485BPOS 1 a2096788z485bpos.txt 485BPOS As filed with the Securities and Exchange Commission on December 30, 2002 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. 21 /X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 22 /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 G. Stephen Wastek 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 December 31, 2002 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. THE PINNACLE IV FILING CONTAINED IN THIS REGISTRATION STATEMENT IS NOT INTENDED TO SUPERSEDE THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FOR THE PINNACLE FLEXIBLE PREMIUM VARIABLE ANNUITY ALSO CONTAINED IN THIS REGISTRATION STATEMENT NOS. 33-51268 (POST-EFFECTIVE NUMBER 21) AND 811-7134 (POST-EFFECTIVE NUMBER 22), FILED ON DECEMBER 30, 2002. 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 corresponding mutual funds. Contributions to the Variable Account Options of Separate Account Ten are allocated to its Select Ten Plus Divisions, which invest directly in securities. FIDELITY VIP FUNDS Fidelity VIP Contrafund Fidelity VIP Equity-Income Fidelity VIP Growth Fidelity VIP Growth & Income Fidelity VIP Growth Opportunities Fidelity VIP Mid-Cap Fidelity VIP Money Market FRANKLIN TEMPLETON VIP TRUST Franklin Growth and Income Securities Franklin Income Securities Franklin Large Cap Growth Securities Mutual Shares Securities Templeton Foreign Securities Templeton Growth Securities JANUS ASPEN SERIES Janus Aspen Series Aggressive Growth Janus Aspen Series Growth Janus Aspen Series International Growth Janus Aspen Series Worldwide Growth J.P. MORGAN SERIES TRUST II J.P. Morgan Bond J.P. Morgan Mid Cap Value J.P. Morgan International Opportunities THE LEGENDS FUND Baron Small Cap Gabelli Large Cap Value Harris Bretall Sullivan & Smith Equity Growth Third Avenue Value PUTNAM FUNDS Putnam VT The George Putnam Fund of Boston Putnam VT Growth and Income Fund Putnam VT International Growth Putnam VT New Opportunities Fund Putnam VT Small Cap Value Fund Putnam VT Voyager Fund Putnam VT Voyager Fund II MFS FUNDS MFS Capital Opportunities MFS Emerging Growth MFS Investors Growth Stock MFS Investors Trust MFS Mid Cap Growth MFS New Discovery MFS Research MFS Total Return SCUDDER VIT FUNDS Scudder EAFE Equity Index Fund Scudder Equity 500 Index Fund Scudder Small Cap Index Fund SELECT TEN PLUS DIVISIONS Select Ten Plus Division - March Select Ten Plus Division - June Select Ten Plus Division - September Select Ten Plus Division - December 1 TOUCHSTONE VARIABLE SERIES TRUST Touchstone Balanced Fund Touchstone Bond Fund Touchstone Emerging Growth Fund Touchstone Enhanced 30 Fund Touchstone Growth & Income Fund Touchstone Growth/Value Fund Touchstone High Yield Fund Touchstone International Equity Fund Touchstone Large Cap Growth Fund Touchstone Money Market Fund Touchstone Small Cap Value Fund Touchstone Value Plus Fund VAN KAMPEN PORTFOLIOS Van Kampen LIT Comstock Van Kampen LIT Emerging Growth Van Kampen UIF Emerging Markets Debt Van Kampen UIF Emerging Markets Equity Van Kampen UIF U.S. Real Estate Van Kampen UIT Bandwidth & Telecommunications Van Kampen UIT Biotechnology & Pharmaceutical Van Kampen UIT Internet Van Kampen UIT Morgan Stanley High-Tech 35(SM) Part I of this prospectus describes the contract and provides background information about the Separate Accounts. Part II of this prospectus (beginning on page 49) provides information about the investment activities and operations of the Select Ten Plus Divisions, including their investment policies. We also offer Guaranteed Rate Options (GROs) and Systematic Transfer Options (STOS), 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%, less any administrative charges and less any charges for the EEB option, if elected (MINIMUM VALUE). Withdrawal charges, charges for the EEB option (if elected), 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 SIX-MONTH STO INTO OTHER INVESTMENT OPTIONS WITHIN SIX MONTHS AND TRANSFER ALL CONTRIBUTIONS TO THE TWELVE-MONTH STO WITHIN ONE YEAR OF CONTRIBUTION. THIS MAY BE DONE ON A MONTHLY OR QUARTERLY BASIS DEPENDING UPON THE STO YOU SELECT. 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 December 31, 2002, 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 D. 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 2 AVAILABLE, AFTER PAYING A DUPLICATING FEE, BY ELECTRONIC REQUEST TO publicinfo@sec.gov OR BY WRITING THE SEC'S PUBLIC REFERENCE SECTION, WASHINGTON, D.C. 20459-0102. The date of this prospectus is December 31, 2002. 3 TABLE OF CONTENTS
PAGE PART I SECTION 1 - SUMMARY Your Variable Annuity Contract 9 Your Benefits 9 How Your Contract is Taxed 9 Your Contributions 9 Your Investment Options 9 Variable Account Options 9 Account Value, Adjusted Account Value and Cash Value 10 Transfers 10 Charges and Fees 10 Withdrawals 10 Your Initial Right to Revoke 10 Table of Annual Fees and Expenses 11 Examples 15 Risk/Return Summary: Investments and Risks 18 SECTION 2 - INTEGRITY AND THE SEPARATE ACCOUNTS Integrity Life Insurance Company 18 The Separate Accounts and the Variable Account Options 18 Assets of Our Separate Accounts 19 Changes In How We Operate 19 SECTION 3 - YOUR INVESTMENT OPTIONS Investment Options 20 The Select Ten Plus Divisions of Separate Account Ten 31 Fixed Accounts 32 Guaranteed Rate Options 32 Renewals of GRO Accounts 32 Market Value Adjustments 33 Systematic Transfer Option 33 SECTION 4 - DEDUCTIONS AND CHARGES Separate Account Charges 34 Annual Administrative Charge 34 Portfolio and Division Charges 34 Reduction or Elimination of Separate Account or Administrative Charges 34 State Premium Tax Deduction 34 Contingent Withdrawal Charge 34 Reduction or Elimination of the Contingent Withdrawal Charge 35 Transfer Charge 35 Hardship Waiver 35 Tax Reserve 36 SECTION 5 - TERMS OF YOUR VARIABLE ANNUITY Contributions Under Your Contract 36 Your Account Value 36 Units in Our Separate Accounts 36 4 How We Determine Unit Value 37 Transfers 38 Excessive Trading 38 Specific Notice Regarding the use of this Annuity for Market Timing of Investments 39 Withdrawals 39 Assignments 40 Death Benefits and Similar Benefit Distributions 40 Annuity Benefits 40 Annuities 41 Fixed Annuity Payments 41 Timing of Payment 41 How You Make Requests and Give Instructions 42 SECTION 6 - OPTIONAL CONTRACT FEATURE Enhanced Earnings Benefit 42 SECTION 7 - VOTING RIGHTS Portfolio Voting Rights 43 How We Determine Your Voting Shares 43 How Portfolio Shares Are Voted 44 How Separate Account Ten Interests Are Voted 44 Separate Account Voting Rights 44 SECTION 8 - TAX ASPECTS OF THE CONTRACT Introduction 44 Your Contract is an Annuity 45 Taxation of Annuities Generally 45 Distribution-at-Death Rules 46 Spousal Continuation 46 Diversification Standards 46 Partial 1035 Exchanges 46 Tax-Favored Retirement Programs 47 Inherited IRAs 47 Annuities in Qualified Plans 47 Federal and State Income Tax Withholding 47 Impact of Taxes on Integrity 48 Transfers Among Investment Options 48 SECTION 9 - ADDITIONAL INFORMATION Systematic Withdrawals 48 Income Plus Withdrawal Program 48 Choices Plus Minimum Required Distribution Program 49 Dollar Cost Averaging 49 Systematic Transfer Program 50 Customized Asset Rebalancing 50 Systematic Contributions 50 Legal Proceedings 51 SECTION 10 - PRIOR CONTRACTS Prior Contracts 51 5 PART II - THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN SECTION 1 - INVESTMENT OBJECTIVE, STRATEGY AND RISK FACTORS The Divisions 54 Investment Objective 54 Investment Strategy 55 Dow Jones Industrial Average 56 Risk Factors 57 SECTION 2 - PERFORMANCE INFORMATION Performance History of the Dogs of the Dow Strategy - Comparison of Total Return 57 Performance History of the Dogs of the Dow Strategy - $10,000 Hypothetical Investment 59 SECTION 3 - CONTRACTHOLDER INFORMATION Pricing of Units 60 Dividends and Distributions 60 SECTION 4 - MANAGEMENT The Investment Adviser 60 The Sub-Adviser 61 APPENDIX A - FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNTS 62 APPENDIX B - ILLUSTRATION OF A MARKET VALUE ADJUSTMENT 72 APPENDIX C - ENHANCED EARNINGS BENEFIT CALCULATION EXAMPLE 75 APPENDIX D - TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION 76
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. 6 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. GAIN - Account Value less Net Premiums. 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, less any administrative charges and less any charges for the EEB option, if elected. 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 charges and less any charges for the EEB option, if elected. NET PREMIUMS - Total Customer Contributions less any withdrawals or loans. 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. 7 STO - Systematic Transfer Option - our STO provides a guaranteed interest rate; contributions to the STO must be transferred into other Investment Options within either six months or one year of your STO contribution. TOTAL CUSTOMER CONTRIBUTIONS - The sum of all premiums contributed by the policyholder. 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. 8 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 (some states may require a higher initial contribution). 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. 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 9 Portfolio. For a full description of each Portfolio, see that Portfolio's prospectus and Statement of Additional Information. The Select Ten Plus Divisions invest directly in securities. For a full description of the Select Ten Plus Divisions, see Part II. ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE Your ACCOUNT VALUE consists of the values of your Fixed Accounts and Variable Account Options added together. Your ADJUSTED ACCOUNT VALUE is your Account Value increased or decreased by any MARKET VALUE ADJUSTMENT. Your Account Value in the GROs can never be decreased below the Minimum Value. You'll find a discussion of Market Value Adjustment in the Guaranteed Rate Options paragraph of Part I, Section 3, "Your Investment Options." Your Cash Value is your ADJUSTED ACCOUNT VALUE reduced by any withdrawal charges or pro rata annual administrative charges that may apply. Fees and charges are discussed in more detail 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, or (iii) 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 1.45% is deducted from the Account Value of each of your Variable Account Options (except the Select Ten Plus Divisions) to cover mortality and expense risks (1.30%) and certain administrative expenses (.15%). For the Select Ten Plus Divisions, a daily charge equal to an annual fee of 1.35% is deducted from the Account Value 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 15% of your Account Value each contract year with no withdrawal charges. After the first 15% 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 depending upon the investment experience of the Investment Options you selected. You bear the investment risk during the ten-day period, as well as any fees and charges incurred during the period your contract is in force. If your state requires, upon cancellation we'll return your contribution without assessing any fees, charges or other adjustments. We'll return the amount of any contribution to the Guaranteed Rate Option upon cancellation. 10 TABLE OF ANNUAL FEES AND EXPENSES OWNER TRANSACTION EXPENSES Sales Load on Purchases $ 0 Deferred Sales Load (as a percentage of contributions)(1) 8% Maximum Transfer Charge (assessed after 12 transfers in one contract year)(2) $ 20
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 Separate Account II (AS A PERCENTAGE OF SEPARATE ACCOUNT VALUE) Mortality and Expense Risk Charge 1.30% Administrative Expenses .15% ---- Base Contract Total Separate Account II Annual Expenses 1.45% ==== Optional Enhanced Earnings Benefit Charge, Issue Age 70-79 .50% ---- Highest Possible Total Separate Account Annual Expenses if this Option Elected 1.95% ====
OPTIONAL CONTRACT EXPENSES Enhanced Earnings Benefit (Charges are assessed to both the Separate and Fixed Accounts)
ISSUE AGE ANNUAL COST --------- ----------- 0-59 .20% Total Separate Account II Charges with EEB 1.65% ==== 60-69 40% Total Separate Account II Charges with EEB 1.85% ==== 70-79 50% Total Separate Account II Charges with EEB 1.95% ====
11 Portfolio Annual Expenses After Reimbursement (AS A PERCENTAGE OF AVERAGE NET ASSETS)
MANAGEMENT OTHER 12b-1 TOTAL ANNUAL PORTFOLIO FEES EXPENSES FEE EXPENSES --------- ---------- -------- ----- ------------ Fidelity VIP Contrafund: Service Class 2 .58% .11% .25% .94%(3) Fidelity VIP Equity Income: Service Class 2 .48% .11% .25% .84%(3) Fidelity VIP Growth: Service Class 2 .58% .10% .25% .93%(3) Fidelity VIP Growth and Income: Service Class 2 .48% .11% .25% .84%(3) Fidelity VIP Growth Opportunity: Service Class 2 .58% .12% .25% .95%(3) Fidelity VIP Mid Cap: Service Class 2 .58% .11% .25% .94%(3) Fidelity VIP Money Market: Service Class 2 .18% .12% .25% .55% Franklin Income Securities - Class 2 .49% .04% .25% .78% Franklin Growth and Income Securities - Class 2 .48% .03% .25% .76% Franklin Large Cap Growth Securities - Class 2 .75% .03% .25% 1.03% Mutual Shares Securities - Class 2 .60% .19% .25% 1.04% Templeton Foreign Securities - Class 2 .69% .22% .25% 1.16% Templeton Growth Securities - Class 2 .80% .05% .25% 1.10% Janus Aspen Series Aggressive Growth: Service Shares .65% .02% .25% .92%(4) Janus Aspen Series Growth: Service Shares .65% .01% .25% .91%(4) Janus Aspen Series International Growth: Service Shares .65% .06% .25% .96%(4) Janus Aspen Series Worldwide Growth: Service Shares .65% .04% .25% .94%(4) J.P. Morgan Series Trust II Bond .30% .45% .00% .75% J.P. Morgan Series Trust II International Opportunities .60% .60% .00% 1.20%(5) J.P. Morgan Series Trust II Mid Cap .70% .30% .00% 1.00%(5) Baron Small Cap 1.05% .60% .00% 1.65%(6) Gabelli Large Cap Value .90% .60% .00% 1.50%(6) Harris Bretall Equity Growth .65% .52% .00% 1.17%(6) Third Avenue Value .65% .43% .00% 1.08%(6) MFS Capital Opportunities: Service Class .75% .15% .25% 1.15%(7) MFS Emerging Growth: Service Class .75% .12% .25% 1.12% MFS Investors Growth Stock: Service Class .75% .17% .25% 1.17% MFS Investors Trust: Service Class .75% .15% .25% 1.15%(7) MFS Mid Cap Growth: Service Class .75% .15% .25% 1.15% MFS New Discovery: Service Class .90% .15% .25% 1.30%(7) MFS Research: Service Class .75% .15% .25% 1.15%(7) MFS Total Return: Service Class .75% .14% .25% 1.14%(7) Putnam VT The George Putnam Fund of Boston: Class IB .65% .11% .25% 1.01% Putnam VT Growth and Income Fund: Class IB .46% .05% .25% .76%(8) Putnam VT International Growth Fund: Class IB .76% .18% .25% 1.19%(8) Putnam VT New Opportunities Fund: Class IB .54% .05% .25% .84% Putnam VT Small Cap Value Fund: Class IB .80% .14% .25% 1.19%(8) Putnam VT Voyager Fund: Class IB .53% .04% .25% .82% Putnam VT Voyager II Fund: Class IB .70% .92% .25% 1.87%(8) Scudder EAFE Equity Index: Class B .45% .20% .00% .65%(9) Scudder Equity 500 Index: Class B .20% .10% .00% .30%(9) Scudder Small Cap Index: Class B .35% .10% .00% .45%(9) Touchstone Balanced .80% .10% .00% .90%(10) Touchstone Bond .55% .20% .00% .75%(10) Touchstone Emerging Growth .80% .35% .00% 1.15%(10) Touchstone Enhanced 30 .65% .10% .00% .75%(10) Touchstone Growth and Income .80% .05% .00% .85%(10) Touchstone Growth/Value 1.00% .10% .00% 1.10%(10) Touchstone High Yield .50% .30% .00% .80%(10) Touchstone International Equity .95% .30% .00% 1.25%(10) Touchstone Large Cap Growth .75% .20% .00% .95%(10) 12 Touchstone Money Market .50% .10% .00% .60%(10) Touchstone Small Cap Value .80% .20% .00% 1.00%(10) Touchstone Value Plus .75% .40% .00% 1.15%(10) Van Kampen LIT Comstock .60% .21% .25% 1.06% Van Kampen LIT Emerging Growth .70% .06% .25% 1.01% Van Kampen UIF Emerging Markets Debt .80% .37% .00% 1.17%(11) Van Kampen UIF Emerging Markets Equity .80% .35% .25% 1.40% Van Kampen UIF U.S. Real Estate .75% .35% .00% 1.10%(11) Van Kampen UIT Bandwidth & Telecommunication .00% 3.57% .00% 3.57%(12) Van Kampen UIT Biotechnology & Pharmaceutical .00% 1.20% .00% 1.20%(12) Van Kampen UIT Internet .00% 4.96% .00% 4.96%(12) Van Kampen UIT Morgan Stanley High Tech 35 .00% 1.20% .00% 1.20%(12) Van Kampen UIT Morgan Stanley U.S. Multinational .00% 1.20% .00% 1.20%(12)
Division Annual Expenses After Reimbursement (AS A PERCENTAGE OF AVERAGE NET ASSETS)
MANAGEMENT FEES(13) OTHER EXPENSES(14) TOTAL ANNUAL EXPENSES(14) --------------------- -------------------- --------------------------- Select Ten Plus Division-March .50% .35% .85% Select Ten Plus Division-June .50% .35% .85% Select Ten Plus Division-September .50% .35% .85% Select Ten Plus Division-December .50% .35% .85%
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part I, Section 4. You may make a partial withdrawal of up to 15% 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 will charge a transfer fee of $20 for each transfer. This charge doesn't apply to transfers made for dollar cost averaging, customized asset rebalancing, or systematic transfers. See "Deductions and Charges - Transfer Charge" in Part I, Section 4. (3) Actual annual class operating expenses were lower because a portion of the brokerage commissions that the fund paid was used to reduce the fund's expenses. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances are used to reduce a portion of the fund's custodian expenses. These offsets may be discontinued at any time (4) Expenses are based upon actual annualized expenses for the fiscal year ending December 31, 2001. (5) The information in this table has been restated to reflect a voluntary agreement by J.P. Morgan Chase Bank of New York, an affiliate of JPMIM, to reimburse the portfolio to the extent certain expenses exceed 1.20% for the International Opportunities Portfolio and 1.00% for the Mid Cap Value Portfolio. Without this agreement, Total Annual Expenses would have been 1.40% and 10.62%, respectively. (6) Touchstone Advisors has voluntarily agreed to reimburse each of the Legends Fund Portfolios for Other Expenses (excluding Management Fees) above an annual rate of .60% of average net assets. Without reimbursements, Total Annual Expenses for the Fund's fiscal year ended June 30, 2002 would have been 2.32% for the Baron Small Cap Portfolio and 1.63% for the Gabelli Large Cap Value Portfolio. Touchstone Advisors has reserved the right for withdraw or modify its policy of expense reimburse for the Portfolios. In the Legends Fund's prospectus, see "Management of the Fund." (7) Each series has an expense offset arrangement that reduces the series' custodian fee based upon the amount of cash maintained by the series with its custodian and dividend disbursing agent. The series may enter into other similar arrangements and directed brokerage arrangements which have the effect of reducing the series' expenses. MFS has also contractually agreed, subject to reimbursement, to bear the series' expenses such that the "Other Expenses" do not exceed 0.15% annually. These contractual fee arrangements will continues until at 13 least May 1, 2003 unless changed with the consent of the board of trustees which oversees the series. Without these arrangements the Total Annual Expenses for the portfolios would have been as follows: Capital Opportunity 1.21%, Investors Growth Stock 1.17%, Mid Cap Growth 1.20%, and New Discovery 1.34%. (8) Reflects actual annualized expenses as of December 31, 2001. (9) Deutsche Asset Management, Inc. (the advisor) has voluntarily agreed to waive its fee and/or reimburse expenses of the fund, to the extent necessary, to limit all expenses to the current expense cap listed until April 30, 2002. Absent this expense cap reimbursement the Management Fees and Other Expenses for the Scudder Funds would be: .20% and .11% for the Equity Index Fund; 0.35% and .28% for the Small Cap Index Fund; and .45% and .36% for the EAFE Equity Index Fund. (10) Touchstone Advisors, Inc. has voluntarily agreed to waive it's fee and or provide an expense reimbursement arrangement that limit the Total Annual Expenses the funds pay. Without fee waiver or expense reimbursement limits the funds Total Annual Expenses would have been as follows: Balanced 1.43%; Bond 1.09%; Emerging Growth 1.36%; Enhanced 30 1.79%; Growth and Income 1.36%; Growth/Value 3.00%; High Yield 1.45%; International Equity 2.21%; Large Cap Growth 2.28%; Money Market 2.31%; Small Cap Value 2.16%; and Value Plus 2.24%. (11) The Management Fee for certain portfolios has been reduced to reflect the voluntary waiver of a portion or all of the Management Fee and the reimbursement by the portfolios adviser to the extent Total Annual Expenses exceed the following percentages: Emerging Markets Debt Portfolio 1.30%; and U.S. Real Estate 1.10%. The advisor may terminate this voluntary waiver at any time at its sole discretion. Absent such reductions, the Management Fees, Other Expenses, 12b-1 Fees and Total Annual Expenses, respectively, would be as follows: Emerging Market Debts Portfolio 0.80%, 0.37%, 0.00% 1.17%; U.S. Real Estate Portfolio 0.80%, 0.35%, 0.00% and 1.15%. (12) These expenses are estimated based upon an initial accumulation unit value of $10. Van Kampen Funds, Inc. has agreed if actual organizational costs and annual expenses exceed $0.10 per unit in any year, Van Kampen Funds, Inc. will voluntary pay any excess at its own expense. Please see the Van Kampen Portfolio prospectus for more detail. (13) Touchstone Advisors will pay a portion of its Management Fees to National Asset for its services under a sub-advisory agreement at an annual rate of .10% of the Divisions' average daily net assets up to $100 million and .05% of the Divisions' average daily net assets in excess of $100 million. Touchstone Advisors has guaranteed it or an affiliate will pay National Asset an annual minimum sub-advisory fee of $50,000. (14) 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 for the fiscal year ended December 31, 2000 would have been .98% and 1.48%, respectively, for the March Division, 1.10% and 1.60%, respectively, for the June Division, .95% and 1.45%, respectively, for the September Division, and .55% and 1.05%, respectively, for the December Division. 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 2001. 14 EXAMPLES The examples below show the expenses on a $1,000 investment, assuming a $50,000 average contract value and a 5% annual rate of return on assets. These figures include the Enhanced Earnings Benefit charges for issue age 70-79. CUMULATIVE EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE APPLICABLE PERIOD:
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------- ------ ------- ------- -------- Fidelity VIP Contrafund: Service Class 2 $ 110.21 $ 152.34 $ 196.82 $ 328.89 Fidelity VIP Equity Income: Service Class 2 $ 109.19 $ 149.30 $ 191.81 $ 319.22 Fidelity VIP Growth: Service Class 2 $ 110.11 $ 152.04 $ 196.32 $ 327.92 Fidelity VIP Growth and Income: Service Class 2 $ 109.19 $ 149.30 $ 191.81 $ 319.22 Fidelity VIP Growth Opportunity: Service Class 2 $ 110.32 $ 152.65 $ 197.32 $ 329.85 Fidelity VIP Mid Cap: Service Class 2 $ 110.21 $ 152.34 $ 196.82 $ 328.89 Fidelity VIP Money Market: Service Class 2 $ 106.22 $ 140.44 $ 177.16 $ 290.60 Franklin Income Securities - Class 2 $ 108.57 $ 147.47 $ 188.79 $ 313.37 Franklin Growth and Income Securities - Class 2 $ 108.37 $ 146.86 $ 187.78 $ 311.41 Franklin Large Cap Growth Securities - Class 2 $ 111.14 $ 155.08 $ 201.31 $ 337.51 Mutual Shares Securities - Class 2 $ 111.24 $ 155.38 $ 201.81 $ 338.46 Templeton Foreign Securities - Class 2 $ 112.47 $ 159.01 $ 207.76 $ 349.82 Templeton Growth Securities - Class 2 $ 111.85 $ 157.20 $ 204.79 $ 344.16 Janus Aspen Series Aggressive Growth: Service Shares $ 110.01 $ 151.74 $ 195.82 $ 326.96 Janus Aspen Series Growth: Service Shares $ 109.91 $ 151.43 $ 195.32 $ 326.00 Janus Aspen Series International Growth: Service Shares $ 110.42 $ 152.95 $ 197.82 $ 330.81 Janus Aspen Series Worldwide Growth: Service Shares $ 110.21 $ 152.34 $ 196.82 $ 328.89 J.P. Morgan Series Trust II Bond $ 108.27 $ 146.56 $ 187.28 $ 310.43 J.P. Morgan Series Trust II International Opportunities $ 112.88 $ 160.22 $ 209.74 $ 353.57 J.P. Morgan Series Trust II Mid Cap Value $ 110.83 $ 154.17 $ 199.81 $ 334.64 Baron Small Cap $ 117.49 $ 173.75 $ 231.77 $ 394.76 Gabelli Large Cap Value $ 115.95 $ 169.26 $ 224.48 $ 381.24 Harris Bretall Equity Growth $ 112.57 $ 159.32 $ 208.26 $ 350.76 Third Avenue Value $ 111.65 $ 156.59 $ 203.80 $ 342.26 MFS Capital Opportunities: Service Class $ 112.37 $ 158.71 $ 207.27 $ 348.88 MFS Emerging Growth: Service Class $ 112.06 $ 157.80 $ 205.78 $ 346.05 MFS Investors Growth Stock: Service Class $ 112.37 $ 158.71 $ 207.27 $ 348.88 MFS Investors Trust: Service Class $ 112.37 $ 158.71 $ 207.27 $ 348.88 MFS Mid Cap Growth: Service Class $ 112.37 $ 158.71 $ 207.27 $ 348.88 MFS New Discovery: Service Class $ 113.90 $ 163.24 $ 214.68 $ 362.89 MFS Research: Service Class $ 112.37 $ 158.71 $ 207.27 $ 348.88 MFS Total Return: Service Class $ 112.26 $ 158.41 $ 206.77 $ 347.93 Putnam VT The George Putnam Fund of Boston: Class IB $ 111.96 $ 157.50 $ 205.29 $ 345.10 Putnam VT Growth and Income Fund: Class IB $ 108.37 $ 146.86 $ 187.78 $ 311.41 Putnam VT International Growth Fund: Class IB $ 112.78 $ 159.92 $ 209.25 $ 352.63 Putnam VT New Opportunities Fund: Class IB $ 109.19 $ 149.30 $ 191.81 $ 319.22 Putnam VT Small Cap Value Fund: Class IB $ 112.78 $ 159.92 $ 209.25 $ 352.63 Putnam VT Voyager Fund: Class IB $ 108.98 $ 148.69 $ 190.80 $ 317.27 Putnam VT Voyager II Fund: Class IB $ 119.74 $ 180.32 $ 242.38 $ 414.21 Scudder EAFE Equity Index: Class S $ 107.24 $ 143.50 $ 182.23 $ 300.57 Scudder Equity 500 Index: Class S $ 103.66 $ 132.76 $ 164.38 $ 265.25 Scudder Small Cap Index: Class S $ 105.19 $ 137.38 $ 172.06 $ 280.54 Touchstone Balanced $ 109.80 $ 151.13 $ 194.82 $ 325.03 Touchstone Bond $ 108.27 $ 146.56 $ 187.28 $ 310.43 Touchstone Emerging Growth $ 112.37 $ 158.71 $ 207.27 $ 348.88 Touchstone Enhanced 30 $ 108.27 $ 146.56 $ 187.28 $ 310.43 Touchstone Growth and Income $ 109.29 $ 149.61 $ 192.31 $ 320.19 Touchstone Growth/Value $ 111.85 $ 157.20 $ 204.79 $ 344.16 15 Touchstone High Yield $ 108.78 $ 148.08 $ 189.80 $ 315.32 Touchstone International Equity $ 113.39 $ 161.73 $ 212.21 $ 358.24 Touchstone Large Cap Growth $ 110.32 $ 152.65 $ 197.32 $ 329.85 Touchstone Money Market $ 106.73 $ 141.98 $ 179.70 $ 295.60 Touchstone Small Cap Value $ 110.83 $ 154.17 $ 199.81 $ 334.64 Touchstone Value Plus $ 110.32 $ 152.65 $ 197.32 $ 329.85 Van Kampen LIT Comstock $ 111.44 $ 155.99 $ 202.80 $ 340.36 Van Kampen LIT Emerging Growth $ 110.93 $ 154.47 $ 200.31 $ 335.60 Van Kampen UIF Emerging Markets Debt $ 112.57 $ 159.32 $ 208.26 $ 350.76 Van Kampen UIF Emerging Markets Equity $ 114.93 $ 166.25 $ 219.59 $ 372.11 Van Kampen UIF U.S. Real Estate $ 111.85 $ 157.20 $ 204.79 $ 344.16 Van Kampen UIT Bandwidth & Telecommunication $ 112.88 $ 160.22 $ 209.74 $ 353.57 Van Kampen UIT Biotechnology & Pharmaceutical $ 112.88 $ 160.22 $ 209.74 $ 353.57 Van Kampen UIT Internet $ 112.88 $ 160.22 $ 209.74 $ 353.57 Van Kampen UIT Morgan Stanley High Tech 35 $ 112.88 $ 160.22 $ 209.74 $ 353.57 Van Kampen UIT Morgan Stanley U.S. Multinational $ 112.88 $ 160.22 $ 209.74 $ 353.57
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):
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------- ------ ------- ------- -------- Fidelity VIP Contrafund: Service Class 2 $ 30.21 $ 92.34 $ 156.82 $ 328.89 Fidelity VIP Equity Income: Service Class 2 $ 29.19 $ 89.30 $ 151.81 $ 319.22 Fidelity VIP Growth: Service Class 2 $ 30.11 $ 92.04 $ 156.32 $ 327.92 Fidelity VIP Growth and Income: Service Class 2 $ 29.19 $ 89.30 $ 151.81 $ 319.22 Fidelity VIP Growth Opportunity: Service Class 2 $ 30.32 $ 92.65 $ 157.32 $ 329.85 Fidelity VIP Mid Cap: Service Class 2 $ 30.21 $ 92.34 $ 156.82 $ 328.89 Fidelity VIP Money Market: Service Class 2 $ 26.22 $ 80.44 $ 137.16 $ 290.60 Franklin Income Securities - Class 2 $ 28.57 $ 87.47 $ 148.79 $ 313.37 Franklin Growth and Income Securities - Class 2 $ 28.37 $ 86.86 $ 147.78 $ 311.41 Franklin Large Cap Growth Securities - Class 2 $ 31.14 $ 95.08 $ 161.31 $ 337.51 Mutual Shares Securities - Class 2 $ 31.24 $ 95.38 $ 161.81 $ 338.46 Templeton Foreign Securities - Class 2 $ 32.47 $ 99.01 $ 167.76 $ 349.82 Templeton Growth Securities - Class 2 $ 31.85 $ 97.20 $ 164.79 $ 344.16 Janus Aspen Series Aggressive Growth: Service Shares $ 30.01 $ 91.74 $ 155.82 $ 326.96 Janus Aspen Series Growth: Service Shares $ 29.91 $ 91.43 $ 155.32 $ 326.00 Janus Aspen Series International Growth: Service Shares $ 30.42 $ 92.95 $ 157.82 $ 330.81 Janus Aspen Series Worldwide Growth: Service Shares $ 30.21 $ 92.34 $ 156.82 $ 328.89 J.P. Morgan Series Trust II Bond $ 28.27 $ 86.56 $ 147.28 $ 310.43 J.P. Morgan Series Trust II International Opportunities $ 32.88 $ 100.22 $ 169.74 $ 353.57 J.P. Morgan Series Trust II Mid Cap Value $ 30.83 $ 94.17 $ 159.81 $ 334.64 Baron Small Cap $ 37.49 $ 113.75 $ 191.77 $ 394.76 Gabelli Large Cap Value $ 35.95 $ 109.26 $ 184.48 $ 381.24 Harris Bretall Equity Growth $ 32.57 $ 99.32 $ 168.26 $ 350.76 Third Avenue Value $ 31.65 $ 96.59 $ 163.80 $ 342.26 MFS Capital Opportunities: Service Class $ 32.37 $ 98.71 $ 167.27 $ 348.88 MFS Emerging Growth: Service Class $ 32.06 $ 97.80 $ 165.78 $ 346.05 MFS Investors Growth Stock: Service Class $ 32.37 $ 98.71 $ 167.27 $ 348.88 MFS Investors Trust: Service Class $ 32.37 $ 98.71 $ 167.27 $ 348.88 MFS Mid Cap Growth: Service Class $ 32.37 $ 98.71 $ 167.27 $ 348.88 MFS New Discovery: Service Class $ 33.90 $ 103.24 $ 174.68 $ 362.89 MFS Research: Service Class $ 32.37 $ 98.71 $ 167.27 $ 348.88 MFS Total Return: Service Class $ 32.26 $ 98.41 $ 166.77 $ 347.93 Putnam VT The George Putnam Fund of Boston: Class IB $ 31.96 $ 97.50 $ 165.29 $ 345.10 Putnam VT Growth and Income Fund: Class IB $ 28.37 $ 86.86 $ 147.78 $ 311.41 16 Putnam VT International Growth Fund: Class IB $ 32.78 $ 99.92 $ 169.25 $ 352.63 Putnam VT New Opportunities Fund: Class IB $ 29.19 $ 89.30 $ 151.81 $ 319.22 Putnam VT Small Cap Value Fund: Class IB $ 32.78 $ 99.92 $ 169.25 $ 352.63 Putnam VT Voyager Fund: Class IB $ 28.98 $ 88.69 $ 150.80 $ 317.27 Putnam VT Voyager II Fund: Class IB $ 39.74 $ 120.32 $ 202.38 $ 414.21 Scudder EAFE Equity Index: Class S $ 27.24 $ 83.50 $ 142.23 $ 300.57 Scudder Equity 500 Index: Class S $ 23.66 $ 72.76 $ 124.38 $ 265.25 Scudder Small Cap Index: Class S $ 25.19 $ 77.38 $ 132.06 $ 280.54 Touchstone Balanced $ 29.80 $ 91.13 $ 154.82 $ 325.03 Touchstone Bond $ 28.27 $ 86.56 $ 147.28 $ 310.43 Touchstone Emerging Growth $ 32.37 $ 98.71 $ 167.27 $ 348.88 Touchstone Enhanced 30 $ 28.27 $ 86.56 $ 147.28 $ 310.43 Touchstone Growth and Income $ 29.29 $ 89.61 $ 152.31 $ 320.19 Touchstone Growth/Value $ 31.85 $ 97.20 $ 164.79 $ 344.16 Touchstone High Yield $ 28.78 $ 88.08 $ 149.80 $ 315.32 Touchstone International Equity $ 33.39 $ 101.73 $ 172.21 $ 358.24 Touchstone Large Cap Growth $ 30.32 $ 92.65 $ 157.32 $ 329.85 Touchstone Money Market $ 26.73 $ 81.98 $ 139.70 $ 295.60 Touchstone Small Cap Value $ 30.83 $ 94.17 $ 159.81 $ 334.64 Touchstone Value Plus $ 30.32 $ 92.65 $ 157.32 $ 329.85 Van Kampen LIT Comstock $ 31.44 $ 95.99 $ 162.80 $ 340.36 Van Kampen LIT Emerging Growth $ 30.93 $ 94.47 $ 160.31 $ 335.60 Van Kampen UIF Emerging Markets Debt $ 32.57 $ 99.32 $ 168.26 $ 350.76 Van Kampen UIF Emerging Markets Equity $ 34.93 $ 106.25 $ 179.59 $ 327.11 Van Kampen UIF U.S. Real Estate $ 31.85 $ 97.20 $ 164.79 $ 344.16 Van Kampen UIT Bandwidth & Telecommunication $ 32.88 $ 100.22 $ 169.74 $ 353.57 Van Kampen UIT Biotechnology & Pharmaceutical $ 32.88 $ 100.22 $ 169.74 $ 353.57 Van Kampen UIT Internet $ 32.88 $ 100.22 $ 169.74 $ 353.57 Van Kampen UIT Morgan Stanley High Tech 35 $ 32.88 $ 100.22 $ 169.74 $ 353.57 Van Kampen UIT Morgan Stanley U.S. Multinational $ 32.88 $ 100.22 $ 169.74 $ 353.57
These examples assume the current charges that are borne by the Separate Accounts, and the total annual expenses of the Portfolios and the Divisions as they were for their most recent fiscal years or estimated expenses (after reimbursement), if applicable. The examples also assume that any applicable fee waivers or reimbursements will continue for the periods shown. 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 assumes an estimated $50,000 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. Premium taxes at the time of payout also may be applicable. CONDENSED FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNTS IS PROVIDED IN APPENDIX A. 17 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, Third Avenue Value Portfolio, 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. 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. 18 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: - add Options to, or remove Options from, our Separate Account, combine two or more Options within our Separate Accounts, or withdraw assets relating to your contract from one Option and put them into another; - register or end the registration of the Separate Accounts under the 1940 Act; - operate our Separate Accounts under the direction of a committee or discharge a committee at any time (the committee may be composed of a majority of persons who are "interested persons" of Integrity under the 1940 Act); - restrict or eliminate any voting rights of owners or others who have voting rights that affect our Separate Accounts; - cause one or more Options to invest in a mutual fund other than or in addition to the Portfolios; or - 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. 19 PART 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. FIDELITY THE PORTFOLIOS' INVESTMENT ADVISER. Fidelity Management & Research Company (FMR) is a registered investment adviser under the Investment Advisers Act of 1940. It serves as the investment adviser to each Portfolio. Deutsche Asset Management, Inc. is the VIP Index 500 Portfolio's sub-adviser. 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. FIDELITY VIP CONTRAFUND(R) PORTFOLIO VIP Contrafund(R) 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 earning 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 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 that 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. FIDELITY 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. FIDELITY VIP GROWTH & INCOME PORTFOLIO VIP 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. 20 FIDELITY VIP GROWTH OPPORTUNITIES PORTFOLIO VIP 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. FIDELITY VIP MID-CAP PORTFOLIO FMR normally invests the VIP 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. FIDELITY VIP MONEY MARKET PORTFOLIO VIP Money Market Portfolio seeks to earn a high level of current income while preserving capital and providing liquidity. It invests only in high-quality, U.S. dollar denominated money market securities of domestic and foreign issuers, such as certificates of deposit, obligations of governments and their agencies, and commercial paper and notes. THE FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST ("TRUST") Each Fund is a series of the Trust, which is a mutual fund registered with the SEC. Affiliates of Franklin Resources, Inc., which operates as Franklin Templeton Investments, serve as the investment advisors for the funds in which the portfolios invest. FRANKLIN INCOME SECURITIES PORTFOLIO The Franklin Income Securities Portfolio seeks to maximize income while maintaining prospects for capital appreciation. Under normal market conditions, the portfolio will invest in both debt and equity securities. The portfolio seeks income by investing in corporate, foreign, and U.S. Treasury bonds. In its search for income producing growth opportunities the portfolio invests in common stocks with attractive dividend yields of companies from a variety of industries such as electric utilities, oil, gas, real estate and consumer goods. From time to time the Portfolio may invest a significant portion of its assets in certain sectors such as utilities. FRANKLIN GROWTH AND INCOME SECURITIES PORTFOLIO The Franklin Growth and Income Securities Portfolio seeks capital appreciation with a secondary goal to provide current income. Under normal market conditions, the portfolio will invest at least 65% of its total assets in a broadly diversified portfolio of equity securities that the portfolio's manager considers to be financially strong, but undervalued by the market. The portfolio may invest in real estate investment trusts but does not intend to invest more than 15% of its assets in these trusts. FRANKLIN LARGE CAP GROWTH SECURITIES PORTFOLIO The Franklin Large Cap Growth Securities Portfolio seeks capital appreciation. Under normal market conditions, the portfolio will invest at least 80% of its net assets in investments of large capitalization companies. For this portfolio, large-cap companies are those with market capitalization values (share price multiplied by the number of common stock shares outstanding) within those of the top 50% of companies in the Russell 1000 Index, at the time of purchase. The portfolio may also invest up to 25% of its total assets in foreign securities, but currently intends to limit these investments to between 10-15%. In addition to its main investments, the portfolio may invest up to 20% of its net assets in small to medium capitalization companies. Although the portfolio seeks investments across a number of sectors, it expects to have substantial positions in the technology sector and in communications. 21 MUTUAL SHARES SECURITIES PORTFOLIO The Mutual Shares Securities Portfolio seeks capital appreciation with a secondary goal of income. Under normal market conditions the portfolio will invest at least 65% of its total assets in equity securities of companies that the manager believes are available at market prices less than their value based on certain recognized objective criteria. The portfolio currently intends to invest up to approximately 25% of its total assets in foreign investments. TEMPLETON FOREIGN SECURITIES PORTFOLIO The Templeton Foreign Securities Portfolio seeks long-term capital growth. Under normal market conditions, the portfolio will invest at least 80% of its net assets in investments of issuers located outside the U.S. including those in emerging markets. TEMPLETON GROWTH SECURITIES PORTFOLIO The Templeton Growth Securities Portfolio seeks long-term capital growth. Under normal market conditions, the portfolio will invest at least 65% of its total assets in the equity securities of companies located anywhere in the world, including those in the U.S. and emerging markets. The portfolio may also invest up to 25% of its net assets in debt securities of companies and governments located anywhere in the world. 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 capitalization's 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 capitalization's within the Index will vary, but as of December 31, 2001, they ranged from approximately $225 million to $10.5 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 INTERNATIONAL GROWTH PORTFOLIO Janus Aspen International Growth Portfolio seeks long-term growth of capital. It normally invests at least 65% of its total assets in securities of issuers from at least five different countries, excluding the United States. Although the Portfolio intends to invest substantially all of its assets in issuers located outside the United States, it may invest in U.S. issuers and it may at times invest all of its assets in fewer than five countries, or even a single country. 22 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. 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 companies. 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 MID CAP VALUE PORTFOLIO J.P. Morgan Mid Cap Value Portfolio seeks to provide growth from capital appreciation. The Portfolio will generally invest 80% of its total assets in a broad portfolio of common stocks of companies with market capitalization of $1 billion to $20 billion that the advisor believes are undervalued. THE LEGENDS FUND The Legends Fund is an open-end management investment company registered with the SEC. Touchstone Advisers, Inc. is the investment advisor of 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. BARON SMALL CAP PORTFOLIO The Baron Small Cap Portfolio seeks long-term capital appreciation. It is a diversified portfolio that pursues its objective by investing primarily in common stocks of smaller companies with market values under $2 billion selected for their capital appreciation potential. In making investment decisions for the Portfolio, the sub-adviser seeks securities that it believes have (1) favorable price to value characteristics based on the sub-adviser's assessment of their prospects for future growth and profitability, and (2) the potential to increase in value at least 50% over two subsequent years. The sub-adviser to the Portfolio is BAMCO, Inc. 23 GABELLI LARGE CAP VALUE PORTFOLIO The Gabelli Large Cap Value Portfolio seeks long term capital appreciation. It is a diversified Portfolio that seeks to achieve its objective by investing primarily in common stocks of large, well known, widely-held, high-quality companies that have a market capitalization greater than $5 billion. Companies of this general type are often referred to as "Blue Chip" companies. The sub-adviser is Gabelli Asset Management Company. HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO Harris Bretall Sullivan & Smith Equity Growth Portfolio seeks long-term capital appreciation. It is a diversified portfolio that pursues its objective by investing 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. Harris Bretall Sullivan & Smith, LLC is the sub-adviser to the Portfolio. THIRD AVENUE VALUE PORTFOLIO The Third Avenue Value Portfolio seeks long-term capital appreciation. It is a non-diversified portfolio that seeks to achieve its objective mainly by acquiring common stocks of well-financed companies (companies without significant debt in comparison to their cash resources) at a substantial discount to what the sub-adviser believes is their true value. The Portfolio also seeks to acquire senior securities, such as preferred stock and debt instruments, that the sub-adviser believes are undervalued. The sub-adviser is Third Avenue Management LLC. 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 net 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 net 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 INVESTORS GROWTH STOCK PORTFOLIO MFS Investors Growth Stock Portfolio seeks to provide long-term growth of capital and future income rather than current income by investing, under normal market conditions, at least 80% of its net assets in common stocks and related securities, such as preferred stocks, convertible securities and depositary receipts for those securities, of 24 companies which MFS believes offer better than average prospects for long-term growth. MFS looks particularly for companies which demonstrate: (1) a strong franchise, strong cash flows and a recurring revenue stream; (2) a strong industry position where there is potential for high profit margins or substantial barriers to new entry in the industry; (3) a strong management with a clearly defined strategy; and (4) new products or services. MFS INVESTORS TRUST PORTFOLIO MFS Investors Trust Portfolio seeks mainly to provide long-term growth of capital, with a secondary objective of current income, by normally investing at least 65% of its net 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 80% of its net 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 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 80% 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 net 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. MFS RESEARCH PORTFOLIO The MFS Research Portfolio seeks to provide long-term growth of capital and future income. The portfolio invests, under normal market conditions, at least 80% of its net assets in common stocks and related securities, such as preferred stocks, convertible securities and depository receipts. The portfolio focuses on companies that MFS believes have favorable prospects for long-term growth, attractive valuations based on current and expected earnings or cash flow, dominant or growing market share, and superior management. The portfolio may invest in companies of any size. The investments may include securities traded on securities exchanges or in the over-the-counter markets. The portfolio may invest in foreign securities (including emerging market securities), through which it may have exposure to foreign currencies. MFS TOTAL RETURN PORTFOLIO MFS Total Return Portfolio seeks mainly to provide above-average income (compared to a portfolio invested entirely in equity securities) consistent with the prudent employment of capital, and secondarily to provide a reasonable opportunity for growth of capital and income. The Portfolio invests in a combination of equity and fixed income securities. Under normal market conditions, the Portfolio invests (1) at least 40%, but not more than 75%, of its net assets in common stocks and related securities such as preferred stock, bonds, warrants or rights 25 convertible into stock, and depositary receipts for those securities; and (2) at least 25% of its net assets in non-convertible fixed income securities. The Portfolio may vary the percentage of its assets invested in any one type of security, within the limits described above, in accordance with MFS's interpretation of economic and money market conditions, fiscal and monetary policy and underlying security values. PUTNAM FUNDS Each fund is a mutual fund registered with the SEC. Putnam Investment Management, LLC ("Putnam Management") serves as the investment adviser of each portfolio. INVESTMENT OBJECTIVES OF THE FUNDS. Below is a summary of the investment objectives of Putnam's VT Funds. YOU SHOULD READ PUTNAM'S VT FUNDS' PROSPECTUS CAREFULLY BEFORE INVESTING. PUTNAM VT THE GEORGE PUTNAM FUND OF BOSTON The fund seeks to provide a balanced investment composed of a well diversified portfolio of stocks and bonds which produce both capital growth and current income. The fund invests mainly in a combination of bonds and U.S. value stocks, with a greater focus on value stocks. Value stocks are those that Putnam Management believes are currently undervalued by the market. The fund buys bonds of governments and private companies that are mostly investment-grade in quality with intermediate to long-term maturities. Under normal market conditions, the fund invests at least 25% of the fund's total assets in fixed-income securities, including debt securities, preferred stocks and that portion of the value of convertible securities attributable to the fixed-income characteristics of those securities. PUTNAM VT GROWTH AND INCOME FUND The fund seeks capital growth and current income. The fund seeks its goal by investing mainly in common stocks of U.S. companies, with a focus on value stocks that offer potential for capital growth, current income, or both. Value stocks are those stocks Putnam Management believes are currently undervalued by the market. Putnam Management looks for companies undergoing positive change. It invests mainly in large companies. PUTNAM VT INTERNATIONAL GROWTH FUND The fund seeks capital appreciation. The fund seeks its goal by investing mainly in common stocks of companies outside the United States. For example, the fund may purchase stocks of companies with stock prices that reflect a value lower than that which we place on the company. The fund may also consider other factors it believe will cause the stock price to rise. The fund invests mainly in midsize and large companies, although it can invest in companies of any size. Although the fund emphasizes investments in developed countries, it may also invest in companies located in developing (also know as emerging) markets. PUTNAM VT NEW OPPORTUNITIES FUND The fund seeks long-term capital appreciation by investing mainly in common stocks of U.S. companies, with a focus on growth stocks in sectors of the economy that Putnam Management believes have high growth potential. Growth stocks are issued by companies that Putnam Management believes are fast-growing and whose earnings it believes are likely to increase over time. PUTNAM VT SMALL CAP VALUE FUND The fund seeks capital appreciation. The fund seeks its goal by investing in at least 80% of its assets in small companies of a size similar to those in the Russell 2000 Index, an index that measures the performance of small companies. Value stocks are those that Putnam Management believes are currently undervalued by the market. Putnam Management looks for companies undergoing positive change. 26 PUTNAM VT VOYAGER FUND The fund seeks capital appreciation by investing mainly in common stocks of U.S. companies, with a focus on growth stocks. Growth stocks are issued by companies that Putnam Management believes are fast-growing and whose earnings it believes are likely to increase over time. PUTNAM VT VOYAGER FUND II The fund seeks long-term growth of capital. The fund seeks its goal by investing mainly in common stocks of U.S. companies, with a focus on growth stocks. Growth stocks are issued by companies that Putnam Management believes are fast-growing and whose earnings it believes are likely to increase. The fund invests in companies of all sizes. SCUDDER VIT FUNDS The investment adviser for the Scudder VIT Funds is Deutsche Asset Management, Inc. (DeAM). DeAM is a broad-based global investment firm that provides asset management capabilities to a variety of institutional clients worldwide. DeAM presence in all of the major investment markets gives its clients a global network and product range. DeAM manages U.S., international, emerging markets, and fixed income investments and is a leader in index strategies. INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Following is a summary of the investment objectives of the Scudder Asset Management VIT Funds. We can't guarantee that these objectives will be met. YOU SHOULD READ THE SCUDDER ASSET MANAGEMENT VIT FUNDS PROSPECTUSES CAREFULLY BEFORE INVESTING. SCUDDER VIT EAFE(R) EQUITY INDEX FUND The EAFE(R) Equity Index Fund seeks to match, as closely as possible (before expenses are deducted), the performance of the EAFE(R) Index, which measures international stock market performance. The Fund attempts to invest in stocks and other securities that are representative of the EAFE(R) Index as a whole. SCUDDER VIT EQUITY 500 INDEX FUND The Equity 500 Index Fund seeks to match, as closely as possible (before expenses are deducted), the performance of the S&P 500 Index, which emphasizes stocks of large U.S. companies. The Fund attempts to invest in stocks and other securities that are representative of the S&P 500 Index as a whole. SCUDDER VIT SMALL CAP INDEX FUND The Small Cap Index Fund seeks to match, as closely as possible (before expenses are deducted), the performance of the Russell 2000 Index, which emphasizes stocks of small U.S. companies. The Fund attempts to invest in stocks and other securities that are representative of the Russell 2000 Index as a whole. TOUCHSTONE VARIABLE SERIES TRUST Each portfolio of the Touchstone Variable Series Trust is an open-end, diversified management investment company. Touchstone Advisors, Inc. is the investment adviser of each fund. Bank of Ireland Asset Management (U.S.) Ltd. is the sub-adviser for the International Equity Fund. Westfield Capital Management, Inc./TCW Investment Management Company is the sub-adviser for the Emerging Growth Fund. Todd Investment Advisors is the sub-adviser for the Enhanced 30 Fund. Ark Asset Management Co., Inc is the sub-adviser for the Small Cap Value Fund. Mastrapasqua & Associates is the sub-adviser for the Growth/Value Fund. Ft. Washington Investment Advisors, Inc. is the sub-adviser for the Large Cap Growth, Value Plus, High Yield, Bond and Money Market Funds. Deutsche Investment Management (Americas) Inc. is the sub-adviser for the Growth & Income Fund. OpCap Advisors is the sub-advisor for the Balanced Fund. 27 TOUCHSTONE BALANCED FUND Touchstone Balanced Fund seeks to achieve both an increase in share price and current income by investing in both equity securities (generally about 60% of total assets) and debt securities (generally about 40%, but at least 25%). The fund may also invest up to one-third of its assets in securities of foreign companies, and up to 15% in securities of companies in emerging market countries. In choosing equity securities for the fund, the portfolio manager will seek out companies that are in a strong position within their industry, are owned in part by management and are selling at a price lower than the company's intrinsic value. Debt securities are also chosen using a value style, and will be rated investment grade or at the two highest levels of non-investment grade. The portfolio manager will focus on higher yielding securities, but will also consider expected movements in interest rates and industry position. TOUCHSTONE BOND FUND Touchstone Bond Fund seeks to provide a high level of current income as is consistent with the preservation of capital by investing primarily in high-quality investment grade debt securities (at least 65% of total assets). The fund invests in mortgage-related securities (up to 60%), asset-backed securities and preferred stocks. The fund also invests in non-investment grade U.S. or foreign debt securities and preferred stock that are rated as low as B (up to 35%). TOUCHSTONE EMERGING GROWTH FUND Touchstone Emerging Growth Fund seeks to increase value of fund shares as a primary goal and to earn income as a secondary goal. The fund invests primarily in small cap companies, but may invest in mid cap. It primarily invests in equity securities, including common and preferred stocks and convertible securities. TOUCHSTONE ENHANCED 30 FUND Touchstone Enhanced 30 Fund seeks to achieve a total return which is higher than the total return of the Dow Jones Industrial Average ("DJIA"). The fund's portfolio is based on the 30 stocks that compromise the DJIA. The DJIA is a measurement of general market price movement for 30 widely held stocks. The portfolio manager seeks to surpass the total return of the DJIA by substituting stocks that offer above average growth potential for those stocks in the DJIA that appear to have less growth potential. The fund's portfolio will at all times consist of 30 stocks and up to one-third of these holdings may represent substituted stocks in the enhanced portion of the portfolio. TOUCHSTONE GROWTH & INCOME FUND Touchstone Growth & Income Fund seeks to increase the value of fund shares over the long-term, while receiving dividend income, by investing at least 50% of total assets in dividend paying common stock, preferred stocks and convertible securities in a variety of industries. The portfolio manager may purchase securities that do not pay dividends (up to 50%) but which are expected to increase in value or produce high income payments in the future. TOUCHSTONE GROWTH/VALUE FUND Touchstone Growth/Value Fund seeks long-term capital appreciation primarily through equity investments in companies whose valuation may not reflect the prospects for accelerated earnings and/or cash flow growth. The fund invests primarily in stocks of domestic large-cap growth companies that the portfolio manager believes have a demonstrated record of achievement with excellent prospects for earnings and/or cash flow growth over a 3 to 5 year period. In choosing securities, the portfolio manager looks for companies that it believes to be priced lower than their true value. These may include companies in the technology sector. TOUCHSTONE HIGH YIELD FUND Touchstone High Yield Fund seeks to achieve a high level of current income as its main goal, with capital appreciation as a secondary consideration. The fund invests primarily (at least 80% of total assets) in non- 28 investment grade debt securities of domestic corporations. Non-investment grade securities are often referred to as "junk bonds" and are considered speculative. TOUCHSTONE INTERNATIONAL EQUITY FUND Touchstone International Equity Fund seeks long term growth of capital by investing at least 80% of total assets in equity securities of foreign issuers. The fund will invest in at least three countries outside of the United States and focuses on companies located in Europe, Australia and the Far East. The fund may invest up to 40% of its assets in securities issued by companies active in emerging market countries. TOUCHSTONE LARGE CAP GROWTH FUND Touchstone Large Cap Growth Fund seeks long-term growth of capital by investing primarily in growth-oriented stocks. The fund invests primarily (at least 65% of total assets) in a diversified portfolio of common stocks that are believed to have growth attributes superior to the general market. In selecting investments, the portfolio manager focuses on those companies that have attractive opportunities for growth of principal, yet sell at reasonable valuations compared to their expected growth rate of revenues, cash flows and earnings. These may include companies in the technology sector. TOUCHSTONE MONEY MARKET FUND Touchstone Money Market Fund seeks high current income, consistent with liquidity and stability of principal by investing primarily (at least 65% of total assets) in high-quality money market instruments. The fund is a money market fund and tries to maintain a constant share price of $1.00 per share, although there is no guarantee that it will do so. TOUCHSTONE SMALL CAP VALUE FUND Touchstone Small Cap Value Fund seeks long-term growth of capital by investing primarily (at least 75% of total assets) in common stocks of small to medium capitalization companies that the portfolio manager believes are undervalued. The portfolio manager looks for stocks that it believes are priced lower than they should be, and also contain a catalyst for growth. These stocks may not pay dividends. TOUCHSTONE VALUE PLUS FUND Touchstone Value Plus Fund seeks to increase value of the fund shares over the long-term by investing primarily (at least 65% of total assets) in common stock of larger companies that the portfolio manager believes are undervalued. In choosing undervalued stocks, the portfolio manager looks for companies that have proven management and unique features or advantages, but are believed to be priced lower than their true value. These companies may not pay dividends. The fund may also invest in common stocks of rapidly growing companies to enhance the fund's return and vary its investments to avoid having too much of the fund's assets subject to risks specific to undervalued stocks. Approximately 70% of total assets will generally be invested in large cap companies and approximately 30% will generally be invested in mid cap companies. VAN KAMPEN PORTFOLIOS INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment objectives of the Van Kampen Portfolios. There is no guarantee that these objectives will be met. YOU SHOULD READ THE VAN KAMPEN PROSPECTUS CAREFULLY BEFORE INVESTING. VAN KAMPEN LIT PORTFOLIOS Van Kampen Investments is the investment adviser for each of the LIT Portfolios VAN KAMPEN LIT COMSTOCK PORTFOLIO 29 The Portfolios investment objective and strategy is to seek capital growth and income through investment in equity securities, including common stocks, preferred stocks and securities convertible into common and preferred stocks. The Portfolio may invest up to 25% of its total assets in securities of foreign issuers. VAN KAMPEN LIT EMERGING GROWTH PORTFOLIO The Portfolios investment objective and strategy is to seek capital appreciation. Under normal market conditions, the Portfolio's investment adviser seeks to achieve the Portfolio/s investment objective by investing at least 65% of the Portfolios total assets in common stocks of companies the investment adviser believes to be emerging growth companies. VAN KAMPEN UIF PORTFOLIOS Morgan Stanley Dean Witter Investment Management, Inc. is the investment adviser for each of the UIF Portfolios. VAN KAMPEN UIF EMERGING MARKETS DEBT PORTFOLIO Van Kampen 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. Using macroeconomic and fundamental analysis, the adviser seeks to identify developing countries that are believed to be undervalued and have attractive or improving fundamentals. After the country allocation is determined, the sector and security selection is made within each country. VAN KAMPEN UIF EMERGING MARKETS EQUITY PORTFOLIO The Portfolios investment objective and strategy is to seek long-term capital appreciation by investing primarily in growth-oriented equity securities of issuers in emerging market countries. Under normal circumstances, at least 80% of the assets of the Portfolio will be invested in equity securities of issuers located in emerging market countries. VAN KAMPEN UIF U.S. REAL ESTATE PORTFOLIO Van Kampen 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 companies in the U.S. real estate industry, including real estate investment trusts ("REITs") and real estate operating companies. VAN KAMPEN UIT PORTFOLIOS Each portfolio of Van Kampen UIT Portfolios is a unit investment trust registered with the SEC. Van Kampen Funds, Inc. is the sponsor and depositor for each portfolio. VAN KAMPEN BANDWIDTH & TELECOMMUNICATIONS PORTFOLIO Van Kampen Bandwidth and Telecommunications Portfolio seeks capital appreciation by investing in common stocks of companies diversified within the communications industry. VAN KAMPEN BIOTECHNOLOGY AND PHARMACEUTICAL PORTFOLIO Van Kampen Biotechnology and Pharmaceutical Portfolio seeks capital appreciation by investing in common stocks of companies diversified within the biotechnology and pharmaceuticals industry. Van Kampen designed the portfolio to benefit from companies that are positioned for growth in these industries. VAN KAMPEN INTERNET PORTFOLIO Van Kampen Internet Portfolio seeks capital appreciation by investing in common stocks of companies primarily involved in the enabling technology or communications services area of the Internet. 30 VAN KAMPEN HIGH-TECHNOLOGY 35 INDEX PORTFOLIO Van Kampen Morgan Stanley High-Technology 35 Index seeks to provide capital appreciation through investment in a portfolio of the common stocks included in the Morgan Stanley High-Technology 35 Index. In creating the index, the Morgan Stanley Technology Research Group sought to design a benchmark that provides broad industry representation of equally-weighted, highly liquid, pure technology companies that is rebalanced annually. The index currently includes 35 pure technology companies representing the full breadth of technology industry segments. VAN KAMPEN MORGAN STANLEY U.S. MULTINATIONAL 50 INDEX PORTFOLIO Van Kampen Morgan Stanley U.S. Multinational 50 Index Portfolio seeks capital appreciation through an investment in a portfolio of the stocks included in the Morgan Stanley U.S. Multinational Index. The index consists of 50 of the largest U.S. based companies often referred to as the "New Nifty Fifty". The Morgan Stanley Research Group designed the index to measure the performance of companies that derive a significant portion of their activity from foreign operations. TERMINATION OF VAN KAMPEN UIT PORTFOLIOS Because the Van Kampen Life Portfolio is a unit investment trust, it is only available for a fixed period of time. All of the Portfolios will be liquidated on May 1, 2003. We currently anticipate that the same investment strategy will be reapplied to any successor unit investment trust offered to succeed any of the Van Kampen Life Portfolios. However, there is no guarantee that Van Kampen will create a successor trust. You will be required to give us instructions by April 30, 2003 about how to invest any account value in these Portfolios when they terminate. You will receive a notice requesting instructions prior to that time. Your choices at that time will include: 1. Giving us instructions to rollover your account value in the Van Kampen Life Portfolios to the successor portfolio, if available, or; 2. Giving us instructions to transfer any account value in the Van Kampen Life Portfolios to any other investment options available under contract. This transfer will be made on the date you give us your transfer instructions, unless you direct us to make the transfer on date of liquidation. IF YOU DO NOT PICK EITHER OF THESE CHOICES AT THAT TIME, YOU WILL BE DEEMED TO HAVE INSTRUCTED US TO TRANSFER ANY OF YOU ACCOUNT VALUE IN THE VAN KAMPEN LIFE PORTFOLIOS TO THE FIDELITY VIP MONEY MARKET FUND ON THE DATE OF LIQUIDATION. 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." 31 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, less any administrative charges and less any charges for the EEB option, if elected. We credit interest daily at an effective annual rate equal to the Guaranteed Interest Rate. We may declare a higher rate of interest in the first year of any GRO Account that exceeds the Guaranteed Interest Rate credited during the rest of the Guarantee Period (ENHANCED RATE). This Enhanced Rate will be guaranteed for the Guaranteed Period's first year and is declared at the time of purchase. We can declare and credit additional interest based on Contribution, Account Value, withdrawal dates, economic conditions or on any other lawful, nondiscriminatory basis (ADDITIONAL INTEREST). Any Enhanced Rate and Additional Interest credited to your GRO Account will be separate from the Guaranteed Interest Rate and not used in the Market Value Adjustment formula. THE ENHANCED RATE OR ADDITIONAL INTEREST MAY NOT BE AVAILABLE IN CERTAIN STATES. Each group of GRO Accounts of the same duration is considered one GRO. For example, all of your three-year GRO Accounts are one GRO while all of your five-year GRO Accounts are another GRO, even though they may have different maturity dates. You can get our current Guaranteed Interest Rates by calling our Administrative Office. ALLOCATIONS TO GROs CAN'T BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES. THE TEN-YEAR GRO ISN'T AVAILABLE IN OREGON. RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO Account for the same duration as your old one, at the then-current Guaranteed Interest Rate, unless you withdraw your GRO Value or transfer it to another Investment Option. We'll notify you in writing before your GRO Accounts expire. You must tell us before the expiration of your GRO Accounts if you want to make any changes. The effective date of a renewal of a GRO Account will be the expiration date of the old GRO Account. If a GRO Account expires and it can't be renewed for the same duration, the new GRO Account will be set up for the next shortest duration. For example, if your expiring GRO Account was for 10 years and when it expires we don't offer a 10-year GRO, but we do offer a seven-year GRO, your new one will be for seven years. You can tell us if you 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. 32 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. No Market Value Adjustment shall be made when withdrawals are taken to meet minimum required distribution rules. 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, less any administrative charges, and less any charges for the EEB option, if elected. 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: MVA = GRO Value X [(1 + A)(POWER OF N/12) / (1 + B + .0025)(POWER OF N/12) - 1], where A is the Guaranteed Interest Rate being credited to the GRO Account subject to the Market Value Adjustment, B is the current Guaranteed Interest Rate, as of the effective date of the 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 Pennsylvania, the formula will be adjusted to comply with state requirements. If for any reason we are no longer declaring current Guaranteed Interest Rates, then for purposes of determining B we'll use the yield to maturity of U. S. Treasury Notes with the same remaining term as your GRO Account, using a formula to find a value when necessary, in place of the current Guaranteed Interest Rate or Rates. For illustrations of the application of the Market Value Adjustment formula, see Appendix B. SYSTEMATIC TRANSFER OPTION We also offer a Systematic Transfer Option that guarantees an interest rate that we declare in advance for each calendar quarter. This interest rate applies to all contributions made to the STO Account during the calendar quarter for which the rate has been declared. You MUST transfer all STO contributions you make to the six-month STO into other Investment Options on a monthly basis within six months, and transfer all contributions to the twelve-month STO on a monthly or quarterly basis within one year of contribution. Transfers are automatically made in approximately equal 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. 33 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 1.45% of your Account Value in each of the Variable Account Options (except the Select Ten Plus Divisions). This daily expense rate can't be increased without your consent. Of the 1.45% total charge, .15% is used to reimburse us for administrative expenses not covered by the annual administrative charge described below. We deduct the remaining 1.30% for assuming the expense risk (.95%) and the mortality risk (.35%) under the contract. For the Select Ten Plus Divisions, a daily charge equal to an annual fee of 1.35% is deducted from the Account Value to cover expense risk (.85%), mortality risk (.35%) and administrative expenses (.15%). 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 charges may be changed, but the total effective annual risk charges 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. 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%. This amount is a percentage of your contributions and not Account Value. 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 34 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 15% of your account value (less any earlier withdrawal in the same contract year) each contract 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 contract 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. Should you completely surrender the contract the amount of surrender charges is based on contributions and is not reduced by any free withdrawals.
