27,536
------------------------
TOTAL LIABILITIES 34,233
------------------------
NET ASSETS $ 6,799,999
========================
UNIT VALUE, offering and redemption price per unit $ 10.24
========================
Units outstanding 664,381
========================
<CAPTION>
Statement of Operations
MARCH 31, 1999
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1999
------------------------
<S> <C>
INVESTMENT INCOME - DIVIDENDS $ 163,112
EXPENSES
Mortality and expense risk and administrative charges 85,208
Investment advisory and management fees 31,558
Custody and accounting fees 15,282
Professional fees 5,000
Directors' fees and expenses 6,251
Printing and filing fees 3,295
Other expenses 4,922
------------------------
Total expenses before reimbursement 151,516
Less: expense reimbursement (12,658)
------------------------
Net expenses 138,858
------------------------
Net investment income 24,254
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 147,764
Net unrealized appreciation during the period on investments 59,526
------------------------
Net realized and unrealized gain on investments 207,290
------------------------
Net increase in net assets resulting from operations $ 231,544
========================
</TABLE>
SEE ACCOMPANYING NOTES.
19
<PAGE>
Select Ten Plus Division - March
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
MARCH 31, 1999
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1999
------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 24,254
Net realized gain on investments 147,764
Net unrealized appreciation during the period on investments 59,526
------------------------
Net increase in net assets resulting from operations 231,544
Contract related transactions:
Contributions from contract holders (798,422 units) 7,991,654
Cost of units redeemed (134,041 units) (1,423,199)
------------------------
Net increase in net assets resulting from unit transactions 6,568,455
------------------------
TOTAL INCREASE IN NET ASSETS 6,799,999
NET ASSETS
Beginning of period -
------------------------
End of period $ 6,799,999
========================
</TABLE>
SEE ACCOMPANYING NOTES.
20
<PAGE>
Select Ten Plus Division - March
Financial Highlights
<TABLE>
<CAPTION>
MARCH 31, 1999
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1999
-----------------------
<S> <C>
SELECTED PER-UNIT DATA
Unit value, beginning of period $ 10.00
Income from investment operations:
Net investment income 0.04
Net realized and unrealized gain on investments 0.20
-----------------------
Total from investment operations 0.24
=======================
Unit value, end of period $ 10.24
=======================
TOTAL RETURN 2.35%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 6,800
Ratio of net investment income to average net assets 0.38%
Ratio of expenses to average net assets 2.20%
Ratio of net investment income to average net assets before voluntary
expense reimbursement 0.18%
Ratio of expenses to average net assets before voluntary expense reimbursement 2.40%
Portfolio turnover rate 22%
</TABLE>
PERCENTAGE AMOUNTS ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER
RATE.
21
<PAGE>
Select Ten Plus Division - March
Schedule of Investments
December 31, 1999
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------- ---------------
<S> <C> <C>
COMMON STOCKS (100.0%)
BASIC MATERIALS (34.9%)
Du Pont (E.I.) de Nemours and Company 11,457 $ 754,730
Exxon Mobil Corporation 9,903 797,810
International Paper Company 14,580 822,859
---------------
2,375,399
CAPITAL GOODS (23.5%)
Caterpillar, Inc. 14,362 675,912
Minnesota Mining and Manufacturing Company 9,429 922,863
---------------
1,598,775
CONSUMER CYCLICAL (15.3%)
Eastman Kodak Company 10,489 694,896
The Goodyear Tire & Rubber Company 12,432 350,427
---------------
1,045,323
CONSUMER STAPLE (6.2%)
Philip Morris Companies, Inc. 18,242 422,986
ENERGY (10.1%)
Chevron Corporation 7,916 685,724
FINANCIAL (10.0%)
J.P. Morgan & Company, Inc. 5,406 684,535
---------------
TOTAL COMMON STOCKS (Cost $6,753,216) 6,812,742
---------------
TOTAL INVESTMENTS (100.0%) $ 6,812,742
===============
</TABLE>
OTHER INFORMATION:
Cost of purchases and proceeds from sales of securities, excluding
short-term securities, for the period ended December 31, 1999 aggregated
$8,405,848 and $1,800,396, respectively. At December 31, 1999, net unrealized
appreciation for tax purposes aggregated $59,526 of which $562,724 related to
appreciated investments and $503,198 related to depreciated investments. The
aggregate cost of investments was the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
22
<PAGE>
Select Ten Plus Division - June
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
<S> <C>
ASSETS
Investments in securities, at value (cost $7,162,739)--See accompanying schedule $ 6,441,407
Cash 4,456
Due from investment advisor 1,933
Dividends receivable 19,927
----------------------
TOTAL ASSETS 6,467,723
LIABILITIES
Accrued expenses 36,749
----------------------
NET ASSETS $ 6,430,974
======================
UNIT VALUE, offering and redemption price per unit $ 10.14
======================
Units outstanding 634,209
======================
Statement of Operations
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
----------------------
<S> <C>
INVESTMENT INCOME - DIVIDENDS $ 131,487
EXPENSES
Mortality and expense risk and administrative charges 64,928
Investment advisory and management fees 24,047
Custody and accounting fees 20,350
Professional fees 6,990
Directors' fees and expenses 6,249
Printing and filing fees 6,570
Other expenses 6,088
----------------------
Total expenses before reimbursement 135,222
Less: expense reimbursement (29,414)
----------------------
Net expenses 105,808
----------------------
Net investment income 25,679
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 109,186
Net unrealized depreciation during the period on investments (800,095)
----------------------
Net realized and unrealized loss on investments (690,909)
----------------------
Net decrease in net assets resulting from operations $ (665,230)
======================
</TABLE>
SEE ACCOMPANYING NOTES.
23
<PAGE>
Select Ten Plus Division - June
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
JUNE 30, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 25,679 $ 4,944
Net realized gain on investments 109,186 925
Net unrealized appreciation (depreciation) during the period
on investments (800,095) 78,763
-------------------------------------------
Net increase (decrease) in net assets resulting from operations (665,230) 84,632
Contract related transactions:
Contributions from contract holders (557,624 and 196,589 units,
respectively) 6,304,246 1,965,893
Cost of units redeemed (119,256 and 748 units, respectively) (1,251,062) (7,505)
-------------------------------------------
Net increase in net assets resulting from unit transactions 5,053,184 1,958,388
-------------------------------------------
TOTAL INCREASE IN NET ASSETS 4,387,954 2,043,020
NET ASSETS
Beginning of period 2,043,020 -
-------------------------------------------
End of period $ 6,430,974 $ 2,043,020
===========================================
</TABLE>
SEE ACCOMPANYING NOTES.
24
<PAGE>
Select Ten Plus Division - June
Financial Highlights
<TABLE>
<CAPTION>
JUNE 30,1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------------------
<S> <C> <C>
SELECTED PER-UNIT DATA
Unit value, beginning of period $ 10.43 $ 10.00
Income (loss) from investment operations:
Net investment income 0.02 0.03
Net realized and unrealized gain (loss) on investments (0.31) 0.40
--------------------------------------------
Total from investment operations (0.29) 0.43
============================================
Unit value, end of period $ 10.14 $ 10.43
============================================
TOTAL RETURN (2.78%) 4.30%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 6,431 $ 2,043
Ratio of net investment income to average net assets 0.54% 0.50%
Ratio of expenses to average net assets 2.20% 2.20%
Ratio of net investment loss to average net assets before voluntary
Expense reimbursement (0.08%) (1.50%)
Ratio of expenses to average net assets before voluntary expense
Reimbursement 2.82% 4.20%
Portfolio turnover rate 43% 1%
</TABLE>
PERCENTAGE AMOUNTS ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER
RATE.
25
<PAGE>
Select Ten Plus Division - June
Schedule of Investments
December 31, 1999
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------- ----------------
<S> <C> <C>
COMMON STOCKS (100.0%)
BASIC MATERIALS (23.1%)
Du Pont (E.I.) de Nemours and Company 10,411 $ 685,825
Exxon Mobil Corporation 9,997 805,383
----------------
1,491,208
CAPITAL GOODS (20.9%)
Caterpillar, Inc. 11,728 551,949
Minnesota Mining and Manufacturing Company 8,089 791,711
----------------
1,343,660
COMMUNICATION SERVICES (0.0%)
AT&T Corporation -* 4
CONSUMER CYCLICAL (27.3%)
Eastman Kodak Company 10,318 683,568
General Motors Corporation 10,323 750,353
The Goodyear Tire & Rubber Company 11,429 322,155
----------------
1,756,076
CONSUMER STAPLE (6.5%)
Philip Morris Companies, Inc. 18,147 420,784
ENERGY (11.0%)
Chevron Corporation 8,178 708,419
FINANCIAL (11.2%)
J.P. Morgan & Company, Inc. 5,696 721,256
----------------
TOTAL COMMON STOCKS (Cost $7,162,739) 6,441,407
----------------
TOTAL INVESTMENTS (100.0%) $6,441,407
================
</TABLE>
OTHER INFORMATION:
Cost of purchases and proceeds from sales of securities, excluding
short-term securities, for the period ended December 31, 1999 aggregated
$7,192,357 and $2,116,723, respectively. At December 31, 1999, net
unrealized depreciation for tax purposes aggregated $721,332 of which
$207,973 related to appreciated investments and $929,305 related to
depreciated investments. The aggregate cost of investments was the same for
book and tax purposes.
* Less than one.
SEE ACCOMPANYING NOTES.
26
<PAGE>
Select Ten Plus Division - September
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
<S> <C>
ASSETS
Investments in securities, at value (cost $11,541,867)--See accompanying schedule $ 11,262,352
Due from investment advisor 2,638
Dividends receivable 47,027
Receivable for investments sold 32,070
----------------------
TOTAL ASSETS 11,344,087
LIABILITIES
Cash overdraft 29,194
Accrued expenses 68,339
----------------------
TOTAL LIABILITIES 97,533
----------------------
NET ASSETS $11,246,554
======================
UNIT VALUE, offering and redemption price per unit $ 10.11
======================
Units outstanding 1,111,983
======================
Statement of Operations
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
----------------------
<S> <C>
INVESTMENT INCOME - DIVIDENDS $ 317,948
EXPENSES
Mortality and expense risk and administrative charges 154,779
Investment advisory and management fees 57,325
Custody and accounting fees 20,350
Professional fees 13,903
Directors' fees and expenses 12,432
Printing and filing fees 13,067
Other expenses 12,111
----------------------
Total expenses before reimbursement 283,967
Less: expense reimbursement (31,735)
----------------------
Net expenses 252,232
----------------------
Net investment income 65,716
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 278,707
Net unrealized depreciation during the period on investments (547,581)
----------------------
Net realized and unrealized loss on investments (268,874)
----------------------
Net decrease in net assets resulting from operations $ (203,158)
======================
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE>
Select Ten Plus Division-September
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 65,716 $ 16,164
Net realized gain on investments 278,707 2,620
Net unrealized appreciation (depreciation) during the period on investments (547,581) 268,066
----------------------------------------------
Net increase (decrease) in net assets resulting from operations (203,158) 286,850
Contract related transactions:
Contributions from contract holders (427,004 and 1,084,432 units,
respectively) 4,567,272 10,841,972
Cost of units redeemed (387,975 and 11,478 units, respectively) (4,129,946) (116,436)
----------------------------------------------
Net increase in net assets resulting from unit transactions 437,326 10,725,536
----------------------------------------------
TOTAL INCREASE IN NET ASSETS 234,168 11,012,386
NET ASSETS
Beginning of period -
11,012,386
----------------------------------------------
End of period $ 11,246,554 $11,012,386
==============================================
</TABLE>
SEE ACCOMPANYING NOTES.
28
<PAGE>
Select Ten Plus Division-September
Financial Highlights
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------------------
<S> <C> <C>
SELECTED PER-UNIT DATA
Unit value, beginning of period $ 10.26 $ 10.00
Income (loss) from investment operations:
Net investment income 0.05 0.02
Net realized and unrealized gain (loss) on investments (0.20) 0.24
--------------------------------------------
Total from investment operations (0.15) 0.26
--------------------------------------------
Unit value, end of period $ 10.11 $ 10.26
============================================
TOTAL RETURN (1.42%) 2.60%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 11,247 $ 11,012
Ratio of net investment income to average net assets 0.57% 0.57%
Ratio of expenses to average net assets 2.20% 2.20%
Ratio of net investment income to average net assets before voluntary
Expense reimbursement 0.29% 0.28%
Ratio of expenses to average net assets before voluntary expense
Reimbursement 2.48% 2.49%
Portfolio turnover rate 50% 1%
</TABLE>
PERCENTAGE AMOUNTS ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER
RATE.
