-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ef72G3Obiyi+jEEyCkoE7GXaxDo3zIgpRqWzj5IQ8aMUBpii2yhqs9oIqPEIAsDv tZw04vXan5QxACEPV7PNxQ== 0001047469-99-016800.txt : 19990429 0001047469-99-016800.hdr.sgml : 19990429 ACCESSION NUMBER: 0001047469-99-016800 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19990428 EFFECTIVENESS DATE: 19990428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEPARATE ACCOUNT II OF INTEGRITY LIFE INSURANCE CO CENTRAL INDEX KEY: 0000890931 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 860214103 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-51268 FILM NUMBER: 99603277 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-07134 FILM NUMBER: 99603278 BUSINESS ADDRESS: STREET 1: 515 WEST MARKET ST STREET 2: 7TH FLOOR CITY: LOVISVILLE STATE: KY ZIP: 40202 BUSINESS PHONE: 5025827910 MAIL ADDRESS: STREET 1: 515 WEST MARKET ST STREET 2: 7TH FLOOR CITY: LOUISVILLE STATE: KY ZIP: 40202 FORMER COMPANY: FORMER CONFORMED NAME: SEPARATE ACCOUNT SF OF INTEGRITY LIFE INSURANCE CO DATE OF NAME CHANGE: 19930328 485BPOS 1 485BPOS As filed with the Securities and Exchange Commission on April 28, 1999 Registration Nos. 33-51268 and 811-7134 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. [ ] ---- Post-Effective Amendment No. 13 [x] ---- REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 14 [x] ---- (Check appropriate box or boxes) Separate Account II of Integrity Life Insurance Company (Exact Name of Registrant) Integrity Life Insurance Company (Name of Depositor) 515 West Market Street, Louisville, KY 40202 (Address of Depositor's Principal Executive Offices) (Zip Code) Depositor's Telephone Number, including Area Code (502) 582-7900 Kevin L. Howard Integrity Life Insurance Company 515 West Market Street Louisville, Kentucky 40202 (Name and Address of Agent for Service) Approximate Date of Proposed Public Offering: As soon after the effective date of this Registration Statement as is practicable. It is proposed that this filing will become effective (check appropriate box) immediately upon filing pursuant to paragraph (b) of Rule 485 --- x on (May 1, 1999) pursuant to paragraph (b) of Rule 485 --- 60 days after filing pursuant to paragraph (a)(1) of Rule 485 --- on (date) pursuant to paragraph (a)(1) of Rule 485 --- 75 days after filing pursuant to paragraph (a)(2) of Rule 485 --- on (date) pursuant to paragraph (a)(2) of Rule 485 --- If appropriate, check the following box: this post-effective amendment designates a new effective date for a --- previously filed post-effective amendment. PROSPECTUS PINNACLE FLEXIBLE PREMIUM VARIABLE ANNUITY issued by INTEGRITY LIFE INSURANCE COMPANY This prospectus describes a flexible premium variable annuity contract offered by Integrity Life Insurance Company, a subsidiary of ARM Financial Group, Inc. (ARM). The contracts provide several types of benefits, some of which have tax-favored status under the Internal Revenue Code of 1986, as amended. Two separate accounts, Separate Account II and Separate Account Ten, fund the Variable Annuity contracts. You may allocate contributions to various available investment divisions of the Separate Accounts, called Variable Account Options, or to our Fixed Accounts, or both. The Variable Account Options and Fixed Accounts are together referred to as INVESTMENT OPTIONS. Your contributions to the Variable Account Options of Separate Account II are invested in shares of the Portfolios of the following mutual funds: BT Insurance Funds Trust; Fidelity's Variable Insurance Products Fund (VIP), Fidelity's Variable Insurance Products Fund II (VIP II), and Fidelity's Variable Insurance Products Fund III (VIP III), trust funds of the Fidelity Investments group of companies; The Legends Fund, Inc.; Janus Aspen Series; J.P. Morgan Series Trust II; and Morgan Stanley Dean Witter Universal Funds, Inc. (MSDW UNIVERSAL FUNDS). The prospectuses for the Portfolios describe their investment objectives, policies and risks. Contributions to the Variable Account Options of Separate Account Ten are allocated to its Select Ten Plus Divisions, which invest directly in securities. The value of your contributions to the Variable Account Options reflects the performance of the Portfolios and/or the Select Ten Plus Divisions. There are 27 Variable Account Options available under the Separate Accounts:
BT FUNDS TRUST FIDELITY'S VIP FUNDS EAFE Equity Index Fund VIP Equity-Income Portfolio: Initial Class Equity 500 Index Fund VIP II Contrafund Portfolio: Initial Class Small Cap Index Fund VIP III Growth & Income Portfolio: Initial Class VIP III Growth Opportunities Portfolio: Initial Class JANUS ASPEN SERIES VIP Growth Portfolio: Service Class Janus Aspen Capital Appreciation Portfolio VIP III Mid Cap Portfolio: Service Class Janus Aspen Balanced Portfolio Janus Aspen Worldwide Growth Portfolio J.P. MORGAN SERIES TRUST II Janus Aspen Money Market Portfolio J.P. Morgan International Opportunities Portfolio J.P. Morgan Bond Portfolio LEGENDS FUND MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. Harris Bretall Sullivan & Smith Equity Growth Portfolio MSDW Universal Funds Asian Equity Portfolio Zweig Asset Allocation Portfolio MSDW Universal Funds Emerging Markets Debt Portfolio Zweig Equity (Small Cap) Portfolio MSDW Universal Funds High Yield Portfolio Scudder Kemper Value Portfolio MSDW Universal Funds U.S. Real Estate Portfolio SELECT TEN PLUS DIVISIONS Select Ten Plus Division March Select Ten Plus Division June Select Ten Plus Division September Select Ten Plus Division December
Part I of this prospectus describes the contract and provides background information about the Separate Accounts. Part II of this prospectus (beginning on page 37) provides information about the investment activities and operations of the Select Ten Plus Divisions, including their investment policies. We also offer Guaranteed Rate Options (GROs) and a Systematic Transfer Option (STO), together referred to as FIXED ACCOUNTS. The money you put into a GRO earns a fixed interest rate that we declare at the beginning of the duration you select. A MARKET VALUE ADJUSTMENT will be made for withdrawals, surrenders, transfers and certain other transactions made before your GRO Account expires. However, your value under a GRO Account can't be decreased below an amount equal to your contribution less prior withdrawals plus interest compounded at an annual effective rate of 3% (MINIMUM VALUE). Withdrawal charges and an annual administrative charge may apply, and may invade principal. Your allocation to the STO earns a fixed interest rate that we declare each calendar quarter, guaranteed never to be less than an effective annual yield of 3%. YOU MUST TRANSFER ALL CONTRIBUTIONS YOU MAKE TO THE STO INTO OTHER INVESTMENT OPTIONS WITHIN ONE YEAR OF CONTRIBUTION ON A MONTHLY OR QUARTERLY BASIS. This prospectus contains information about the contracts that you should know before investing. You should read this prospectus and any supplements, and retain them for future reference. This prospectus isn't valid unless provided with the current Portfolio prospectuses, which you should also read. For further information and assistance, contact our Administrative Office at Integrity Life Insurance Company, P.O. Box 740074, Louisville, Kentucky 40201-0074. Our express mail address is Integrity Life Insurance Company, 515 West Market Street, Louisville, Kentucky 40202-3319. You may also call the following toll-free number: 1-800-325-8583. Registration statements relating to the contracts, which include a Statement of Additional Information dated May 1, 1999, have been filed with the Securities and Exchange Commission. The SAI is incorporated by reference into this prospectus. A free copy of the SAI is available by writing to or calling our Administrative Office. A table of contents for the SAI is found in Appendix C. *NOTE: CONTRACTS ISSUED IN THE STATE OF OREGON WILL BE SINGLE PREMIUM VARIABLE ANNUITIES RATHER THAN FLEXIBLE PREMIUM VARIABLE ANNUITIES. ALL REFERENCES TO FLEXIBLE CONTRIBUTIONS ARE SINGLE CONTRIBUTIONS FOR OREGON. THE CONTRACTS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY ANY BANK, NOR ARE THEY INSURED BY THE FDIC. THEY ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE CONTRACTS OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. YOU CAN REVIEW AND COPY INFORMATION ABOUT THE CONTRACTS AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, D.C. FOR HOURS OF OPERATION OF THE PUBLIC REFERENCE ROOM, PLEASE CALL 1-800-SEC-0330. YOU MAY ALSO OBTAIN INFORMATION ABOUT THE CONTRACTS ON THE SEC'S INTERNET SITE AT http://www.sec.gov, OR, UPON PAYMENT OF A DUPLICATING FEE, BY WRITING THE SEC'S PUBLIC REFERENCE SECTION, WASHINGTON, D.C. 20459-6009. The date of this Prospectus is May 1, 1999. ii TABLE OF CONTENTS
PART I PAGE SECTION 1 - SUMMARY Your Variable Annuity Contract . . . . . . . . . . . . . . . . . . . . . . . 1 Your Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 How Your Contract is Taxed . . . . . . . . . . . . . . . . . . . . . . . . . 1 Your Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Your Investment Options. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Variable Account Options . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Account Value, Adjusted Account Value and Cash Value . . . . . . . . . . . . 2 Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Charges and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Your Initial Right to Revoke . . . . . . . . . . . . . . . . . . . . . . . . 2 Risk/Return Summary: Investments and Risks. . . . . . . . . . . . . . . . . 3 Year 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Table of Annual Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . 4 Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2 - INTEGRITY AND THE SEPARATE ACCOUNTS Integrity Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . 9 The Separate Accounts and the Variable Account Options . . . . . . . . . . . 9 Assets of Our Separate Accounts. . . . . . . . . . . . . . . . . . . . . . . 9 Changes In How We Operate. . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 3 - YOUR INVESTMENT OPTIONS The Legends Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 BT Insurance Funds Trust . . . . . . . . . . . . . . . . . . . . . . . . . .11 Fidelity's Variable Insurance Products Funds . . . . . . . . . . . . . . . .11 Janus Aspen Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 J.P. Morgan Series Trust II. . . . . . . . . . . . . . . . . . . . . . . . .13 Morgan Stanley Dean Witter Universal Funds, Inc. . . . . . . . . . . . . . .13 The Select Ten Plus Divisions of Separate Account Ten. . . . . . . . . . . .14 Fixed Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Guaranteed Rate Options . . . . . . . . . . . . . . . . . . . . . . . .15 Renewals of GRO Accounts . . . . . . . . . . . . . . . . . . . . . .15 Market Value Adjustments . . . . . . . . . . . . . . . . . . . . . .16 Systematic Transfer Option. . . . . . . . . . . . . . . . . . . . . . .16 SECTION 4 - DEDUCTIONS AND CHARGES Separate Account Charges . . . . . . . . . . . . . . . . . . . . . . . . . .17 Annual Administrative Charge . . . . . . . . . . . . . . . . . . . . . . . .17 Portfolio and Division Charges . . . . . . . . . . . . . . . . . . . . . . .17 Reduction or Elimination of Separate Account or Administrative Charges . . .17 State Premium Tax Deduction. . . . . . . . . . . . . . . . . . . . . . . . .17 Contingent Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . .17 Reduction or Elimination of the Contingent Withdrawal Charge . . . . . . . .18 iii Transfer Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Hardship Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Tax Reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 SECTION 5 - TERMS OF YOUR VARIABLE ANNUITY Contributions Under Your Contract. . . . . . . . . . . . . . . . . . . . . .19 Your Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Units in Our Separate Accounts . . . . . . . . . . . . . . . . . . . . . . .20 How We Determine Unit Value. . . . . . . . . . . . . . . . . . . . . . . . .20 Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Death Benefits and Similar Benefit Distributions . . . . . . . . . . . . . .22 Annuity Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Fixed Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Timing of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 How You Make Requests and Give Instructions. . . . . . . . . . . . . . . . .24 SECTION 6 - VOTING RIGHTS Portfolio Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . .24 How We Determine Your Voting Shares. . . . . . . . . . . . . . . . . . . . .25 How Portfolio Shares Are Voted . . . . . . . . . . . . . . . . . . . . . . .25 How Separate Account Ten Interests Are Voted . . . . . . . . . . . . . . . .25 Separate Account Voting Rights . . . . . . . . . . . . . . . . . . . . . . .25 SECTION 7 - TAX ASPECTS OF THE CONTRACTS Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Your Contract is an Annuity. . . . . . . . . . . . . . . . . . . . . . . . .26 Taxation of Annuities Generally. . . . . . . . . . . . . . . . . . . . . . .26 Distribution-at-Death Rules. . . . . . . . . . . . . . . . . . . . . . . . .27 Diversification Standards. . . . . . . . . . . . . . . . . . . . . . . . . .27 Tax-Favored Retirement Programs. . . . . . . . . . . . . . . . . . . . . . .28 Federal and State Income Tax Withholding . . . . . . . . . . . . . . . . . .28 Impact of Taxes on Integrity . . . . . . . . . . . . . . . . . . . . . . . .28 Transfers Among Investment Options . . . . . . . . . . . . . . . . . . . . .28 SECTION 8 - ADDITIONAL INFORMATION Systematic Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . .28 Income Plus Withdrawal Program . . . . . . . . . . . . . . . . . . . . . . .28 Dollar Cost Averaging. . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Systematic Transfer Program. . . . . . . . . . . . . . . . . . . . . . . . .30 Customized Asset Rebalancing . . . . . . . . . . . . . . . . . . . . . . . .30 Callan Asset Allocation and Rebalancing Program. . . . . . . . . . . . . . .30 Systematic Contributions . . . . . . . . . . . . . . . . . . . . . . . . . .31 Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . .31 iv SECTION 9 - PRIOR CONTRACTS Death Benefit Information for Contacts Issued Before January 1, 1997 . . . .33 Reduction in Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 Contingent Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . .34 Retirement Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 Contracts Issued to Oregon Residents . . . . . . . . . . . . . . . . . . . .34 Callan Asset Allocation and Rebalancing Program. . . . . . . . . . . . . . .35 Hardship Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 PART II - THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN SECTION 1 - INVESTMENT OBJECTIVE, STRATEGY AND RISK FACTORS The Divisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 Investment Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 Dow Jones Industrial Average . . . . . . . . . . . . . . . . . . . . . . . .37 Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 SECTION 2 - PERFORMANCE INFORMATION Performance History of the Dogs of the Dow Strategy - Comparison of Historical Total Return. . . . . . . . . . . . . . . . . . . . . . . . . . .39 Performance History of the Dogs of the Dow Strategy - $10,000 Hypothetical Investment. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . .40 SECTION 3 - CONTRACTHOLDER INFORMATION Pricing of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . . .42 SECTION 4 - MANAGEMENT The Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . .41 The Sub-Adviser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 APPENDIX A - FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNTS.. . . . . . . .45 APPENDIX B - ILLUSTRATION OF A MARKET VALUE ADJUSTMENT . . . . . . . . . . .50 APPENDIX C - TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION. . . .53 THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS.