CONTRIBUTION YEAR IN WHICH CHARGE AS A % OF THE WITHDRAWN CONTRIBUTION WAS MADE CONTRIBUTION WITHDRAWN ------------------------------- ---------------------- Current 8% First Prior 7 Second Prior 6 Third Prior 5 Fourth Prior 4 Fifth Prior 3 Sixth Prior 2 Seventh Prior and Earlier 0
We won't deduct a contingent withdrawal charge if you use the withdrawal to buy from us either an immediate annuity benefit with life contingencies, or an immediate annuity without life contingencies with a restricted prepayment option that provides for level payments over five or more years. Similarly, we won't deduct a charge if the Annuitant dies. See "Death Benefits and Similar Benefit Distributions" in Part I, Section 5. REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE We can reduce or eliminate the contingent withdrawal charge for individuals or a group of individuals if we anticipate expense savings. We may do this based on the size and type of the group, the amount of the contribution, or whether there is some relationship with us. Examples of these relationships would include being an employee of Integrity or an affiliate, receiving distributions or making internal transfers from other contracts we issued, or transferring amounts held under qualified plans we or our affiliate sponsored. We won't unlawfully discriminate against any person or group if we reduce or eliminate the contingent withdrawal charge. TRANSFER CHARGE If you make more than twelve transfers among your Investment Options during one contract year, we may charge your account up to $20 for each additional transfer during that year. Transfer charges don't apply to transfers under (i) Dollar Cost Averaging, (ii) Customized Asset Rebalancing, or (iii) systematic transfers from the STO, nor do these transfers count toward the twelve free transfers you can make during a year. HARDSHIP WAIVER We may waive contingent withdrawal charges on full or partial withdrawal requests of $1,000 or more under a hardship circumstance. We may 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 will 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 35 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 (some states may require a higher initial contribution). 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. 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 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 36 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 and the charge for the EEB option, if elected. 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 charge is an amount equal to an effective annual rate of 1.45%. 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. 37 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, or Systematic Transfer programs, described in Section 9. You may request a transfer by sending a written request directly to the Administrative Office. Each request for a transfer must specify the contract number, the amounts to be transferred and the Investment Options to and from which the amounts are to be transferred. Transfers may also be arranged through our telephone transfer service if you've established a Personal Identification Number (PIN CODE). We'll honor telephone transfer instructions from any person who provides correct identifying information and we aren't responsible for fraudulent telephone transfers we believe to be genuine according to these procedures. Accordingly, you bear the risk of loss if unauthorized persons make transfers on your behalf. A transfer request is effective as of the Business Day our Administrative Office receives it, except for transfers to the Select Ten Plus Divisions (see Part II). A transfer request doesn't change the allocation of current or future 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 reserve the right to modify these restrictions or to adopt new restrictions at any time and in our sole discretion. 38 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. SPECIFIC NOTICE REGARDING THE USE OF THIS ANNUITY FOR MARKET TIMING OF INVESTMENTS This contract is not designed to serve as a vehicle for frequent trading in response to short-term fluctuations in the stock market. Any individual or legal entity that intends to engage in arbitrage, utilize market timing practices or make frequent transfers to take advantage of inefficiencies in mutual fund pricing should not purchase this contract. These abusive or disruptive transfers can have an adverse impact on management of a fund, increase fund expenses and affect fund performance. National Integrity Life Insurance Company has the following policies for transfers between Investment Options, which is designed to protect contract owners from abusive or disruptive trading activity: - You may submit 20 Investment Option transfers each contract year for each contract by U.S. Mail, Internet, telephone, Annuitrac, or facsimile. - Once these 20 Investment Option transfers have been executed in any contract year, we will require you to submit any additional Investment Option transfers only in writing by U.S. Mail or overnight delivery service. Transfer requests made by telephone or the Internet or sent by fax, same day mail or courier service will not be accepted, and Annuitrac trading privileges will be suspended. If you want to cancel a written Investment Option transfer, you must also cancel it in writing by U.S Mail or overnight delivery service. We will process the cancellation request as of the day we receive it. Upon reaching your next contract anniversary, you will again be provided with 20 Investment Option transfers. Investment Option transfers are non-cumulative and may not be carried over from year to year. None of these restrictions are applicable to transfers made under our Dollar Cost Averaging program, Systematic Transfer Option program, Customized Asset Rebalancing program, or other related programs we may offer unless we determine, in our sole discretion, that one of those programs is being used as a method of market timing. National Integrity Life Insurance Company will continue to monitor transfer activity, and we may modify these restrictions at any time. If National Integrity Life Insurance Company determines, in its sole discretion, that an annuity policy may be used for market timing, we may refuse to accept any additional contributions to the policy. 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. You may withdraw up to 15% of your Account Value each contract year with no withdrawal charges. After the first 15% 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. 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 39 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. 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 annuitant dies before annuity payments have started. If the contract was issued on or after the 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 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 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. 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. 40 ANNUITIES Annuity benefits can provide for fixed payments, which may be made monthly, quarterly, semi-annually or annually. You can't change or redeem the annuity once payments have begun. For any annuity, the minimum initial payment must be at least $100 monthly, $300 quarterly, $600 semi-annually or $1,200 annually. If you haven't already elected a lump sum payment or an annuity benefit, we'll send you a notice within six months before your Retirement Date outlining your options. If you fail to notify us of your benefit payment election before your Retirement Date, you'll receive a lump sum benefit. We currently offer the following types of annuities: A LIFE AND TEN YEARS CERTAIN ANNUITY is a fixed life income annuity with 10 years of payments guaranteed, funded through our general account. A PERIOD CERTAIN ANNUITY provides for fixed payments to the Annuitant or the Annuitant's beneficiary for a fixed period. The amount is determined by the period selected. If the Annuitant dies before the end of the period selected, the Annuitant's beneficiary can choose to receive the total present value of future payments in cash. A PERIOD CERTAIN LIFE ANNUITY provides for fixed payments for at least the period selected and after that for the life of the Annuitant, or for the lives of the Annuitant and another annuitant under a joint and survivor annuity. If the Annuitant (or the Annuitant and the other annuitant under a joint and survivor 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 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. 41 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. SECTION 6 - OPTIONAL CONTRACT FEATURES For an additional charge, the following option is available to contract purchasers. This option can only be elected at the time of application, may not be cancelled once the contract is issued and will replace or supplement the standard contract death benefits. Reductions in death benefits due to withdrawals are calculated on a pro-rata basis with respect to the Account Value at the time of withdrawal. Charges for the optional benefit are in addition to the standard variable account charges. Be sure you understand the charges. Carefully consider whether you need the benefit. Also consider whether you can buy the benefit more cheaply as part of the variable annuity or with a separate policy. ENHANCED EARNINGS BENEFIT The Enhanced Earnings Benefit ("EEB") is an optional death benefit where a percentage of the Gain in the contract is paid in addition to the standard or any optional death benefit. If there is a Gain in the contract when Integrity receives proof of the Annuitant's death, Integrity will pay up to an additional 40% of the Gain as an additional death benefit. This additional benefit is intended to help offset potential income tax payments made by your beneficiaries. The maximum available benefit is 150% of the Net Premium. If there is no Gain, no EEB benefit will be paid. The following is an example of how the EEB would work: $100,000 Total Customer Contributions (assuming no withdrawals) $125,000 Account Value upon receipt of proof of death Assume a 40% benefit based on issue age. Gain = $25,000 ($125,000 - $100,000 = $25,000) EEB Benefit Paid = $10,000 ($25,000 X 40%) Please see Appendix C for an additional example of how the EEB works with the death benefit. The EEB is an optional death benefit and is available at an additional cost. The EEB must be selected at the time the contract is initially purchased and may not be cancelled once it is selected. The EEB automatically terminates upon annuitization or contract surrender. The cost and availability of the EEB is dependent upon the Annuitant's age at issue. The following chart summarizes the different costs and benefits.
ISSUE AGE BENEFIT PAID ANNUAL COST* --------- ------------ ----------- 0-59 40% of Gain .20% 60-69 40% of Gain .40% 70-79 25% of Gain .50% 80+ Not Available Not Available
* Integrity will assess the cost of the benefit on a calendar quarter basis against both the Fixed Accounts and Variable Account Options. All Total Customer Contributions received in the first seven contract years will be included for purposes of calculating the EEB payment. Total Customer Contributions received after the seventh contract anniversary will not be included in calculating the maximum EEB benefit until they have been in the contract for 6 months. MONIES RECEIVED FROM EXCHANGED CONTRACTS SHALL BE TREATED AS PREMIUM FOR PURPOSES OF THE EEB RIDER AND DETERMINATION OF 42 THE BENEFIT PAID. THE GAIN IN THE EXCHANGED CONTRACT WILL NOT BE CARRIED OVER TO THE NEW CONTRACT FOR PURPOSES OF CALCULATING THE EEB BENEFIT. IT WILL BE CARRIED OVER FOR PURPOSES OF INCOME TAX OR EXCLUSION ALLOWANCE CALCULATIONS. Based on our current interpretation of the tax law, the additional benefit provided by the EEB will be treated as earnings of the contract and subject to income taxes upon distribution. You may wish to consult your tax advisor, legal advisor or investment professional to determine if the EEB will be of benefit to you or your beneficiaries. A SPECIAL NOTE IF YOU ARE PURCHASING THIS ANNUITY FOR USE AS AN IRA: IF YOU ARE PURCHASING THIS CONTRACT AS AN IRA AND ARE ELECTING THE EEB RIDER THERE IS NO ASSURANCE THAT THE CONTRACT WILL MEET THE QUALIFICATION REQUIREMENTS FOR AN IRA. YOU WILL WANT TO CAREFULLY CONSIDER SELECTING THE EEB OPTION IF THIS CONTRACT IS AN IRA. CONSULT YOUR TAX OR LEGAL ADVISOR IF YOU ARE CONSIDERING USING THE EEB WITH AN IRA. THE CONTRACT OWNER BEARS THE RISK OF ANY ADVERSE TAX CONSEQUENCES. Under certain circumstances, a spouse may continue the contract and is substituted for the deceased spouse. The surviving spouse will become the new annuitant and may elect a new beneficiary to receive the death benefit. No adjustment is made to the Account Value at the death of the first spouse. The benefit payable does not change and shall remain based on the original issue age of the annuitant. The annual charges for the EEB rider will continue along with the benefit. Upon the death of the second spouse, the death benefit and EEB will be paid. This death benefit option may not be available in all states. SECTION 7 - 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. 43 HOW PORTFOLIO SHARES ARE VOTED All Portfolio shares are entitled to one vote; fractional shares have fractional votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters (for example, election of Directors) that require collective approval. On matters where the interests of the individual Portfolios differ, the approval of the shareholders in one Portfolio isn't needed to make a decision in another Portfolio. To the extent shares of a Portfolio are sold to separate accounts of other insurance companies, the shares voted by those companies according to instructions received from their contract holders will dilute the effect of voting instructions received by us from its owners. Owners of Units in the Divisions also have voting rights. Each owner will be given one vote for every $1.00 of value in a Division. Fractional interests are counted, unless different voting rights are required under the law. HOW SEPARATE ACCOUNT TEN INTERESTS ARE VOTED Separate Account Ten's rules don't require Separate Account Ten to hold annual meetings, although special meetings may be called for purposes such as electing or removing members of the Board of Managers, changing fundamental policies, or approving a contract for investment advisory services. When required, "the vote of a majority of the outstanding voting securities" of Separate Account Ten means the lesser of: (1) The holders of more than 50% of all votes entitled to be cast with respect to Separate Account Ten; or (2) The holders of at least 67% of the votes that are present or represented by proxy at a meeting, assuming more than 50% of those entitled to vote are present or represented. We'll determine the number of votes you can instruct us to vote 60 days or less before a Separate Account Ten special meeting. SEPARATE ACCOUNT VOTING RIGHTS Under the 1940 Act, certain actions (such as some of those described under "Changes in How We Operate" in Part I, Section 2) may require owner approval. In that case, you'll be entitled to a number of votes based on the value you have in the Variable Account Options, as described above under "How We Determine Your Voting Shares." We'll cast votes attributable to amounts we have in the Variable Account Options in the same proportions as votes cast by owners. SECTION 8 - 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. 44 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. 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; 45 (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. 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. SPOUSAL CONTINUATION Upon the death of a spouse, the Internal Revenue Code allows a surviving spouse to continue the annuity contract. The policy must be structured properly with the surviving spouse listed as the sole owner's beneficiary. If the surviving spouse is also the sole annuitant's beneficiary, we will increase the continued policy's account value to the same amount that would have been paid to the surviving spouse had they taken a lump sum distribution. For example, if the account value at death was $100,000, but we would have paid out a death benefit of $115,000, the surviving spouse's policy will continue with a $115,000 account value. The surviving spouse continues the policy with its tax deferred earnings and may make any changes to the policy allowed under the contract. When the surviving spouse dies, a second death benefit may be paid. 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. PARTIAL 1035 EXCHANGES Section 1035 of the Code provides that an annuity contract may be exchanged in a tax-free transaction for another annuity contract. Historically, it was presumed that only the exchange of an entire contract, as opposed to a partial exchange, would be accorded tax-free status. In 1998 in Conway vs. Commissioner, the Tax Court held that the direct transfer of a portion of an annuity contract into another annuity contract qualified as a non-taxable exchange. In November 1999, the IRS filed an Action on Decision indicating that it acquiesced in the Tax Court decision in Conway. However, in its acquiescence with the decision of the Tax Court, the IRS stated that it will challenge transactions where taxpayers enter into a series of partial exchanges and annuitizations as part of a design to avoid application of the 10% premature distribution penalty or other limitations imposed on annuity contracts under the Code. In the absence of further guidance from the IRS it is unclear what specific types of partial exchange designs and transactions will be challenged by the IRS. Due to the uncertainty in this area owners should consult their own tax advisers prior to entering into a partial exchange of an annuity contract. Currently, we will accept partial 1035 exchanges, but at this time we cannot process outgoing partial 1035 exchanges. 46 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. deferred growth and other tax advantages. For most investors, it will be advantageous to make maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity. In addition, if you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) or IRA), you will get no additional tax advantage from the variable annuity. Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity's other features, such as lifetime income payments and death benefit protection. INHERITED IRAs This policy may be issued as an inherited IRA. This occurs if, after the death of the owner of an IRA, the named beneficiary (other than the IRA owner's spouse) directs that the IRA death proceeds be transferred to a new policy issued and titled as an inherited IRA. The named beneficiary of the original IRA policy will become the annuitant under the inherited IRA and may generally exercise all rights under the inherited IRA policy, including the right to name his or her own beneficiary in the event of death. Special tax rules apply to an inherited IRA, The tax law does not permit additional premiums to be contributed to an inherited IRA policy. Also, in order to avoid certain income tax penalties, a minimum required distribution ("MRD") must be withdrawn each year from an inherited IRA. The first MRD must be taken on or before December 31 of the calendar year following the year of the original IRA owner's death. The tax penalty equals 50% of the excess of the MRD amount over the amounts, if any, actually withdrawn form the inherited IRA during the calendar year. ANNUITIES IN QUALIFIED PLANS Other investment vehicles, such as IRAs and employer sponsored 401(k) plans, also may provide you with tax deferred growth and other tax advantages. For most investors, it will be advantageous to make maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity. In addition, if you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) or IRA), you will get no additional tax advantage from the variable annuity. Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity's other features, such as lifetime income payments and death benefit protection. This contract has enhanced death benefits. THE IRS HAS NOT RULED WHETHER AN ENHANCED DEATH BENEFIT COULD BE CHARACTERIZED AS AN INCIDENTAL BENEFIT, THE AMOUNT OF WHICH IS LIMITED IN A CODE SECTION 401(a) OR 403(b) PLAN. AN EMPLOYER OR QUALIFIED PLAN ADMINISTRATOR MAY WANT TO CONSULT THEIR TAX OR LEGAL ADVISOR REGARDING SUCH LIMITATIONS BEFORE USING AN ANNUITY WITH AN ENHANCED DEATH BENEFIT IN ONE OF THESE 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. 47 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 9 - 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." 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 can choose among three calculation methods permitted by the Code, each of which is designed to provide a substantially equal periodic payment. You won't have to pay any tax penalty for these withdrawals, but they will be subject to ordinary income tax. See "Taxation of Annuities Generally," in Section 7. Once you begin receiving distributions, they shouldn't be changed or stopped until the later of: - the date you reach age 59 1/2; or - five years from the date of the first distribution. If you change or stop the distribution or take an additional withdrawal, you may have to pay a 10% penalty tax that would have been due on all prior distributions made under the Income Plus 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 48 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, or Systematic Transfer Option. 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. CHOICES PLUS MINIMUM REQUIRED DISTRIBUTION PROGRAM We offer a Choices Plus Minimum Required Distribution Program that allows you to pre-authorize withdrawals from your contract after you attain age 70 1/2. Section 401(a)(9)(A) of the Code states that minimum required distributions from an IRA must begin on or before April 1st of the year following the year in which the IRA owner turns 70 1/2. You won't have to pay any tax penalty for these withdrawals, but they are subject to ordinary income tax. See "Taxation of Annuities Generally" in Section 7. You can choose the Choices Plus Program any time if you're age 70 1/2 or older. You can elect this option by sending the election form to our Administrative Office. You can choose to have withdrawals made monthly, quarterly, semiannually, 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 using current IRS guidance. This program is open to new contractholders, as well as existing contractholders who are already taking minimum required distributions from their Integrity IRAs. Payments can be made to you by check or by electronic funds transfer. DOLLAR COST AVERAGING Dollar-cost averaging refers to the practice of investing the same amount of money in the same investment at regular intervals (like once a month), regardless of market conditions. If you choose to dollar-cost average, the amount you invest is always the same. Thus, you automatically buy more units when the price is low, and fewer when the price is high. Over time, you may reduce the risk of buying units when their cost is highest, although dollar-cost averaging does not assure a profit and it does not protect against investment losses in declining markets. We offer a dollar cost averaging program under which we transfer contributions allocated to the Fidelity VIP 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 Fidelity VIP Money Market Portfolio to transfer to each Variable Account Option specified, no transfer will be made and your enrollment in the program will end. 49 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. See Part I, Section 3, "Systematic Transfer Option." You must transfer all STO contributions you make to the six-month STO into other Investment Options on a monthly basis within six months, and transfer all contributions to the twelve-month STO on a monthly or quarterly basis within one year of contribution. Transfers are automatically made in approximately equal installments (including interest earned) of at least $1,000 each. If you don't have enough money in the STO to transfer to each Option specified, a final transfer will be made on a pro rata basis and your enrollment in the program will end. Any remaining accrued interest 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 Customized asset rebalancing allows you to choose a diversified investment mix among our Variable Account Options that is appropriate for your goals and risk tolerance. You may wish to consult with your financial adviser when establishing your investment portfolio. Because some of your Variable Account Options may grow faster than others, your asset allocation may shift from your preferred mix. Asset rebalancing periodically resets your Variable Account Options to your original allocations, ensuring that your asset mix stays in line with your investment strategy. Our customized asset rebalancing program 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. 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 50 amount for systematic contributions is $100 per month. The Select Ten Plus Divisions aren't eligible for Systematic Contributions. LEGAL PROCEEDINGS Integrity is a party to litigation and arbitration proceedings in the ordinary course of its business. None of these matters is expected to have a material adverse effect on Integrity. SECTION 10 - 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 the contract, multiplying the result by two, and then adding that to your total contributions made after the first five participation years. 51 REDUCTION IN CHARGES FOR CONTRACTS ISSUED BETWEEN JANUARY 1, 1995 AND FEBRUARY 1, 1997 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 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.
CONTRIBUTION YEAR IN WHICH CHARGE AS A % OF THE WITHDRAWN CONTRIBUTION WAS MADE CONTRIBUTION WITHDRAWN ------------------------------- ---------------------- Current 7% First Prior 6 Second Prior 5 Third Prior 4 Fourth Prior 3 Fifth Prior 2 Sixth Prior and Earlier 0
We won't deduct a contingent withdrawal charge if the Annuitant uses the withdrawal to buy from us either an immediate annuity benefit with life contingencies or an immediate annuity without life contingencies with a restricted prepayment option that provides for level payments over five or more years. Similarly, we won't deduct a charge if the Annuitant dies and the withdrawal is made by the Annuitant's beneficiary. See "Death Benefits and Similar Benefit Distributions" in Part 5. The minimum withdrawal permitted is $300. RETIREMENT DATE For contracts issued before January 1, 1997, the Retirement Date will be the date you specify, but no later than your 85th birthday or the 10th Contract Anniversary, whichever is later. 52 CONTRACTS ISSUED TO OREGON RESIDENTS If you are a resident of Oregon and your Contract was issued before October 16, 1997 (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. HARDSHIP WAIVERS Hardship Waivers aren't available for contracts issued prior to February 15, 1997. Hardship waivers are available in most states for contracts issued on or after that date, but certain states approved the availability of hardship waivers after February 15, 1997. Please check your contract if you are uncertain about the applicability of this section to your contract. LIMITATION ON NUMBER OF INVESTMENT OPTIONS FOR CONTACTS ISSUED BEFORE JULY 17, 2000 For most contracts issued prior to July 17, 2000, contractholders may not allocate to more than nine Investment Options. In determining the nine Investment Options, each of your GRO Accounts counts as one Investment Option. TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES FOR CONTRACTS ISSUED BEFORE JULY 16, 2001 For contracts before July 16, 2001, and for contracts issued in certain states after that date, Total Separate Account Annual Expenses are 1.35%. Please check your contract if you are uncertain about the applicability of this section to your contract. DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED AFTER JANUARY 1, 1997 & BEFORE JULY 16, 2001 For contracts issued after January 1, 1997 and before July 16, 2001, the following rules apply in most states even if they are different from other provisions in this prospectus. Please check your contract if you are uncertain about the applicability of this section to your contract. We'll pay a death benefit to the Annuitant's surviving beneficiary (or beneficiaries, in equal shares) if the 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 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. 53 FREE WITHDRAWALS FOR CONTACTS ISSUED BEFORE JULY 16, 2001 For contracts issued prior to July 16, 2001 in most states, 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. SIX MONTH SYSTEMATIC TRANSFER PROGRAM FOR CONTACTS ISSUED BEFORE JULY 16, 2001 The six month option in the Systematic Transfer Program is not available for contracts issued prior to July 16, 2001. JANUS ASPEN MONEY MARKET PORTFOLIO AVAILABLE FOR CONTACTS ISSUED BEFORE JULY 16, 2001 The Janus Aspen Money Market Portfolio is available for all contracts issued prior to July 16, 2001. The Fidelity VIP Money Market Portfolio is not available for contracts issued prior to July 16, 2001. NEW SHARE CLASSES ADDED EFFECTIVE JULY 16, 2001 New share classes that charge distribution fees pursuant to Rule 12b-1 were added to certain Portfolios effective July 16, 2001. These fees will not be charged to contracts issued prior to July 16, 2001. CONTRACTS ISSUED BEFORE MAY 1, 2002 As of May 1, 2002 Deutsche Asset Management VIT Funds has changed its name to the Scudder VIT Funds and the Morgan Stanley UIF Portfolios has changed its name to the Van Kampen Portfolios. A new service class of Scudder Funds has been added NEW INVESTMENT OPTIONS FOR CONTRACTS ISSUED BEFORE DECEMBER 31, 2002 All of the Franklin Templeton Portfolios, the Putnam VT George Putnam Fund, New Opportunities Fund and Voyager Fund as well as the Van Kampen LIT Comstock and Emerging Growth and the Van Kampen UIF Emerging Markets Equity are being made available as investment options in annuity policies issued before December 31, 2002. Please consult the fees, expenses and objectives located in Parts 1 and 3 of this prospectus. 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. 54 The selection process is a straightforward, objective, mathematical application that ignores any subjective factors concerning an issuer in the DJIA, an industry or the economy generally. The application of the selection process may cause a Division to own a stock that the sub-adviser doesn't recommend for purchase. In fact, the sub-adviser may have sell recommendations on a number of the stocks at the time the stocks are selected for inclusion in a Division's portfolio. There are various theories to explain why a common stock is among the ten highest yielding stocks in the DJIA at any given time: (1) the issuer may be in financial difficulty or out of favor in the market because of weak earnings, performance or forecasts, or negative publicity; (2) there may be uncertainties because of pending or threatened litigation or pending or proposed legislation or government regulation; (3) the stock may be a cyclical stock reacting to national and international economic developments; or (4) the market may be anticipating a reduction in or the elimination of the issuer's dividend. While these factors may affect only a part of an issuer's overall business, the publicity may be strong enough to outweigh otherwise solid business performance. In addition, companies in certain industries have historically paid relatively high dividends. INVESTMENT STRATEGY The Divisions seek total return by buying the ten highest yielding 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:
DIVISION INVESTMENT DATE -------- --------------- Select Ten Plus Division - March last Business Day of March Select Ten Plus Division - June last Business Day of June Select Ten Plus Division - September last Business Day of September Select Ten Plus Division - December last Business Day of December
The weights of the individual stock positions won't be rebalanced during the year, and additional contributions or transfers won't be accepted during any Division's twelve-month holding period. Instead, additional contributions or transfers are invested on the next Investment Date. On the day we receive a dividend from a stock in a Division's investment portfolio, we'll reinvest it in the form of additional shares of the stock that paid the dividend. We can't guarantee that the dividend rates on the selected stocks will be maintained. Reduction or elimination of a dividend could adversely affect the stock price. The "highest yielding stocks" are determined by calculating the yield for each stock by annualizing the last ordinary quarterly or semi-annual dividend distributed on that stock and dividing the result by the market value of the stock at the close of the NYSE on the Business Day before the Investment Date. 55 The investment strategy is based on three time-tested investment principles: (1) time in the market is more important than timing the market; (2) the stocks to buy are the ones everyone else is selling; and (3) dividends can be an important part of total return. Investment in a number of companies with high dividends relative to their stock prices is designed to increase a Division's potential for higher returns. Investing in these stocks of the DJIA may be effective as well as conservative because regular dividends are common for established companies and have accounted for a substantial portion of the total return on stocks of the DJIA as a group. Each Division's return will consist of a combination of capital appreciation and current dividend income. Transfers from any other Investment Option into one of the Divisions will be effective at a price determined as of the day preceding the next available Investment Date. We reserve the right not to accept transfer instructions received less than two business days before any Investment Date. See Part I, Section 5, "Transfers." THE DOW JONES INDUSTRIAL AVERAGE The DJIA consists of 30 common stocks chosen by the editors of THE WALL STREET JOURNAL as representative of the NYSE and of American industry. The companies are highly capitalized in their industries and their stocks are widely followed and held by individual and institutional investors. The companies marked below with an asterisk are the ten highest yielding stocks in the DJIA as of the market close on Monday, December 31, 2001. The ten highest yielding stocks in the DJIA are commonly known as the "Dogs of the Dow": AT&T Honeywell Aluminum Co. of America IBM American Express Intel Boeing International Paper* Caterpillar* Johnson & Johnson Citigroup J.P. Morgan Chase* 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 The designations "Dow Jones(R)," "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. 56 RISK FACTORS RISKS IN GENERAL An investment in a Division results in certain risks common to all stock investments. Stocks fluctuate in price for a variety of reasons. For example, the value of your investment will decline if the financial condition of the issuers of the stocks becomes impaired or if the general condition of the stock market worsens. Common stocks in general may be especially susceptible to general stock market movements and to increases and decreases in value as market confidence in and perceptions of the issuers change. These perceptions are based on unpredictable factors, including government, economic, monetary and fiscal policies, inflation and interest rates, economic expansion or contraction, and global or regional political, economic or banking crises. In addition, holders of common stocks generally are behind creditors and holders of preferred stock for payments in the event of the bankruptcy of a stock issuer. Common stocks aren't backed by an obligation of the issuer and therefore don't offer any assurance of income or provide the degree of protection of capital provided by debt securities. STRATEGY SPECIFIC RISKS Each Division is non-diversified and invests a larger portion of its assets in the securities of fewer issuers than diversified investment companies. As a result, an investment in a Division may be subject to greater fluctuation in value than an investment in a diversified investment company. In addition, a Division may be concentrated in issuers primarily engaged in a particular industry. Concentration may involve additional risk because of the decreased diversification of economic, financial, and market risks. In addition, increased regulation, particularly with respect to the environment or with respect to the petroleum or tobacco industry, may have a negative impact on certain companies represented in a Division's portfolio. SECTION 2 - PERFORMANCE INFORMATION The performance of the investment 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. 57 PERFORMANCE HISTORY OF THE DOGS OF THE DOW STRATEGY - COMPARISON OF HISTORICAL TOTAL RETURN(1)
TEN HIGHEST DIVIDEND YEAR YIELDING STOCKS (2) DJIA ---- -------------------- ---- 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% 2000 6.4% (4.7)% 2001 (4.9%) (5.45) Cumulative 7,657% 2,773%
(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 listed above, the ten highest dividend yielding stocks in the DJIA achieved an average annual total return of 16.2%. Over this period, the strategy achieved a greater average annual total return than that of the DJIA, which was 12.3%. 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 1998-2001: 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. 58 PERFORMANCE HISTORY OF THE DOGS OF THE DOW STRATEGY - $10,000 HYPOTHETICAL INVESTMENT
TEN HIGHEST DIVIDEND YEAR YIELDING DJIA STOCKS DJIA INDEX ---- -------------------- ---------- 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 2000 815,633 303,673 2001 775,667 287,275
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, 2000. 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 $443,352 if the following fees and expenses had been charged: (1) insurance charges of 1.20%, (2) management fees of .50%, (3) administrative fees of .15%, and (4) other expenses of .35%. Investors shouldn't rely on performance information as an indication of the past or future performance of the Divisions. We can't guarantee that any of the Divisions will outperform the DJIA. Performance data for the Divisions, including the yield and total return of the Divisions, may appear in advertisements or sales literature. See "Performance Information" in Part I, Section 8 for a discussion of how performance is calculated. 59 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, 2000, The Western-Southern Enterprise owned or managed assets of approximately $25.5 billion and Touchstone Advisors managed assets of approximately $605 million. Touchstone Advisors is located at 221 East Fourth Street, Suite 300, 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 - 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. 60 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 Management 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 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. On April 18, 2001, National Asset completed its merger with a wholly owned subsidiary of AMVESCAP PLC. AMVESCAP, which is headquartered in Atlanta and London, is the largest publicly traded asset management firm in the world. In the transaction, AMVESCAP acquired all the outstanding shares of National Asset. As a result of the transaction, National Asset's business is now conducted by the National Asset Management Division of INVESCO, Inc. INVESCO manages more than $93 billion in assets for institutional investors, and offers a broad range of investment services. The main place of business of INVESCO is 1315 Peachtree Street, N.E., Suite 300, Atlanta, Georgia 30309. 61 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 for contracts issued after July 16, 2001. No Unit values are included for the Franklin Templeton, J.P. Morgan Mid Cap Value, Putnam VT George Putnam of Boston Fund, Putnam VT New Opportunities Fund, Putnam VT Voyager Fund, Scudder, Van Kampen and Touchstone portfolio because as of May 1, 2002 had not yet begun Separate Account I operations in.
YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- FIDELITY VIP CONTRAFUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.71 Number of units outstanding at end of period 48,780 FIDELITY VIP EQUITY-INCOME Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.64 Number of units outstanding at end of period 89,239 FIDELITY VIP GROWTH Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.42 Number of units outstanding at end of period 40,739 FIDELITY VIP GROWTH & INCOME Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.90 Number of units outstanding at end of period 26,772 FIDELITY VIP GROWTH OPPORTUNITIES Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.58 Number of units outstanding at end of period 4,696 62 YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- FIDELITY VIP MID-CAP Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.23 Number of units outstanding at end of period 39,530 FIDELITY VIP MONEY MARKET Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.05 Number of units outstanding at end of period 222,525 JANUS ASPEN SERIES AGGRESSIVE GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 8.75 Number of units outstanding at end of period 2,400 JANUS ASPEN SERIES BALANCED PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.89 Number of units outstanding at end of period 46,750 JANUS ASPEN SERIES CAPITAL APPRECIATION PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.46 Number of units outstanding at end of period 15,143 JANUS ASPEN SERIES CORE EQUITY PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.63 Number of units outstanding at end of period 2,429 JANUS ASPEN SERIES GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 6.39 Number of units outstanding at end of period 249,380 JANUS ASPEN SERIES INTERNATIONAL GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.61 Number of units outstanding at end of period 6,052 JANUS ASPEN SERIES STRATEGIC VALUE PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.47 63 YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- Number of units outstanding at end of period 2,738 JANUS ASPEN SERIES WORLDWIDE GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.48 Number of units outstanding at end of period 52,926 J.P. MORGAN BOND PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.21 Number of units outstanding at end of period 83,068 J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.77 Number of units outstanding at end of period 1,889 LEGENDS FUND BARON SMALL CAP PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.01 Number of units outstanding at end of period 15,455 LEGENDS FUND GABELLI LARGE CAP VALUE PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 8.79 Number of units outstanding at end of period 17,072 LEGENDS FUND HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.19 Number of units outstanding at end of period 9,622 LEGENDS FUND THIRD AVENUE VALUE PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.93 Number of units outstanding at end of period 57,286 64 YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- MFS FUNDS CAPITAL OPPORTUNITIES PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.02 Number of units outstanding at end of period 15,642 MFS FUNDS EMERGING GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.22 Number of units outstanding at end of period 7,528 MFS FUNDS INVESTORS GROWTH STOCK PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.44 Number of units outstanding at end of period 5,271 MFS FUNDS INVESTORS TRUST PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 8.39 Number of units outstanding at end of period 288,106 MFS FUNDS MID CAP GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.11 Number of units outstanding at end of period 20,309 MFS FUNDS NEW DISCOVERY PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.06 Number of units outstanding at end of period 17,420 MFS FUNDS RESEARCH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.32 Number of units outstanding at end of period 3,095 MFS FUNDS TOTAL RETURN PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.94 Number of units outstanding at end of period 48,866 PUTNAM VT GROWTH AND INCOME FUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.53 Number of units outstanding at end of period 20,057 65 YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- PUTNAM VT INTERNATIONAL GROWTH Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.68 Number of units outstanding at end of period 6,480 PUTNAM VT SMALL CAP VALUE FUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.17 Number of units outstanding at end of period 17,965 PUTNAM VT VOYAGER FUND II Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.03 Number of units outstanding at end of period 4,045 SCUDDER EAFE EQUITY INDEX FUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.40 Number of units outstanding at end of period 5,267 SCUDDER EQUITY 500 INDEX FUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.53 Number of units outstanding at end of period 42,322 SCUDDER SMALL CAP INDEX FUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.05 Number of units outstanding at end of period 2,706 VAN KAMPEN BANDWIDTH & TELECOMMUNICATIONS Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 8.69 Number of units outstanding at end of period 2,907 VAN KAMPEN BIOTECHNOLOGY & PHARMACEUTICAL Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.86 Number of units outstanding at end of period 4,445 VAN KAMPEN EMERGING MARKETS DEBT Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.59 Number of units outstanding at end of period 1,019 66 YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- VAN KAMPEN INTERNET PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 6.81 Number of units outstanding at end of period 1,472 VAN KAMPEN MORGAN STANLEY HIGH - TECH35 PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.35 Number of units outstanding at end of period 25 VAN KAMPEN MORGAN STANLEY U.S. MULTINATIONAL PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.66 Number of units outstanding at end of period 52 VAN KAMPEN UIF U.S. REAL ESTATE Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period 10.22 Number of units outstanding at end of period 9,603
67 The table below shows Unit Values 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 for contracts issued prior to July 16, 2001.
2001 2000 1999 1998 1997 ------------- ------------- ------------- ------------- ------------- THIRD AVENUE VALUE** Unit value at beginning of period $ 26.06 $ 23.76 $ 27.42 $ 23.47 $ 18.24 Unit value at end of period $ 14.62 $ 26.06 $ 23.76 $ 27.42 $ 23.47 Number of units outstanding at end of period 597,420 620,186 930,696 1,385,723 1,278,296 HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH Unit value at beginning of period $ 27.02 $ 35.32 $ 26.42 $ 19.74 $ 14.85 Unit value at end of period $ 19.21 $ 27.02 $ 35.32 $ 26.42 $ 19.74 Number of units outstanding at end of period 1,023,394 1,230,820 1,214,898 1,345,118 1,295,185 GABELLI LARGE CAP VALUE** Unit value at beginning of period $ 17.36 $ 18.45 $ 17.70 $ 18.32 $ 15.23 Unit value at end of period $ 14.62 $ 17.36 $ 18.45 $ 17.70 $ 18.32 Number of units outstanding at end of period 597,420 514,402 804,931 1,761,932 2,107,245 BARON SMALL CAP** Unit value at beginning of period $ 17.09 $ 17.10 $ 17.80 $ 18.15 $ 14.71 Unit value at end of period $ 17.97 $ 17.09 $ 17.10 $ 17.80 $ 18.15 Number of units outstanding at end of period 243,483 206,561 332,006 581,283 592,060 FIDELITY VIP EQUITY-INCOME Unit value at beginning of period $ 12.43 $ 11.62 $ 11.08 $ 10.06 Unit value at end of period $ 11.66 $ 12.43 $ 11.62 $ 11.08 $ 10.06 Number of units outstanding at end of period 1,532,888 1,303,950 1,571,231 1,206,214 155,520 FIDELITY VIP CONTRAFUND Unit value at beginning of period $ 14.08 $ 15.29 $ 12.47 $ 9.73 Unit value at end of period $ 12.19 $ 14.08 $ 15.29 $ 12.47 $ 9.73 Number of units outstanding at end of period 1,519,016 1,735,357 1,652,352 893,485 129,361 FIDELITY VIP GROWTH & INCOME Unit value at beginning of period $ 13.41 $ 14.11 $ 13.10 $ 10.24 Unit value at end of period $ 12.07 $ 13.41 $ 14.11 $ 13.10 $ 10.24 Number of units outstanding at end of period 1,130,965 1,111,831 1,291,885 859,704 119,576 FIDELITY VIP GROWTH OPPORTUNITIES Unit value at beginning of period $ 10.62 $ 12.98 $ 12.62 $ 10.26 Unit value at end of period $ 8.97 $ 10.62 $ 12.98 $ 12.62 $ 10.26 Number of units outstanding at end of period 661,779 768,638 948,352 617,513 78,180 1996 1995 1994 1993 INCEPTION ------------- ------------- ------------- ------------- ------------- THIRD AVENUE VALUE** Unit value at beginning of period $ 14.85 $ 10.34 $ 10.56 $ 10.07 $ 10.00 Unit value at end of period $ 18.24 $ 14.85 $ 10.34 $ 10.56 Number of units outstanding at end of period 1,119,634 806,752 733,336 547,498 HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH Unit value at beginning of period $ 13.21 $ 10.17 $ 9.91 $ 10.05 $ 10.00 Unit value at end of period $ 14.85 $ 13.21 $ 10.17 $ 9.91 Number of units outstanding at end of period 1,184,119 1,342,971 1,014,016 830,307 GABELLI LARGE CAP VALUE** Unit value at beginning of period $ 13.44 $ 11.23 $ 11.33 $ 9.99 $ 10.00 Unit value at end of period $ 15.23 $ 13.44 $ 11.23 $ 11.33 Number of units outstanding at end of period 2,434,199 2,541,023 2,558,692 1,518,39 BARON SMALL CAP** Unit value at beginning of period $ 12.58 $ 10.53 $ 10.74 - $ 10.00 Unit value at end of period $ 14.71 $ 12.58 $ 10.53 $ 10.74 Number of units outstanding at end of period 592,469 587,830 567,827 425,500 FIDELITY VIP EQUITY-INCOME Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period FIDELITY VIP CONTRAFUND Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period FIDELITY VIP GROWTH & INCOME Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period FIDELITY VIP GROWTH OPPORTUNITIES Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period 68 2001 2000 1999 1998 1997 ------------- ------------- ------------- ------------- ------------- FIDELITY VIP GROWTH Unit value at beginning of period $ 11.08 $ 12.63 - - Unit value at end of period $ 8.99 $ 11.08 $ 12.63 Number of units outstanding at end of period 503.508 364,255 54,439 FIDELITY VIP MID CAP Unit value at beginning of period $ 17.07 $ 12.96 - - Unit value at end of period $ 16.27 $ 17.07 $ 12.96 Number of units outstanding at end of period 581,376 503,449 82,924 JANUS ASPEN CAPITAL APPRECIATION Unit value at beginning of period $ 19.64 $ 24.33 $ 14.77 $ 9.47 Unit value at end of period $ 15.17 $ 19.64 $ 24.33 $ 14.77 $ 9.47 Number of units outstanding at end of period 1,720,961 2,289,751 1,953,906 712,285 92,194 JANUS ASPEN BALANCED Unit value at beginning of period $ 15.90 $ 16.49 $ 13.19 $ 9.95 Unit value at end of period $ 14.95 $ 15.90 $ 16.49 $ 13.19 $ 9.95 Number of units outstanding at end of period 2,824,401 3,292,580 3,904,271 5,548,134 5,661,088 JANUS ASPEN WORLDWIDE GROWTH Unit value at beginning of period $ 16.26 $ 19.54 $ 12.04 $ 9.47 Unit value at end of period $ 12.44 $ 16.26 $ 19.54 $ 12.04 $ 9.47 Number of units outstanding at end of period 2,314,559 2,890,991 2,314,085 1,327,696 151,721 JANUS ASPEN MONEY MARKET Unit value at beginning of period $ 11.38 $ 10.85 $ 10.48 $ 10.08 Unit value at end of period $ 11.70 $ 11.38 $ 10.85 $ 10.48 $ 10.08 Number of units outstanding at end of period 2,337,296 1,569,997 2,017,825 1,709,186 634,249 J.P. MORGAN INTERNATIONAL OPPORTUNITIES Unit value at beginning of period $ 10.73 $ 12.93 $ 9.59 $ 9.28 Unit value at end of period $ 8.56 $ 10.73 $ 12.93 $ 9.59 $ 9.28 Number of units outstanding at end of period 293,390 324,546 345,201 137,064 41,664 J.P. MORGAN BOND Unit value at beginning of period $ 11.55 $ 10.60 $ 10.85 $ 10.19 Unit value at end of period $ 12.19 $ 11.55 $ 10.60 $ 10.85 $ 10.19 Number of units outstanding at end of period 1,972,807 1,491,565 1,890,368 1,499,874 418,029 1996 1995 1994 1993 INCEPTION ------------- ------------- ------------- ------------- ------------- FIDELITY VIP GROWTH Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period FIDELITY VIP MID CAP Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN CAPITAL APPRECIATION Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN BALANCED Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN WORLDWIDE GROWTH Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN MONEY MARKET Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period J.P. MORGAN INTERNATIONAL OPPORTUNITIES Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period J.P. MORGAN BOND Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period 69 2001 2000 1999 1998 1997 ------------- ------------- ------------- ------------- ------------- JANUS ASPEN AGGRESSIVE GROWTH Unit value at beginning of period $ 6.74 - Unit value at end of period $ 402 $ 6.74 Number of units outstanding at end of period 376,578 424,984 JANUS ASPEN GROWTH Unit value at beginning of period $ 8.63 - - - Unit value at end of period $ 6.39 $ 8.63 Number of units outstanding at end of period 249,380 154,157 JANUS ASPEN STRATEGIC VALUE Unit value at beginning of period $ 9.59 - - - Unit value at end of period $ 8.67 $ 9.59 Number of units outstanding at end of period 215,986 38,274 MFS CAPITAL OPPORTUNITIES Unit value at beginning of period $ 8.73 - - - - Unit value at end of period $ 6.58 $ 8.73 Number of units outstanding at end of period 560,187 477,460 MFS EMERGING GROWTH Unit value at beginning of period $ 8.00 - - - Unit value at end of period $ 5.24 $ 8.00 Number of units outstanding at end of period 337,119 279,091 MFS INVESTORS TRUST Unit value at beginning of period 10.14 - - - - Unit value at end of period 8.39 10.14 Number of units outstanding at end of period 288,106 56,839 MFS MID CAP GROWTH Unit value at beginning of period 9.63 - - - - Unit value at end of period 7.83 9.63 Number of units outstanding at end of period 870,222 479,615 MFS NEW DISCOVERY Unit value at beginning of period 9.27 - - - - Unit value at end of period 8.67 $ 9.27 Number of units outstanding at end of period 417,974 214,134 SCUDDER EAFE EQUITY INDEX Unit value at beginning of period $ 11.70 $ 14.22 $ 11.30 $ 9.42 Unit value at end of period $ 8.69 $ 11.70 $ 14.22 $ 11.30 $ 9.42 Number of units outstanding at end of period 257,086 247,563 240,439 177,704 19,652 1996 1995 1994 1993 INCEPTION ------------- ------------- ------------- ------------- ------------- JANUS ASPEN AGGRESSIVE GROWTH Unit value at beginning of period $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN GROWTH Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN STRATEGIC VALUE Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period MFS CAPITAL OPPORTUNITIES Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period MFS EMERGING GROWTH Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period MFS INVESTORS TRUST Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period MFS MID CAP GROWTH Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period MFS NEW DISCOVERY Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period SCUDDER EAFE EQUITY INDEX Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period 70 2001 2000 1999 1998 1997 ------------- ------------- ------------- ------------- ------------- SCUDDER EQUITY INDEX Unit value at beginning of period $ 13.71 $ 15.32 $ 12.90 $ 10.16 Unit value at end of period $ 11.88 $ 13.71 $ 15.32 $ 12.90 $ 10.16 Number of units outstanding at end of period 2,357,487 2,509,913 2,454,241 1,563,771 224,706 SCUDDER SMALL CAP INDEX Unit value at beginning of period $ 10.24 $ 10.80 $ 9.11 $ 9.44 Unit value at end of period $ 10.31 $ 10.24 $ 10.80 $ 9.11 $ 9.44 Number of units outstanding at end of period 491,217 528,324 456,819 389,699 70,238 UNIVERSAL FUNDS EMERGING MARKETS DEBT Unit value at beginning of period $ 9.14 $ 8.32 $ 6.52 $ 9.23 Unit value at end of period $ 9.93 $ 9.14 $ 8.32 $ 6.52 $ 9.23 Number of units outstanding at end of period 150,281 192,477 310,684 607,509 653,365 UNIVERSAL FUNDS U.S. REAL ESTATE Unit value at beginning of period $ 11.07 $ 8.68 $ 8.93 $ 10.15 Unit value at end of period $ 11.99 $ 11.07 $ 8.68 $ 8.93 $ 10.15 Number of units outstanding at end of period 339,600 238,338 234,609 252,794 67,357 1996 1995 1994 1993 INCEPTION ------------- ------------- ------------- ------------- ------------- SCUDDER EQUITY INDEX Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period SCUDDER SMALL CAP INDEX Unit value at beginning of period - - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period UNIVERSAL FUNDS EMERGING MARKETS DEBT Unit value at beginning of period $ 10.00 Unit value at end of period Number of units outstanding at end of period UNIVERSAL FUNDS U.S. REAL ESTATE Unit value at beginning of period $ 10.00 Unit value at end of period Number of units outstanding at end of period
71 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: -0.0551589 = [(1 + .05) (POWER OF (48/12))/ (1 + .0625 + .0025) (POWER OF (48/12))] - 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 If instead of a full withdrawal, $20,000 was requested, we would first determine the free withdrawal amount: 72 $8,682.19 = $57,881.25 X .15 Free Amount = $8,682.19 The non-free amount would be: $11,317.81 = $20,000.00 - $8,682.19 The Market Value Adjustment, which is only applicable to the non-free amount, would be - $624.28 = -0.0551589 X $11,317.81 The withdrawal charge would be: $762.26 = [($11,317.81 + $624.28)/(1 - .06)] - ($11,317.81 + 624.28) Thus, the total amount needed to provide $20,000 after the Market Value Adjustment and withdrawal charge would be: $21,386.54 = $20,000.00 + $624.28 + $762.26 The ending Account Value would be: $36,494.71 = $57,881.25 - $21,386.54 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: .0290890 = [(1 + .05) POWER OF (48/12)/ (1 + .04 + .0025) POWER OF (48/12)] - 1 The Market Value Adjustment is an increase of $1,683.71 to the GRO Value: $1,683.71 = .0290890 X $57,881.25 The Market Adjusted Value would be: $59,564.96 = $57,881.25 + $1,683.71 A withdrawal charge of 6% would be assessed against the $50,000 original contribution: $3,000.00 = $50,000.00 X .06 Thus, the amount payable on a full withdrawal would be: $56,564.96 = $57,881.25 + $1,683.71 - $3,000.00 If instead of a full withdrawal, $20,000 was requested, the free withdrawal amount and non-free amount would first be determined as above: 73 Free Amount = $ 8,682.19 Non-Free Amount = $11,317.81 The Market Value Adjustment would be: $329.22 = .0290890 X $11,317.81 The withdrawal charge would be: $701.40 = [($11,317.81 - $329.22)/(1 - .06)] - ($11,317.81 - $329.22) Thus, the total amount needed to provide $20,000 after the Market Value Adjustment and withdrawal charge would be: $20,372.18 = $20,000.00 - $329.22 + $701.40 The ending Account Value would be: $37,509.07 = $57,881.25 - $20,372.18 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. 74 APPENDIX C ENHANCED EARNINGS BENEFIT CALCULATION EXAMPLE The following is an additional example of how the Enhanced Earnings Benefit ("EEB") will be calculated and paid. A. EEB in conjunction with Highest Anniversary Death Benefit Net Premium = $50,000 Account Value upon presentation of proof of death = $60,000 Highest Anniversary Value = $70,000 Gain = $10,000 ($60,000 - $50,000) Assume a 40% benefit based on issue age EEB Benefit = $4,000 (40% x $10,000) Total Payment to Beneficiaries $74,000 ($70,000 + $4,000) 75 APPENDIX D - 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: ___________ 76 STATEMENT OF ADDITIONAL INFORMATION DECEMBER 31, 2002 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
PAGE 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 10 Part 6 - Performance Information 11 Part 7 - Determination of Accumulation Unit Values 14 Part 8 - Tax-Favored Retirement Programs 14 Part 9 - Financial Statements 17 Appendix A SEC Standardized Performance Appendix B Non Standardized Performance
This Statement of Additional Information (SAI) is not a prospectus. It should be read in conjunction with the prospectus for the contracts, dated December 31, 2002. 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 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). In 2001 Integrity provided all management services of Separate Account II and no longer pays management services fee to a third party. Prior to that, 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 1998 were $27,158,002, in 1999 were $32,545,976, and in 2000 were $3,001,867. 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. 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 221 East Fourth Street, Suite 300, Cincinnati, Ohio 45202. The contracts are offered through Touchstone Securities on a continuous basis. We generally pay a maximum distribution allowance of 7.5% of initial contributions, plus .50% trail commission paid on Account Value after the eighth Contract Year. The amount of distribution allowances paid to Touchstone Securities, the principal underwriter, was $17,435,358 in 2001. The amount of distribution allowances paid to Touchstone Securities between March 3, 2000 and December 21, 2000 was $3,407,594. The amount of distribution allowances paid to ARM Securities Corporation, the principal underwriter for the contracts prior to March 3, 2000, was $399,896 for the year ended December 31, 2000, $11,028,481 for the year ended December 31, 1999, and $12,537,715 for the year ended December 31, 1998. Distribution allowances weren't retained by either ARM Securities Corporation or Touchstone Securities, as applicable, 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. 2 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. 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 3 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 five (5) 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. 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. 4
NAME, AGE, AND ADDRESS OF MANAGER PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS --------------------------------- ------------------------------------------- John R. Lindholm (52)* President of Integrity since November 1993; President of National Integrity 515 West Market Street since September 1997; Vice President-Chief Marketing Officer of National Louisville, KY 40202 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 (63) Managing partner, Associated Mezzanine Investors, LLC since March 2000; 10 Hemlock Road Director, Nations Flooring, Inc. since March 1998; investment banker since Hartsdale, NY 10530 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 (74) President, William Faulkner & Associates LLC (international trade business) 825 Goodrich Ave. since 1986; Manager, Carroll Family, LLC (commercial land development St. Paul, MN 55105 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 (46) Chief Executive Officer, Aveus (an interactive strategy and development 425 Portland Avenue firm) since July 1999; President, clavm, inc. (a management consulting Minneapolis, MN 55488 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. (53) Retired; Founder and Managing Director of National Asset Management 2939 Rainbow Drive Corporation (investment counseling firm) from 1979 to 1995**; Member of Louisville, KY 40206 Louisville Community Foundation Investment Committee; Board member, Louisville Water Company, since 1986.