29
<PAGE>
Select Ten Plus Division - September
Schedule of Investments
December 31, 1999
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------- -----------------
<S> <C> <C>
COMMON STOCKS (100.0%)
BASIC MATERIALS (11.5%)
Du Pont (E.I.) de Nemours and Company 19,600 $ 1,291,150
CAPITAL GOODS (20.2%)
Caterpillar, Inc. 21,303 1,002,572
Minnesota Mining and Manufacturing Company 13,059 1,278,150
-----------------
2,280,722
CONSUMER CYCLICAL (28.1%)
Eastman Kodak Company 16,810 1,113,662
General Motors Corporation 19,686 1,430,926
The Goodyear Tire & Rubber Company 21,960 618,997
-----------------
3,163,585
CONSUMER STAPLE (17.7%)
Philip Morris Companies, Inc. 36,682 850,564
Sears, Roebuck and Company 37,680 1,146,885
-----------------
1,997,449
ENERGY (10.3%)
Chevron Corporation 13,334 1,155,058
FINANCIAL (12.2%)
J.P. Morgan & Company, Inc. 10,854 1,374,388
-----------------
TOTAL COMMON STOCKS (Cost $11,541,867) 11,262,352
-----------------
TOTAL INVESTMENTS (100.0%) $ 11,262,352
=================
</TABLE>
OTHER INFORMATION:
COST OF PURCHASES AND PROCEEDS FROM SALES OF SECURITIES, EXCLUDING
SHORT-TERM SECURITIES, FOR THE PERIOD ENDED DECEMBER 31, 1999 AGGREGATED
$6,341,272 AND $5,824,261 RESPECTIVELY. AT DECEMBER 31, 1999, NET UNREALIZED
DEPRECIATION FOR TAX PURPOSES AGGREGATED $279,515 OF WHICH $987,085 RELATED
TO APPRECIATED INVESTMENTS AND $1,266,600 RELATED TO DEPRECIATED
INVESTMENTS. THE AGGREGATE COST OF INVESTMENTS WAS THE SAME FOR BOOK AND TAX
PURPOSES.
SEE ACCOMPANYING NOTES.
30
<PAGE>
Select Ten Plus Division - December
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
<S> <C>
ASSETS
Investments in securities, at value (cost $12,370,944)--See accompanying schedule $ 12,850,250
Cash 1,787,405
Dividends, interest and other receivables 29,076
Receivable for investments sold 1,901,913
Receivable for fund shares sold 13,997
----------------------
TOTAL ASSETS 16,582,641
LIABILITIES
Accrued expenses 29,522
Payable for investments purchased 3,440,394
----------------------
TOTAL LIABILITIES 3,469,916
----------------------
NET ASSETS $ 13,112,725
======================
UNIT VALUE, offering and redemption price per unit $ 10.15
======================
Units outstanding 1,291,739
======================
Statement of Operations
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
----------------------
<S> <C>
INVESTMENT INCOME - DIVIDENDS $ 383,961
EXPENSES
Mortality and expense risk and administrative charges 197,035
Investment advisory and management fees 72,976
Custody and accounting fees 20,354
Professional fees 5,000
Directors' fees and expenses 6,249
Printing and filing fees 3,296
Other expenses 4,919
----------------------
Net expenses 309,829
----------------------
Net investment income 74,132
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (161,661)
Net unrealized appreciation during the period on investments 744,431
----------------------
Net realized and unrealized gain on investments 582,770
----------------------
Net increase in net assets resulting from operations $ 656,902
======================
</TABLE>
SEE ACCOMPANYING NOTES.
31
<PAGE>
Select Ten Plus Division - December
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE ONE DAY
PERIOD ENDED
DECEMBER 31, 1998
YEAR ENDED (COMMENCEMENT
DECEMBER 31, 1999 OF OPERATIONS)
------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 74,132 $ (844)
Net realized loss on investments (161,661) -
Net unrealized appreciation (depreciation) during the period on investments 744,431 (265,125)
------------------------------------------
Net increase (decrease) in net assets resulting from operations 656,902 (265,969)
Contract related transactions:
Contributions from contract holders (218,388 and 1,478,641 units,
respectively) 2,213,528 14,786,409
Cost of units redeemed (405,290 and 0 units, respectively) (4,278,145) -
------------------------------------------
Net increase (decrease) in net assets resulting from unit transactions (2,064,617) 14,786,409
------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,407,715) 14,520,440
NET ASSETS
Beginning of period 14,520,440 -
------------------------------------------
End of period $13,112,725 $ 14,520,440
==========================================
</TABLE>
SEE ACCOMPANYING NOTES.
32
<PAGE>
Select Ten Plus Division - December
Financial Highlights
<TABLE>
<CAPTION>
FOR THE ONE DAY
PERIOD ENDED
DECEMBER 31, 1998
YEAR ENDED (COMMENCEMENT
DECEMBER 31, 1999 OF OPERATIONS)
------------------------------------------
<S> <C> <C>
SELECTED PER-UNIT DATA
Unit value, beginning of period $ 9.82 $ 10.00
Income (loss) from investment operations:
Net investment income (loss) 0.05 -*
Net realized and unrealized gain (loss) on investments 0.28 (0.18)
------------------------------------------
Total from investment operations 0.33 (0.18)
------------------------------------------
Unit value, end of period $ 10.15 $ 9.82
==========================================
TOTAL RETURN 3.38% (1.80%)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 13,113 $ 14,520
Ratio of net investment income (loss) to average net assets 0.51% (2.12%)
Ratio of expenses to average net assets 2.12% 2.12%
Portfolio turnover rate 36% -
</TABLE>
* Less than $0.01
PERCENTAGE AMOUNTS ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER
RATE.
33
<PAGE>
Select Ten Plus Division - December
Schedule of Investments
December 31, 1999
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------- ----------------
<S> <C> <C>
COMMON STOCKS (100.0%)
BASIC MATERIALS (31.9%)
Du Pont (E.I.) de Nemours and Company 21,073 $ 1,388,184
Exxon Mobil Corporation 16,049 1,297,762
International Paper Company 25,162 1,420,101
----------------
4,106,047
CAPITAL GOODS (18.9%)
Caterpillar, Inc. 23,541 1,107,899
Minnesota Mining and Manufacturing Company 13,527 1,323,955
----------------
2,431,854
COMMUNICATION SERVICES (10.0%)
SBC Communications Inc. 26,530 1,283,057
CONSUMER CYCLICAL (18.9%)
Eastman Kodak Company 16,012 1,060,795
General Motors Corporation 18,812 1,367,397
----------------
2,428,192
CONSUMER STAPLE (9.7%)
Philip Morris Companies, Inc. 53,603 1,242,920
FINANCIAL (10.6%)
J.P. Morgan & Company, Inc. 10,726 1,358,180
----------------
TOTAL COMMON STOCKS (Cost $12,370,944) 12,850,250
----------------
TOTAL INVESTMENTS (100.0%) $ 12,850,250
================
</TABLE>
OTHER INFORMATION:
Cost of purchases and proceeds from sales of securities, excluding
short-term securities, for the period ended December 31, 1999 aggregated
$5,109,955 and $7,362,086, respectively. At December 31, 1999, net
unrealized appreciation for tax purposes aggregated $479,306 of which
$1,070,190 related to appreciated investments and $590,884 related to
depreciated investments. The aggregate cost of investments was the same
for book and tax purposes.
SEE ACCOMPANYING NOTES.
34
<PAGE>
Separate Account Ten of Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Separate Account Ten of Integrity Life Insurance Company (the "Separate
Account") was established as of 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 (the "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 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-March
invests only on the last business day of March each year. 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 provides retirement savings and investment
products through it insurance company subsidiaries. At December 31, 1999, ARM
had approximately $4.8 billion of assets under management.
35
<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 ("GAAP") 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
Security 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). Integrity
Capital has agreed to reimburse each Division for operating expenses (excluding
management fees and mortality and expense charges) above an annual rate of 0.35%
of the Divisions' average net assets.
36
<PAGE>
Separate Account Ten of Integrity Life Insurance Company
Notes to Financial Statements (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 0.50% of each Division's average daily net assets.
Integrity Capital, not the Separate Account, pays sub-advisory fees to National
Asset based on the combined average daily net assets of the Integrity Divisions
and the portfolios that comprise Select Ten Plus Fund, LLC of National Integrity
Life Insurance Company (collectively, the "net asset base"). Fees under the
sub-advisory agreement are paid at an annual rate of 0.10% of the net asset base
up to $100 million and 0.05% of the net asset base in excess of $100 million.
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.
4. EVENTS RELATING TO ARM AND INTEGRITY
On July 29, 1999, ARM announced that it was restructuring its institutional
business and positioning its retail business and technology operations for the
sale of ARM or its businesses or its assets. Following the July 29, 1999
announcement, the ratings of ARM and Integrity were significantly lowered
several times by four major rating agencies, materially and adversely affecting
Integrity's ability to market and maintain persistency of retail products. As a
result, ARM sought protection with respect to its insurance subsidiary,
Integrity, from the Ohio Department of Insurance. Integrity is domiciled in
Ohio. On August 20, 1999, Integrity consented to a Supervision Order issued by
the Ohio Department of Insurance, which remains in effect. Unless the Ohio
Department of Insurance begins proceedings for the appointment of a
rehabilitator or liquidator, the Supervision Order will automatically be
extended for successive 60-day periods until written notice is given to
Integrity ending the supervision.
This regulatory action is intended to ensure an orderly process for addressing
the financial obligations of Integrity and to protect the interests of its
individual policyholders. Integrity will continue payments of death benefits,
previously scheduled systematic withdrawals, previously scheduled immediate
annuity payments, and agent commissions, but must receive written consent from
the Ohio Department of Insurance for other payments. In particular, the
Supervision Order suspends the processing of surrenders of fixed annuity
policies except in cases of approved hardship. The Supervision Order does not
affect the surrender of variable annuity contracts, including the contracts
through which the Divisions of the Separate Account are offered.
On December 17, 1999 ARM announced that it had signed a definitive agreement
whereby Western and Southern Life Insurance Company ("Western and Southern")
would acquire the ARM's insurance subsidiaries, Integrity and National Integrity
Life Insurance Company.
37
<PAGE>
Separate Account Ten of Integrity Life Insurance Company
Notes to Financial Statements (continued)
4. Events Relating to ARM and Integrity (continued)
Western and Southern is part of the Western-Southern Enterprise, a financial
services group which also includes Western-Southern Life Assurance Company,
Columbus Life Insurance Company, Touchstone Advisors, Inc., Fort Washington
Investment Advisors, Inc., Todd Investment Advisors, Inc., Countrywide Financial
Services, Capital Analysts Incorporated and Eagle Realty Group, Inc. Assets
owned or under management by the group exceed $20 billion. Western and Southern
is rated A++ (Superior) by A.M. Best, AAA (Highest) by Duff & Phelps, AAA
(Extremely Strong) by Standard & Poor's, and Aa2 (Excellent) by Moody's.
The acquisition of the insurance companies by Western and Southern is being
implemented in a chapter 11 case filed by ARM under the U.S. Bankruptcy Code.
The closing of the transaction is subject to the approval of the Ohio Department
of Insurance, the New York Department of Insurance, and the Bankruptcy Court, as
well as to other customary conditions to closing. The transaction is expected to
close late in the first quarter of 2000; however, there can be no assurance as
to obtaining the required approvals or the timing of the closing of the
transaction.
Integrity Capital will not be acquired by Western and Southern. Accordingly, it
is contemplated that Integrity Capital will assign the current management
agreement between Integrity Capital and the Separate Account to Touchstone
Advisers, Inc., an indirect wholly-owned subsidiary of Western and Southern. The
assignment of the management agreement will automatically terminate the
agreement, and will also terminate the current sub-advisory agreements between
the Separate Account and National Asset.
The Board of Managers of the Separate Account will be asked to approve new
management and sub-advisory agreements and a distribution agreement for the
Separate Account. These new agreements will be subject to contractholder
approval. The new management and sub-advisory agreements are expected to contain
the same material terms as the current management and sub-advisory agreements.
It is anticipated that the contractholders meeting will occur early in the
second quarter of 2000.