v PART I SECTION I - SUMMARY YOUR VARIABLE ANNUITY CONTRACT When this prospectus uses the terms "we," "our" and "us," it means Integrity Life Insurance Company. When it uses the terms "you" and "your" it means the Annuitant, who is the person upon whose life the annuity benefit and the death benefit are based. That person is usually the Owner of the contract. If the Annuitant doesn't own the contract, the Owner has all the rights under the contract until annuity payments begin. If there are Joint Owners, they share the contract rights and any changes or transactions must be signed by both of them. The death of the first Joint Owner to die will determine the timing of distribution. If you want to invest for retirement by buying a Pinnacle Variable Annuity contract, complete a Customer Profile form (unless your state requires an application) and send it to us along with at least the minimum initial contribution. Because the premium is flexible, your future contributions can be any amount you choose, as long as it's above the minimum required contribution, discussed below. The latest your endowment or "retirement" date can be is your 98th birthday, unless your state law requires it to be a different date, or unless you specify an earlier date. YOUR BENEFITS Your contract has an Account Value, an annuity benefit and a death benefit. These benefits are described in more detail below. Your benefits under the annuity contract may be controlled by the usual tax rules for annuities, including deferral of taxes on your investment growth until you actually make a withdrawal. You should read Part I, Section 7, "Tax Aspects of the Contracts" for more information, and possibly consult a tax adviser. The contract can also provide your benefits under tax-favored retirement programs, which may be subject to special eligibility and contribution rules. HOW YOUR CONTRACT IS TAXED Under the current tax laws, any increases in the value of your contributions won't be considered part of your taxable income until you make a withdrawal. However, most of the withdrawals you make before you are 59 1/2 years old are subject to a 10% federal tax penalty on the taxable portion of the amounts withdrawn. YOUR CONTRIBUTIONS The minimum initial contribution is $1,000 ($3,000 in South Carolina and Pennsylvania). Contributions after your initial one can be as little as $100. Some tax-favored retirement plans allow smaller contributions. For more details on contribution requirements, see Part I, Section 5, "Contributions Under Your Contract." YOUR INVESTMENT OPTIONS You may have your contributions placed in the Variable Account Options or in the Fixed Accounts, or place part of your contributions in each of them. The Variable Account Options and Fixed Accounts are together referred to as the INVESTMENT OPTIONS. You may have money in as many as nine different Investment Options at any one time. See "Contributions Under Your Contract" in Part I, Section 5. The effective dates of contributions to the Select Ten Plus Divisions are subject to special rules. See "Investment Strategy" in Part II, Section 1. To select Investment Options that most closely reflect your investment goals, see Part I, Section 3, "Your Investment Options." VARIABLE ACCOUNT OPTIONS Each of the Variable Account Options, except the Select Ten Plus Divisions, invests in shares of an investment portfolio of a mutual fund. Each investment portfolio is referred to as a PORTFOLIO. The investment goals of each Variable Account Option are the same as the Portfolio in which it's invested. For example, if your investment goal is to save money for 1 retirement, you might choose a GROWTH oriented Variable Account Option, which invests in a GROWTH Portfolio. Your value in a Variable Account Option will vary with the performance of the corresponding Portfolio. For a full description of each Portfolio, see that Portfolio's prospectus and Statement of Additional Information. The Select Ten Plus Divisions invest directly in securities. For a full description of the Select Ten Plus Divisions, see Part II. ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE Your ACCOUNT VALUE consists of the values of your Fixed Accounts and Variable Account Options added together. Your ADJUSTED ACCOUNT VALUE is your Account Value increased or decreased by any MARKET VALUE ADJUSTMENT. Your Account Value in the GROs can never be decreased below the Minimum Value. You'll find a discussion of Market Value Adjustment in the Guaranteed Rate Options paragraph of Part I, Section 3, "Your Investment Options." Your Cash Value is your ADJUSTED ACCOUNT VALUE reduced by any withdrawal charges or pro rata annual administrative charges that may apply. Fees and charges are discussed in more detail in the "Charges and Fees" section below. TRANSFERS You may transfer all or any part of your Account Value among the Investment Options, although there are some restrictions that apply. You can find these under "Transfers" in Part I, Section 5. Any transfer must be for at least $250 and may be arranged through our telephone transfer service. Transfers may also be made among certain Investment Options under the following special programs: (i) Dollar Cost Averaging, (ii) Customized Asset Rebalancing, (iii) Callan Asset Allocation and Rebalancing, or (iv) transfer of your STO contributions. All of these programs are discussed in Part I, Section 8. If you make more than twelve transfers between your Investment Options in one contract year, your account can be charged up to $20 for each transfer. CHARGES AND FEES If your Account Value is less than $50,000 as of the last day of any contract year before your Retirement Date, an annual administrative expense charge of $30 is deducted from your Account. A daily charge equal to an annual fee of 1.35% is deducted from the Account Value of each of your Variable Account Options to cover mortality and expense risks (1.20%) and certain administrative expenses (.15%). The charges will never be greater than this. For more information about the account charges, see Part I, Section 4, "Deductions and Charges." Investment management fees and other expenses are deducted from Separate Account Ten and from amounts Separate Account II invests in the Portfolios. The advisory fees of a Portfolio or Division can't be increased without the consent of its shareholders. See "Table of Annual Fees and Expenses" below. For a discussion about the fees of various investment advisers and sub-advisers of the Portfolios, see the Portfolio prospectuses. For a discussion about the fees of investment adviser and sub-adviser of the Divisions, see Part II, Section 4. WITHDRAWALS You may make any number of withdrawals as often as you wish. Each withdrawal must be for at least $300. You may withdraw up to 10% of your Account Value each year with no withdrawal charges. After the first 10% within a year, there will be a charge for any withdrawals you make, based upon the length of time your money has been in your account. See Part I, Section 4, "Contingent Withdrawal Charge" and Part I, Section 5, "Withdrawals." YOUR INITIAL RIGHT TO REVOKE You can cancel your contract within ten days after you receive it by returning it to our Administrative Office. We will extend the ten-day period as required by law in some states. If you cancel your contract, we'll return your entire contribution, with adjustments made for any investment gain or loss experienced by the Variable Account Options from the date you purchased it until the date we receive your cancelled contract, along with any charges deducted. If your state requires, upon cancellation we'll return your contribution without any adjustments. We'll return the amount of any contribution to the Guaranteed Rate Option upon cancellation. 2 RISK/RETURN SUMMARY: INVESTMENTS AND RISKS VARIABLE ANNUITY INVESTMENT GOALS The investment goals of the Pinnacle Flexible Premium Variable Annuity are protecting your investment, building for retirement and providing future income. We strive to achieve these goals through extensive portfolio diversification and superior portfolio management. RISKS An investment in any of the Variable Account Options carries with it certain risks, including the risk that the value of your investment will decline and you could lose money. This could happen if one of the issuers of the stocks becomes financially impaired or if the stock market as a whole declines. Because most of the Variable Account Options are in common stocks, there's also the inherent risk that holders of common stock generally are behind creditors and holders of preferred stock for payments in the event of the bankruptcy of a stock issuer. The Select Ten Plus Divisions are non-diversified, which means that they invest a large amount of their assets in a very small number of issuers. As a result, an investment in a Division may experience greater fluctuations in value than an investment in a diversified Variable Account Option. In addition, a Division may be concentrated in one or more market sectors. Concentration may involve addition risk because of the decreased diversification of economic, financial and market risks. There are certain risks that are specific to certain industries or market sectors. Examples of this are industries that are highly regulated and could experience declines due to burdensome regulations, and industries such as the tobacco industry that are the subject of lawsuits and governmental scrutiny. Some issuers of stock refine, market and transport oil and related petroleum products. These companies face the risks of price and availability of oil, the level of demand for the products, refinery capacity and operating costs, the cost of financing the exploration for oil and the increasing expenses necessary to comply with environmental and other energy related regulations. Declining U.S. crude oil production is likely to lead to increased dependence on foreign sources of oil and to uncertain supply for refiners and the risk of unpredictable supply disruptions. In addition, future scientific advances with new energy sources could have a negative impact on the petroleum and natural gas industries. For a complete discussion of the risks associated with an investment in any particular Portfolio, see the prospectus of that Portfolio. For a complete discussion of the risks associated with an investment in the Divisions, see Part II of this prospectus. YEAR 2000 Many computer programs are written so that only the last two digits of the year are read. Because of this, many computer systems will read the year 2000 as 1900. This could cause many programs to malfunction. We are evaluating, on an ongoing basis, our computer systems and the systems of other companies on which we rely, to determine if they'll function properly, and make the transition from 1999 to 2000 smoothly. These activities are designed to ensure that there is no adverse effect on our business operations. While we've been working very hard to make sure that this process will be problem-free, we can't guarantee that there won't be some Year 2000 problems experienced by our systems and we can't make any representations or guarantees that the outside sources on which we rely will be ready to make a smooth transition to Year 2000 with their systems. 3 TABLE OF ANNUAL FEES AND EXPENSES
Contract Owner Transaction Expenses - ----------------------------------- Sales Load on Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0 Deferred Sales Load (as a percentage of contributions) (1). . . . . . . . . . . . . . . . . . . . 8% Maximum Exchange Fee (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0
Annual Administrative Charge - ---------------------------- Annual Administrative Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30 * This charge applies only if the Account Value is less than $50,000 at the end of any contract year before your Retirement Date. See "Annual Administrative Charge" in Part I, Section 4.
Annual Expenses of the Separate Accounts (as a percentage of average account value) (3) - ---------------------------------------------- Mortality and Expense Risk Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.20% Administrative Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15% Total Separate Account Annual Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.35%
Portfolio Annual Expenses After Waivers/Reimbursements (as a percentage of average net assets) - ---------------------------------------
Management Other Total Annual Portfolio Fees Expenses Expenses - --------- ---------- --------- ------------ EAFE-Registered Trademark- Equity Index . . . . . . . . . . 0.45% (4) 0.20% (4) 0.65% (4) Equity 500 Index. . . . . . . . . . . . . . . . . . . . . . 0.20% (4) 0.10% (4) 0.30% (4) Small Cap Index . . . . . . . . . . . . . . . . . . . . . . 0.35% (4) 0.10% (4) 0.45% (4) VIP Equity-Income: Initial Class. . . . . . . . . . . . . . 0.49% 0.08% 0.57% (5) VIP II Contrafund: Initial Class. . . . . . . . . . . . . . 0.59% 0.07% 0.66% (5) VIP III Growth & Income: Initial Class. . . . . . . . . . . 0.49% 0.11% 0.60% (5) VIP III Growth Opportunities:Initial Class. . . . . . . . . 0.59% 0.11% 0.70% (5) VIP Growth: Service Class . . . . . . . . . . . . . . . . . 0.59% 0.16% (6) 0.75% (5) VIP III Mid Cap: Service Class. . . . . . . . . . . . . . . 0.56% 0.54% (6) 1.10% (7) Harris Bretall Sullivan & Smith Equity Growth . . . . . . . 0.65% 0.30% 0.95% (8) Scudder Kemper Value. . . . . . . . . . . . . . . . . . . . 0.65% 0.29% 0.94% (8) Zweig Asset Allocation. . . . . . . . . . . . . . . . . . . 0.90% 0.28% 1.18% (8) Zweig Equity (Small Cap). . . . . . . . . . . . . . . . . . 1.05% 0.47% 1.52% (8) Janus Aspen Capital Appreciation. . . . . . . . . . . . . . 0.70% (9) 0.22% (9) 0.92% (9) Janus Aspen Balanced. . . . . . . . . . . . . . . . . . . . 0.72% (9) 0.02% (9) 0.74% (9) Janus Aspen Worldwide Growth. . . . . . . . . . . . . . . . 0.65% (9) 0.07% (9) 0.72% (9) Janus Aspen Money Market. . . . . . . . . . . . . . . . . . 0.25% (9) 0.09% (9) 0.34% (9) J.P. Morgan International Opportunities . . . . . . . . . . 0.60% 0.60% (10) 1.20% (10) J.P. Morgan Bond. . . . . . . . . . . . . . . . . . . . . . 0.30% 0.45% (10) 0.75% (10) MSDW Universal Funds Asian Equity . . . . . . . . . . . . . 0.00% (11) 1.21% (11) 1.21% (11) MSDW Universal Funds Emerging Markets Debt. . . . . . . . . 0.27% (11) 1.25% (11) 1.52% (11) MSDW Universal Funds High Yield . . . . . . . . . . . . . . 0.15% (11) 0.65% (11) 0.80% (11) MSDW Universal Funds U.S. Real Estate . . . . . . . . . . . 0.17% (11) 0.93% (11) 1.10% (11)
4 Division Annual Expenses After Reimbursement (as a percentage of average net assets) - ---------------------------------------
Management Fees(12) Other Expenses (13) Total Annual Expenses (13) ------------------- ------------------- -------------------------- 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 10% of the Account Value in any contract year minus withdrawals during the current contract year, without incurring a withdrawal charge. (2) After the first twelve transfers during a contract year, we can charge a transfer fee of $20 for each transfer. This charge doesn't apply to transfers made for dollar cost averaging, customized asset rebalancing, asset allocation and rebalancing, or systematic transfers. See "Deductions and Charges - Transfer Charge" in Part I, Section 4. (3) See "Deductions and Charges - Separate Account Charges" in Part I, Section 4. (4) Under the Advisory Agreement with Bankers Trust, the Portfolios will pay advisory fees at the following annual percentage rates of the average daily net assets of each Portfolio: 0.45% for the EAFE Equity Index Fund, 0.20% for the Equity 500 Index Fund and 0.35% for the Small Cap Index Fund. These fees are accrued daily and paid monthly. Bankers Trust has voluntarily undertaken to waive its fees and to reimburse the Portfolios for certain expenses so that the EAFE Equity Index Fund, Equity 500 Index Fund and Small Cap Index Fund total operating expenses will not exceed 0.65%, 0.30% and 0.45%, respectively. Without the waiver and reimbursement, annualized total expense ratios for the year ended December 31, 1998 would have been as follows: 1.66% for the EAFE Equity Index Fund, 1.19% for the Equity 500 Index Fund and 1.58% for the Small Cap Index Fund. (5) Part of the brokerage commissions that certain of Fidelity's VIP Funds pay was used to reduce the Portfolios' expenses. In addition, certain Portfolios, or FMR on behalf of certain Portfolios, have arranged with their custodian to use uninvested cash balances to reduce custodian expenses. Without these reductions, the total operating expenses presented in the table would have been .58% for VIP Equity-Income Portfolio, .80% for VIP Growth Portfolio, .70% for VIP II Contrafund Portfolio, .71% for VIP III Growth Opportunities Portfolio, and .61% for VIP III Growth & Income Portfolio. (6) The "Other Expenses" reflect the payment of 0.10% pursuant to a Rule 12b-1 Plan adopted by the underlying Mutual Funds. (7) The investment adviser agreed to reimburse part of the expenses for the VIP III Mid Cap Portfolio during the period. Without this reimbursement, the management fee, other expenses and total expenses would have been .56%, 115.40% and 115.96% respectively for the VIP III Mid Cap Portfolio. (8) Integrity Capital Advisors has agreed to reimburse each of the Legends Fund Portfolios for operating expenses (excluding management fees) above an annual rate of .50% of average net assets for all Portfolios of the Legends Fund. Without reimbursements, total annual expenses for the Portfolio's fiscal year ended June 30, 1998 would have been 1.56% for the Zweig Equity (Small Cap) Portfolio. Integrity Capital Advisors has reserved the right to withdraw or modify its policy of expense reimbursement for the Portfolios, but doesn't intend to do so during 1999. In the Legends Fund's prospectus, see "Management of the Fund." (9) The fees and expenses in the table above are based on gross expenses after expense offset arrangements for the fiscal year ended December 31, 1998. Fee reductions for the Janus Aspen Balanced, Janus Aspen Capital Appreciation and Janus Aspen Worldwide Growth Portfolios reduce the management fee to the level of the corresponding Janus retail fund. Other waivers, if applicable, are first applied against the management fee and then against other expenses. Without waivers or reductions, the Management Fee, Other Expenses, and Total Annual Expenses would have been .67%, .07%, and .74% for 5 Worldwide Growth Portfolio and .75%, .22% and .97% for Capital Appreciation Portfolio. Janus has agreed to continue the waivers and fee reductions until at least the next annual renewal of the advisory agreement. (10) The information in this table has been restated to reflect a voluntary agreement by Morgan Guaranty Trust Company of New York, an affiliate of JPMIM, to reimburse the Trust to the extent certain expenses in any fiscal year exceed 1.20% of the average daily net assets of J.P. Morgan International Opportunities Portfolio and .75% of the average daily net assets of J.P. Morgan Bond Portfolio. Without this agreement, the Other Expenses and Total Annual Expenses for the fiscal year ended December 31, 1998 would have been as follows: 2.66% and 3.26% for the International Opportunities Portfolio, and 0.72% and 1.02% for the Bond Portfolio. (11) The Portfolios' expenses were voluntarily waived and reimbursed by the Portfolios' investment advisers. Without the waiver and/or reimbursement, the Management Fee, Other Expenses and Total Annual Expenses for the fiscal year ended December 31, 1998 would have been as follows: .80%, 2.00% and 2.80% for the Asian Equity Portfolio; .80%, 1.25% and 2.05% for the Emerging Markets Debt Portfolio; .50%, 0.65% and 1.15% for the High Yield Portfolio; and .80%, 0.93% and 1.73% for the U.S. Real Estate Portfolio. MSDW Investment Management Inc. or Miller Anderson & Sherrerd, LLP may modify or terminate the waivers or reductions at any time. (12) Integrity Capital Advisors will pay a portion of its Management Fee to National Asset for its services under a sub-advisory agreement at an annual rate of .10% of the Divisions' average daily net assets up to $100 million and .05% of the Divisions' average daily net assets in excess of $100 million. Integrity Capital Advisors has guaranteed it will pay National Asset a minimum sub-advisory fee of $25,000 during the Divisions' first year of operations. (13) Integrity Capital Advisors has agreed to reimburse each Division for operating expenses (excluding management fees) above an annual rate of .35% of each Division's average net assets. Without that reimbursement, Integrity Capital Advisors estimates that operating expenses would be approximately 4.20%. Integrity Capital Advisors reserves the right to withdraw or modify its policy of expense reimbursement for the Divisions, but doesn't intend to do so during 1999. 6 EXAMPLES The examples below show the expenses charged to the Annuitant per $1,000 investment, assuming a $60,000 average contract value and a 5% annual rate of return on assets. Cumulative expenses per $1,000 investment if you surrender your contract at the end of the applicable period:
Portfolio 1 year 3 years 5 years 10 years - --------- ------- -------- ------- -------- EAFE-Registered Trademark- Equity Index . . . . $100.99 $124.75 $150.98 $238.35 Equity 500 Index. . . . . . . . . . . . . . . . $ 97.41 $113.87 $132.66 $200.80 Small Cap Index . . . . . . . . . . . . . . . . $ 98.94 $118.54 $140.54 $217.06 VIP Equity-Income: Initial Class. . . . . . . . $100.17 $122.27 $146.82 $229.88 VIP II Contrafund: Initial Class. . . . . . . . $101.10 $125.06 $151.50 $239.40 VIP III Growth & Income: Initial Class. . . . . $100.48 $123.20 $148.38 $233.07 VIP III Growth Opportunities: Initial Class . . $101.51 $126.30 $153.57 $243.61 VIP Growth: Service Class . . . . . . . . . . . $102.02 $127.84 $156.16 $248.84 VIP III Mid Cap: Service Class. . . . . . . . . $105.61 $138.62 $174.14 $284.71 Harris Bretall Sullivan & Smith Equity Growth . $104.07 $134.01 $166.47 $269.49 Scudder Kemper Value. . . . . . . . . . . . . . $103.97 $133.70 $165.95 $268.47 Zweig Asset Allocation. . . . . . . . . . . . . $106.42 $141.07 $178.21 $292.73 Zweig Equity (Small Cap). . . . . . . . . . . . $109.91 $151.44 $195.35 $326.10 Janus Aspen Capital Appreciation. . . . . . . . $103.76 $133.09 $164.93 $266.42 Janus Aspen Balanced . . . . . . . . . . . . . $101.92 $127.53 $155.65 $247.79 Janus Aspen Worldwide Growth. . . . . . . . . . $101.71 $126.92 $154.61 $245.70 Janus Aspen Money Market . . . . . . . . . . . $ 97.82 $115.12 $134.76 $205.16 J.P. Morgan International Opportunities . . . . $106.63 $141.68 $179.22 $294.73 J.P. Morgan Bond. . . . . . . . . . . . . . . . $102.02 $127.84 $156.16 $248.84 MSDW Universal Funds Asian Equity . . . . . . . $106.73 $141.99 $179.73 $295.72 MSDW Universal Funds Emerging Markets Debt . . $109.91 $151.44 $195.35 $326.10 MSDW Universal Funds High Yield . . . . . . . . $102.53 $129.39 $158.75 $254.04 MSDW Universal Funds U.S. Real Estate . . . . . $105.61 $138.62 $174.14 $284.71 Select Ten Plus Division March. . . . . . . . . $103.04 $130.93 $161.33 $259.22 Select Ten Plus Division June . . . . . . . . . $103.04 $130.93 $161.33 $259.22 Select Ten Plus Division September. . . . . . . $103.04 $130.93 $161.33 $259.22 Select Ten Plus Division December . . . . . . . $103.04 $130.93 $161.33 $259.22
7 Cumulative expenses per $1,000 investment if you elect the normal form of annuity or don't surrender your contract at the end of the specified period (i.e., no deferred sales load charged):
Portfolio 1 year 3 years 5 years 10 years - --------- ------ ------- ------- -------- EAFE-Registered Trademark- Equity Index . . . . $20.99 $64.75 $110.98 $238.35 Equity 500 Index. . . . . . . . . . . . . . . . $17.41 $53.87 $ 92.66 $200.80 Small Cap Index . . . . . . . . . . . . . . . . $18.94 $58.54 $100.54 $217.06 VIP Equity-Income: Initial Class. . . . . . . . $20.17 $62.27 $106.82 $229.88 VIP II Contrafund: Initial Class. . . . . . . . $21.10 $65.06 $111.50 $239.40 VIP III Growth & Income: Initial Class. . . . . $20.48 $63.20 $108.38 $233.07 VIP III Growth Opportunities: Initial Class . . $21.51 $66.30 $113.57 $243.61 VIP Growth: Service Class . . . . . . . . . . . $22.02 $67.84 $116.16 $248.84 VIP III Mid Cap: Service Class. . . . . . . . . $25.61 $78.62 $134.14 $284.71 Harris Bretall Sullivan & Smith Equity Growth . $24.07 $74.01 $126.47 $269.49 Scudder Kemper Value. . . . . . . . . . . . . . $23.97 $73.70 $125.95 $268.47 Zweig Asset Allocation. . . . . . . . . . . . . $26.42 $81.07 $138.21 $292.73 Zweig Equity (Small Cap). . . . . . . . . . . . $29.91 $91.44 $155.35 $326.10 Janus Aspen Capital Appreciation. . . . . . . . $23.76 $73.09 $124.93 $266.42 Janus Aspen Balanced. . . . . . . . . . . . . . $21.92 $67.53 $115.65 $247.79 Janus Aspen Worldwide Growth. . . . . . . . . . $21.71 $66.92 $114.61 $245.70 Janus Aspen Money Market. . . . . . . . . . . . $17.82 $55.12 $ 94.76 $205.16 J.P. Morgan International Opportunities . . . . $26.63 $81.68 $139.22 $294.73 J.P. Morgan Bond. . . . . . . . . . . . . . . . $22.02 $67.84 $116.16 $248.84 MSDW Universal Funds Asian Equity . . . . . . . $26.73 $81.99 $139.73 $295.72 MSDW Universal Funds Emerging Markets Debt. . . $29.91 $91.44 $155.35 $326.10 MSDW Universal Funds High Yield . . . . . . . . $22.53 $69.39 $118.75 $254.04 MSDW Universal Funds U.S. Real Estate . . . . . $25.61 $78.62 $134.14 $284.71 Select Ten Plus Division March. . . . . . . . . $23.04 $70.93 $121.33 $259.22 Select Ten Plus Division June . . . . . . . . . $23.04 $70.93 $121.33 $259.22 Select Ten Plus Division September. . . . . . . $23.04 $70.93 $121.33 $259.22 Select Ten Plus Division December . . . . . . . $23.04 $70.93 $121.33 $259.22
These examples assume the current charges that are borne by the Separate Accounts, and the investment management fees and other expenses of the Portfolios and the Divisions as they were for their most recent fiscal years or estimated expenses (after reimbursement), if applicable. ACTUAL PORTFOLIO/DIVISION EXPENSES MAY BE GREATER OR LESS THAN THOSE ON WHICH THESE EXAMPLES WERE BASED. The annual rate of return assumed in the examples isn't an estimate or guarantee of future investment performance. The table also assumes an estimated $60,000 average contract value, so that the administrative charge per $1,000 of net asset value in the Separate Account is $0.50. The per $1,000 charge would be higher for smaller Account Values and lower for higher values. The above table and examples are shown only to increase your understanding of the various costs and expenses that apply to your contract, directly or indirectly. These tables show expenses of the Separate Accounts as well as those of the Portfolios and the Divisions. Premium taxes at the time of payout also may be applicable. CONDENSED FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNTS IS PROVIDED IN APPENDIX A. 8 SECTION 2 -- INTEGRITY AND THE SEPARATE ACCOUNTS INTEGRITY LIFE INSURANCE COMPANY Integrity is a stock life insurance company organized under the laws of Ohio. Our principal executive offices are located in Louisville, Kentucky. We are authorized to sell life insurance and annuities in 47 states and the District of Columbia. We sell flexible premium annuities with underlying investment options, fixed single premium annuity contracts and flexible premium annuity contracts offering both traditional fixed guaranteed interest rates along with fixed equity indexed options. In addition to issuing annuity products, we provide administrative and investment support for products designed, underwritten and sold by other insurance companies. Integrity is a subsidiary of ARM, which specializes in providing retail and institutional customers with products and services designed for long-term savings and retirement planning. ARM is a publicly traded company listed on the New York Stock Exchange under the symbol "ARM." At December 31, 1998, ARM had $9.9 billion of assets under management. THE SEPARATE ACCOUNTS AND THE VARIABLE ACCOUNT OPTIONS Under your contract, you may allocate contributions to our Separate Accounts or to our Fixed Accounts or both. Separate Account II is comprised of all of the Variable Account Options other than the Select Ten Plus Divisions. Separate Account Ten is comprised of the Select Ten Plus Divisions. The Separate Accounts are established and maintained under the insurance laws of the State of Ohio. Separate Account II was established in 1992 and is a unit investment trust, which is a type of investment company, registered with the Securities and Exchange Commission (SEC). SEC registration doesn't mean that the SEC is involved in any way in supervising the management or investment policies of Separate Account II. Each of Separate Account II's Variable Account Options invests in shares of a corresponding Portfolio. We may establish additional Investment Options from time to time. The Variable Account Options currently available are listed in Section 3, "Your Investment Options." Separate Account Ten was established in 1998 and is registered with the SEC as a management investment company. Registration with the SEC doesn't involve any supervision by the SEC of the management or investment policies or practices of Separate Account Ten. The Divisions invest directly in securities according to their investment objective and policies. ASSETS OF OUR SEPARATE ACCOUNTS Under Ohio law, we own the assets of our Separate Accounts and use them to support the variable portion of yours and other variable annuity contracts. Annuitants under other variable annuity contracts participate in the Separate Accounts in proportion to the amounts in their contracts. We can't use the Separate Accounts' assets supporting the variable portion of these contracts to satisfy liabilities arising out of any of our other businesses. Under certain unlikely circumstances, one Variable Account Option may be liable for claims relating to the operation of another Option. Income, gains and losses, whether realized or unrealized, from assets allocated to the Separate Accounts are credited to or charged against the Separate Accounts without regard to our other income, gains or losses. We may allow charges owed to us to stay in the Separate Accounts, and thus can participate proportionately in the Separate Accounts. Amounts in the Separate Accounts greater than reserves and other liabilities belong to us, and we may transfer them to our general account. CHANGES IN HOW WE OPERATE We may change how we or our Separate Accounts operate, subject to your approval when required by the Investment Company Act of 1940 (1940 ACT) or other applicable law or regulation. We'll notify you if any changes result in a material change in the underlying investments of a Variable Account Option. WE MAY: 9 - - add Options to, or remove Options from, our Separate Account, combine two or more Options within our Separate Accounts, or withdraw assets relating to your contract from one Option and put them into another; - - register or end the registration of the Separate Accounts under the 1940 Act; - - operate our Separate Accounts under the direction of a committee or discharge a committee at any time (the committee may be composed of a majority of persons who are "interested persons" of Integrity under the 1940 Act); - - restrict or eliminate any voting rights of Owners or others who have voting rights that affect our Separate Accounts; - - cause one or more Options to invest in a mutual fund other than or in addition to the Portfolios; - - operate our Separate Accounts or one or more of the Options in any other form the law allows, including a form that allows us to make direct investments. We may make any legal investments we wish. In choosing these investments, we'll rely on our own or outside counsel for advice. SECTION 3 -- YOUR INVESTMENT OPTIONS Management fees and other expenses deducted from each Portfolio are described in that Portfolio's prospectus. FOR A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION ON ANY PORTFOLIO, CALL OUR ADMINISTRATIVE OFFICE TOLL-FREE AT 1-800-325-8583. THE LEGENDS FUND The Legends Fund is an open-end management investment company registered with the SEC. Integrity Capital Advisors is the investment adviser to the Legends Fund. Integrity Capital Advisors has entered into a sub-advisory agreement with a professional manager to invest the assets of each of its Portfolios. The sub-adviser for each Portfolio is listed below. INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Following is a summary of the investment objectives of The Legends Fund Portfolios. We can't guarantee that these objectives will be met. YOU SHOULD READ THE LEGENDS FUND PROSPECTUS CAREFULLY BEFORE INVESTING. HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO Harris Bretall Sullivan & Smith Equity Growth Portfolio's goal is growth of your Account Value. It invests primarily in stocks of established companies with proven records of superior and consistent growth. The Portfolio may invest in U.S. government securities, cash and cash equivalents when that appears to be a better choice in light of the Portfolio's investment objective or when justified by market conditions. Harris Bretall Sullivan & Smith, LLC is the sub-adviser to the Portfolio. SCUDDER KEMPER VALUE PORTFOLIO Scudder Kemper Value Portfolio's goal is to increase your Account Value and to provide current income. It invests primarily in stocks that its sub-adviser considers to be undervalued. The sub-adviser's philosophy centers on choosing stocks of large, well-known companies with solid financial strength and large dividend payment histories that have low price-earnings ratios and have been generally overlooked by the market. Scudder Kemper Investors, Inc. is the sub-adviser to the Portfolio. ZWEIG ASSET ALLOCATION PORTFOLIO Zweig Asset Allocation Portfolio seeks to increase your Account Value over the long term with investments primarily from the 1,000 most liquid stocks. The Portfolio's sub-adviser strives to do this while protecting your principal and reducing its exposure to market risk. The 1,000 most liquid stocks are those that the sub-adviser considers comparable to those included in the S&P 500, and that have a minimum of $400 million market capitalization, average daily trading volume of 50,000 shares or $425 million in total assets, and that are traded on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), over-the-counter (OTC) or on foreign exchanges. Zweig/Glaser Advisers is the sub-adviser to the Portfolio. ZWEIG EQUITY (SMALL CAP) PORTFOLIO Zweig Equity (Small Cap) Portfolio strives to build your Account Value with investments primarily in Small Company Stocks. The Portfolio's sub-adviser tries to do this while protecting your principal and reducing its exposure to market risk. This Portfolio doesn't look for stocks that provide you with current income. SMALL COMPANY STOCKS are the 2,000 stock positions immediately after the 1,000 largest stocks ranked in terms of market capitalization and/or trading volume, and that are traded on the NYSE, AMEX, OTC or on foreign exchanges. Zweig/Glaser Advisers is the sub-adviser to the Portfolio. 10 BT INSURANCE FUNDS TRUST The BT Insurance Funds Trust is an open-end management investment company registered with the SEC. Bankers Trust Global Asset Management Services, a unit of Bankers Trust, is the investment adviser to the BT Funds Trust. INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Following is a summary of the investment objectives of the BT Funds Trust. We can't guarantee that these objectives will be met. YOU SHOULD READ THE BT FUNDS TRUST PROSPECTUSES CAREFULLY BEFORE INVESTING. EAFE-Registered Trademark-EQUITY INDEX FUND The EAFE-Registered Trademark-Equity Index Fund tries to replicate as closely as possible (before expenses are deducted) the total return of the Morgan Stanley Capital International Europe, Australia, Far East (EAFE) Index, a capitalization-weighted index containing approximately 1,100 equity securities of companies located outside the United States. The Portfolio invests primarily in stocks of businesses organized and domiciled outside of the United States or for which the principal trading market is outside the United States. Statistical methods will be used to replicate the EAFE Index by buying most of the EAFE Index securities. Securities purchased for the Portfolio will generally, but not necessarily, be traded on a foreign securities exchange. EQUITY 500 INDEX FUND The Equity 500 Index Fund seeks to replicate as closely as possible (before the deduction of expenses) the total return of the Standard & Poor's 500 Composite Stock Price Index (the S&P 500), an index emphasizing large-capitalization stocks. The Portfolio will include the common stock of those companies included in the S&P 500, other than Bankers Trust New York Corporation, selected on the basis of computer-generated statistical data, that have been determined to represent the industry diversification of the entire S&P 500. SMALL CAP INDEX FUND The Small Cap Index Fund seeks to replicate as closely as possible (before deduction of expenses) the total return of the Russell 2000 Small Stock Index (the RUSSELL 2000), an index consisting of 2,000 small-capitalization common stocks. The Portfolio will include the common stock of companies included in the Russell 2000, on the basis of computer-generated statistical data, that have been determined to represent the industry diversification of the entire Russell 2000. FIDELITY'S VARIABLE INSURANCE PRODUCTS FUNDS Each of Fidelity's VIP Funds is diversified mutual fund registered with the SEC. Fidelity Management & Research Company (FMR) serves the investment adviser to each Portfolio. INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment objectives of the Portfolios of Fidelity's VIP Funds. There are no guarantees that a Portfolio will be able to achieve its objective. YOU SHOULD READ FIDELITY'S VIP FUNDS PROSPECTUS CAREFULLY BEFORE INVESTING. VIP EQUITY-INCOME PORTFOLIO VIP Equity-Income Portfolio seeks reasonable income. The Portfolio will also consider the potential for capital appreciation. The Portfolio seeks a yield which exceeds the composite yield on the securities comprising the S&P 500. FMR normally invests at least 65% of the Portfolio's total assets in income-producing equity securities. VIP II CONTRAFUND PORTFOLIO VIP II Contrafund Portfolio seeks long-term capital appreciation. FMR normally invests the Portfolio's assets primarily in common stocks. FMR invests the Portfolio's assets in securities of companies whose value FMR believes is not fully recognized by the public. The types of companies in which the Portfolio may invest include 11 companies experiencing positive fundamental change such as a new management team or product launch, a significant cost-cutting initiative, a merger or acquisition, or a reduction in industry capacity that should lead to improved pricing; companies whose earnings potential has increased or is expected to increase more than generally perceived; companies that have enjoyed recent market popularity but which appear to have temporarily fallen out of favor for reasons that are considered non-recurring or short-term; and companies that are undervalued in relation to securities of other companies in the same industry. VIP III GROWTH & INCOME PORTFOLIO VIP III Growth & Income Portfolio seeks high total return through a combination of current income and capital appreciation. FMR normally invests a majority of the Portfolio's assets in common stocks with a focus on those that pay current dividends and show potential for capital appreciation. FMR may also invest the Portfolio's assets in bonds, including lower-quality debt securities, as well as stocks that are not currently paying dividends, but offer prospects for future income or capital appreciation. VIP III GROWTH OPPORTUNITIES PORTFOLIO VIP III Growth Opportunities Portfolio seeks to provide capital growth. FMR normally invests the Portfolio's assets primarily in common stocks. FMR may also invest the Portfolio's assets in other types of securities, including bonds which may be lower-quality debt securities. VIP GROWTH PORTFOLIO VIP Growth Portfolio seeks capital appreciation. FMR invests the Portfolio's assets in companies FMR believes have above-average growth potential. Growth may be measured by factors such as earnings or revenue. Companies with high growth potential tend to be companies with higher than average price/earnings (P/E) ratios. Companies with strong growth potential often have new products, technologies, distribution channels or other opportunities or have a strong industry or market position. The stocks of these companies are often called "growth" stocks. VIP III MID CAP PORTFOLIO FMR normally invests the VIP III Mid Cap Portfolio's assets primarily in common stocks. FMR normally invests at least 65% of the Portfolio's total assets in securities of companies with medium market capitalizations. Medium market capitalization companies are those whose market capitalization is similar to the capitalization of companies in the S&P Mid Cap 400 at the time of the investment. Companies whose capitalization no longer meets this definition after purchase continue to be considered to have a medium market capitalization for purposes of the 65% policy. JANUS ASPEN SERIES Each portfolio of the Janus Aspen Series is a mutual fund registered with the SEC. Janus Capital Corporation serves as the investment adviser to each Portfolio. INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment goals of the Portfolios of the Janus Aspen Series. There are no guarantees that these objectives will be met. YOU SHOULD READ THE JANUS ASPEN SERIES PROSPECTUSES CAREFULLY BEFORE INVESTING. JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO Janus Aspen Capital Appreciation Portfolio seeks long-term growth of capital. It is a non-diversified portfolio that pursues its objective by investing primarily in common stocks selected for their growth potential. The Portfolio may invest in companies of any size, from larger, well-established companies to smaller, emerging growth companies. 