- Mr. Lindholm is an INTERESTED PERSON, as defined in the 1940 Act, by virtue of his position with Integrity Life Insurance Company. ** Mr. Quesenberry no longer has any interest in National Asset Management Corporation. OFFICERS:
NAME, AGE & ADDRESS POSITION WITH SEPARATE ACCOUNT PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS ------------------- ------------------------------ ------------------------------------------- Edward J. Haines (54) 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. 5 Kevin L. Howard (37) 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 (38) 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 (29) 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 (26) 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.
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, 2000, Separate Account Ten paid the Independent Managers a combined total of $10,750, 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 Managers are also members of the Board of Directors of The Legends Fund, Inc., an open-end management investment company, which has the same investment adviser as Separate Account Ten. The following table sets forth for the fiscal year ended December 31, 2000, 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. 6
TOTAL PENSION OR COMPENSATION AGGREGATE RETIREMENT BENEFITS FROM SEPARATE COMPENSATION ACCRUED AS PART OF ESTIMATED ANNUAL ACCOUNT TEN FROM SEPARATE SEPARATE ACCOUNT BENEFITS UPON PAID TO NAME OF MANAGER ACCOUNT TEN TEN EXPENSE RETIREMENT MANAGERS --------------- ------------- ------------------- ---------------- ------------- William B. Faulkner $ 2,500 None N/A $ 2,500 John Katz $ 3,000 None N/A $ 3,000 Chris L. Mahai $ 3,000 None N/A $ 3,000 Irvin W. Quesenberry, Jr. $ 2,250 None N/A $ 2,250
As of December 31, 2000, the Managers of Separate Account Ten as a group, owned less than 1% of the outstanding membership interests of the Fund. The following individuals own 5% or more of one of the Divisions' units as of October 18, 2001: SELECT TEN PLUS DIVISION - MARCH
NAME ADDRESS PERCENTAGE OWNERSHIP ---- ------- -------------------- Effie D. Sumrall 823 Fraser Street 7.11% Aurora, CA
SELECT TEN PLUS DIVISION - JUNE
NAME ADDRESS PERCENTAGE OWNERSHIP ---- ------- -------------------- Victoria Grossman 111 Colfax Road 5.66% Skillman, NJ
SELECT TEN PLUS DIVISION - SEPTEMBER
NAME ADDRESS PERCENTAGE OWNERSHIP ---- ------- -------------------- Family Trust Lambert Sun Valley, ID 5.75%
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. 7 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. 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 2001. The following tables show the amount of advisory fees the Divisions paid to Touchstone Advisors, Separate Account Ten's investment adviser since March 3, 2000, to Integrity Capital Advisors, Separate Account Ten's investment adviser until March 3, 2000, the amount of sub-advisory fees Touchstone Advisors paid to National Asset for the period ended December 31, 2000, and the amount of sub-advisory fees Integrity Capital Advisors paid to National Asset, for the periods ended December 31, 1998, December 31, 1999 and December 31, 2000.
AMOUNT DIVISION PAID TO INTEGRITY AMOUNT INTEGRITY CAPITAL ADVISORS PERIOD ENDED DECEMBER 31, 1998 CAPITAL ADVISORS PAID TO NATIONAL ASSET ---------------------------------------------------------------------------------------------------------------------- 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 8 AMOUNT DIVISION PAID TO INTEGRITY AMOUNT INTEGRITY CAPITAL ADVISORS PERIOD ENDED DECEMBER 31, 1999 CAPITAL ADVISORS PAID TO NATIONAL ASSET ---------------------------------------------------------------------------------------------------------------------- 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 AMOUNT DIVISION PAID TO INTEGRITY AMOUNT INTEGRITY CAPITAL ADVISORS PERIOD ENDED DECEMBER 31, 2000 CAPITAL ADVISORS PAID TO NATIONAL ASSET ---------------------------------------------------------------------------------------------------------------------- Select Ten Plus Division-March $ 3,857.36 $ 964.34 Select Ten Plus Division-June $ 3,573.23 $ 893.32 Select Ten Plus Division-September $ 6,376.45 $ 1,594.09 Select Ten Plus Division-December $ 7,122.38 $ 1,780.57 AMOUNT DIVISION PAID TO TOUCHSTONE AMOUNT TOUCHSTONE ADVISORS PAID TO PERIOD ENDED DECEMBER 31, 2000 ADVISORS NATIONAL ASSET ---------------------------------------------------------------------------------------------------------------------- Select Ten Plus Division-March $ 15,118.37 $ 3,779.52 Select Ten Plus Division-June $ 13,184.62 $ 3,296.19 Select Ten Plus Division-September $ 23,936.44 $ 5,984.22 Select Ten Plus Division-December $ 21,758.30 $ 5,439.56
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, 1999 and 2000. On April 18, 2001, National Asset completed its merger with a wholly owned subsidiary of AMVESCAP PLC. AMVESCAP, which is headquartered in Atlanta and London, is the largest publicly traded asset management firm in the world. In the transaction, AMVESCAP acquired all the outstanding shares of National Asset. As a result of the transaction, National Asset's business is now conducted by the National Asset Management Division of INVESCO, Inc. INVESCO manages more than $93 billion in assets for institutional investors, and offers a broad range of investment services. The main place of business of INVESCO is 1315 Peachtree Street, N.E., Suite 300, Atlanta, Georgia 30309. Under the Investment Company Act of 1940, the merger resulted in an "assignment" of the existing sub-advisory agreement between National Asset and Touchstone Advisers, and, consequently, the automatic termination of the sub-advisory agreement at the closing of the merger. Because the contract owners of Separate Account Ten did not approve a new sub-advisory agreement prior to the closing of the merger, the Board of Managers approved an interim sub-advisory agreement that will be effective until the contract owners approve a new sub-advisory agreement. The terms of the interim sub-advisory agreement are substantially the same as the terms of the prior sub-advisory agreement. The merger is not expected to affect the daily operations of the Divisions or the investment management activities of the Divisions' investment adviser. 9 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 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. 10 SEC rules further require that commissions paid to an affiliated broker-dealer or sub-adviser by the account on exchange transactions not exceed "usual and customary brokerage commission". The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time". The Board of Managers has adopted procedures for evaluating the reasonableness of commissions paid to broker-dealers that are affiliated with National Asset and will review these procedures periodically. PART 6 - PERFORMANCE INFORMATION Each Variable Account Option may from time to time include the Average Annual Total Return, the Cumulative Total Return, and Yield of its units in advertisements or in other information furnished to shareholders. The Janus Aspen Money Market Option may also from time to time include the Yield and Effective Yield of its units in information furnished to shareholders. Performance information is computed separately for each Option in accordance with the formulas described below. At any time in the future, total return and yields may be higher or lower than in the past and there is no guarantee that any historical results will continue. TOTAL RETURNS Total returns reflect all aspects of an Option's return, including the automatic reinvestment by the Option of all distributions and the deduction of all applicable charges to the Option on an annual basis, including mortality risk and expense charges, the annual administrative charge and other charges against contract values. Quotations also will assume a termination (surrender) at the end of the particular period and reflect the deductions of the contingent withdrawal charge, if applicable. Total returns may be shown at the same time that don't take into account deduction of the contingent withdrawal charge, and/or the annual administrative charge. Nonstandardized "total return" will be calculated in a similar manner and for the same time periods as the average annual total return and for three years except total return will assume an initial investment of $50,000 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 $50,000 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)(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 11 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 may be calculated for the Janus Money Market Option. Current Yield is based on the change in the value of a hypothetical investment (exclusive of capital changes) over a particular 7-day period, less a hypothetical charge reflecting deductions from contract values during the period (the BASE PERIOD), and stated as a percentage of the investment at the start of the base period (the BASE PERIOD RETURN). The base period return is then annualized by multiplying by 365/7, with the resulting yield figure carried to at least the nearest hundredth of one percent. Effective yield assumes that all dividends received during an annual period have been reinvested. This compounding effect causes effective yield to be higher than current yield. Calculation of effective yield begins with the same base period return used in the calculation of current yield, which is then annualized to reflect weekly compounding pursuant to the following formula: Effective Yield = {(Base Period Return) + 1)POWER OF (365/7)} - 1 PLEASE SEE APPENDIX A FOR SEC STANDARDIZED PERFORMANCE DATA, AND APPENDIX B FOR NON-STANDARDIZED PERFORMANCE DATA. 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. 12 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. 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. 13 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 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 14 with which Integrity may issue a contract. Integrity reserves the right to change its administrative rules, such as minimum contribution amounts, as needed to comply with the Code as to tax-favored retirement programs. TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES Code Section 408(b) permits eligible individuals to contribute to an individual retirement program known as a Traditional IRA. An individual who receives compensation and who hasn't reached age 70 1/2 by the end of the tax year may establish a Traditional IRA and make contributions up to the deadline for filing his or her federal income tax return for that year (without extensions). Traditional IRAs are limited on the amount that may be contributed, the persons who may be eligible, and the time when distributions may begin. An individual may also roll over amounts distributed from another Traditional IRA or another tax-favored retirement program to a Traditional IRA contract. Your Traditional IRA contract will be issued with a rider outlining the special terms of your contract that apply to Traditional IRAs. The owner will be deemed to have consented to any other amendment unless the owner notifies us that he or she doesn't consent within 30 days from the date we mail the amendment. ROTH INDIVIDUAL RETIREMENT ANNUITIES Section 408A of the Code permits eligible individuals to contribute to an individual retirement program known as a Roth IRA. An individual who receives compensation may establish a Roth IRA and make contributions up to the deadline for filing his or her federal income tax return for that year (without extensions). Roth IRAs are limited on 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. 15 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. 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 16 Ernst & Young LLP, 250 East Fifth Street, Cincinnati Ohio 45202, 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, 2001, 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, 2001 and 2000 included herein have been audited by Ernst & Young LLP as set forth in their reports. The financial statements of Integrity should be distinguished from the financial statements of the Separate Accounts and should be considered only as they relate to the ability of Integrity to meet its obligations under the contracts. They shouldn't be considered as relating to the investment performance of the assets held in the Separate Accounts. 17 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 corresponding mutual funds. FIDELITY VIP FUNDS Fidelity VIP Contrafund Fidelity VIP Equity-Income Fidelity VIP Growth Fidelity VIP Growth & Income Fidelity VIP Growth Opportunities Fidelity VIP Mid-Cap Fidelity VIP Money Market FRANKLIN TEMPLETON VIP TRUST Franklin Growth and Income Securities Franklin Income Securities Franklin Large Cap Growth Securities Mutual Shares Securities Templeton Foreign Securities Templeton Growth Securities JANUS ASPEN SERIES Janus Aspen Series Aggressive Growth Janus Aspen Series Growth Janus Aspen Series Worldwide Growth J.P. MORGAN SERIES TRUST II J.P. Morgan Bond J.P. Morgan International Opportunities THE LEGENDS FUND Baron Small Cap Gabelli Large Cap Value Harris Bretall Sullivan & Smith Equity Growth Third Avenue Value MFS FUNDS MFS Capital Opportunities MFS Emerging Growth MFS Investors Growth Stock MFS Investors Trust MFS Mid Cap Growth MFS New Discovery MFS Research MFS Total Return PUTNAM FUNDS Putnam VT The George Putnam Fund of Boston Putnam VT Growth and Income Fund Putnam VT International Growth Putnam VT New Opportunities Fund Putnam VT Small Cap Value Fund Putnam VT Voyager Fund Putnam VT Voyager Fund II SCUDDER VIT FUNDS Scudder EAFE Equity Index Fund Scudder Equity 500 Index Fund Scudder Small Cap Index Fund SELECT TEN PLUS DIVISIONS Select Ten Plus Division - March Select Ten Plus Division - June Select Ten Plus Division - September Select Ten Plus Division - December TOUCHSTONE VARIABLE SERIES TRUST Touchstone Balanced Fund Touchstone Bond Fund Touchstone Emerging Growth Fund Touchstone Enhanced 30 Fund Touchstone Growth & Income Fund Touchstone Growth/Value Fund Touchstone High Yield Fund Touchstone International Equity Fund Touchstone Large Cap Growth Fund Touchstone Money Market Fund Touchstone Small Cap Value Fund Touchstone Value Plus Fund VAN KAMPEN PORTFOLIOS Van Kampen LIT Comstock Van Kampen LIT Emerging Growth Van Kampen UIF Emerging Markets Debt Van Kampen UIF Emerging Markets Equity Van Kampen UIF U.S. Real Estate Van Kampen UIT Bandwidth & Telecommunications Van Kampen UIT Biotechnology & Pharmaceutical Van Kampen UIT Internet Van Kampen UIT Morgan Stanley High-Tech 35(SM) Part I of this prospectus describes the contract and provides background information about the Separate Accounts. Part II of this prospectus (beginning on page 40) provides information about the investment activities and operations of the Select Ten Plus Divisions, including their investment policies. We also offer Guaranteed Rate Options (GROs) and a Systematic Transfer Option (STO), together referred to as FIXED ACCOUNTS. The money you put into a GRO earns a fixed interest rate that we declare at the beginning of the duration you select. A MARKET VALUE ADJUSTMENT will be made for withdrawals, surrenders, transfers and certain other transactions made before your GRO Account expires. However, your value under a GRO 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 December 31, 2002, 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 publicinfo@sec.gov OR BY WRITING THE SEC'S PUBLIC REFERENCE SECTION, WASHINGTON, D.C. 20459-0102. The date of this prospectus is December 31, 2002. 2 TABLE OF CONTENTS
PAGE PART I SECTION 1 - SUMMARY Your Variable Annuity Contract 7 Your Benefits 7 How Your Contract is Taxed 7 Your Contributions 7 Your Investment Options 7 Variable Account Options 7 Account Value, Adjusted Account Value and Cash Value 8 Transfers 8 Charges and Fees 8 Withdrawals 8 Your Initial Right to Revoke 8 Risk/Return Summary: Investments and Risks 9 Table of Annual Fees and Expenses 10 Examples 14 SECTION 2 - INTEGRITY AND THE SEPARATE ACCOUNTS Integrity Life Insurance Company 17 The Separate Accounts and the Variable Account Options 17 Assets of Our Separate Accounts 17 Changes In How We Operate 17 SECTION 3 - YOUR INVESTMENT OPTIONS Investment Options 18 The Select Ten Plus Divisions of Separate Account Ten 29 Fixed Accounts 29 Guaranteed Rate Options 29 Renewals of GRO Accounts 30 Market Value Adjustments 30 Systematic Transfer Option 31 SECTION 4 - DEDUCTIONS AND CHARGES Separate Account Charges 31 Annual Administrative Charge 32 Portfolio and Division Charges 32 Reduction or Elimination of Separate Account or Administrative Charges 32 State Premium Tax Deduction 32 Contingent Withdrawal Charge 32 Reduction or Elimination of the Contingent Withdrawal Charge 33 Transfer Charge 33 Hardship Waiver 33 Tax Reserve 33 SECTION 5 - TERMS OF YOUR VARIABLE ANNUITY Contributions Under Your Contract 34 Your Account Value 34 Units in Our Separate Accounts 34 How We Determine Unit Value 35 3 Transfers 36 Excessive Trading 36 Withdrawals 37 Assignments 38 Death Benefits and Similar Benefit Distributions 38 Annuity Benefits 38 Annuities 39 Fixed Annuity Payments 39 Timing of Payment 39 How You Make Requests and Give Instructions 40 SECTION 6 - VOTING RIGHTS Portfolio Voting Rights 40 How We Determine Your Voting Shares 40 How Portfolio Shares Are Voted 40 How Separate Account Ten Interests Are Voted 40 Separate Account Voting Rights 41 SECTION 7 - TAX ASPECTS OF THE CONTRACT Introduction 41 Your Contract is an Annuity 41 Taxation of Annuities Generally 41 Distribution-at-Death Rules 43 Diversification Standards 43 Tax-Favored Retirement Programs 43 Inherited IRAs 43 Annuities in Qualified Plans 44 Federal and State Income Tax Withholding 44 Impact of Taxes on Integrity 44 Transfers Among Investment Options 44 SECTION 8 - ADDITIONAL INFORMATION Systematic Withdrawals 44 Income Plus Withdrawal Program 45 Dollar Cost Averaging 45 Systematic Transfer Program 46 Customized Asset Rebalancing 46 Systematic Contributions 46 Legal Proceedings 46 SECTION 9 - PRIOR CONTRACTS Death Benefit Information for Contacts Issued Before January 1, 1997 47 4 PART II - THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN SECTION 1 - INVESTMENT OBJECTIVE, STRATEGY AND RISK FACTORS The Divisions 49 Investment Objective 49 Investment Strategy 50 Dow Jones Industrial Average 51 Risk Factors 51 SECTION 2 - PERFORMANCE INFORMATION Performance History of the Dogs of the Dow Strategy - Comparison of Total Return 52 Performance History of the Dogs of the Dow Strategy - $10,000 Hypothetical Investment 52 SECTION 3 - CONTRACTHOLDER INFORMATION Pricing of Units 54 Dividends and Distributions 54 SECTION 4 - MANAGEMENT The Investment Adviser 54 The Sub-Adviser 55 APPENDIX A - FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNTS 56 APPENDIX B - ILLUSTRATION OF A MARKET VALUE ADJUSTMENT 66 APPENDIX C - TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION 69
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. 5 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 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. 6 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 7 GROWTH Portfolio. Your value in a Variable Account Option will vary with the performance of the corresponding Portfolio. For a full description of each Portfolio, see that Portfolio's prospectus and Statement of Additional Information. The Select Ten Plus Divisions invest directly in securities. For a full description of the Select Ten Plus Divisions, see Part II. ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE Your ACCOUNT VALUE consists of the values of your Fixed Accounts and Variable Account Options added together. Your ADJUSTED ACCOUNT VALUE is your Account Value increased or decreased by any MARKET VALUE ADJUSTMENT. Your Account Value in the GROs can never be decreased below the Minimum Value. You'll find a discussion of Market Value Adjustment in the Guaranteed Rate Options paragraph of Part I, Section 3, "Your Investment Options." Your Cash Value is your ADJUSTED ACCOUNT VALUE reduced by any withdrawal charges or pro rata annual administrative charges that may apply. Fees and charges are discussed in more detail 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, or (iii) 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. 8 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, Third Avenue Value Portfolio, 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. 9 TABLE OF ANNUAL FEES AND EXPENSES OWNER TRANSACTION EXPENSES Sales Load on Purchases $ 0 Deferred Sales Load (as a percentage of contributions)(1) 8% Maximum Transfer Charge (Assessed after 12 transfers in any contract year)(2) $ 20 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) Mortality and Expense Risk Charge 1.20% Administrative Expenses .15% ------------ Total Separate Account Annual Expenses 1.35% ============
10 Portfolio Annual Expenses After Waivers/Reimbursements (AS A PERCENTAGE OF AVERAGE NET ASSETS)
MANAGEMENT OTHER 12b-1 TOTAL ANNUAL PORTFOLIO FEES EXPENSES FEE EXPENSES --------- ---------- -------- ----- ------------ Fidelity VIP Contrafund: Initial Class .58% .10% .00% .68%(3) Fidelity VIP Equity Income: Initial Class .48% .10% .00% .58%(3) Fidelity VIP Growth: Service Class .58% .10% .00% .68%(3) Fidelity VIP Growth and Income: Initial Class .48% .10% .00% .58%(3) Fidelity VIP Growth Opportunity: Initial Class .58% .10% .00% .69%(3) Fidelity VIP Money Market: Initial Class .18% .10% .00% .28% Fidelity VIP Mid Cap: Service Class .58% .10% .10% .79%(3) Franklin Income Securities - Class 1 .49% .04% .00% .53% Franklin Growth and Income Securities - Class 1 .48% .03% .00% .51% Franklin Large Cap Growth Securities - Class 2 .75% .03% .25% 1.03% Mutual Shares Securities- Class 2 .60% .19% .25% 1.04% Templeton Foreign Securities - Class 2 .69% .22% .25% 1.16% Templeton Growth Securities - Class 2 .80% .05% .25% 1.10% Janus Aspen Series Aggressive Growth: Service Shares .65% .02% .25% .92%(4) Janus Aspen Series Growth: Service Shares .65% .01% .25% .91%(4) Janus Aspen Series Worldwide Growth: Service Shares .65% .04% .25% .94%(4) J.P. Morgan Series Trust II Bond .30% .45% .00% .75% J.P. Morgan Series Trust II International Opportunities .60% .60% .00% 1.20%(5) Baron Small Cap 1.05% .60% .00% 1.65%(6) Gabelli Large Cap Value .90% .60% .00% 1.50%(6) Harris Bretall Sullivan & Smith Equity Growth .65% .52% .00% 1.17%(6) Third Avenue Value .65% .43% .00% 1.08%(6) MFS Capital Opportunities: Service Class .75% .15% .25% 1.15%(7) MFS Emerging Growth: Service Class .75% .12% .25% 1.12% MFS Investors Trust: Service Class .75% .15% .25% 1.15%(7) MFS Mid Cap Growth: Service Class .75% .15% .25% 1.15% MFS New Discovery: Service Class .90% .15% .25% 1.30%(7) MFS Research: Service Class .75% .15% .25% 1.15%(7) MFS Total Return: Service Class .75% .14% .25% 1.14%(7) Putnam VT The George Putnam Fund of Boston: Class IB .65% .11% .25% 1.01% Putnam VT Growth and Income Fund: Class IB .46% .05% .25% .76%(8) Putnam VT International Growth Fund: Class IB .76% .18% .25% 1.19%(8) Putnam VT New Opportunities Fund: Class IB .54% .05% .25% .84% Putnam VT Small Cap Value Fund: Class IB .80% .14% .25% 1.19%(8) Putnam VT Voyager Fund: Class IB .53% .04% .25% .82% Putnam VT Voyager II Fund: Class IB .70% .92% .25% 1.87%(8) Scudder EAFE Equity Index: Class A .45% .20% .00% .65%(9) Scudder Equity 500 Index: Class A .20% .10% .00% .30%(9) Scudder Small Cap Index: Class A .35% .10% .00% .45%(9) Touchstone Balanced .80% .10% .00% .90%(10) Touchstone Bond .55% .20% .00% .75%(10) Touchstone Emerging Growth .80% .35% .00% 1.15%(10) Touchstone Enhanced 30 .65% .10% .00% .75%(10) Touchstone Growth and Income .80% .05% .00% .85%(10) Touchstone Growth/Value 1.00% .10% .00% 1.10%(10) Touchstone High Yield .50% .30% .00% .80%(10) Touchstone International Equity .95% .30% .00% 1.25%(10) Touchstone Large Cap Growth .75% .20% .00% .95%(10) Touchstone Money Market .50% .10% .00% .60%(10) Touchstone Small Cap Value .80% .20% .00% 1.00%(10) 11 Touchstone Value Plus .75% .20% .00% .95%(10) Van Kampen LIT Comstock .60% .21% .25% 1.06% Van Kampen LIT Emerging Growth .70% .06% .25% 1.01% Van Kampen UIF Emerging Markets Debt .80% .37% .00% 1.17%(11) Van Kampen UIF Emerging Markets Equity .80% .35% .25% 1.40% Van Kampen UIF U.S. Real Estate .75% .35% .00% 1.10%(11) Van Kampen UIT Bandwidth & Telecommunication .00% 3.57% .00% 3.57%(12) Van Kampen UIT Biotechnology & Pharmaceutical .00% 1.20% .00% 1.20%(12) Van Kampen UIT Internet .00% 4.96% .00% 4.96%(12) Van Kampen UIT Morgan Stanley High Tech 35 .00% 1.20% .00% 1.20%(12) Van Kampen UIT Morgan Stanley U.S. Multinational .00% 1.20% .00% 1.20%(12)
Division Annual Expenses After Reimbursement (AS A PERCENTAGE OF AVERAGE NET ASSETS)
MANAGEMENT FEES(13) OTHER EXPENSES(14) TOTAL ANNUAL EXPENSES(14) ------------------- ------------------ ------------------------ Select Ten Plus Division-March .50% .35% .85% Select Ten Plus Division-June .50% .35% .85% Select Ten Plus Division-September .50% .35% .85% Select Ten Plus Division-December .50% .35% .85%
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part I, Section 4. You may make a partial withdrawal of up to 15% 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 will charge a transfer fee of $20 for each transfer. This charge doesn't apply to transfers made for dollar cost averaging, customized asset rebalancing, or systematic transfers. See "Deductions and Charges - Transfer Charge" in Part I, Section 4. (3) Actual annual class operating expenses were lower because a portion of the brokerage commissions that the fund paid was used to reduce the fund's expenses. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances are used to reduce a portion of the fund's custodian expenses. These offsets may be discontinued at any time (4) Expenses are based upon actual annualized expenses for the fiscal year ending December 31, 2001. (5) The information in this table has been restated to reflect a voluntary agreement by J.P. Morgan Chase Bank of New York, an affiliate of JPMIM, to reimburse the portfolio to the extent certain expenses exceed 1.20% for the International Opportunities Portfolio and 1.00% for the Mid-Cap Value Portfolio. Without this agreement, Total Annual Expenses would have been 1.40% and 10.62%, respectively. (6) Touchstone Advisors has voluntarily agreed to reimburse each of the Legends Fund Portfolios for Other Expenses (excluding Management Fees) above an annual rate of .60% of average net assets. Without reimbursements, Total Annual Expenses for the Fund's fiscal year ended June 30, 2002 would have been 2.32% for the Baron Small Cap Portfolio and 1.63% for the Gabelli Large Cap Value Portfolio. Touchstone Advisors has reserved the right for withdraw or modify its policy of expense reimburse for the Portfolios. In the Legends Fund's prospectus, see "Management of the Fund." (7) Each series has an expense offset arrangement that reduces the series custodian fee based upon the amount of cash maintained by the series with its custodian and dividend disbursing agent. The series' may enter into other similar arrangements and directed brokerage arrangements which have the effect of reducing the series' expenses. MFS has also contractually agreed, subject to reimbursement, to bear the series' expenses such that the "Other Expenses" do not exceed 0.15% annually. These contractual fee arrangements will continues until at least May 1, 2003 unless changed with the consent of the board of trustees which oversees the series. Without 12 these arrangements the Total Annual Expenses for the portfolios would have been as follows: Capital Opportunity 1.21%, Investors Growth Stock 1.17%, Mid Cap Growth 1.20%, and New Discovery 1.34%. (8) Reflects actual annualized expenses as of December 31, 2001. (9) Deutsche Asset Management, Inc. (the advisor) has voluntarily agreed to waive its fee and/or reimburse expenses of the fund, to the extent necessary, to limit all expenses to the current expense cap listed until April 30, 2002. Absent of this expense cap reimbursement the Management Fees and Other Expenses for the Scudder Funds would be: .20% and .11% for the Equity Index Fund; 0.35% and .28% for the Small Cap Index Fund; and .43% and .36% for the EAFE Equity Index Fund. (10) Touchstone Advisors, Inc. has voluntarily agreed to waive it's fee and or expense reimbursement arrangement that limit the total expense the funds pays. Without fee waiver or expenses reimbursement limits the funds Total Annual Expenses would have been as follows: Balanced 1.43%; Bond 1.09%; Emerging Growth 1.36%; Enhanced 30 1.79%; Growth and Income 1.36%; Growth/Value 3.00%; High Yield 1.45%; International Equity 2.21%; Large Cap Growth 2.28%; Money Market 2.31%; Small Cap Value 2.16%; and Value Plus 2.24%. (11) The Management Fee for certain portfolios has been reduced to reflect the voluntary waiver of a portion or all of the Management Fee and the reimbursement by the portfolios adviser to the extent total annual operating expenses exceed the following percentages: Emerging Market Debt Portfolio 1.30%; and US Real Estate 1.10%. The advisor may terminate this voluntary waiver at any time at its sole discretion. Absent such reductions, the Management Fees, Other Expenses, 12b-1 fees and Total Annual Expenses, respectively, would be as follows: Emerging Markets Debt Portfolio 0.80%, 0.37%, 0.00% 1.17%; U.S. Real Estate Portfolio 0.80%, 0.35%, 0.00% and 1.15%. (12) These expenses are estimated based upon an initial accumulation unit value of $10. Van Kampen Funds, Inc. has agreed if actual organizational costs and annual expenses exceed $0.10 per unit in any year, Van Kampen Funds, Inc. will voluntary pay any excess at its own expense. Please see the Van Kampen Portfolio prospectus for more detail. (13) Touchstone Advisors will pay a portion of its Management Fees to National Asset for its services under a sub-advisory agreement at an annual rate of .10% of the Divisions' average daily net assets up to $100 million and .05% of the Divisions' average daily net assets in excess of $100 million. Touchstone Advisors has guaranteed it or an affiliate will pay National Asset an annual minimum sub-advisory fee of $50,000. (14) 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 for the fiscal year ended December 31, 2000 would have been .98% and 1.48%, respectively, for the March Division, 1.10% and 1.60%, respectively, for the June Division, .95% and 1.45%, respectively, for the September Division, and .55% and 1.05%, respectively, for the December Division. 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 2001. 13 EXAMPLES The examples below show the expenses on a $1,000 investment, assuming a $50,000 average contract value and a 5% annual rate of return on assets. These figures include the Enhanced Earnings Benefit charges for issue age 70-79. CUMULATIVE EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE APPLICABLE PERIOD:
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------- ------ ------- ------- -------- Fidelity VIP Contrafund: Initial Class $ 101.40 $ 125.97 $ 153.02 $ 242.40 Fidelity VIP Equity Income: Initial Class $ 100.38 $ 122.87 $ 147.82 $ 231.85 Fidelity VIP Growth: Service Class $ 102.43 $ 129.06 $ 158.19 $ 252.85 Fidelity VIP Growth and Income: Initial Class $ 100.38 $ 122.87 $ 147.82 $ 231.85 Fidelity VIP Growth Opportunity: Initial Class $ 101.50 $ 126.28 $ 153.53 $ 243.45 Fidelity VIP Mid Cap: Service Class $ 102.53 $ 129.37 $ 158.71 $ 253.89 Franklin Income Securities - Class 1 $ 99.86 $ 121.32 $ 145.21 $ 226.53 Franklin Growth and Income Securities - Class 1 $ 99.66 $ 120.70 $ 144.16 $ 224.39 Franklin Large Cap Growth Securities - Class 2 $ 104.99 $ 136.76 $ 171.04 $ 278.52 Mutual Shares Securities- Class 2 $ 105.09 $ 137.07 $ 171.55 $ 279.53 Templeton Foreign Securities - Class 2 $ 106.32 $ 140.75 $ 177.66 $ 291.61 Templeton Growth Securities - Class 2 $ 105.71 $ 138.91 $ 174.61 $ 285.59 Janus Aspen Series Aggressive Growth: Service Shares $ 103.86 $ 133.38 $ 165.40 $ 267.30 Janus Aspen Series Growth: Service Shares $ 103.76 $ 133.07 $ 164.89 $ 266.28 Janus Aspen Series Worldwide Growth: Service Shares $ 104.07 $ 134.00 $ 166.43 $ 269.35 J.P. Morgan Series Trust II Bond $ 102.12 $ 128.14 $ 156.64 $ 249.73 J.P. Morgan Series Trust II International Opportunities $ 106.73 $ 141.98 $ 179.70 $ 295.60 Baron Small Cap $ 111.34 $ 155.68 $ 202.30 $ 339.41 Gabelli Large Cap Value $ 109.80 $ 151.13 $ 194.82 $ 325.03 Harris Bretall Equity Growth $ 106.42 $ 141.06 $ 178.17 $ 292.61 Third Avenue Value $ 105.20 $ 138.30 $ 173.59 $ 283.57 MFS Capital Opportunities: Service Class $ 106.22 $ 140.44 $ 177.16 $ 290.60 MFS Emerging Growth: Service Class $ 105.91 $ 139.52 $ 175.63 $ 287.60 MFS Investors Trust: Service Class $ 106.22 $ 140.44 $ 177.16 $ 290.60 MFS Mid Cap Growth: Service Class $ 106.22 $ 140.44 $ 177.16 $ 290.60 MFS New Discovery: Service Class $ 107.75 $ 145.03 $ 184.76 $ 305.51 Putnam VT The George Putnam Fund of Boston: Class IB $ 105.81 $ 139.22 $ 175.12 $ 286.59 Putnam VT Growth and Income Fund: Class IB $ 102.22 $ 128.45 $ 157.16 $ 250.77 Putnam VT International Growth Fund: Class IB $ 106.63 $ 141.67 $ 179.19 $ 294.60 Putnam VT New Opportunities Fund: Class IB $ 103.04 $ 130.92 $ 161.29 $ 259.07 Putnam VT Small Cap Value Fund: Class IB $ 106.63 $ 141.67 $ 179.19 $ 294.60 Putnam VT Voyager Fund: Class IB $ 102.84 $ 130.30 $ 160.26 $ 257.00 Putnam VT Voyager II Fund: Class IB $ 113.29 $ 161.43 $ 211.72 $ 357.31 Scudder EAFE Equity Index: Class A $ 101.09 $ 125.04 $ 151.46 $ 239.25 Scudder Equity 500 Index: Class A $ 97.51 $ 114.17 $ 133.14 $ 201.72 Scudder Small Cap Index: Class A $ 99.04 $ 118.84 $ 141.02 $ 217.96 Touchstone Balanced $ 103.66 $ 132.76 $ 164.36 $ 265.25 Touchstone Bond $ 102.12 $ 128.14 $ 156.64 $ 249.73 Touchstone Emerging Growth $ 106.22 $ 140.44 $ 177.16 $ 290.60 Touchstone Enhanced 30 $ 102.12 $ 128.14 $ 156.64 $ 249.73 Touchstone Growth and Income $ 103.14 $ 131.22 $ 161.80 $ 260.10 Touchstone Growth/Value $ 105.71 $ 138.91 $ 174.61 $ 285.59 Touchstone High Yield $ 102.63 $ 129.68 $ 159.23 $ 254.93 Touchstone International Equity $ 107.24 $ 143.50 $ 182.23 $ 300.57 Touchstone Large Cap Growth $ 104.17 $ 134.30 $ 166.94 $ 270.37 Touchstone Money Market $ 100.58 $ 123.49 $ 148.86 $ 233.97 Touchstone Small Cap Value $ 104.68 $ 135.84 $ 169.50 $ 275.47 Touchstone Value Plus $ 104.17 $ 134.30 $ 166.94 $ 270.37 Van Kampen LIT Comstock $ 105.30 $ 137.68 $ 172.57 $ 281.55 14 Van Kampen LIT Emerging Growth $ 104.78 $ 136.15 $ 170.02 $ 276.49 Van Kampen UIF Emerging Markets Debt $ 106.42 $ 141.06 $ 178.17 $ 292.61 Van Kampen UIF Emerging Markets Equity $ 108.78 $ 148.08 $ 189.80 $ 315.32 Van Kampen UIF U.S. Real Estate $ 105.71 $ 138.91 $ 174.61 $ 285.59 Van Kampen UIT Bandwidth & Telecommunication $ 106.73 $ 141.98 $ 179.70 $ 295.60 Van Kampen UIT Biotechnology & Pharmaceutical $ 106.73 $ 141.98 $ 179.70 $ 295.60 Van Kampen UIT Internet $ 106.73 $ 141.98 $ 179.70 $ 295.60 Van Kampen UIT Morgan Stanley High Tech 35 $ 106.73 $ 141.98 $ 179.70 $ 295.60 Van Kampen UIT Morgan Stanley Multinational $ 106.73 $ 141.98 $ 179.70 $ 295.60
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):
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------- ------ ------- ------- -------- Fidelity VIP Contrafund: Initial Class $ 21.40 $ 65.97 $ 113.02 $ 242.40 Fidelity VIP Equity Income: Initial Class $ 20.38 $ 62.87 $ 107.82 $ 231.85 Fidelity VIP Growth: Service Class $ 22.43 $ 69.06 $ 118.19 $ 252.85 Fidelity VIP Growth and Income: Initial Class $ 20.38 $ 62.87 $ 107.82 $ 231.85 Fidelity VIP Growth Opportunity: Initial Class $ 21.50 $ 66.28 $ 113.53 $ 243.45 Fidelity VIP Mid Cap: Service Class $ 22.53 $ 69.37 $ 118.71 $ 253.89 Franklin Income Securities - Class 1 $ 19.86 $ 61.32 $ 105.21 $ 226.53 Franklin Growth and Income Securities - Class 1 $ 19.66 $ 60.70 $ 104.16 $ 224.39 Franklin Large Cap Growth Securities - Class 2 $ 24.99 $ 76.76 $ 131.04 $ 278.52 Mutual Shares Securities- Class 2 $ 25.09 $ 77.07 $ 131.55 $ 279.53 Templeton Foreign Securities - Class 2 $ 26.32 $ 80.75 $ 137.66 $ 291.61 Templeton Growth Securities - Class 2 $ 25.71 $ 78.91 $ 134.61 $ 285.59 Janus Aspen Series Aggressive Growth: Service Shares $ 23.86 $ 73.38 $ 125.40 $ 267.30 Janus Aspen Series Growth: Service Shares $ 23.76 $ 73.07 $ 124.89 $ 266.28 Janus Aspen Series Worldwide Growth: Service Shares $ 24.07 $ 74.00 $ 126.43 $ 269.35 J.P. Morgan Series Trust II Bond $ 22.12 $ 68.14 $ 116.64 $ 249.73 J.P. Morgan Series Trust II International Opportunities $ 26.73 $ 81.98 $ 139.70 $ 295.60 Baron Small Cap $ 31.34 $ 95.68 $ 162.30 $ 339.41 Gabelli Large Cap Value $ 29.80 $ 91.13 $ 154.82 $ 325.03 Harris Bretall Equity Growth $ 26.42 $ 81.06 $ 138.17 $ 292.61 Third Avenue Value $ 25.50 $ 78.30 $ 133.59 $ 283.57 MFS Capital Opportunities: Service Class $ 26.22 $ 80.44 $ 137.16 $ 290.60 MFS Emerging Growth: Service Class $ 25.91 $ 79.52 $ 135.63 $ 287.60 MFS Investors Trust: Service Class $ 26.22 $ 80.44 $ 137.16 $ 290.60 MFS Mid Cap Growth: Service Class $ 26.22 $ 80.44 $ 137.16 $ 290.60 MFS New Discovery: Service Class $ 27.75 $ 85.03 $ 144.76 $ 305.51 Putnam VT The George Putnam Fund of Boston: Class IB $ 25.81 $ 79.22 $ 135.12 $ 286.59 Putnam VT Growth and Income Fund: Class IB $ 22.22 $ 68.45 $ 117.16 $ 250.77 Putnam VT International Growth Fund: Class IB $ 26.63 $ 81.67 $ 139.19 $ 294.60 Putnam VT New Opportunities Fund: Class IB $ 23.04 $ 70.92 $ 121.92 $ 259.07 Putnam VT Small Cap Value Fund: Class IB $ 26.63 $ 81.67 $ 139.19 $ 294.60 Putnam VT Voyager Fund: Class IB $ 22.84 $ 70.30 $ 120.26 $ 257.00 Putnam VT Voyager II Fund: lass IB $ 33.29 $ 101.43 $ 171.72 $ 357.31 Scudder EAFE Equity Index: Class A $ 21.09 $ 65.04 $ 111.46 $ 239.25 Scudder Equity 500 Index: Class A $ 17.51 $ 54.17 $ 93.14 $ 201.72 Scudder Small Cap Index: Class A $ 19.04 $ 58.84 $ 101.02 $ 217.96 Touchstone Balanced $ 23.66 $ 72.76 $ 124.38 $ 265.25 Touchstone Bond $ 22.12 $ 68.14 $ 116.64 $ 249.73 Touchstone Emerging Growth $ 26.22 $ 80.44 $ 137.16 $ 290.60 Touchstone Enhanced 30 $ 22.12 $ 68.14 $ 116.64 $ 249.73 Touchstone Growth and Income $ 23.14 $ 71.22 $ 121.80 $ 260.10 Touchstone Growth/Value $ 25.71 $ 78.91 $ 134.61 $ 285.59 15 Touchstone High Yield $ 22.63 $ 69.68 $ 119.23 $ 254.93 Touchstone International Equity $ 27.24 $ 83.50 $ 142.23 $ 300.57 Touchstone Large Cap Growth $ 24.17 $ 74.30 $ 126.94 $ 270.37 Touchstone Money Market $ 20.58 $ 63.49 $ 108.86 $ 233.97 Touchstone Small Cap Value $ 24.68 $ 75.84 $ 129.50 $ 275.47 Touchstone Value Plus $ 24.17 $ 74.30 $ 126.94 $ 270.37 Van Kampen LIT Comstock $ 25.30 $ 77.68 $ 132.57 $ 281.55 Van Kampen LIT Emerging Growth $ 24.78 $ 76.15 $ 130.02 $ 276.49 Van Kampen UIF Emerging Markets Debt $ 26.42 $ 81.06 $ 138.17 $ 292.61 Van Kampen UIF Emerging Markets Equity $ 28.78 $ 88.08 $ 149.80 $ 315.32 Van Kampen UIF U.S. Real Estate $ 25.71 $ 78.91 $ 134.61 $ 285.59 Van Kampen UIT Bandwidth & Telecommunication $ 26.73 $ 81.98 $ 139.70 $ 295.60 Van Kampen UIT Biotechnology & Pharmaceutical $ 26.73 $ 81.98 $ 139.70 $ 295.60 Van Kampen UIT Internet $ 26.73 $ 81.98 $ 139.70 $ 295.60 Van Kampen UIT Morgan Stanley High Tech 35 $ 26.73 $ 81.98 $ 139.70 $ 295.60 Van Kampen UIT Morgan Stanley Multinational $ 26.73 $ 81.98 $ 139.70 $ 295.60
These examples assume the current charges that are borne by the Separate Accounts, and the total annual expenses of the Portfolios and the Divisions as they were for their most recent fiscal years or estimated expenses (after reimbursement), if applicable. The examples also assume that any applicable fee waivers or reimbursements will continue for the periods shown. 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 assumes an estimated $50,000 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. Premium taxes at the time of payout also may be applicable. CONDENSED FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNTS IS PROVIDED IN APPENDIX A. 16 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: - add Options to, or remove Options from, our Separate Account, combine two or more Options within our Separate Accounts, or withdraw assets relating to your contract from one Option and put them into another; - register or end the registration of the Separate Accounts under the 1940 Act; - operate our Separate Accounts under the direction of a committee or discharge a committee at any time 17 (the committee may be composed of a majority of persons who are "interested persons" of Integrity under the 1940 Act); - restrict or eliminate any voting rights of owners or others who have voting rights that affect our Separate Accounts; - cause one or more Options to invest in a mutual fund other than or in addition to the Portfolios; - operate our Separate Accounts or one or more of the Options in any other form the law allows, including a form that allows us to make direct investments. We may make any legal investments we wish. In choosing these investments, we'll rely on our own or outside counsel for advice. SECTION 3 - YOUR INVESTMENT OPTIONS Management fees and other expenses deducted from each Portfolio are described in that Portfolio's prospectus. 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. FIDELITY THE PORTFOLIOS' INVESTMENT ADVISER. Fidelity Management & Research Company (FMR) is a registered investment adviser under the Investment Advisers Act of 1940. It serves as the investment adviser to each Portfolio. Deutsche Asset Management, Inc. is the VIP Index 500 Portfolio's sub-adviser. 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. FIDELITY VIP CONTRAFUND(R) PORTFOLIO VIP Contrafund(R) 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 earning 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 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 that 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. FIDELITY 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. 18 FIDELITY VIP GROWTH & INCOME PORTFOLIO VIP 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. FIDELITY VIP GROWTH OPPORTUNITIES PORTFOLIO VIP 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. FIDELITY VIP MONEY MARKET PORTFOLIO VIP Money Market Portfolio seeks to earn a high level of current income while preserving capital and providing liquidity. It invests only in high-quality, U.S. dollar denominated money market securities of domestic and foreign issuers, such as certificates of deposit, obligations of governments and their agencies, and commercial paper and notes. FIDELITY VIP MID-CAP PORTFOLIO FMR normally invests the VIP 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. THE FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST ("TRUST") Each Fund is a series of the Trust, which is a mutual fund registered with the SEC. Affiliates of Franklin Resources, Inc., which operates as Franklin Templeton Investments, serve as the investment advisors for the funds in which the portfolios invest. FRANKLIN INCOME SECURITIES PORTFOLIO The Franklin Income Securities Portfolio seeks to maximize income while maintaining prospects for capital appreciation. Under normal market conditions, the portfolio will invest in both debt and equity securities. The portfolio seeks income by investing in corporate, foreign, and U.S. Treasury bonds. In its search for income producing growth opportunities the portfolio invests in common stocks with attractive dividend yields of companies from a variety of industries such as electric utilities, oil, gas, real estate and consumer goods. From time to time the Portfolio may invest a significant portion of its assets in certain sectors such as utilities. FRANKLIN GROWTH AND INCOME SECURITIES PORTFOLIO The Franklin Growth and Income Securities Portfolio seeks capital appreciation with a secondary goal to provide current income. Under normal market conditions, the portfolio will invest at least 65% of its total assets in a broadly diversified portfolio of equity securities that the portfolio's manager considers to be financially strong, but undervalued by the market. The portfolio may invest in real estate investment trusts but does not intend to invest more than 15% of its assets in these trusts. 19 FRANKLIN LARGE CAP GROWTH SECURITIES PORTFOLIO The Franklin Large Cap Growth Securities Portfolio seeks capital appreciation. Under normal market conditions, the portfolio will invest at least 80% of its net assets in investments of large capitalization companies. For this portfolio, large-cap companies are those with market capitalization values (share price multiplied by the number of common stock shares outstanding) within those of the top 50% of companies in the Russell 1000 Index, at the time of purchase. The portfolio may also invest up to 25% of its total assets in foreign securities, but currently intends to limit these investments to between 10-15%. In addition to its main investments, the portfolio may invest up to 20% of its net assets in small to medium capitalization companies. Although the portfolio seeks investments across a number of sectors, it expects to have substantial positions in the technology sector and in communications. MUTUAL SHARES SECURITIES PORTFOLIO The Mutual Shares Securities Portfolio seeks capital appreciation with a secondary goal of income. Under normal market conditions the portfolio will invest at least 65% of its total assets in equity securities of companies that the manager believes are available at market prices less than their value based on certain recognized objective criteria. The portfolio currently intends to invest up to approximately 25% of its total assets in foreign investments. TEMPLETON FOREIGN SECURITIES PORTFOLIO The Templeton Foreign Securities Portfolio seeks long-term capital growth. Under normal market conditions, the portfolio will invest at least 80% of its net assets in investments of issuers located outside the U.S. including those in emerging markets. TEMPLETON GROWTH SECURITIES PORTFOLIO The Templeton Growth Securities Portfolio seeks long-term capital growth. Under normal market conditions, the portfolio will invest at least 65% of its total assets in the equity securities of companies located anywhere in the world, including those in the U.S. and emerging markets. The portfolio may also invest up to 25% of its net assets in debt securities of companies and governments located anywhere in the world. 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 capitalization's 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 capitalization's within the Index will vary, but as of December 31, 2001, they ranged from approximately $225 million to $10.5 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. 20 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. 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 companies. 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 Advisers, Inc. is the investment advisor of 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. BARON SMALL CAP PORTFOLIO The Baron Small Cap Portfolio seeks long-term capital appreciation. It is a diversified portfolio that pursues its objective by investing primarily in common stocks of smaller companies with market values under $2 billion selected for their capital appreciation potential. In making investment decisions for the Portfolio, the sub-adviser seeks securities that it believes have (1) favorable price to value characteristics based on the sub-adviser's assessment of their prospects for future growth and profitability, and (2) the potential to increase in value at least 50% over two subsequent years. The sub-adviser to the Portfolio is BAMCO, Inc. GABELLI LARGE CAP VALUE PORTFOLIO The Gabelli Large Cap Value Portfolio seeks long term capital appreciation. It is a diversified Portfolio that seeks to achieve its objective by investing primarily in common stocks of large, well known, widely-held, high-quality 21 companies that have a market capitalization greater than $5 billion. Companies of this general type are often referred to as "Blue Chip" companies. The sub-adviser is Gabelli Asset Management Company. HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO Harris Bretall Sullivan & Smith Equity Growth Portfolio seeks long-term capital appreciation. It is a diversified portfolio that pursues its objective by investing 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. Harris Bretall Sullivan & Smith, LLC is the sub-adviser to the Portfolio. THIRD AVENUE VALUE PORTFOLIO The Third Avenue Value Portfolio seeks long-term capital appreciation. It is a non-diversified portfolio that seeks to achieve its objective mainly by acquiring common stocks of well-financed companies (companies without significant debt in comparison to their cash resources) at a substantial discount to what the sub-adviser believes is their true value. The Portfolio also seeks to acquire senior securities, such as preferred stock and debt instruments, that the sub-adviser believes are undervalued. The sub-adviser is Third Avenue Management LLC. 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 net 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 net 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 INVESTORS GROWTH STOCK PORTFOLIO MFS Investors Growth Stock Portfolio seeks to provide long-term growth of capital and future income rather than current income by investing, under normal market conditions, at least 80% of its net assets in common stocks and related securities, such as preferred stocks, convertible securities and depositary receipts for those securities, of companies which MFS believes offer better than average prospects for long-term growth. MFS looks particularly for companies which demonstrate: (1) a strong franchise, strong cash flows and a recurring revenue stream; (2) a strong industry position where there is potential for high profit margins or substantial barriers to new entry in the industry; (3) a strong management with a clearly defined strategy; and (4) new products or services. 22 MFS INVESTORS TRUST PORTFOLIO MFS Investors Trust Portfolio (formerly known as MFS Growth with Income) seeks mainly to provide long-term growth of capital, with a secondary objective of current income, by normally investing at least 65% of its net 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 80% of its net 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 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 net 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. MFS RESEARCH PORTFOLIO The MFS Research Portfolio seeks to provide long-term growth of capital and future income. The portfolio invests, under normal market conditions, at least 80% of its total assets in common stocks and related securities, such as preferred stocks, convertible securities and depository receipts. The portfolio focuses on companies that MFS believes have favorable prospects for long-term growth, attractive valuations based on current and expected earnings or cash flow, dominant or growing market share, and superior management. The portfolio may invest in companies of any size. The investments may include securities traded on securities exchanges or in the over-the-counter markets. The portfolio may invest in foreign securities (including emerging market securities), through which it may have exposure to foreign currencies. MFS TOTAL RETURN PORTFOLIO MFS Total Return Portfolio seeks mainly to provide above-average income (compared to a portfolio invested entirely in equity securities) consistent with the prudent employment of capital, and secondarily to provide a reasonable opportunity for growth of capital and income. The Portfolio invests in a combination of equity and fixed income securities. Under normal market conditions, the Portfolio invests (1) at least 40%, but not more than 75%, of its net assets in common stocks and related securities such as preferred stock, bonds, warrants or rights convertible into stock, and depositary receipts for those securities; and (2) at least 25% of its net assets in non-convertible fixed income securities. The Portfolio may vary the percentage of its assets invested in any one type of security, within the limits described above, in accordance with MFS's interpretation of economic and money market conditions, fiscal and monetary policy and underlying security values. 