38
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
Part 1 - Financial Information
FINANCIAL STATEMENTS INCLUDED IN PART B:
SEPARATE ACCOUNT II:
Report of Independent Auditors
Statement of Assets and Liabilities as of December 31, 1999
Statement of Operations for the Year Ended December 31, 1999
Statements of Changes in Net Assets for the Years Ended
December 31, 1999 and 1998
Notes to Financial Statements
SEPARATE ACCOUNT TEN:
Report of Independent Auditors
Statement of Assets and Liabilities as of December 31, 1999
Statement of Changes in Net Assets for the Year Ended
December 31, 1999
Statement of Operations for the Year Ended December 31, 1999
Notes to Financial Statements
INTEGRITY LIFE INSURANCE COMPANY:
Report of Independent Auditors
Balance Sheets (Statutory Basis) as of December 31, 1999 and 1998
Statements of Income (Statutory Basis) for the Years Ended
December 31, 1999 and 1998
Statements of Changes in Capital and Surplus (Statutory Basis) for the
Years Ended December 31, 1999 and 1998
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1999 and 1998
Notes to Financial Statements (Statutory Basis)
(b) EXHIBITS:
The following exhibits are filed herewith:
1. Resolutions of the Board of Directors of 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 Touchstone Securities
1
<PAGE>
Corporation. Incorporated by reference to Registrant's Form
N-4 registration statement (File 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.
2
<PAGE>
8.(d) Amendment No. 1 to Participation Agreements Among Variable
Insurance Products Fund, 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. Incorporated by
reference to Registrant's Form N-4 registration statement
(File No. 33-51268) on April 28, 1999.
8.(g) Form of Participation Agreement Among Insurance Series,
Federated Securities Corp. and Integrity. Incorporated by
reference to Registrant's Form N-4 registration statement
(File No. 33-51268) on April 28, 1999.
8.(h) Form of Participation Agreement Between Janus Aspen Series
and Integrity. Incorporated by reference to Registrant's
Form N-4 registration statement (File No. 33-51268) on
April 28, 1999.
8.(i) Form of Participation Agreement Between JPM Series Trust II
and Integrity. Incorporated by reference to Registrant's
Form N-4 registration statement (File No. 33-51268) on
April 28, 1999.
8.(j) Form of Participation Agreement Between Morgan Stanley
Universal Funds, Inc., Morgan Stanley Asset Management Inc.,
Miller Anderson & Sherrerd, LLP and Integrity. Incorporated
by reference to Registrant's Form N-4 registration statement
(File No. 33-51268) on April 28, 1999.
8.(k) Form of Participation Agreement (Service Shares) between
Janus Aspen Series and Integrity.
8.(l) Form of Distribution and Shareholder Services Agreement
(Service Shares) between Janus Distributors, Inc. and
Integrity.
8.(m) Form of Participation Agreement between MFS Variable
Insurance Trust, Massachusetts Financial Services Company
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:
3
<PAGE>
<TABLE>
<S> <C>
DIRECTORS:
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES WITH DEPOSITOR
John F. Barrett Director
400 Broadway, Cincinnati, Ohio 45202
Dennis L. Carr Director, Executive Vice President and Chief Actuary
515 W. Market, Louisville, Kentucky 40202
John R. Lindholm Director and President
515 W. Market, Louisville, Kentucky 40202
Robert L. Walker Director
400 Broadway, Cincinnati, Ohio 45202
William J. Williams Director
400 Broadway, Cincinnati, Ohio 45202
Donald J. Wuebbling Director
400 Broadway, Cincinnati, Ohio 45202
OFFICERS:
John R. Lindholm* President
Dennis L. Carr* Executive Vice President & Chief Actuary
James G. Kaiser Executive Vice President
333 Ludlow Street, Stamford, Connecticut 06902
Don W. Cummings* Senior Vice President & Chief Financial Officer
William F. Ledwin Senior Vice President & Chief Investment Officer
400 Broadway, Cincinnati, Ohio 45202
William H. Guth* Senior Vice President
Edward J. Haines* Senior Vice President
Kevin L. Howard* Senior Vice President
William J. Hrabik* Senior Vice President
Jill R. Keinsley* Senior Vice President
Scott Vincini Senior Vice President, National Sales Manager
333 Ludlow Street, Stamford, Connecticut 06902
James J. Vance Vice President & Treasurer
400 Broadway, Cincinnati, Ohio 45202
Joseph F. Vap* Director, Financial Operations
Edward J. Babbitt Secretary
400 Broadway, Cincinnati, Ohio 45202
</TABLE>
4
<PAGE>
* Principal Business Address: 515 West Market Street, Louisville, Kentucky 40202
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH INTEGRITY OR
REGISTRANT
The Western and Southern Life Insurance Company ("WSLIC"); Ohio corporation
Western-Southern Life Assurance Company ("WSLAC"); Ohio corporation; 100%
owned by WSLIC
Courtyard Nursing Care, Inc.; Ohio corporation; 100% owned by WSLAC;
ownership and operation of real estate.
IFS Financial Services, Inc. ("IFS"); Ohio corporation; 100% owned by
WSLAC; development and marketing of financial products for
distribution through financial institutions.
IFS Systems, Inc.; Delaware corporation; 100% owned by IFS;
development, marketing and support of software systems.
IFS Insurance Agency, Inc.; Ohio corporation; 99% owned by IFS,
1% owned by William F. Ledwin; general insurance agency.
Touchstone Securities, Inc.; Nebraska corporation; 100% owned by
IFS; securities broker-dealer.
Touchstone Advisors, Inc.; Ohio corporation; 100% owned by IFS;
registered investment adviser.
IFS Agency Services, Inc.; Pennsylvania corporation; 100% owned
by IFS; general insurance agency.
IFS Agency, Inc.; Texas corporation; 100% owned by an individual;
general insurance agency.
IFS General Agency, Inc.; Pennsylvania corporation; 100% owned by
William F. Ledwin; general insurance agency.
Integrity Life Insurance Company; Ohio corporation; 100% owned by WSLIC.
National Integrity Life Insurance Company; New York corporation; 100%
owned by Integrity Life Insurance Company.
Seasons Congregate Living, Inc.; Ohio corporation; 100% owned by WSLIC;
ownership and operation of real estate.
Latitudes at the Moors, Inc.; Florida corporation; 100% owned by WSLIC;
ownership and operation of real estate.
WestAd Inc.; Ohio corporation; 100% owned by WSLIC, general advertising,
book-selling and publishing.
Fort Washington Investment Advisors, Inc.; Ohio corporation; 100% owned by
WSLIC; registered investment adviser.
Todd Investment Advisors, Inc.; Kentucky corporation; 100% owned by
Fort Washington Investment Advisors, Inc.; registered investment
adviser.
5
<PAGE>
Countrywide Financial Services, Inc.; Ohio corporation; 100% owned by Fort
Washington Investment Advisors, Inc.
Countrywide Investments, Inc.; Ohio corporation; 100% owned by
Countrywide Financial Services, Inc.; registered investment
advisor and broker dealer.
CW Fund Distributors, Inc.; Ohio corporation; 100% owned by
Countrywide Finacial Services, Inc.; registered broker dealer
Countrywide Fund Services, Inc.; Ohio corporation; 100% owned by
Countrywide Financial Services, Inc.
Columbus Life Insurance Company; Ohio corporation; 100% owned by WSLIC;
insurance.
Colmain Properties, Inc.; Ohio corporation; 100% owned by Columbus
Life Insurance Company; acquiring, owning, managing, leasing,
selling real estate.
Colpick, Inc.; Ohio corporation; 100% owned by Colmain
Properties, Inc.; acquiring, owning, managing, leasing and
selling real estate.
CAI Holding Company, Inc.; Ohio corporation; 100% owned by Columbus
Life Insurance Company; holding company.
Capital Analysts Incorporated; Delaware corporation; 100% owned
by CAI Holding Company; securities broker-dealer and
registered investment advisor.
Capital Analysts Agency, Inc.; Ohio corporation; 99% owned by
Capital Analysts Incorporated, 1% owned by William F.
Ledwin; general insurance agency.
Capital Analysts Agency, Inc.; Texas corporation; 100% owned by
an individual who is a resident of Texas, but under
contractual association with Capital Analysts Incorporated;
general insurance agency.
Capital Analysts Insurance Agency, Inc.; Massachusetts
corporation; 100% owned by Capital Analysts Incorporated;
general insurance agency.
CLIC Company I; Delaware corporation; 100% owned by Columbus Life
Insurance Company; holding company.
CLIC Company II; Delaware corporation; 100% owned by Columbus Life
Insurance Company; holding company.
Eagle Properties, Inc.; Ohio corporation; 100% owned by WSLIC; ownership,
development and management of real estate.
Seasons Management Company; Ohio corporation; 100% owned by Eagle
Properties, Inc.; management of real estate.
Waslic Company II; Delaware corporation; 100% owned by WSLIC; holding
company.
WestTax, Inc.; Ohio corporation, 100% owned by WSLIC; preparation and
electronic filing of tax returns.
Florida Outlet Marts, Inc.; Florida corporation; 100% owned by WSLIC;
ownership and operation of real estate.
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AM Concepts Inc.; Delaware corporation, 100% owned by WSLIC; venture
capital investment in companies engaged in alternative marketing of
financial products.
Western-Southern Agency, Inc.; Ohio corporation; 99% owned by WSLIC; 1%
owned by William F. Ledwin; general insurance agency.
Western-Southern Agency Services, Inc.; Pennsylvania corporation; 100%
owned by WSLIC; general insurance agency.
W-S Agency of Texas, Inc.; Texas corporation; 100% owned by an individual;
general insurance agency.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of January 31, 2000 there were 5,874 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;
(2) Any action of suit in which the only liability asserted
against a Director is pursuant to Section
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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.
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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.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Touchstone Securities is the principal underwriter for Separate
Account II. Touchstone Securities also serves as an underwriter for Separate
Account I and Ten of Integrity, Separate Accounts I and II of National Integrity
Life Insurance Company, contracts issued under Western-Southern Life Assurance
Company's Separate Accounts 1 and 2; The Legends Fund, Inc.; and for the shares
of several series (Funds) of Touchstone Series Trust (formerly Select Advisors
Trust A), Touchstone Strategic Trust, Touchstone Investment Trust and Touchstone
Tax-Free Trust; each of which is affiliated with the Depositor. Integrity is the
Depositor of Separate Accounts II, I, Ten and VUL.
(b) The names and business addresses of the officers and directors of, and
their positions with, Touchstone Securities are as follows:
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES WITH TOUCHSTONE
SECURITIES
James N. Clark* Director
Jill T. McGruder Director, Chief Executive Officer and
311 Pike Street President
Cincinnati, Ohio 45202
Edward S. Heenan* Director and Controller
William F. Ledwin* Director
Donald J. Wuebbling* Director
Richard K. Taulbee* Vice President
Robert F. Morand* Secretary
Patricia Wilson Chief Compliance Officer
311 Pike Street
Cincinnati, Ohio 45202
*Principal Business Address: 400 Broadway, Cincinnati, Ohio 45202
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder, are
maintained by Integrity at 515 West Market Street, Louisville, Kentucky 40202.
ITEM 31. MANAGEMENT SERVICES
There are currently no management-related services provided to the Registrant.
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ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial
statements in the registration statement are never more than 16 months
old for so long as payments under the variable annuity contracts may
be accepted;
(b) to include either (1) as part of any application to purchase a
contract offered by the prospectus, a space that an applicant can
check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in
the prospectus that the applicant can remove to send for a Statement
of Additional Information; and
(c) to deliver any Statement of Additional Information and any financial
statements required to be made available under this Form promptly upon
written or oral request.
Integrity represents that the aggregate charges under variable annuity
contracts described in this Registration Statement are reasonable in relation to
the services rendered, the expenses expected to be incurred, and the risks
assumed by Integrity.
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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 certify that they have met the
requirements of Securities Act Rule 485 for effectiveness of this Registration
statement and have duly caused this amendment to the Registration Statement to
be signed on their behalf, in the City of Louisville and State of Kentucky on
this 24th day of April, 2000.
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: 04/24/00
PRINCIPAL FINANCIAL OFFICER: /s/ Don W. Cummings
------------------------------
Don W. Cummings, Chief Financial Officer
Date: 04/24/00
PRINCIPAL ACCOUNTING OFFICER: /s/ Joseph F. Vap
------------------------------
Joseph F. Vap, Director, Financial Operations
Date: 04/24/00
DIRECTORS:
/s/ Dennis L. Carr /s/ Robert L. Walker
- ------------------------------ ------------------------------
Dennis L. Carr Robert L. Walker
Date: 04/24/00 Date: 04/24/00
/s/ Donald J. Wuebbling /s/ William J. Williams
- ------------------------------ ------------------------------
Donald E. Wuebbling William J. Williams
Date: 04/24/00 Date: 04/24/00
/s/ John R. Lindholm
- ------------------------------
John R. Lindholm
Date: 04/24/00
/s/ John F. Barrett
- ------------------------------
John F. Barrett
Date: 04/24/00
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EXHIBIT INDEX
Exhibit No.