12 JANUS ASPEN BALANCED PORTFOLIO Janus Aspen Balanced Portfolio seeks long-term capital growth, consistent with capital preservation and balanced by current income. It is a diversified portfolio that pursues its objective by normally investing 40-60% of its assets in securities selected primarily for their growth potential and 40-60% of its assets in securities selected primarily for their income potential. The Portfolio normally invests at least 25% of its assets in fixed-income securities. JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO Janus Aspen Worldwide Growth Portfolio seeks long-term growth of capital in a manner consistent with the preservation of capital. It is a diversified portfolio that pursues its objective by investing primarily in common stocks of companies of any size throughout the world. The Portfolio normally invests in issuers from at least five different countries, including the United States. The Portfolio may at times invest in fewer than five countries or even a single country. JANUS ASPEN MONEY MARKET PORTFOLIO Janus Aspen Money Market Portfolio seeks maximum current income to the extent consistent with stability of capital. There is no guarantee that the Portfolio will meet its investment goal or be able to maintain a stable net asset value of $1.00 per share. The Portfolio will invest in high quality, short-term money market instruments that present minimal credit risks, as determined by Janus Capital. The Portfolio may invest only in U.S. dollar-denominated instruments that have a remaining maturity of 397 days or less (as calculated pursuant to Rule 2a-7 under the 1940 Act) and will maintain a dollar-weighted average portfolio maturity of 90 days or less. J.P. MORGAN SERIES TRUST II Each portfolio of the J.P. Morgan Series Trust II is a diversified mutual fund registered with the SEC. J.P. Morgan Investment Management Inc. is the investment adviser to the J.P. Morgan Series Trust II. INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment objectives of the Portfolios of the J.P. Morgan Series Trust II. There is no guarantee that these objectives will be met. YOU SHOULD READ THE PROSPECTUS FOR J.P. MORGAN SERIES TRUST II CAREFULLY BEFORE INVESTING. J.P. MORGAN BOND PORTFOLIO J.P. Morgan Bond Portfolio seeks to provide a high total return consistent with moderate risk of capital and maintenance of liquidity. Total return will consist of realized and unrealized capital gains and losses plus income, less expenses. Although the net asset value of the Portfolio will fluctuate, the Portfolio tries to preserve the value of its investments consistent with its objective. J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO J.P. Morgan International Opportunities Portfolio seeks to provide a high total return from a portfolio of equity securities of foreign corporations. Total return will consist of realized and unrealized capital gains and losses plus income, less expenses. The Portfolio is designed for investors who have long-term investment goals and who want to diversify their investments by adding international equities, taking advantage of investment opportunities outside the U.S. The Portfolio seeks to meet its investment goal through country allocation and stock valuation and selection. MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. Each of the MSDW Universal Funds is a diversified mutual fund registered with the SEC. Morgan Stanley Dean Witter Investment Management, Inc. (MSDW INVESTMENT MANAGEMENT) is the investment adviser for the Emerging Markets Debt, U.S. Real Estate, and Asian Equity Portfolios. Miller 13 Anderson & Sherrerd, LLP (MAS) is the investment adviser for the High Yield Portfolio. MSDW Investment Management and MAS are subsidiaries of Morgan Stanley Dean Witter & Co. INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment objectives of the Portfolios of the MSDW Universal Funds. There is no guarantee that these objectives will be met. YOU SHOULD READ THE MSDW UNIVERSAL FUNDS PROSPECTUS CAREFULLY BEFORE INVESTING. MSDW UNIVERSAL FUNDS ASIAN EQUITY PORTFOLIO MSDW Universal Funds Asian Equity Portfolio seeks long-term capital appreciation by investing primarily in a diversified portfolio of equity securities of Asian issuers (excluding Japan). The adviser employs a disciplined, value-oriented approach to security selection, focusing on larger companies with strong management teams. The adviser evaluates top-down country risk factors and opportunities when determining position sizes and overall exposure to individual markets. MSDW UNIVERSAL FUNDS EMERGING MARKETS DEBT PORTFOLIO MSDW Universal Funds Emerging Markets Debt Portfolio seeks high total return by investing primarily in fixed income securities of government and government-related issuers and, to a lesser extent, of corporate issuers in emerging market countries. MSDW UNIVERSAL FUNDS HIGH YIELD PORTFOLIO MSDW Universal Funds High Yield Portfolio seeks above-average total return over a market cycle of three to five years by investing primarily in a diversified portfolio of high yield securities of both U.S. and non-U.S. issuers. The adviser may also invest in other fixed income securities, including U.S. government securities, investment grade corporate bonds, mortgage securities and derivatives. High yield securities are rated below investment grade and are commonly referred to as "junk bonds." The Portfolio's average weighted maturity will usually be greater than five years. MSDW UNIVERSAL FUNDS U.S. REAL ESTATE PORTFOLIO MSDW Universal Funds U.S. Real Estate Portfolio seeks above-average current income and long-term capital appreciation by investing primarily in equity securities of U.S. and non-U.S. companies in the U.S. real estate industry, including real estate investment trusts ("REITs") and real estate operating companies. THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN Each Division is a non-diversified investment company that invests directly in securities. There is no guarantee that any Division will meet its investment goals. Separate Account Ten may also offer other investment divisions that aren't available by buying the contracts offered by this prospectus. Integrity Capital Advisors serves as investment adviser of the Divisions and National Asset Management serves as the sub-adviser of the Divisions. FOR COMPLETE INFORMATION ABOUT THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN, INCLUDING THE RISKS ASSOCIATED WITH THEIR INVESTMENTS, SEE "INVESTMENT OBJECTIVE," "INVESTMENT STRATEGY" AND "RISK FACTORS" IN PART II, SECTION 1. FOR EXPENSE INFORMATION, SEE PART II, SECTION 4 ENTITLED "MANAGEMENT OF SEPARATE ACCOUNT TEN." 14 FIXED ACCOUNTS FOR VARIOUS LEGAL REASONS, GRO CONTRACTS HAVEN'T BEEN REGISTERED UNDER THE 1940 ACT OR THE SECURITIES ACT OF 1933 ("1933 ACT"). THUS, NEITHER THE GRO CONTRACTS NOR OUR GENERAL ACCOUNT, WHICH GUARANTEES THE VALUES AND BENEFITS UNDER THOSE CONTRACTS, ARE GENERALLY SUBJECT TO REGULATION UNDER THE PROVISIONS OF THE 1933 ACT OR THE 1940 ACT. ACCORDINGLY, WE HAVE BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HASN'T REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE GROS OR THE GENERAL ACCOUNT. DISCLOSURES REGARDING THE GROS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES. GUARANTEED RATE OPTIONS We offer GROs with durations of two, three, five, seven and ten years. We can change the durations available from time to time. When you put money in a GRO, that locks in a fixed effective annual interest rate that we declare (GUARANTEED INTEREST RATE) for the duration you select. The duration of your GRO Account is the GUARANTEE PERIOD. Each contribution or transfer to a GRO establishes a new GRO Account for the duration you choose at the then-current Guaranteed Interest Rate we declare. We won't declare an interest rate less than 3%. Each GRO Account expires at the end of the duration you have selected. See "Renewals of GRO Accounts" below. All contributions you make to a GRO Account are placed in a non-unitized separate account. Values and benefits under your GRO contract are guaranteed by the reserves in our GRO separate account as well as by our General Account. The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO Value at the expiration of the GRO Account, assuming you haven't transferred or withdrawn any amounts, will be the amount you put in plus interest at the Guaranteed Interest Rate. We credit interest daily at an effective annual rate equal to the Guaranteed Interest Rate. We may declare a higher rate of interest in the first year of any GRO Account that exceeds the Guaranteed Interest Rate credited during the rest of the Guarantee Period (ENHANCED RATE). This Enhanced Rate will be guaranteed for the Guaranteed Period's first year and is declared at the time of purchase. We can declare and credit additional interest based on Contribution, Account Value, withdrawal dates, economic conditions or on any other lawful, nondiscriminatory basis (ADDITIONAL INTEREST). Any Enhanced Rate and Additional Interest credited to your GRO Account will be separate from the Guaranteed Interest Rate and not used in the Market Value Adjustment formula. THE ENHANCED RATE OR ADDITIONAL INTEREST MAY NOT BE AVAILABLE IN CERTAIN STATES. Each group of GRO Accounts of the same duration is considered one GRO. For example, all of your three-year GRO Accounts are one GRO while all of your five-year GRO Accounts are another GRO, even though they may have different maturity dates. You can get our current Guaranteed Interest Rates by calling our Administrative Office. ALLOCATIONS TO GROS CAN'T BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES. THE TEN-YEAR GRO ISN'T AVAILABLE IN OREGON. RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO Account for the same duration as your old one, at the then-current Guaranteed Interest Rate, unless you withdraw your GRO Value or transfer it to another Investment Option. We'll notify you in writing before your GRO Accounts expire. You must tell us before the expiration of your GRO Accounts if you want to make any changes. The effective date of a renewal of a GRO Account will be the expiration date of the old GRO Account. If a GRO Account expires and it can't be renewed for the same duration, the new GRO Account will be set up for the next shortest duration. For example, if your expiring GRO Account was for 10 years and when it expires we don't offer a 10-year GRO, but we do offer a seven-year GRO, your new one will be for seven years. You can tell us if you 15 want something different within 30 days before the GRO Account expires. You may not choose, and we won't renew, a GRO Account that expires after your Retirement Date. MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up or down, that we make to your GRO Value if you make an early withdrawal or transfer from your GRO Account. No Market Value Adjustment is made for free withdrawal amounts or for withdrawals or transfers made within 30 days of the expiration of the GRO Account. In addition, we won't make a Market Value Adjustment for a death benefit. The market adjusted value may be higher or lower than the GRO Value, but will never be less than the MINIMUM VALUE. Minimum Value is an amount equal to your contribution to the GRO Account, less previous withdrawals (and associated charges) from the GRO Account plus 3% interest, compounded annually and less any applicable contingent withdrawal and administrative charges. Withdrawal charges and the administrative expense charge could take away part of your principal. The Market Value Adjustment we make to your GRO Account is based on the changes in our Guaranteed Interest Rate. If our Guaranteed Interest Rate has increased since the time of your investment, the Market Value Adjustment will reduce your GRO Value (but not below the Minimum Value). On the other hand, if our Guaranteed Interest Rate has decreased since the time of your investment, the Market Value Adjustment will increase your GRO Value. The Market Value Adjustment (MVA) for a GRO Account is determined under the following formula: N/12 N/12 MVA = GRO Value x [(1 + A) / (1 + B + .0025) - 1], where A is the Guaranteed Interest Rate being credited to the GRO Account subject to the Market Value Adjustment, B is the current Guaranteed Interest Rate, as of the effective date of the Market Value Adjustment, for current allocations to a GRO Account, with a duration that is equal to the number of whole months remaining in your GRO Account. Subject to certain adjustments, if that remaining period isn't equal to an exact period for which we have declared a new Guaranteed Interest Rate, B will be determined by a formula that finds a value between the Guaranteed Interest Rates for GRO Accounts of the next highest and next lowest durations. N is the number of whole months remaining in your GRO Account. For contracts issued in certain states, the formula will be adjusted to comply with state requirements. If for any reason we are no longer declaring current Guaranteed Interest Rates, then for purposes of determining B we'll use the yield to maturity of U.S. Treasury Notes with the same remaining term as your GRO Account, using a formula to find a value when necessary, in place of the current Guaranteed Interest Rate or Rates. For illustrations of the application of the Market Value Adjustment formula, see Appendix B. SYSTEMATIC TRANSFER OPTION We also offer a Systematic Transfer Option that guarantees an interest rate that we declare in advance for each calendar quarter. This interest rate applies to all contributions made to the STO Account during the calendar quarter for which the rate has been declared. You MUST transfer all STO contributions into other Investment Options within one year of your most recent STO contribution. Transfers are automatically made in approximately equal quarterly or monthly installments of at least $1,000 each. You can't transfer from other Investment Options into the STO. Normal contingent withdrawal charges apply to withdrawals from the STO. We guarantee that the STO's effective annual yield will never be less than 3.0%. See "Systematic Transfer Program" in Part I, Section 8 for details on this program. This option may not be available in some states. New contributions to a Select Ten Plus Division can be held in the STO or another Investment Option until the next available Investment Date. You can also tell us to transfer approximately equal quarterly installments of at least $1,000 each over a one-year period from the STO to each of the four Divisions. We can hold new contributions 16 received less than five Business Days before any Division's Investment Date, and put in the STO, in the STO until the following Investment Date. See Part II for important information on the Divisions. SECTION 4 -- DEDUCTIONS AND CHARGES SEPARATE ACCOUNT CHARGES We deduct a daily expense amount from the unit value equal to an effective annual rate of 1.35% of the Account Value in the Variable Account Options. This daily expense rate can't be increased without your consent. Of the 1.35% total charge, .15% of the Account Value in the Variable Account Options is used to reimburse us for administrative expenses not covered by the annual administrative charge described below. The remaining 1.20% is deducted for our assuming the expense risk (.85%) and the mortality risk (.35%) under the contract. The expense risk is the risk that our actual expenses of administering the contracts will exceed the annual administrative expense charge. Mortality risk, as used here, refers to the risk we take that annuitants, as a class of persons, will live longer than estimated and we will be required to pay out more annuity benefits than anticipated. The relative proportion of the mortality and expense risk charges may be changed, but the total 1.20% effective annual risk charge can't be increased. We may realize a gain from these daily charges to the extent they aren't needed to meet the actual expenses incurred. ANNUAL ADMINISTRATIVE CHARGE If your Account Value is less than $50,000 on the last day of any contract year before your Retirement Date, we charge an annual administrative charge of $30. This charge is deducted pro rata from your Account Value in each Investment Option. The part of the charge deducted from the Variable Account Options reduces the number of units credited to you. The part of the charge deducted from the Fixed Accounts is withdrawn in dollars. The annual administrative charge is pro-rated in the event of the Annuitant's retirement, death, annuitization or contract termination during a contract year. PORTFOLIO AND DIVISION CHARGES Separate Account II buys shares of the Portfolios at net asset value. That price reflects investment management fees and other direct expenses that have already been deducted from the assets of the Portfolios. The amount charged for investment management can't be increased without shareholder approval. The Divisions invest directly in securities. Management fees and other expenses are deducted directly from the Divisions. REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES We can reduce or eliminate the separate account or administrative charges for individuals or groups of individuals if we anticipate expense savings. We may do this based on the size and type of the group or the amount of the contribution. We won't unlawfully discriminate against any person or group if we reduce or eliminate these charges. STATE PREMIUM TAX DEDUCTION We won't deduct state premium taxes from your contributions before investing them in the Investment Options, unless required to by your state law. If the Annuitant elects an annuity benefit, we'll deduct any applicable state premium taxes from the amount available for the annuity benefit. State premium taxes currently range up to 4%, if applicable. CONTINGENT WITHDRAWAL CHARGE We don't deduct sales charges when you make a contribution to the contract. However, contributions withdrawn may be subject to a withdrawal charge of up to 8%. As shown below, the charge varies, depending upon the "age" of the contributions included in the withdrawal-- that is, the number of years that have passed since each contribution was made. The maximum of 8% would apply if the entire amount of the withdrawal consisted of 17 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.