23 PUTNAM FUNDS Each fund is a mutual fund registered with the SEC. Putnam Investment Management, LLC ("Putnam Management") serves as the investment adviser of each portfolio. INVESTMENT OBJECTIVES OF THE FUNDS. Below is a summary of the investment objectives of Putnam's VT Funds. YOU SHOULD READ PUTNAM'S VT FUNDS' PROSPECTUS CAREFULLY BEFORE INVESTING. PUTNAM VT THE GEORGE PUTNAM FUND OF BOSTON The fund seeks to provide a balanced investment composed of a well diversified portfolio of stocks and bonds which produce both capital growth and current income. The fund invests mainly in a combination of bonds and U.S. value stocks, with a greater focus on value stocks. Value stocks are those that Putnam Management believes are currently undervalued by the market. The fund buys bonds of governments and private companies that are mostly investment-grade in quality with intermediate to long-term maturities. Under normal market conditions, the fund invests at least 25% of the fund's total assets in fixed-income securities, including debt securities, preferred stocks and that portion of the value of convertible securities attributable to the fixed-income characteristics of those securities. PUTNAM VT GROWTH AND INCOME FUND The fund seeks capital growth and current income. The fund seeks its goal by investing mainly in common stocks of U.S. companies, with a focus on value stocks that offer potential for capital growth, current income, or both. Value stocks are those stocks Putnam Management believes are currently undervalued by the market. Putnam Management looks for companies undergoing positive change. It invests mainly in large companies. PUTNAM VT INTERNATIONAL GROWTH FUND The fund seeks capital appreciation. The fund seeks its goal by investing mainly in common stocks of companies outside the United States. For example, the fund may purchase stocks of companies with stock prices that reflect a value lower than that which we place on the company. The fund may also consider other factors it believe will cause the stock price to rise. The fund invests mainly in midsize and large companies, although it can invest in companies of any size. Although the fund emphasizes investments in developed countries, it may also invest in companies located in developing (also know as emerging) markets. PUTNAM VT NEW OPPORTUNITIES FUND The fund seeks long-term capital appreciation by investing mainly in common stocks of U.S. companies, with a focus on growth stocks in sectors of the economy that Putnam Management believes have high growth potential. Growth stocks are issued by companies that Putnam Management believes are fast-growing and whose earnings it believes are likely to increase over time. PUTNAM VT SMALL CAP VALUE FUND The fund seeks capital appreciation. The fund seeks its goal by investing in at least 80% of its assets in small companies of a size similar to those in the Russell 2000 Index, an index that measures the performance of small companies. Value stocks are those that Putnam Management believes are currently undervalued by the market. Putnam Management looks for companies undergoing positive change. PUTNAM VT VOYAGER FUND The fund seeks capital appreciation by investing mainly in common stocks of U.S. companies, with a focus on growth stocks. Growth stocks are issued by companies that Putnam Management believes are fast-growing and whose earnings it believes are likely to increase over time. 24 PUTNAM VT VOYAGER FUND II The fund seeks long-term growth of capital. The fund seeks its goal by investing mainly in common stocks of U.S. companies, with a focus on growth stocks. Growth stocks are issued by companies that Putnam Management believes are fast-growing and whose earnings it believes are likely to increase. The fund invests in companies of all sizes. SCUDDER VIT FUNDS The investment adviser for the Scudder VIT Funds is Deutsche Asset Management, Inc. (DeAM). DeAM is a broad-based global investment firm that provides asset management capabilities to a variety of institutional clients worldwide. DeAM presence in all of the major investment markets gives its clients a global network and product range. DeAM manages U.S., international, emerging markets, and fixed income investments and is a leader in index strategies. INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Following is a summary of the investment objectives of the Scudder Asset Management VIT Funds. We can't guarantee that these objectives will be met. YOU SHOULD READ THE SCUDDER ASSET MANAGEMENT VIT FUNDS PROSPECTUSES CAREFULLY BEFORE INVESTING. SCUDDER VIT EAFE(R) EQUITY INDEX FUND The EAFE(R) Equity Index Fund seeks to match, as closely as possible (before expenses are deducted), the performance of the EAFE(R) Index, which measures international stock market performance. The Fund attempts to invest in stocks and other securities that are representative of the EAFE(R) Index as a whole. SCUDDER VIT EQUITY 500 INDEX FUND The Equity 500 Index Fund seeks to match, as closely as possible (before expenses are deducted), the performance of the S&P 500 Index, which emphasizes stocks of large U.S. companies. The Fund attempts to invest in stocks and other securities that are representative of the S&P 500 Index as a whole. SCUDDER VIT SMALL CAP INDEX FUND The Small Cap Index Fund seeks to match, as closely as possible (before expenses are deducted), the performance of the Russell 2000 Index, which emphasizes stocks of small U.S. companies. The Fund attempts to invest in stocks and other securities that are representative of the Russell 2000 Index as a whole. TOUCHSTONE VARIABLE SERIES TRUST Each portfolio of the Touchstone Variable Series Trust is an open-end, diversified management investment company. Touchstone Advisors, Inc. is the investment adviser of each fund. Bank of Ireland Asset Management (U.S.) Ltd. is the sub-adviser for the International Equity Fund. Westfield Capital Management, Inc./TCW Investment Management Company is the sub-adviser for the Emerging Growth Fund. Todd Investment Advisors is the sub-adviser for the Enhanced 30 Fund. Ark Asset Management Co., Inc is the sub-adviser for the Small Cap Value Fund. Mastrapasqua & Associates is the sub-adviser for the Growth/Value Fund. Ft. Washington Investment Advisors, Inc. is the sub-adviser for the Large Cap Growth, Value Plus, High Yield, Bond and Money Market Funds. Deutsche Investment Management (Americas) Inc. is the sub-adviser for the Growth & Income Fund. OpCap Advisors is the sub-advisor for the Balanced Fund. TOUCHSTONE BALANCED FUND Touchstone Balanced Fund seeks to achieve both an increase in share price and current income by investing in both equity securities (generally about 60% of total assets) and debt securities (generally about 40%, but at least 25%). The fund may also invest up to one-third of its assets in securities of foreign companies, and up to 15% in securities of companies in emerging market countries. In choosing equity securities for the fund, the portfolio manager will seek out companies that are in a strong position within their industry, are owned in part by management and are 25 selling at a price lower than the company's intrinsic value. Debt securities are also chosen using a value style, and will be rated investment grade or at the two highest levels of non-investment grade. The portfolio manager will focus on higher yielding securities, but will also consider expected movements in interest rates and industry position. TOUCHSTONE BOND FUND Touchstone Bond Fund seeks to provide a high level of current income as is consistent with the preservation of capital by investing primarily in high-quality investment grade debt securities (at least 65% of total assets). The fund invests in mortgage-related securities (up to 60%), asset-backed securities and preferred stocks. The fund also invests in non-investment grade U.S. or foreign debt securities and preferred stock that are rated as low as B (up to 35%). TOUCHSTONE EMERGING GROWTH FUND Touchstone Emerging Growth Fund seeks to increase value of fund shares as a primary goal and to earn income as a secondary goal. The fund invests primarily in small cap companies, but may invest in mid cap companies and larger company stocks. It primarily invests in equity securities, including common and preferred stocks and convertible securities. TOUCHSTONE ENHANCED 30 FUND Touchstone Enhanced 30 Fund seeks to achieve a total return which is higher than the total return of the Dow Jones Industrial Average ("DJIA"). The fund's portfolio is based on the 30 stocks that compromise the DJIA. The DJIA is a measurement of general market price movement for 30 widely held stocks. The portfolio manager seeks to surpass the total return of the DJIA by substituting stocks that offer above average growth potential for those stocks in the DJIA that appear to have less growth potential. The fund's portfolio will at all times consist of 30 stocks and up to one-third of these holdings may represent substituted stocks in the enhanced portion of the portfolio. TOUCHSTONE GROWTH & INCOME FUND Touchstone Growth & Income Fund seeks to increase the value of fund shares over the long-term, while receiving dividend income, by investing at least 50% of total assets in dividend paying common stock, preferred stocks and convertible securities in a variety of industries. The portfolio manager may purchase securities that do not pay dividends (up to 50%) but which are expected to increase in value or produce high income payments in the future. TOUCHSTONE GROWTH/VALUE FUND Touchstone Growth/Value Fund seeks long-term capital appreciation primarily through equity investments in companies whose valuation may not reflect the prospects for accelerated earnings and/or cash flow growth. The fund invests primarily in stocks of domestic large-cap growth companies that the portfolio manager believes have a demonstrated record of achievement with excellent prospects for earnings and/or cash flow growth over a 3 to 5 year period. In choosing securities, the portfolio manager looks for companies that it believes to be priced lower than their true value. These may include companies in the technology sector. TOUCHSTONE HIGH YIELD FUND Touchstone High Yield Fund seeks to achieve a high level of current income as its main goal, with capital appreciation as a secondary consideration. The fund invests primarily (at least 80% of total assets) in non-investment grade debt securities of domestic corporations. Non-investment grade securities are often referred to as "junk bonds" and are considered speculative. TOUCHSTONE INTERNATIONAL EQUITY FUND Touchstone International Equity Fund seeks long term growth of capital by investing at least 80% of total assets in equity securities of foreign issuers. The fund will invest in at least three countries outside of the United States and 26 focuses on companies located in Europe, Australia and the Far East. The fund may invest up to 40% of its assets in securities issued by companies active in emerging market countries. TOUCHSTONE LARGE CAP GROWTH FUND Touchstone Large Cap Growth Fund seeks long-term growth of capital by investing primarily in growth-oriented stocks. The fund invests primarily (at least 80% of total assets) in a diversified portfolio of common stocks that are believed to have growth attributes superior to the general market. In selecting investments, the portfolio manager focuses on those companies that have attractive opportunities for growth of principal, yet sell at reasonable valuations compared to their expected growth rate of revenues, cash flows and earnings. These may include companies in the technology sector. TOUCHSTONE MONEY MARKET FUND Touchstone Money Market Fund seeks high current income, consistent with liquidity and stability of principal by investing primarily (at least 65% of total assets) in high-quality money market instruments. The fund is a money market fund and tries to maintain a constant share price of $1.00 per share, although there is no guarantee that it will do so. TOUCHSTONE SMALL CAP VALUE FUND Touchstone Small Cap Value Fund seeks long-term growth of capital by investing primarily (at least 75% of total assets) in common stocks of small to medium capitalization companies that the portfolio manager believes are undervalued. The portfolio manager looks for stocks that it believes are priced lower than they should be, and also contain a catalyst for growth. These stocks may not pay dividends. TOUCHSTONE VALUE PLUS FUND Touchstone Value Plus Fund seeks to increase value of the fund shares over the long-term by investing primarily (at least 65% of total assets) in common stock of larger companies that the portfolio manager believes are undervalued. In choosing undervalued stocks, the portfolio manager looks for companies that have proven management and unique features or advantages, but are believed to be priced lower than their true value. These companies may not pay dividends. The fund may also invest in common stocks of rapidly growing companies to enhance the fund's return and vary its investments to avoid having too much of the fund's assets subject to risks specific to undervalued stocks. Approximately 70% of total assets will generally be invested in large cap companies and approximately 30% will generally be invested in mid cap companies. VAN KAMPEN PORTFOLIOS INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment objectives of the Van Kampen Portfolios. There is no guarantee that these objectives will be met. YOU SHOULD READ THE VAN KAMPEN PROSPECTUS CAREFULLY BEFORE INVESTING. VAN KAMPEN LIT PORTFOLIOS VAN KAMPEN LIT PORTFOLIOS Van Kampen Investments is the investment adviser for each of the LIT Portfolios. VAN KAMPEN LIT COMSTOCK PORTFOLIO The Portfolios investment objective and strategy is to seek capital growth and income through investment in equity securities, including common stocks, preferred stocks and securities convertible into common and preferred stocks. The Portfolio may invest up to 25% of its total assets in securities of foreign issuers. 27 VAN KAMPEN LIT EMERGING GROWTH PORTFOLIO The Portfolios investment objective and strategy is to seek capital appreciation. Under normal market conditions, the Portfolio's investment adviser seeks to achieve the Portfolio/s investment objective by investing at least 65% of the Portfolios total assets in common stocks of companies the investment adviser believes to be emerging growth companies. VAN KAMPEN UIF PORTFOLIOS Morgan Stanley Dean Witter Investment Management, Inc. is the investment adviser for each of UIF Portfolios. VAN KAMPEN UIF EMERGING MARKETS DEBT PORTFOLIO Van Kampen 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. Using macroeconomic and fundamental analysis, the adviser seeks to identify developing countries that are believed to be undervalued and have attractive or improving fundamentals. After the country allocation is determined, the sector and security selection is made within each country. VAN KAMPEN UIF EMERGING MARKETS EQUITY PORTFOLIO The Portfolios investment objective and strategy is to seek long-term capital appreciation by investing primarily in growth-oriented equity securities of issuers in emerging market countries. Under normal circumstances, at least 80% of the assets of the Portfolio will be invested in equity securities of issuers located in emerging market countries. VAN KAMPEN UIF U.S. REAL ESTATE PORTFOLIO Van Kampen 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 companies in the U.S. real estate industry, including real estate investment trusts ("REITs") and real estate operating companies. VAN KAMPEN UIT PORTFOLIOS Each portfolio of Van Kampen UIT Portfolios is a unit investment trust registered with the SEC. Van Kampen Funds, Inc. is the sponsor and depositor for each portfolio. VAN KAMPEN BANDWIDTH & TELECOMMUNICATIONS PORTFOLIO Van Kampen Bandwidth and Telecommunications Portfolio seeks capital appreciation by investing in common stocks of companies diversified within the communications industry. VAN KAMPEN BIOTECHNOLOGY AND PHARMACEUTICAL PORTFOLIO Van Kampen Biotechnology and Pharmaceutical Portfolio seeks capital appreciation by investing in common stocks of companies diversified within the biotechnology and pharmaceuticals industry. Van Kampen designed the portfolio to benefit from companies that are positioned for growth in these industries. VAN KAMPEN INTERNET PORTFOLIO Van Kampen Internet Portfolio seeks capital appreciation by investing in common stocks of companies primarily involved in the enabling technology or communications services area of the Internet. 28 VAN KAMPEN HIGH-TECHNOLOGY 35 INDEX PORTFOLIO Van Kampen Morgan Stanley High-Technology 35 Index seeks to provide capital appreciation through investment in a portfolio of the common stocks included in the Morgan Stanley High-Technology 35 Index. In creating the index, the Morgan Stanley Technology Research Group sought to design a benchmark that provides broad industry representation of equally-weighted, highly liquid, pure technology companies that is rebalanced annually. The index currently includes 35 pure technology companies representing the full breadth of technology industry segments. VAN KAMPEN MORGAN STANLEY U.S. MULTINATIONAL 50 INDEX PORTFOLIO Van Kampen Morgan Stanley U.S. Multinational 50 Index Portfolio seeks capital appreciation through an investment in a portfolio of the stocks included in the Morgan Stanley U.S. Multinational Index. The index consists of 50 of the largest U.S. based companies often referred to as the "New Nifty Fifty". The Morgan Stanley Research Group designed the index to measure the performance of companies that derive a significant portion of their activity from foreign operations. TERMINATION OF VAN KAMPEN UIT PORTFOLIOS Because the Van Kampen Life Portfolio is a unit investment trust, it is only available for a fixed period of time. All of the Portfolios will be liquidated on May 1, 2003. We currently anticipate that the same investment strategy will be reapplied to any successor unit investment trust offered to succeed any of the Van Kampen Life Portfolios. However, there is no guarantee that Van Kampen will create a successor trust. You will be required to give us instructions by April 30, 2003 about how to invest any account value in these Portfolios when they terminate. You will receive a notice requesting instructions prior to that time. Your choices at that time will include: 1. Giving us instructions to rollover your account value in the Van Kampen Life Portfolios to the successor portfolio, if available, or; 2. Giving us instructions to transfer any account value in the Van Kampen Life Portfolios to any other investment options available under contract. This transfer will be made on the date you give us your transfer instructions, unless you direct us to make the transfer on date of liquidation. IF YOU DO NOT PICK EITHER OF THESE CHOICES AT THAT TIME, YOU WILL BE DEEMED TO HAVE INSTRUCTED US TO TRANSFER ANY OF YOU ACCOUNT VALUE IN THE VAN KAMPEN LIFE PORTFOLIOS TO THE FIDELITY VIP MONEY MARKET FUND ON THE DATE OF LIQUIDATION. 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 29 (GUARANTEED INTEREST RATE) for the duration you select. The duration of your GRO Account is the GUARANTEE PERIOD. Each contribution or transfer to a GRO establishes a new GRO Account for the duration you choose at the then-current Guaranteed Interest Rate we declare. We won't declare an interest rate less than 3%. Each GRO Account expires at the end of the duration you have selected. See "Renewals of GRO Accounts" below. All contributions you make to a GRO Account are placed in a non-unitized separate account. Values and benefits under your GRO contract are guaranteed by the reserves in our GRO separate account as well as by our General Account. The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO Value at the expiration of the GRO Account, assuming you haven't transferred or withdrawn any amounts, will be the amount you put in plus interest at the Guaranteed Interest Rate. We credit interest daily at an effective annual rate equal to the Guaranteed Interest Rate. We may declare a higher rate of interest in the first year of any GRO Account that exceeds the Guaranteed Interest Rate credited during the rest of the Guarantee Period (ENHANCED RATE). This Enhanced Rate will be guaranteed for the Guaranteed Period's first year and is declared at the time of purchase. We can declare and credit additional interest based on Contribution, Account Value, withdrawal dates, economic conditions or on any other lawful, nondiscriminatory basis (ADDITIONAL INTEREST). Any Enhanced Rate and Additional Interest credited to your GRO Account will be separate from the Guaranteed Interest Rate and not used in the Market Value Adjustment formula. THE ENHANCED RATE OR ADDITIONAL INTEREST MAY NOT BE AVAILABLE IN CERTAIN STATES. Each group of GRO Accounts of the same duration is considered one GRO. For example, all of your three-year GRO Accounts are one GRO while all of your five-year GRO Accounts are another GRO, even though they may have different maturity dates. You can get our current Guaranteed Interest Rates by calling our Administrative Office. ALLOCATIONS TO GROS CAN'T BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES. THE TEN-YEAR GRO ISN'T AVAILABLE IN OREGON. RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO Account for the same duration as your old one, at the then-current Guaranteed Interest Rate, unless you withdraw your GRO Value or transfer it to another Investment Option. We'll notify you in writing before your GRO Accounts expire. You must tell us before the expiration of your GRO Accounts if you want to make any changes. The effective date of a renewal of a GRO Account will be the expiration date of the old GRO Account. If a GRO Account expires and it can't be renewed for the same duration, the new GRO Account will be set up for the next shortest duration. For example, if your expiring GRO Account was for 10 years and when it expires we don't offer a 10-year GRO, but we do offer a seven-year GRO, your new one will be for seven years. You can tell us if you 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 or when withdrawals are taken to meet Minimum Required Distribution rules. 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. 30 The Market Value Adjustment (MVA) for a GRO Account is determined under the following formula: MVA = GRO Value X [(1 + A)POWER OF (N/12) / (1 + B + .0025)POWER OF (N/12) - 1], where A is the Guaranteed Interest Rate being credited to the GRO Account subject to the Market Value Adjustment, B is the current Guaranteed Interest Rate, as of the effective date of the Market Value Adjustment, for current allocations to a GRO Account, with a duration that is equal to the number of whole months remaining in your GRO Account. Subject to certain adjustments, if that remaining period isn't equal to an exact period for which we have declared a new Guaranteed Interest Rate, B will be determined by a formula that finds a value between the Guaranteed Interest Rates for GRO Accounts of the next highest and next lowest durations. N is the number of whole months remaining in your GRO Account. For contracts issued in certain states, the formula will be adjusted to comply with state requirements. If for any reason we are no longer declaring current Guaranteed Interest Rates, then for purposes of determining B we'll use the yield to maturity of U. S. Treasury Notes with the same remaining term as your GRO Account, using a formula to find a value when necessary, in place of the current Guaranteed Interest Rate or Rates. For illustrations of the application of the Market Value Adjustment formula, see Appendix B. SYSTEMATIC TRANSFER OPTION We also offer a Systematic Transfer Option that guarantees an interest rate that we declare in advance for each calendar quarter. This interest rate applies to all contributions made to the STO Account during the calendar quarter for which the rate has been declared. You MUST transfer all STO contributions into other Investment Options within one year of your most recent STO contribution. Transfers are automatically made in approximately equal quarterly or monthly installments of at least $1,000 each. You can't transfer from other Investment Options into the STO. Normal contingent withdrawal charges apply to withdrawals from the STO. We guarantee that the STO's effective annual yield will never be less than 3.0%. See "Systematic Transfer Program" in Part I, Section 8 for details on this program. This option may not be available in some states. New contributions to a Select Ten Plus Division can be held in the STO or another Investment Option until the next available Investment Date. You can also tell us to transfer approximately equal quarterly installments of at least $1,000 each over a one-year period from the STO to each of the four Divisions. We can hold new contributions 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. 31 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. 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%. This amount is a percentage of your contribution and not of the Account Value. 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. Should you completely surrender the contract, the amount of surrender charges is based on contributions and is not reduced by any free withdrawals. 32
CONTRIBUTION YEAR IN WHICH CHARGE AS A % OF THE WITHDRAWN CONTRIBUTION WAS MADE CONTRIBUTION WITHDRAWN ------------------------------- ---------------------- Current 8% First Prior 7 Second Prior 6 Third Prior 5 Fourth Prior 4 Fifth Prior 3 Sixth Prior 2 Seventh Prior and Earlier 0
We won't deduct a contingent withdrawal charge if you use the withdrawal to buy from us either an immediate annuity benefit with life contingencies, or an immediate annuity without life contingencies with a restricted prepayment option that provides for level payments over five or more years. Similarly, we won't deduct a charge if the Annuitant dies. See "Death Benefits and Similar Benefit Distributions" in Part I, Section 5. REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE We can reduce or eliminate the contingent withdrawal charge for individuals or a group of individuals if we anticipate expense savings. We may do this based on the size and type of the group, the amount of the contribution, or whether there is some relationship with us. Examples of these relationships would include being an employee of Integrity or an affiliate, receiving distributions or making internal transfers from other contracts we issued, or transferring amounts held under qualified plans we or our affiliate sponsored. We won't unlawfully discriminate against any person or group if we reduce or eliminate the contingent withdrawal charge. TRANSFER CHARGE If you make more than twelve transfers among your Investment Options during one contract year, we may charge your account up to $20 for each additional transfer during that year. Transfer charges don't apply to transfers under (i) Dollar Cost Averaging, (ii) Customized Asset Rebalancing, or (iii) 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. 33 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. 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 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 34 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 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. 35 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, or Systematic Transfer programs, described in Section 8. You may request a transfer by sending a written request directly to the Administrative Office. Each request for a transfer must specify the contract number, the amounts to be transferred and the Investment Options to and from which the amounts are to be transferred. Transfers may also be arranged through our telephone transfer service if you've established a Personal Identification Number (PIN CODE). We'll honor telephone transfer instructions from any person who provides correct identifying information and we aren't responsible for fraudulent telephone transfers we believe to be genuine according to these procedures. Accordingly, you bear the risk of loss if unauthorized persons make transfers on your behalf. A transfer request is effective as of the Business Day our Administrative Office receives it, except for transfers to the Select Ten Plus Divisions (see Part II). A transfer request doesn't change the allocation of current or future 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 reserve the right to modify these restrictions or to adopt new restrictions at any time and in our sole discretion. 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 36 WILL NEED TO SUBMIT A NEW TRANSFER REQUEST IN ORDER TO MAKE A TRANSFER THAT WAS NOT MADE BECAUSE OF THESE LIMITATIONS. SPECIFIC NOTICE REGARDING THE USE OF THIS ANNUITY FOR MARKET TIMING OF INVESTMENTS This contract is not designed to serve as a vehicle for frequent trading in response to short-term fluctuations in the stock market. Any individual or legal entity that intends to engage in arbitrage, utilize market timing practices or make frequent transfers to take advantage of inefficiencies in mutual fund pricing should not purchase this contract. These abusive or disruptive transfers can have an adverse impact on management of a fund, increase fund expenses and affect fund performance. Integrity Life Insurance Company has the following policies for transfers between Investment Options, which is designed to protect contract owners from abusive or disruptive trading activity: --You may submit 20 Investment Option transfers each contract year for each contract by U.S. Mail, Internet, telephone, Annuitrac, or facsimile. --Once these 20 Investment Option transfers have been executed in any contract year, we will require you to submit any additional Investment Option transfers only in writing by U.S. Mail or overnight delivery service. Transfer requests made by telephone or the Internet or sent by fax, same day mail or courier service will not be accepted, and Annuitrac trading privileges will be suspended. If you want to cancel a written Investment Option transfer, you must also cancel it in writing by U.S Mail or overnight delivery service. We will process the cancellation request as of the day we receive it. Upon reaching your next contract anniversary, you will again be provided with 20 Investment Option transfers. Investment Option transfers are non-cumulative and may not be carried over from year to year. None of these restrictions are applicable to transfers made under our Dollar Cost Averaging program, Systematic Transfer Option program, Customized Asset Rebalancing program, or other related programs we may offer unless we determine, in our sole discretion, that one of those programs is being used as a method of market timing. Integrity Life Insurance Company will continue to monitor transfer activity, and we may modify these restrictions at any time. If Integrity Life Insurance Company determines, in its sole discretion, that an annuity policy may be used for market timing, we may refuse to accept any additional contributions to the policy. 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 and is a percentage of contributions, not Account Value. 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. 37 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. 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 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 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. 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. 38 ANNUITIES Annuity benefits can provide for fixed payments, which may be made monthly, quarterly, semi-annually or annually. You can't change or redeem the annuity once payments have begun. For any annuity, the minimum initial payment must be at least $100 monthly, $300 quarterly, $600 semi-annually or $1,200 annually. If you haven't already elected a lump sum payment or an annuity benefit, we'll send you a notice within six months before your Retirement Date outlining your options. If you fail to notify us of your benefit payment election before your Retirement Date, you'll receive a lump sum benefit. We currently offer the following types of annuities: A LIFE AND TEN YEARS CERTAIN ANNUITY is a fixed life income annuity with 10 years of payments guaranteed, funded through our general account. A PERIOD CERTAIN ANNUITY provides for fixed payments to the Annuitant or the Annuitant's beneficiary for a fixed period. The amount is determined by the period selected. If the Annuitant dies before the end of the period selected, the Annuitant's beneficiary can choose to receive the total present value of future payments in cash. A PERIOD CERTAIN LIFE ANNUITY provides for fixed payments for at least the period selected and after that for the life of the Annuitant, or for the lives of the Annuitant and another annuitant under a joint and survivor annuity. If the Annuitant (or the Annuitant and the other annuitant under a joint and survivor 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 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. 39 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. 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: 40 (1) The holders of more than 50% of all votes entitled to be cast with respect to Separate Account Ten; or (2) The holders of at least 67% of the votes that are present or represented by proxy at a meeting, assuming more than 50% of those entitled to vote are present or represented. We'll determine the number of votes you can instruct us to vote 60 days or less before a Separate Account Ten special meeting. SEPARATE ACCOUNT VOTING RIGHTS Under the 1940 Act, certain actions (such as some of those described under "Changes in How We Operate" in Part I, Section 2) may require owner approval. In that case, you'll be entitled to a number of votes based on the value you have in the Variable Account Options, as described above under "How We Determine Your Voting Shares." 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, 41 under certain circumstances, the increase in value may be subject to current federal income tax. For example, corporations, partnerships, trusts and other non-natural persons can't defer tax on the annuity's income unless an exception applies. In addition, if an owner transfers an annuity as a gift to someone other than a spouse (or former spouse), all increases in the Account Value are taxed at the time of transfer. The assignment or pledge of any portion of the value of a contract is treated as a taxable distribution of that portion of the value of the contract. You can take withdrawals from the contract or you can wait to annuitize it when the annuitant reaches a certain age. The tax implications are different for each type of distribution. Section 72 of the Code 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. 42 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. SPOUSAL CONTINUATION Upon the death of a spouse, the Internal Revenue Code allows a surviving spouse to continue the annuity contract. The policy must be structured properly with the surviving spouse listed as the sole owner's beneficiary. If the surviving spouse is also the sole annuitant's beneficiary, we will increase the continued policy's account value to the same amount that would have been paid to the surviving spouse had they taken a lump sum distribution. For example, if the account value at death was $100,000, but we would have paid out a death benefit of $115,000, the surviving spouse's policy will continue with a $115,000 account value. The surviving spouse continues the policy with its tax deferred earnings and may make any changes to the policy allowed under the contract. When the surviving spouse dies, a second death benefit may be paid. 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. Other investment vehicles, such as IRAs and employer sponsored 401(k) plans, also may provide you with tax deferred growth and other tax advantages. For most investors, it will be advantageous to make maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity. In addition, if you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) or IRA), you will get no additional tax advantage from the variable annuity. Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity's other features, such as lifetime income payments and death benefit protection. INHERITED IRAS This policy may be issued as an inherited IRA. This occurs if, after the death of the owner of an IRA, the named beneficiary (other than the IRA owner's spouse) directs that the IRA death proceeds be transferred to a new policy issued and titled as an inherited IRA. The named beneficiary of the original IRA policy will become the annuitant under the inherited IRA and may generally exercise all rights under the inherited IRA policy, including the right to name his or her own beneficiary in the event of death. 43 Special tax rules apply to an inherited IRA, The tax law does not permit additional premiums to be contributed to an inherited IRA policy. Also, in order to avoid certain income tax penalties, a minimum required distribution ("MRD") must be withdrawn each year from an inherited IRA. The first MRD must be taken on or before December 31 of the calendar year following the year of the original IRA owner's death. The tax penalty equals 50% of the excess of the MRD amount over the amounts, if any, actually withdrawn form the inherited IRA during the calendar year. ANNUITIES IN QUALIFIED PLANS Other investment vehicles, such as IRAs and employer sponsored 401(k) plans, also may provide you with tax deferred growth and other tax advantages. For most investors, it will be advantageous to make maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity. In addition, if you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) or IRA), you will get no additional tax advantage from the variable annuity. Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity's other features, such as lifetime income payments and death benefit protection. This contract has enhanced death benefits. THE IRS HAS NOT RULED WHETHER AN ENHANCED DEATH BENEFIT COULD BE CHARACTERIZED AS AN INCIDENTAL BENEFIT, THE AMOUNT OF WHICH IS LIMITED IN A CODE SECTION 401(a) OR 403(b) PLAN. AN EMPLOYER OR QUALIFIED PLAN ADMINISTRATOR MAY WANT TO CONSULT THEIR TAX OR LEGAL ADVISOR REGARDING SUCH LIMITATIONS BEFORE USING AN ANNUITY WITH AN ENHANCED DEATH BENEFIT IN ONE OF THESE 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 44 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." 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: - the date you reach age 59 1/2; or - five years from the date of the first distribution. If you change or stop the distribution or take an additional withdrawal, you may have to pay a 10% penalty tax that would have been due on all prior distributions made under the Income Plus 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, or Systematic Transfer Option. 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. 45 SYSTEMATIC TRANSFER PROGRAM We also offer a systematic transfer program under which we transfer contributions allocated to the STO to one or more other Investment Options on a monthly or quarterly basis, as you determine. See Part I, Section 3, "Systematic Transfer Option." We'll transfer your STO contributions in equal installments of at least $1,000 over a one-year period. If you don't have enough money in the STO to transfer to each Option specified, a final transfer will be made on a pro rata basis and your enrollment in the program will end. All interest accrued and any money still in the STO at the end of the period during which transfers are scheduled to be made will be transferred at the end of that period on a pro rata basis to the Options you chose for this program. There is no charge for transfers under this program, and these transfers won't count towards the twelve free transfers you may make in a contract year. We'll hold new contributions to a Select Ten Plus Division in the STO until the next available Investment Date. You may ask us to transfer approximately equal quarterly installments of at least $1,000 each over the next year from the STO to each of the four Select Ten Plus Divisions. We can hold new contributions received less than five Business Days before any Investment Date in the STO until the next Investment Date. See Part II for important information on the Divisions. To enroll under our systematic transfer program, send the appropriate form to our Administrative Office. We can end the systematic transfer program in whole or in part, or restrict contributions to the program. This program may not be available in some states. CUSTOMIZED ASSET REBALANCING We offer a customized asset rebalancing program that allows you to determine how often the rebalancing occurs. You can choose to rebalance monthly, quarterly, semi-annually or annually. The value in the Variable Account Options will be automatically rebalanced by transfers among the Variable Account Options, and you will receive a confirmation notice after each rebalancing. Transfers will occur only to and from those Variable Account Options where you are making contributions. We won't charge a transfer charge to transfers under our customized asset rebalancing program, and these transfers won't count towards the twelve free transfers you may make in a contract year. Fixed Accounts and the Select Ten Plus Divisions aren't included in the customized asset rebalancing program. To enroll in our customized asset rebalancing program, send the appropriate form to our Administrative Office. You should be aware that other allocation programs, such as dollar cost averaging, and transfers and withdrawals that you make, may not work with the customized asset rebalancing program. You should, therefore, monitor your use of other programs, transfers, and withdrawals while the customized asset rebalancing program is in effect. You may end your participation in the program upon one day's prior written notice, and we may end or change the customized asset rebalancing program at any time. 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. LEGAL PROCEEDINGS Integrity is a party to litigation and arbitration proceedings in the ordinary course of its business. None of these matters is expected to have a material adverse effect on Integrity. 46 SECTION 9 - PRIOR CONTRACTS NEW INVESTMENT OPTIONS FOR CONTRACTS ISSUED BEFORE DECEMBER 31, 2002 All of the Franklin Templeton Portfolios, the Putnam VT George Putnam Fund, New Opportunities Fund and Voyager Fund as well as the Van Kampen LIT Comstock and Emerging Growth and the Van Kampen UIF Emerging Markets Equity are being made available as investment options in annuity policies issued before December 31, 2002. Please consult the fees, expenses and objectives located in Parts 1 and 3 of this prospectus. DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997 This section shows the Death Benefit information for contracts issued before January 1, 1997. It may be different from other provisions in this prospectus. For contracts issued before 1997, the following provisions apply: For contracts issued before January 1, 1995, the amount of the death benefit is the greatest of: - your Adjusted Account Value - the Account Value at the beginning of the seventh contract year, plus subsequent contributions and minus subsequent withdrawals - your total contributions less the sum of withdrawals - for Annuitants younger than 70 years old on the birthday nearest the date on which their contract was issued, an enhanced minimum death benefit, explained below. For contracts issued during 1995, the amount of the death benefit is the greatest of: - your Adjusted Account Value - the highest Account Value at the beginning of any contract year, plus subsequent contributions and minus subsequent withdrawals - your total contributions less the sum of withdrawals For contracts issued during 1996, the amount of the death benefit is the greatest of: - your Account Value - the highest Account Value at the beginning of any contract year, plus subsequent contributions and minus subsequent withdrawals - your total contributions less the sum of withdrawals "Subsequent withdrawals" for purposes of calculation of a death benefit reflect any market value adjustments that apply to those withdrawals and reduce the death benefit on a pro rata basis. The enhanced minimum death benefit is the same as the guaranteed death benefit, except that the guaranteed death benefit may not exceed the maximum guaranteed death benefit. The guaranteed death benefit on your Participation Date is your initial contribution. After that, every month we recalculate that portion of your guaranteed death benefit allocated to the Separate Account by adding interest at an annual rate of 7% until the contract anniversary nearest your 70th birthday, subject to the maximum. We subtract from that the sum of any withdrawals or transfers from the Separate Account during the month and a pro rata amount of the interest accumulated that applies to the withdrawn or transferred amount. Therefore, your guaranteed death benefit at any time, subject to the maximum, is the sum of (1) your Guarantee Period Values, and (2) your Separate Account contributions, including the amount of interest calculated on your Separate Account values for purposes of determining the guaranteed death benefit, less any withdrawals or transfers and less the interest calculated on a pro rata basis on those withdrawals or transfers. Your maximum guaranteed death benefit is determined by totaling your contributions during your first five participation years, subtracting all withdrawals, taking into consideration any market value adjustments made under the contract, multiplying the result by two, and then adding that to your total contributions made after the first five participation years. 47 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.
CONTRIBUTION YEAR IN WHICH CHARGE AS A % OF THE WITHDRAWN CONTRIBUTION WAS MADE CONTRIBUTION WITHDRAWN ------------------------------- ---------------------- Current 7% First Prior 6 Second Prior 5 Third Prior 4 Fourth Prior 3 Fifth Prior 2 Sixth Prior and Earlier 0
We won't deduct a contingent withdrawal charge if the Annuitant uses the withdrawal to buy from us either an immediate annuity benefit with life contingencies or an immediate annuity without life contingencies with a restricted prepayment option that provides for level payments over five or more years. Similarly, we won't deduct a charge if the Annuitant dies and the withdrawal is made by the Annuitant's beneficiary. See "Death Benefits and Similar Benefit Distributions" in Part 5. The minimum withdrawal permitted is $300. RETIREMENT DATE For contracts issued before January 1, 1997, the Retirement Date will be the date you specify, but no later than your 85th birthday or the 10th Contract Anniversary, whichever is later. 48 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. HARDSHIP WAIVERS Hardship Waivers aren't available. 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. 49 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:
DIVISION INVESTMENT DATE -------- --------------- Select Ten Plus Division - March last Business Day of March Select Ten Plus Division - June last Business Day of June Select Ten Plus Division - September last Business Day of September Select Ten Plus Division - December last Business Day of December
The weights of the individual stock positions won't be rebalanced during the year, and additional contributions or transfers won't be accepted during any Division's twelve-month holding period. Instead, additional contributions or transfers are invested on the next Investment Date. On the day we receive a dividend from a stock in a Division's investment portfolio, we'll reinvest it in the form of additional shares of the stock that paid the dividend. We can't guarantee that the dividend rates on the selected stocks will be maintained. Reduction or elimination of a dividend could adversely affect the stock price. The "highest yielding stocks" are determined by calculating the yield for each stock by annualizing the last ordinary quarterly or semi-annual dividend distributed on that stock and dividing the result by the market value of the stock at the close of the NYSE on the Business Day before the Investment Date. The investment strategy is based on three time-tested investment principles: (1) time in the market is more important than timing the market; (2) the stocks to buy are the ones everyone else is selling; and (3) dividends can be an important part of total return. Investment in a number of companies with high dividends relative to their stock prices is designed to increase a Division's potential for higher returns. Investing in these stocks of the DJIA may be effective as well as conservative because regular dividends are common for established companies and have accounted for a substantial portion of the total return on stocks of the DJIA as a group. Each Division's return will consist of a combination of capital appreciation and current dividend income. Transfers from any other Investment Option into one of the Divisions will be effective at a price determined as of the day preceding the next available Investment Date. We reserve the right not to accept transfer instructions received less than two business days before any Investment Date. See Part I, Section 5, "Transfers." 50 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 Friday, December 31, 2001. The ten highest yielding stocks in the DJIA are commonly known as the "Dogs of the Dow": AT&T Honeywell Aluminum Co. of America IBM American Express Intel Boeing International Paper* Caterpillar* Johnson & Johnson Citigroup J.P. Morgan Chase* 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 The designations "Dow Jones", "Dow Jones Industrial Average" and "DJIA""are the property of Dow Jones & Company, Inc. (DOW JONES). Dow Jones isn't affiliated with the Divisions, hasn't participated in any way in the creation of the Divisions or in the selection of stocks included in the Divisions and hasn't reviewed or approved any information included in this prospectus. The Divisions aren't sponsored, endorsed, sold or promoted by Dow Jones, and Dow Jones has no relationship at all with the Divisions. Dow Jones isn't responsible for and doesn't participate in determining the timing, price, or quantity of the Divisions' shares to be issued or redeemed. Dow Jones doesn't have any obligation or liability in connection with the administration or marketing of the Divisions. RISK FACTORS RISKS IN GENERAL An investment in a Division results in certain risks common to all stock investments. Stocks fluctuate in price for a variety of reasons. For example, the value of your investment will decline if the financial condition of the issuers of the stocks becomes impaired or if the general condition of the stock market worsens. Common stocks in general may be especially susceptible to general stock market movements and to increases and decreases in value as market confidence in and perceptions of the issuers change. These perceptions are based on unpredictable factors, including government, economic, monetary and fiscal policies, inflation and interest rates, economic expansion or contraction, and global or regional political, economic or banking crises. In addition, holders of common stocks generally are behind creditors and holders of preferred stock for payments in the event of the bankruptcy of a stock issuer. Common stocks aren't backed by an obligation of the issuer and therefore don't offer any assurance of income or provide the degree of protection of capital provided by debt securities. STRATEGY SPECIFIC RISKS Each Division is non-diversified and invests a larger portion of its assets in the securities of fewer issuers than diversified investment companies. As a result, an investment in a Division may be subject to greater fluctuation in value than an investment in a diversified investment company. In addition, a Division may be concentrated in issuers primarily engaged in a particular industry. Concentration may involve additional risk because of the decreased diversification of economic, financial, and market risks. In addition, increased regulation, particularly with respect to the environment or with respect to the petroleum or tobacco industry, may have a negative impact on certain companies represented in a Division's portfolio. 51 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)
TEN HIGHEST DIVIDEND YEAR YIELDING STOCKS(2) DJIA ---- -------------------- ---- 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% 2000 6.4% (4.7)% 2001 (4.9%) (5.4%) Cumulative 7,657% 2773%
---------- (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 52 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 listed above, the ten highest dividend yielding stocks in the DJIA achieved an average annual total return of 16.2%. Over this period, the strategy achieved a greater average annual total return than that of the DJIA, which was 12.3%. 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 1998-2001: 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
TEN HIGHEST DIVIDEND YEAR YIELDING DJIA STOCKS DJIA INDEX ---- -------------------- ---------- 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 2000 815,633 303,673 2001 775,667 387,275
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, 2001. The table assumes that all dividends and 53 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 $443,352 if the following fees and expenses had been charged: (1) insurance charges of 1.20%, (2) management fees of .50%, (3) administrative fees of .15%, and (4) other expenses of .35%. Investors shouldn't rely on performance information as an indication of the past or future performance of the Divisions. We can't guarantee that any of the Divisions will outperform the DJIA. Performance data for the Divisions, including the yield and total return of the Divisions, may appear in advertisements or sales literature. See "Performance Information" in Part I, Section 8 for a discussion of how performance is calculated. SECTION 3 - CONTRACTHOLDER INFORMATION PRICING OF UNITS The net asset value of the Units of each Division is determined on each day the NYSE is open for trading. The net assets are valued based on market quotations as of the close of business of the NYSE, which is currently 4:00 p.m., Eastern Time. Each Division's Unit Value is calculated separately by dividing the value of the securities held by the Division plus any cash or other assets, less liabilities, by the number of outstanding Units of the Division. 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, 2000, The Western-Southern Enterprise owned or managed assets of approximately $25.5 billion and Touchstone Advisors managed assets of approximately $605 million. Touchstone Advisors is located at 221 East Fourth Street, Suite 300, 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; 54 - is responsible for ensuring that the Divisions operate in compliance with applicable legal requirements and for monitoring the sub-adviser for compliance with requirements under applicable law and with the investment policies and restrictions of the Divisions; and - is responsible for monitoring and evaluating the sub-adviser on a periodic basis and considering its performance record with respect to the investment objective and policies of the Divisions. 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 Management 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 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. On April 18, 2001, National Asset completed its merger with a wholly owned subsidiary of AMVESCAP PLC. AMVESCAP, which is headquartered in Atlanta and London, is the largest publicly traded asset management firm in the world. In the transaction, AMVESCAP acquired all the outstanding shares of National Asset. As a result of the transaction, National Asset's business is now conducted by the National Asset Management Division of INVESCO, Inc. INVESCO manages more than $93 billion in assets for institutional investors, and offers a broad range of investment services. The main place of business of INVESCO is 1315 Peachtree Street, N.E., Suite 300, Atlanta, Georgia 30309. 55 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 for contracts issued after July 16, 2001. No Unit values are included for the Franklin Templeton, Putnam, J.P. Morgan Mid Cap Value, Van Kampen and Touchstone Portfolios because as of May 1, 2002 they had not yet begun operations in Separate Account II.
YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- FIDELITY VIP CONTRAFUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.71 Number of units outstanding at end of period 48,780 FIDELITY VIP EQUITY-INCOME Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.64 Number of units outstanding at end of period 89,239 FIDELITY VIP GROWTH Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.42 Number of units outstanding at end of period 40,739 FIDELITY VIP GROWTH & INCOME Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.90 Number of units outstanding at end of period 26,772 FIDELITY VIP GROWTH OPPORTUNITIES Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.58 Number of units outstanding at end of period 4,696 FIDELITY VIP MID-CAP Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.23 Number of units outstanding at end of period 39,530 56 YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- FIDELITY VIP MONEY MARKET Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.05 Number of units outstanding at end of period 222,525 JANUS ASPEN SERIES AGGRESSIVE GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 8.75 Number of units outstanding at end of period 2,400 JANUS ASPEN SERIES BALANCED PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.89 Number of units outstanding at end of period 46,750 JANUS ASPEN SERIES CAPITAL APPRECIATION PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.46 Number of units outstanding at end of period 15,143 JANUS ASPEN SERIES CORE EQUITY PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.63 Number of units outstanding at end of period 2,429 JANUS ASPEN SERIES GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 6.39 Number of units outstanding at end of period 249,380 JANUS ASPEN SERIES INTERNATIONAL GROWTH PORTFOLIO - - - - - - - - - $ 10.00 Unit value at beginning of period $ 9.61 Unit value at end of period 6,052 Number of units outstanding at end of period JANUS ASPEN SERIES STRATEGIC VALUE PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.47 Number of units outstanding at end of period 2,738 57 YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- JANUS ASPEN SERIES WORLDWIDE GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.48 Number of units outstanding at end of period 52,926 J.P. MORGAN BOND PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.21 Number of units outstanding at end of period 83,068 J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.77 Number of units outstanding at end of period 1,889 LEGENDS FUND BARON SMALL CAP PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.01 Number of units outstanding at end of period 15,455 LEGENDS FUND GABELLI LARGE CAP VALUE PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 8.79 Number of units outstanding at end of period 17,072 LEGENDS FUND HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.19 Number of units outstanding at end of period 9,622 LEGENDS FUND THIRD AVENUE VALUE PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.93 Number of units outstanding at end of period 57,286 58 YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- MFS FUNDS CAPITAL OPPORTUNITIES PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.02 Number of units outstanding at end of period 15,642 MFS FUNDS EMERGING GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.22 Number of units outstanding at end of period 7,528 MFS FUNDS INVESTORS TRUST PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 8.39 Number of units outstanding at end of period 288,106 MFS FUNDS MID CAP GROWTH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.11 Number of units outstanding at end of period 20,309 MFS FUNDS NEW DISCOVERY PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.06 Number of units outstanding at end of period 17,420 MFS FUNDS RESEARCH PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.32 Number of units outstanding at end of period 3,095 MFS FUNDS TOTAL RETURN PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.54 Number of units outstanding at end of period 48,866 PUTNAM VT GROWTH AND INCOME FUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.53 Number of units outstanding at end of period 20,057 PUTNAM VT INTERNATIONAL GROWTH Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.68 Number of units outstanding at end of period 6,480 59 YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- PUTNAM VT SMALL CAP VALUE FUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.17 Number of units outstanding at end of period 17,965 PUTNAM VT VOYAGER FUND II Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.03 Number of units outstanding at end of period 4,045 SCUDDER EAFE EQUITY INDEX FUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.40 Number of units outstanding at end of period 5,267 SCUDDER EQUITY 500 INDEX FUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.53 Number of units outstanding at end of period 42,322 SCUDDER SMALL CAP INDEX FUND Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.05 Number of units outstanding at end of period 2,706 VAN KAMPEN BANDWIDTH & TELECOMMUNICATIONS Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 8.69 Number of units outstanding at end of period 2,907 VAN KAMPEN BIOTECHNOLOGY & PHARMACEUTICAL Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.86 Number of units outstanding at end of period 4,445 VAN KAMPEN EMERGING MARKETS DEBT Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 10.59 Number of units outstanding at end of period 1,019 VAN KAMPEN INTERNET PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 6.81 Number of units outstanding at end of period 1,472 60 YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 1996 1995 1994 1993 INCEPTION ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- VAN KAMPEN MORGAN STANLEY HIGH -TECH35 PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.35 Number of units outstanding at end of period 25 VAN KAMPEN MORGAN STANLEY U.S. MULTINATIONAL PORTFOLIO Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period $ 9.66 Number of units outstanding at end of period 52 VAN KAMPEN UIF U.S. REAL ESTATE Unit value at beginning of period - - - - - - - - - $ 10.00 Unit value at end of period 10.22 Number of units outstanding at end of period 9,603
61 The table below shows Unit Values 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 for contracts issued prior to July 16, 2001.