8.(k) Form of Participation Agreement (Service Shares) between
Janus Aspen Series and National Integrity.
8.(l) Form of Distribution and Shareholder Services Agreement
(Service Shares) between Janus Distributors, Inc. and
National Integrity.
8.(m) Form of Participation Agreement between MFS Variable
Insurance Trust, Massachusetts Financial Services Company
and National Integrity.
10. Consents of Ernst & Young LLP.
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JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
(SERVICE SHARES)
THIS AGREEMENT is made this ____ day of ______________________, between
JANUS ASPEN SERIES, an open-end management investment company organized as a
Delaware business trust (the "Trust"), and ________________________________, a
life insurance company organized under the laws of the State of ___________ (the
"Company"), on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A, as may be amended from time to time (the
"Accounts").
W I T N E S S E T H:
-------------------
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the beneficial interest in
the Trust is divided into several series of shares, each series representing an
interest in a particular managed portfolio of securities and other assets (the
"Portfolios"); and
WHEREAS, the Trust has registered the offer and sale of a class of
shares designated the Service Shares ("Shares") of each of its Portfolios under
the Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the Trust has received an order from the Securities and
Exchange Commission granting Participating Insurance Companies and their
separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder,
to the extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered or will register (unless
registration is not required under applicable law) certain variable life
insurance policies and/or variable annuity contracts under the 1933 Act (the
"Contracts"); and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
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WHEREAS, the Company desires to utilize the Shares of one or more
Portfolios as an investment vehicle of the Accounts;
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I
SALE OF TRUST SHARES
1.1 The Trust shall make Shares of its Portfolios available to the
Accounts at the net asset value next computed after receipt of such purchase
order by the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust. Shares of a particular
Portfolio of the Trust shall be ordered in such quantities and at such times as
determined by the Company to be necessary to meet the requirements of the
Contracts. The Trustees of the Trust (the "Trustees") may refuse to sell Shares
of any Portfolio to any person, or suspend or terminate the offering of Shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, necessary in the best interests of the shareholders of such
Portfolio.
1.2 The Trust will redeem any full or fractional Shares of any
Portfolio when requested by the Company on behalf of an Account at the net asset
value next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby
appoints the Company as its agent for the limited purpose of receiving and
accepting purchase and redemption orders resulting from investment in and
payments under the Contracts. Receipt by the Company shall constitute receipt by
the Trust provided that i) such orders are received by the Company in good order
prior to the time the net asset value of each Portfolio is priced in accordance
with its prospectus and ii) the Trust receives notice of such orders by 10:00
a.m. New York time on the next following Business Day. "Business Day" shall mean
any day on which the New York Stock Exchange is open for trading and on which
the Trust calculates its net asset value pursuant to the rules of the Securities
and Exchange Commission.
1.4 Purchase orders that are transmitted to the Trust in accordance
with Section 1.3 shall be paid for no later than 12:00 noon New York time on the
same Business Day that the Trust receives notice of the order. Payments shall be
made in federal funds transmitted by wire.
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1.5 Issuance and transfer of the Trust's Shares will be by book
entry only. Stock certificates will not be issued to the Company or the Account.
Shares ordered from the Trust will be recorded in the appropriate title for each
Account or the appropriate subaccount of each Account.
1.6 The Trust shall furnish prompt notice to the Company of any
income dividends or capital gain distributions payable on the Trust's Shares.
The Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's Shares in additional Shares of
that Portfolio. The Trust shall notify the Company of the number of Shares so
issued as payment of such dividends and distributions.
1.7 The Trust shall make the net asset value per Share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per Share is calculated and shall use its
best efforts to make such net asset value per Share available by 6 p.m. New York
time.
1.8 The Trust agrees that its Shares will be sold only to
Participating Insurance Companies and their separate accounts and to certain
qualified pension and retirement plans to the extent permitted by the Exemptive
Order. No Shares of any Portfolio will be sold directly to the general public.
The Company agrees that Trust Shares will be used only for the purposes of
funding the Contracts and Accounts listed in Schedule A, as amended from time to
time.
1.9 The Trust agrees that all Participating Insurance Companies
shall have the obligations and responsibilities regarding pass-through voting
and conflicts of interest corresponding to those contained in Section 2.8 and
Article IV of this Agreement.
ARTICLE II
OBLIGATIONS OF THE PARTIES
2.1 The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and statements
of additional information of the Trust. The Trust shall bear the costs of
registration and qualification of its shares, preparation and filing of the
documents listed in this Section 2.1 and all taxes to which an issuer is subject
on the issuance and transfer of its shares.
2.2 At the option of the Company, the Trust shall either (a) provide
the Company (at the Company's expense) with as many copies of the Trust's
Shares' current prospectus, annual report, semi-annual report and other
shareholder communications, including any amendments or supplements to any of
the foregoing, as the Company shall reasonably request;
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<PAGE>
or (b) provide the Company with a camera ready copy of such documents in a form
suitable for printing. The Trust shall provide the Company with a copy of the
Shares' statement of additional information in a form suitable for duplication
by the Company. The Trust (at its expense) shall provide the Company with copies
of any Trust-sponsored proxy materials in such quantity as the Company shall
reasonably require for distribution to Contract owners.
2.3 (a) The Company shall bear the costs of printing and
distributing the Trust's Shares' prospectus, statement of additional
information, shareholder reports and other shareholder communications to owners
of and applicants for policies for which Shares of the Trust are serving or are
to serve as an investment vehicle. The Company shall bear the costs of
distributing proxy materials (or similar materials such as voting solicitation
instructions) to Contract owners. The Company assumes sole responsibility for
ensuring that such materials are delivered to Contract owners in accordance with
applicable federal and state securities laws.
(b) If the Company elects to include any materials provided
by the Trust, specifically prospectuses, SAIs, shareholder reports and proxy
materials, on its web site or in any other computer or electronic format, the
Company assumes sole responsibility for maintaining such materials in the form
provided by the Trust and for promptly replacing such materials with all updates
provided by the Trust.
2.4 The Company agrees and acknowledges that the Trust's adviser,
Janus Capital Corporation ("Janus Capital"), is the sole owner of the name and
mark "Janus" and that all use of any designation comprised in whole or part of
Janus (a "Janus Mark") under this Agreement shall inure to the benefit of Janus
Capital. Except as provided in Section 2.5, the Company shall not use any Janus
Mark on its own behalf or on behalf of the Accounts or Contracts in any
registration statement, advertisement, sales literature or other materials
relating to the Accounts or Contracts without the prior written consent of Janus
Capital. Upon termination of this Agreement for any reason, the Company shall
cease all use of any Janus Mark(s) as soon as reasonably practicable.
2.5 The Company shall furnish, or cause to be furnished, to the
Trust or its designee, a copy of each Contract prospectus or statement of
additional information in which the Trust or its investment adviser is named
prior to the filing of such document with the Securities and Exchange
Commission. The Company shall furnish, or shall cause to be furnished, to the
Trust or its designee, each piece of sales literature or other promotional
material in which the Trust or its investment adviser is named, at least fifteen
Business Days prior to its use. No such material shall be used if the Trust or
its designee reasonably objects to such use within fifteen Business Days after
receipt of such material.
2.6 The Company shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust or
its investment adviser in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from the
registration statement or prospectus for the Trust Shares (as
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<PAGE>
such registration statement and prospectus may be amended or supplemented from
time to time), reports of the Trust, Trust-sponsored proxy statements, or in
sales literature or other promotional material approved by the Trust or its
designee, except as required by legal process or regulatory authorities or with
the written permission of the Trust or its designee.
2.7 The Trust shall not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, the Accounts or the Contracts other than information or representations
contained in and accurately derived from the registration statement or
prospectus for the Contracts (as such registration statement and prospectus may
be amended or supplemented from time to time), or in materials approved by the
Company for distribution including sales literature or other promotional
materials, except as required by legal process or regulatory authorities or with
the written permission of the Company.
2.8 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each Account, the
Company will vote Shares of the Trust held by the Account and for which no
timely voting instructions from policyowners are received as well as Shares it
owns that are held by that Account, in the same proportion as those Shares for
which voting instructions are received. The Company and its agents will in no
way recommend or oppose or interfere with the solicitation of proxies for Trust
shares held by Contract owners without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion.
2.9 The Company shall notify the Trust of any applicable state
insurance laws that restrict the Portfolios' investments or otherwise affect the
operation of the Trust and shall notify the Trust of any changes in such laws.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance
company duly organized and in good standing under the laws of the State of
_________________ and that it has legally and validly established each Account
as a segregated asset account under such law on the date set forth in Schedule
A.
3.2 The Company represents and warrants that each Account has been
registered or, prior to any issuance or sale of the Contracts, will be
registered as a unit investment trust in accordance with the provisions of the
1940 Act.
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3.3 The Company represents and warrants that the Contracts or
interests in the Accounts (1) are or, prior to issuance, will be registered as
securities under the 1933 Act or, alternatively (2) are not registered because
they are properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that the Contracts will be
issued and sold in compliance in all material respects with all applicable
federal and state laws; and the sale of the Contracts shall comply in all
material respects with state insurance suitability requirements.
3.4 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Delaware.
3.5 The Trust represents and warrants that the Trust Shares offered
and sold pursuant to this Agreement will be registered under the 1933 Act and
the Trust shall be registered under the 1940 Act prior to any issuance or sale
of such Shares. The Trust shall amend its registration statement under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its Shares. The Trust shall register and qualify its
Shares for sale in accordance with the laws of the various states only if and to
the extent deemed advisable by the Trust.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder.
ARTICLE IV
POTENTIAL CONFLICTS
4.1 The parties acknowledge that the Trust's shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Trustees shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
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4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority
of its disinterested Trustees, that a material irreconcilable conflict exists
that affects the interests of Contract owners, the Company shall, in cooperation
with other Participating Insurance Companies whose contract owners are also
affected, at its expense and to the extent reasonably practicable (as determined
by the Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any appropriate
group (I.E., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Trust's election, to withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account; provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account within six (6) months after the Trustees
inform the Company in writing that it has determined that such decision has
created an irreconcilable material conflict; provided, however, that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested Trustees. Until the end of such six (6) month period, the Trust
shall continue to accept and implement orders by the Company for the purchase
and redemption of shares of the Trust.
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<PAGE>
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Company be required to establish a new funding medium for the Contracts
if an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the Exemptive Order) on terms and conditions
materially different from those contained in the Exemptive Order, then the Trust
and/or the Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and
Rule 6e-3, as adopted, to the extent such rules are applicable.
ARTICLE V
INDEMNIFICATION
5.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify
and hold harmless the Trust and each of its Trustees, officers, employees and
agents and each person, if any, who controls the Trust within the meaning of
Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes
of this Article V) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or expenses (including the reasonable costs of investigating or defending any
alleged loss, claim, damage, liability or expense and reasonable legal counsel
fees incurred in connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or regulation, or at
common law or otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a
registration statement or prospectus for the Contracts or in the
Contracts themselves or in sales literature generated or approved
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<PAGE>
by the Company on behalf of the Contracts or Accounts (or any amendment
or supplement to any of the foregoing) (collectively, "Company
Documents" for the purposes of this Article V), or arise out of or are
based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this indemnity shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Company by
or on behalf of the Trust for use in Company Documents or otherwise for
use in connection with the sale of the Contracts or Trust Shares; or
(b) arise out of or result from statements or
representations (other than statements or representations contained in
and accurately derived from Trust Documents as defined in Section
5.2(a)) or wrongful conduct of the Company or persons under its control,
with respect to the sale or acquisition of the Contracts or Trust
Shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Trust Documents
as defined in Section 5.2(a) or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading if such statement or
omission was made in reliance upon and accurately derived from written
information furnished to the Trust by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company
to provide the services or furnish the materials required under the
terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company.