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, (iii) Callan Asset Allocation and Rebalancing, or (iv) systematic transfers from the STO, nor do these transfers count toward the twelve free transfers you can make during a year. 18 HARDSHIP WAIVER We can waive contingent withdrawal charges on full or partial withdrawal requests of $1,000 or more under a hardship circumstance. We can also waive the Market Value Adjustment on any amounts withdrawn from the GRO Accounts. Hardship circumstances include the Owner's (1) confinement to a nursing home, hospital or long term care facility, (2) diagnosis of terminal illness with any medical condition that would result in death or total disability, and (3) unemployment. We can require reasonable notice and documentation including, but not limited to, a physician's certification and Determination Letter from a State Department of Labor. Some of the hardship circumstances listed above may not apply in some states, and, in other states, may not be available at all. The waivers of withdrawal charges and Market Value Adjustment apply to the Owner, not to the Annuitant. If there are joint Owners, the waivers apply to the primary Owner. If no primary Owner can be determined, the waivers will apply to the youngest Owner. TAX RESERVE We can make a charge in the future for taxes or for reserves set aside for taxes, which will reduce the investment experience of the Variable Account Options. SECTION 5 - TERMS OF YOUR VARIABLE ANNUITY CONTRIBUTIONS UNDER YOUR CONTRACT You can make contributions of at least $100 at any time up to the Annuitant's Retirement Date. Your first contribution, however, can't be less than $1,000 ($3,000 for residents of South Carolina and Pennsylvania). We'll accept contributions of at least $50 for salary allotment programs. We have special rules for minimum contribution amounts for tax-favored retirement programs. See "Tax-Favored Retirement Programs" in the SAI. We may limit the total contributions under one contract to $1,000,000 if you are under age 76 or to $250,000 if you are over age 76. Once you reach nine years before your Retirement Date, we may refuse to accept any contribution. Contributions may also be limited by various laws or prohibited by us for all annuitants under the contract. If your contributions are made under a tax-favored retirement program, we won't measure them against the maximum limits set by law. Contributions are applied to the various Investment Options you select and are used to pay annuity and death benefits. Each contribution is credited as of the date we have RECEIVED (as defined below) at our Administrative Office both the contribution and instructions for allocation among the Investment Options, PROVIDED THAT AT ANY TIME YOU MAY NOT HAVE AMOUNTS IN MORE THAN NINE INVESTMENT OPTIONS. In determining the nine Investment Options, each of your GRO Accounts counts as one Investment Option. Wire transfers of federal funds are deemed received on the day of transmittal if credited to our account by 3 p.m. Eastern Time, otherwise they are deemed received on the next Business Day. Contributions by check or mail are deemed received when they are delivered in good order to our Administrative Office. A BUSINESS DAY is defined as any day that the New York Stock Exchange is open. Contributions to the Select Ten Plus Divisions are subject to special rules described in Part II, Section 1, "Investment Strategy." You can change your choice of Investment Options at any time by writing to the Administrative Office. The request should indicate your contract number and the specific change, and you should sign the request. When the Administrative Office receives it, the change will be effective for any contribution that accompanies it and for all future contributions. See "Transfers" in Section 5. For special rules on transfers to the Select Ten Plus Divisions, see Part II, Section 1, "Investment Strategy." 19 YOUR ACCOUNT VALUE Your Account Value reflects various charges. See Part I, Section 4, "Deductions and Charges." Annual deductions are made as of the last day of each contract year. Withdrawal charges and Market Value Adjustments, if applicable, are made as of the effective date of the transaction. Charges against our Separate Accounts are reflected daily. Any amount allocated to a Variable Account Option will go up or down in value depending on the investment experience of that Option. The value of contributions allocated to the Variable Account Options aren't guaranteed. The value of your contributions allocated to the Fixed Accounts is guaranteed, subject to any applicable Market Value Adjustments. See "Guaranteed Rate Options" in Part I, Section 3. UNITS IN OUR SEPARATE ACCOUNTS Allocations to the Variable Account Options are used to purchase units. On any given day, the value you have in a Variable Account Option is the unit value multiplied by the number of units credited to you in that Option. The units of each Variable Account Option have different unit values. The number of units purchased or redeemed (sold) in any Variable Account Option is calculated by dividing the dollar amount of the transaction by the Option's unit value, calculated as of the close of business that day. The number of units for a Variable Account Option at any time is the number of units purchased less the number of units redeemed. The value of units of Separate Account II fluctuates with the investment performance of the corresponding Portfolios, which in turn reflects the investment income and realized and unrealized capital gains and losses of the Portfolios, as well as the Portfolios' expenses. The value of units of Separate Account Ten varies with the performance of the securities held by the Divisions. Your unit values also change because of deductions and charges we make to our Separate Accounts. The number of units credited to you, however, won't vary due to changes in unit values. Units of a Variable Account Option are purchased when you allocate new contributions or transfer prior contributions to that Option. Units are redeemed when you make withdrawals or transfer amounts from a Variable Account Option. We also redeem units to pay the death benefit when the Annuitant dies and to pay the annual administrative charge. Please note that special rules apply to the timing of allocations to the Select Ten Plus Divisions. See Part II. HOW WE DETERMINE UNIT VALUE We determine unit values for each Variable Account Option at 4 p.m. Eastern Time on each Business Day. The unit value of each Variable Account Option in Separate Account II for any Business Day is equal to the unit value for the previous Business Day, multiplied by the NET INVESTMENT FACTOR for that Option on the current day. We determine a NET INVESTMENT FACTOR for each Option in Separate Account II as follows: - - First, we take the value of the shares belonging to the Option in the corresponding Portfolio at the close of business that day (before giving effect to any transactions for that day, such as contributions or withdrawals). For this purpose, we use the share value reported to us by the Portfolios. - - Next, we add any dividends or capital gains distributions by the Portfolio on that day. - - Then, we charge or credit for any taxes or amounts set aside as a reserve for taxes. - - Then, we divide this amount by the value of the amounts in the Option at the close of business on the last day that a unit value was determined (after giving effect to any transactions on that day). - - Finally, we subtract a daily asset charge for each calendar day since the last day that a unit value was determined (for example, a Monday calculation will include charges for Saturday and Sunday). The daily charge is an amount equal to an effective annual rate of 1.35%. This charge is for the mortality risk, administrative expenses and expense risk assumed by us under the contract. 20 We determine a net investment factor for each Division as follows: - - First, we take the value of the assets in the Division at the end of the preceding period. - - Next, we add any investment income and capital gains, realized or unrealized, credited to the assets during the current valuation period. - - Then, we subtract any capital losses, realized or unrealized, charged against the assets during the current valuation period. - - Next, we subtract any amount charged against the Division for any taxes. - - Then, we divide this amount by the value of the assets in the Division at the end of the preceding valuation period. - - Then we subtract the daily charge for management and investment advice for each day in the valuation period and a daily charge for estimated operating expenses for each day in the valuation period. - - Finally, we subtract a daily asset charge for each calendar day since the last day that a unit value was determined (for example, a Monday calculation will include charges for Saturday and Sunday). The daily charge is an amount equal to an effective annual rate of 1.35%. This charge is for the mortality risk, administrative expenses and expense risk assumed by us under the contract. Generally, this means that we adjust unit values to reflect what happens to the Portfolios and the Divisions, and also for the mortality and expense risk charge and any charge for administrative expenses or taxes. TRANSFERS You may transfer your Account Value among the Variable Account Options and the GROs, subject to our transfer restrictions. You can't make a transfer into the STO. Transfers to a GRO must be to a newly elected GRO (that is, to a GRO that you haven't already purchased) at the then-current Guaranteed Interest Rate, unless we agree otherwise. Unless you make a transfer from a GRO within 30 days before the expiration date of a GRO Account, the transfer is subject to a Market Value Adjustment. See "Guaranteed Rate Options" in Part I, Section 3. Transfers from GROs will be made according to the order in which money was originally allocated to the GRO. You can transfer from a Select Ten Plus Division at any time. Transfers to a Select Ten Plus Division from any other Investment Option in which you are invested will be effected at a price determined as of the day preceding the next available Investment Date. We reserve the right not to accept transfer instructions received less than two Business Days before any Investment Date. See Part II for important information on the Divisions. The amount transferred must be at least $250 or, if less, the entire amount in the Investment Option. You have twelve free transfers during a contract year. After those twelve transfers, a charge of up to $20 may apply to each additional transfer during that contract year. No charge will be made for transfers under our Dollar Cost Averaging, Customized Asset Rebalancing, Callan Asset Allocation and Rebalancing or Systematic Transfer programs, described in Section 8. You may request a transfer by sending a written request directly to the Administrative Office. Each request for a transfer must specify the contract number, the amounts to be transferred and the Investment Options to and from which the amounts are to be transferred. Transfers may also be arranged through our telephone transfer service if you've established a Personal Identification Number (PIN CODE). We'll honor telephone transfer instructions from any person who provides correct identifying information and we aren't responsible for fraudulent telephone transfers we believe to be genuine according to these procedures. Accordingly, you bear the risk of loss if unauthorized persons make transfers on your behalf. A transfer request is effective as of the Business Day our Administrative Office receives it, except for transfers to the Select Ten Plus Divisions (see Part II). A transfer request doesn't change the allocation of current or future 21 contributions among the Investment Options. Telephone transfers may be requested from 9:00 a.m. - 5:00 p.m., Eastern Time, on any day we're open for business. You'll receive the Variable Account Options' unit values as of the close of business on the day you call, except that you'll receive the unit values for the Select Ten Plus Divisions as described in Part II. Accordingly, transfer requests for Variable Account Options (other than the Select Ten Plus Divisions) received after 4:00 p.m. Eastern Time (or the close of the New York Stock Exchange, if earlier) will be processed using unit values as of the close of business on the next Business Day after the day you call. All transfers will be confirmed in writing. Transfer requests submitted by agents or market timing services that represent multiple policies will be processed not later than the next Business Day after the requests are received by our Administrative Office. WITHDRAWALS You may make any number of withdrawals as often as you wish. Each withdrawal must be at least $300. The money will be taken from your Investment Options pro rata, in the same proportion their value bears to your total Account Value. For example if your Account Value is divided in equal 25% shares among four Investment Options, when you make a withdrawal, 25% of the money withdrawn will come from each of your Investment Options. You can tell us if you want your withdrawal handled differently. During the first seven years of your contract, there is a contingent withdrawal charge for any withdrawals other than free withdrawals (discussed below). The charge starts at 8% and decreases depending on the age of your account. This charge is in addition to any Market Value Adjustments made to early withdrawals from GRO Accounts. Under some circumstances, the contingent withdrawal charge and Market Value Adjustment may be waived. When you make a partial withdrawal, the total amount deducted from your Account Value will include the withdrawal amount requested plus any contingent withdrawal charges and any Market Value Adjustments. The total amount that you receive will be the total that you requested. Most of the withdrawals you make before you are 59-1/2 years old are subject to a 10% federal tax penalty. If your contract is part of a tax-favored retirement plan, the plan may limit your withdrawals. See "Tax Aspects of the Contracts" in Part I, Section 7. Residents of Pennsylvania and South Carolina are required to keep at least $3,000 in their Accounts. ASSIGNMENTS If your contract isn't part of a tax-favored program, you may assign the contract before the Annuitant's Retirement Date. You can't, however, make a partial assignment. An assignment of the contract may have adverse tax consequences. See Part I, Section 7, "Tax Aspects of the Contracts." We won't be bound by an assignment unless it is in writing and is received at our Administrative Office in a form acceptable to us. DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS We'll pay a death benefit to the Annuitant's surviving beneficiary (or beneficiaries, in equal shares) if the last Annuitant dies before annuity payments have started. If the Annuitant dies at or over age 90 (or after the contract's 10th anniversary date, if later), the death benefit is the contract account value at the end of the business day when we receive proof of death. Similarly, if the contract was issued on or after the youngest Annuitant's 86th birthday, the death benefit is the contract account value at the end of the business day when we receive proof of death. For contracts issued before the Annuitant's 86th birthday, if the Annuitant dies before age 90 (or the contract's 10th anniversary date, if later) and before annuity payments have started, the death benefit is the highest of: a) Your highest Account Value on any contract anniversary (before age 81), plus subsequent contributions and minus subsequent withdrawals (after being adjusted for associated charges and adjustments); b) Total contributions, minus subsequent withdrawals (after being adjusted for associated charges and adjustments); or 22 c) Your current Account Value. The reductions in death benefit described in a) and b) above for subsequent withdrawals will be calculated on a pro rata basis with respect to Account Value at the time of withdrawal. We'll also adjust the death benefit for any applicable Market Value Adjustments and/or charges. Death benefits and benefit distributions required because of a separate Owner's death can be paid in a lump sum or as an annuity. If a benefit option hasn't been selected for the beneficiary at the Annuitant's death, the beneficiary can select an option. The Owner selects the beneficiary of the death benefit. An Owner may change beneficiaries by submitting the appropriate form to the Administrative Office. If an Annuitant's beneficiary doesn't survive the Annuitant, then the death benefit is generally paid to the Annuitant's estate. A death benefit won't be paid after the Annuitant's death if there is a contingent Annuitant. In that case, the contingent Annuitant becomes the new Annuitant under the contract. The maximum issue age for the Annuitant is 85 years old. ANNUITY BENEFITS All annuity benefits under your contract are calculated as of the Retirement Date you select. You can change the Retirement Date by writing to the Administrative Office any time before the Retirement Date. The Retirement Date can't be later than your 98th birthday, or earlier if required by law. Contract terms applicable to various retirement programs, along with federal tax laws, establish certain minimum and maximum retirement ages. Annuity benefits may be a lump sum payment or paid out over time. A lump sum payment will provide the Annuitant with the Cash Value under the contract, shortly after the Retirement Date. The amount applied toward the purchase of an annuity benefit is the Account Value less any pro-rata Annual Administrative Charge, except that the Cash Value will be the amount applied if the annuity benefit doesn't have a life contingency and either the term is less than five years or the annuity can be changed to a lump sum payment without a withdrawal charge. ANNUITIES Annuity benefits can provide for fixed payments which may be made monthly, quarterly, semi-annually or annually. You can't change or redeem the annuity once payments have begun. For any annuity, the minimum initial payment must be at least $100 monthly, $300 quarterly, $600 semi-annually or $1,200 annually. If you haven't already elected a lump sum payment or an annuity benefit, we'll send you a notice within six months before your Retirement Date outlining your options. If you fail to notify us of your benefit payment election before your Retirement Date, you'll receive a lump sum benefit. We currently offer the following types of annuities: A LIFE AND TEN YEARS CERTAIN ANNUITY is a fixed life income annuity with 10 years of payments guaranteed, funded through our General Account. A PERIOD CERTAIN ANNUITY provides for fixed payments to the Annuitant or the Annuitant's beneficiary for a fixed period. The amount is determined by the period selected. If the Annuitant dies before the end of the period selected, the Annuitant's beneficiary can choose to receive the total present value of future payments in cash. A PERIOD CERTAIN LIFE ANNUITY provides for fixed payments for at least the period selected and after that for the life of the Annuitant, or for the lives of the Annuitant and another annuitant under a joint and survivor annuity. If the Annuitant (or the Annuitant and the other annuitant under a joint and survivor 23 annuity) dies before the period selected ends, the remaining payments will go to the Annuitant's beneficiary. The Annuitant's beneficiary can redeem the annuity and receive the present value of future guaranteed payments in a lump sum. A LIFE INCOME ANNUITY provides fixed payments to the Annuitant for the life of the Annuitant, or until the last annuitant dies under a joint and survivor annuity. FIXED ANNUITY PAYMENTS Fixed annuity payments won't change and are based upon annuity rates provided in your contract. The size of payments will depend on the form of annuity that was chosen and, in the case of a life income annuity, on the Annuitant's age (or Annuitant and a joint annuitant in the case of a joint and survivor annuity) and sex (except under most tax-favored retirement programs). If our current annuity rates would provide a larger payment, those current rates will apply instead of the contract rates. If the age or sex of an annuitant has been misstated, any benefits will be those which would have been purchased at the correct age and sex. Any overpayments or underpayments made by us will be charged or credited with interest at the rate of 6% per year. If we have made overpayments because of incorrect information about age or sex, we'll deduct the overpayment from the next payment or payments due. We add underpayments to the next payment. TIMING OF PAYMENT We normally apply your Adjusted Account Value to the purchase of an annuity within seven days after receipt of the required form at our Administrative Office. Our action can be delayed, however, for any period during which (1) the New York Stock Exchange has been closed or trading on it is restricted; (2) an emergency exists so that disposal of securities isn't reasonably practicable or it isn't reasonably practicable for a Separate Account fairly to determine the value of its net assets; or (3) the SEC, by order, permits us to delay action to protect persons with interests in the Separate Accounts. We can delay payment of your Fixed Accounts for up to six months, and interest will be paid on any payment delayed for 30 days or more. HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS When you write to our Administrative Office, use the address on the first page of this prospectus. We can't honor your request or instruction unless it's proper and complete. Whenever possible, use one of our printed forms, which may be obtained from our Administrative Office. SECTION 6 - VOTING RIGHTS PORTFOLIO VOTING RIGHTS We are the legal owner of the shares of the Portfolios held by Separate Account II and, therefore, have the right to vote on certain matters. Among other things, we may vote to elect a Portfolio's Board of Directors, to ratify the selection of independent auditors for a Portfolio, and on any other matters described in a Portfolio's current prospectus or requiring a vote by shareholders under the 1940 Act. Whenever a shareholder vote is taken, we give you the opportunity to tell us how to vote the number of shares purchased as a result of contributions to your contract. We'll send you Portfolio proxy materials and a form for giving us voting instructions. 