2001 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- THIRD AVENUE VALUE** Unit value at beginning of period $ 26.06 $ 23.76 $ 27.42 $ 23.47 $ 18.24 $ 14.85 Unit value at end of period $ 14.62 $ 26.06 $ 23.76 $ 27.42 $ 23.47 $ 18.24 Number of units outstanding at end of period 597,420 620,186 930,696 1,385,723 1,278,296 1,119,634 HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH Unit value at beginning of period $ 27.02 $ 35.32 $ 26.42 $ 19.74 $ 14.85 $ 13.21 Unit value at end of period $ 19.21 $ 27.02 $ 35.32 $ 26.42 $ 19.74 $ 14.85 Number of units outstanding at end of period 1,023,394 1,230,820 1,214,898 1,345,118 1,295,185 1,184,119 GABELLI LARGE CAP VALUE** Unit value at beginning of period $ 17.36 $ 18.45 $ 17.70 $ 18.32 $ 15.23 $ 13.44 Unit value at end of period $ 14.62 $ 17.36 $ 18.45 $ 17.70 $ 18.32 $ 15.23 Number of units outstanding at end of period 597,420 514,402 804,931 1,761,932 2,107,245 2,434,199 BARON SMALL CAP** Unit value at beginning of period $ 17.09 $ 17.10 $ 17.80 $ 18.15 $ 14.71 $ 12.58 Unit value at end of period $ 17.97 $ 17.09 $ 17.10 $ 17.80 $ 18.15 $ 14.71 Number of units outstanding at end of period 243,483 206,561 332,006 581,283 592,060 592,469 FIDELITY VIP EQUITY-INCOME Unit value at beginning of period $ 12.43 $ 11.62 $ 11.08 $ 10.06 - - Unit value at end of period $ 11.66 $ 12.43 $ 11.62 $ 11.08 $ 10.06 Number of units outstanding at end of period 1,532,888 1,303,950 1,571,231 1,206,214 155,520 FIDELITY VIP CONTRAFUND Unit value at beginning of period $ 14.08 $ 15.29 $ 12.47 $ 9.73 - Unit value at end of period $ 12.19 $ 14.08 $ 15.29 $ 12.47 $ 9.73 Number of units outstanding at end of period 1,519,.016 1,735,357 1,652,352 893,485 129,361 FIDELITY VIP GROWTH & INCOME Unit value at beginning of period $ 13.41 $ 14.11 $ 13.10 $ 10.24 - Unit value at end of period $ 12.07 $ 13.41 $ 14.11 $ 13.10 $ 10.24 Number of units outstanding at end of period 1,130,965 1,111,831 1,291,885 859,704 119,576 FIDELITY VIP GROWTH OPPORTUNITIES Unit value at beginning of period $ 10.62 $ 12.98 $ 12.62 $ 10.26 - Unit value at end of period $ 8.97 $ 10.62 $ 12.98 $ 12.62 $ 10.26 Number of units outstanding at end of period 661,779 768,638 948,352 617,513 78,180 1995 1994 1993 INCEPTION ---- ---- ---- --------- THIRD AVENUE VALUE** Unit value at beginning of period $ 10.34 $ 10.56 $ 10.07 $ 10.00 Unit value at end of period $ 14.85 $ 10.34 $ 10.56 Number of units outstanding at end of period 806,752 733,336 547,498 HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH Unit value at beginning of period $ 10.17 $ 9.91 $ 10.05 $ 10.00 Unit value at end of period $ 13.21 $ 10.17 $ 9.91 Number of units outstanding at end of period 1,342,971 1,014,016 830,307 GABELLI LARGE CAP VALUE** Unit value at beginning of period $ 11.23 $ 11.33 $ 9.99 $ 10.00 Unit value at end of period $ 13.44 $ 11.23 $ 11.33 Number of units outstanding at end of period 2,541,023 2,558,692 1,518,39 BARON SMALL CAP** Unit value at beginning of period $ 10.53 $ 10.74 - $ 10.00 Unit value at end of period $ 12.58 $ 10.53 $ 10.74 Number of units outstanding at end of period 587,830 567,827 425,500 FIDELITY VIP EQUITY-INCOME Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period FIDELITY VIP CONTRAFUND Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period FIDELITY VIP GROWTH & INCOME Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period FIDELITY VIP GROWTH OPPORTUNITIES Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period 62 2001 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- FIDELITY VIP GROWTH Unit value at beginning of period $ 11.08 $ 12.63 - - - Unit value at end of period $ 8.99 $ 11.08 $ 12.63 Number of units outstanding at end of period 503.508 364,255 54,439 FIDELITY VIP MID CAP Unit value at beginning of period $ 17.07 $ 12.96 - - - Unit value at end of period $ 16.27 $ 17.07 $ 12.96 Number of units outstanding at end of period 581,376 503,449 82,924 JANUS ASPEN CAPITAL APPRECIATION Unit value at beginning of period $ 19.64 $ 24.33 $ 14.77 $ 9.47 - Unit value at end of period $ 15.17 $ 19.64 $ 24.33 $ 14.77 $ 9.47 Number of units outstanding at end of period 1,720,961 2,289,751 1,953,906 712,285 92,194 JANUS ASPEN BALANCED Unit value at beginning of period $ 15.90 $ 16.49 $ 13.19 $ 9.95 - Unit value at end of period $ 14.95 $ 15.90 $ 16.49 $ 13.19 $ 9.95 Number of units outstanding at end of period 2,824,401 3,292,580 3,904,271 5,548,134 5,661,088 JANUS ASPEN WORLDWIDE GROWTH Unit value at beginning of period $ 16.26 $ 19.54 $ 12.04 $ 9.47 - Unit value at end of period $ 12.44 $ 16.26 $ 19.54 $ 12.04 $ 9.47 Number of units outstanding at end of period 2,314,559 2,890,991 2,314,085 1,327,696 151,721 JANUS ASPEN MONEY MARKET Unit value at beginning of period $ 11.38 $ 10.85 $ 10.48 $ 10.08 - Unit value at end of period $ 11.70 $ 11.38 $ 10.85 $ 10.48 $ 10.08 Number of units outstanding at end of period 2,337,296 1,569,997 2,017,825 1,709,186 634,249 J.P. MORGAN INTERNATIONAL OPPORTUNITIES Unit value at beginning of period $ 10.73 $ 12.93 $ 9.59 $ 9.28 - Unit value at end of period $ 8.56 $ 10.73 $ 12.93 $ 9.59 $ 9.28 Number of units outstanding at end of period 293,290 324,546 345,201 137,064 41,664 J.P. MORGAN BOND Unit value at beginning of period $ 11.55 $ 10.60 $ 10.85 $ 10.19 - Unit value at end of period $ 12.19 $ 11.55 $ 10.60 $ 10.85 $ 10.19 Number of units outstanding at end of period 1,972,807 1,491,565 1,890,368 1,499,874 418,029 1995 1994 1993 INCEPTION ---- ---- ---- --------- FIDELITY VIP GROWTH Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period FIDELITY VIP MID CAP Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN CAPITAL APPRECIATION Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN BALANCED Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN WORLDWIDE GROWTH Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN MONEY MARKET Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period J.P. MORGAN INTERNATIONAL OPPORTUNITIES Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period J.P. MORGAN BOND Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period 63 2001 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- JANUS ASPEN AGGRESSIVE GROWTH Unit value at beginning of period $ 6.74 - Unit value at end of period $ 402 $ 6.74 Number of units outstanding at end of period 376,578 424,984 JANUS ASPEN GROWTH Unit value at beginning of period $ 8.63 - - - - Unit value at end of period $ 6.39 $ 8.63 Number of units outstanding at end of period 249,380 154,157 JANUS ASPEN STRATEGIC VALUE Unit value at beginning of period $ 9.59 - - - - Unit value at end of period $ 8.67 $ 9.59 Number of units outstanding at end of period 215,986 38,274 MFS CAPITAL OPPORTUNITIES Unit value at beginning of period $ 8.73 - - - - - Unit value at end of period $ 6.58 Number of units outstanding at end of period 560,187 477,460 MFS EMERGING GROWTH Unit value at beginning of period $ 8.00 - - - - Unit value at end of period $ 5.24 $ 8.00 Number of units outstanding at end of period 337,119 279,091 MFS INVESTORS TRUST Unit value at beginning of period 10.14 - - - - - Unit value at end of period 8.39 10.14 Number of units outstanding at end of period 288,106 56,839 MFS MID CAP GROWTH Unit value at beginning of period 9.63 - - - - - Unit value at end of period 7.83 9.63 Number of units outstanding at end of period 870,222 479,615 MFS NEW DISCOVERY Unit value at beginning of period 9.27 - - - - - Unit value at end of period 8.67 $ 9.27 Number of units outstanding at end of period 417,974 214,134 SCUDDER EAFE EQUITY INDEX Unit value at beginning of period $ 11.70 $ 14.22 $ 11.30 $ 9.42 - Unit value at end of period $ 8.69 $ 11.70 $ 14.22 $ 11.30 $ 9.42 Number of units outstanding at end of period 257,086 247,563 240,439 177,704 19,652 1995 1994 1993 INCEPTION ---- ---- ---- ---------- JANUS ASPEN AGGRESSIVE GROWTH Unit value at beginning of period $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN GROWTH Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period JANUS ASPEN STRATEGIC VALUE Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period MFS CAPITAL OPPORTUNITIES Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period MFS EMERGING GROWTH Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period MFS INVESTORS TRUST Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period MFS MID CAP GROWTH Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period MFS NEW DISCOVERY Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period SCUDDER EAFE EQUITY INDEX Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period 64 2001 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- SCUDDER EQUITY INDEX Unit value at beginning of period $ 13.71 $ 15.32 $ 12.90 $ 10.16 - Unit value at end of period $ 11.88 $ 13.71 $ 15.32 $ 12.90 $ 10.16 Number of units outstanding at end of period 2,357,487 2,509,913 2,454,241 1,563,771 224,706 SCUDDER SMALL CAP INDEX Unit value at beginning of period $ 10.24 $ 10.80 $ 9.11 $ 9.44 - Unit value at end of period $ 10.31 $ 10.24 $ 10.80 $ 9.11 $ 9.44 Number of units outstanding at end of period 1,972,807 528,324 456,819 389,699 70,238 UNIVERSAL FUNDS EMERGING MARKETS DEBT Unit value at beginning of period $ 9.14 $ 8.32 $ 6.52 $ 9.23 Unit value at end of period $ 9.93 $ 9.14 $ 8.32 $ 6.52 $ 9.23 Number of units outstanding at end of period 150,281 192,477 310,684 607,509 653,365 UNIVERSAL FUNDS U.S. REAL ESTATE Unit value at beginning of period $ 11.07 $ 8.68 $ 8.93 $ 10.15 Unit value at end of period $ 11.99 $ 11.07 $ 8.68 $ 8.93 $ 10.15 Number of units outstanding at end of period 339,600 238,338 234,609 252,794 67,357 1995 1994 1993 INCEPTION ---- ---- ---- --------- SCUDDER EQUITY INDEX Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period SCUDDER SMALL CAP INDEX Unit value at beginning of period - - - $ 10.00 Unit value at end of period Number of units outstanding at end of period UNIVERSAL FUNDS EMERGING MARKETS DEBT Unit value at beginning of period $ 10.00 Unit value at end of period Number of units outstanding at end of period UNIVERSAL FUNDS U.S. REAL ESTATE Unit value at beginning of period $ 10.00 Unit value at end of period Number of units outstanding at end of period
65 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: -0.0551589 = [(1 + .05)POWER OF (48/12) / (1 + .0625 + .0025)POWER OF (48/12)] - 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 If instead of a full withdrawal, $20,000 was requested, we would first determine the free withdrawal amount: 66 $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: .0290890 = [(1 + .05)POWER OF (48/12) / (1 + .04 + .0025)POWER OF (48/12)] - 1 The Market Value Adjustment is an increase of $1,683.71 to the GRO Value: $1,683.71 = .0290890 X $57,881.25 The Market Adjusted Value would be: $59,564.96 = $57,881.25 + $1,683.71 A withdrawal charge of 6% would be assessed against the $50,000 original contribution: $3,000.00 = $50,000.00 X .06 Thus, the amount payable on a full withdrawal would be: $56,564.96 = $57,881.25 + $1,683.71 - $3,000.00 If instead of a full withdrawal, $20,000 was requested, the free withdrawal amount and non-free amount would first be determined as above: 67 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. 68 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: _____________ 69 STATEMENT OF ADDITIONAL INFORMATION DECEMBER 31, 2002 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
PAGE 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 10 Part 6 - Performance Information 11 Part 7 - Determination of Accumulation Unit Values 14 Part 8 - Tax-Favored Retirement Programs 14 Part 9 - Financial Statements 17
This Statement of Additional Information (SAI) is not a prospectus. It should be read in conjunction with the prospectus for the contracts, dated December 31, 2002. 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 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). In 2001 Integrity provided all management services of Separate Account II and no longer pays management services fees to a third party. Prior to that, 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 1998 were $27,158,002, in 1999 were $32,545,976, and in 2000 were $3,001,867. 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. 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 221 East Fourth Street, Suite 300, Cincinnati, Ohio 45202. The contracts are offered through Touchstone Securities on a continuous basis. We generally pay a maximum distribution allowance of 7.5% of initial contributions, plus .50% trail commission paid on Account Value after the eighth Contract Year. The amount of distribution allowances paid to Touchstone Securities, the principal underwriter, was $17,435,358 in 2001. The amount of distribution allowances paid to Touchstone Securities between March 3, 2000 and December 31, 2000 was $3,407,594. The amount of distribution allowances paid to ARM Securities Corporation, the principal underwriter for the contracts prior to March 3, 2000, was $399,896 for the year ended December 31, 2000, $11,028,481 for the year ended December 31, 1999, and $12,537,715 for the year ended December 31, 1998. Distribution allowances weren't retained by either ARM Securities Corporation or Touchstone Securities, as applicable, 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. 2 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. 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 3 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 five (5) 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. 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. 4
NAME, AGE, AND ADDRESS OF MANAGER PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS ------------------------- ------------------------------------------- John R. Lindholm (52)* President of Integrity since November 1993; President of National Integrity 515 West Market Street since September 1997; Vice President-Chief Marketing Officer of National Louisville, KY 40202 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 (62) Managing partner, Associated Mezzanine Investors, LLC since March 2000; 10 Hemlock Road Director, Nations Flooring, Inc. since March 1998; investment banker since Hartsdale, NY 10530 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 (73) President, William Faulkner & Associates LLC (international trade business) 825 Goodrich Ave. since 1986; Manager, Carroll Family, LLC (commercial land development St. Paul, MN 55105 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 (45) Chief Executive Officer, Aveus (an interactive strategy and development 425 Portland Avenue firm) since July 1999; President, clavm, inc. (a management consulting Minneapolis, MN 55488 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. (52) Retired; Founder and Managing Director of National Asset Management 2939 Rainbow Drive Corporation (investment counseling firm) from 1979 to 1995**; Member of Louisville, KY 40206 Louisville Community Foundation Investment Committee; Board member, Louisville Water Company, since 1986.
* Mr. Lindholm is an INTERESTED PERSON, as defined in the 1940 Act, by virtue of his position with Integrity Life Insurance Company. ** Mr. Quesenberry no longer has any interest in National Asset Management Corporation. OFFICERS:
POSITION WITH NAME, AGE & ADDRESS SEPARATE ACCOUNT PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS ------------------- ---------------- ------------------------------------------- Edward J. Haines (54) 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. 5 Kevin L. Howard (36) 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 (37) 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 (29) 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 (25) 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.
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, 2000, Separate Account Ten paid the Independent Managers a combined total of $10,750, 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 Managers are also members of the Board of Directors of The Legends Fund, Inc., an open-end management investment company, which has the same investment adviser as Separate Account Ten. The following table sets forth for the fiscal year ended December 31, 2000, 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. 6
TOTAL PENSION OR COMPENSATION AGGREGATE RETIREMENT BENEFITS FROM SEPARATE COMPENSATION ACCRUED AS PART OF ESTIMATED ANNUAL ACCOUNT TEN FROM SEPARATE SEPARATE ACCOUNT BENEFITS UPON PAID TO NAME OF MANAGER ACCOUNT TEN TEN EXPENSE RETIREMENT MANAGERS --------------- ------------- ------------------- ---------------- ------------- William B. Faulkner $ 2,500 None N/A $ 2,500 John Katz $ 3,000 None N/A $ 3,000 Chris L. Mahai $ 3,000 None N/A $ 3,000 Irvin W. Quesenberry, Jr. $ 2,250 None N/A $ 2,250
As of December 31, 2000, the Managers of Separate Account Ten as a group, owned less than 1% of the outstanding membership interests of the Fund. The following individuals own 5% or more of one of the Divisions' units as of April 5, 2001: SELECT TEN PLUS DIVISION - MARCH
NAME ADDRESS PERCENTAGE OWNERSHIP ---- ------- -------------------- Effie D. Sumrall 823 Fraser Street 6.79% Aurora, CA
SELECT TEN PLUS DIVISION - JUNE
NAME ADDRESS PERCENTAGE OWNERSHIP ---- ------- -------------------- Victoria Grossman 111 Colfax Road 5.61% Skillman, NJ
SELECT TEN PLUS DIVISION - SEPTEMBER
NAME ADDRESS PERCENTAGE OWNERSHIP ---- ------- -------------------- David V. Wise 128 Forestmere Circle 8.65% Butler, PA
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. 7 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. 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 2001. The following tables show the amount of advisory fees the Divisions paid to Touchstone Advisors, Separate Account Ten's investment adviser since March 3, 2000, to Integrity Capital Advisors, Separate Account Ten's investment adviser until March 3, 2000, the amount of sub-advisory fees Touchstone Advisors paid to National Asset for the period ended December 31, 2000, and the amount of sub-advisory fees Integrity Capital Advisors paid to National Asset, for the periods ended December 31, 1998, December 31, 1999 and December 31, 2000.
AMOUNT DIVISION PAID TO INTEGRITY AMOUNT INTEGRITY CAPITAL ADVISORS PERIOD ENDED DECEMBER 31, 1998 CAPITAL ADVISORS PAID TO NATIONAL ASSET ---------------------------------------- -------------------------------------- -------------------------------------- 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
8
AMOUNT DIVISION PAID TO INTEGRITY AMOUNT INTEGRITY CAPITAL ADVISORS PERIOD ENDED DECEMBER 31, 1999 CAPITAL ADVISORS PAID TO NATIONAL ASSET ---------------------------------------- -------------------------------------- -------------------------------------- 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 AMOUNT DIVISION PAID TO INTEGRITY AMOUNT INTEGRITY CAPITAL ADVISORS PERIOD ENDED DECEMBER 31, 2000 CAPITAL ADVISORS PAID TO NATIONAL ASSET ---------------------------------------- -------------------------------------- -------------------------------------- Select Ten Plus Division-March $ 3,857.36 $ 964.34 Select Ten Plus Division-June $ 3,573.23 $ 893.32 Select Ten Plus Division-September $ 6,376.45 $ 1,594.09 Select Ten Plus Division-December $ 7,122.38 $ 1,780.57 AMOUNT DIVISION PAID TO TOUCHSTONE AMOUNT TOUCHSTONE ADVISORS PAID TO PERIOD ENDED DECEMBER 31, 2000 ADVISORS NATIONAL ASSET ---------------------------------------- -------------------------------------- -------------------------------------- Select Ten Plus Division-March $ 15,118.37 $ 3,779.52 Select Ten Plus Division-June $ 13,184.62 $ 3,296.19 Select Ten Plus Division-September $ 23,936.44 $ 5,984.22 Select Ten Plus Division-December $ 21,758.30 $ 5,439.56
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, 1999 and 2000. On April 18, 2001, National Asset completed its merger with a wholly owned subsidiary of AMVESCAP PLC. AMVESCAP, which is headquartered in Atlanta and London, is the largest publicly traded asset management firm in the world. In the transaction, AMVESCAP acquired all the outstanding shares of National Asset. As a result of the transaction, National Asset's business is now conducted by the National Asset Management Division of INVESCO, Inc. INVESCO manages more than $93 billion in assets for institutional investors, and offers a broad range of investment services. The main place of business of INVESCO is 1315 Peachtree Street, N.E., Suite 300, Atlanta, Georgia 30309. Under the Investment Company Act of 1940, the merger resulted in an "assignment" of the existing sub-advisory agreement between National Asset and Touchstone Advisers, and, consequently, the automatic termination of the sub-advisory agreement at the closing of the merger. Because the contract owners of Separate Account Ten did not approve a new sub-advisory agreement prior to the closing of the merger, the Board of Managers approved an interim sub-advisory agreement that will be effective until the contract owners approve a new sub-advisory agreement. The terms of the interim sub-advisory agreement are substantially the same as the terms of the prior sub-advisory agreement. The merger is not expected to affect the daily operations of the Divisions or the investment management activities of the Divisions' investment adviser. 9 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 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. 10 SEC rules further require that commissions paid to an affiliated broker-dealer or sub-adviser by the account on exchange transactions not exceed "usual and customary brokerage commission". The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time". The Board of Managers has adopted procedures for evaluating the reasonableness of commissions paid to broker-dealers that are affiliated with National Asset and will review these procedures periodically. PART 6 - PERFORMANCE INFORMATION Each Variable Account Option may from time to time include the Average Annual Total Return, the Cumulative Total Return, and Yield of its units in advertisements or in other information furnished to shareholders. The Janus Aspen Money Market Option may also from time to time include the Yield and Effective Yield of its units in information furnished to shareholders. Performance information is computed separately for each Option in accordance with the formulas described below. At any time in the future, total return and yields may be higher or lower than in the past and there is no guarantee that any historical results will continue. TOTAL RETURNS Total returns reflect all aspects of an Option's return, including the automatic reinvestment by the Option of all distributions and the deduction of all applicable charges to the Option on an annual basis, including mortality risk and expense charges, the annual administrative charge and other charges against contract values. Quotations also will assume a termination (surrender) at the end of the particular period and reflect the deductions of the contingent withdrawal charge, if applicable. Total returns may be shown at the same time that don't take into account deduction of the contingent withdrawal charge, and/or the annual administrative charge. Nonstandardized "total return" will be calculated in a similar manner and for the same time periods as the average annual total return and for three years except total return will assume an initial investment of $50,000 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 $50,000 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)(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 11 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 may be calculated for the Janus Money Market Option. Current Yield is based on the change in the value of a hypothetical investment (exclusive of capital changes) over a particular 7-day period, less a hypothetical charge reflecting deductions from contract values during the period (the BASE PERIOD), and stated as a percentage of the investment at the start of the base period (the BASE PERIOD RETURN). The base period return is then annualized by multiplying by 365/7, with the resulting yield figure carried to at least the nearest hundredth of one percent. Effective yield assumes that all dividends received during an annual period have been reinvested. This compounding effect causes effective yield to be higher than current yield. Calculation of effective yield begins with the same base period return used in the calculation of current yield, which is then annualized to reflect weekly compounding pursuant to the following formula: Effective Yield = {(Base Period Return) + 1)POWER OF (365/7)} - 1 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. 12 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. 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. 13 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 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 14 year may establish a Traditional IRA and make contributions up to the deadline for filing his or her federal income tax return for that year (without extensions). Traditional IRAs are limited on the amount that may be contributed, the persons who may be eligible, and the time when distributions may begin. An individual may also roll over amounts distributed from another Traditional IRA or another tax-favored retirement program to a Traditional IRA contract. Your Traditional IRA contract will be issued with a rider outlining the special terms of your contract that apply to Traditional IRAs. The owner will be deemed to have consented to any other amendment unless the owner notifies us that he or she doesn't consent within 30 days from the date we mail the amendment. ROTH INDIVIDUAL RETIREMENT ANNUITIES Section 408A of the Code permits eligible individuals to contribute to an individual retirement program known as a Roth IRA. An individual who receives compensation may establish a Roth IRA and make contributions up to the deadline for filing his or her federal income tax return for that year (without extensions). Roth IRAs are limited on 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 15 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. 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, 250 East Fifth Street, Cincinnati Ohio 45202, 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, 2001, 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, 2001 and 2000 included herein have been audited by Ernst & Young LLP as set forth in their reports. 16 The financial statements of Integrity should be distinguished from the financial statements of the Separate Accounts and should be considered only as they relate to the ability of Integrity to meet its obligations under the contracts. They shouldn't be considered as relating to the investment performance of the assets held in the Separate Accounts. 17 Financial Statements Separate Account II of Integrity Life Insurance Company DECEMBER 31, 2001 WITH REPORT OF INDEPENDENT AUDITORS Separate Account II of Integrity Life Insurance Company Financial Statements December 31, 2001 CONTENTS Report of Independent Auditors 1 Audited Financial Statements Statement of Assets and Liabilities 3 Statement of Operations 17 Statements of Changes in Net Assets 31 Notes to Financial Statements 51
Report of Independent Auditors Contract Holders Separate Account II of Integrity Life Insurance Company Board of Directors 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 Gabelli Large Cap Value (Pinnacle(TM)), Gabelli Large Cap Value (Pinnacle IV(TM)), Harris Bretall Sullivan & Smith Equity Growth (Pinnacle(TM)), Harris Bretall Sullivan & Smith Equity Growth (Pinnacle IV(TM)), Third Avenue Value (Pinnacle(TM)), Third Avenue Value (Pinnacle IV(TM)), Baron Small Cap Value (Pinnacle(TM)), Baron Small Cap Value (Pinnacle IV(TM)), Deutsche VIT EAFE Equity Index (Pinnacle(TM)), Deutsche VIT EAFE Equity Index (Pinnacle IV(TM)), Deutsche VIT Equity 500 Index (Pinnacle(TM)), Deutsche VIT Equity 500 Index (Pinnacle IV(TM)), Deutsche VIT Small Cap Index (Pinnacle(TM)), Deutsche VIT Small Cap Index (Pinnacle IV(TM)), JPM Bond (Pinnacle(TM)), JPM Bond (Pinnacle IV(TM)), JPM International Opportunities (Pinnacle(TM)), JPM International Opportunities (Pinnacle IV(TM)), Morgan Stanley Emerging Markets Debt (Pinnacle(TM)), Morgan Stanley Emerging Markets Debt (Pinnacle IV(TM)), Morgan Stanley High Yield (Pinnacle(TM)), Morgan Stanley High Yield (Pinnacle IV(TM)), Morgan Stanley U.S. Real Estate (Pinnacle(TM)), Morgan Stanley U.S. Real Estate (Pinnacle IV(TM)), Morgan Stanley Asian Equity (Pinnacle(TM)), Van Kampen Bandwidth & Telecommunication (Pinnacle IV(TM)), Van Kampen Biotechnology & Pharmaceutical (Pinnacle(TM)), Van Kampen Biotechnology & Pharmaceutical (Pinnacle IV(TM)), Van Kampen Internet (Pinnacle IV(TM)), Van Kampen MS High-Tech 35 Index (Pinnacle(TM)), Van Kampen MS High-Tech 35 Index (Pinnacle IV(TM)) and Van Kampen MS U.S. Multinational (Pinnacle IV(TM)); INITIAL CLASS: VIP Equity-Income (Pinnacle(TM)), VIP II Contrafund (Pinnacle(TM)), VIP III Growth & Income (Pinnacle(TM)) and VIP III Growth Opportunities (Pinnacle(TM)); INSTITUTIONAL SHARES: Janus Aspen Balanced (Pinnacle(TM)), Janus Aspen Capital Appreciation (Pinnacle(TM)), Janus Aspen Money Market (Pinnacle(TM)) and Janus Aspen Worldwide Growth (Pinnacle(TM)); SERVICE CLASS: VIP Growth (Pinnacle(TM)), VIP III MID Cap (Pinnacle(TM)), MFS Emerging Growth (Pinnacle(TM)), MFS Emerging Growth (Pinnacle IV(TM)), MFS Investors Trust (Pinnacle(TM)), MFS Investors Trust (Pinnacle IV(TM)), MFS Mid Cap Growth (Pinnacle(TM)), MFS Mid Cap Growth (Pinnacle IV(TM)), MFS New Discovery (Pinnacle(TM)), MFS New Discovery (Pinnacle IV(TM)), MFS Capital Opportunities (Pinnacle(TM)), MFS Capital Opportunities (Pinnacle IV(TM)), MFS Investors Growth Stock (Pinnacle IV(TM)), MFS Research (Pinnacle IV(TM)) and MFS Total Return (Pinnacle IV(TM)); SERVICE CLASS 2: VIP Contrafund (Pinnacle IV(TM)), VIP Dynamic Capital Appreciation (Pinnacle IV(TM)), VIP Equity-Income (Pinnacle IV(TM)), VIP Growth & Income (Pinnacle IV(TM)), VIP Growth (Pinnacle IV(TM)), VIP Growth Opportunities (Pinnacle IV(TM)), VIP Mid Cap (Pinnacle IV(TM)) and VIP Money Market (Pinnacle IV(TM)); SERVICE SHARES: Janus Aspen Aggressive Growth (Pinnacle(TM)), Janus Aspen Aggressive Growth (Pinnacle IV(TM)), Janus Aspen Balanced (Pinnacle IV(TM)), Janus Aspen Capital Appreciation (Pinnacle IV(TM)), Janus Aspen Core Equity (Pinnacle IV(TM)), Janus Aspen 1 Growth (Pinnacle(TM)), Janus Aspen Growth (Pinnacle IV(TM)), Janus Aspen International Growth (Pinnacle IV(TM)), Janus Aspen Strategic Value (Pinnacle(TM)), Janus Aspen Strategic Value (Pinnacle IV(TM)) and Janus Aspen Worldwide Growth (Pinnacle IV(TM)); and CLASS 1B SHARES: Putnam VT Growth & Income (Pinnacle(TM)), Putnam VT Growth & Income (Pinnacle IV(TM)), Putnam VT International Growth (Pinnacle(TM)), Putnam VT International Growth (Pinnacle IV(TM)), Putnam VT Small Cap Value (Pinnacle(TM)), Putnam VT Small Cap Value (Pinnacle IV(TM)), Putnam VT Technology (Pinnacle(TM)), Putnam VT Technology (Pinnacle IV(TM)), Putnam VT Voyager II (Pinnacle(TM)) and Putnam VT Voyager II (Pinnacle IV(TM)) Divisions) as of December 31, 2001, 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 as of December 31, 2001, by correspondence with the transfer agents of the respective mutual 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, 2001, the results of their operations and the changes in their net assets for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. Cincinnati, Ohio /s/ Ernst & Young LLP April 5, 2002 2 Separate Account II of Integrity Life Insurance Company Statement of Assets and Liabilities December 31,2001
-------------------------------------------------------------------------- AFFILIATED -------------------------------------------------------------------------- HARRIS BRETALL HARRIS BRETALL SULLIVAN & SULLIVAN & GABELLI LARGE GABELLI LARGE SMITH EQUITY SMITH EQUITY CAP VALUE CAP VALUE GROWTH GROWTH (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) TOTAL DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------------------------ ASSETS Investments, at value (aggregate cost of $423,509,580) $ 367,047,211 $ 8,744,161 $ 150,123 $ 19,643,892 $ 88,442 Receivable from (payable to) the general account of Integrity 31,621 (9,881) (60) 15,507 (16) ------------------------------------------------------------------------------------------ NET ASSETS $ 367,078,832 $ 8,734,280 $ 150,063 $ 19,659,399 $ 88,426 ========================================================================================== Unit value $ 14.62 $ 8.79 $ 19.21 $ 9.19 ========================================================================== Units outstanding 597,420 17,072 1,023,394 9,622 ========================================================================== --------------------------------- AFFILIATED --------------------------------- THIRD AVENUE THIRD AVENUE VALUE VALUE (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION --------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 27,693,006 $ 568,873 Receivable from (payable to) the general account of Integrity (1,653) (23) --------------------------------- NET ASSETS $ 27,691,353 $ 568,850 ================================= Unit value $ 29.62 $ 9.93 ================================= Units outstanding 934,887 57,286 ================================= SEE ACCOMPANYING NOTES. 3 ---------------------------------- AFFILIATED ---------------------------------- BARON BARON SMALL CAP SMALL CAP VALUE VALUE (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION ---------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 4,368,098 $ 154,675 Receivable from (payable to) the general account of Integrity 104 30 ---------------------------------- NET ASSETS $ 4,368,202 $ 154,705 ================================== Unit value $ 17.97 $ 10.01 ================================== Units outstanding 243,083 15,455 ================================== -------------------------------------------------------------------------- NON-AFFILIATED -------------------------------------------------------------------------- DEUTSCHE VIT DEUTSCHE VIT DEUTSCHE VIT DEUTSCHE VIT EAFE EAFE EQUITY EQUITY EQUITY INDEX EQUITY INDEX 500 INDEX 500 INDEX (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION -------------------------------------------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 2,233,949 $ 49,451 $ 28,005,583 $ 403,289 Receivable from (payable to) the general account of Integrity 128 2 1,363 40 -------------------------------------------------------------------------- NET ASSETS $ 2,234,077 $ 49,453 $ 28,006,946 $ 403,329 ========================================================================== Unit value $ 8.69 $ 9.40 $ 11.88 $ 9.53 ========================================================================== Units outstanding 257,086 5,261 2,357,487 42,322 ========================================================================== SEE ACCOMPANYING NOTES. 4 ------------------------------------------------------------------------ NON-AFFILIATED ------------------------------------------------------------------------ DEUTSCHE VIT SMALL CAP DEUTSCHE VIT JPM JPM INDEX SMALL CAP INDEX BOND BOND (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------ ASSETS Investments, at value (aggregate cost of $423,509,580) $ 5,064,159 $ 27,201 $ 24,043,354 $ 848,383 Receivable from (payable to) the general account of Integrity 288 (6) 5,163 (259) ------------------------------------------------------------------------ NET ASSETS $ 5,064,447 $ 27,195 $ 24,048,517 $ 848,124 ======================================================================== Unit value $ 10.31 $ 10.05 $ 12.19 $ 10.21 ======================================================================== Units outstanding 491,217 2,706 1,972,807 83,068 ======================================================================== ------------------------------------ NON-AFFILIATED ------------------------------------ JPM JPM INTERNATIONAL INTERNATIONAL OPPORTUNITIES OPPORTUNITIES (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION ------------------------------------ ASSETS Investments, at value (aggregate cost of $423,509,580) $ 2,509,880 $ 18,445 Receivable from (payable to) the general account of Integrity 1,538 11 ------------------------------------ NET ASSETS $ 2,511,418 $ 18,456 ==================================== Unit value $ 8.56 $ 9.77 ==================================== Units outstanding 293,390 1,889 ==================================== SEE ACCOMPANYING NOTES. 5 ------------------------------------------------------------------------- NON-AFFILIATED ------------------------------------------------------------------------- MORGAN STANLEY MORGAN STANLEY EMERGING EMERGING MORGAN STANLEY MORGAN STANLEY MARKETS DEBT MARKETS DEBT HIGH YIELD HIGH YIELD (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 1,492,440 $ 10,785 $ 6,486,133 $ 580,901 Receivable from (payable to) the general account of Integrity (150) 6 1,823 131 ------------------------------------------------------------------------- NET ASSETS $ 1,492,290 $ 10,791 $ 6,487,956 $ 581,032 ========================================================================= Unit value $ 9.93 $ 10.59 $ 9.18 $ 9.64 ========================================================================= Units outstanding 150,281 1,019 706,749 60,273 ========================================================================= ----------------------------------- NON-AFFILIATED ----------------------------------- MORGAN STANLEY MORGAN STANLEY U.S. REAL ESTATE U.S. REAL ESTATE (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION ----------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 4,071,515 $ 98,171 Receivable from (payable to) the general account of Integrity 289 (28) ----------------------------------- NET ASSETS $ 4,071,804 $ 98,143 =================================== Unit value $ 11.99 $ 10.22 =================================== Units outstanding 339,600 9,603 =================================== SEE ACCOMPANYING NOTES. 6 ------------------------------------------------------------------------- NON-AFFILIATED ------------------------------------------------------------------------- VAN KAMPEN VAN KAMPEN VAN KAMPEN MORGAN STANLEY BANDWIDTH & BIOTECHNOLOGY & BIOTECHNOLOGY & ASIAN EQUITY TELECOMMUNICATION PHARMACEUTICAL PHARMACEUTICAL (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ - $ 25,268 $ 2,005,587 $ 43,839 Receivable from (payable to) the general account of Integrity - (6) 293 (11) ------------------------------------------------------------------------- NET ASSETS $ - $ 25,262 $ 2,005,880 $ 43,828 ========================================================================= Unit value $ - $ 8.69 $ 9.87 $ 9.86 ========================================================================= Units outstanding - 2,907 203,230 4,445 ========================================================================= --------------------------------------- NON-AFFILIATED --------------------------------------- VAN KAMPEN VAN KAMPEN MS HIGH-TECH INTERNET 35 INDEX (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION --------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 10,019 $ 282,084 Receivable from (payable to) the general account of Integrity 5 (51) --------------------------------------- NET ASSETS $ 10,024 $ 282,033 ======================================= Unit value $ 6.81 $ 9.35 ======================================= Units outstanding 1,472 30,164 ======================================= SEE ACCOMPANYING NOTES. 7 ------------------------------------ NON-AFFILIATED ------------------------------------ VAN KAMPEN VAN KAMPEN MS HIGH-TECH MS U.S. 35 INDEX MULTINATIONAL (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION ------------------------------------ ASSETS Investments, at value (aggregate cost of $423,509,580) $ 237 $ 499 Receivable from (payable to) the general account of Integrity (3) 3 ------------------------------------ NET ASSETS $ 234 $ 502 ==================================== Unit value $ 9.35 $ 9.66 ==================================== Units outstanding 25 52 ==================================== ------------------------------------------------------------------------------ INITIAL CLASS NON-AFFILIATED ------------------------------------------------------------------------------ VIP III VIP III VIP VIP II GROWTH & GROWTH EQUITY-INCOME CONTRAFUND INCOME OPPORTUNITIES (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------------ ASSETS Investments, at value (aggregate cost of $423,509,580) $ 17,866,545 $ 18,520,651 $ 13,653,403 $ 5,933,096 Receivable from (payable to) the general account of Integrity 6,929 (3,846) (2,655) 3,062 ------------------------------------------------------------------------------ NET ASSETS $ 17,873,474 $ 18,516,805 $ 13,650,748 $ 5,936,158 ============================================================================== Unit value $ 11.66 $ 12.19 $ 12.07 $ 8.97 ============================================================================== Units outstanding 1,532,888 1,519,016 1,130,965 661,779 ============================================================================== SEE ACCOMPANYING NOTES. 8 ------------------------------------------------------------------------- INSTITUTIONAL SHARES NON-AFFILIATED ------------------------------------------------------------------------- JANUS ASPEN JANUS ASPEN JANUS ASPEN CAPITAL JANUS ASPEN WORLDWIDE BALANCED APPRECIATION MONEY MARKET GROWTH (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 42,221,817 $ 26,113,724 $ 27,340,083 $ 28,787,041 Receivable from (payable to) the general account of Integrity 2,978 (6,746) 6,280 6,073 ------------------------------------------------------------------------- NET ASSETS $ 42,224,795 $ 26,106,978 $ 27,346,363 $ 28,793,114 ========================================================================= Unit value $ 14.95 $ 15.17 $ 11.70 $ 12.44 ========================================================================= Units outstanding 2,824,401 1,720,961 2,337,296 2,314,559 ========================================================================= ---------------------------------------- SERVICE CLASS NON-AFFILIATED ---------------------------------------- VIP VIP III GROWTH MID CAP (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION ---------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 4,527,278 $ 9,461,008 Receivable from (payable to) the general account of Integrity (741) (2,020) ---------------------------------------- NET ASSETS $ 4,526,537 $ 9,458,988 ======================================== Unit value $ 8.99 $ 16.27 ======================================== Units outstanding 503,508 581,376 ======================================== SEE ACCOMPANYING NOTES. 9 ------------------------------------------------------------------------- SERVICE CLASS NON-AFFILIATED ------------------------------------------------------------------------- MFS MFS EMERGING EMERGING MFS MFS GROWTH GROWTH INVESTORS TRUST INVESTORS TRUST (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 1,766,284 $ 69,425 $ 2,416,709 $ 82,477 Receivable from (payable to) the general account of Integrity 220 (17) 500 (35) ------------------------------------------------------------------------- NET ASSETS $ 1,766,504 $ 69,408 $ 2,417,209 $ 82,442 ========================================================================= Unit value $ 5.24 $ 9.22 $ 8.39 $ 9.51 ========================================================================= Units outstanding 337,119 7,528 288,106 8,669 ========================================================================= --------------------------------------- SERVICE CLASS NON-AFFILIATED --------------------------------------- MFS MFS MID CAP MID CAP GROWTH GROWTH (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION --------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 6,810,967 $ 184,997 Receivable from (payable to) the general account of Integrity 2,871 18 --------------------------------------- NET ASSETS $ 6,813,838 $ 185,015 ======================================= Unit value $ 7.83 $ 9.11 ======================================= Units outstanding 870,222 20,309 ======================================= SEE ACCOMPANYING NOTES. 10 ------------------------------------------------------------------------- SERVICE CLASS NON-AFFILIATED ------------------------------------------------------------------------- MFS MFS MFS MFS CAPITAL CAPITAL NEW DISCOVERY NEW DISCOVERY OPPORTUNITIES OPPORTUNITIES (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 3,622,344 $ 175,237 $ 3,683,831 $ 141,129 Receivable from (payable to) the general account of Integrity 1,491 8 2,199 (38) ------------------------------------------------------------------------- NET ASSETS $ 3,623,835 $ 175,245 $ 3,686,030 $ 141,091 ========================================================================= Unit value $ 8.67 $ 10.06 $ 6.58 $ 9.02 ========================================================================= Units outstanding 417,974 17,420 560,187 15,642 ========================================================================= --------------------------------------- SERVICE CLASS NON-AFFILIATED --------------------------------------- MFS INVESTORS MFS GROWTH STOCK RESEARCH (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION --------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 49,756 $ 28,859 Receivable from (payable to) the general account of Integrity 2 (14) --------------------------------------- NET ASSETS $ 49,758 $ 28,845 ======================================= Unit value $ 9.44 $ 9.32 ======================================= Units outstanding 5,271 3,095 ======================================= SEE ACCOMPANYING NOTES. 11 ---------------- NON-AFFILATED ------------------------------------------------------- SERVICE CLASS SERVICE CLASS 2 NON-AFFILIATED ---------------- ------------------------------------------------------- VIP DYNAMIC MFS VIP CAPITAL VIP TOTAL RETURN CONTRAFUND APPRECIATION EQUITY-INCOME (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION ---------------- ------------------------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 485,602 $ 473,461 $ 28,690 $ 860,105 Receivable from (payable to) the general account of Integrity 126 193 15 159 ---------------- ------------------------------------------------------- NET ASSETS $ 485,728 $ 473,654 $ 28,705 $ 860,264 ================ ======================================================= Unit value $ 9.94 $ 9.71 $ 9.43 $ 9.64 ================ ======================================================= Units outstanding 48,866 48,780 3,044 89,239 ================ ======================================================= ---------------------------------------- SERVICE CLASS 2 NON-AFFILIATED ---------------------------------------- VIP GROWTH & VIP INCOME GROWTH (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION ---------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 265,018 $ 383,647 Receivable from (payable to) the general account of Integrity 25 114 ---------------------------------------- NET ASSETS $ 265,043 $ 383,761 ======================================== Unit value $ 9.90 $ 9.42 ======================================== Units outstanding 26,772 40,739 ======================================== SEE ACCOMPANYING NOTES. 12 ------------------------------------------------------- SERVICE CLASS 2 NON-AFFILIATED ------------------------------------------------------- VIP GROWTH VIP VIP OPPORTUNITIES MIDCAP MONEY MARKET (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION ----------------------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 44,993 $ 404,533 $ 2,237,232 Receivable from (payable to) the general account of Integrity (5) (141) (856) ------------------------------------------------------- NET ASSETS $ 44,988 $ 404,392 $ 2,236,376 ======================================================= Unit value $ 9.58 $ 10.23 $ 10.05 ======================================================= Units outstanding 4,696 39,530 222,525 ======================================================= ------------------------------------------------------------ SERVICE SHARES NON-AFFILIATED ------------------------------------------------------------ JANUS ASPEN JANUS ASPEN AGGRESSIVE AGGRESSIVE JANUS ASPEN GROWTH GROWTH BALANCED (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION ------------------------------------------------------------ ASSETS Investments, at value (aggregate cost of $423,509,580) $ 1,512,541 $ 21,006 $ 462,395 Receivable from (payable to) the general account of Integrity 1,303 (6) (37) ------------------------------------------------------------ NET ASSETS $ 1,513,844 $ 21,000 $ 462,358 ============================================================ Unit value $ 4.02 $ 8.75 $ 9.89 ============================================================ Units outstanding 376,578 2,400 46,750 ============================================================ SEE ACCOMPANYING NOTES. 13 -------------------------------------------------------------------------- SERVICE SHARES NON-AFFILIATED -------------------------------------------------------------------------- JANUS ASPEN CAPITAL JANUS ASPEN JANUS ASPEN JANUS ASPEN APPRECIATION CORE EQUITY GROWTH GROWTH (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION -------------------------------------------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 143,250 $ 23,395 $ 1,593,558 $ 439,385 Receivable from (payable to) the general account of Integrity 3 (4) (20) (47) -------------------------------------------------------------------------- NET ASSETS $ 143,253 $ 23,391 $ 1,593,538 $ 439,338 ========================================================================== Unit value $ 9.46 $ 9.63 $ 6.39 $ 9.06 ========================================================================== Units outstanding 15,143 2,429 249,380 48,492 ========================================================================== --------------------------------------- SERVICE SHARES NON-AFFILIATED --------------------------------------- JANUS ASPEN INTERNATIONAL JANUS ASPEN GROWTH STRATEGIC VALUE (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION --------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 58,175 $ 1,872,680 Receivable from (payable to) the general account of Integrity (15) (81) --------------------------------------- NET ASSETS $ 58,160 $ 1,872,599 ======================================= Unit value $ 9.61 $ 8.67 ======================================= Units outstanding 6,052 215,986 ======================================= SEE ACCOMPANYING NOTES. 14 ------------------------------------ SERVICE SHARES NON-AFFILIATED ------------------------------------ JANUS ASPEN JANUS ASPEN WORLDWIDE STRATEGIC VALUE GROWTH (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION ------------------------------------ ASSETS Investments, at value (aggregate cost of $423,509,580) $ 25,939 $ 501,890 Receivable from (payable to) the general account of Integrity (10) (152) ------------------------------------ NET ASSETS $ 25,929 $ 501,738 ==================================== Unit value $ 9.47 $ 9.48 ==================================== Units outstanding 2,738 52,926 ==================================== ------------------------------------------------------------------------------ CLASS 1B SHARES NON-AFFILIATED ------------------------------------------------------------------------------ PUTNAM VT PUTNAM VT PUTNAM VT PUTNAM VT GROWTH & GROWTH & INTERNATIONAL INTERNATIONAL INCOME INCOME GROWTH GROWTH (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------------ ASSETS Investments, at value (aggregate cost of $423,509,580) $ 194,427 $ 191,071 $ 485,167 $ 62,716 Receivable from (payable to) the general account of Integrity 53 72 (114) 10 ------------------------------------------------------------------------------ NET ASSETS $ 194,480 $ 191,143 $ 485,053 $ 62,726 ============================================================================== Unit value $ 9.51 $ 9.53 $ 9.59 $ 9.68 ============================================================================== Units outstanding 20,450 20,057 50,579 6,480 ============================================================================== SEE ACCOMPANYING NOTES. 15 -------------------------------------------------------------------------- CLASS 1B SHARES NON-AFFILIATED -------------------------------------------------------------------------- PUTNAM VT PUTNAM VT SMALL CAP SMALL CAP PUTNAM VT PUTNAM VT VALUE VALUE TECHNOLOGY TECHNOLOGY (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION -------------------------------------------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 740,896 $ 182,768 $ 17,637 $ 25,433 Receivable from (payable to) the general account of Integrity 23 (64) - (13) -------------------------------------------------------------------------- NET ASSETS $ 740,919 $ 182,704 $ 17,637 $ 25,420 ========================================================================== Unit value $ 10.21 $ 10.17 $ 8.93 $ 8.96 ========================================================================== Units outstanding 72,568 17,965 1,975 2,837 ========================================================================== --------------------------------------- CLASS 1B SHARES NON-AFFILIATED --------------------------------------- PUTNAM VT PUTNAM VT VOYAGER II VOYAGER II (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION --------------------------------------- ASSETS Investments, at value (aggregate cost of $423,509,580) $ 93,980 $ 36,518 Receivable from (payable to) the general account of Integrity (14) 8 --------------------------------------- NET ASSETS $ 93,966 $ 36,526 ======================================= Unit value $ 8.95 $ 9.03 ======================================= Units outstanding 10,499 4,045 =======================================
SEE ACCOMPANYING NOTES. 16 Separate Account II of Integrity Life Insurance Company Statement of Operations Periods Ended December 31, 2001
GABELLI LARGE HARRIS BRETALL GABELLI LARGE CAP VALUE SULLIVAN & SMITH CAP VALUE (PINNACLE IV(TM)) EQUITY GROWTH (PINNACLE(TM)) DIVISION (PINNACLE(TM)) TOTAL DIVISION -JULY 30*- DIVISION ------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 11,931,750 $ 315,076 $ 952 $ 1,884,335 EXPENSES Mortality and expense risk and administrative charges 5,018,168 143,301 691 323,429 ------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 6,913,582 171,775 261 1,560,906 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (25,138,817) (2,042,394) (2,930) (1,712,348) Net unrealized appreciation (depreciation) of investments: Beginning of period (24,318,646) (2,189,020) - (7,178,892) End of period (56,462,369) (2,306,723) 5,801 (16,183,863) ------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period (32,143,723) (117,703) 5,801 (9,004,971) ------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (57,282,540) (2,160,097) 2,871 (10,717,319) ------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (50,368,958) $ (1,988,322) $ 3,132 $ (9,156,413) ========================================================================= HARRIS BRETALL SULLIVAN & SMITH THIRD AVENUE EQUITY GROWTH THIRD AVENUE VALUE (PINNACLE IV(TM)) VALUE (PINNACLE IV(TM)) DIVISION (PINNACLE(TM)) DIVISION -JULY 20*- DIVISION -JULY 30*- -------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 605 $ 200,253 $ 1,074 EXPENSES Mortality and expense risk and administrative charges 200 322,456 1,484 -------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 405 (122,203) (410) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (16) (1,445,734) (5,766) Net unrealized appreciation (depreciation) of investments: Beginning of period - (3,670,973) - End of period 2,990 429,987 30,358 -------------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period 2,990 4,100,960 30,358 -------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 2,974 2,655,226 24,592 -------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,379 $ 2,533,023 $ 24,182 ==============================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 17
BARON DEUTSCHE VIT BARON SMALL CAP DEUTSCHE VIT EAFE SMALL CAP VALUE EAFE EQUITY INDEX VALUE (PINNACLE IV(TM)) EQUITY INDEX (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION (PINNACLE(TM)) DIVISION DIVISION -JULY 30*- DIVISION -JULY 30*- ------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ - $ - $ - $ - EXPENSES Mortality and expense risk and administrative charges 51,227 274 35,052 99 ------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) (51,227) (274) (35,052) (99) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (20,245) (17) (676,222) (5) Net unrealized appreciation (depreciation) of investments: Beginning of period (51,326) - (183,529) - End of period 222,248 10,159 8,886 415 ------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period 273,574 10,159 192,415 415 ------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 253,329 10,142 (483,807) 410 ------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 202,102 $ 9,868 $ (518,859) $ 311 ========================================================================= DEUTSCHE VIT DEUTSCHE VIT EQUITY EQUITY 500 INDEX 500 INDEX (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION -JULY 30*- --------------------------------------- INVESTMENT INCOME Reinvested dividends $ 259,391 $ 3,531 EXPENSES Mortality and expense risk and administrative charges 401,686 1,140 --------------------------------------- NET INVESTMENT INCOME (LOSS) (142,295) 2,391 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (593,255) 8,594 Net unrealized appreciation (depreciation) of investments: Beginning of period 799,463 - End of period (3,011,572) 4,397 --------------------------------------- Change in net unrealized appreciation/depreciation during the period (3,811,035) 4,397 --------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (4,404,290) 12,991 --------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (4,546,585) $ 15,382 =======================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 18
DEUTSCHE VIT DEUTSCHE VIT SMALL CAP JPM SMALL CAP INDEX JPM BOND INDEX (PINNACLE IV(TM)) BOND (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION (PINNACLE(TM)) DIVISION DIVISION -JULY 30*- DIVISION -JULY 24*- ------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 265,369 $ 1,125 $ 1,642,058 $ 34,505 EXPENSES Mortality and expense risk and administrative charges 70,850 35 309,068 2,405 ------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 194,519 1,090 1,332,990 32,100 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments 392,984 62 314,541 1,179 Net unrealized appreciation (depreciation) of investments: Beginning of period 214,696 - 231,081 - End of period (394,169) 377 (314,625) (31,293) ------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period (608,865) 377 (545,706) (31,293) ------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (215,881) 439 (231,165) (30,114) ------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (21,362) $ 1,529 $ 1,101,825 $ 1,986 ========================================================================= JPM JPM INTERNATIONAL INTERNATIONAL OPPORTUNITIES OPPORTUNITIES (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION -JULY 30*- --------------------------------------- INVESTMENT INCOME Reinvested dividends $ 94,048 $ 1,016 EXPENSES Mortality and expense risk and administrative charges 36,747 287 --------------------------------------- NET INVESTMENT INCOME (LOSS) 57,301 729 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (1,317,645) 4,612 Net unrealized appreciation (depreciation) of investments: Beginning of period (565,664) - End of period 46,542 387 --------------------------------------- Change in net unrealized appreciation/depreciation during the period 612,206 387 --------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (705,439) 4,999 --------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (648,138) $ 5,728 =======================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 19
MORGAN STANLEY MORGAN STANLEY EMERGING MORGAN STANLEY EMERGING MARKETS DEBT MORGAN STANLEY HIGH YIELD MARKETS DEBT (PINNACLE IV(TM)) HIGH YIELD (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION (PINNACLE(TM)) DIVISION DIVISION -JULY 30*- DIVISION -JULY 30*- ------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 130,717 $ 944 $ 738,469 $ 58,887 EXPENSES Mortality and expense risk and administrative charges 22,424 20 88,273 2,044 ------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 108,293 924 650,196 56,843 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments 50,736 25 (1,572,349) 18,003 Net unrealized appreciation (depreciation) of investments: Beginning of period 13,151 - (1,607,564) - End of period (17,186) (619) (976,085) (51,400) ------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period (30,337) (619) 631,479 (51,400) ------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 20,399 (594) (940,870) (33,397) ------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 128,692 $ 330 $ (290,674) $ 23,446 ========================================================================= MORGAN STANLEY MORGAN STANLEY U.S. REAL ESTATE U.S. REAL ESTATE (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION -JULY 30*- --------------------------------------- INVESTMENT INCOME Reinvested dividends $ 178,643 $ 3,633 EXPENSES Mortality and expense risk and administrative charges 53,029 331 --------------------------------------- NET INVESTMENT INCOME (LOSS) 125,614 3,302 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments 459,136 3,910 Net unrealized appreciation (depreciation) of investments: Beginning of period 333,143 - End of period 150,719 (2) --------------------------------------- Change in net unrealized appreciation/depreciation during the period (182,424) (2) --------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 276,712 3,908 --------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 402,326 $ 7,210 =======================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 20
VAN KAMPEN VAN KAMPEN VAN KAMPEN BANDWIDTH & BIOTECHNOLOGY & BIOTECHNOLOGY & MORGAN STANLEY TELECOMMUNICATION PHARMACEUTICAL PHARMACEUTICAL ASIAN EQUITY (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION DIVISION -JULY 30*- -JULY 30*- -JULY 30*- ------------------------------------------------------------------------ INVESTMENT INCOME Reinvested dividends $ - $ 144 $ 5,396 $ 91 EXPENSES Mortality and expense risk and administrative charges 9,602 64 5,327 82 ------------------------------------------------------------------------ NET INVESTMENT INCOME (LOSS) (9,602) 80 69 9 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (264,359) 59 488 6 Net unrealized appreciation (depreciation) of investments: Beginning of period (304,043) - - - End of period - 1,551 75,457 1,123 ------------------------------------------------------------------------ Change in net unrealized appreciation/depreciation during the period 304,043 1,551 75,457 1,123 ------------------------------------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 39,684 1,610 75,945 1,129 ------------------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 30,082 $ 1,690 $ 76,014 $ 1,138 ======================================================================== VAN KAMPEN VAN KAMPEN MS HIGH-TECH INTERNET 35 INDEX (PINNACLE 1V(TM)) (PINNACLE(TM)) DIVISION DIVISION -JULY 30*- -SEPTEMBER 21*- --------------------------------------- INVESTMENT INCOME Reinvested dividends $ - $ 635 EXPENSES Mortality and expense risk and administrative charges 13 273 --------------------------------------- NET INVESTMENT INCOME (LOSS) (13) 362 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments 1 483 Net unrealized appreciation (depreciation) of investments: Beginning of period - - End of period 415 (23,596) --------------------------------------- Change in net unrealized appreciation/depreciation during the period 415 (23,596) --------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 416 (23,113) --------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 403 $ (22,751) =======================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 21
VAN KAMPEN VAN KAMPEN MS HIGH-TECH MS U.S. 35 INDEX MULTINATIONAL (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION -JULY 30*- -JULY 30*- ---------------------------------- INVESTMENT INCOME Reinvested dividends $ - $ - EXPENSES Mortality and expense risk and administrative charges - - ---------------------------------- NET INVESTMENT INCOME (LOSS) - - REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments - - Net unrealized appreciation (depreciation) of investments: Beginning of period - - End of period (12) - ---------------------------------- Change in net unrealized appreciation/depreciation during the period (12) - ---------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (12) - ---------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (12) $ - ================================== ----------------------------------------------------------------------------- INITIAL CLASS ----------------------------------------------------------------------------- VIP III VIP III VIP VIP II GROWTH & GROWTH EQUITY-INCOME CONTRAFUND INCOME OPPORTUNITIES (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------------ INVESTMENT INCOME Reinvested dividends $ 1,042,153 $ 851,873 $ 787,066 $ 27,674 EXPENSES Mortality and expense risk and administrative charges 234,722 277,933 192,239 90,614 ------------------------------------------------------------------------------ NET INVESTMENT INCOME (LOSS) 807,431 573,940 594,827 (62,940) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (476,588) (2,263,915) (153,811) (791,789) Net unrealized appreciation (depreciation) of investments: Beginning of period 224,551 (692,459) (70,274) (1,822,178) End of period (1,389,646) (2,611,833) (2,134,530) (2,273,298) ------------------------------------------------------------------------------ Change in net unrealized appreciation/depreciation during the period (1,614,197) (1,919,374) (2,064,256) (451,120) ------------------------------------------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (2,090,785) (4,183,289) (2,218,067) (1,242,909) ------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (1,283,354) $ (3,609,349) $ (1,623,240) $ (1,305,849) =========-====================================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 22
------------------------------------------------------------------------- INSTITUTIONAL SHARES ------------------------------------------------------------------------- JANUS ASPEN JANUS ASPEN JANUS ASPEN CAPITAL JANUS ASPEN WORLDWIDE BALANCED APPRECIATION MONEY MARKET GROWTH (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION DIVISION -------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 1,168,098 $ 391,400 $ 842,544 $ 160,084 EXPENSES Mortality and expense risk and administrative charges 634,764 453,916 291,424 480,158 -------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 533,334 (62,516) 551,120 (320,074) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments 3,158,429 (369,509) - (9,676,839) Net unrealized appreciation (depreciation) of investments: Beginning of period 6,955,903 (425,860) 2 (11,737,728) End of period 174,323 (9,950,175) 1 (12,393,373) -------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period (6,781,580) (9,524,315) (1) (655,645) -------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (3,623,151) (9,893,824) (1) (10,332,484) -------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (3,089,817) $ (9,956,340) $ 551,119 $ (10,652,558) ========================================================================== --------------------------------------- SERVICE CLASS --------------------------------------- VIP VIP III GROWTH MID CAP (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION ---------------------------------------- INVESTMENT INCOME Reinvested dividends $ 234,072 $ - EXPENSES Mortality and expense risk and administrative charges 54,989 120,787 --------------------------------------- NET INVESTMENT INCOME (LOSS) 179,083 (120,787) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (1,291,800) (179,071) Net unrealized appreciation (depreciation) of investments: Beginning of period (473,912) 403,748 End of period (165,804) 169,593 --------------------------------------- Change in net unrealized appreciation/depreciation during the period 308,108 (234,155) --------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (983,692) (413,226) --------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (804,609) $ (534,013) ===============-=======================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 23
--------------------------------------------------------------------------- SERVICE CLASS --------------------------------------------------------------------------- MFS MFS EMERGING MFS EMERGING GROWTH MFS INVESTORS TRUST GROWTH (PINNACLE IV(TM)) INVESTORS TRUST (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION (PINNACLE(TM)) DIVISION DIVISION -JULY 30*- DIVISION -JULY 30*- ------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 106,101 $ - $ 40,043 $ - EXPENSES Mortality and expense risk and administrative charges 24,217 113 22,925 278 ------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 81,884 (113) 17,118 (278) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (308,018) (3) (199,416) (2,169) Net unrealized appreciation (depreciation) of investments: Beginning of period (345,167) - (5,802) - End of period (955,342) 2,953 (96,666) (1,019) ------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period (610,175) 2,953 (90,864) (1,019) ------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (918,193) 2,950 (290,280) (3,188) ------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (836,309) $ 2,837 $ (273,162) $ (3,466) ========================================================================= --------------------------------------- SERVICE CLASS --------------------------------------- MFS MFS MID CAP MID CAP GROWTH GROWTH (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION -JULY 30*- --------------------------------------- INVESTMENT INCOME Reinvested dividends $ 50,711 $ - EXPENSES Mortality and expense risk and administrative charges 71,854 354 --------------------------------------- NET INVESTMENT INCOME (LOSS) (21,143) (354) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (1,183,977) (122) Net unrealized appreciation (depreciation) of investments: Beginning of period (263,456) - End of period (395,357) 11,513 --------------------------------------- Change in net unrealized appreciation/depreciation during the period (131,901) 11,513 --------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (1,315,878) 11,391 --------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (1,337,021) $ 11,037 =======================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 24
--------------------------------------------------------------------------- SERVICE CLASS --------------------------------------------------------------------------- MFS MFS MFS CAPITAL MFS NEW DISCOVERY CAPITAL OPPORTUNITIES NEW DISCOVERY (PINNACLE IV(TM)) OPPORTUNITIES (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION (PINNACLE(TM)) DIVISION DIVISION -JULY 20*- DIVISION -JULY 30*- ------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 74,047 $ - $ 309,081 $ - EXPENSES Mortality and expense risk and administrative charges 39,576 339 52,421 297 ------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 34,471 (339) 256,660 (297) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (348,595) (50) (569,700) (8,654) Net unrealized appreciation (depreciation) of investments: Beginning of period (134,234) - (518,709) - End of period (174,230) 16,982 (1,430,820) 7,251 ------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period (39,996) 16,982 (912,111) 7,251 ------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (388,591) 16,932 (1,481,811) (1,403) ------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (354,120) $ 16,593 $ (1,225,151) $ (1,700) ========================================================================= --------------------------------------- SERVICE CLASS --------------------------------------- MFS INVESTORS MFS GROWTH STOCK RESEARCH (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION -JULY 30*- -JULY 30*- --------------------------------------- INVESTMENT INCOME Reinvested dividends $ - $ - EXPENSES Mortality and expense risk and administrative charges 281 448 --------------------------------------- NET INVESTMENT INCOME (LOSS) (281) (448) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (238) 10,694 Net unrealized appreciation (depreciation) of investments: Beginning of period - - End of period (2,811) 1,403 --------------------------------------- Change in net unrealized appreciation/depreciation during the period (2,811) 1,403 --------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (3,049) 12,097 --------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (3,330) $ 11,649 =======================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 25
----------------- -------------------------------------------------------- SERVICE CLASS SERVICE CLASS 2 ----------------- -------------------------------------------------------- VIP DYNAMIC MFS VIP CAPITAL VIP TOTAL RETURN CONTRAFUND APPRECIATION EQUITY-INCOME (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION -JULY 30*- -JULY 20*- -JULY 30*- -JULY 30*- ----------------- -------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ - $ - $ - $ - EXPENSES Mortality and expense risk and administrative charges 888 1,024 61 2,013 ----------------- -------------------------------------------------------- NET INVESTMENT INCOME (LOSS) (888) (1,024) (61) (2,013) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (53) (79) 10 6,447 Net unrealized appreciation (depreciation) of investments: Beginning of period - - - - End of period 9,111 14,713 1,655 14,842 ----------------- -------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period 9,111 14,713 1,655 14,842 ----------------- -------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 9,058 14,634 1,665 21,289 ---------------- --------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 8,170 $ 13,610 $ 1,604 $ 19,276 ================ ========================================================= --------------------------------------- SERVICE CLASS 2 --------------------------------------- VIP GROWTH & VIP INCOME GROWTH (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION -JULY 30*- -JULY 30*- --------------------------------------- INVESTMENT INCOME Reinvested dividends $ - $ - EXPENSES Mortality and expense risk and administrative charges 543 787 --------------------------------------- NET INVESTMENT INCOME (LOSS) (543) (787) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (350) 18,200 Net unrealized appreciation (depreciation) of investments: Beginning of period - - End of period 3,571 335 --------------------------------------- Change in net unrealized appreciation/depreciation during the period 3,571 335 --------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 3,221 18,535 --------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,678 $ 17,748 =======================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 26
---------------------------------------------------- SERVICE CLASS 2 ---------------------------------------------------- VIP GROWTH VIP VIP OPPORTUNITIES MID CAP MONEY MARKET (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION -JULY 30*- -JULY 20*- -JULY 30*- ---------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ - $ - $ 12,758 EXPENSES Mortality and expense risk and administrative charges 69 757 7,798 ---------------------------------------------------- NET INVESTMENT INCOME (LOSS) (69) (757) 4,960 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (94) (2,349) - Net unrealized appreciation (depreciation) of investments: Beginning of period - - - End of period 867 17,199 - ---------------------------------------------------- Change in net unrealized appreciation/depreciation during the period 867 17,199 - ---------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 773 14,850 - ---------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 704 $ 14,093 $ 4,960 ==================================================== ------------------------------------------------------------ SERVICE SHARES ------------------------------------------------------------ JANUS ASPEN JANUS ASPEN AGGRESSIVE JANUS ASPEN AGGRESSIVE GROWTH BALANCED GROWTH (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION -JULY 20*- -JULY 30*- ------------------------------------------------------------ INVESTMENT INCOME Reinvested dividends $ - $ - $ 3,921 EXPENSES Mortality and expense risk and administrative charges 24,146 30 1,249 ------------------------------------------------------------ NET INVESTMENT INCOME (LOSS) (24,146) (30) 2,672 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (1,417,577) (100) (1,329) Net unrealized appreciation (depreciation) of investments: Beginning of period (953,682) - - End of period (548,791) 335 91 ------------------------------------------------------------ Change in net unrealized appreciation/depreciation during the period 404,891 335 91 ------------------------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (1,012,686) 235 (1,238) ------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (1,036,832) $ 205 $ 1,434 ============================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 27