5.2 INDEMNIFICATION BY THE TRUST. The Trust agrees to indemnify and
hold harmless the Company and each of its directors, officers, employees and
agents and each person, if any, who controls the Company within the meaning of
Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes
of this Article V) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Trust) or
expenses (including the reasonable costs of investigating or defending any
alleged loss, claim, damage, liability or expense and reasonable legal counsel
fees incurred in connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or regulation, or at
common law or otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
registration statement or prospectus for the Trust (or any amendment or
supplement thereto), (collectively, "Trust Documents"
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<PAGE>
for the purposes of this Article V), or arise out of or are based upon
the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, provided that this indemnity shall not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and was accurately
derived from written information furnished to the Trust by or on behalf
of the Company for use in Trust Documents or otherwise for use in
connection with the sale of the Contracts or Trust Shares; or
(b) arise out of or result from statements or
representations (other than statements or representations contained in
and accurately derived from Company Documents) or wrongful conduct of
the Trust or persons under its control, with respect to the sale or
acquisition of the Contracts or Trust Shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Company
Documents or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made
in reliance upon and accurately derived from written information
furnished to the Company by or on behalf of the Trust; or
(d) arise out of or result from any failure by the Trust to
provide the services or furnish the materials required under the terms
of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Trust.
5.3 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
5.4 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice of
service upon or other notification to any designated agent), but failure to
notify the party against whom indemnification is sought of any such claim shall
not relieve that party from any liability which it may have to the Indemnified
Party in the absence of Sections 5.1 and 5.2.
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<PAGE>
5.5 In case any such action is brought against the Indemnified
Parties, the indemnifying party shall be entitled to participate, at its own
expense, in the defense of such action. The indemnifying party also shall be
entitled to assume the defense thereof, with counsel reasonably satisfactory to
the party named in the action. After notice from the indemnifying party to the
Indemnified Party of an election to assume such defense, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
ARTICLE VI
TERMINATION
6.1 This Agreement may be terminated by either party for any reason
by ninety (90) days advance written notice delivered to the other party.
6.2 Notwithstanding any termination of this Agreement, the Trust
shall, at the option of the Company, continue to make available additional
shares of the Trust (or any Portfolio) pursuant to the terms and conditions of
this Agreement for all Contracts in effect on the effective date of termination
of this Agreement, provided that the Company continues to pay the costs set
forth in Section 2.3.
6.3 The provisions of Article V shall survive the termination of
this Agreement, and the provisions of Article IV and Section 2.8 shall survive
the termination of this Agreement as long as Shares of the Trust are held on
behalf of Contract owners in accordance with Section 6.2.
ARTICLE VII
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust:
Janus Aspen Series
100 Fillmore Street
Denver, Colorado 80206
Attention: General Counsel
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<PAGE>
If to the Company:
---------------------------
---------------------------
---------------------------
Attention: ----------------
ARTICLE VIII
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of State of Colorado.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers, Inc., and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
8.8 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
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<PAGE>
8.9 Neither this Agreement nor any rights or obligations hereunder
may be assigned by either party without the prior written approval of the other
party.
8.10 No provisions of this Agreement may be amended or modified in
any manner except by a written agreement properly authorized and executed by
both parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Participation Agreement as of the date and year first
above written.
JANUS ASPEN SERIES
By:_____________________________________
Name:___________________________________
Title:__________________________________
(INSURANCE COMPANY)
By:_____________________________________
Name:___________________________________
Title:__________________________________
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<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
Contracts Funded
Name of Separate Account By Separate Account
------------------------ -------------------
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<PAGE>
DISTRIBUTION AND SHAREHOLDER SERVICES AGREEMENT
SERVICE SHARES OF JANUS ASPEN SERIES
(for Insurance Companies)
This Agreement is made as of ______________, by and between Janus
Distributors, Inc. (the "Distributor"), a Colorado corporation, and
__________________________ (the "Company"), a ____________________ corporation.
RECITALS
A. The Company has entered into a participation agreement with Janus
Aspen Series (the "Trust"), an open-end investment company registered under the
Investment Company Act of 1940 (the "1940 Act") with respect to the purchase of
a class of shares designated "Service Shares" of one or more series of the Trust
(each a "Portfolio") by certain separate accounts of the Company ("Accounts").
B. The Distributor serves as the distributor to Service Shares.
C. The Company desires to provide certain distribution and
shareholder services to owners ("Contract Owners") of variable life insurance
policies or variable annuity contracts ("Contracts") in connection with their
allocation of contract values in the Service Shares of the Portfolios and
Distributor desires Company to provide such services, subject to the conditions
of this Agreement.
D. Pursuant to Rule 12b-1 under the 1940 Act, the Service Shares of
each Portfolio have adopted a Distribution and Shareholder Servicing Plan (the
"12b-1 Plan") which, among other things, authorizes the Distributor to enter
into this Agreement with organizations such as Company and to compensate such
organizations out of each Portfolio's average daily net assets attributable to
the Service Shares.
AGREEMENT
1. SERVICES OF COMPANY
(a) The Company shall provide any combination of the following
support services, as agreed upon by the parties from time to time, to Contract
Owners who allocate contract values to the Service Shares of the Portfolios:
delivering prospectuses, statements of additional information, shareholder
reports, proxy statements and marketing materials to prospective and existing
Contract Owners; providing educational materials regarding the Service Shares;
providing facilities to answer questions from prospective and existing Contract
Owners about the Portfolios;
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<PAGE>
receiving and answering correspondence; complying with federal and state
securities laws pertaining to the sale of Service Shares; assisting Contract
Owners in completing application forms and selecting account options; and
providing Contract Owner record-keeping and similar administrative services.
(b) The Company will provide such office space and equipment,
telephone facilities, and personnel as may be reasonably necessary or beneficial
in order to provide such services to Contract Owners.
(c) The Company will furnish to the Distributor, the Trust or
their designees such information as the Distributor may reasonably request, and
will otherwise cooperate with the Distributor in the preparation of reports to
the Trust's Board of Trustees concerning this Agreement, as well as any other
reports or filings that may be required by law.
2. INDEMNIFICATION. The Company shall indemnify Distributor, the
Trust, and their affiliates, directors, trustees, employees and shareholders for
any loss (including without limitation, litigation costs and expenses and
attorneys' and experts' fees) directly resulting from Company's negligent or
willful act, omission or error, or Company's breach of this Agreement. Such
indemnification shall survive termination of the Agreement.
3. MAINTENANCE OF RECORDS. The Company shall maintain and preserve
all records as required by law to be maintained and preserved in connection with
providing the services herein. Upon the reasonable request of Distributor or the
Trust, Company shall provide Distributor, the Trust or the representative of
either, copies of all such records.
4. FEES. In consideration of Company's performance of the services
described in this Agreement, Distributor shall pay to the Company a monthly fee
("Distribution Fee") calculated as follows: the average aggregate amount
invested in each month in the Service Shares of each Portfolio by the Accounts
is multiplied by a pro-rata fee factor. The pro-rata fee factor is calculated
by: (a) dividing the per annum factor set forth on Exhibit A for the Service
Shares of each Portfolio by the number of days in the applicable year, and (b)
multiplying the result by the actual number of days in the applicable month. The
average aggregate amount invested over a one-month period shall be computed by
totaling the aggregate investment by the Accounts (share net asset value
multiplied by total number of shares held) on each calendar day during the month
and dividing by the total number of calendar days during such month.
Distributor will calculate the fee at the end of each month and
will make such reimbursement to the Company. The reimbursement check will be
accompanied by a statement showing the calculation of the monthly amounts
payable by Distributor and such other supporting data as may be reasonably
requested by the Company.
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<PAGE>
5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Company
represents, warrants, and covenants that:
(a) It and its employees and agents meet the requirements of
applicable law, including but not limited to federal and state securities law
and state insurance law, for the performance of services contemplated herein;
(b) It will not purchase Service Shares with Account assets
derived from tax-qualified retirement plans except indirectly, through Contracts
purchased in connection with such plans and the Service Fee does not include any
payment to the Company that is prohibited under the Employee Retirement Income
Securities Act of 1974 ("ERISA") with respect to any assets of a Contract Owner
invested in a Contract using the Portfolios as investment vehicles;
(c) If required by applicable law, the Company will disclose to
each Contract Owner the existence of the Distribution Fee received by the
Company pursuant to this Agreement in a form consistent with the requirements of
applicable law.
6. TERMINATION.
(a) Unless sooner terminated with respect to any Portfolio,
this Agreement will continue with respect to a Portfolio if only the continuance
of a form of this Agreement is specifically approved at least annually by the
vote of a majority of the members of the Board of Trustees of the Trust who are
not "interested persons" (as such term is defined in the 1940 Act) and who have
no direct or indirect financial interest in the 12b-1 Plan relating to such
Portfolio or any agreement relating to such 12b-1 Plan, including this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval.
(b) This Agreement will automatically terminate with respect to
a Portfolio in the event of its assignment (as such term is defined in the 1940
Act) with respect to such Portfolio. This Agreement may be terminated with
respect to any Portfolio by the Distributor or by the Company, without penalty,
upon 60 days' prior written notice to the other party. This Agreement may also
be terminated with respect to any Portfolio at any time without penalty by the
vote of a majority of the members of the Board of Trustees of the Trust who are
not "interested persons" (as such term is defined in the 1940 Act) and who have
no direct or indirect financial interest in the 12b-1 Plan relating to such
Portfolio or any agreement relating to such Plan, including this Agreement, or
by a vote of a majority of the Service Shares of such Portfolio on 60 days'
written notice.
(c) In addition, either party may terminate this Agreement
immediately if at any time it is determined by any federal or state regulatory
authority that compensation to be paid under this Agreement is in violation of
or inconsistent with any federal or state law.
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<PAGE>
7. MISCELLANEOUS.
(a) No modification of any provision of this Agreement will be
binding unless in writing and executed by the parties. No waiver of any
provision of this Agreement will be binding unless in writing and executed by
the party granting such waiver.
(b) This Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective successors and assigns; provided,
however that neither this Agreement nor any rights, privileges, duties, or
obligations of the parties may be assigned by either party without the written
consent of the other party or as expressly contemplated by this Agreement.
(c) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Colorado, exclusive of conflicts of
laws.
(d) This Agreement may be executed in several counterparts,
each of which shall be an original but all of which together shall constitute
one and the same instrument.
JANUS DISTRIBUTORS, INC.
-----------------------------------
By: By:
-------------------------------- --------------------------------
Name: Kelley Abbott Howes Name:
----------------------------- -----------------------------
Title: Vice President Title:
---------------------------- ----------------------------
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<PAGE>
EXHIBIT A TO DISTRIBUTION AND SHAREHOLDER SERVICES AGREEMENT
<TABLE>
<CAPTION>
Name of Portfolio Fee Factor*
----------------- ----------
<S> <C>
All Portfolios of Janus Aspen Series 0.25%
(Service Shares)
</TABLE>
*Shall not exceed 0.25%
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<PAGE>
PARTICIPATION AGREEMENT
AMONG
MFS VARIABLE INSURANCE TRUST,
INTEGRITY LIFE INSURANCE COMPANY
AND
MASSACHUSETTS FINANCIAL SERVICES COMPANY
THIS AGREEMENT, made and entered into this ____ day of ____ 2000, by and
among MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), INTEGRITY LIFE INSURANCE COMPANY, a life insurance company organized
under the laws of the State of Ohio (the "Company") on its own behalf and on
behalf of each of the segregated asset accounts of the Company set forth in
Schedule A hereto, as may be amended from time to time (the "Accounts"), and
MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation ("MFS").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares are registered or will be registered under the Securities Act of
1933, as amended (the "1933 Act");
WHEREAS, shares of beneficial interest of the Trust are divided into
several series of shares, each representing the interests in a particular
managed pool of securities and other assets;
WHEREAS, certain series of shares of the Trust are divided into two
separate share classes, an Initial Class and a Service Class, and the Trust on
behalf of the Service Class has adopted a Rule 12b-1 plan under the 1940 Act
pursuant to which the Service Class pays a distribution fee;
WHEREAS, the series of shares of the Trust (each, a "Portfolio," and,
collectively, the "Portfolios") and the classes of shares of those Portfolios
(the "Shares") offered by the Trust to the Company and the Accounts are set
forth on Schedule A attached hereto;
WHEREAS, MFS is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
law, and is the Trust's investment adviser;
WHEREAS, the Company will issue certain variable annuity and/or variable
life insurance contracts (individually, the "Policy" or, collectively, the
"Policies") which, if required by applicable law, will be registered under the
1933 Act;
WHEREAS, the Accounts are duly organized, validly existing segregated
asset accounts, established by resolution of the Board of Directors of the
Company, to set aside and invest assets attributable to the aforesaid variable
annuity and/or variable life insurance contracts that are allocated to the
Accounts (the Policies and the Accounts covered by this Agreement, and each
corresponding Portfolio covered by this Agreement in which the Accounts invest,
is specified in Schedule A attached hereto as may be modified from time to
time);
<PAGE>
WHEREAS, the Company has registered or will register the Accounts as unit
investment trusts under the 1940 Act (unless exempt therefrom);
WHEREAS, MFS Fund Distributors, Inc. (the "Underwriter") is registered as
a broker-dealer with the Securities and Exchange Commission (the "SEC") under
the Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"),
and is a member in good standing of the National Association of Securities
Dealers, Inc. (the "NASD");
WHEREAS, Touchstone Securities, Inc. ("Touchstone"), the underwriter for
the individual variable annuity and the variable life policies, is registered as
a broker-dealer with the SEC under the 1934 Act and is a member in good standing
of the NASD; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase the Shares of the Portfolios as
specified in Schedule A attached hereto on behalf of the Accounts to fund the
Policies, and the Trust intends to sell such Shares to the Accounts at net asset
value;
NOW, THEREFORE, in consideration of their mutual promises, the Trust,
MFS, and the Company agree as follows:
ARTICLE I. SALE OF TRUST SHARES
1.1. The Trust agrees to sell to the Company those Shares which the
Accounts order (based on orders placed by Policy holders on that Business
Day, as defined below) and which are available for purchase by such
Accounts, executing such orders on a daily basis at the net asset value
next computed after receipt by the Trust or its designee of the order for
the Shares. For purposes of this Section 1.1, the Company shall be the
designee of the Trust for receipt of such orders from Policy owners and
receipt by such designee shall constitute receipt by the Trust; PROVIDED
that the Trust receives notice of such orders by 9:30 a.m. New York time
on the next following Business Day. "Business Day" shall mean any day on
which the New York Stock Exchange, Inc. (the "NYSE") is open for trading
and on which the Trust calculates its net asset value pursuant to the
rules of the SEC.