24 If we don't receive instructions in time from all Owners, we'll vote shares in a Portfolio for which we have not received instructions in the same proportion as we vote shares for which we have received instructions. Under eligible deferred compensation plans and certain qualified plans, your voting instructions must be sent to us indirectly, through your employer, but we aren't responsible for any failure by your employer to solicit your instructions or to send your instructions to us. We'll vote any Portfolio shares that we're entitled to vote directly, because of amounts we have accumulated in Separate Account II, in the same proportion that other Owners vote. If the federal securities laws or regulations or interpretations of them change so that we're permitted to vote shares of a Portfolio on our behalf or to restrict Owner voting, we may do so. HOW WE DETERMINE YOUR VOTING SHARES You vote only on matters concerning the Portfolios in which your contributions are invested. We determine the number of Portfolio shares in each Variable Account Option under your contract by dividing your Account Value allocated to that Option by the net asset value of one share of the corresponding Portfolio on the record date set by a Portfolio's Board for its shareholders' meeting. For this purpose, the record date can't be more than 60 days before the meeting of a Portfolio. We count fractional shares. After annuity payments have commenced, voting rights are calculated in a similar manner based on the actuarially determined value of your interest in each Variable Account Option. HOW PORTFOLIO SHARES ARE VOTED All Portfolio shares are entitled to one vote; fractional shares have fractional votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters (for example, election of Directors) that require collective approval. On matters where the interests of the individual Portfolios differ, the approval of the shareholders in one Portfolio isn't needed to make a decision in another Portfolio. To the extent shares of a Portfolio are sold to separate accounts of other insurance companies, the shares voted by those companies according to instructions received from their contract holders will dilute the effect of voting instructions received by us from its Owners. Owners of units in the Divisions also have voting rights. Each Owner will be given one vote for every $1.00 of value in a Division. Fractional interests are counted, unless different voting rights are required under the law. HOW SEPARATE ACCOUNT TEN INTERESTS ARE VOTED Separate Account Ten's rules don't require Separate Account Ten to hold annual meetings, although special meetings may be called for purposes such as electing or removing members of the Board of Managers, changing fundamental policies, or approving a contract for investment advisory services. When required, "the vote of a majority of the outstanding voting securities" of Separate Account Ten means the lesser of: (1) The holders of more than 50% of all votes entitled to be cast with respect to Separate Account Ten; or, (2) The holders of at least 67% of the votes that are present or represented by proxy at a meeting, assuming more than 50% of those entitled to vote are present or represented. We'll determine the number of votes you can instruct us to vote 60 days or less before a Separate Account Ten special meeting. SEPARATE ACCOUNT VOTING RIGHTS Under the 1940 Act, certain actions (such as some of those described under "Changes in How We Operate" in Part I, Section 2) may require Owner approval. In that case, you'll be entitled to a number of votes based on the value you have in the Variable Account Options, as described above under "How We Determine Your Voting Shares." 25 We'll cast votes attributable to amounts we have in the Variable Account Options in the same proportions as votes cast by Owners. SECTION 7 - TAX ASPECTS OF THE CONTRACTS INTRODUCTION The effect of federal income taxes on the amounts held under a contract, on annuity payments, and on the economic benefits to the Owner, Annuitant, and the beneficiary or other payee may depend on several factors. These factors may include Integrity's tax status, the type of retirement plan, if any, for which the contract is purchased, and the tax and employment status of the individuals concerned. The following discussion of the federal income tax treatment of the contract isn't designed to cover all situations and isn't intended to be tax advice. It's based upon our understanding of the federal income tax laws as currently interpreted by the Internal Revenue Service (IRS) and various courts. We can't guarantee that the tax code or the courts will or won't change their views on the treatment of these contracts. Future legislation could affect annuity contracts adversely. Moreover, we haven't attempted to consider any applicable state or other tax laws. Because of the complexity of tax laws and the fact that tax results will vary according to particular circumstances, anyone considering the purchase of a contract, selecting annuity payments under the contract, or receiving annuity payments under a contract should consult a qualified tax adviser. INTEGRITY DOESN'T MAKE ANY GUARANTEE REGARDING THE TAX STATUS, FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS. YOUR CONTRACT IS AN ANNUITY Under federal tax law, anyone can purchase an annuity with after-tax dollars and your annuity earnings won't be taxed until you make a withdrawal. Or, an individual (or employer) may purchase the annuity to fund a tax-favored retirement program (contributions are with pre-tax dollars), such as an IRA or qualified plan. Finally, the individual (or employer) may purchase the annuity to fund a Roth IRA (contributions are with after-tax dollars and earnings may be excluded from taxable income at distribution). This prospectus covers the basic tax rules that apply to an annuity purchased directly with after-tax dollars (a nonqualified annuity), and some of the special tax rules that apply to an annuity purchased to fund a tax-favored retirement program (a qualified annuity). A qualified annuity may restrict your rights and benefits to qualify for its special treatment under federal tax law. TAXATION OF ANNUITIES GENERALLY Section 72 of the Code governs the taxation of annuities. In general, contributions you put into the annuity (your "basis" or "investment" in the contract) won't be taxed when you receive the amounts back in a distribution. Also, an Owner isn't taxed on the annuity's earnings (increases in Account Value) until some form of withdrawal or distribution is made under the contract. However, under certain circumstances, the increase in value may be subject to current federal income tax. For example, corporations, partnerships, trusts and other non-natural persons can't defer tax on the annuity's income unless an exception applies. In addition, if an Owner transfers an annuity as a gift to someone other than a spouse (or former spouse), all increases in the Account Value are taxed at the time of transfer. The assignment or pledge of any portion of the value of a contract is treated as a taxable distribution of that portion of the value of the contract. You can take withdrawals from the contract or you can wait to annuitize it when the annuitant reaches a certain age. The tax implications are different for each type of distribution. Section 72 of the Code says that the proceeds of a full or partial withdrawal from a contract before annuity payments begin are treated first as taxable income, but only to the extent of the increase of the Account Value. The rest of the withdrawal, representing your basis in the annuity, is not taxable. Generally, the investment or basis in the contract equals the contributions made by you or on your behalf, minus any amounts previously withdrawn that weren't treated as taxable income. Special rules may apply if the contract includes contributions made before August 14, 1982 that were rolled over to the contract in a tax-free exchange. 26 If you take annuity payments over the lifetime of the annuitant, part of each payment is considered to be a tax-free return of your investment. This tax-free portion of each payment is figured using a ratio of the Owner's investment to his or her expected return under the contract (exclusion ratio). Once you get the tax-free part, the rest of each payment will be considered the increase of your Account Value, and is ordinary income. When all of these tax-free portions add up to your investment in the annuity, future payments are all counted as an increase in your Account Value, and are taxable income. If the Annuitant dies before recovering the total investment, a deduction for the remaining basis will generally be allowed on the Owner's final federal income tax return. We may be required to withhold federal income taxes on all distributions unless the eligible recipients elect not to have any amounts withheld and properly notify us of that election. The taxable portion of a distribution is taxed at ordinary income tax rates. In addition, you may be subject to a 10% penalty on the taxable portion of a distribution unless it is: (1) on or after the date on which the taxpayer attains age 59-1/2; (2) as a result of the Owner's death; (3) part of a series of "substantially equal periodic payments" (paid at least annually) for the life (or life expectancy) of the taxpayer or joint lives (or joint life expectancies) of the taxpayer and beneficiary; (4) a result of the taxpayer becoming disabled within the meaning of Code Section 72(m)(7); (5) from certain qualified plans (note, however, other penalties may apply); (6) under a qualified funding asset (as defined in Section 130(d) of the Code); (7) purchased by an employer on termination of certain types of qualified plans and held by the employer until the employee separates from service; (8) under an immediate annuity as defined in Code Section 72(u)(4); (9) for the purchase of a first home (distribution up to $10,000); (10) for certain higher education expenses or (11) to cover certain deductible medical expenses. Please note that items (9), (10) and (11) apply to IRAs only. Any withdrawal provisions of your contract will also apply. See "Withdrawals" in Part I, Section 5. All annuity contracts issued by us or our affiliates to one Annuitant during any calendar year are treated as a single contract in measuring the taxable income that results from surrenders and withdrawals under any one of the contracts. DISTRIBUTION-AT-DEATH RULES Under Section 72(s) of the Code, in order to be treated as an annuity, a contract must provide the following distribution rules: (a) if any Owner dies on or after the date the annuity starts and before the entire interest in the contract has been distributed, then the rest of that annuity must be distributed at least as quickly as the method in effect when the owner died; and (b) if any Owner dies before the date the annuity starts, the entire contract must be distributed within five years after the Owner's death. However, any interest that is payable to a death beneficiary may be annuitized over the life of that beneficiary, as long as distributions begin within one year after the Owner dies. If the death beneficiary is the Owner's spouse, the contract (along with the deferred tax status) may be continued in the spouse's name as the Owner. DIVERSIFICATION STANDARDS We manage the investments in the annuities under Section 817(h) of the Code to ensure that you will be taxed as described above. 27 TAX-FAVORED RETIREMENT PROGRAMS An owner can use this annuity with certain types of retirement plans that receive favorable treatment under the Code. Numerous tax rules apply to the participants in these qualified plans and to the contracts used in connection with those qualified plans. These tax rules vary according to the type of plan and the terms and conditions of the plan itself. Owners, Annuitants, and beneficiaries are cautioned that the rights of any person to any benefits under qualified plans may be subject to the terms and conditions of the plans themselves, regardless of the terms and conditions of the contract. In addition, loans from qualified contracts, where allowed, are subject to a variety of limitations, including restrictions on the amount that may be borrowed, the duration of the loan, and repayment of the loan. (Owners should always consult their tax advisors and retirement plan fiduciaries before taking any loans from the plan.) Also, special rules apply to the time at which distributions must begin and the form in which the distributions must be paid. THE STATEMENT OF ADDITIONAL INFORMATION CONTAINS GENERAL INFORMATION ABOUT THE USE OF CONTRACTS WITH THE VARIOUS TYPES OF QUALIFIED PLANS. FEDERAL AND STATE INCOME TAX WITHHOLDING Certain states have indicated that pension and annuity withholding will apply to payments made to residents. Generally, an election out of federal withholding will also be considered an election out of state withholding. For more information concerning a particular state, call our Administrative Office at the toll-free number. IMPACT OF TAXES ON INTEGRITY The contracts allow us to charge the Separate Accounts for taxes. We can also set up reserves for taxes. TRANSFERS AMONG INVESTMENT OPTIONS There won't be any tax liability if you transfer any part of the Account Value among the Investment Options of your contract. SECTION 8 - ADDITIONAL INFORMATION SYSTEMATIC WITHDRAWALS We offer a program that allows you to pre-authorize periodic withdrawals from your contract before your Retirement Date. You can choose to have withdrawals made monthly, quarterly, semi-annually or annually and can specify the day of the month (other than the 29th, 30th or 31st) on which the withdrawal is made. You may specify a dollar amount for each withdrawal or an annual percentage to be withdrawn. The minimum systematic withdrawal currently is $100. Residents of Pennsylvania and South Carolina must keep a $3,000 minimum account balance after any withdrawal. You may also specify an account for direct deposit of your systematic withdrawals. To enroll under our systematic withdrawal program, send the appropriate form to our Administrative Office. Withdrawals may begin one business day after we receive the form. You may terminate your participation in the program upon one day's prior written notice, and we may end or change the systematic withdrawal program at any time. If on any withdrawal date you don't have enough money in your accounts to make all of the withdrawals you have specified, no withdrawal will be made and your enrollment in the program will be ended. Amounts you withdraw under the systematic withdrawal program may be within the free withdrawal amount. If so, we won't deduct a contingent withdrawal charge or make a Market Value Adjustment. See "Contingent Withdrawal Charge" in Part I, Section 4. AMOUNTS WITHDRAWN UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM GREATER THAN THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE AND A MARKET VALUE ADJUSTMENT IF APPLICABLE. WITHDRAWALS ALSO MAY BE SUBJECT TO THE 10% FEDERAL TAX PENALTY FOR EARLY WITHDRAWALS UNDER THE CONTRACTS AND TO INCOME TAXATION. See Part I, Section 7, "Tax Aspects of the Contracts." INCOME PLUS WITHDRAWAL PROGRAM 28 We offer an Income Plus Withdrawal Program that allows you to pre-authorize equal periodic withdrawals, based on your life expectancy, from your contract before you reach age 59-1/2. You won't have to pay any tax penalty for these withdrawals, but they will be subject to ordinary income tax. See "Taxation of Annuities Generally," in Section 7. Once you begin receiving distributions, they shouldn't be changed or stopped until the later of: - - the date you reach age 59-1/2; or - - five years from the date of the first distribution. If you change or stop the distribution or take an additional withdrawal, you may have to pay a 10% penalty tax that would have been due on all prior distributions made under the Income Plus Program, plus any interest. You can choose the Income Plus Withdrawal Program at any time if you're younger than 59-1/2. You can elect this option by sending the election form to our Administrative Office. You can choose to have withdrawals made monthly, quarterly, semi-annually or annually and can specify the day of the month (other than the 29th, 30th or 31st) on which the withdrawal is made. We'll calculate the amount of the distribution under a method you select, subject to a minimum, which is currently $100. You must also specify an account for direct deposit of your Income Plus Withdrawals. To enroll in our Income Plus Withdrawal Program, send the appropriate form to our Administrative Office. Your withdrawals will begin at least one Business Day after we receive your form. You may end your participation in the program upon seven Business Days prior written notice, and we may end or change the Income Plus Program at any time. If on any withdrawal date you don't have enough money in your accounts to make all of the withdrawals you have specified, no withdrawal will be made and your enrollment in the program will end. This program isn't available in connection with the Systematic Withdrawal Program, Dollar Cost Averaging, Systematic Transfer Option or Callan Asset Allocation and Rebalancing Program. If you haven't used up your free withdrawals in any given contract year, amounts you withdraw under the Income Plus Withdrawal Program may be within the free withdrawal amount. If they are, no contingent withdrawal charge or Market Value Adjustment will be made. See "Contingent Withdrawal Charge" in Part 4. AMOUNTS WITHDRAWN UNDER THE INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE AND A MARKET VALUE ADJUSTMENT IF APPLICABLE. DOLLAR COST AVERAGING We offer a dollar cost averaging program under which we transfer contributions allocated to the Janus Money Market Option to one or more other Variable Account Options on a monthly, quarterly, semi-annual or annual basis. You must tell us how much you want to be transferred into each Variable Account Option. The current minimum transfer to each Option is $250. We won't charge a transfer charge under our dollar cost averaging program, and these transfers won't count towards the twelve free transfers you may make in a contract year. The Select Ten Plus Divisions aren't eligible for the dollar cost averaging program. To enroll under our dollar cost averaging program, send the appropriate form to our Administrative Office. You may end your participation in the program upon one day's prior written notice, and we may end or change the dollar cost averaging program at any time. If you don't have enough money in the Janus Money Market Option to transfer to each Variable Account Option specified, no transfer will be made and your enrollment in the program will end. 29 SYSTEMATIC TRANSFER PROGRAM We also offer a systematic transfer program under which we transfer contributions allocated to the STO to one or more other Investment Options on a monthly or quarterly basis, as you determine. See Part I, Section 3, "Systematic Transfer Option." We'll transfer your STO contributions in equal installments of at least $1,000 over a one-year period. If you don't have enough money in the STO to transfer to each Option specified, a final transfer will be made on a pro rata basis and your enrollment in the program will end. All interest accrued and any money still in the STO at the end of the period during which transfers are scheduled to be made will be transferred at the end of that period on a pro rata basis to the Options you chose for this program. There is no charge for transfers under this program, and these transfers won't count towards the twelve free transfers you may make in a contract year. We'll hold new contributions to a Select Ten Plus Division in the STO until the next available Investment Date. You may ask us to transfer approximately equal quarterly installments of at least $1,000 each over the next year from the STO to each of the four Select Ten Plus Divisions. We can hold new contributions received less than five Business Days before any Investment Date in the STO until the next Investment Date. See Part II for important information on the Divisions. To enroll under our systematic transfer program, send the appropriate form to our Administrative Office. We can end the systematic transfer program in whole or in part, or restrict contributions to the program. This program may not be available in some states. CUSTOMIZED ASSET REBALANCING We offer a customized asset rebalancing program that allows you to determine how often the rebalancing occurs. You can choose to rebalance monthly, quarterly, semi-annually or annually. The value in the Variable Account Options will be automatically rebalanced by transfers among the Variable Account Options, and you will receive a confirmation notice after each rebalancing. Transfers will occur only to and from those Variable Account Options where you are making contributions. We won't charge a transfer charge to transfers under our customized asset rebalancing program, and these transfers won't count towards the twelve free transfers you may make in a contract year. Fixed Accounts and the Select Ten Plus Divisions aren't included in the customized asset rebalancing program. To enroll in our customized asset rebalancing program, send the appropriate form to our Administrative Office. You should be aware that other allocation programs, such as dollar cost averaging, and transfers and withdrawals that you make, may not work with the customized asset rebalancing program. You should, therefore, monitor your use of other programs, transfers, and withdrawals while the customized asset rebalancing program is in effect. You may end your participation in the program upon one day's prior written notice, and we may end or change the customized asset rebalancing program at any time. CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM We also offer an Asset Allocation and Rebalancing Program, developed with Callan Associates. Callan Associates is an independent research and consulting firm, specializing in the strategic asset allocation decision. You may select one of five proposed Asset Allocation and Rebalancing Models: Conservative, Moderately Conservative, Moderate, Moderately Aggressive, or Aggressive. The contributions you are making will initially be allocated among the Options established for each Model. You and your financial representative can design a program that is tailored to your specific retirement needs. When you select this program, your contributions will be allocated and your variable portfolios will be rebalanced at least annually. The program applies to all contributions made to your annuity contract. You will receive a confirmation notice after each rebalancing. No transfer charge will apply to transfers made under the Callan Asset 30 Allocation and Rebalancing Program, nor will these transfers count toward the twelve transfers you may make in a contract year before we charge a transfer fee. See "Transfer Charges" in Part I, Section 4. In each Asset Allocation and Rebalancing Model, a portion of all contributions is allocated to a five-year Guaranteed Rate Option (GRO). The amount allocated to the GRO won't be reallocated or rebalanced while you are participating in a specific Model. You may cancel or change the Model you have selected at any time. The GRO funds may be subject to a market value adjustment (MVA) that may increase or decrease your account value. To enroll under the Callan Asset Allocation and Rebalancing Program, complete the Dollar Cost Averaging/Asset Allocation and Rebalancing form. You should be aware that other allocation programs, such as dollar cost averaging, as well as additions, transfers and withdrawals that you make, may not work with the Customized Asset Rebalancing program. If, after selecting one of the five Models, you request a transaction that results in a reallocation outside your Model, your participation in the program automatically ends. Because of this, you should monitor your use of other programs, transfers, and withdrawals while the Asset Allocation and Rebalancing program is in effect. This program isn't available with the Customized Asset Rebalancing program