--------------------------------------------------------------------------- SERVICE SHARES --------------------------------------------------------------------------- JANUS ASPEN CAPITAL JANUS ASPEN JANUS ASPEN APPRECIATION CORE EQUITY JANUS ASPEN GROWTH (PINNACLE IV(TM)) (PINNACLE IV(TM)) GROWTH (PINNACLE IV(TM)) DIVISION DIVISION (PINNACLE(TM)) DIVISION -JULY 30*- -JULY 30*- DIVISION -JULY 30*- --------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 245 $ 43 $ 3,101 $ - EXPENSES Mortality and expense risk and administrative charges 327 47 19,997 885 --------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) (82) (4) (16,896) (885) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (6,349) 2 (568,105) 812 Net unrealized appreciation (depreciation) of investments: Beginning of period - - (292,144) - End of period 6,690 455 (153,732) 15,697 --------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period 6,690 455 138,412 15,697 --------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 341 457 (429,693) 16,509 --------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 259 $ 453 $ (446,589) $ 15,624 =========================================================================== --------------------------------------- SERVICE SHARES --------------------------------------- JANUS ASPEN INTERNATIONAL GROWTH JANUS ASPEN (PINNACLE IV(TM)) STRATEGIC VALUE DIVISION (PINNACLE(TM)) -JULY 30*- DIVISION --------------------------------------- INVESTMENT INCOME Reinvested dividends $ 74 $ 5,443 EXPENSES Mortality and expense risk and administrative charges 139 24,888 --------------------------------------- NET INVESTMENT INCOME (LOSS) (65) (19,445) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (5) (135,844) Net unrealized appreciation (depreciation) of investments: Beginning of period - (7,768) End of period 3,010 (81,528) --------------------------------------- Change in net unrealized appreciation/depreciation during the period 3,010 (73,760) --------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 3,005 (209,604) --------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,940 $ (229,049) =======================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 28
----------------------------------- SERVICE SHARES ----------------------------------- JANUS ASPEN JANUS ASPEN WORLDWIDE STRATEGIC VALUE GROWTH (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION -JULY 30*- -JULY 30*- ----------------------------------- INVESTMENT INCOME Reinvested dividends $ - $ 321 EXPENSES Mortality and expense risk and administrative charges 70 689 ----------------------------------- NET INVESTMENT INCOME (LOSS) (70) (368) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (70) (262) Net unrealized appreciation (depreciation) of investments: Beginning of period - - End of period 1,141 11,556 ----------------------------------- Change in net unrealized appreciation/depreciation during the period 1,141 11,556 ----------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 1,071 11,294 ----------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,001 $ 10,926 =================================== ----------------------------------------------------------------------------- CLASS 1B SHARES ----------------------------------------------------------------------------- PUTNAM VT PUTNAM VT PUTNAM VT PUTNAM VT GROWTH & GROWTH & INTERNATIONAL INTERNATIONAL INCOME INCOME GROWTH GROWTH (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION -AUGUST 22*- -JULY 30*- -AUGUST 6*- -JULY 30*- ----------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ - $ - $ - $ - EXPENSES Mortality and expense risk and administrative charges 561 511 947 113 ----------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) (561) (511) (947) (113) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (2,546) (1,927) 29,865 (4) Net unrealized appreciation (depreciation) of investments: Beginning of period - - - - End of period 7,907 1,861 12,908 1,922 ----------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period 7,907 1,861 12,908 1,922 ----------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 5,361 (66) 42,773 1,918 ----------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 4,800 $ (577) $ 41,826 $ 1,805 =============================================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 29
------------------------------------------------------------------------- CLASS 1B SHARES ------------------------------------------------------------------------- PUTNAM VT PUTNAM VT SMALL CAP SMALL CAP PUTNAM VT PUTNAM VT VALUE VALUE TECHNOLOGY TECHNOLOGY (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION DIVISION -JULY 17*- -JULY 30*- -DECEMBER 19*- -JULY 30*- ------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ - $ - $ - $ - EXPENSES Mortality and expense risk and administrative charges 2,405 382 8 68 ------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) (2,405) (382) (8) (68) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (2,744) (780) - 10 Net unrealized appreciation (depreciation) of investments: Beginning of period - - - - End of period 83,637 17,653 (499) 797 ------------------------------------------------------------------------- Change in net unrealized appreciation/depreciation during the period 83,637 17,653 (499) 797 ------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 80,893 16,873 (499) 807 ------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 78,488 $ 16,491 $ (507) $ 739 ========================================================================= --------------------------------------- CLASS 1B SHARES --------------------------------------- PUTNAM VT PUTNAM VT VOYAGER II VOYAGER II (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION -NOVEMBER 1*- -JULY 30*- --------------------------------------- INVESTMENT INCOME Reinvested dividends $ - $ - EXPENSES Mortality and expense risk and administrative charges 123 81 --------------------------------------- NET INVESTMENT INCOME (LOSS) (123) (81) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments 19 (8) Net unrealized appreciation (depreciation) of investments: Beginning of period - - End of period 3,035 1,411 --------------------------------------- Change in net unrealized appreciation/depreciation during the period 3,035 1,411 --------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 3,054 1,403 --------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,931 $ 1,322 =======================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 30 Separate Account II of Integrity Life Insurance Company Statement of Changes in Net Assets Periods Ended December 31, 2001
GABELLI LARGE HARRIS BRETALL GABELLI LARGE CAP VALUE SULLIVAN & SMITH CAP VALUE (PINNACLE IV(TM)) EQUITY GROWTH (PINNACLE(TM)) DIVISION (PINNACLE(TM)) TOTAL DIVISION -JULY 30*- DIVISION --------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 6,913,582 $ 171,775 $ 261 $ 1,560,906 Net realized gain (loss) on sales of investments (25,138,817) (2,042,394) (2,930) (1,712,348) Change in net unrealized appreciation/depreciation during the period (32,143,723) (117,703) 5,801 (9,004,971) --------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (50,368,958) (1,988,322) 3,132 (9,156,413) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 39,370,372 1,059,160 95,769 737,277 Contract terminations and benefits (37,236,275) (1,729,664) (80,677) (2,933,940) Net transfers among investment options 20,803,799 2,465,698 131,839 (2,235,383) Contract maintenance charges (123,232) (2,611) - (8,898) --------------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 22,814,664 1,792,583 146,931 (4,440,944) --------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (27,554,294) (195,739) 150,063 (13,597,357) Net assets, beginning of year 394,633,126 8,930,019 - 33,256,756 --------------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 367,078,832 $ 8,734,280 $ 150,063 $ 19,659,399 =========================================================================== UNIT TRANSACTIONS Units purchased 60,554 10,603 33,404 Units redeemed (104,408) (9,366) (136,936) Units transferred 126,872 15,835 (103,894) ---------------------------------------------------------- Net increase (decrease) in units 83,018 17,072 (207,426) ========================================================== HARRIS BRETALL SULLIVAN & SMITH THIRD AVENUE EQUITY GROWTH THIRD AVENUE VALUE (PINNACLE IV(TM)) VALUE (PINNACLE IV(TM)) DIVISION (PINNACLE(TM)) DIVISION -JULY 20*- DIVISION -JULY 30*- -------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 405 $ (122,203) $ (410) Net realized gain (loss) on sales of investments (16) (1,445,734) (5,766) Change in net unrealized appreciation/depreciation during the period 2,990 4,100,960 30,358 -------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 3,379 2,533,023 24,182 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 60,548 1,973,904 340,380 Contract terminations and benefits (394) (2,177,706) (8,864) Net transfers among investment options 24,893 9,206,716 213,152 Contract maintenance charges - (6,631) - -------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 85,047 8,996,283 544,668 -------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 88,426 11,529,306 568,850 Net assets, beginning of year - 16,162,047 - -------------------------------------------------------------- NET ASSETS, END OF YEAR $ 88,426 $ 27,691,353 $ 568,850 ============================================================== UNIT TRANSACTIONS Units purchased 6,719 67,648 35,884 Units redeemed (43) (76,012) (924) Units transferred 2,946 323,065 22,326 -------------------------------------------------------------- Net increase (decrease) in units 9,622 314,701 57,286 ==============================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 31
BARON BARON SMALL CAP DEUTSCHE VIT SMALL CAP VALUE EAFE VALUE (PINNACLE IV(TM)) EQUITY INDEX (PINNACLE(TM)) DIVISION (PINNACLE(TM)) DIVISION -JULY 30*- DIVISION ----------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (51,227) $ (274) $ (35,052) Net realized gain (loss) on sales of investments (20,245) (17) (676,222) Change in net unrealized appreciation/depreciation during the period 273,574 10,159 192,415 ----------------------------------------------------- Net increase (decrease) in net assets resulting from operations 202,102 9,868 (518,859) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 80,767 44,293 189,456 Contract terminations and benefits (510,047) (274) (199,944) Net transfers among investment options 1,066,625 100,818 (132,372) Contract maintenance charges (1,372) - (691) ----------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 635,973 144,837 (143,551) ----------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 838,075 154,705 (662,410) Net assets, beginning of year 3,530,127 - 2,896,487 ----------------------------------------------------- NET ASSETS, END OF YEAR $ 4,368,202 $ 154,705 $ 2,234,077 ===================================================== UNIT TRANSACTIONS Units purchased 4,674 4,749 18,052 Units redeemed (29,998) (30) (20,394) Units transferred 61,846 10,736 11,865 ----------------------------------------------------- Net increase (decrease) in units 36,522 15,455 9,523 ===================================================== DEUTSCHE VIT DEUTSCHE VIT EAFE DEUTSCHE VIT EQUITY EQUITY INDEX EQUITY 500 INDEX (PINNACLE IV(TM)) VALUE (PINNACLE IV(TM)) DIVISION (PINNACLE(TM)) DIVISION -JULY 30*- DIVISION -JULY 30*- ----------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (99) $ (142,295) $ 2,391 Net realized gain (loss) on sales of investments (5) (593,255) 8,594 Change in net unrealized appreciation/depreciation during the period 415 (3,811,035) 4,397 ----------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 311 (4,546,585) 15,382 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 32,060 1,571,648 272,874 Contract terminations and benefits - (2,107,449) (3,948) Net transfers among investment options 17,082 (1,311,151) 119,021 Contract maintenance charges - (10,424) - ----------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 49,142 (1,857,376) 387,947 ----------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 49,453 (6,403,961) 403,329 Net assets, beginning of year - 34,410,907 - ----------------------------------------------------------- NET ASSETS, END OF YEAR $ 49,453 $ 28,006,946 $ 403,329 =========================================================== UNIT TRANSACTIONS Units purchased 3,396 122,190 29,837 Units redeemed - (168,356) (426) Units transferred 1,865 (106,260) 12,911 ----------------------------------------------------------- Net increase (decrease) in units 5,261 (152,426) 42,322 ===========================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 32
DEUTSCHE VIT DEUTSCHE VIT SMALL CAP SMALL CAP INDEX JPM INDEX (PINNACLE IV(TM)) BOND (PINNACLE(TM)) DIVISION (PINNACLE(TM)) DIVISION -JULY 30*- DIVISION -------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 194,519 $ 1,090 $ 1,332,990 Net realized gain (loss) on sales of investments 392,984 62 314,541 Change in net unrealized appreciation/depreciation during the period (608,865) 377 (545,706) -------------------------------------------------- Net increase (decrease) in net assets resulting from operations (21,362) 1,529 1,101,825 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 354,907 7,439 649,818 Contract terminations and benefits (249,399) (10) (1,267,308) Net transfers among investment options (428,217) 18,237 6,341,768 Contract maintenance charges (1,520) - (5,162) -------------------------------------------------- Net increase (decrease) in net assets from contract related transactions (324,229) 25,666 5,719,116 -------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (345,591) 27,195 6,820,941 Net assets, beginning of year 5,410,038 - 17,227,576 -------------------------------------------------- NET ASSETS, END OF YEAR $ 5,064,447 $ 27,195 $ 24,048,517 ================================================== UNIT TRANSACTIONS Units purchased 34,880 778 54,387 Units redeemed (25,598) (1) (105,931) Units transferred (46,389) 1,929 532,786 -------------------------------------------------- Net increase (decrease) in units (37,107) 2,706 481,242 ================================================== JPM JPM JPM INTERNATIONAL BOND INTERNATIONAL OPPORTUNITIES (PINNACLE IV(TM)) OPPORTUNITIES (PINNACLE IV(TM)) DIVISION (PINNACLE(TM)) DIVISION -JULY 24*- DIVISION -JULY 30*- ------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 32,100 $ 57,301 $ 729 Net realized gain (loss) on sales of investments 1,179 (1,317,645) 4,612 Change in net unrealized appreciation/depreciation during the period (31,293) 612,206 387 ------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 1,986 (648,138) 5,728 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 760,146 104,278 9,685 Contract terminations and benefits (14,740) (360,678) (80,199) Net transfers among investment options 100,732 (65,794) 83,242 Contract maintenance charges - (629) - ------------------------------------------------------ Net increase (decrease) in net assets from contract related transactions 846,138 (322,823) 12,728 ------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS 848,124 (970,961) 18,456 Net assets, beginning of year - 3,482,379 - ------------------------------------------------------ NET ASSETS, END OF YEAR $ 848,124 $ 2,511,418 $ 18,456 ====================================================== UNIT TRANSACTIONS Units purchased 74,765 10,817 1,025 Units redeemed (1,451) (39,651) (8,350) Units transferred 9,754 (2,322) 9,214 ------------------------------------------------------ Net increase (decrease) in units 83,068 (31,156) 1,889 ======================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 33
MORGAN STANLEY MORGAN STANLEY EMERGING EMERGING MARKETS DEBT MORGAN STANLEY MARKETS DEBT (PINNACLE IV(TM)) HIGH YIELD (PINNACLE(TM)) DIVISION (PINNACLE(TM)) DIVISION -JULY 30*- DIVISION ------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 108,293 $ 924 $ 650,196 Net realized gain (loss) on sales of investments 50,736 25 (1,572,349) Change in net unrealized appreciation/depreciation during the period (30,337) (619) 631,479 ------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 128,692 330 (290,674) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 88,326 5,765 248,516 Contract terminations and benefits (296,961) (9) (408,572) Net transfers among investment options (186,229) 4,705 623,607 Contract maintenance charges (778) - (1,467) ------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions (395,642) 10,461 462,084 ------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (266,950) 10,791 171,410 Net assets, beginning of year 1,759,240 - 6,316,546 ------------------------------------------------------------- NET ASSETS, END OF YEAR $ 1,492,290 $ 10,791 $ 6,487,956 ============================================================= UNIT TRANSACTIONS Units purchased 9,443 558 24,711 Units redeemed (31,559) (1) (42,001) Units transferred (20,080) 462 75,523 ------------------------------------------------------------- Net increase (decrease) in units (42,196) 1,019 58,233 ============================================================= MORGAN STANLEY MORGAN STANLEY HIGH YIELD MORGAN STANLEY U.S. REAL ESTATE (PINNACLE IV(TM)) U.S. REAL ESTATE (PINNACLE IV(TM)) DIVISION (PINNACLE (TM)) DIVISION -JULY 30*- DIVISION -JULY 30*- ------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 56,843 $ 125,614 $ 3,302 Net realized gain (loss) on sales of investments 18,003 459,136 3,910 Change in net unrealized appreciation/depreciation during the period (51,400) (182,424) (2) ------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 23,446 402,326 7,210 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 55,024 179,606 39,374 Contract terminations and benefits (14) (310,248) (2,836) Net transfers among investment options 502,576 1,162,759 54,395 Contract maintenance charges - (1,041) - ------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 557,586 1,031,076 90,933 ------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 581,032 1,433,402 98,143 Net assets, beginning of year - 2,638,402 - ------------------------------------------------------------- NET ASSETS, END OF YEAR $ 581,032 $ 4,071,804 $ 98,143 ============================================================= UNIT TRANSACTIONS Units purchased 5,743 15,857 4,029 Units redeemed (1) (26,729) (285) Units transferred 54,531 112,134 5,859 ------------------------------------------------------------- Net increase (decrease) in units 60,273 101,262 9,603 =============================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 34
VAN KAMPEN VAN KAMPEN BANDWIDTH & BIOTECHNOLOGY & MORGAN STANLEY TELECOMMUNICATION PHARMACEUTICAL ASIAN EQUITY (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION -JULY 30*- -JULY 30*- ------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (9,602) $ 80 $ 69 Net realized gain (loss) on sales of investments (264,359) 59 488 Change in net unrealized appreciation/depreciation during the period 304,043 1,551 75,457 ------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 30,082 1,690 76,014 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 8,343 17,901 42,503 Contract terminations and benefits (82,927) (206) (31,605) Net transfers among investment options (1,883,911) 5,877 1,919,048 Contract maintenance charges (212) - (80) ------------------------------------------------------------------ Net increase (decrease) in net assets from contract related transactions (1,958,707) 23,572 1,929,866 ------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS (1,928,625) 25,262 2,005,880 Net assets, beginning of year 1,928,625 - - ------------------------------------------------------------------ NET ASSETS, END OF YEAR $ - $ 25,262 $ 2,005,880 ================================================================== UNIT TRANSACTIONS Units purchased 1,225 2,204 4,435 Units redeemed (10,844) (23) (3,273) Units transferred (244,817) 726 202,068 ------------------------------------------------------------------ Net increase (decrease) in units (254,436) 2,907 203,230 ================================================================== VAN KAMPEN VAN KAMPEN BIOTECHNOLOGY & VAN KAMPEN MS HIGH-TECH PHARMACEUTICAL INTERNET 35 INDEX (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION -JULY 30*- -JULY 30*- -SEPTEMBER 21*- ------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 9 $ (13) $ 362 Net realized gain (loss) on sales of investments 6 1 483 Change in net unrealized appreciation/depreciation during the period 1,123 415 (23,596) ------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 1,138 403 (22,751) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 25,244 9,615 - Contract terminations and benefits (134) - (1,332) Net transfers among investment options 17,580 6 306,116 Contract maintenance charges - - - ------------------------------------------------------------------ Net increase (decrease) in net assets from contract related transactions 42,690 9,621 304,784 ------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS 43,828 10,024 282,033 Net assets, beginning of year - - - ------------------------------------------------------------------ NET ASSETS, END OF YEAR $ 43,828 $ 10,024 $ 282,033 ================================================================== UNIT TRANSACTIONS Units purchased 2,609 1,472 - Units redeemed (14) - (137) Units transferred 1,850 - 30,301 ------------------------------------------------------------------ Net increase (decrease) in units 4,445 1,472 30,164 ==================================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 35
-------------------- INITIAL CLASS -------------------- VAN KAMPEN VAN KAMPEN MS HIGH-TECH MS U.S. 35 INDEX MULTINATIONAL VIP (PINNACLE IV(TM)) (PINNACLE IV(TM)) EQUITY-INCOME DIVISION DIVISION (PINNACLE(TM)) -JULY 30*- -JULY 30*- DIVISION ------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ - $ - $ 807,431 Net realized gain (loss) on sales of investments - - (476,588) Change in net unrealized appreciation/depreciation during the period (12) - (1,614,197) ------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations (12) - (1,283,354) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 250 500 1,587,195 Contract terminations and benefits - - (1,113,107) Net transfers among investment options (4) 2 2,479,983 Contract maintenance charges - - (5,342) ------------------------------------------------------------------ Net increase (decrease) in net assets from contract related transactions 246 502 2,948,729 ------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS 234 502 1,665,375 Net assets, beginning of year - - 16,208,099 ------------------------------------------------------------------ NET ASSETS, END OF YEAR $ 234 $ 502 $ 17,873,474 ================================================================== UNIT TRANSACTIONS Units purchased 25 52 129,674 Units redeemed - - (93,548) Units transferred - - 192,812 ------------------------------------------------------------------ Net increase (decrease) in units 25 52 228,938 ================================================================== ------------------------------------------------------------------ INITIAL CLASS ------------------------------------------------------------------ VIP III VIP III VIP GROWTH & GROWTH CONTRAFUND INCOME OPPORTUNITIES (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION ------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 573,940 $ 594,827 $ (62,940) Net realized gain (loss) on sales of investments (2,263,915) (153,811) (791,789) Change in net unrealized appreciation/depreciation during the period (1,919,374) (2,064,256) (451,120) ------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations (3,609,349) (1,623,240) (1,305,849) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 1,199,065 671,010 288,659 Contract terminations and benefits (1,121,578) (633,805) (430,235) Net transfers among investment options (2,377,123) 332,076 (776,730) Contract maintenance charges (8,037) (4,947) (2,623) ------------------------------------------------------------------ Net increase (decrease) in net assets from contract related transactions (2,307,673) 364,334 (920,929) ------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS (5,917,022) (1,258,906) (2,226,778) Net assets, beginning of year 24,433,827 14,909,654 8,162,936 ------------------------------------------------------------------ NET ASSETS, END OF YEAR $ 18,516,805 $ 13,650,748 $ 5,936,158 ================================================================== UNIT TRANSACTIONS Units purchased 94,673 53,382 30,263 Units redeemed (90,223) (51,859) (45,814) Units transferred (220,791) 17,611 (91,308) ------------------------------------------------------------------ Net increase (decrease) in units (216,341) 19,134 (106,859) ==================================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 36
------------------------------------------------------------------ INSTITUTIONAL SHARES ------------------------------------------------------------------ JANUS ASPEN JANUS ASPEN CAPITAL JANUS ASPEN BALANCED APPRECIATION MONEY MARKET (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION ------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 533,334 $ (62,516) $ 551,120 Net realized gain (loss) on sales of investments 3,158,429 (369,509) -- Change in net unrealized appreciation/depreciation during the period (6,781,580) (9,524,315) (1) ------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations (3,089,817) (9,956,340) 551,119 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 1,632,370 1,797,233 3,509,687 Contract terminations and benefits (5,745,942) (2,142,662) (8,854,204) Net transfers among investment options (2,911,018) (8,545,373) 14,276,905 Contract maintenance charges (12,820) (16,590) (3,710) ------------------------------------------------------------------ Net increase (decrease) in net assets from contract related transactions (7,037,410) (8,907,392) 8,928,678 ------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS (10,127,227) (18,863,732) 9,479,797 Net assets, beginning of year 52,352,022 44,970,710 17,866,566 ------------------------------------------------------------------ NET ASSETS, END OF YEAR $ 42,224,795 $ 26,106,978 $ 27,346,363 ================================================================== UNIT TRANSACTIONS Units purchased 106,374 103,638 304,953 Units redeemed (383,624) (130,482) (765,064) Units transferred (190,929) (541,946) 1,227,410 ------------------------------------------------------------------ Net increase (decrease) in units (468,179) (568,790) 767,299 ================================================================== -------------------- ------------------------------------------- INSTITUTIONAL SHARES SERVICE CLASS -------------------- ------------------------------------------- JANUS ASPEN WORLDWIDE VIP VIP III GROWTH GROWTH MID CAP (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION -------------------- ------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (320,074) $ 179,083 $ (120,787) Net realized gain (loss) on sales of investments (9,676,839) (1,291,800) (179,071) Change in net unrealized appreciation/depreciation during the period (655,645) 308,108 (234,155) -------------------- -------------------------------------------- Net increase (decrease) in net assets resulting from operations (10,652,558) (804,609) (534,013) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 1,701,172 1,367,340 1,748,240 Contract terminations and benefits (1,965,735) (229,809) (510,821) Net transfers among investment options (7,281,351) 159,197 164,999 Contract maintenance charges (15,928) (1,527) (3,291) -------------------- -------------------------------------------- Net increase (decrease) in net assets from contract related transactions (7,561,842) 1,295,201 1,399,127 -------------------- -------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (18,214,400) 490,592 865,114 Net assets, beginning of year 47,007,514 4,035,945 8,593,874 -------------------- -------------------------------------------- NET ASSETS, END OF YEAR $ 28,793,114 $ 4,526,537 $ 9,458,988 ==================== ============================================ UNIT TRANSACTIONS Units purchased 116,964 139,079 110,590 Units redeemed (144,251) (24,981) (32,676) Units transferred (549,145) 25,155 13 -------------------- -------------------------------------------- Net increase (decrease) in units (576,432) 139,253 77,927 ==================== ============================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 37
------------------------------------------------------------------- SERVICE CLASS ------------------------------------------------------------------- MFS MFS EMERGING GROWTH MFS EMERGING GROWTH (PINNACLE IV(TM)) INVESTORS TRUST (PINNACLE(TM)) DIVISION (PINNACLE(TM)) DIVISION -JULY 30*- DIVISION ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 81,884 $ (113) $ 17,118 Net realized gain (loss) on sales of investments (308,018) (3) (199,416) Change in net unrealized appreciation/depreciation during the period (610,175) 2,953 (90,864) ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (836,309) 2,837 (273,162) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 436,153 48,193 630,583 Contract terminations and benefits (48,535) - (206,215) Net transfers among investment options (16,840) 18,378 1,689,936 Contract maintenance charges (693) - (280) ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 370,085 66,571 2,114,024 ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (466,224) 69,408 1,840,862 Net assets, beginning of year 2,232,728 - 576,347 ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 1,766,504 $ 69,408 $ 2,417,209 =================================================================== UNIT TRANSACTIONS Units purchased 68,993 5,414 67,364 Units redeemed (8,604) - (23,723) Units transferred (2,361) 2,114 187,626 ------------------------------------------------------------------- Net increase (decrease) in units 58,028 7,528 231,267 =================================================================== ------------------------------------------------------------------- SERVICE CLASS ------------------------------------------------------------------- MFS MFS INVESTORS TRUST MFS MID CAP GROWTH (PINNACLE IV(TM)) MID CAP GROWTH (PINNACLE IV(TM)) DIVISION (PINNACLE(TM)) DIVISION -JULY 30*- DIVISION -JULY 30*- ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (278) $ (21,143) $ (354) Net realized gain (loss) on sales of investments (2,169) (1,183,977) (122) Change in net unrealized appreciation/depreciation during the period (1,019) (131,901) 11,513 ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (3,466) (1,337,021) 11,037 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 80,418 1,548,086 129,326 Contract terminations and benefits (3,487) (227,390) (1,787) Net transfers among investment options 8,977 2,213,390 46,439 Contract maintenance charges - (1,919) - ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 85,908 3,532,167 173,978 ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 82,442 2,195,146 185,015 Net assets, beginning of year - 4,618,692 - ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 82,442 $ 6,813,838 $ 185,015 =================================================================== UNIT TRANSACTIONS Units purchased 8,219 176,879 14,911 Units redeemed (372) (28,672) (200) Units transferred 822 242,400 5,598 ------------------------------------------------------------------- Net increase (decrease) in units 8,669 390,607 20,309 ===================================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 38
------------------------------------------------------------- SERVICE CLASS ------------------------------------------------------------- MFS MFS MFS NEW DISCOVERY CAPITAL NEW DISCOVERY PINNACLE IV(TM)) OPPORTUNITIES (PINNACLE(TM)) DIVISION (PINNACLE(TM)) DIVISION -JULY 20*- DIVISION ------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 34,471 $ (339) $ 256,660 Net realized gain (loss) on sales of investments (348,595) (50) (569,700) Change in net unrealized appreciation/depreciation during the period (39,996) 16,982 (912,111) ------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (354,120) 16,593 (1,225,151) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 1,132,400 105,738 1,210,827 Contract terminations and benefits (80,939) (1,517) (158,214) Net transfers among investment options 942,125 54,431 (308,356) Contract maintenance charges (653) - (1,302) ------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 1,992,933 158,652 742,955 ------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 1,638,813 175,245 (482,196) Net assets, beginning of year 1,985,022 - 4,168,226 ------------------------------------------------------------- NET ASSETS, END OF YEAR $ 3,623,835 $ 175,245 $ 3,686,030 ============================================================= UNIT TRANSACTIONS Units purchased 129,237 11,561 151,673 Units redeemed (9,704) (154) (22,878) Units transferred 84,307 6,013 (46,068) ------------------------------------------------------------- Net increase (decrease) in units 203,840 17,420 82,727 ============================================================= ------------------------------------------------------------- SERVICE CLASS ------------------------------------------------------------- MFS MFS CAPITAL INVESTORS MFS OPPORTUNITIES GROWTH STOCK RESEARCH (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION -JULY 30*- -JULY 30*- -JULY 30*- ------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (297) $ (281) $ (448) Net realized gain (loss) on sales of investments (8,654) (238) 10,694 Change in net unrealized appreciation/depreciation during the period 7,251 (2,811) 1,403 ------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (1,700) (3,330) 11,649 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 108,795 52,316 5,059 Contract terminations and benefits (624) (1,954) (109,379 Net transfers among investment options 34,620 2,726 121,516 Contract maintenance charges - - - ------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 142,791 53,088 17,196 ------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 141,091 49,758 28,845 Net assets, beginning of year - - - ------------------------------------------------------------- NET ASSETS, END OF YEAR $ 141,091 $ 49,758 $ 28,845 ============================================================= UNIT TRANSACTIONS Units purchased 12,281 5,192 607 Units redeemed (72) (215) (11,910) Units transferred 3,433 294 14,398 ------------------------------------------------------------- Net increase (decrease) in units 15,642 5,271 3,095 =============================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 39
--------------------- --------------------------------------------- SERVICE CLASS SERVICE CLASS 2 --------------------- --------------------------------------------- VIP MFS VIP DYNAMIC CAPITAL TOTAL RETURN CONTRAFUND APPRECIATION (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION -JULY 30*- -JULY 20*- -JULY 30*- --------------------- --------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (888) $ (1,024) $ (61) Net realized gain (loss) on sales of investments (53) (79) 10 Change in net unrealized appreciation/depreciation during the period 9,111 14,713 1,655 --------------------- --------------------------------------------- Net increase (decrease) in net assets resulting from operations 8,170 13,610 1,604 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 419,297 316,230 14,745 Contract terminations and benefits (2,312) (316) (100) Net transfers among investment options 60,573 144,130 12,456 Contract maintenance charges - - - --------------------- --------------------------------------------- Net increase (decrease) in net assets from contract related transactions 477,558 460,044 27,101 --------------------- --------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 485,728 473,654 28,705 Net assets, beginning of year - - - --------------------- --------------------------------------------- NET ASSETS, END OF YEAR $ 485,728 $ 473,654 $ 28,705 ===================== ============================================= UNIT TRANSACTIONS Units purchased 42,876 33,731 1,651 Units redeemed (237) (33) (11) Units transferred 6,227 15,082 1,404 --------------------- --------------------------------------------- Net increase (decrease) in units 48,866 48,780 3,044 ===================== ============================================= ------------------------------------------------------------------- SERVICE CLASS 2 ------------------------------------------------------------------- VIP VIP VIP EQUITY-INCOME GROWTH & INCOME GROWTH (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION -JULY 30*- -JULY 30*- -JULY 30*- ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (2,013) $ (543) $ (787) Net realized gain (loss) on sales of investments 6,447 (350) 18,200 Change in net unrealized appreciation/depreciation during the period 14,842 3,571 335 ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 19,276 2,678 17,748 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 561,462 221,057 314,872 Contract terminations and benefits (6,328) (2,065) (154) Net transfers among investment options 285,854 43,373 51,295 Contract maintenance charges - - - ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 840,988 262,365 366,013 ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 860,264 265,043 383,761 Net assets, beginning of year - - - ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 860,264 $ 265,043 $ 383,761 =================================================================== UNIT TRANSACTIONS Units purchased 59,700 22,535 34,405 Units redeemed (677) (214) (17) Units transferred 30,216 4,451 6,351 ------------------------------------------------------------------- Net increase (decrease) in units 89,239 26,772 40,739 ===================================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 40
------------------------------------------------------------------- SERVICE CLASS 2 ------------------------------------------------------------------- VIP GROWTH VIP VIP OPPORTUNITIES MID CAP MONEY MARKET (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION -JULY 30*- -JULY 20*- -JULY 30*- ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (69) $ (757) $ 4,960 Net realized gain (loss) on sales of investments (94) (2,349) -- Change in net unrealized appreciation/depreciation during the period 867 17,199 -- ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 704 14,093 4,960 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 41,957 266,323 3,599,024 Contract terminations and benefits - (2,478) (280,686) Net transfers among investment options 2,327 126,454 (1,086,922) Contract maintenance charges - - - ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 44,284 390,299 2,231,416 ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 44,988 404,392 2,236,376 Net assets, beginning of year - - - ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 44,988 $ 404,392 $ 2,236,376 =================================================================== UNIT TRANSACTIONS Units purchased 4,451 26,971 358,626 Units redeemed - (253) (27,922) Units transferred 245 12,812 (108,179) ------------------------------------------------------------------- Net increase (decrease) in units 4,696 39,530 222,525 =================================================================== ------------------------------------------------------------------- SERVICE SHARES ------------------------------------------------------------------- JANUS ASPEN JANUS ASPEN AGGRESSIVE JANUS ASPEN AGGRESSIVE GROWTH BALANCED GROWTH (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION -JULY 20*- -JULY 30*- ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (24,146) $ (30) $ 2,672 Net realized gain (loss) on sales of investments (1,417,577) (100) (1,329) Change in net unrealized appreciation/depreciation during the period 404,891 335 91 ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (1,036,832) 205 1,434 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 512,148 10,540 270,630 Contract terminations and benefits (263,272) (10) (4,187) Net transfers among investment options (561,794) 10,265 194,481 Contract maintenance charges (798) - - ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions (313,716) 20,795 460,924 ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (1,350,548) 21,000 462,358 Net assets, beginning of year 2,864,392 - - ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 1,513,844 $ 21,000 $ 462,358 =================================================================== UNIT TRANSACTIONS Units purchased 100,045 1,204 27,448 Units redeemed (56,598) (1) (429) Units transferred (91,853) 1,197 19,731 ------------------------------------------------------------------- Net increase (decrease) in units (48,406) 2,400 46,750 ===================================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 41
------------------------------------------------------------------- SERVICE SHARES ------------------------------------------------------------------- JANUS ASPEN CAPITAL JANUS ASPEN APPRECIATION CORE EQUITY JANUS ASPEN (PINNACLE IV(TM)) (PINNACLE IV(TM)) GROWTH DIVISION DIVISION (PINNACLE(TM)) -JULY 30*- -JULY 30*- DIVISION ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (82) $ (4) $ (16,896) Net realized gain (loss) on sales of investments (6,349) 2 (568,105) Change in net unrealized appreciation/depreciation during the period 6,690 455 138,412 ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 259 453 (446,589) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 150,369 22,941 649,422 Contract terminations and benefits (697) - (72,066) Net transfers among investment options (6,678) (3) 133,136 Contract maintenance charges - - (740) ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 142,994 22,938 709,752 ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 143,253 23,391 263,163 Net assets, beginning of year - - 1,330,375 ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 143,253 $ 23,391 $ 1,593,538 =================================================================== UNIT TRANSACTIONS Units purchased 16,435 2,429 84,681 Units redeemed (76) - (10,878) Units transferred (1,216) - 21,420 ------------------------------------------------------------------- Net increase (decrease) in units 15,143 2,429 95,223 =================================================================== ------------------------------------------------------------------- SERVICE SHARES ------------------------------------------------------------------- JANUS ASPEN JANUS ASPEN INTERNATIONAL GROWTH GROWTH JANUS ASPEN (PINNACLE IV(TM)) (PINNACLE IV(TM)) STRATEGIC VALUE DIVISION DIVISION (PINNACLE(TM)) -JULY 30*- -JULY 30*- DIVISION ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (885) $ (65) $ (19,445) Net realized gain (loss) on sales of investments 812 (5) (135,844) Change in net unrealized appreciation/depreciation during the period 15,697 3,010 (73,760) ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 15,624 2,940 (229,049) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 100,675 44,598 1,270,058 Contract terminations and benefits (1,097) - (133,360) Net transfers among investment options 324,136 10,622 598,353 Contract maintenance charges - - (451) ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 423,714 55,220 1,734,600 ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 439,338 58,160 1,505,551 Net assets, beginning of year - - 367,048 ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 439,338 $ 58,160 $ 1,872,599 =================================================================== UNIT TRANSACTIONS Units purchased 11,813 4,916 134,101 Units redeemed (122) - (15,056) Units transferred 36,801 1,136 58,667 ------------------------------------------------------------------- Net increase (decrease) in units 48,492 6,052 177,712 ===================================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 42
-------------------------------------------- ----------------------- SERVICE SHARES CLASS 1B SHARES -------------------------------------------- ----------------------- JANUS ASPEN PUTNAM VT JANUS ASPEN WORLDWIDE GROWTH & STRATEGIC VALUE GROWTH INCOME (PINNACLE IV(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION -JULY 30*- -JULY 30*- -AUGUST 22*- -------------------------------------------- ----------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (70) $ (368) $ (561) Net realized gain (loss) on sales of investments (70) (262) (2,546) Change in net unrealized appreciation/depreciation during the period 1,141 11,556 7,907 -------------------------------------------- ----------------------- Net increase (decrease) in net assets resulting from operations 1,001 10,926 4,800 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 6,677 110,375 6,400 Contract terminations and benefits (2,610) (3,172) (3,979) Net transfers among investment options 20,861 383,609 187,268 Contract maintenance charges - - (9) -------------------------------------------- ----------------------- Net increase (decrease) in net assets from contract related transactions 24,928 490,812 189,680 -------------------------------------------- ----------------------- INCREASE (DECREASE) IN NET ASSETS 25,929 501,738 194,480 Net assets, beginning of year - - - -------------------------------------------- ----------------------- NET ASSETS, END OF YEAR $ 25,929 $ 501,738 $ 194,480 ============================================ ======================= UNIT TRANSACTIONS Units purchased 757 11,846 697 Units redeemed (279) (343) (429) Units transferred 2,260 41,423 20,182 -------------------------------------------- ----------------------- Net increase (decrease) in units 2,738 52,926 20,450 ============================================ ======================= --------------------------------------------------------------------- CLASS 1B SHARES --------------------------------------------------------------------- PUTNAM VT PUTNAM VT PUTNAM VT GROWTH & INTERNATIONAL INTERNATIONAL INCOME GROWTH GROWTH (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION -JULY 30*- -AUGUST 6*- -JULY 30*- --------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (511) $ (947) $ (113) Net realized gain (loss) on sales of investments (1,927) 29,865 (4) Change in net unrealized appreciation/depreciation during the period 1,861 12,908 1,922 --------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (577) 41,826 1,805 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 152,773 2,400 55,770 Contract terminations and benefits (1,636) (1,132) - Net transfers among investment options 40,583 441,962 5,151 Contract maintenance charges - (3) - --------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 191,720 443,227 60,921 --------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 191,143 485,053 62,726 Net assets, beginning of year - - - --------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 191,143 $ 485,053 $ 62,726 ===================================================================== UNIT TRANSACTIONS Units purchased 16,016 235 5,934 Units redeemed (175) (121) - Units transferred 4,216 50,465 546 --------------------------------------------------------------------- Net increase (decrease) in units 20,057 50,579 6,480 =====================================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 43
------------------------------------------------------------------- CLASS 1B SHARES ------------------------------------------------------------------- PUTNAM VT PUTNAM VT SMALL CAP SMALL CAP PUTNAM VT VALUE VALUE TECHNOLOGY (PINNACLE(TM)) (PINNACLE IV(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION -JULY 17*- -JULY 30*- -DECEMBER 19*- ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (2,405) $ (382) $ (8) Net realized gain (loss) on sales of investments (2,744) (780) - Change in net unrealized appreciation/depreciation during the period 83,637 17,653 (499) ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 78,488 16,491 (507) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 18,471 124,510 - Contract terminations and benefits (5,117) (1,155) - Net transfers among investment options 649,130 42,858 18,144 Contract maintenance charges (53) - - ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 662,431 166,213 18,144 ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 740,919 182,704 17,637 Net assets, beginning of year - - - ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 740,919 $ 182,704 $ 17,637 =================================================================== UNIT TRANSACTIONS Units purchased 2,083 13,476 - Units redeemed (546) (120) - Units transferred 71,031 4,609 1,975 ------------------------------------------------------------------- Net increase (decrease) in units 72,568 17,965 1,975 =================================================================== ------------------------------------------------------------------- CLASS 1B SHARES ------------------------------------------------------------------- PUTNAM VT PUTNAM VT PUTNAM VT TECHNOLOGY VOYAGER II VOYAGER II (PINNACLE IV(TM)) (PINNACLE(TM)) (PINNACLE IV(TM)) DIVISION DIVISION DIVISION -JULY 30*- -NOVEMBER 1*- -JULY 30*- ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (68) $ (123) $ (81) Net realized gain (loss) on sales of investments 10 19 (8) Change in net unrealized appreciation/depreciation during the period 797 3,035 1,411 ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 739 2,931 1,322 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 21,313 - 30,094 Contract terminations and benefits (101) (80) (141) Net transfers among investment options 3,469 91,115 5,251 Contract maintenance charges - - - ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 24,681 91,035 35,204 ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 25,420 93,966 36,526 Net assets, beginning of year - - - ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 25,420 $ 93,966 $ 36,526 =================================================================== UNIT TRANSACTIONS Units purchased 2,447 - 3,458 Units redeemed (11) (9) (16) Units transferred 401 10,508 603 ------------------------------------------------------------------- Net increase (decrease) in units 2,837 10,499 4,045 ===================================================================
SEE ACCOMPANYING NOTES. * - 2001 inception date for division. Note: Year ended unless otherwise noted. 44 Separate Account II of Integrity Life Insurance Company Statement of Changes in Net Assets Periods Ended December 31, 2000
HARRIS BRETALL SULLIVAN & GABELLI LARGE SMITH EQUITY CAP VALUE GROWTH (PINNACLE(TM)) (PINNACLE(TM)) TOTAL DIVISION DIVISION ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 27,616,489 $ 1,273,297 $ 6,281,014 Net realized gain (loss) on sales of investments 13,447,826 (2,487,363) 3,652,587 Change in net unrealized appreciation/depreciation during the period (85,529,107) 543,981 (20,090,139) ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (44,464,792) (670,085) (10,156,538) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 50,907,435 123,575 3,282,984 Contract terminations and benefits (69,850,637) (4,513,441) (7,544,420) Net transfers among investment options 28,671,436 (861,007) 4,764,533 ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 9,728,234 (5,250,873) 503,097 ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (34,736,558) (5,920,958) (9,653,441) Net assets, beginning of year 429,369,684 14,850,977 42,910,197 ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 394,633,126 $ 8,930,019 $ 33,256,756 =================================================================== UNIT TRANSACTIONS Units purchased 6,862 97,356 Units redeemed (249,821) (220,653) Units transferred (47,570) 139,219 -------------------------------------------- Net increase (decrease) in units (290,529) 15,922 ============================================ DEUTSCHE VIT THIRD AVENUE BARON SMALL EAFE VALUE CAP VALUE EQUITY INDEX (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 1,536,525 $ 14,819 $ 3,772 Net realized gain (loss) on sales of investments (4,256,415) (1,093,260) 139,258 Change in net unrealized appreciation/depreciation during the period 3,711,341 980,973 (773,164) ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 991,451 (97,468) (630,134) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 354,124 119,601 283,694 Contract terminations and benefits (3,908,944) (1,336,506) (180,643) Net transfers among investment options (3,387,921) (832,803) 4,527 ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions (6,942,741) (2,049,708) 107,578 ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (5,951,290) (2,147,176) (522,556) Net assets, beginning of year 22,113,337 5,677,303 3,419,043 ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 16,162,047 $ 3,530,127 $ 2,896,487 =================================================================== UNIT TRANSACTIONS Units purchased 15,677 7,303 22,488 Units redeemed (171,803) (82,141) (13,793) Units transferred (154,384) (50,607) (1,571) ------------------------------------------------------------------- Net increase (decrease) in units (310,510) (125,445) 7,124 ===================================================================
SEE ACCOMPANYING NOTES. Note: Year ended unless otherwise noted. 45
DEUTSCHE VIT DEUTSCHE VIT EQUITY SMALL CAP 500 INDEX INDEX JPM BOND (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (493,746) $ (47,937) $ 836,517 Net realized gain (loss) on sales of investments 1,725,855 160,185 (338,553) Change in net unrealized appreciation/depreciation during the period (5,277,757) (485,979) 970,200 ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (4,045,648) (373,731) 1,468,164 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 2,372,798 251,509 398,188 Contract terminations and benefits (3,205,673) (241,879) (2,362,121) Net transfers among investment options 1,690,458 840,494 (2,314,556) ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 857,583 850,124 (4,278,489) ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (3,188,065) 476,393 (2,810,325) Net assets, beginning of year 37,598,972 4,933,645 20,037,901 ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 34,410,907 $ 5,410,038 $ 17,227,576 =================================================================== UNIT TRANSACTIONS Units purchased 160,333 22,910 36,018 Units redeemed (214,596) (21,968) (216,999) Units transferred 109,935 70,563 (217,822) ------------------------------------------------------------------- Net increase (decrease) in units 55,672 71,505 (398,803) =================================================================== ------------------------------------------------------------------- JPM MORGAN STANLEY INTERNATIONAL EMERGING MORGAN STANLEY OPPORTUNITIES MARKETS DEBT HIGH YIELD (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 27,850 $ 151,171 $ 699,547 Net realized gain (loss) on sales of investments 183,489 (224,202) (224,770) Change in net unrealized appreciation/depreciation during the period (966,059) 279,262 (1,283,181) ------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (754,720) 206,231 (808,404) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 462,653 47,745 425,915 Contract terminations and benefits (285,967) (764,435) (1,016,912) Net transfers among investment options (403,036) (315,192) (1,738,389) ------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions (226,350) (1,031,882) (2,329,386) ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (981,070) (825,651) (3,137,790) Net assets, beginning of year 4,463,449 2,584,891 9,454,336 ------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 3,482,379 $ 1,759,240 $ 6,316,546 =================================================================== UNIT TRANSACTIONS Units purchased 40,474 5,683 42,635 Units redeemed (24,887) (87,092) (94,332) Units transferred (36,242) (36,798) (156,158) ------------------------------------------------------------------- Net increase (decrease) in units (20,655) (118,207) (207,855) ===================================================================
SEE ACCOMPANYING NOTES. Note: Year ended unless otherwise noted. 46
-------------------------------------------- INITIAL CLASS -------------------------------------------- MORGAN STANLEY VIP III U.S. REAL MORGAN STANLEY VIP EQUITY- VIP II GROWTH & ESTATE ASIAN EQUITY INCOME CONTRAFUND INCOME (PINNACLE(TM))(PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION DIVISION DIVISION ------------------------------ -------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 29,162 $ 794,856 $ 1,161,278 $ 3,158,487 $ 1,191,011 Net realized gain (loss) on sales of investments (59,248) (1,688,579) - - - Change in net unrealized appreciation/ depreciation during the period 525,784 (690,771) (324,709) (5,462,023) (2,022,333) ------------------------------ -------------------------------------------- Net increase (decrease) in net assets resulting from operations 495,698 (1,584,494) 836,569 (2,303,536) (831,322) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 150,930 48,228 819,262 2,753,892 615,096 Contract terminations and benefits (150,145) (496,431) (1,485,810) (2,902,330) (1,816,356) Net transfers among investment options 105,513 (474,789) (2,219,626) 1,621,339 (1,286,261) ------------------------------ -------------------------------------------- Net increase (decrease) in net assets from contract related transactions 106,298 (922,992) (2,886,174) 1,472,901 (2,487,521) ------------------------------ -------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 601,996 (2,507,486) (2,049,605) (830,635) (3,318,843) Net assets, beginning of year 2,036,406 4,436,111 18,257,704 25,264,462 18,228,497 ------------------------------ -------------------------------------------- NET ASSETS, END OF YEAR $ 2,638,402 $ 1,928,625 $ 16,208,099 $ 24,433,827 $ 14,909,654 ============================== ============================================ UNIT TRANSACTIONS Units purchased 14,277 4,158 71,339 185,367 45,376 Units redeemed (15,506) (42,855) (126,162) (193,623) (133,450) Units transferred 4,958 (27,627) (212,458) 91,261 (91,980) ------------------------------ -------------------------------------------- Net increase (decrease) in units 3,729 (66,324) (267,281) 83,005 (180,054) ============================== ============================================
SEE ACCOMPANYING NOTES. Note: Year ended unless otherwise noted. 47
--------------- ----------------------------------------------------------- INITIAL CLASS INSTITUTIONAL SHARES --------------- ----------------------------------------------------------- VIP III JANUS ASPEN JANUS ASPEN GROWTH JANUS ASPEN CAPITAL JANUS ASPEN WORLDWIDE OPPORTUNITIES BALANCED APPRECIATION MONEY MARKET GROWTH (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION DIVISION DIVISION ------------ ----------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 759,924 $ 5,592,023 $ (72,759) $ 858,967 $ 3,799,383 Net realized gain (loss) on sales of investments - 5,628,006 4,735,204 - 6,950,191 Change in net unrealized appreciation/ depreciation during the period (2,719,709) (13,140,685) (16,117,500) - (20,303,577) ------------ ----------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (1,959,785) (1,920,656) (11,455,055) 858,967 (9,554,003) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 510,526 4,026,338 6,236,835 8,167,556 7,256,498 Contract terminations and benefits (983,691) (16,045,322) (4,872,268) (11,771,715) (3,407,157) Net transfers among investment options (1,713,723) 1,910,233 7,522,665 (1,281,643) 7,494,955 ------------ ----------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions (2,186,888) (10,108,751) 8,887,232 (4,885,802) 11,344,296 ------------ ----------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (4,146,673) (12,029,407) (2,567,823) (4,026,835) 1,790,293 Net assets, beginning of year 12,309,609 64,381,429 47,538,533 21,893,401 45,217,221 ------------ ----------------------------------------------------------- NET ASSETS, END OF YEAR $ 8,162,936 $ 52,352,022 $ 44,970,710 $ 17,866,566 $ 47,007,514 ============ =========================================================== UNIT TRANSACTIONS Units purchased 41,641 247,797 266,652 731,581 371,955 Units redeemed (81,049) (979,169) (207,896) (1,069,849) (174,138) Units transferred (140,306) 119,681 277,089 (109,560) 379,089 ------------ ----------------------------------------------------------- Net increase (decrease) in units (179,714) (611,691) 335,845 (447,828) 576,906 ============ ===========================================================
SEE ACCOMPANYING NOTES. Note: Year ended unless otherwise noted. 48
----------------------------------------------------------------------------- SERVICE CLASS ----------------------------------------------------------------------------- MFS EMERGING MFS INVESTORS MFS MID CAP MFS NEW MFS CAPITAL GROWTH TRUST GROWTH DISCOVERY OPPORTUNITIES (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM)) DIVISION (1) DIVISION (1) DIVISION (1) DIVISION (1) DIVISION (1) ----------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (10,639) $ (1,634) $ (19,785) $ (9,158) $ (23,586) Net realized gain (loss) on sales of investments - 333 - - - Change in net unrealized appreciation/ depreciation during the period (345,167) (5,802) (263,456) (134,234) (518,709) ----------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (355,806) (7,103) (283,241) (143,392) (542,295) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 1,556,771 397,146 1,145,957 734,264 1,580,833 Contract terminations and benefits (25,839) (10,906) (52,500) (16,716) (52,846) Net transfers among investment options 1,057,602 197,210 3,808,476 1,410,866 3,182,534 ----------------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 2,588,534 583,450 4,901,933 2,128,414 4,710,521 ----------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 2,232,728 576,347 4,618,692 1,985,022 4,168,226 Net assets, beginning of year - - - - - ----------------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 2,232,728 $ 576,347 $ 4,618,692 $ 1,985,022 $ 4,168,226 ============================================================================= UNIT TRANSACTIONS Units purchased 166,349 38,934 110,901 75,222 164,299 Units redeemed (2,676) (1,060) (5,108) (1,762) (5,119) Units transferred 115,418 18,965 373,822 140,674 318,280 ----------------------------------------------------------------------------- Net increase (decrease) in units 279,091 56,839 479,615 214,134 477,460 =============================================================================
SEE ACCOMPANYING NOTES. (1) For the period May 1, 2000 (commencement of operations) to December 31, 2000. Note: Year ended unless otherwise noted. 49
------------------------------ -------------------------------------------- SERVICE CLASS SERVICE SHARES ------------------------------ -------------------------------------------- JANUS ASPEN JANUS ASPEN VIP III AGGRESSIVE JANUS ASPEN STRATEGIC VIP GROWTH MID CAP GROWTH GROWTH VALUE (PINNACLE(TM)) (PINNACLE(TM)) (PINNACLE(TM))(PINNACLE(TM)) (PINNACLE(TM)) DIVISION DIVISION DIVISION (1) DIVISION (1) DIVISION (2) ------------------------------ -------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 57,278 $ (23,942) $ 62,164 $ 31,905 $ (1,275) Net realized gain (loss) on sales of investments 39,329 606,245 - - (466) Change in net unrealized appreciation/ depreciation during the period (573,791) 211,691 (953,682) (292,144) (7,768) ------------------------------ -------------------------------------------- Net increase (decrease) in net assets resulting from operations (477,184) 793,994 (891,518) (260,239) (9,509) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 1,795,056 3,181,150 911,435 784,699 112,177 Contract terminations and benefits (127,345) (215,382) (36,319) (19,742) (876) Net transfers among investment options 2,157,853 3,759,417 2,880,794 825,657 265,256 ------------------------------ -------------------------------------------- Net increase (decrease) in net assets from contract related transactions 3,825,564 6,725,185 3,755,910 1,590,614 376,557 ------------------------------ -------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 3,348,380 7,519,179 2,864,392 1,330,375 367,048 Net assets, beginning of year 687,565 1,074,695 - - - ------------------------------ -------------------------------------------- NET ASSETS, END OF YEAR $ 4,035,945 $ 8,593,874 $ 2,864,392 $ 1,330,375 $ 367,048 ============================== ============================================ UNIT TRANSACTIONS Units purchased 143,541 201,758 102,293 77,623 11,635 Units redeemed (10,409) (14,389) (4,064) (2,002) (90) Units transferred 176,684 233,156 326,755 78,536 26,729 ------------------------------ -------------------------------------------- Net increase (decrease) in units 309,816 420,525 424,984 154,157 38,274 ============================== ============================================
SEE ACCOMPANYING NOTES. (1) For the period May 1, 2000 (commencement of operations) to December 31, 2000. (2) For the period July 10, 2000 (commencement of operations) to December 31, 2000. Note: Year ended unless otherwise noted. 50 Separate Account II of Integrity Life Insurance Company Notes to Financial Statements December 31, 2001 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 under the Investment Company Act of 1940, as amended. 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. Effective March 3, 2000, Integrity and its wholly owned subsidiary, National Integrity Life Insurance Company, were acquired by The Western and Southern Life Insurance Company ("W&S"). Contract holders may allocate or transfer their account values to one or more of the Separate Account's investment divisions 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 Managed 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 Funds"); Janus Aspen Series; J.P. Morgan Series Trust II ("JPM Series"); Morgan Stanley Universal Funds, Inc. ("Morgan Stanley Universal Funds"); MFS Variable Insurance Trust Funds ("MFS Funds"); Putnam Funds; and Van Kampen Life UIT Portfolios ("Van Kampen 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. Touchstone Advisors, Inc. ("Touchstone Advisors"), a wholly owned subsidiary of W&S serves as the investment adviser of the Legends Fund. Janus Capital Corporation serves as investment adviser to the Janus Aspen Series. J.P. Morgan Investment Management Inc. is the investment adviser to the JPM Series. Morgan Stanley Dean Witter Asset Management Inc. ("MSDW") serves as investment adviser to the Morgan Stanley Universal Funds except for Morgan Stanley High Yield Portfolio, for which Miller Anderson & Sherrerd, LLP serves as investment adviser. MSDW is a wholly owned subsidiary of Morgan Stanley Dean Witter & Co. ("Morgan Stanley"). 51 Massachusetts Financial Services Company ("MFS") is the investment adviser to the MFS Funds. Putnam Investment Management, LLC serves as the investment adviser of the Putnam Funds. The Van Kampen Funds are managed by Van Kampen Funds, Inc. 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 eighty-six investment divisions available. The investment objective of each division and its corresponding portfolio are the same. Refer to each portfolio's prospectus for a description of investment objectives. 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. INVESTMENTS Investments in shares of the Funds are valued at the net asset values of the respective portfolios, which approximate 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. Capital gain distributions are included in the reinvested dividend amounts in the Statement of Operations. 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 values of the divisions of the Separate Account. 52 UNIT VALUE Unit values for the Separate Account divisions are computed at the end of each business day. The unit value is equal to the unit value for the preceding business day multiplied by a net investment factor. This net investment factor is determined based on the value of the underlying mutual fund portfolios of the Separate Account, reinvested dividends and capital gains, new premium deposits or withdrawals, and the daily asset charge for the mortality and expense risk and administrative charges. Unit values are adjusted daily for all activity in the Separate Account. TAXES Operations of the Separate Account are included in the income tax return of Integrity which is taxed as a life insurance company under the Internal Revenue Code. The Separate Account will not be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code. Under the provisions of the policies, Integrity has the right to charge the Separate Account for federal income tax attributable to the Separate Account. No charge is currently being made against the Separate Account for such tax since, under current tax law, Integrity pays no tax on investment income and capital gains reflected in variable life insurance policy reserves. However, Integrity retains the right to charge for any federal income tax incurred which is attributable to the Separate Account if the law is changed. Charges for state and local taxes, if any, attributable to the Separate Account may also be made. USE OF ESTIMATES The preparation of financial statements 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. 53 2. INVESTMENTS The aggregate cost of portfolio shares purchased and proceeds from portfolio shares sold during the periods ended December 31, 2001 (refer to the Statement of Changes in Net Assets for the periods ended December 31, 2001 for the applicable periods) and the cost of shares held at December 31, 2001 for each division were as follows:
DIVISION PURCHASES SALES COST --------------------------------------------------------------------------------------------------------- Gabelli Large Cap Value (Pinnacle(TM)) $ 5,930,064 $ 3,969,535 $ 11,050,884 Gabelli Large Cap Value (Pinnacle IV(TM)) 224,063 76,811 144,322 Harris Bretall Sullivan & Smith Equity Growth (Pinnacle(TM)) 3,865,435 6,740,984 35,827,755 Harris Bretall Sullivan & Smith Equity Growth (Pinnacle IV(TM)) 95,348 9,880 85,452 Third Avenue Value (Pinnacle(TM)) 13,365,062 4,488,045 27,263,019 Third Avenue Value (Pinnacle IV(TM)) 575,774 31,493 538,515 Baron Small Cap Value (Pinnacle(TM)) 2,106,376 1,522,081 4,145,850 Baron Small Cap Value (Pinnacle IV(TM)) 144,846 313 144,516 Deutsche VIT EAFE Equity Index (Pinnacle(TM)) 26,576,063 26,753,815 2,225,063 Deutsche VIT EAFE Equity Index (Pinnacle IV(TM)) 49,111 70 49,036 Deutsche VIT Equity 500 Index (Pinnacle(TM)) 14,665,617 16,675,712 31,017,155 Deutsche VIT Equity 500 Index (Pinnacle IV(TM)) 903,894 513,596 398,892 Deutsche VIT Small Cap Index (Pinnacle(TM)) 3,646,205 3,775,799 5,458,328 Deutsche VIT Small Cap Index (Pinnacle IV(TM)) 27,383 621 26,824 JPM Bond (Pinnacle(TM)) 15,483,453 8,443,622 24,357,979 JPM Bond (Pinnacle IV(TM)) 933,366 54,869 879,676 JPM International Opportunities (Pinnacle(TM)) 3,813,358 4,081,145 2,463,338 JPM International Opportunities (Pinnacle IV(TM)) 94,354 80,908 18,058 Morgan Stanley Emerging Markets Debt (Pinnacle(TM)) 296,224 584,182 1,509,626 Morgan Stanley Emerging Markets Debt (Pinnacle IV(TM)) 11,857 478 11,404 Morgan Stanley High Yield (Pinnacle(TM)) 6,607,619 5,496,710 7,462,218 Morgan Stanley High Yield (Pinnacle IV(TM)) 1,083,941 469,643 632,301 Morgan Stanley U.S. Real Estate (Pinnacle(TM)) 6,512,664 5,355,076 3,920,796 Morgan Stanley U.S. Real Estate (Pinnacle IV(TM)) 239,492 145,229 98,173 Morgan Stanley Asian Equity (Pinnacle(TM)) 13,999,776 15,967,698 - Van Kampen Bandwidth & Telecommunication (Pinnacle IV(TM)) 23,909 251 23,717 54 DIVISION PURCHASES SALES COST --------------------------------------------------------------------------------------------------------- Van Kampen Biotechnology & Pharmaceutical (Pinnacle(TM)) $ 1,948,048 $ 18,406 $ 1,930,130 Van Kampen Biotechnology & Pharmaceutical (Pinnacle IV(TM)) 42,890 180 42,716 Van Kampen Internet (Pinnacle IV(TM)) 9,616 13 9,604 Van Kampen MS High-Tech 35 Index (Pinnacle(TM)) 306,791 1,594 305,680 Van Kampen MS High-Tech 35 Index (Pinnacle IV(TM)) 249 - 249 Van Kampen MS U.S. Multinational (Pinnacle IV(TM)) 499 - 499 INITIAL CLASS: VIP Equity-Income (Pinnacle(TM)) 10,070,184 6,323,479 19,256,191 VIP II Contrafund (Pinnacle(TM)) 7,387,596 9,125,957 21,132,484 VIP III Growth & Income (Pinnacle(TM)) 3,037,730 2,077,587 15,787,933 VIP III Growth Opportunities (Pinnacle(TM)) 916,317 1,903,513 8,206,394 INSTITUTIONAL SHARES: Janus Aspen Balanced (Pinnacle(TM)) 6,030,944 12,524,994 42,047,494 Janus Aspen Capital Appreciation (Pinnacle(TM)) 3,783,739 12,745,377 36,063,899 Janus Aspen Money Market (Pinnacle(TM)) 110,207,290 100,730,842 27,340,082 Janus Aspen Worldwide Growth (Pinnacle(TM)) 13,299,951 21,175,545 41,180,414 SERVICE CLASS: VIP Growth (Pinnacle(TM)) 6,307,203 4,831,877 4,693,082 VIP III Mid Cap (Pinnacle(TM)) 9,566,393 8,286,043 9,291,415 MFS Emerging Growth (Pinnacle(TM)) 1,072,539 621,350 2,721,626 MFS Emerging Growth (Pinnacle IV(TM)) 66,552 77 66,472 MFS Investors Trust (Pinnacle(TM)) 3,124,245 993,342 2,513,375 MFS Investors Trust (Pinnacle IV(TM)) 99,551 13,886 83,496 MFS Mid Cap Growth (Pinnacle(TM)) 10,721,886 7,214,681 7,206,324 MFS Mid Cap Growth (Pinnacle IV(TM)) 175,593 1,987 173,484 MFS New Discovery (Pinnacle(TM)) 3,586,949 1,561,602 3,796,574 MFS New Discovery (Pinnacle IV(TM)) 158,893 588 158,255 MFS Capital Opportunities (Pinnacle(TM)) 2,512,713 1,517,665 5,114,651 MFS Capital Opportunities (Pinnacle IV(TM)) 169,309 26,777 133,878 55 DIVISION PURCHASES SALES COST --------------------------------------------------------------------------------------------------------- MFS Investors Growth Stock (Pinnacle IV(TM)) $ 55,026 $ 2,221 $ 52,567 MFS Research (Pinnacle IV(TM)) 137,634 120,872 27,456 MFS Total Return (Pinnacle IV(TM)) 478,818 2,274 476,491 SERVICE CLASS 2: VIP Contrafund (Pinnacle IV(TM)) 470,775 11,948 458,748 VIP Dynamic Capital Appreciation (Pinnacle IV(TM)) 27,178 153 27,035 VIP Equity-Income (Pinnacle IV(TM)) 1,413,961 575,145 845,263 VIP Growth & Income (Pinnacle IV(TM)) 274,616 12,819 261,447 VIP Growth (Pinnacle IV(TM)) 798,497 433,385 383,312 VIP Growth Opportunities (Pinnacle IV(TM)) 45,211 991 44,126 VIP Mid Cap (Pinnacle IV(TM)) 521,368 131,685 387,334 VIP Money Market (Pinnacle IV(TM)) 5,897,071 3,659,839 2,237,232 SERVICE SHARES: Janus Aspen Aggressive Growth (Pinnacle(TM)) 3,607,303 3,946,681 2,061,332 Janus Aspen Aggressive Growth (Pinnacle IV(TM)) 21,344 573 20,671 Janus Aspen Balanced (Pinnacle IV(TM)) 481,022 17,389 462,304 Janus Aspen Capital Appreciation (Pinnacle IV(TM)) 172,268 29,359 136,560 Janus Aspen Core Equity (Pinnacle IV(TM)) 22,985 47 22,940 Janus Aspen Growth (Pinnacle(TM)) 3,193,221 2,499,763 1,747,290 Janus Aspen Growth (Pinnacle IV(TM)) 461,633 38,757 423,688 Janus Aspen International Growth (Pinnacle IV(TM)) 55,289 119 55,165 Janus Aspen Strategic Value (Pinnacle(TM)) 3,203,367 1,488,263 1,954,208 Janus Aspen Strategic Value (Pinnacle IV(TM)) 27,404 2,536 24,798 Janus Aspen Worldwide Growth (Pinnacle IV(TM)) 493,644 3,048 490,334 CLASS 1B SHARES: Putnam VT Growth & Income (Pinnacle(TM)) 298,278 109,212 186,520 Putnam VT Growth & Income (Pinnacle IV(TM)) 202,263 11,126 189,210 Putnam VT International Growth (Pinnacle(TM)) 3,101,362 2,658,968 472,259 Putnam VT International Growth (Pinnacle IV(TM)) 60,900 102 60,794 Putnam VT Small Cap Value (Pinnacle(TM)) 703,157 43,154 657,259 Putnam VT Small Cap Value (Pinnacle IV(TM)) 255,612 89,717 165,115 Putnam VT Technology (Pinnacle(TM)) 18,144 8 18,136 56 DIVISION PURCHASES SALES COST --------------------------------------------------------------------------------------------------------- Putnam VT Technology (Pinnacle IV(TM)) $ 24,786 $ 160 $ 24,636 Putnam VT Voyager II (Pinnacle(TM)) 91,128 202 90,945 Putnam VT Voyager II (Pinnacle IV(TM)) 35,213 98 35,107 ------------ $423,509,580 ============
57 3. EXPENSES AND RELATED PARTY TRANSACTIONS 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. There are two contracts currently offered by the Separate Account: Pinnacle and Pinnacle IV. Pinnacle charges 1.20% and 0.15%, and Pinnacle IV charges 1.30% and 0.15%, respectively, of net assets to cover these risks and expenses. In addition, an annual administrative 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). 58 4. FINANCIAL HIGHLIGHTS A summary of unit values and units outstanding for variable annuity contracts, investment income and expense ratios, excluding expenses of the underlying funds, capital gain dividend distributions and total returns are presented for the periods ended December 31, 2001 (refer to the Statement of Changes in Net Assets for the periods ended December 31, 2001 for the applicable periods).