1.2. The Trust agrees to make the Shares available indefinitely for
purchase at the applicable net asset value per share by the Company and
the Accounts on those days on which the Trust calculates its net asset
value pursuant to rules of the SEC and the Trust shall calculate such net
asset value on each day which the NYSE is open for trading.
Notwithstanding the foregoing, the Board of Trustees of the Trust (the
"Board") may refuse to sell any Shares to the Company and the Accounts,
or suspend or terminate the offering of the Shares if such action is
required by law or by regulatory authorities having jurisdiction or is,
in the sole discretion of the Board acting in good faith and in light of
its fiduciary duties under federal and any applicable state laws,
necessary in the best interest of the Shareholders of such Portfolio.
1.3. The Trust and MFS agree that the Shares will be sold only to
insurance companies which have entered into participation agreements with
the Trust and MFS (the "Participating Insurance Companies") and their
separate accounts, qualified pension and retirement plans and MFS or its
affiliates. The Trust and MFS will not sell Trust shares to any insurance
company or separate account unless an agreement containing provisions
substantially the same as Articles III and VII of
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<PAGE>
this Agreement is in effect to govern such sales. The Company will not
resell the Shares except to the Trust or its agents.
1.4. The Trust agrees to redeem for cash, on the Company's request, any
full or fractional Shares held by the Accounts (based on orders placed by
Policy owners on that Business Day), executing such requests on a daily
basis at the net asset value next computed after receipt by the Trust or
its designee of the request for redemption. For purposes of this Section
1.4, the Company shall be the designee of the Trust for receipt of
requests for redemption from Policy owners and receipt by such designee
shall constitute receipt by the Trust; provided that the Trust receives
notice of such request for redemption by 9:30 a.m. New York time on the
next following Business Day.
1.5. Each purchase, redemption and exchange order placed by the Company
shall be placed separately for each Portfolio and shall not be netted
with respect to any Portfolio. However, with respect to payment of the
purchase price by the Company and of redemption proceeds by the Trust,
the Company and the Trust shall net purchase and redemption orders with
respect to each Portfolio and shall transmit one net payment for all of
the Portfolios in accordance with Section 1.6 hereof.
1.6. In the event of net purchases, the Company shall pay for the
Shares by 2:00 p.m. New York time on the next Business Day after an order
to purchase the Shares is made in accordance with the provisions of
Section 1.1. hereof. In the event of net redemptions, the Trust shall pay
the redemption proceeds by 2:00 p.m. New York time on the next Business
Day after an order to redeem the shares is made in accordance with the
provisions of Section 1.4. hereof. All such payments shall be in federal
funds transmitted by wire.
1.7. Issuance and transfer of the Shares will be by book entry only.
Stock certificates will not be issued to the Company or the Accounts. The
Shares ordered from the Trust will be recorded in an appropriate title
for the Accounts or the appropriate subaccounts of the Accounts.
1.8. The Trust shall furnish same day notice (by wire or telephone
followed by written confirmation) to the Company of any dividends or
capital gain distributions payable on the Shares. The Company hereby
elects to receive all such dividends and distributions as are payable on
a Portfolio's Shares in additional Shares of that Portfolio. The Trust
shall notify the Company of the number of Shares so issued as payment of
such dividends and distributions.
1.9. The Trust or its custodian shall make the net asset value per
share for each Portfolio available to the Company on each Business Day as
soon as reasonably practical after the net asset value per share is
calculated and shall use its best efforts to make such net asset value
per share available by 6:30 p.m. New York time. In the event that the
Trust is unable to meet the 6:30 p.m. time stated herein, it shall
provide additional time for the Company to place orders for the purchase
and redemption of Shares. Such additional time shall be equal to the
additional time which the Trust takes to make the net asset value
available to the Company. If the Trust provides materially incorrect
share net asset value information, the Trust shall make an adjustment to
the number of shares purchased or redeemed for the Accounts to reflect
the correct net asset value per share. Any material error in the
calculation or reporting of net asset value per share, dividend or
capital gains information shall be reported promptly upon discovery to
the Company.
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ARTICLE II. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. The Company represents and warrants that the Policies are or will
be registered under the 1933 Act or are exempt from or not subject to
registration thereunder, and that the Policies will be issued, sold, and
distributed in compliance in all material respects with all applicable
state and federal laws, including without limitation the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the
1940 Act. The Company further represents and warrants that it is an
insurance company duly organized and in good standing under applicable
law and that it has legally and validly established the Account as a
segregated asset account under applicable law and has registered or,
prior to any issuance or sale of the Policies, will register the Accounts
as unit investment trusts in accordance with the provisions of the 1940
Act (unless exempt therefrom) to serve as segregated investment accounts
for the Policies, and that it will maintain such registration for so long
as any Policies are outstanding. The Company shall amend the registration
statements under the 1933 Act for the Policies and the registration
statements under the 1940 Act for the Accounts from time to time as
required in order to effect the continuous offering of the Policies or as
may otherwise be required by applicable law. The Company shall register
and qualify the Policies for sales in accordance with the securities laws
of the various states only if and to the extent deemed necessary by the
Company.
2.2. The Company represents and warrants that the Policies are
currently and at the time of issuance will be treated as life insurance,
endowment or annuity contract under applicable provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), that it will maintain such
treatment and that it will notify the Trust or MFS immediately upon
having a reasonable basis for believing that the Policies have ceased to
be so treated or that they might not be so treated in the future.
2.3. The Company represents and warrants that Touchstone, the
underwriter for the individual variable annuity and the variable life
policies, is a member in good standing of the NASD and is a registered
broker-dealer with the SEC. The Company represents and warrants that the
Company and Touchstone will sell and distribute such policies in
accordance in all material respects with all applicable state and federal
securities laws, including without limitation the 1933 Act, the 1934 Act,
and the 1940 Act.
2.4. The Trust and MFS represent and warrant that the Shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with the laws of The
Commonwealth of Massachusetts and all applicable federal and state
securities laws and that the Trust is and shall remain registered under
the 1940 Act. The Trust shall amend the registration statement for its
Shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its Shares. The Trust shall
register and qualify the Shares for sale in accordance with the laws of
the various states only if and to the extent deemed necessary by the
Trust.
2.5. MFS represents and warrants that the Underwriter is a member in
good standing of the NASD and is registered as a broker-dealer with the
SEC. The Trust and MFS represent that the Trust and the Underwriter will
sell and distribute the Shares in accordance in all material respects
with all applicable state and federal securities laws, including without
limitation the 1933 Act, the 1934 Act, and the 1940 Act.
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2.6. The Trust represents that it is lawfully organized and validly
existing under the laws of The Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and any
applicable regulations thereunder.
2.7. MFS represents and warrants that it is and shall remain duly
registered under all applicable federal securities laws and that it shall
perform its obligations for the Trust in compliance in all material
respects with any applicable federal securities laws and with the
securities laws of The Commonwealth of Massachusetts. MFS represents and
warrants that it is not subject to state securities laws other than the
securities laws of The Commonwealth of Massachusetts and that it is
exempt from registration as an investment adviser under the securities
laws of The Commonwealth of Massachusetts.
2.8. No less frequently than annually, the Company shall submit to the
Board such reports, material or data as the Board may reasonably request
so that it may carry out fully the obligations imposed upon it by the
conditions contained in the exemptive application pursuant to which the
SEC has granted exemptive relief to permit mixed and shared funding (the
"Mixed and Shared Funding Exemptive Order").
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. At least annually, the Trust or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios listed in Schedule A hereto) for the
Shares as the Company may reasonably request for distribution to existing
Policy owners whose Policies are funded by such Shares. The Trust or its
designee shall provide the Company, at the Company's expense, with as
many copies of the current prospectus for the Shares as the Company may
reasonably request for distribution to prospective purchasers of
Policies. If requested by the Company in lieu thereof, the Trust or its
designee shall provide such documentation (including a "camera ready"
copy of the new prospectus as set in type or, at the request of the
Company, as a diskette in the form sent to the financial printer) and
other assistance as is reasonably necessary in order for the parties
hereto once each year (or more frequently if the prospectus for the
Shares is supplemented or amended) to have the prospectus for the
Policies and the prospectus for the Shares printed together in one
document; the expenses of such printing to be apportioned between (a) the
Company and (b) the Trust or its designee in proportion to the number of
pages of the Policy and Shares' prospectuses, taking account of other
relevant factors affecting the expense of printing, such as covers,
columns, graphs and charts; the Trust or its designee to bear the cost of
printing the Shares' prospectus portion of such document for distribution
to owners of existing Policies funded by the Shares and the Company to
bear the expenses of printing the portion of such document relating to
the Accounts; PROVIDED, however, that the Company shall bear all printing
expenses of such combined documents where used for distribution to
prospective purchasers or to owners of existing Policies not funded by
the Shares. In the event that the Company requests that the Trust or its
designee provides the Trust's prospectus in a "camera ready" or diskette
format, the Trust shall be responsible for providing the prospectus in
the format in which it or MFS is accustomed to formatting prospectuses
and shall bear the expense of providing the prospectus in such format
(E.G., typesetting expenses), and the Company shall bear the expense of
adjusting or changing the format to conform with any of its prospectuses.
3.2. The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Trust or its
designee. The Trust or its designee, at its expense, shall
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print and provide such statement of additional information to the Company
(or a master of such statement suitable for duplication by the Company)
for distribution to any owner of a Policy funded by the Shares. The Trust
or its designee, at the Company's expense, shall print and provide such
statement to the Company (or a master of such statement suitable for
duplication by the Company) for distribution to a prospective purchaser
who requests such statement or to an owner of a Policy not funded by the
Shares.
3.3. The Trust or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Trust's
proxy materials, reports to Shareholders and other communications to
Shareholders in such quantity as the Company shall reasonably require for
distribution to Policy owners.
3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3
above, or of Article V below, the Company shall pay the expense of
printing or providing documents to the extent such cost is considered a
distribution expense. Distribution expenses would include by way of
illustration, but are not limited to, the printing of the Shares'
prospectus or prospectuses for distribution to prospective purchasers or
to owners of existing Policies not funded by such Shares.
3.5. The Trust hereby notifies the Company that it may be appropriate
to include in the prospectus pursuant to which a Policy is offered
disclosure regarding the potential risks of mixed and shared funding.