described above. The Select Ten Plus Divisions aren't eligible for the Asset Allocation and Rebalancing Program. We can end or change this program in whole or in part, and we may restrict contributions to the program. This program may not be available in all states. You may end your participation in this program upon one day's prior written notice. SYSTEMATIC CONTRIBUTIONS We offer a program for systematic contributions that allows you to pre-authorize monthly, quarterly, or semi-annual withdrawals from your checking account to make your contributions. To enroll in this program, send the appropriate form to our Administrative Office. You or we may end your participation in the program with 30 days' prior written notice. We may end your participation if your bank declines to make any payment. The minimum amount for systematic contributions is $100 per month. The Select Ten Plus Divisions aren't eligible for Systematic Contributions. PERFORMANCE INFORMATION Performance data for the Investment Options, including the yield and effective yield and total return of the Investment Options, may appear in advertisements or sales literature. This performance data is based only on the performance of a hypothetical investment in that Option during the particular period of time on which the calculations are based. Performance information should be considered in light of investment objectives and policies of the Portfolio in which the Option invests and the market conditions during the given time frame, and it shouldn't be considered a representation of performance to be achieved in the future. TOTAL RETURNS are based on the overall dollar or percentage change in value of a hypothetical investment in an Option. Total return information reflects changes in Portfolio share price, the automatic reinvestment of all distributions and the deduction of contract charges and expenses that may apply, including any contingent withdrawal charge that would apply if an Owner surrendered the contract at the end of the period shown. Total returns may also be shown that don't take into account the contingent withdrawal charge or the annual administrative charge that is applied when the Account Value is less than $50,000 at the end of the contract year. CUMULATIVE TOTAL RETURNS show an Investment Option's performance over a specific period of time, usually several years. An AVERAGE ANNUAL TOTAL RETURN shows the hypothetical yearly return that would produce the same cumulative total return if the Investment Option experienced exactly the same return each year for the entire period shown. Because performance will fluctuate on a year-by-year basis, the average annual total returns tend to show a smooth result that won't mirror actual performance, even though the end result will be the same. 31 Some Investment Options may also advertise YIELD, which shows the income generated by an investment in that particular Option over a specified period of time. This income is annualized and shown as a percentage. Yields don't take into account capital gains or losses or the contingent withdrawal charge that may apply if you withdraw your money at the end of the hypothetical time period. The Janus Aspen Money Market Option may advertise its CURRENT and EFFECTIVE YIELD. Current yield reflects the income generated by an investment in that Option over a specified seven-day period. Effective yield is calculated in a similar manner, except that it assumes that the income earned is reinvested, and the income on the reinvested amount is included. The J.P. Morgan Bond Option may advertise a 30-day yield, which reflects the income generated by an investment in that Option over a specified 30-day period. For a detailed description of the methods used to determine the yield and total return for the Variable Account Options, see the Statement of Additional Information. In Part II of this prospectus, there is a table showing what the performance of the strategy for the Select Ten Plus Divisions would have been relative to the Dow Jones Industrial Average for the last 26 years. The information is historical and reflects a hypothetical investment, and shouldn't be used as an indicator of future performance. In some years, the strategy outperformed the Dow Jones index, and in some years, it didn't. The performance of this strategy depends both on stock prices, which will fluctuate, and dividend payments, which may increase, decrease or be eliminated. There are no guarantees that this strategy will outperform the Dow Jones Industrial average over any given period of time. 32 SECTION 9 - PRIOR CONTRACTS AVAILABILITY OF VIP GROWTH PORTFOLIO AND VIP III MID CAP PORTFOLIO For contracts issued before May 1, 1999, the VIP Growth Portfolio and VIP III Mid Cap Portfolio are not yet available. DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997 This section shows the Death Benefit information for contracts issued before January 1, 1997. It may be different from other provisions in this prospectus. For contracts issued before 1997, the following provisions apply: For contracts issued before January 1, 1995, the amount of the death benefit is the greatest of: - your Adjusted Account Value - the Account Value at the beginning of the seventh contract year, plus subsequent contributions and minus subsequent withdrawals - your total contributions less the sum of withdrawals - for Annuitants younger than 70 years old on the birthday nearest the date on which their contract was issued, an enhanced minimum death benefit, explained below. For contracts issued during 1995, the amount of the death benefit is the greatest of: - your Adjusted Account Value - the highest Account Value at the beginning of any contract year, plus subsequent contributions and minus subsequent withdrawals - your total contributions less the sum of withdrawals For contracts issued during 1996, the amount of the death benefit is the greatest of: - your Account Value - the highest Account Value at the beginning of any contract year, plus subsequent contributions and minus subsequent withdrawals - your total contributions less the sum of withdrawals "Subsequent withdrawals" for purposes of calculation of a death benefit reflect any market value adjustments that apply to those withdrawals and reduce the death benefit on a pro rata basis. The enhanced minimum death benefit is the same as the guaranteed death benefit, except that the guaranteed death benefit may not exceed the maximum guaranteed death benefit. The guaranteed death benefit on your Participation Date is your initial contribution. After that, every month we recalculate that portion of your guaranteed death benefit allocated to the Separate Account by adding interest at an annual rate of 7% until the contract anniversary nearest your 70th birthday, subject to the maximum. We subtract from that the sum of any withdrawals or transfers from the Separate Account during the month and a pro rata amount of the interest accumulated that applies to the withdrawn or transferred amount. Therefore, your guaranteed death benefit at any time, subject to the maximum, is the sum of (1) your Guarantee Period Values, and (2) your Separate Account contributions, including the amount of interest calculated on your Separate Account values for purposes of determining the guaranteed death benefit, less any withdrawals or transfers and less the interest calculated on a pro rata basis on those withdrawals or transfers. Your maximum guaranteed death benefit is determined by totaling your contributions during your first five participation years, subtracting all withdrawals, taking into consideration any market value adjustments made under the contract, multiplying the result by two, and then adding that to your total contributions made after the first five participation years. REDUCTION IN CHARGES If your contract was issued on or after January 1, 1995, but before January 1, 1997, the effective annual rate of mortality, expense and administrative charges will reduce to 1.10% after your contract has been in effect for six years. 33 CONTINGENT WITHDRAWAL CHARGE For contracts issued before February 15, 1997 (2/27/97 in Washington, 5/30/97 in Pennsylvania, 7/7/97 in Maryland, 10/16/97 in Oregon) the following rules apply even if they are different from other provisions in this prospectus: There is a withdrawal charge of up to 7% on all contributions withdrawn. As shown below, this charge varies, depending upon the "age" of the contributions included in the withdrawal, that is, how long ago you made your contributions. The maximum percentage of 7% would apply if the entire amount of the withdrawal consisted of contributions made during your current contract year. No withdrawal charge applies when you withdraw contributions made earlier than your fifth prior contribution year. For purposes of calculating the withdrawal charge, (1) the oldest contributions will be treated as the first withdrawn and more recent contributions next, and (2) partial withdrawals up to the free withdrawal amount won't be considered a withdrawal of any contributions. For partial withdrawals, the total amount deducted from your Account Value will include the withdrawal amount requested, any applicable Market Value Adjustment and any applicable withdrawal charge, so that the net amount you receive will be the amount requested. No charge will be applied to your partial withdrawals that don't exceed the free withdrawal amount in any contract year. On any Business Day, the free withdrawal amount is the greater of (i) 10% of your Account Value and (ii) any investment gain during the prior contract year, less withdrawals during the current contract year. Investment gain is calculated as the increase in the Account Value during the prior contract year, minus contributions during that year, plus withdrawals made during that year. We'll deduct contingent withdrawal charges for any partial withdrawal amount that is over the free withdrawal amount. The contingent withdrawal charge is a sales charge to help pay our costs of selling and promoting the contracts. We don't expect revenues from contingent withdrawal charges to cover all of those costs. Any shortfall will be made up from our General Account assets, which may include profits from other charges under the contracts.
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. 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. 34 CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM The Callan Asset Allocation and Rebalancing Program uses the 4-year Guaranteed Rate Option for the Fixed Income Investment Sector of the Model. HARDSHIP WAIVERS Hardship Waivers aren't available. 35 PART II THE SELECT TEN PLUS DIVISIONS OF SEPARATE ACCOUNT TEN SECTION 1 - INVESTMENT OBJECTIVE, STRATEGY AND RISK FACTORS THE DIVISIONS Separate Account Ten is currently divided into four Divisions: March, June, September and December. Each Division is a non-diversified investment company that invests directly in securities. We can't guarantee that any Division will meet its investment goals. Separate Account Ten may also offer other securities that aren't available through this prospectus. INVESTMENT OBJECTIVE The Divisions seek total return by investing in shares of the ten highest dividend yielding common stocks in the Dow Jones Industrial Average (DJIA) in equal weights and holding them for twelve months. The dividend yield for each stock is calculated by annualizing the last quarterly or semi-annual ordinary dividend distributed on that stock and dividing the result by the market value of that stock at the close of the New York Stock Exchange (NYSE) on the business day before the investment date. This yield is historical and we can't guarantee that any dividends will be declared or paid in the future on the stocks in the Divisions. The term "equal weights" means that if you invested $100 in a Division, the Division would buy $10 of each of the ten highest yielding stocks. The selection process is a straightforward, objective, mathematical application that ignores any subjective factors concerning an issuer in the DJIA, an industry or the economy generally. The application of the selection process may cause a Division to own a stock that the sub-adviser doesn't recommend for purchase. In fact, the sub-adviser may have sell recommendations on a number of the stocks at the time the stocks are selected for inclusion in a Division's portfolio. There are various theories to explain why a common stock is among the ten highest yielding stocks in the DJIA at any given time: (1) the issuer may be in financial difficulty or out of favor in the market because of weak earnings, performance or forecasts, or negative publicity; (2) there may be uncertainties because of pending or threatened litigation or pending or proposed legislation or government regulation; (3) the stock may be a cyclical stock reacting to national and international economic developments; or (4) the market may be anticipating a reduction in or the elimination of the issuer's dividend. While these factors may affect only a part of an issuer's overall business, the publicity may be strong enough to outweigh otherwise solid business performance. In addition, companies in certain industries have historically paid relatively high dividends. INVESTMENT STRATEGY The Divisions seek total return by buying the ten highest yielding stock in the Dow Jones Industrial Average (DJIA) in equal weights and holding them for approximately twelve months. Each new Division begins on the last Business Day of each calendar quarter. At the end of each Division's twelve-month period, its portfolio is restructured to hold the current ten highest yielding stocks in the DJIA. Separate Account Ten's four Divisions, operating at the same time, may each have different investment portfolios for its own twelve-month period. New contributions and transfers to a Division are invested on only one day each year, the INVESTMENT DATE, as follows: 36 Division Investment Date -------- --------------- Select Ten Plus Division - March last Business Day of March Select Ten Plus Division - June last Business Day of June Select Ten Plus Division - September last Business Day of September Select Ten Plus Division - December last Business Day of December The weights of the individual stock positions won't be rebalanced during the year, and additional contributions or transfers won't be accepted during any Division's twelve-month holding period. Instead, additional contributions or transfers are invested on the next Investment Date. On the day we receive a dividend from a stock in a Division's investment portfolio, we'll reinvest it in the form of additional shares of the stock that paid the dividend. We can't guarantee that the dividend rates on the selected stocks will be maintained. Reduction or elimination of a dividend could adversely affect the stock price. The "highest yielding stocks" are determined by calculating the yield for each stock by annualizing the last ordinary quarterly or semi-annual dividend distributed on that stock and dividing the result by the market value of the stock at the close of the NYSE on the Business Day before the Investment Date. The investment strategy is based on three time-tested investment principles: (1) time in the market is more important than timing the market; (2) the stocks to buy are the ones everyone else is selling; and (3) dividends can be an important part of total return. Investment in a number of companies with high dividends relative to their stock prices is designed to increase a Division's potential for higher returns. Investing in these stocks of the DJIA may be effective as well as conservative because regular dividends are common for established companies and have accounted for a substantial portion of the total return on stocks of the DJIA as a group. Each Division's return will consist of a combination of capital appreciation and current dividend income. Transfers from any other Investment Option into one of the Divisions will be effective at a price determined as of the day preceding the next available Investment Date. We reserve the right not to accept transfer instructions received less than two business days before any Investment Date. See Part I, Section 5, "Transfers." THE DOW JONES INDUSTRIAL AVERAGE The DJIA consists of 30 common stocks chosen by the editors of THE WALL STREET JOURNAL as representative of the NYSE and of American industry. The companies are highly capitalized in their industries and their stocks are widely followed and held by individual and institutional investors. The companies marked below with an asterisk are the ten highest yielding stocks in the DJIA as of the market close on March 31, 1999. The ten highest yielding stocks in the DJIA are commonly known as the "Dogs of the Dow": AT&T Hewlett-Packard Allied Signal IBM Aluminum Co. of America International Paper American Express J.P. Morgan* Boeing Johnson & Johnson Caterpillar* McDonald's Chevron* Merck 37 Citigroup Minnesota Mining & Manufacturing* Coca-Cola Philip Morris* DuPont* Proctor & Gamble Eastman Kodak* Sears Roebuck Exxon* Union Carbide General Electric United Technologies General Motors* Walmart Goodyear* Walt Disney The designations Dow Jones, Dow Jones Industrial Average and DJIA are the property of Dow Jones & Company, Inc. (DOW JONES). Dow Jones isn't affiliated with the Divisions, hasn't participated in any way in the creation of the Divisions or in the selection of stocks included in the Divisions and hasn't reviewed or approved any information included in this prospectus. The Divisions aren't sponsored, endorsed, sold or promoted by Dow Jones, and Dow Jones has no relationship at all with the Divisions. Dow Jones isn't responsible for and doesn't participate in determining the timing, price, or quantity of the Divisions' shares to be issued or redeemed. Dow Jones doesn't have any obligation or liability in connection with the administration or marketing of the Divisions. RISK FACTORS RISKS IN GENERAL An investment in a Division results in certain risks common to all stock investments. Stocks fluctuate in price for a variety of reasons. For example, the value of your investment will decline if the financial condition of the issuers of the stocks becomes impaired or if the general condition of the stock market worsens. Common stocks in general may be especially susceptible to general stock market movements and to increases and decreases in value as market confidence in and perceptions of the issuers change. These perceptions are based on unpredictable factors, including government, economic, monetary and fiscal policies, inflation and interest rates, economic expansion or contraction, and global or regional political, economic or banking crises. In addition, holders of common stocks generally are behind creditors and holders of preferred stock for payments in the event of the bankruptcy of a stock issuer. Common stocks aren't backed by an obligation of the issuer and therefore don't offer any assurance of income or provide the degree of protection of capital provided by debt securities. STRATEGY SPECIFIC RISKS Each Division is non-diversified and invests a larger portion of its assets in the securities of fewer issuers than diversified investment companies. As a result, an investment in a Division may be subject to greater fluctuation in value than an investment in a diversified investment company. In addition, a Division may be concentrated in issuers primarily engaged in a particular industry. Concentration may involve additional risk because of the decreased diversification of economic, financial, and market risks. In addition, increased regulation, particularly with respect to the environment or with respect to the petroleum or tobacco industry, may have a negative impact on certain companies represented in a Division's portfolio. SECTION 2 -- PERFORMANCE INFORMATION The performance of the investment strategies for the Divisions relative to other investment strategies can be shown using historical data. You should note that Separate Account Ten didn't start operations until 1998. Therefore, the returns shown in the following tables reflect the historical performance of a hypothetical investment in the ten highest yielding stocks in the DJIA and the performance of the DJIA, and not the performance of any Division. They don't guarantee future performance or predict any Division's returns. Stock prices (which will fluctuate in value) and dividends (which may be increased, reduced or eliminated) can affect the returns. The strategy has underperformed the DJIA in certain years. Accordingly, we can't guarantee that any Division will outperform the DJIA over the life of the Division. An investor in a Division might not receive as high a total return on an investment in the Divisions that the hypothetical returns are based on because (1) the total return figures shown don't reflect Division expenses or brokerage commissions, and (2) the Divisions are established at different times of the year. If these charges were reflected in the hypothetical returns, the returns would be lower than those shown here. 38 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% Cumulative 7,271.4% 2,429.7%
- ---------------------------------- (1) Total Return is the sum of the percentage change in market value of each group of stocks between the first and last trading days of a period and the total dividends paid on each group of stocks during the period, divided by the opening market value of each group of stocks as of the first trading day of a period. Total Return doesn't take into consideration any expenses or commissions. Over the twenty-six years listed above, the ten highest dividend yielding stocks in the DJIA achieved an average annual total return of 18.0%. Over this period, the strategy achieved a greater average annual total return than that of the DJIA, which was 13.2%. Although each Division seeks to achieve a better performance than the DJIA as a whole, we can't guarantee that a Division will achieve a better performance. Performance may also be compared to the performance of the S&P 500 Composite Price Stock Index or performance data from publications such as Morningstar Publications, Inc. Source for years 1973-1997: BEATING THE DOW, by Michael O'Higgins with John Downes, published by Harper Perennial, 1992, and "Beating the Dow," edited by John Downes, published by the Hirsch Organization. Used with permission of the authors. Source for 1998: ARM. (2) The ten highest dividend yielding stocks in the DJIA for any given year were selected by ranking the dividend yields for each of the stocks in the index at the beginning of that year, based upon an annualization of the last quarterly or semi-annual regular dividend distribution (which would have been declared in the preceding year), divided by that stock's market value on the first trading day on the NYSE in that year. 39 PERFORMANCE HISTORY OF THE DOGS OF THE DOW STRATEGY - $10,000 HYPOTHETICAL INVESTMENT (1)
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