AT DECEMBER 31, 2001 FOR THE PERIODS ENDED DECEMBER 31, 2001 ----------------------------------------------------------------------------------------- CAPITAL GAIN INVESTMENT ------------------ UNITS UNIT VALUE NET ASSETS DIVIDEND INCOME EXPENSE TOTAL ------------------ DIVISION (000s) LOWEST HIGHEST (000s) DISTRIBUTION RATIO (1) RATIO RETURN (2) ------------------------------------------------------------------------------------------------------------------------------------ Gabelli Large Cap Value (Pinnacle(TM)) 597 $ 12.84 $ 19.76 $ 8,734 $ 127,066 1.76% 1.35% (15.78%) Gabelli Large Cap Value (Pinnacle IV(TM)) 17 7.73 10.07 150 384 1.23% 1.45% (12.10%) Harris Bretall Sullivan & Smith Equity Growth (Pinnacle(TM)) 1,023 15.18 28.74 19,659 1,884,335 0.00% 1.35% (28.90%) Harris Bretall Sullivan & Smith Equity Growth (Pinnacle IV(TM)) 10 7.27 10.24 88 605 0.00% 1.45% (8.10%) Third Avenue Value (Pinnacle(TM)) 935 24.34 31.44 27,691 - 0.84% 1.35% 13.66% Third Avenue Value (Pinnacle IV(TM)) 57 8.16 10.33 569 - 1.10% 1.45% (0.70%) Baron Small Cap Value (Pinnacle(TM)) 243 14.27 18.52 4,368 - 0.00% 1.35% 5.15% Baron Small Cap Value (Pinnacle IV(TM)) 15 7.95 10.07 155 - 0.00% 1.45% 0.10% Deutsche VIT EAFE Equity Index (Pinnacle(TM)) 257 7.67 11.68 2,234 - 0.00% 1.35% (25.73%) Deutsche VIT EAFE Equity Index (Pinnacle IV(TM)) 5 8.30 10.48 49 - 0.00% 1.45% (6.00%) Deutsche VIT Equity 500 Index (Pinnacle(TM)) 2,357 10.00 14.25 28,007 24,484 0.80% 1.35% (13.35%) Deutsche VIT Equity 500 Index (Pinnacle IV(TM)) 42 8.02 10.15 403 333 4.30% 1.45% (4.70%) Deutsche VIT Small Cap Index (Pinnacle(TM)) 491 7.99 10.91 5,064 107,632 3.04% 1.35% 0.68% Deutsche VIT Small Cap Index (Pinnacle IV(TM)) 3 7.79 10.16 27 456 28.72% 1.45% 0.50% JPM Bond (Pinnacle(TM)) 1,973 11.59 12.47 24,049 133,096 6.65% 1.35% 5.54% JPM Bond (Pinnacle IV(TM)) 83 9.98 10.45 848 3,489 19.65% 1.45% 2.10% JPM International Opportunities (Pinnacle(TM)) 293 7.28 10.81 2,511 39,919 2.02% 1.35% (20.22%) JPM International Opportunities (Pinnacle IV(TM)) 2 8.31 10.42 18 - 5.51% 1.45% (2.30%) Morgan Stanley Emerging Markets Debt (Pinnacle(TM)) 150 8.96 9.95 1,492 - 7.95% 1.35% 8.64% Morgan Stanley Emerging Markets Debt (Pinnacle IV(TM)) 1 9.68 10.61 11 - 69.79% 1.45% 5.90% Morgan Stanley High Yield (Pinnacle(TM)) 707 8.73 10.62 6,488 - 11.48% 1.35% (5.75%) Morgan Stanley High Yield (Pinnacle IV(TM)) 60 9.17 10.19 581 - 43.21% 1.45% (3.60%) Morgan Stanley U.S. Real Estate (Pinnacle(TM)) 340 10.65 12.43 4,072 30,456 3.80% 1.35% 8.31% Morgan Stanley U.S. Real Estate (Pinnacle IV(TM)) 10 9.22 10.60 98 288 15.00% 1.45% 2.20% Morgan Stanley Asian Equity (Pinnacle(TM)) - 6.52 8.45 - - 0.00% 1.35% (100.00%) Van Kampen Bandwidth & Telecommunication (Pinnacle IV(TM)) 3 6.78 11.05 25 - 3.58% 1.45% (13.10%)
(1) Results for periods of less than one year have been annualized. (2) Results for periods of less than one year have not been annualized. * - Less than 1,000. 59
AT DECEMBER 31, 2001 FOR THE PERIODS ENDED DECEMBER 31, 2001 ----------------------------------------------------------------------------------------- CAPITAL GAIN INVESTMENT ------------------ UNITS UNIT VALUE NET ASSETS DIVIDEND INCOME EXPENSE TOTAL ------------------ DIVISION (000S) LOWEST HIGHEST (000S) DISTRIBUTION RATIO (1) RATIO RETURN (2) ------------------------------------------------------------------------------------------------------------------------------------ Van Kampen Biotechnology & Pharmaceutical (Pinnacle(TM)) 203 $ 8.12 $ 10.22 $ 2,006 $ - 1.41% 1.35% (1.30%) Van Kampen Biotechnology & Pharmaceutical (Pinnacle IV(TM)) 4 8.12 10.22 44 - 1.66% 1.45% (1.40%) Van Kampen Internet (Pinnacle IV(TM)) 1 4.74 10.53 10 - 0.00% 1.45% (31.90%) Van Kampen MS High-Tech 35 Index (Pinnacle(TM)) 30 6.10 10.42 282 - 4.95% 1.35% (6.50%) Van Kampen MS High-Tech 35 Index (Pinnacle IV(TM)) -- * 6.10 10.42 0 - 0.00% 1.45% (6.50%) Van Kampen MS U.S. Multinational (Pinnacle IV(TM)) -- * 8.03 10.14 1 - 0.00% 1.45% (3.40%) INITIAL CLASS: VIP Equity-Income (Pinnacle(TM)) 1,533 9.95 12.89 17,873 768,588 1.58% 1.35% (6.19%) VIP II Contrafund (Pinnacle(TM)) 1,519 10.66 13.89 18,517 663,797 0.92% 1.35% (13.42%) VIP III Growth & Income (Pinnacle(TM)) 1,131 10.42 13.45 13,651 600,138 1.33% 1.35% (9.99%) VIP III Growth Opportunities (Pinnacle(TM)) 662 7.51 10.75 5,936 - 0.42% 1.35% (15.54%) INSTITUTIONAL SHARES: Janus Aspen Balanced (Pinnacle(TM)) 2,824 13.74 16.14 42,225 - 2.51% 1.35% (5.97%) Janus Aspen Capital Appreciation (Pinnacle(TM)) 1,721 13.01 20.49 26,107 - 1.18% 1.35% (22.76%) Janus Aspen Money Market (Pinnacle(TM)) 2,337 11.38 11.70 27,346 - 3.96% 1.35% 2.81% Janus Aspen Worldwide Growth (Pinnacle(TM)) 2,315 10.30 17.04 28,793 - 0.46% 1.35% (23.49%) SERVICE CLASS: VIP Growth (Pinnacle(TM)) 504 7.23 11.41 4,527 234,072 0.00% 1.35% (18.86%) VIP III Mid Cap (Pinnacle(TM)) 581 14.30 16.47 9,459 - 0.00% 1.35% (4.69%) MFS Emerging Growth (Pinnacle(TM)) 337 4.11 7.82 1,767 106,101 0.00% 1.35% (34.50%) MFS Emerging Growth (Pinnacle IV(TM)) 8 7.23 10.11 69 - 0.00% 1.45% (7.80%) MFS Investors Trust (Pinnacle(TM)) 288 7.26 10.10 2,417 31,554 0.51% 1.35% (17.26%) MFS Investors Trust (Pinnacle IV(TM)) 9 8.24 10.07 82 - 0.00% 1.45% (4.90%) MFS Mid Cap Growth (Pinnacle(TM)) 870 5.81 10.47 6,814 - 0.96% 1.35% (18.69%) MFS Mid Cap Growth (Pinnacle IV(TM)) 20 6.77 10.00 185 - 0.00% 1.45% (8.90%) MFS New Discovery (Pinnacle(TM)) 418 6.58 9.98 3,624 2,852 2.44% 1.35% (6.47%) MFS New Discovery (Pinnacle IV(TM)) 17 7.64 10.14 175 - 0.00% 1.45% 0.60% MFS Capital Opportunities (Pinnacle(TM)) 560 5.31 9.52 3,686 128,720 4.68% 1.35% (24.63%) MFS Capital Opportunities (Pinnacle IV(TM)) 16 7.28 10.11 141 - 0.00% 1.45% (9.80%) MFS Investors Growth Stock (Pinnacle IV(TM)) 5 7.72 10.16 50 - 0.00% 1.45% (5.60%) MFS Research (Pinnacle IV(TM)) 3 7.80 10.09 29 - 0.00% 1.45% (6.80%) MFS Total Return (Pinnacle IV(TM)) 49 9.11 10.04 486 - 0.00% 1.45% (0.60%)
(1) Results for periods of less than one year have been annualized. (2) Results for periods of less than one year have not been annualized. * - Less than 1,000. 60
AT DECEMBER 31, 2001 FOR THE PERIODS ENDED DECEMBER 31, 2001 ----------------------------------------------------------------------------------------- CAPITAL GAIN INVESTMENT ------------------ UNITS UNIT VALUE NET ASSETS DIVIDEND EXPENSE INCOME TOTAL ------------------ DIVISION (000s) LOWEST HIGHEST (000s) DISTRIBUTION RATIO (1) RATIO RETURN (2) ------------------------------------------------------------------------------------------------------------------------------------ SERVICE CLASS 2: VIP Contrafund (Pinnacle IV(TM)) 49 $ 8.49 $ 10.00 $ 474 $ - 0.00% 1.45% (2.90%) VIP Dynamic Capital Appreciation (Pinnacle IV(TM)) 3 7.46 10.31 29 - 0.00% 1.45% (5.70%) VIP Equity-Income (Pinnacle IV(TM)) 89 8.23 10.16 860 - 0.00% 1.45% (3.60%) VIP Growth & Income (Pinnacle IV(TM)) 27 8.55 10.16 265 - 0.00% 1.45% (1.00%) VIP Growth (Pinnacle IV(TM)) 41 7.58 10.26 384 - 0.00% 1.45% (5.80%) VIP Growth Opportunities (Pinnacle IV(TM)) 5 8.03 10.18 45 - 0.00% 1.45% (4.20%) VIP Mid Cap (Pinnacle IV(TM)) 40 9.00 10.28 404 - 0.00% 1.45% 2.30% VIP Money Market (Pinnacle IV(TM)) 223 10.00 10.05 2,236 - 2.51% 1.45% 0.50% SERVICE SHARES: Janus Aspen Aggressive Growth (Pinnacle(TM)) 377 3.37 7.32 1,514 - 0.00% 1.35% (40.36%) Janus Aspen Aggressive Growth (Pinnacle IV(TM)) 2 7.35 10.22 21 - 0.00% 1.45% (12.50%) Janus Aspen Balanced (Pinnacle IV(TM)) 47 9.10 10.09 462 - 4.81% 1.45% (1.10%) Janus Aspen Capital Appreciation (Pinnacle IV(TM)) 15 8.12 10.23 143 - 1.15% 1.45% (5.40%) Janus Aspen Core Equity (Pinnacle IV(TM)) 2 8.15 10.16 23 - 1.41% 1.45% (3.70%) Janus Aspen Growth (Pinnacle(TM)) 249 5.27 9.53 1,594 3,101 0.00% 1.35% (25.96%) Janus Aspen Growth (Pinnacle IV(TM)) 48 7.47 10.31 439 - 0.00% 1.45% (9.40%) Janus Aspen International Growth (Pinnacle IV(TM)) 6 7.97 10.28 58 - 0.80% 1.45% (3.90%) Janus Aspen Strategic Value (Pinnacle(TM)) 216 7.51 10.21 1,873 - 0.29% 1.35% (9.59%) Janus Aspen Strategic Value (Pinnacle IV(TM)) 3 8.21 10.10 26 - 0.00% 1.45% (5.30%) Janus Aspen Worldwide Growth (Pinnacle IV(TM)) 53 7.86 10.28 502 - 0.70% 1.45% (5.20%) CLASS 1B SHARES: Putnam VT Growth & Income (Pinnacle(TM)) 20 8.35 10.12 194 - 0.00% 1.35% (4.90%) Putnam VT Growth & Income (Pinnacle IV(TM)) 20 8.37 10.14 191 - 0.00% 1.45% (4.70%) Putnam VT International Growth (Pinnacle(TM)) 51 8.11 10.33 485 - 0.00% 1.35% (4.10%) Putnam VT International Growth (Pinnacle IV(TM)) 6 8.18 10.43 63 - 0.00% 1.45% (3.20%) Putnam VT Small Cap Value (Pinnacle(TM)) 73 8.09 10.29 741 - 0.00% 1.35% 2.10% Putnam VT Small Cap Value (Pinnacle IV(TM)) 18 8.07 10.26 183 - 0.00% 1.45% 1.70% Putnam VT Technology (Pinnacle(TM)) 2 6.53 10.59 18 - 0.00% 1.35% (10.70%) Putnam VT Technology (Pinnacle IV(TM)) 3 6.56 10.64 25 - 0.00% 1.45% (10.40%) Putnam VT Voyager II (Pinnacle(TM)) 10 6.91 10.12 94 - 0.00% 1.35% (10.50%) Putnam VT Voyager II (Pinnacle IV(TM)) 4 6.97 10.22 37 - 0.00% 1.45% (9.70%)
(1) Results for periods of less than one year have been annualized. (2) Results for periods of less than one year have not been annualized. * - Less than 1,000. 61 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, including the schedules of investments, of Separate Account Ten of Integrity Life Insurance Company (the "Separate Account") (comprised of the Select Ten Plus Division-March, Select Ten Plus Division-June, Select Ten Plus Division-September and Select Ten Plus Division-December) as of December 31, 2001, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the 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 investments owned as of December 31, 2001 by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. 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 respective divisions constituting the Separate Account at December 31, 2001 and the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young LLP Kansas City, Missouri January 18, 2002 2 Select Ten Plus Division - March Statement of Assets and Liabilities
DECEMBER 31, 2001 -------------------- ASSETS Investments in securities, at value (cost $4,244,575) - See accompanying schedule $ 4,026,202 Cash 9,700 Due from investment advisor 7,456 Dividends receivable 4,973 -------------------- TOTAL ASSETS 4,048,331 LIABILITIES Payable for investment securities purchased 6,746 Accrued expenses 61,356 Payable for fund shares repurchased 136 -------------------- TOTAL LIABILITIES 68,238 -------------------- NET ASSETS $ 3,980,093 ==================== UNIT VALUE, offering and redemption price per unit $ 9.95 ==================== Units outstanding 400,132 ====================
Statement of Operations
YEAR ENDED DECEMBER 31, 2001 -------------------- INVESTMENT INCOME - DIVIDENDS $ 129,694 EXPENSES Mortality and expense risk and administrative charges 56,212 Investment advisory and management fees 20,819 Custody and accounting expenses 20,283 Professional fees 6,636 Directors' fees and expenses 8,296 Printing and filing fees 4,373 Errors and omissions insurance 4,873 Other expenses 1,661 -------------------- Total expenses before reimbursement 123,153 Less: expense reimbursement (31,548) -------------------- Net expenses 91,605 -------------------- Net investment income 38,089 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments 109,655 Net unrealized depreciation during the period on investments (296,533) -------------------- Net realized and unrealized loss on investments (186,878) -------------------- Net decrease in net assets resulting from operations $ (148,789) ====================
SEE ACCOMPANYING NOTES. 3 Select Ten Plus Division - March Statements of Changes in Net Assets
YEAR ENDED YEAR ENDED DECEMBER 31, 2001 DECEMBER 31, 2000 -------------------- -------------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income $ 38,089 $ 44,872 Net realized gain (loss) on investments 109,655 (268,344) Net unrealized appreciation (depreciation) during the period on investments (296,533) 18,634 -------------------- -------------------- Net decrease in net assets resulting from operations (148,789) (204,838) Contract related transactions: Contributions from contract holders (9,185 and 119,903 units, respectively) 89,444 1,110,586 Cost of units redeemed (33,849 and 359,488 units, respectively) (350,503) (3,315,806) -------------------- -------------------- Net decrease in net assets resulting from unit transactions (261,059) (2,205,220) -------------------- -------------------- TOTAL DECREASE IN NET ASSETS (409,848) (2,410,058) NET ASSETS Beginning of period 4,389,941 6,799,999 -------------------- -------------------- End of period $ 3,980,093 $ 4,389,941 ==================== ====================
SEE ACCOMPANYING NOTES. 4 Select Ten Plus Division - March Financial Highlights
MARCH 31, 1999 (COMMENCEMENT OF YEAR ENDED YEAR ENDED OPERATIONS) THROUGH DECEMBER 31, 2001 DECEMBER 31, 2000 (a) DECEMBER 31, 1999 -------------------- -------------------- -------------------- SELECTED PER-UNIT DATA Unit value, beginning of period $ 10.33 $ 10.24 $ 10.00 Income (loss) from investment operations: Net investment income 0.11 0.13 0.04 Net realized and unrealized gain (loss) on investments (0.49) (0.04) 0.20 -------------------- -------------------- -------------------- Total from investment operations (0.38) 0.09 0.24 -------------------- -------------------- -------------------- Unit value, end of period $ 9.95 $ 10.33 $ 10.24 ==================== ==================== ==================== TOTAL RETURN (3.75%) 0.97% 2.35% RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 3,980 $ 4,390 $ 6,800 Units outstanding 400,132 424,796 664,381 Ratio of investment income to average net assets 3.11% 3.15% 2.58% Ratio of net investment income to average net assets 0.92% 0.95% 0.38% Ratio of expenses to average net assets 2.20% 2.20% 2.20% Ratio of net investment income to average net assets before voluntary expense reimbursement 0.16% 0.32% 0.18% Ratio of expenses to average net assets before voluntary expense reimbursement 2.96% 2.83% 2.40% Portfolio turnover rate 19% 37% 22%
PERCENTAGE AMOUNTS FOR PERIODS LESS THAN A FULL FISCAL YEAR ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER RATE. (a) Effective March 3, 2000, Touchstone Advisors, Inc. replaced Integrity Capital Advisors, Inc. as adviser for the Separate Account. SEE ACCOMPANYING NOTES. 5 Select Ten Plus Division - March Schedule of Investments December 31, 2001
NUMBER OF SHARES VALUE --------------- --------------- COMMON STOCKS (101.2%) BASIC MATERIALS (22.1%) Du Pont (E.I.) de Nemours and Company 9,589 $ 407,628 International Paper Company 11,671 470,925 --------------- 878,553 CAPITAL GOODS (22.7%) Caterpillar, Inc. 8,641 451,492 Minnesota Mining and Manufacturing Company 3,810 450,380 --------------- 901,872 COMMUNICATION SERVICES (9.0%) SBC Communications, Inc. 9,138 357,936 CONSUMER CYCLICAL (16.5%) Eastman Kodak Company 9,497 279,497 General Motors Corporation 7,767 377,476 --------------- 656,973 CONSUMER STAPLE (22.2%) Philip Morris Companies, Inc. 8,564 392,659 Procter & Gamble Company 6,198 490,448 --------------- 883,107 FINANCIAL (8.7%) J.P. Morgan & Company, Inc. 9,567 347,761 --------------- TOTAL COMMON STOCKS (Cost $4,244,575) 4,026,202 --------------- TOTAL INVESTMENTS (101.2%) 4,026,202 OTHER ASSETS, LESS LIABILITIES ((1.2%)) (46,109) --------------- NET ASSETS (100.0%) $ 3,980,093 ===============
OTHER INFORMATION: Cost of purchases and proceeds from sales of securities, excluding short-term securities, for the period ended December 31, 2001 aggregated $804,281 and $985,619, respectively. At December 31, 2001, net unrealized depreciation for tax purposes aggregated $218,373 of which $479,191 related to appreciated investments and $697,564 related to depreciated investments. The aggregate cost of investments was the same for book and tax purposes. SEE ACCOMPANYING NOTES. 6 Select Ten Plus Division - June Statement of Assets and Liabilities
DECEMBER 31, 2001 -------------------- ASSETS Investments in securities, at value (cost $3,959,304) - See accompanying schedule $ 3,683,768 Cash 11,772 Due from investment advisor 6,290 Dividends receivable 6,900 -------------------- TOTAL ASSETS 3,708,730 LIABILITIES Payable for investment securities purchased 5,956 Accrued expenses 71,089 Payable for fund shares repurchased 23 -------------------- TOTAL LIABILITIES 77,068 -------------------- NET ASSETS $ 3,631,662 ==================== UNIT VALUE, offering and redemption price per unit $ 10.25 ==================== Units outstanding 354,416 ====================
Statement of Operations
YEAR ENDED DECEMBER 31, 2001 -------------------- INVESTMENT INCOME - DIVIDENDS $ 117,382 EXPENSES Mortality and expense risk and administrative charges 51,821 Investment advisory and management fees 19,193 Custody and accounting expenses 20,283 Professional fees 6,989 Directors' fees and expenses 6,249 Printing and filing fees 6,570 Errors and omissions insurance 3,840 Other expenses 2,248 -------------------- Total expenses before reimbursement 117,193 Less: expense reimbursement (32,745) -------------------- Net expenses 84,448 -------------------- Net investment income 32,934 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments 21,014 Net unrealized depreciation during the period on investments (217,778) -------------------- Net realized and unrealized loss on investments (196,764) -------------------- Net decrease in net assets resulting from operations $ (163,830) ====================
SEE ACCOMPANYING NOTES. 7 Select Ten Plus Division - June Statements of Changes in Net Assets
YEAR ENDED YEAR ENDED DECEMBER 31, 2001 DECEMBER 31, 2000 -------------------- -------------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income $ 32,934 $ 39,499 Net realized gain (loss) on investments 21,014 (584,541) Net unrealized appreciation (depreciation) during the period on investments (217,778) 663,574 -------------------- -------------------- Net increase (decrease) in net assets resulting from operations (163,830) 118,532 Contract related transactions: Contributions from contract holders (11,424 and 45,090 units, respectively) 125,100 409,921 Cost of units redeemed (33,213 and 303,094 units, respectively) (354,170) (2,934,865) -------------------- -------------------- Net decrease in net assets resulting from unit transactions (229,070) (2,524,944) -------------------- -------------------- TOTAL DECREASE IN NET ASSETS (392,900) (2,406,412) NET ASSETS Beginning of period 4,024,562 6,430,974 -------------------- -------------------- End of period $ 3,631,662 $ 4,024,562 ==================== ====================
SEE ACCOMPANYING NOTES. 8 Select Ten Plus Division - June Financial Highlights
JUNE 30, 1998 (COMMENCEMENT OF OPERATIONS) YEAR ENDED YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 (a) 1999 1998 --------------- --------------- --------------- --------------- SELECTED PER-UNIT DATA Unit value, beginning of period $ 10.70 $ 10.14 $ 10.43 $ 10.00 Income (loss) from investment operations: Net investment income 0.10 0.14 0.02 0.03 Net realized and unrealized gain (loss) on investments (0.55) 0.42 (0.31) 0.40 --------------- --------------- --------------- --------------- Total from investment operations (0.45) 0.56 (0.29) 0.43 --------------- --------------- --------------- --------------- Unit value, end of period $ 10.25 $ 10.70 $ 10.14 $ 10.43 =============== =============== =============== =============== TOTAL RETURN (4.21%) 5.50% (2.78%) 4.30% RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 3,632 $ 4,025 $ 6,431 $ 2,043 Units outstanding 354,416 376,205 634,209 195,841 Ratio of investment income to average net assets 3.06% 3.14% 2.62% 2.69% Ratio of net investment income to average net assets 0.86% 0.94% 0.54% 0.50% Ratio of expenses to average net assets 2.20% 2.20% 2.20% 2.20% Ratio of net investment income (loss) to average net assets before voluntary expense reimbursement 0.01% 0.19% (0.08%) (1.50%) Ratio of expenses to average net assets before voluntary expense reimbursement 3.05% 2.95% 2.82% 4.20% Portfolio turnover rate 26% 35% 43% 1%
PERCENTAGE AMOUNTS FOR PERIODS LESS THAN A FULL FISCAL YEAR ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER RATE. (a) Effective March 3, 2000, Touchstone Advisors, Inc. replaced Integrity Capital Advisors, Inc. as adviser for the Separate Account. SEE ACCOMPANYING NOTES. 9 Select Ten Plus Division - June Schedule of Investments December 31, 2001
NUMBER OF SHARES VALUE --------------- --------------- COMMON STOCKS (101.4%) BASIC MATERIALS (22.2%) Du Pont (E.I.) de Nemours and Company 8,491 $ 360,952 International Paper Company 10,982 443,124 --------------- 804,076 CAPITAL GOODS (11.3%) Caterpillar, Inc. 7,865 410,946 COMMUNICATION SERVICES (10.6%) AT&T Corporation 20 363 SBC Communications, Inc. 9,845 385,628 --------------- 385,991 CONSUMER CYCLICAL (15.6%) Eastman Kodak Company 8,578 252,451 General Motors Corporation 6,480 314,928 --------------- 567,379 CONSUMER STAPLE (23.0%) Philip Morris Companies, Inc. 8,284 379,821 Proctor & Gamble Company 5,758 455,631 --------------- 835,452 FINANCIAL (9.0%) J.P. Morgan & Company, Inc. 9,030 328,241 PHARMACEUTICAL PREPARATIONS (9.7%) Merck & Co., Inc. 5,981 351,683 --------------- TOTAL COMMON STOCKS (Cost $3,959,304) 3,683,768 --------------- TOTAL INVESTMENTS (101.4%) 3,683,768 OTHER ASSETS, LESS LIABILITIES ((1.4%)) (52,106) --------------- NET ASSETS (100.0%) $ 3,631,662 ===============
OTHER INFORMATION: Cost of purchases and proceeds from sales of securities, excluding short-term securities, for the period ended December 31, 2001 aggregated $1,003,020 and $1,163,782, respectively. At December 31, 2001, net unrealized depreciation for tax purposes aggregated $275,536 of which $349,890 related to appreciated investments and $625,426 related to depreciated investments. The aggregate cost of investments was the same for book and tax purposes. SEE ACCOMPANYING NOTES. 10 Select Ten Plus Division - September Statement of Assets and Liabilities
DECEMBER 31, 2001 -------------------- ASSETS Investments in securities, at value (cost $5,686,110) - See accompanying schedule $ 5,626,785 Cash 8,391 Due from investment advisor 12,940 Dividends receivable 5,914 -------------------- TOTAL ASSETS 5,654,030 LIABILITIES Payable for investment securities purchased 6,093 Accrued expenses 145,411 Payable for fund shares repurchased 16,043 -------------------- TOTAL LIABILITIES 167,547 -------------------- NET ASSETS $ 5,486,483 ==================== UNIT VALUE, offering and redemption price per unit $ 10.54 ==================== Units outstanding 520,341 ====================
Statement of Operations
YEAR ENDED DECEMBER 31, 2001 -------------------- INVESTMENT INCOME - DIVIDENDS $ 183,647 EXPENSES Mortality and expense risk and administrative charges 80,135 Investment advisory and management fees 29,680 Custody and accounting expenses 20,283 Professional fees 13,903 Directors' fees and expenses 12,432 Printing and filing fees 13,067 Errors and omissions insurance 7,636 Other expenses 4,474 -------------------- Total expenses before reimbursement 181,610 Less: expense reimbursement (51,020) -------------------- Net expenses 130,590 -------------------- Net investment income 53,057 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments 12,110 Net unrealized depreciation during the period on investments (4,366) -------------------- Net realized and unrealized gain on investments 7,744 -------------------- Net increase in net assets resulting from operations $ 60,801 ====================
SEE ACCOMPANYING NOTES. 11 Select Ten Plus Division - September Statements of Changes in Net Assets
YEAR ENDED YEAR ENDED DECEMBER 31, 2001 DECEMBER 31, 2000 -------------------- -------------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income $ 53,057 $ 84,778 Net realized gain (loss) on investments 12,110 (212,946) Net unrealized appreciation (depreciation) during the period on investments (4,366) 224,556 -------------------- -------------------- Net increase in net assets resulting from operations 60,801 96,388 Contract related transactions: Contributions from contract holders (31,962 and 19,753 units, respectively) 301,858 188,607 Cost of units redeemed (164,133 and 479,224 units, respectively) (1,749,776) (4,657,948) -------------------- -------------------- Net decrease in net assets resulting from unit transactions (1,447,919) (4,469,341) -------------------- -------------------- TOTAL DECREASE IN NET ASSETS (1,387,118) (4,372,953) NET ASSETS Beginning of period 6,873,601 11,246,554 -------------------- -------------------- End of period $ 5,486,483 $ 6,873,601 ==================== ====================
SEE ACCOMPANYING NOTES. 12 Select Ten Plus Division - September Financial Highlights
SEPTEMBER 30, 1998 (COMMENCEMENT OF OPERATIONS) YEAR ENDED YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 (a) 1999 1998 --------------- --------------- --------------- ------------------ SELECTED PER-UNIT DATA Unit value, beginning of period $ 10.53 $ 10.11 $ 10.26 $ 10.00 Income (loss) from investment operations: Net investment income 0.17 0.18 0.05 0.02 Net realized and unrealized gain (loss) on investments (0.16) 0.24 (0.20) 0.24 --------------- --------------- --------------- ------------------ Total from investment operations 0.01 0.42 (0.15) 0.26 --------------- --------------- --------------- ------------------ Unit value, end of period $ 10.54 $ 10.53 $ 10.11 $ 10.26 =============== =============== =============== ================== TOTAL RETURN 0.09% 4.15% (1.42%) 2.60% RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 5,486 $ 6,874 $ 11,247 $ 11,012 Units outstanding 520,341 652,512 1,111,983 1,072,954 Ratio of investment income to average net assets 3.09% 3.32% 2.77% 2.80% Ratio of net investment income to average net assets 0.89% 1.12% 0.57% 0.57% Ratio of expenses to average net assets 2.20% 2.20% 2.20% 2.20% Ratio of net investment income to average net assets before voluntary expense reimbursement 0.03% 0.52% 0.29% 0.28% Ratio of expenses to average net assets before voluntary expense reimbursement 3.06% 2.80% 2.48% 2.49% Portfolio turnover rate 26% 28% 50% 1%
PERCENTAGE AMOUNTS FOR PERIODS LESS THAN A FULL FISCAL YEAR ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER RATE. (a) Effective March 3, 2000, Touchstone Advisors, Inc. replaced Integrity Capital Advisors, Inc. as adviser for the Separate Account. SEE ACCOMPANYING NOTES. 13 Select Ten Plus Division - September Schedule of Investments December 31, 2001
NUMBER OF SHARES VALUE --------------- --------------- COMMON STOCKS (102.5%) AIRCRAFT PARTS & EQUIPMENT (11.8%) Honeywell International, Inc. 19,212 $ 649,750 BASIC MATERIALS (21.7%) Du Pont (E.I.) de Nemours and Company 13,851 588,806 International Paper Company 14,839 598,754 --------------- 1,187,560 CAPITAL GOODS (22.1%) Caterpillar, Inc. 11,458 598,680 Minnesota Mining and Manufacturing Company 5,212 616,110 --------------- 1,214,790 CONSUMER CYCLICAL (19.3%) Eastman Kodak Company 15,620 459,697 General Motors Corporation 12,304 597,974 --------------- 1,057,671 CONSUMER STAPLE (8.5%) Philip Morris Companies, Inc. 10,196 467,487 ENERGY (9.0%) Exxon Mobil Corporation 12,628 496,280 FINANCIAL (10.1%) J.P. Morgan & Company, Inc. 15,220 553,247 --------------- TOTAL COMMON STOCKS (Cost $5,686,110) 5,626,785 --------------- TOTAL INVESTMENTS (102.5%) 5,626,785 OTHER ASSETS, LESS LIABILITIES ((2.5%)) (140,302) --------------- NET ASSETS (100.0%) $ 5,486,483 ===============
OTHER INFORMATION: Cost of purchases and proceeds from sales of securities, excluding short-term securities, for the period ended December 31, 2001 aggregated $1,543,007 and $2,859,135, respectively. At December 31, 2001, net unrealized depreciation for tax purposes aggregated $59,325 of which $705,167 related to appreciated investments and $764,492 related to depreciated investments. The aggregate cost of investments was the same for book and tax purposes. SEE ACCOMPANYING NOTES. 14 Select Ten Plus Division - December Statement of Assets and Liabilities
DECEMBER 31, 2001 -------------------- ASSETS Investments in securities, at value (cost $6,190,259) - See accompanying schedule $ 5,580,619 Cash 293,868 Due from investment advisor 3,448 Dividends receivable 7,073 Receivable for investment securities sold 664,206 -------------------- TOTAL ASSETS 6,549,214 -------------------- LIABILITIES Payable for investment securities purchased 955,328 Accrued expenses 39,883 Payable for fund shares repurchased 2,598 -------------------- TOTAL LIABILITIES 997,809 -------------------- NET ASSETS $ 5,551,405 ==================== UNIT VALUE, offering and redemption price per unit $ 9.84 ==================== Units outstanding 564,115 ====================
Statement of Operations
YEAR ENDED DECEMBER 31, 2001 -------------------- INVESTMENT INCOME - DIVIDENDS $ 181,523 EXPENSES Mortality and expense risk and administrative charges 77,830 Investment advisory and management fees 28,826 Custody and accounting expenses 20,283 Professional fees 5,000 Directors' fees and expenses 6,249 Printing and filing fees 3,296 Errors and omissions insurance 3,672 Other expenses 1,248 -------------------- Total expenses before reimbursement 146,404 Less: expense reimbursement (19,570) -------------------- Net expenses 126,834 -------------------- Net investment income 54,689 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments 235,844 Net unrealized depreciation during the period on investments (654,615) -------------------- Net realized and unrealized loss on investments (418,771) -------------------- Net decrease in net assets resulting from operations $ (364,082) ====================
SEE ACCOMPANYING NOTES. 15 Select Ten Plus Division - December Statements of Changes in Net Assets
YEAR ENDED YEAR ENDED DECEMBER 31, 2001 DECEMBER 31, 2000 -------------------- -------------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income $ 54,689 $ 65,921 Net realized gain on investments 235,844 6,717 Net unrealized depreciation during the period on investments (654,615) (434,331) -------------------- -------------------- Net decrease in net assets resulting from operations (364,082) (361,693) Contract related transactions: Contributions from contract holders (28,713 and 5,703 units, respectively) 285,589 60,163 Cost of units redeemed (49,768 and 712,272 units, respectively) (525,020) (6,656,277) -------------------- -------------------- Net decrease in net assets resulting from unit transactions (239,431) (6,596,114) -------------------- -------------------- TOTAL DECREASE IN NET ASSETS (603,513) (6,957,807) NET ASSETS Beginning of period 6,154,918 13,112,725 -------------------- -------------------- End of period $ 5,551,405 $ 6,154,918 ==================== ====================
SEE ACCOMPANYING NOTES. 16 Select Ten Plus Division - December Financial Highlights
FOR THE ONE DAY PERIOD ENDED DECEMBER 31, YEAR ENDED YEAR ENDED YEAR ENDED 1998 DECEMBER 31, DECEMBER 31, DECEMBER 31, (COMMENCEMENT 2001 2000 (a) 1999 OF OPERATIONS) --------------- --------------- --------------- --------------- SELECTED PER-UNIT DATA Unit value, beginning of period $ 10.52 $ 10.15 $ 9.82 $ 10.00 Income (loss) from investment operations: Net investment income 0.11 0.18 0.05 - (b) Net realized and unrealized gain (loss) on investments (0.79) 0.19 0.28 (0.18) --------------- --------------- --------------- --------------- Total from investment operations (0.68) 0.37 0.33 (0.18) --------------- --------------- --------------- --------------- Unit value, end of period $ 9.84 $ 10.52 $ 10.15 $ 9.82 =============== =============== =============== =============== TOTAL RETURN (6.45%) 3.62% 3.38% (1.80%) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 5,551 $ 6,155 $ 13,113 $ 14,520 Units outstanding 564,115 585,170 1,291,739 1,478,641 Ratio of investment income to average net assets 3.15% 3.11% 2.63% - Ratio of net investment income (loss) to average net assets 0.95% 0.91% 0.51% (2.12%) Ratio of expenses to average net assets 2.20% 2.20% 2.12% 2.12% Ratio of net investment income (loss) to average net assets before voluntary expense reimbursement 0.61% 0.71% 0.51% (2.12%) Ratio of expenses to average net assets before voluntary expense reimbursement 2.54% 2.40% 2.12% 2.12% Portfolio turnover rate 17% 9% 36% 0%
PERCENTAGE AMOUNTS FOR PERIODS LESS THAN A FULL FISCAL YEAR ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER RATE. (a) Effective March 3, 2000, Touchstone Advisors, Inc. replaced Integrity Capital Advisors, Inc. as adviser for the Separate Account. (b) Less than $0.01 SEE ACCOMPANYING NOTES. 17 Select Ten Plus Division - December Schedule of Investments December 31, 2001
NUMBER OF SHARES VALUE --------------- --------------- COMMON STOCKS (100.5%) BASIC MATERIALS (20.2%) Du Pont (E.I.) de Nemours and Company 13,196 $ 560,962 International Paper Company 13,925 561,874 --------------- 1,122,836 CAPITAL GOODS (10.0%) Caterpillar, Inc. 10,579 552,753 COMMUNICATION SERVICES (10.1%) SBC Communications, Inc. 14,249 558,133 CONSUMER CYCLICAL (19.9%) Eastman Kodak Company 18,461 543,307 General Motors Corporation 11,611 564,295 --------------- 1,107,602 CONSUMER STAPLE (10.1%) Philip Morris Companies, Inc. 12,230 560,746 ENERGY (10.0%) Exxon Mobil Corporation 14,145 555,898 FINANCIAL (10.1%) J.P. Morgan & Company, Inc. 15,395 559,608 PHARMACEUTICAL PREPARATIONS (10.1%) Merck & Company, Inc. 9,454 563,043 --------------- TOTAL COMMON STOCKS (Cost $6,190,259) 5,580,619 --------------- TOTAL INVESTMENTS (100.5%) 5,580,619 OTHER ASSETS, LESS LIABILITIES ((0.5%)) (29,214) --------------- NET ASSETS (100.0%) $ 5,551,405 ===============
OTHER INFORMATION: Cost of purchases and proceeds from sales of securities, excluding short-term securities, for the period ended December 31, 2001 aggregated $1,005,053 and $1,150,495, respectively. At December 31, 2001, net unrealized depreciation for tax purposes aggregated $609,640 of which $403,061 related to appreciated investments and $1,012,701 related to depreciated investments. The aggregate cost of investments was the same for book and tax purposes. SEE ACCOMPANYING NOTES. 18 Separate Account Ten of Integrity Life Insurance Company Notes to Financial Statements December 31, 2001 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 that 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 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. Touchstone Securities, Inc. ("Touchstone 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. Touchstone Advisors, Inc. ("Touchstone Advisors"), an investment adviser registered under the Investment Advisers Act of 1940, provides management services to the Separate Account pursuant to a management agreement. INVESCO-National Asset Management ("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. (See Note 4.) The Western and Southern Life Insurance Company ("W&S") is the ultimate parent of Integrity, Touchstone Advisors and Touchstone Securities. BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States as set forth for separate accounts in the revised audit and accounting guide issued by the American Institute of Certified Public Accountants, AUDITS OF INVESTMENT COMPANIES. 19 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, if any, 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 accounting principles generally accepted in the United States 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). 20 3. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES Touchstone Advisors 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, Touchstone Advisors receives a monthly fee based on an annual rate of 0.50% of each Division's average daily net assets. Touchstone Advisors, not the Separate Account, pays sub-advisory fees to National Asset based on the average daily net assets of the Divisions. Fees under the sub-advisory agreement are paid at an annual rate of 0.10% of average daily net assets up to $100 million and 0.05% of average daily net assets in excess of $100 million. Touchstone Advisors has guaranteed it or an affiliate will pay National Asset a minimum annual subadvisory fee of $50,000. Touchstone Advisors has agreed to reimburse each Division for operating expenses (excluding investment advisory and management fees and mortality and expense risk and administrative charges) above an annual rate of 0.35% of the Divisions' average net assets. Certain officers and directors of the Separate Account are also officers of Touchstone Securities, Touchstone Advisors, and Integrity. The Separate Account does not pay any amounts to compensate these individuals. 4. CHANGE OF CONTROL OF NATIONAL ASSET MANAGEMENT CORPORATION (UNAUDITED) On April 18, 2001, National Asset Management Corporation merged with a wholly owned subsidiary of AMVESCAP PLC. AMVESCAP PLC, which is headquartered in Atlanta and London, is the largest publicly traded asset management firm in the world. In the transaction, AMVESCAP PLC acquired all the outstanding shares of National Asset Management Corporation. National Asset Management Corporation's business is now conducted by INVESCO-National Asset Management. As a result of the merger, the Sub-Advisory Agreement most recently approved by contract holders automatically terminated, by operation of law. At an in-person meeting of the Board of Managers of the Separate Account held on April 6, 2001, the Board of Managers, including all of the Independent Managers, voted unanimously to approve a new Sub-Advisory Agreement for each Division and to recommend that contract holders of each Division vote for the new Sub-Advisory Agreement. In connection with the approval of the new Sub-Advisory Agreement, the Board of Managers also unanimously approved an interim Sub-Advisory Agreement, which took effect upon the closing date and which could remain in effect for a period of up to 150 days, or until the date contract holders approved the new Sub-Advisory Agreement, whichever occurred earlier. A special meeting of contract holders was scheduled to be held at 515 West Market Street, Louisville, Kentucky 40202, on August 10, 2001, at 3:00 p.m. Eastern Time. The Board of Managers of the Separate Account fixed the close of business on May 22, 2001 as the record date for determining the contract holders entitled to receive notice and to vote at the special meeting of contract holders. On August 10, 2001, the special meeting of contract holders was adjourned until such time as a 21 4. CHANGE OF CONTROL OF NATIONAL ASSET MANAGEMENT CORPORATION (UNAUDITED) (CONTINUED) quorum was reached. A quorum was reached and the special meeting of contract holders was held on September 17, 2001. Following are the items voted upon by each Division at the special meeting of contract holders, and the results of that vote. Each item was approved by contract holders. Other than its effective date and the identity of the sub-adviser, the new Sub-Advisory Agreement is identical in form and terms to the Sub-Advisory Agreement that automatically terminated on April 18, 2001. Although the name of the sub-adviser changed, no significant changes in its personnel or practices with respect to the Divisions are anticipated. (a) March Division Contract Holders approved a new sub-advisory agreement (the "New Sub-Advisory Agreement") between Touchstone Advisors and National Asset.