3.6. If and to the extent required by law, the Company shall:
(a) solicit voting instructions from Policy owners;
(b) vote the Shares in accordance with instructions received
from Policy owners; and
(c) vote the Shares for which no instructions have been
received in the same proportion as the Shares of such
Portfolio for which instructions have been received from
Policy owners;
so long as and to the extent that the SEC continues to interpret the 1940
Act to require pass through voting privileges for variable contract
owners. The Company will in no way recommend action in connection with or
oppose or interfere with the solicitation of proxies for the Shares held
for such Policy owners. The Company reserves the right to vote shares
held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible
for assuring that each of their separate accounts holding Shares
calculates voting privileges in the manner required by the Mixed and
Shared Funding Exemptive Order. The Trust and MFS will notify the Company
of any changes of interpretations or amendments to the Mixed and Shared
Funding Exemptive Order.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Trust or its designee, each piece of sales literature or other
promotional material in which the Trust, MFS, any other investment
adviser to the Trust, or any affiliate of MFS are named, at least three
(3) Business Days
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prior to its use. No such material shall be used if the Trust, MFS, or
their respective designees reasonably objects to such use within three
(3) Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statement on behalf of the Trust, MFS, any other
investment adviser to the Trust, or any affiliate of MFS or concerning
the Trust or any other such entity in connection with the sale of the
Policies other than the information or representations contained in the
registration statement, prospectus or statement of additional information
for the Shares, as such registration statement, prospectus and statement
of additional information may be amended or supplemented from time to
time, or in reports or proxy statements for the Trust, or in sales
literature or other promotional material approved by the Trust, MFS or
their respective designees, except with the permission of the Trust, MFS
or their respective designees. The Trust, MFS or their respective
designees each agrees to respond to any request for approval on a prompt
and timely basis. The Company shall adopt and implement procedures
reasonably designed to ensure that information concerning the Trust, MFS
or any of their affiliates which is intended for use only by brokers or
agents selling the Policies (I.E., information that is not intended for
distribution to Policy owners or prospective Policy owners) is so used,
and neither the Trust, MFS nor any of their affiliates shall be liable
for any losses, damages or expenses relating to the improper use of such
broker only materials.
4.3. The Trust or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or the Accounts is
named, at least three (3) Business Days prior to its use. No such
material shall be used if the Company or its designee reasonably objects
to such use within three (3) Business Days after receipt of such
material.
4.4. The Trust and MFS shall not give, and agree that the Underwriter
shall not give, any information or make any representations on behalf of
the Company or concerning the Company, the Accounts, or the Policies in
connection with the sale of the Policies other than the information or
representations contained in a registration statement, prospectus, or
statement of additional information for the Policies, as such
registration statement, prospectus and statement of additional
information may be amended or supplemented from time to time, or in
reports for the Accounts, or in sales literature or other promotional
material approved by the Company or its designee, except with the
permission of the Company. The Company or its designee agrees to respond
to any request for approval on a prompt and timely basis. The parties
hereto agree that this Section 4.4. is neither intended to designate nor
otherwise imply that MFS is an underwriter or distributor of the
Policies.
4.5. The Company and the Trust (or its designee in lieu of the Company
or the Trust, as appropriate) will each provide to the other at least one
complete copy of all registration statements, prospectuses, statements of
additional information, reports, proxy statements, sales literature and
other promotional materials, applications for exemptions, requests for
no-action letters, and all amendments to any of the above, that relate to
the Policies, or to the Trust or its Shares, prior to or
contemporaneously with the filing of such document with the SEC or other
regulatory authorities. The Company and the Trust shall also each
promptly inform the other of the results of any examination by the SEC
(or other regulatory authorities) that relates to the Policies, the Trust
or its Shares, and the party that was the subject of the examination
shall provide the other party with a copy of relevant portions of any
"deficiency letter" or other correspondence or written report regarding
any such examination.
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4.6. The Trust and MFS will provide the Company with as much notice as
is reasonably practicable of any proxy solicitation for any Portfolio,
and of any material change in the Trust's registration statement,
particularly any change resulting in change to the registration statement
or prospectus or statement of additional information for any Account. The
Trust and MFS will cooperate with the Company so as to enable the Company
to solicit proxies from Policy owners or to make changes to its
prospectus, statement of additional information or registration
statement, in an orderly manner. The Trust and MFS will make reasonable
efforts to attempt to have changes affecting Policy prospectuses become
effective simultaneously with the annual updates for such prospectuses.
4.7. For purpose of this Article IV and Article VIII, the phrase "sales
literature or other promotional material" includes but is not limited to
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or
tape recording, videotape display, signs or billboards, motion pictures,
or other public media), and sales literature (such as brochures,
circulars, reprints or excerpts or any other advertisement, sales
literature, or published articles), distributed or made generally
available to customers or the public, educational or training materials
or communications distributed or made generally available to some or all
agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1. The Trust shall pay no fee or other compensation to the Company
under this Agreement, and the Company shall pay no fee or other
compensation to the Trust, except that, to the extent the Trust or any
Portfolio has adopted and implemented a plan pursuant to Rule 12b-1 under
the 1940 Act to finance distribution and for Shareholder servicing
expenses, then the Trust may make payments to the Company or to the
underwriter for the Policies in accordance with such plan. Each party,
however, shall, in accordance with the allocation of expenses specified
in Articles III and V hereof, reimburse other parties for expenses
initially paid by one party but allocated to another party. In addition,
nothing herein shall prevent the parties hereto from otherwise agreeing
to perform, and arranging for appropriate compensation for, other
services relating to the Trust and/or to the Accounts.
5.2. The Trust or its designee shall bear the expenses for the cost of
registration and qualification of the Shares under all applicable federal
and state laws, including preparation and filing of the Trust's
registration statement, and payment of filing fees and registration fees;
preparation and filing of the Trust's proxy materials and reports to
Shareholders; setting in type and printing its prospectus and statement
of additional information (to the extent provided by and as determined in
accordance with Article III above); setting in type and printing the
proxy materials and reports to Shareholders (to the extent provided by
and as determined in accordance with Article III above); the preparation
of all statements and notices required of the Trust by any federal or
state law with respect to its Shares; all taxes on the issuance or
transfer of the Shares; and the costs of printing and distributing the
Trust's prospectuses and proxy materials to owners of Policies funded by
the Shares and any expenses permitted to be paid or assumed by the Trust
pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act. The
Trust shall not bear any expenses of marketing the Policies.
5.3. The Company shall bear the expenses of printing and distributing
the Shares' prospectus or prospectuses in connection with new sales of
the Policies and of distributing the Trust's
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Shareholder reports to Policy owners. The Company shall bear all expenses
associated with the registration, qualification, and filing of the
Policies under applicable federal securities and state insurance laws;
the cost of preparing, printing and distributing the Policy prospectus
and statement of additional information; and the cost of preparing,
printing and distributing annual individual account statements for Policy
owners as required by state insurance laws.
5.4. MFS will quarterly reimburse the Company certain of the
administrative costs and expenses incurred by the Company as a result of
operations necessitated by the beneficial ownership by Policy owners of
shares of the Portfolios in the Trust, equal to 0.20% per annum of the
aggregate net assets of the Trust attributable to such Policy owners. In
no event shall such fee be paid by the Trust, its shareholders or by the
Policy holders.
ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
6.1. The Trust and MFS represent and warrant that each Portfolio of the
Trust will meet the diversification requirements of Section 817 (h) (1)
of the Code and Treas. Reg. 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance
contracts, as they may be amended from time to time (and any revenue
rulings, revenue procedures, notices, and other published announcements
of the Internal Revenue Service interpreting these sections), as if those
requirements applied directly to each such Portfolio.
6.2. The Trust and MFS represent that each Portfolio will elect to be
qualified as a Regulated Investment Company under Subchapter M of the
Code and that they will maintain such qualification (under Subchapter M
or any successor or similar provision).
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1. The Trust agrees that the Board, constituted with a majority of
disinterested trustees, will monitor each Portfolio of the Trust for the
existence of any material irreconcilable conflict between the interests
of the variable annuity contract owners and the variable life insurance
policy owners of the Company and/or affiliated companies ("contract
owners") investing in the Trust. The Board shall have the sole authority
to determine if a material irreconcilable conflict exists, and such
determination shall be binding on the Company only if approved in the
form of a resolution by a majority of the Board, or a majority of the
disinterested trustees of the Board. The Board will give prompt notice of
any such determination to the Company.
7.2. The Company agrees that it will be responsible for assisting the
Board in carrying out its responsibilities under the conditions set forth
in the Trust's exemptive application pursuant to which the SEC has
granted the Mixed and Shared Funding Exemptive Order by providing the
Board, as it may reasonably request, with all information necessary for
the Board to consider any issues raised and agrees that it will be
responsible for promptly reporting any potential or existing conflicts of
which it is aware to the Board including, but not limited to, an
obligation by the Company to inform the Board whenever contract owner
voting instructions are disregarded. The Company also agrees that, if a
material irreconcilable conflict arises, it will at its own cost remedy
such conflict up to and including (a) withdrawing the assets allocable to
some or all of the Accounts from the Trust or any Portfolio and
reinvesting such assets in a different investment medium, including (but
not limited to) another Portfolio of the Trust, or submitting to a vote
of all affected contract owners whether to
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withdraw assets from the Trust or any Portfolio and reinvesting such
assets in a different investment medium and, as appropriate, segregating
the assets attributable to any appropriate group of contract owners that
votes in favor of such segregation, or offering to any of the affected
contract owners the option of segregating the assets attributable to
their contracts or policies, and (b) establishing a new registered
management investment company and segregating the assets underlying the
Policies, unless a majority of Policy owners materially adversely
affected by the conflict have voted to decline the offer to establish a
new registered management investment company.
7.3. A majority of the disinterested trustees of the Board shall
determine whether any proposed action by the Company adequately remedies
any material irreconcilable conflict. In the event that the Board
determines that any proposed action does not adequately remedy any
material irreconcilable conflict, the Company will withdraw from
investment in the Trust each of the Accounts designated by the
disinterested trustees and terminate this Agreement within six (6) months
after the Board informs the Company in writing of the foregoing
determination; PROVIDED, HOWEVER, that such withdrawal and termination
shall be limited to the extent required to remedy any such material
irreconcilable conflict as determined by a majority of the disinterested
trustees of the Board.
7.4. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the 1940 Act or the rules promulgated thereunder with respect to mixed
or shared funding (as defined in the Mixed and Shared Funding Exemptive
Order) on terms and conditions materially different from those contained
in the Mixed and Shared Funding Exemptive Order, then (a) the Trust
and/or the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with Rule 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable; and (b) Sections 3.5, 3.6, 7.1, 7.2, 7.3 and 7.4 of this
Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
The Company agrees to indemnify and hold harmless the Trust, MFS,
any affiliates of MFS, and each of their respective directors/trustees,
officers and each person, if any, who controls the Trust or MFS within
the meaning of Section 15 of the 1933 Act, and any agents or employees of
the foregoing (each an "Indemnified Party," or collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Company) or expenses
(including reasonable counsel fees) to which any Indemnified Party may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Shares or the Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus or statement of
additional information for the Policies or contained in the
Policies or sales
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literature or other promotional material for the Policies
(or any amendment or supplement to any of the foregoing),
or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading PROVIDED that this agreement to
indemnify shall not apply as to any Indemnified Party if
such statement or omission or such alleged statement or
omission was made in reasonable reliance upon and in
conformity with information furnished to the Company or its
designee by or on behalf of the Trust or MFS for use in the
registration statement, prospectus or statement of
additional information for the Policies or in the Policies
or sales literature or other promotional material (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Policies or Shares; or
(b) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus,
statement of additional information or sales literature or
other promotional material of the Trust not supplied by the
Company or its designee, or persons under its control and
on which the Company has reasonably relied) or wrongful
conduct of the Company or persons under its control, with
respect to the sale or distribution of the Policies or
Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information,
or sales literature or other promotional literature of the
Trust, or any amendment thereof or supplement thereto, or
the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon
information furnished to the Trust by or on behalf of the
Company; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company; or
(e) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of
this Agreement;
as limited by and in accordance with the provisions of this Article VIII.
8.2. INDEMNIFICATION BY THE TRUST
The Trust agrees to indemnify and hold harmless the Company and
each of its directors and officers and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act, and any
agents or employees of the foregoing (each an "Indemnified Party," or
collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or
expenses (including reasonable counsel fees) to which any Indemnified
Party may become subject under any statute, at common law or otherwise,
insofar as such losses, claims,
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damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Shares or the
Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus, statement of
additional information or sales literature or other
promotional material of the Trust (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statement therein not misleading,
PROVIDED that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in
reasonable reliance upon and in conformity with information
furnished to the Trust, MFS, the Underwriter or their
respective designees by or on behalf of the Company for use
in the registration statement, prospectus or statement of
additional information for the Trust or in sales literature
or other promotional material for the Trust (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Policies or Shares; or
(b) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus,
statement of additional information or sales literature or
other promotional material for the Policies not supplied by
the Trust, MFS, the Underwriter or any of their respective
designees or persons under their respective control and on
which any such entity has reasonably relied) or wrongful
conduct of the Trust or persons under its control, with
respect to the sale or distribution of the Policies or
Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information,
or sales literature or other promotional literature of the
Accounts or relating to the Policies, or any amendment
thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of the Trust, MFS or the
Underwriter; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement) or
arise out of or result from any other material breach of
this Agreement by the Trust; or
(e) arise out of or result from the materially incorrect or
untimely calculation or reporting of the daily net asset
value per share or dividend or capital gain distribution
rate; or
(f) arise as a result of any failure by the Trust to provide
the services and furnish the materials under the terms of
the Agreement;
as limited by and in accordance with the provisions of this Article VIII.
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8.3. In no event shall the Trust be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including without limitation, the Company, or any Participating Insurance
Company or any Policy holder, with respect to any losses, claims,
damages, liabilities or expenses that arise out of or result from (i) a
breach of any representation, warranty, and/or covenant made by the
Company hereunder or by any Participating Insurance Company under an
agreement containing substantially similar representations, warranties
and covenants; (ii) the failure by the Company or any Participating
Insurance Company to maintain its segregated asset account (which invests
in any Portfolio) as a legally and validly established segregated asset
account under applicable state law and as a duly registered unit
investment trust under the provisions of the 1940 Act (unless exempt
therefrom); or (iii) the failure by the Company or any Participating
Insurance Company to maintain its variable annuity and/or variable life
insurance contracts (with respect to which any Portfolio serves as an
underlying funding vehicle) as life insurance, endowment or annuity
contracts under applicable provisions of the Code.
8.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions contained in this Agreement with respect to
any losses, claims, damages, liabilities or expenses to which an
Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, willful misconduct, or gross
negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and
duties under this Agreement.
8.5. Promptly after receipt by an Indemnified Party under this Section
8.5. of notice of commencement of any action, such Indemnified Party
will, if a claim in respect thereof is to be made against the
indemnifying party under this section, notify the indemnifying party of
the commencement thereof; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
Indemnified Party otherwise than under this section. In case any such
action is brought against any Indemnified Party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein and, to the extent that it may
wish, assume the defense thereof, with counsel satisfactory to such
Indemnified Party. After notice from the indemnifying party of its
intention to assume the defense of an action, the Indemnified Party shall
bear the expenses of any additional counsel obtained by it, and the
indemnifying party shall not be liable to such Indemnified Party under
this section for any legal or other expenses subsequently incurred by
such Indemnified Party in connection with the defense thereof other than
reasonable costs of investigation.
8.6. Each of the parties agrees promptly to notify the other parties of
the commencement of any litigation or proceeding against it or any of its
respective officers, directors, trustees, employees or 1933 Act control
persons in connection with the Agreement, the issuance or sale of the
Policies, the operation of the Accounts, or the sale or acquisition of
Shares.
8.7. A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this Article
VIII. The indemnification provisions contained in this Article VIII shall
survive any termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
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9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as
the SEC may grant and the terms hereof shall be interpreted and construed
in accordance therewith.
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<PAGE>
ARTICLE X. NOTICE OF FORMAL PROCEEDINGS
The Trust, MFS, and the Company agree that each such party shall promptly
notify the other parties to this Agreement, in writing, of the institution of
any formal proceedings brought against such party or its designees by the NASD,
the SEC, or any insurance department or any other regulatory body regarding such
party's duties under this Agreement or related to the sale of the Policies, the
operation of the Accounts, or the purchase of the Shares.
ARTICLE XI. TERMINATION
11.1. This Agreement shall terminate with respect to the Accounts, or
one, some, or all Portfolios:
(a) at the option of any party upon six (6) months' advance
written notice to the other parties; or
(b) at the option of the Company to the extent that the Shares
of Portfolios are not reasonably available to meet the
requirements of the Policies or are not "appropriate
funding vehicles" for the Policies, as reasonably
determined by the Company. Without limiting the generality
of the foregoing, the Shares of a Portfolio would not be
"appropriate funding vehicles" if, for example, such Shares
did not meet the diversification or other requirements
referred to in Article VI hereof; or if the Company would
be permitted to disregard Policy owner voting instructions
pursuant to Rule 6e-2 or 6e-3(T) under the 1940 Act. Prompt
notice of the election to terminate for such cause and an
explanation of such cause shall be furnished to the Trust
by the Company; or
(c) at the option of the Trust or MFS upon institution of
formal proceedings against the Company by the NASD, the
SEC, or any insurance department or any other regulatory
body regarding the Company's duties under this Agreement or
related to the sale of the Policies, the operation of the
Accounts, or the purchase of the Shares; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust by the NASD, the SEC, or any
state securities or insurance department or any other
regulatory body regarding the Trust's or MFS' duties under
this Agreement or related to the sale of the Shares; or
(e) at the option of the Company, the Trust or MFS upon receipt
of any necessary regulatory approvals and/or the vote of
the Policy owners having an interest in the Accounts (or
any subaccounts) to substitute the shares of another
investment company for the corresponding Portfolio Shares
in accordance with the terms of the Policies for which
those Portfolio Shares had been selected to serve as the
underlying investment media. The Company will give thirty
(30) days' prior written notice to the Trust of the Date of
any proposed vote or other action taken to replace the
Shares; or
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<PAGE>
(f) termination by either the Trust or MFS by written notice to
the Company, if either one or both of the Trust or MFS
respectively, shall determine, in their sole judgment
exercised in good faith, that the Company has suffered a
material adverse change in its business, operations,
financial condition, or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(g) termination by the Company by written notice to the Trust
and MFS, if the Company shall determine, in its sole
judgment exercised in good faith, that the Trust or MFS has
suffered a material adverse change in its business,
operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse
publicity; or
(h) at the option of any party to this Agreement, upon another
party's material breach of any provision of this Agreement;
or
(i) upon assignment of this Agreement, unless made with the
written consent of the parties hereto.
11.2. The notice shall specify the Portfolio or Portfolios, Policies
and, if applicable, the Accounts as to which the Agreement is to be
terminated.
11.3. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 11.1(a) may be exercised for
cause or for no cause.
11.4. Except as necessary to implement Policy owner initiated
transactions, or as required by state insurance laws or regulations, the
Company shall not redeem the Shares attributable to the Policies (as
opposed to the Shares attributable to the Company's assets held in the
Accounts), and the Company shall not prevent Policy owners from
allocating payments to a Portfolio that was otherwise available under the
Policies, until thirty (30) days after the Company shall have notified
the Trust of its intention to do so.
11.5. Notwithstanding any termination of this Agreement, the Trust and
MFS shall, at the option of the Company, continue to make available
additional shares of the Portfolios pursuant to the terms and conditions
of this Agreement, for all Policies in effect on the effective date of
termination of this Agreement (the "Existing Policies"), except as
otherwise provided under Article VII of this Agreement. Specifically,
without limitation, the owners of the Existing Policies shall be
permitted to transfer or reallocate investment under the Policies, redeem
investments in any Portfolio and/or invest in the Trust upon the making
of additional purchase payments under the Existing Policies.
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ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail, overnight courier or facsimile to the other party at the address
of such party set forth below or at such other address as such party may from
time to time specify in writing to the other party.
If to the Trust:
MFS VARIABLE INSURANCE TRUST
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, Secretary
If to the Company:
INTEGRITY LIFE INSURANCE COMPANY
515 W. Market Street, 8th Floor
Louisville, Kentucky 40202
Facsimile No.: (502) 582-7903
Attn: Kevin L. Howard, Senior Vice President and Counsel
If to MFS:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, General Counsel
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirement of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Policies and all information reasonably
identified as confidential in writing by any other party hereto and,
except as permitted by this Agreement or as otherwise required by
applicable law or regulation, shall not disclose, disseminate or utilize
such names and addresses and other confidential information without the
express written consent of the affected party until such time as it may
come into the public domain.
13.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
13.3. This Agreement may be executed simultaneously in one or more
counterparts, each of which taken together shall constitute one and the
same instrument.
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<PAGE>
13.4. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
13.5. The Schedule attached hereto, as modified from time to time, is
incorporated herein by reference and is part of this Agreement.
13.6. Each party hereto shall cooperate with each other party in
connection with inquiries by appropriate governmental authorities
(including without limitation the SEC, the NASD, and state insurance
regulators) relating to this Agreement or the transactions contemplated
hereby.
13.7. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled
to under state and federal laws.
13.8. A copy of the Trust's Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Company
acknowledges that the obligations of or arising out of this instrument
are not binding upon any of the Trust's trustees, officers, employees,
agents or shareholders individually, but are binding solely upon the
assets and property of the Trust in accordance with its proportionate
interest hereunder. The Company further acknowledges that the assets and
liabilities of each Portfolio are separate and distinct and that the
obligations of or arising out of this instrument are binding solely upon
the assets or property of the Portfolio on whose behalf the Trust has
executed this instrument. The Company also agrees that the obligations of
each Portfolio hereunder shall be several and not joint, in accordance
with its proportionate interest hereunder, and the Company agrees not to
proceed against any Portfolio for the obligations of another Portfolio.
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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.
INTEGRITY LIFE INSURANCE COMPANY
By its authorized officer,
By:
-----------------------------------------
Title:
--------------------------------------
MFS VARIABLE INSURANCE TRUST,
ON BEHALF OF THE PORTFOLIOS
By its authorized officer and not individually,
By:
-----------------------------------------
James R. Bordewick, Jr.
Assistant Secretary
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By its authorized officer,
By:
-----------------------------------------
Jeffrey L. Shames
Chairman and Chief Executive Officer
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As of ____________________
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
NAME OF SEPARATE
ACCOUNT AND DATE POLICIES FUNDED SHARE CLASS PORTFOLIOS
ESTABLISHED BY BY SEPARATE ACCOUNT (INITIAL OR SERVICE CLASS) APPLICABLE TO POLICIES
BOARD OF DIRECTORS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEGRITY LIFE INSURANCE COMPANY 1Q THE SMART ANNUITY SERVICE CLASS MFS EMERGING GROWTH
SEPARATE ACCOUNT I MFS GROWTH WITH INCOME
MAY 19, 1986 MFS MID CAP GROWTH
MFS NEW DISCOVERY
MFS CAPITAL OPPORTUNITIES
MFS TOTAL RETURN
MFS GROWTH
- -----------------------------------------------------------------------------------------------------------------------------------
NATIONAL INTEGRITY LIFE 1Q THE SMART ANNUITY SERVICE CLASS MFS EMERGING GROWTH
INSURANCE COMPANY MFS GROWTH WITH INCOME
SEPARATE ACCOUNT I MFS MID CAP GROWTH
MAY 19, 1986 MFS NEW DISCOVERY
MFS CAPITAL OPPORTUNITIES
MFS TOTAL RETURN
MFS GROWTH
- -----------------------------------------------------------------------------------------------------------------------------------
INTEGRITY LIFE INSURANCE COMPANY PINNACLE FLEXIBLE PREMIUM SERVICE CLASS MFS EMERGING GROWTH
SEPARATE ACCOUNT II VARIABLE ANNUITY MFS GROWTH WITH INCOME
MAY 21, 1992 MFS MID CAP GROWTH
MFS NEW DISCOVERY
MFS CAPITAL OPPORTUNITIES
- -----------------------------------------------------------------------------------------------------------------------------------
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<PAGE>
- -----------------------------------------------------------------------------------------------------------------------------------
NATIONAL INTEGRITY LIFE PINNACLE FLEXIBLE PREMIUM SERVICE CLASS MFS EMERGING GROWTH
INSURANCE COMPANY VARIABLE ANNUITY MFS GROWTH WITH INCOME
SEPARATE ACCOUNT II MFS MID CAP GROWTH
MAY 21, 1992 MFS NEW DISCOVERY
MFS CAPITAL OPPORTUNITIES
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
in Post-Effective Amendment No. 14 to the Registration Statement (Form N-4 No.
33-51268) and Amendment No. 15 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 28, 2000, with
respect to the financial statements of Separate Account Ten included in the
Registration Statement (Form N-4) for 1999 filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Kansas City, Missouri
April 24, 2000
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
in Post-Effective Amendment No. 14 to the Registration Statement (Form N-4 No.
33-51268) and Amendment No. 15 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 March 31, 2000, with
respect to the statutory basis financial statements of Integrity Life Insurance
Company, and (b) dated April 12, 2000, 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 1999 filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 24, 2000