UNITS UNITS BROKER VOTED "FOR" VOTED "AGAINST" ABSTENTIONS NON-VOTES --------------- --------------- --------------- --------------- 203,658.379 10,206.731 20,015.666 -
(b) June Division Contract Holders approved the New Sub-Advisory Agreement between Touchstone Advisors and National Asset.
UNITS UNITS BROKER VOTED "FOR" VOTED "AGAINST" ABSTENTIONS NON-VOTES --------------- --------------- --------------- --------------- 140,294.554 2,277.066 36,150.422 -
(c) September Division Contract Holders approved the New Sub-Advisory Agreement between Touchstone Advisors and National Asset.
UNITS UNITS BROKER VOTED "FOR" VOTED "AGAINST" ABSTENTIONS NON-VOTES --------------- --------------- --------------- --------------- 240,817.096 11,654.440 36,925.346 -
(d) December Division Contract Holders approved the New Sub-Advisory Agreement between Touchstone Advisors and National Asset.
UNITS UNITS BROKER VOTED "FOR" VOTED "AGAINST" ABSTENTIONS NON-VOTES --------------- --------------- --------------- --------------- 238,905.359 8,102.464 62,037.004 -
22 Integrity Life Insurance Company Financial Statements, (Statutory Basis) Years Ended December 31, 2001 and 2000 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 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, 2001 and 2000, 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 A to the financial statements, the Company presents its financial statements in conformity with accounting practices prescribed or permitted by the Ohio Department of Insurance, which practices differ from 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 A. 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, 2001 and 2000, 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, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting practices prescribed or permitted by the Ohio Department of Insurance. As discussed in Note B to the financial statements, in 2001 Integrity Life Insurance Company changed various accounting policies to be in accordance with the revised NAIC Accounting Practices and Procedures Manual, as adopted by the Ohio Department of Insurance. April 5, 2002 /s/ Ernst & Young LLP Cincinnati, Ohio 1 Integrity Life Insurance Company Balance Sheets (Statutory Basis)
DECEMBER 31, 2001 2000 ------------------------------------ (IN THOUSANDS) ADMITTED ASSETS Cash and invested assets: Bonds $ 1,349,888 $ 1,422,318 Preferred stocks 85,631 80,310 Investment in common stock of subsidiary 58,908 72,422 Non-affiliated common stocks 54,878 121 Mortgage loans 19,589 21,318 Policy loans 110,235 107,400 Cash and short-term investments 27,739 21,608 Other invested assets 9,076 18,854 Receivable for securities - 1,736 ------------------------------------ Total cash and invested assets 1,715,944 1,746,087 Separate account assets 1,636,626 1,526,535 Accrued investment income 22,241 34,490 Federal income tax recoverable 15,288 16,502 Other admitted assets 4,827 2,677 ------------------------------------ Total admitted assets $ 3,394,926 $ 3,326,291 ====================================
2
DECEMBER 31, 2001 2000 ------------------------------------ (IN THOUSANDS) LIABILITIES AND CAPITAL AND SURPLUS Liabilities: Policy and contract liabilities: Life and annuity reserves $ 1,553,986 $ 1,591,106 Unpaid claims 146 146 Deposits on policies to be issued, net 2,332 747 ------------------------------------ Total policy and contract liabilities 1,556,464 1,591,999 Separate account liabilities 1,608,626 1,498,535 Accounts payable and accrued expenses 10,408 9,533 Transfers from separate accounts due, net (38,444) (33,165) Reinsurance balances payable 1,324 915 Payable for securities 1,473 5,440 Asset valuation reserve 31,530 22,024 Interest maintenance reserve 18,914 23,357 Payable to affiliates - 15,210 Other liabilities 2,254 3,933 ------------------------------------ Total liabilities 3,192,549 3,137,781 Capital and surplus: Common stock, $2 par value, 1,500,000 shares authorized, issued and outstanding 3,000 3,000 Paid-in surplus 299,232 294,330 Unassigned deficit (99,855) (108,820) ------------------------------------ Total capital and surplus 202,377 188,510 ------------------------------------ Total liabilities and capital and surplus $ 3,394,926 $ 3,326,291 ====================================
SEE ACCOMPANYING NOTES. 3 Integrity Life Insurance Company Statements of Operations (Statutory Basis)
YEAR ENDED DECEMBER 31, 2001 2000 ------------------------------------- (IN THOUSANDS) Premiums and other revenues: Premiums and annuity considerations $ 392,201 $ 13,365 Deposit-type funds - 179,266 Net investment income 118,798 133,428 Amortization of the interest maintenance reserve 820 1,461 Reserve adjustments on reinsurance ceded (1,631) (10,935) Fees from management of separate account mutual funds 12,230 14,627 Surrender charges 3,352 6,462 Other revenues 5,379 3,703 Gain on settlement of notes payable - 22,716 ------------------------------------- Total premiums and other revenues 531,149 364,093 Benefits paid or provided: Death benefits 4,705 5,984 Annuity benefits 79,498 79,598 Surrender benefits 251,622 438,338 Interest on funds left on deposit - 299 Payments on supplementary contracts 1,642 14,962 Decrease in reserves and deposit fund liabilities (43,136) (135,066) Other benefits 2,333 - ------------------------------------- Total benefits paid or provided 296,664 404,115 Insurance expenses and other deductions : Commissions 20,873 11,512 General expenses 21,158 27,803 Taxes, licenses and fees 484 1,371 Net transfers to (from) separate accounts 182,691 (91,432) Other expenses 2,668 2,897 ------------------------------------- Total insurance expenses and other deductions 227,874 (47,849) ------------------------------------- Gain from operations before federal income taxes and net realized capital losses 6,611 7,827 Federal income tax expense (benefit) 65 (7,552) ------------------------------------- Gain from operations before net realized capital losses 6,546 15,379 Net realized capital losses, excluding realized capital losses, net of tax, transferred to the interest maintenance reserve (2001-$(3,623); 2000-$(1,888)) (11,814) (7,117) ------------------------------------- Net income (loss) $ (5,268) $ 8,262 =====================================
SEE ACCOMPANYING NOTES. 4 Integrity Life Insurance Company Statements of Changes in Capital and Surplus (Statutory Basis) Years Ended December 31, 2001 and 2000
COMMON STOCK PAID-IN SURPLUS UNASSIGNED DEFICIT TOTAL CAPITAL AND SURPLUS --------------------------------------------------------------------------- (IN THOUSANDS) Balance, January 1, 2000 $ 3,000 $ 173,506 $ (91,894) $ 84,612 Net income 8,262 8,262 Net change in unrealized gain of subsidiary (24,581) (24,581) Net change in nonadmitted assets and related items 641 641 Change in reserve (change in valuation basis) (14,162) (14,162) Decrease in asset valuation reserve 2,918 2,918 Change in surplus in separate accounts 9,996 9,996 Capital contribution 120,824 120,824 --------------------------------------------------------------------------- Balance, December 31, 2000 3,000 294,330 (108,820) 188,510 Net loss (5,268) (5,268) Cumulative effect of changes in accounting principles (65,058) (65,058) Change in net deferred income tax 508 508 Net change in unrealized gain of subsidiary 19,553 19,553 Net change in unrealized gain on investment securities 44,052 44,052 Net change in nonadmitted assets and related items 27,630 27,630 Change in reserve (change in valuation basis) (10,751) (10,751) Increase in asset valuation reserve (9,506) (9,506) Change in surplus in separate accounts 7,805 7,805 Capital contribution 4,902 4,902 --------------------------------------------------------------------------- Balance, December 31, 2001 $ 3,000 $ 299,232 $ (99,855) $ 202,377 ===========================================================================
SEE ACCOMPANYING NOTES. 5 Integrity Life Insurance Company Statements of Cash Flows (Statutory Basis)
YEAR ENDED DECEMBER 31, 2001 2000 ------------------------------------- (IN THOUSANDS) OPERATIONS: Premiums, policy proceeds and other considerations received $ 392,201 $ 192,631 Net investment income received 124,384 130,341 Commission and expense allowances received (paid) on reinsurance ceded (1,579) (9,377) Benefits paid (337,628) (539,155) Insurance expenses paid (41,640) (33,162) Other income received net of other expenses paid 22,555 42,477 Net transfers (to) from separate accounts (187,970) 74,563 Federal income taxes recovered 5,506 4,998 ------------------------------------- Net cash used in operations (24,171) (136,684) INVESTMENT ACTIVITIES: Proceeds from sales, maturities, or repayments of investments: Bonds 425,185 253,283 Mortgage loans 1,728 957 Other invested assets 7,797 30,606 Net losses on cash and short-term investments - (14) Miscellaneous proceeds 2,617 - ------------------------------------- Net proceeds from sales, maturities, or repayments of investments 437,327 284,832
6 Integrity Life Insurance Company Statements of Cash Flows (Statutory Basis) (continued)
YEAR ENDED DECEMBER 31, 2001 2000 ------------------------------------- (IN THOUSANDS) Cost of investments acquired: Bonds 364,552 321,418 Preferred stocks 318 - Common stocks 9,824 - Mortgage loans - 13,340 Miscellaneous applications 3,968 - ------------------------------------- Total cost of investments acquired 378,662 334,758 Net increase in policy loans 2,835 3,206 ------------------------------------- Net cash provided by (used in) investment activities 55,830 (53,132) FINANCING AND MISCELLANEOUS ACTIVITIES: Other cash provided: Capital and surplus paid-in - 120,824 Deposits on deposit-type contract funds and other liabilities without life or disability contingencies 6,330 - Other sources 9,898 8,508 ------------------------------------- Total other cash provided 16,228 129,332 Other cash applied: Withdrawals on deposit-type contract funds and other liabilities without life or disability contingencies 12,649 - Other applications, net 29,107 95,187 ------------------------------------- Total other cash applied 41,756 95,187 ------------------------------------- Net cash provided by (used in) financing and miscellaneous activities (25,528) 34,145 ------------------------------------- Net increase (decrease) in cash and short-term investments 6,131 (155,671) Cash and short-term investments at beginning of year 21,608 177,279 ------------------------------------- Cash and short-term investments at end of year $ 27,739 $ 21,608 =====================================
SEE ACCOMPANYING NOTES. 7 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis) December 31, 2001 A. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Integrity Life Insurance Company (the "Company") and its wholly owned insurance subsidiary, National Integrity Life Insurance Company ("National Integrity"), are wholly owned subsidiaries of The Western and Southern Life Insurance Company ("W&S"). The Company, domiciled in the state of Ohio and currently licensed in 47 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 March 3, 2000, W&S acquired the Company and National Integrity from ARM Financial Group, Inc. ("ARM") pursuant to a purchase agreement dated December 17, 1999 ("Purchase Agreement"). Under the terms of the Purchase Agreement, W&S placed the entire purchase price of $119.3 million into a recoverable escrow account subject to a number of downward price adjustments. These price adjustments related primarily to an indemnification of losses from the sales or deemed sales of certain securities owned by the Company and National Integrity. In a separate agreement, W&S assigned the right to receive the recovery of the purchase price on indemnified securities to the Company. As of March 31, 2001, the Company had recovered $125.0 million related to the sales of these securities and accrued interest on the escrow funds in full settlement of the escrow account. In accordance with accounting practices prescribed or permitted by the Ohio Department of Insurance, the Company netted realized losses from the sale of such securities with the related gain from indemnification. In addition, the interest maintenance reserve was not reduced by statutory realized losses from the securities sold during 2000 because those losses were netted with indemnification income. Subsequent to March 3, 2000, the Company and National Integrity have been assigned an AAA (Extremely Strong) rating for financial strength by Standard and Poor's, AAA (Highest) for claims paying ability from Duff & Phelps', A+ (Superior) for financial strength from A.M. Best and Aa2 (Excellent) for financial strength by Moody's Investor Services. 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. 8 A. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. All single class and multi-class mortgage-backed/asset-backed securities (e.g., CMOs) are adjusted for the effects of changes in prepayment assumptions on the related accretion of discount or amortization of premium of such securities using the retrospective method. If it is determined that a decline in fair value is other than temporary, the cost basis of the security is written down to the undiscounted estimated future cash flows. Prior to April 1, 2001, under GAAP, the Company accounted for the effects of changes in prepayment assumptions in the same manner. Effective April 1, 2001, for GAAP purposes, all securities, purchased or retained, that represent beneficial interests in securitized assets (e.g., CMO, CBO, CDO, CLO, MBS and ABS securities), other than high credit quality securities, are adjusted using the prospective method when there is a change in estimated future cash flows. If it is determined that a decline in fair value is other than temporary, the cost basis of the security is written down to the discounted fair value. If high credit quality securities are adjusted, the retrospective method is used. Under a formula prescribed by the NAIC, the Company defers the portion of realized capital 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. 9 A. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The net deferral is reported as the interest maintenance reserve ("IMR") in the accompanying balance sheets. Realized capital gains and losses are reported in income net of federal income tax and transfers to the IMR. Under GAAP, realized capital gains and losses would be reported in the income statement on a pretax basis in the period that the assets giving rise to the gains or losses are sold. The asset valuation reserve ("AVR") provides a valuation allowance for invested assets. The AVR is determined by an NAIC prescribed formula with changes reflected directly in unassigned surplus. AVR is not recognized for GAAP. 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, would be deferred and amortized generally in proportion to the emergence of gross profits over the estimated terms of the underlying policies. NONADMITTED ASSETS Certain assets designated as "nonadmitted," principally disallowed deferred tax assets and other assets not specifically designated as an admitted asset within the NAIC Accounting Practices and Procedures Manual, are excluded from the accompanying balance sheets and are charged directly to unassigned surplus. Under GAAP, such assets are included in the balance sheet. PREMIUM AND BENEFITS Subsequent to January 1, 2001, revenues for universal life and annuity policies with mortality or morbidity risk, except for guaranteed interest and group annuity contracts, consist of the entire premium received and benefits incurred represent the total of death benefits paid and the change in policy reserves. Premiums received for annuity policies without mortality 10 A. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) or morbidity risk and for guaranteed interest and group annuity contracts are recorded using deposit accounting, and credited directly to an appropriate policy reserve account, without recognizing premium income. Prior to January 1, 2001, all revenues for universal life and annuity policies consist of the entire premium received and benefits incurred represent the total of death benefits paid and the change in policy reserves. Under GAAP, premiums received in excess of policy charges would not be recognized as premium revenue and benefits would represent the excess of benefits paid over the policy account value and interest credited to the account values. 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. REINSURANCE Policy and contract liabilities ceded to reinsurers have been reported as reductions of the related reserves rather than as assets as would be required under GAAP. Commissions allowed by reinsurers on business ceded are reported as income when received rather than being deferred and amortized with policy acquisition costs as required under GAAP. DEFERRED INCOME TAXES Effective January 1, 2001, deferred tax assets are limited to 1) the amount of federal income taxes paid in prior years that can be recovered through loss carrybacks for existing temporary differences that reverse by the end of the subsequent calendar year, plus 2) the lesser of the remaining gross deferred tax assets expected to be realized within one year of the balance sheet date or 10% of capital and surplus excluding any net deferred tax assets, EDP equipment and operating software and any net positive goodwill, plus 3) the amount of remaining gross deferred tax assets that can be offset against existing gross deferred tax liabilities. The remaining deferred tax assets are non-admitted. Deferred taxes do not include amounts for state taxes. Prior to January 1, 2001, deferred federal income taxes were not provided for differences between the financial statement amounts and tax bases of assets and liabilities. Under GAAP, state taxes are included in the computation of deferred 11 A. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) taxes, a deferred tax asset is recorded for the amount of gross deferred tax assets expected to be realized in future years, and a valuation allowance is established for deferred tax assets not realizable. STATEMENTS OF CASH FLOWS Cash and short-term investments in the statements 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:
YEAR ENDED DECEMBER 31, 2001 2000 ------------------------------------ (IN THOUSANDS) Net income (loss) as reported in the accompanying statutory basis financial statements $(5,268) $ 8,262 Deferred policy acquisition costs, net of amortization 22,945 7,851 Adjustments to customer deposits (10,221) 20,063 Adjustments to invested asset carrying values at acquisition date 22,722 10,876 Amortization of value of insurance in force (30,530) (33,607) Amortization of interest maintenance reserve (820) (1,337) Amortization of goodwill (3,284) (1,313) Adjustments for realized investment gains/losses (1,184) 4,415 Adjustments for federal income tax expense (4,320) - Investment in subsidiary 11,983 (845) Other 1,728 (14,037) ------------------------------------ Net income, GAAP basis $ 3,751 $ 328 ====================================
12 A. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEAR ENDED DECEMBER 31, 2001 2000 ------------------------------------ (IN THOUSANDS) Capital and surplus as reported in the accompanying statutory basis financial statements $202,377 $188,510 Adjustments to customer deposits (153,450) (155,988) Adjustments to invested asset carrying values at acquisition date (116,991) (175,477) Asset valuation reserve and interest maintenance reserve 50,444 45,381 Value of insurance in force 182,054 232,223 Goodwill 100,505 61,710 Deferred policy acquisition costs 30,796 7,851 Adjustments to investment in subsidiary excluding net unrealized gains (losses) (6,165) (31,443) Net unrealized losses on available-for-sale securities (6,127) (47,725) Other (14,050) (22,668) ------------------------------------ Stockholder's equity, GAAP basis $269,393 $102,374 ====================================
Other significant accounting practices are as follows: INVESTMENTS Bonds, preferred stocks, common stocks, and short-term investments are stated at values prescribed by the NAIC, as follows: Bonds not backed by other loans are principally stated at amortized cost using the interest method. Single class and multi-class mortgage-backed/asset-backed securities are valued at amortized cost using the interest method including anticipated prepayments. Prepayment assumptions are obtained from dealer surveys or internal estimates and are based on the current interest rate and economic environment. The retrospective adjustment method is used to value all such securities except principal-only and interest-only securities, which are valued using the prospective method. 13 A. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Preferred stocks are reported at cost. Non-affiliated common stocks are reported at fair value as determined by the Securities Valuation Office of the NAIC and the related unrealized capital gains and losses are reported in unassigned surplus along with any adjustment for federal income taxes. Prior to January 1, 2001, the related capital unrealized gains and losses were reported in unassigned surplus without any adjustment for federal income taxes. There are no restrictions on non-affiliated common or preferred stocks. 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 remaining maturities of less than one year at the date of acquisition and are principally stated at amortized cost. Cash equivalents are short-term highly liquid investments with original maturities of three months or less and are principally stated at amortized cost. Mortgage loans and policy loans are reported at unpaid principal balances. Realized capital gains and losses are determined using the specific identification method. Changes in admitted asset carrying amounts for bonds, preferred stocks, non-affiliated common stocks and mortgage loans are credited or charged directly to unassigned surplus. PREMIUMS Premiums are recognized as revenue when due. Subsequent to January 1, 2001, premiums for annuity policies with mortality and morbidity risk, except for guaranteed interest and group annuity contracts, are also recognized as revenue when due. Premiums received for annuity policies without mortality or morbidity risk and for guaranteed interest and group annuity contracts are recorded using deposit accounting. Prior to January 1, 2001, life, annuity, accident and health premiums were recognized as revenue when due. 14 A. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 reserves. 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. The mean reserve method is used to adjust the calculated terminal reserve to the appropriate reserve at December 31. Mean reserves are determined by computing the regular mean reserve for the plan at the rated age and holding, in addition, one-half of the extra premium charge for the year. Policies issued after July 1 for substandard lives, are charged an extra premium plus the regular premium for the true age. Mean reserves are based on appropriate multiples of standard rates of mortality. An asset is recorded for deferred premiums net of loading to adjust the reserve for model premium payments. Tabular interest, tabular less actual reserve released, and tabular cost have been determined by formula as prescribed by the NAIC. Tabular interest on funds not involving life contingencies was derived from basic data. 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. GUARANTY FUND ASSESSMENTS A liability for guaranty fund assessments is accrued after an insolvency has occurred. 15 A. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SEPARATE ACCOUNTS Separate account assets and liabilities reported in the accompanying financial statements represent funds that are separately administered, principally for variable annuity contracts. 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 operations 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 operations 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. RECLASSIFICATIONS Certain 2000 amounts in the Company's statutory-basis financial statements have been reclassified to conform to the 2001 financial presentation. B. ACCOUNTING CHANGES The Company prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the Ohio Department of Insurance. Effective January 1, 2001, the State of Ohio required that insurance companies domiciled in the State of Ohio prepare their statutory basis financial statements in accordance with the NAIC Accounting Practices and Procedures Manual subject to any deviation prescribed or permitted by the State of Ohio Insurance Commissioner. Accounting changes adopted to conform to the provisions of the NAIC Accounting Practices and Procedures Manual are reported as changes in accounting principles. The cumulative effect of changes in accounting principles is reported as an adjustment to unassigned surplus in the period of the change in accounting principle. The cumulative effect is the difference between the amount of capital and surplus at the beginning of the year and the amount of capital and surplus that would have been reported at that date if the new accounting principles 16 B. ACCOUNTING CHANGES (CONTINUED) had been applied retroactively for all prior periods. As a result of these changes, the Company reported a change of accounting principle that decreased unassigned surplus $65.1 million as of January 1, 2001. Included in this total adjustment is a reduction in capital and surplus of approximately $37.5 million in write-downs of impaired invested assets, $24.7 million related to deferred tax assets and $2.9 million of accrued guaranty fund assessments. Despite the negative effect on statutory surplus, management expects the Company to remain in compliance with all regulatory and contractual obligations. C. INVESTMENTS The cost or amortized cost and the fair value of investments in bonds and preferred stocks are summarized as follows:
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ----------------------------------------------------------------------- (IN THOUSANDS) At December 31, 2001: Mortgage-backed securities $ 328,068 $ 4,528 $ 21,919 $ 310,677 Corporate securities 872,386 18,951 101,063 790,274 Asset-backed securities 99,972 1,993 15,235 86,730 U.S. Treasury securities and obligations of U.S. government agencies 40,788 665 532 40,921 Foreign governments 3,105 - 830 2,275 States and political subdivisions 6,450 535 - 6,985 ----------------------------------------------------------------------- Total bonds $1,350,769 $26,672 $139,579 $1,237,862 Preferred stocks 85,631 17 11,990 73,658 ----------------------------------------------------------------------- Total bonds and preferred stocks $1,436,400 $26,689 $151,569 $1,311,520 =======================================================================
17 C. INVESTMENTS (CONTINUED)
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ----------------------------------------------------------------------- (IN THOUSANDS) At December 31, 2000: Mortgage-backed securities $ 344,729 $ 60 $ 56,503 $ 288,286 Corporate securities 899,590 3,771 74,890 828,471 Asset-backed securities 135,205 - 27,191 108,014 U.S. Treasury securities and obligations of U.S. government agencies 35,548 171 - 35,719 Foreign governments 3,406 - 115 3,291 States and political subdivisions 3,840 - - 3,840 ----------------------------------------------------------------------- Total bonds $1,422,318 $4,002 $158,699 $1,267,621 Preferred stocks 80,311 - 1,349 78,962 ----------------------------------------------------------------------- Total bonds and preferred stocks $1,502,629 $4,002 $160,048 $1,346,583 =======================================================================
Fair values are based on published quotations of the Securities Valuation Office ("SVO") 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 both December 31, 2001 and 2000, the fair value of investments in bonds includes $800 million of bonds that were valued at amortized cost. The amortized cost of bonds at December 31, 2001 has been reduced by adjustments of $0.9 million to derive the carrying amount of bonds in the balance sheets ($1,349.9 million). 18 C. INVESTMENTS (CONTINUED) A summary of the cost or amortized cost and fair value of the Company's investments in bonds at December 31, 2001, by contractual maturity, is as follows:
COST OR AMORTIZED FAIR COST VALUE ------------------------------------ (IN THOUSANDS) Years to maturity: One or less $ 14,068 $ 14,423 After one through five 102,460 101,463 After five through ten 310,786 284,657 After ten 495,415 439,912 Asset-backed securities 99,972 86,730 Mortgage-backed securities 328,068 310,677 ------------------------------------ Total $1,350,769 $1,237,862 ====================================
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 lives. Proceeds from the sales of investments in bonds during 2001 and 2000 were $425.2 million, and $253.3 million; gross gains of $1.9 million and $432,425, and gross losses of $5.6 million and $9.3 million were realized on those sales, respectively. At December 31, 2001 and 2000, bonds with an admitted asset value of $6,958,555 and $6,988,000 respectively, were on deposit with state insurance departments to satisfy regulatory requirements. At December 31, 2001, the Company held unrated or less-than-investment grade bonds of $162.0 million, with an aggregate fair value of $114.6 million. Those holdings amounted to 12% 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 19 C. INVESTMENTS (CONTINUED) the issuers of these bonds. These evaluations are considered by the Company in their overall investment strategy. Unrealized gains and losses on investment in subsidiary and non-affiliated common stocks 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:
GROSS GROSS UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ----------------------------------------------------------------------- (IN THOUSANDS) At December 31, 2001: Subsidiary $ 17,823 $41,085 $ - $ 58,908 Non-affiliated common stocks 9,943 45,317 382 54,878 ----------------------------------------------------------------------- $ 27,766 $86,402 $382 $113,786 ======================================================================= At December 31, 2000: Subsidiary $ 17,823 $54,599 $ - $ 72,422 Non-affiliated common stocks 121 - - 121 ----------------------------------------------------------------------- $17,944 $54,599 $ - $ 72,543 =======================================================================
The Company's mortgage loan portfolio is primarily comprised of commercial and agricultural loans. During 2000, the Company made $13.3 million of new investments in commercial mortgage loans. The Company made no new mortgage loans during 2001. 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, 2001, the Company held no mortgages with interest more than 180 days past due. During 2001, excluding adjustments on adjustable rate mortgages, no interest rates of outstanding mortgage loans were reduced. No amounts have been advanced by the Company. 20 C. INVESTMENTS (CONTINUED) Major categories of the Company's net investment income are summarized as follows:
YEAR ENDED DECEMBER 31, 2001 2000 ------------------------------------ (IN THOUSANDS) Income: Bonds $ 93,625 $111,140 Preferred stocks 6,748 6,349 Mortgage loans 1,751 1,004 Policy loans 8,219 7,932 Cash and short-term investments 8,351 8,559 Other investment income 1,092 927 ------------------------------------ Total investment income 119,786 135,911 Investment expenses (988) (2,483) ------------------------------------ Net investment income $118,798 $133,428 ====================================
There has been no due and accrued investment income excluded from surplus. Realized capital gains and losses are reported net of federal income taxes and amounts transferred to the IMR, as follows:
YEAR ENDED DECEMBER 31, 2001 2000 ------------------------------------ (IN THOUSANDS) Realized capital losses $(15,437) $(9,005) Less amount transferred to IMR (3,623) (1,888) ------------------------------------ Net realized capital losses $(11,814) $(7,117) ====================================
21 D. FINANCIAL INSTRUMENTS The Company has offered equity-indexed products through its separate accounts. In connection with these products, the Company purchased over-the-counter call options from Citibank N.A., New York, and custom-tailored options from W&S. These options, which are held by the separate account, are recorded at market value of $20.2 million and $31.9 million at December 31, 2001 and 2000, respectively. Unrealized market value gains and losses on the option contracts are recorded in the separate account statements of operations to hedge against the Company's obligation to pay equity-indexed returns to policyholders. 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. E. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating the "fair value" disclosures for financial instruments in the accompanying financial statements and notes thereto: BONDS AND EQUITY SECURITIES Fair values for bonds and equity securities are based on quoted market prices where available. For bonds and equity securities 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, POLICY LOANS, CASH AND SHORT-TERM INVESTMENTS AND SEPARATE ACCOUNT ASSETS The carrying amounts of mortgage loans, policy loans cash and short-term investments and separate account assets approximate their fair value. LIFE AND ANNUITY RESERVES FOR INVESTMENT-TYPE CONTRACTS AND DEPOSIT FUND LIABILITIES The fair values 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 22 E. FAIR VALUES OF FINANCIAL INSTRUMENTS of deposit fund liabilities and the remaining annuity reserves are primarily based on the cash surrender values of the underlying contracts. SEPARATE ACCOUNT ANNUITY RESERVES The fair value of separate account annuity reserves for investment-type products equals the cash surrender values. The carrying amounts and fair values of the Company's significant financial instruments are shown below. For financial instruments not separately disclosed below, the carrying amount is a reasonable estimate of fair value.
DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------------------------------------------------------------------- (IN THOUSANDS) Assets: Bonds $1,349,888 $1,249,601 $1,422,318 $1,212,490 Preferred stocks 85,631 73,766 80,310 79,259 Non-affiliated common stocks 54,878 54,878 121 121 Mortgage loans 19,589 19,589 21,318 21,318 Policy loans 110,235 110,235 107,400 107,400 Cash and short-term investments 27,739 27,739 21,608 21,608 Separate account assets 1,636,626 1,636,626 1,526,535 1,526,535 Liabilities: Life and annuity reserves for investment-type contracts and deposit fund liabilities $1,257,178 $1,312,316 $1,295,299 $1,313,733 Separate accounts annuity reserves 1,565,616 1,564,214 1,455,875 1,453,631
23 F. 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 deposits, much of the mortality risks associated with variable annuity deposits and substantially all risks associated with variable life business have been reinsured with non-affiliated insurance companies. A contingent liability exists with respect to insurance ceded which would become a liability should the reinsurer be unable to meet the obligations assumed under these reinsurance agreements. The effect of reinsurance on premiums, annuity considerations and deposit-type funds is as follows:
YEAR ENDED DECEMBER 31, 2001 2000 ------------------------------------ (IN THOUSANDS) Direct premiums and amounts assessed against policyholders $401,116 $195,202 Reinsurance assumed 552 735 Reinsurance ceded (3,136) (3,306) ------------------------------------ Net premiums, annuity considerations and deposit-type funds $398,532 $192,631 ====================================
The Company assumed $551,712 and $734,602 of Variable Life Insurance (VLI) premiums in 2001 and 2000, respectively, from a modified-coinsurance agreement with Safeco Life Insurance Company. 24 F. REINSURANCE (CONTINUED) In 2001 and 2000, the Company did not commute any ceded reinsurance nor did it enter into or engage in any agreement that reinsures policies or contracts that were in-force or had existing reserves as of the effective date of such agreements. Neither the Company nor any of its related parties control, directly or indirectly, any reinsurers with whom the Company conducts business. No policies issued by the Company have been reinsured with a foreign company, which is controlled, either directly or indirectly, by a party not primarily engaged in the business of insurance. The Company does not have any reinsurance agreements in effect under which the reinsurer may unilaterally cancel the agreement. At December 31, 2001 there are no reinsurance agreements in effect such that the amount of losses paid or accrued exceed the total direct premium collected. The net amount of reduction in surplus at December 31, 2001 if all reinsurance ceded agreements were cancelled is $3,044,503. G. FEDERAL INCOME TAXES The Company files a consolidated return with National Integrity. The method of allocation between the companies is subject to a written agreement, approved by the Board of Directors. Allocation is based on separate return calculations with current credit for net losses. Intercompany tax balances are settled annually. Income before federal income taxes differs from taxable income principally due to tax-exempt investment income, dividends-received tax deductions, and differences in reserves for policy and contract liabilities for tax and statutory-basis financial reporting purposes. As of December 31, 2001, the Company and National Integrity had consolidated operating loss carryforwards of $4,012,069 that will expire in years 2021 through 2022. The amount of federal income taxes incurred that will be available for recoupment in the event of future net losses is $1.7 million from 2001 (none from 2000). 25 G. FEDERAL INCOME TAXES (CONTINUED) The components of the consolidated carryover for the Company and National Integrity are as follows:
CARRYOVER EXPIRATION DATES ----------------------- -------------------------- General business credit carryover $ 337,517 2006 - 2009 Foreign tax credit carryover $ 145,292 2003 - 2004 AMT credit carryover $ 2,344,692 indefinitely Capital loss carryover $ 216,419,095 2004 - 2007 The components of the net deferred tax asset/(liability) at December 31, 2001 are as follows (in thousands): Gross deferred tax assets $107,996 Gross deferred tax liabilities 8,560 Deferred tax assets non-admitted 95,080 Increase (decrease) in deferred tax assets non-admitted (28,512)
Current income taxes incurred consists of the following major components:
YEAR ENDED DECEMBER 31, 2001 2000 ------------------------------------ (IN THOUSANDS) Current year income tax (benefit) $1,695 $(7,522) Tax credits - - Current year equity tax - - Prior year over-accrual of tax reserves (1,630) - ------------------------------------ Current income tax (benefit) incurred $ 65 $(7,552) ====================================
26 G. FEDERAL INCOME TAXES (CONTINUED) The main components of the 2001 deferred tax amounts are as follows: Gross Deferred Tax Assets: Reserves $ 14,057 Bonds/Stocks 9,249 DAC 3,548 Capital loss carryover 72,377 Section 197 intangible 4,149 Acquisition related goodwill 1,842 Separate account adjustment - Deferred hedge losses 2,774 Other - Total Deferred Tax Assets $107,996 Deferred Tax Assets non-admitted $ 95,080 =================== Gross Deferred Tax Liabilities: Reserves strengthening $ 8,560 ------------------- Total Deferred Tax Liabilities $ 8,560 ===================
Changes in DTAs and DTLs for the year ended 12/31/01 are as follows: Change in total DTAs $107,996 $130,162 $(22,166) ====================================================== DTAs non-admitted $ 95,080 $123,592 $(28,512) ====================================================== Change in total DTLs $ 8,560 $ 2,722 $ 5,838 ======================================================
27 G. FEDERAL INCOME TAXES (CONTINUED) The federal income tax provision reflects an effective tax rate different than the prevailing federal income tax rate due in part to various exclusions and special deductions available to life insurance companies. Following is a reconciliation between the amount of tax computed at the federal statutory rate of 35% and the federal income tax provision (exclusive of taxes related to capital gains or losses) reflected in the statements of operations:
YEAR END DECEMBER 31, 2001 2000 ------------------------------------ (IN THOUSANDS) Federal income tax expense (benefit) computed at statutory rate $2,314 $ 2,739 Amortization of value of insurance in force (2,365) (2,365) Adjustment to statutory reserves for tax purposes 4,866 2,590 Forgiveness of debt - Sec. 108(a)(1)(B) - (7,951) Bond discount accrual (3,074) (2,121) Deferred acquisition costs recorded for tax purposes 286 (328) Amortization of interest maintenance reserve (287) (511) Other (1,675) 395 ------------------------------------ Federal income tax expense (benefit) $ 65 $(7,552) ====================================
The Company made tax payments in the amount of $4.5 million in 2001 (none in 2000). H. CAPITAL AND 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 unassigned 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 unassigned surplus as of December 31, 2001 or (ii) the Company's statutory net income for the preceding year. The Company may not pay any dividends during 2002 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 28 H. CAPITAL AND SURPLUS (CONTINUED) 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 2001, the Company did not receive any dividends from National Integrity. At December 31, 2001, the portion of unassigned deficit represented or reduced by each item below is as follows:
AMOUNT --------------------- (IN THOUSANDS) Unrealized gains and losses $44,053 Non-admitted asset values (95,962) Separate account businesses - Asset valuation reserves (31,530) Provision for reinsurance -
Life/health insurance companies are subject to certain Risk-Based Capital ("RBC") requirements as specified by the NAIC. Under those requirements, the amount of capital and surplus maintained by a life/health insurance company is to be determined based on the various risk factors related to it. At December 31, 2001 and 2000, the Company meets the RBC requirements. I. RELATED PARTY TRANSACTIONS During 2001, the Company received a $4.9 million capital contribution from W&S. The capital contribution was in the form of common stock having an original cost to W&S of $4.9 million and a market value at the date of transfer of approximately $50.0 million. During 2000, the Company (i) received $105.8 million in capital contributions from W&S, (ii) received a $15.0 million capital contribution from ARM and (iii) recorded a $41.8 million capital contribution to National Integrity. The Company paid no dividends during 2000 or 2001. On March 3, 2000, W&S began performing certain administrative and special services for the Company to assist with its business operations. The services include tax compliance and reporting; payroll functions; administrative support services; and investment functions. Before March 3, 2000, certain administrative and special services were provided to the Company through Administrative and Investment Services agreements with ARM, the Company's former parent. During 2001, the Company paid $0.3 million and $0.9 million to 29 I. RELATED PARTY TRANSACTIONS (CONTINUED) W&S and Ft. Washington (a subsidiary of W&S), respectively, and received $8.5 million from National Integrity related to these services. During 2000, the Company paid $3.0 million and $1.1 million to ARM and Ft. Washington, respectively, and received $6.0 million from National Integrity related to these services. The charges for services are considered reasonable and in accordance with the requirements of applicable insurance law and regulations. At December 31, 2001, the Company had amounts due from National Integrity of $2.4 million and amounts due to Touchstone Securities, Inc. ("Touchstone"), a wholly owned subsidiary of W&S, of $0.4 million. At December 31, 2000, the Company had amounts due to National Integrity of $32.2 million, and amounts of $0.2 million and $16.8 million due from Touchstone and W&S, respectively. These amounts are generally settled on a monthly basis. The Company has not guaranteed any obligation of its affiliates as of December 31, 2001. J. COMMITMENTS AND CONTINGENCIES The Company is assessed amounts by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. At December 31, 2001 and 2000, the Company has accrued $3.6 million and $1.4 million, respectively, for guaranty fund assessments. Various lawsuits against the Company have arisen in the course of the Company's business. Contingent liabilities arising from litigation, income taxes and other matters are not considered material in relation to the financial position of the Company. 30 K. ANNUITY RESERVES At December 31, 2001, 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:
AMOUNT PERCENT ------------------------------------ (IN THOUSANDS) Subject to discretionary withdrawal (with adjustment): With market value adjustment $ 572,992 20.2% At book value less surrender charge of 5% or more 455,835 16.1% At market value 865,451 30.5% ------------------------------------ Total with adjustment or at market value 1,894,278 66.8% Subject to discretionary withdrawal (without adjustment) at book value with minimal or no charge or adjustment 297,980 10.5% Not subject to discretionary withdrawal 642,425 22.7% ------------------------------------ Total annuity reserves and deposit fund liabilities (before reinsurance) 2,834,683 100% Less reinsurance ceded (16,754) ========= ------------------ Net annuity reserves and deposit fund liabilities $2,817,929 ==================
L. SEPARATE ACCOUNTS The Company's guaranteed separate accounts include indexed products (i.e. equity-indexed annuities) 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. These policies carry an interest rate guarantee based on the guarantee period selected by the policyholder. The Company's equity-indexed annuities provide participation in the S&P 500 Price Index. The Company's non-guaranteed 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. Variable annuities include minimum guaranteed death benefits that vary by product and include optional death benefits available on some products. The death benefits currently provided by the Company include the following: return of premium paid, a death benefit that is adjusted after 7 years to the current account value, a death benefit 31 L. SEPARATE ACCOUNTS (CONTINUED) that is adjusted periodically to the current account value, and a death benefit of premium accumulated at 5% annually up to a maximum of 200% of premium. 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, 2001 is as follows: 32 L. SEPARATE ACCOUNTS (CONTINUED)
SEPARATE ACCOUNTS WITH GUARANTEES ----------------------------------------------------- NONINDEXED GUARANTEED LESS NONINDEXED THAN / EQUAL TO GUARANTEED MORE NONGUARANTEED INDEXED 4% THAN 4% SEPARATE ACCOUNTS TOTAL ----------------------------------------------------------------------------------------- (IN THOUSANDS) Premiums, deposits and other considerations $5,137 $129 $263,704 $ 123,588 $ 392,558 ========================================================================================= Reserves for separate accounts with assets at fair value $94,586 $11,362 $594,217 $884,466 $1,584,631 ========================================================================================= Reserves for separate accounts by withdrawal characteristics: Subject to discretionary withdrawal (with adjustment): With market adjustment $48,622 $11,362 $513,008 $- $572,992 At book value without market value adjustment and with current surrender charge of 5% or more - - 81,209 - 81,209 At market value - - - 884,466 884,466 ----------------------------------------------------------------------------------------- Total with adjustment or at market value 48,622 11,362 594,217 884,466 1,538,667 Not subject to discretionary withdrawal 45,964 - - - 45,694 ----------------------------------------------------------------------------------------- Total separate accounts reserves $94,586 $11,362 $594,214 $884,466 $1,584,631 =========================================================================================
33 L. SEPARATE ACCOUNTS (CONTINUED) Amounts transferred to and from the separate accounts as reported in the Summary of Operations of the Separate Accounts for the year ended December 31, 2001 are as follows:
SEPARATE ACCOUNTS WITH GUARANTEES ------------------------------------------------------ NONINDEXED GUARANTEED LESS NONINDEXED THAN / EQUAL TO GUARANTEED MORE NONGUARANTEED INDEXED 4% THAN 4% SEPARATE ACCOUNTS TOTAL ---------------------------------------------------------------------------------------- (IN THOUSANDS) Transfers to Separate Accounts $ 5,137 $129 $ 263,704 $123,588 $ 392,558 Transfers from Separate Accounts 6,839 127 128,516 81,620 217,102 ---------------------------------------------------------------------------------------- Net transfers to (from) Separate Accounts $(1,702) $ 2 $135,188 $41,968 $175,456 ========================================================================================
A reconciliation of the amounts transferred to and from the separate accounts for the year ended December 31, 2001 is presented below:
2001 ------------------ (IN THOUSANDS) Transfers as reported in the Summary of Operations of the Separate Accounts Statement: Transfers to separate accounts $392,558 Transfers from separate accounts (217,102) ------------------ Net transfers to separate accounts 175,456 Reconciling adjustments: Policy deductions and other expense reported as other revenues (570) Other changes in surplus in separate account statement 7,805 ------------------ Transfers as reported in the Summary of Operations $182,691 ==================
34 M. DIRECT PREMIUMS WRITTEN BY MANAGING GENERAL AGENTS/THIRD PARTY ADMINISTRATORS The Company issued business through the following managing general agents in 2001:
NAME AND ADDRESS EIN EXCLUSIVE TYPE OF BUSINESS AUTHORITY TOTAL CONTRACT WRITTEN GRANTED PREMIUMS WRITTEN ---------------------------------------------------------------------------------------------------------------- Signature Financial Services 550 Pinetown Rd., Suite 208 ###-##-#### No Fixed Annuities Writing premium $32,863,331 Ft. Washington, PA 19034 ---------------------------------------------------------------------------------------------------------------- Ann Arbor Annuity Exchange 45 Research Drive Ann Arbor, MI 48103 38-2929874 No Fixed Annuities None $10,632,655
The aggregate remaining premiums written by other managing general agents for 2001 was $31,294,731. N. OTHER ITEMS SUPERVISION ORDER On August 20, 1999, the Ohio Department of Insurance issued a Supervision Order with respect to the Company. The Supervision Order was automatically extended until March 2, 2000, when it was released upon the close of the sale of the Company. Under the terms of the Supervision Order, the Company continued payments of death benefits, previously scheduled systematic withdrawals, previously scheduled immediate annuity payments, and agent commissions, but was to 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. FORGIVENESS OF DEBT During 1998, the Company entered into total yield swap transactions with two former 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 were considered off-balance sheet items. 35 FORGIVENESS OF DEBT (CONTINUED) The swap transactions generally provided that the Company paid an amount that approximated the interest credited to be paid to certificate holders plus outside credit enhancement fees and received the book income of the 312CC and 212CC investment portfolios, less investment advisory expenses. The Company accounted for the swap activity in its guaranteed separate account. Under the terms of the Purchase Agreement, notes payable outstanding of $7.8 million and $16.4 million for the above-mentioned swap transactions for 312CC and 212CC, respectively, were forgiven or paid off on March 3, 2000. 36 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, 2001 Statement of Operations for the Year Ended December 31, 2001 Statements of Changes in Net Assets for the Years Ended December 31, 2001 and 2000 Notes to Financial Statements SEPARATE ACCOUNT TEN: Report of Independent Auditors Statement of Assets and Liabilities as of December 31, 2001 Statement of Changes in Net Assets for the Year Ended December 31, 2001 Statement of Operations for the Year Ended December 31, 2001 Notes to Financial Statements INTEGRITY LIFE INSURANCE COMPANY: Report of Independent Auditors Balance Sheets (Statutory Basis) as of December 31, 2001 and 2000 Statements of Income (Statutory Basis) for the Years Ended December 31, 2001 and 2000 Statements of Changes in Capital and Surplus (Statutory Basis) for the Years Ended December 31, 2001 and 2000 Statements of Cash Flows (Statutory Basis) for the Years Ended December 31, 2001 and 2000 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 Corporation. Incorporated by reference to Registrant's Form N-4 registration statement (File 1 No. 33-51268) on May 1, 1996. 4.(a) Form of trust agreement. Incorporated by reference to Registrant's Form N-4 registration statement filed on August 24, 1992. 4.(b) Form of group variable annuity contract. Incorporated by reference to pre-effective amendment no. 1 to Registrant's Form N-4 registration statement filed on November 9, 1992. 4.(c) Form of variable annuity certificate. Incorporated by reference to Registrant's N-4 registration statement filed on August 24, 1992. 4.(d) Form of individual variable annuity contract. Incorporated by reference to pre-effective amendment no. 1 to Registrant's Form N-4 registration statement (File No. 33-51270), filed on November 9, 1992. 4.(e) Forms of riders to certificate for qualified plans. Incorporated by reference to pre-effective amendment no. 1 to Registrant's Form N-4 registration statement filed on November 9, 1992. 4.(f) Form of rider for use in certain states eliminating the Guarantee Period Options. Incorporated by reference to Form N-4 registration statement (File No. 33-56654). 4.(g) Alternate form of variable annuity contract for use in certain states. Incorporated by reference to Registrant's Form N-4 registration statement (File No. 33-51268) on May 1, 1996. 5. Form of application. Incorporated by reference to post-effective amendment no. 1 to Form S-1 registration statement (File No. 33-51270). 6.(a) Certificate of Incorporation of Integrity. Incorporated by reference to post-effective amendment no. 4 to Registrant's Form N-4 registration statement (File No. 51268), filed on April 28, 1995. 6.(b) By-Laws of Integrity. Incorporated by reference to post-effective amendment no. 4 to Registrant's Form N-4 registration statement (File No. 33-51268), filed on April 28, 1995. 7.(a) Reinsurance Agreement between Integrity and Connecticut General Life Insurance Company (CIGNA). Incorporated by reference to post-effective amendment no. 4 to Registrant's Form N-4 registration statement (File No. 33-51268), filed on April 28, 1995. 7.(b) Reinsurance Agreement between Integrity and Connecticut General Life Insurance Company (CIGNA) effective January 1, 1995. Incorporated by reference to Registrant's Form N-4 registration statement (File No. 33-51268) on May 1, 1996. 8.(a) Form of Participation Agreement among Integrity Series Fund, Inc., Integrity Financial Services, Inc. and Integrity, incorporated by reference to Registrant's registration statement on Form N-4 (File No. 33-51268) filed August 24, 1992. 8.(b) Participation Agreement Among Variable Insurance Products Fund, Fidelity Distributors Corporation ("FDC") and Integrity, dated November 20, 1990. Incorporated by reference from post-effective amendment no. 5 to Form N-4 registration statement of Separate Account I of Integrity (File No. 33-8903), filed on February 28, 1992. 8.(c) Participation Agreement Among Variable Insurance Products Fund II, FDC and Integrity, dated November 20, 1990. Incorporated by reference from post-effective amendment no. 5 to Form N-4 registration statement of Separate Account I of Integrity (File No. 33-8903), filed on February 28, 1992. 8.(d) Amendment No. 1 to Participation Agreements Among Variable Insurance Products Fund, 2 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) filed on April 28, 1999. 8.(g) 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.(h) 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.(i) 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.(j) Form of Participation Agreement (Service Shares) between Janus Aspen Series and National Integrity, incorporated by reference to Registrant's registration statement on Form N-4 (File No. 33-51268) filed April 24, 2000. 8.(k) Form of Distribution and Shareholder Services Agreement (Service Shares) between Janus Distributors, Inc. and Integrity, incorporated by reference to Registrant's registration statement on Form N-4 (File No. 33-51268) filed April 24, 2000. 8.(l) Form of Participation Agreement between MFS Variable Insurance Trust, Massachusetts Financial Services Company and Integrity, incorporated by reference to Registrant's registration statement on Form N-4 (File No. 33-51268) filed April 24, 2000. 8.(m) Form of Participation Agreement among Putnam Variable Trust, Putnam Mutual Fund Corp., Touchstone Securities, Inc. and Integrity, incorporated by reference to Registrant's registration statement on Form N-4 (File No. 333-44876) filed November 13, 2000. 8.(n) Form of Participation Agreement among Van Kampen Funds, Inc., Touchstone Securities, Inc. and Integrity, incorporated by reference to Registrant's registration statement. On Form N-4 (File No. 333-44876) filed November 13, 2000. 8.(o) Form of Participation Agreement among Franklin Templeton Variable Insurance Products Trust, Touchstone Securities, Inc. and Integrity Life Insurance Company. 9. Opinion and Consent of G. Stephen Wastek. 10. Consents of Ernst & Young LLP. 11. Not applicable. 12. Not applicable. 3 13. Schedule for computation of performance quotations. Incorporated by reference to Registrant's Form N-4 registration statement (File No. 33-51268) on May 1, 1996. 14. Not applicable. ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR Set forth below is information regarding the directors and principal officers of Integrity, the Depositor: DIRECTORS:
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES WITH DEPOSITOR ----------------------------------- ----------------------------------- John F. Barrett Vice Chairman of the Board and 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 Chairman of the Board and 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 Kenneth A. Palmer* Senior Vice President Jill R. Keinsley* Senior Vice President James J. Vance Vice President & Treasurer 400 Broadway, Cincinnati, Ohio 45202 Joseph F. Vap* Director, Financial Operations 4 Edward J. Babbitt Secretary 400 Broadway, Cincinnati, Ohio 45202
* 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. Fort Washington Brokerage Services, Inc.; Ohio corporation; 100% owned by IFS Financial Services, Inc.; registered investment advisor and broker dealer. IFS Fund Distributors, Inc.; Ohio corporation; 100% owned by IFS Financial Services, Inc.; registered broker dealer Integrated Fund Services, Inc.; Ohio corporation; 100% owned by IFS Financial Services, Inc.; registered transfer agent 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. 5 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. Fort Washington Brokerage Services, Inc.; Ohio corporation; 100% owned by IFS Financial Services, Inc.; registered investment advisor and broker dealer. IFS Fund Distributors, Inc.; Ohio corporation; 100% owned by IFS Financial Services, Inc.; registered broker dealer Integrated Fund Services, Inc.; Ohio corporation; 100% owned by IFS Financial Services, Inc.; registered transfer agent 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. 6 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. 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 March 1, 2002 there were 8198 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, 7 despite the adjudication of liability, but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court of common pleas or such other court shall deem proper; (2) Any action of suit in which the only liability asserted against a Director is pursuant to Section 1701.95 of the Ohio Revised Code. (c) To the extent that a Director, trustee, officer, employee, or agent has been successful in the merits or otherwise in defense of any action, suit, or proceeding referred to in division (a) and (b) of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses, including attorney's fees, actually and reasonably incurred by him in connection with the action, suit, or proceeding. (d) Any indemnification under divisions (a) and (b) of this Article, unless ordered by a court, shall be made by the Corporation only as authorized in the specific case upon the determination that indemnification of the Director, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in divisions (a) and (b) of this Article. Such determination shall be made as follows: (1) By a majority vote of a quorum consisting of Directors of the Corporation who were not and are not parties to or threatened with any such action, suit, or proceeding; (2) If the quorum described in division (d)(1) of this Article is not obtainable or if a majority vote of a quorum of disinterested Directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the Corporation or any person to be indemnified within the past five years; (3) By the Shareholders; or (4) By the court of common pleas or the court in which such action, suit or proceeding was brought. Any determination made by the disinterested Directors under Article (d)(1) or by independent legal counsel under Article (d)(2) shall be promptly communicated to the person who threatened or brought the action or suit by in the right of the Corporation under (b) of this Article, and within ten days after receipt of such notification, such person shall have the right to petition the court of common pleas or the court in which such action or suit was brought to review the reasonableness of such determination. (e) (1) Expenses, including attorney's fees, incurred by a Director in defending the action, suit, or proceeding 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 8 action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. (g) The Corporation may purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit, or self insurance, on behalf of or for any person who is or was a Director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee, or agent of another corporation, domestic or foreign, non-profit or for profit, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under this section. Insurance may be purchased from or maintained with a person in which the Corporation has a financial interest. 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: DIRECTORS:
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES WITH TOUCHSTONE SECURITIES ----------------------------------- ----------------------------------------------- James N. Clark(1) Director Jill T. McGruder(3) Director, Chief Executive Officer and President Edward S. Heenan(1) Director and Controller William F. Ledwin(1) Director Donald J. Wuebbling(1) Director OFFICERS: Jill T McGruder(3) President and CEO Richard K. Taulbee(1) Vice President Robert F. Morand(1) Secretary Patricia Wilson(3) Chief Compliance Officer Edward S. Heenan(1) Controller James J. Vance(1) Vice President and Treasurer Robert F. Morand(1) Secretary Terrie A. Wiedenheft(3) Chief Financial Officer Don W. Cummings(2) Vice President 9 Elaine M. Reuss(1) Assistant Treasurer Jospeh Vap(2) Assistant Treasurer David L. Anders(2) Assistant Vice President Laurel S. Durham(2) Assistant Vice President Lisa C. Heffley(2) Assistant Vice President Patricia L. Tackett(2) Assistant Vice President Mark Murphy(2) Assistant Vice President
(1) Principal Business Address: 400 Broadway, Cincinnati, Ohio 45202 (2) Principal Business Address: 515 W. Market St. Louisville, Kentucky 40202 (3) Principal Business Address: 221 East Fourth Street, Suite 300, 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. 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. 10 SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant and the Depositor certify that they meet 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 30th day of December, 2002. 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 11 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: 12/30/02 PRINCIPAL FINANCIAL OFFICER: /s/ Don W. Cummings -------------------------------------- Don W. Cummings, Chief Financial Officer Date: 12/30/02 PRINCIPAL ACCOUNTING OFFICER: /s/ Joseph F Vap ------------------ Joseph F. Vap, Director, Financial Operations Date: 12/30/02 DIRECTORS: /s/ Dennis L. Carr /s/ Robert L. Walker ------------------------- ---------------------- Dennis L. Carr Robert L. Walker Date: 12/30/02 Date: 12/30/02 /s/ Donald J. Wuebbling ------------------------- ---------------------- Donald J. Wuebbling William J. Williams Date: 12/30/02 Date: 12/30/02 /s/ John R. Lindholm ------------------------- John R. Lindholm Date: 12/30/02 /s/ John F. Barrett ------------------------- John F. Barrett Date: 12/30/02 12 EXHIBIT INDEX EXHIBIT NUMBER 8.(o) Form of Franklin Templeton Variable Insurance Products Trust Participation Agreement 9. Opinion and Consent of G. Stephen Wastek 10. Auditors Consent 13