The table above represents a hypothetical investment of $10,000 in the DJIA and the ten highest dividend yielding DJIA Stocks from January 1, 1973 through December 31, 1998. The table assumes that all dividends and distributions during a year are reinvested at the end of that year. The table doesn't reflect expenses or commissions. The value of the ten highest dividend-yielding DJIA stocks would have been $449,913 if the following fees and expenses had been charged: (1) insurance charges of 1.20%, (2) management fees of .50%, (3) administrative fees of .15%, and (4) other expenses of .35%. Investors shouldn't rely on performance information as an indication of the past or future performance of the Divisions. We can't guarantee that any of the Divisions will outperform the DJIA. Performance data for the Divisions, including the yield and total return of the Divisions, may appear in advertisements or sales literature. See "Performance Information" in Part I, Section 8 for a discussion of how performance is calculated. SECTION 3 -- CONTRACTHOLDER INFORMATION PRICING OF UNITS The net asset value of the units of each Division is determined on each day the NYSE is open for trading. The net assets are valued based on market quotations as of the close of business of the NYSE, which is currently 4:00 p.m., Eastern Time. Each Division's unit value is calculated separately by dividing the value of the securities held by the Division plus any cash or other assets, less liabilities, by the number of outstanding units of the Division. 40 Amounts contributed and transferred to the Divisions are invested on only four days each year, the INVESTMENT DATE for each of the four Divisions. Because of this, purchase orders are priced at the net asset value that is next computed at the end of the Business Day preceding the next available Investment Date after receipt of your order. Redemption orders and transfers out of the Divisions are priced at the net asset value next computed after receipt of your order. See Part II, Section 2 - "Investment Strategy." DIVIDENDS AND DISTRIBUTIONS Dividends from stocks in each Division's portfolio will be reinvested on the day the dividend is received in additional shares of the stock that paid the dividend. SECTION 4 -- MANAGEMENT THE INVESTMENT ADVISER Integrity Capital Advisors Inc. serves as the investment adviser to the Select Ten Plus Divisions. Integrity Capital Advisors provides investment management and supervisory services to investment companies, and has been in operation since October 1994. Integrity Capital Advisors is a wholly owned subsidiary of ARM. Its offices are located at 515 West Market Street, Louisville, Kentucky 40202. Integrity Capital Advisors has overall responsibility for administering all operations of the Divisions and for monitoring and evaluating the management of the assets of the Divisions by the sub-adviser. Specifically, Integrity Capital Advisors: - provides the overall business management and administrative services necessary for each Division's operation; - furnishes or procures on behalf of the Division the services and information necessary to the proper conduct of the Divisions' business; - acts as liaison among the various service providers to the Divisions, including the custodian, portfolio accounting personnel, sub-adviser, counsel, and auditors; - is responsible for ensuring that the Divisions operate in compliance with applicable legal requirements and for monitoring the sub-adviser for compliance with requirements under applicable law and with the investment policies and restrictions of the Divisions; and - is responsible for monitoring and evaluating the sub-adviser on a periodic basis and considering its performance record with respect to the investment objective and policies of the Divisions. Integrity Capital Advisors is authorized to exercise full investment discretion and make all determinations with respect to the investment of each Division's assets and the purchase and sale of securities for the Divisions in the event that at any time a sub-adviser isn't engaged to manage the assets of the Divisions. For providing investment management services to the Divisions, Integrity Capital Advisors receives a monthly fee based on an annual rate of .50% of each Division's average daily net assets. Integrity Capital Advisors will pay a portion of those fees to National Asset for its services under a sub-advisory agreement at an annual rate of .10% of the Divisions' average daily net assets up to $100 million, and .05% of the Divisions' average daily net assets over $100 million. Integrity Capital Advisors guaranteed it would pay National Asset a minimum sub-advisory fee of $25,000 during the Divisions' first year of operations. Integrity Capital Advisors has agreed to reimburse each Division for operating expenses (excluding management fees) above an annual rate of .35% of the Division's average net assets. Integrity Capital Advisors can change or terminate its expense reimbursement policy for the Divisions, but doesn't currently intend to do so. 41 THE SUB-ADVISER National Asset Management Corporation serves as the sub-adviser to the Divisions and in that capacity provides investment advisory services, including security selection. National Asset makes all determinations with respect to the investment of each Division's assets and the purchase and sale of securities and other investments under the Divisions' investment objectives and policies. National Asset is a Kentucky corporation with executive offices at National City Tower, Louisville, Kentucky 40202. Since its inception in 1979, National Asset has provided customized investment management services to corporations, governmental entities, foundations, endowments, and similar entities. As of December 31, 1998, National Asset managed approximately $10.2 billion in assets. 42 GLOSSARY ACCOUNT VALUE - the value of your contract, which consists of the values of your Fixed Accounts and Variable Account Options added together. ADJUSTED ACCOUNT VALUE - your Account Value increased or decreased by any Market Value Adjustment made to your GRO Account. ANNUITANT ("You," "Your") - the person upon whose life an annuity benefit and death benefit are based. ANNUITY PAYMENT - one of a series of payments made if you choose to annuitize your contract. ARM - ARM Financial Group, Inc. BUSINESS DAY - any day that the New York Stock Exchange is open. CASH VALUE - your Adjusted Account Value reduced by any withdrawal charges and/or any pro rata annual administrative charges that may apply. CONTRACT - your variable annuity contract. DIVISION - an investment division of the Select Ten Plus Divisions. There are four Divisions: the Select Ten Plus Division - March, June, September and December. ENHANCED RATE - a higher rate of interest we may declare for the first year of any GRO Account that exceeds the Guaranteed Interest Rate credited during the rest of the Guarantee Period. FIXED ACCOUNTS - Guaranteed Rate Options and the Systematic Transfer Option. GRO - Guaranteed Rate Option, which offer durations of two, three, five, seven and ten years and lock in a fixed annual effective interest rate. GRO VALUE - the value of a GRO Account. The GRO Value at the expiration of a GRO Account, assuming you haven't withdrawn or transferred any amounts, will be the amount you put in plus interest at the Guaranteed Interest Rate. GUARANTEE PERIOD - the duration of your GRO Account. GUARANTEED INTEREST RATE - a fixed annual effective interest rate that we declare for the duration of your GRO Account. INVESTMENT OPTIONS - Variable Account Options and Fixed Accounts, collectively. MARKET VALUE ADJUSTMENT ("MVA")- an upward or downward adjustment (never below the Minimum Value) made to the value of your GRO Account for withdrawals, surrenders, transfers and certain other transactions made before the GRO Account expires. MINIMUM VALUE - an amount equal to your net allocation to a GRO Account, less prior withdrawals (and associated charges) accumulated at 3% interest annually, less any administrative charge. NON-DIVERSIFIED - a "non-diversified" portfolio may invest a larger portion of its assets in the securities of fewer issuers than could a diversified portfolio. OWNER - the person who owns the contract, and is usually the annuitant. Includes any person named as Joint Owner. PORTFOLIO - an investment portfolio of a mutual fund in which Separate Account II invests its assets. 43 RETIREMENT DATE - the date you elect annuity payments to begin. The Retirement Date can't be later than your 98th birthday, or earlier if required by law. SEPARATE ACCOUNTS - Separate Account II and Separate Account Ten of Integrity Life Insurance Company. Each Separate Account consists of assets that are segregated by Integrity and invested in Variable Account Options. STO - Systematic Transfer Option - our STO provides a guaranteed interest rate; contributions to the STO must be transferred into other Investment Options within one year of your most recent STO contribution. UNIT - a measure of your ownership interest in a Variable Account Option. UNIT VALUE - the value of each unit calculated on any Business Day. VARIABLE ACCOUNT OPTIONS - the various investment options available to you under the contract, consisting of the Divisions and the Portfolios. The value of your contract will reflect the investment performance of the Variable Account Options you choose. WE, OUR AND US - Integrity Life Insurance Company, a subsidiary of ARM Financial Group, Inc. 44 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.
YEAR ENDED DECEMBER 31 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SCUDDER KEMPER VALUE Unit value at beginning of period ......................... $23.47 $18.24 $14.85 $10.34 $10.56 Unit value at end of period ............................... $27.42 $23.47 $18.24 $14.85 $10.34 Number of units outstanding at end of period............... 1,385,723 1,278,296 1,119,634 806,752 733,336 HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH Unit value at beginning of period ......................... $19.74 $14.85 $13.21 $10.17 $9.91 Unit value at end of period ............................... $26.42 $19.74 $14.85 $13.21 $10.17 Number of units outstanding at end of period .............. 1,345,118 1,295,185 1,184,119 1,342,971 1,014,016 ZWEIG ASSET ALLOCATION Unit value at beginning of period ......................... $18.32 $15.23 $13.44 $11.23 $11.33 Unit value at end of period ............................... $17.70 $18.32 $15.23 $13.44 $11.23 Number of units outstanding at end of period .............. 1,761,932 2,107,245 2,434,199 2,541,023 2,558,692 ZWEIG EQUITY (SMALL CAP) Unit value at beginning of period ......................... $18.15 $14.71 $12.58 $10.53 $10.74 Unit value at end of period ............................... $17.80 $18.15 $14.71 $12.58 $10.53 Number of units outstanding at end of period .............. 581,283 592,060 592,469 587,830 567,827 BT EAFE EQUITY INDEX Unit value at beginning of period ......................... $9.42 - - - Unit value at end of period ............................... $11.30 $9.42 Number of units outstanding at end of period .............. 177,704 19,652 1993 1992 INCEPTION* ---- ---- --------- SCUDDER KEMPER VALUE Unit value at beginning of period ......................... $10.07 - $10.00 Unit value at end of period ............................... $10.56 $10.07 Number of units outstanding at end of period............... 547,498 3,540 HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH Unit value at beginning of period ......................... $10.05 - $10.00 Unit value at end of period ............................... $9.91 $10.05 Number of units outstanding at end of period .............. 830,307 18,906 ZWEIG ASSET ALLOCATION Unit value at beginning of period ......................... $9.99 - $10.00 Unit value at end of period ............................... $11.33 $9.99 Number of units outstanding at end of period .............. 1,518,39 11,385 ZWEIG EQUITY (SMALL CAP) Unit value at beginning of period ......................... - - $10.00 Unit value at end of period ............................... $10.74 - Number of units outstanding at end of period .............. 425,500 - BT EAFE EQUITY INDEX Unit value at beginning of period ......................... - - $10.00 Unit value at end of period ............................... Number of units outstanding at end of period .............. 45 BT EQUITY 500 INDEX Unit value at beginning of period ............................ $10.16 - - - Unit value at end of period .................................. $12.90 $10.16 Number of units outstanding at end of period .................1,563,771 224,706 BT SMALL CAP INDEX Unit value at beginning of period ............................ $9.44 - - - Unit value at end of period .................................. $9.11 $9.44 Number of units outstanding at end of period ................. 389,699 70,238 VIP EQUITY-INCOME Unit value at beginning of period ............................ $10.06 - - - Unit value at end of period .................................. $11.08 $10.06 Number of units outstanding at end of period .................1,206,214 155,520 VIP II CONTRAFUND Unit value at beginning of period ............................ $9.73 - - - Unit value at end of period .................................. $12.47 $9.73 Number of units outstanding at end of period ................. 893,485 129,361 VIP III GROWTH & INCOME Unit value at beginning of period ............................ $10.24 - - - Unit value at end of period .................................. $13.10 $10.24 Number of units outstanding at end of period ................ 859,704 119,576 VIP III GROWTH OPPORTUNITIES Unit value at beginning of period ............................ $10.26 - - - Unit value at end of period .................................. $12.62 $10.26 Number of units outstanding at end of period ................. 617,513 78,180 BT EQUITY 500 INDEX Unit value at beginning of period ............................ - - $10.00 Unit value at end of period .................................. Number of units outstanding at end of period ................. BT SMALL CAP INDEX Unit value at beginning of period ............................ - - $10.00 Unit value at end of period .................................. Number of units outstanding at end of period ................. VIP EQUITY-INCOME Unit value at beginning of period ............................ - - $10.00 Unit value at end of period .................................. Number of units outstanding at end of period ................. VIP II CONTRAFUND Unit value at beginning of period ............................ - - $10.00 Unit value at end of period .................................. Number of units outstanding at end of period ................. VIP III GROWTH & INCOME Unit value at beginning of period ............................ - - $10.00 Unit value at end of period .................................. Number of units outstanding at end of period ................ VIP III GROWTH OPPORTUNITIES Unit value at beginning of period ............................ - - $10.00 Unit value at end of period .................................. Number of units outstanding at end of period ................. YEAR ENDED DECEMBER 31 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- JANUS ASPEN CAPITAL APPRECIATION Unit value at beginning of period............................. $9.47 - - - Unit value at end of period................................... $14.77 $9.47 Number of units outstanding at end of period.................. 712,285 92,194 1993 1992 INCEPTION* ---- ---- --------- JANUS ASPEN CAPITAL APPRECIATION Unit value at beginning of period............................. - - $10.00 Unit value at end of period................................... Number of units outstanding at end of period.................. 46 JANUS ASPEN BALANCED Unit value at beginning of period............................... $9.95 - - - Unit value at end of period..................................... $13.19 $9.95 Number of units outstanding at end of period.................... 5,548,134 5,661,088 JANUS ASPEN WORLDWIDE GROWTH Unit value at beginning of period............................... $9.47 - - - Unit value at end of period..................................... $12.04 $9.47 Number of units outstanding at end of period.................... 1,327,696 151,721 JANUS ASPEN MONEY MARKET Unit value at beginning of period............................... $10.08 - - - Unit value at end of period..................................... $10.48 $10.08 Number of units outstanding at end of period.................... 1,709,186 634,249 J.P. MORGAN INTERNATIONAL OPPORTUNITIES Unit value at beginning of period............................... $9.28 - - - Unit value at end of period..................................... $9.59 $9.28 Number of units outstanding at end of period.................... 137,064 41,664 J.P. MORGAN BOND Unit value at beginning of period............................... $10.19 - - - Unit value at end of period..................................... $10.85 $10.19 Number of units outstanding at end of period.................... 1,499,874 418,029 MSDW UNIVERSAL FUNDS ASIAN EQUITY Unit value at beginning of period............................... $8.46 - - - Unit value at end of period..................................... $7.81 $8.46 Number of units outstanding at end of period.................... 476,370 484,093 MSDW UNIVERSAL FUNDS EMERGING MARKETS DEBT Unit value at beginning of period............................... $9.23 - - - Unit value at end of period..................................... $6.52 $9.23 Number of units outstanding at end of period.................... 607,509 653,365 JANUS ASPEN BALANCED Unit value at beginning of period............................... - - $10.00 Unit value at end of period..................................... Number of units outstanding at end of period.................... JANUS ASPEN WORLDWIDE GROWTH Unit value at beginning of period............................... - - $10.00 Unit value at end of period..................................... Number of units outstanding at end of period.................... JANUS ASPEN MONEY MARKET $10.00 Unit value at beginning of period............................... - - Unit value at end of period..................................... Number of units outstanding at end of period.................... J.P. MORGAN INTERNATIONAL OPPORTUNITIES Unit value at beginning of period............................... - - $10.00 Unit value at end of period..................................... Number of units outstanding at end of period.................... J.P. MORGAN BOND Unit value at beginning of period............................... - - $10.00 Unit value at end of period..................................... Number of units outstanding at end of period.................... MSDW UNIVERSAL FUNDS ASIAN EQUITY Unit value at beginning of period............................... - - $10.00 Unit value at end of period..................................... Number of units outstanding at end of period.................... MSDW UNIVERSAL FUNDS EMERGING MARKETS DEBT Unit value at beginning of period............................... - - $10.00 Unit value at end of period..................................... Number of units outstanding at end of period.................... 47 MSDW UNIVERSAL FUNDS HIGH YIELD Unit value at beginning of period................................ $10.11 - - - Unit value at end of period...................................... $10.45 $10.11 Number of units outstanding at end of period..................... 578,494 69,823 MSDW UNIVERSAL FUNDS U.S. REAL ESTATE Unit value at beginning of period................................ $10.15 - - - Unit value at end of period...................................... $ 8.93 $10.15 Number of units outstanding at end of period..................... 252,794 67,357 SELECT TEN PLUS DIVISION JUNE Unit value at beginning of period................................ - - - - Unit value at end of period...................................... $10.43 Number of units outstanding at end of period..................... 195,841 MSDW UNIVERSAL FUNDS HIGH YIELD Unit value at beginning of period................................ - - $10.00 Unit value at end of period...................................... Number of units outstanding at end of period..................... MSDW UNIVERSAL FUNDS U.S. REAL ESTATE Unit value at beginning of period................................ - - $10.00 Unit value at end of period...................................... Number of units outstanding at end of period..................... SELECT TEN PLUS DIVISION JUNE Investment income.............................................. $0.14 Expenses....................................................... $0.11 Net investment income.......................................... $0.03 Net realized and unrealized gains (losses) on securities................................................ $0.40 Net increase (decrease) in unit value.......................... $0.43 Unit value at beginning of period.............................. $10.00 Unit value at end of period.................................... $10.43 Expenses to average net assets................................. 2.20% Portfolio turnover rate........................................ 0.86% Number of units outstanding at end of period................... 195,841 48 YEAR ENDED DECEMBER 31 1998 1997 1996 1995 1994 1993 1992 INCEPTION* ---- ---- ---- ---- ---- ---- ---- --------- SELECT TEN PLUS DIVISION SEPTEMBER Investment income.......................... $0.07 Expenses................................... $0.06 Net investment income...................... $0.02 Net realized and unrealized gains (losses) on securities................... $0.24 Net increase (decrease) in unit value...... $0.26 Unit value at beginning of period.......... $10.00 - - $10.00 Unit value at end of period................ $10.26 Expenses to average net assets............. 2.20% Portfolio turnover rate.................... 1.35% Number of units outstanding at end of period........................... 1,072,954 SELECT TEN PLUS DIVISION DECEMBER Investment income.......................... $- Expenses................................... $-* Net investment loss........................ ($-* Net realized and unrealized gains (losses) on securities................... ($0.18) Net increase (decrease) in unit value...... ($0.18) Unit value at beginning of period.......... $10.00 - - $10.00 Unit value at end of period................ $9.82 Expenses to average net assets............. 2.12% Portfolio turnover rate.................... - Number of units outstanding at end of period........................... 1,478,641 *Less than $0.01
*The unit value for each Variable Account Option at inception is $10.00. The inception date for the Harris Bretall Sullivan & Smith Equity Growth Option is December 8, 1992. The inception date for the Zweig Asset Allocation, Scudder Kemper Value and Zweig Equity Options is December 14, 1992. The inception date for the EAFE Equity Index, Equity 500 Index, Small Cap Index, VIP Equity-Income, VIP II Contrafund,VIP III Growth & Income,VIP III Growth Opportunities, Janus Aspen Capital Appreciation, Janus Aspen Balanced, Janus Aspen Worldwide Growth, Janus Aspen Money Market, J.P.Morgan International Opportunities, J.P. Morgan Bond, MSDW Universal Funds Asian Equity, MSDW Universal Funds Emerging Markets Debt, MSDW Universal Funds High Yield, and MSDW Universal Funds U.S. Real Estate Options is October 1, 1997. The inception date for the Select Ten Plus Division June is June 30, 1998. The inception date for the Select Ten Plus Division September is September 30, 1998. The inception date for the Select Ten Plus Division December is December 31, 1998. The inception date for the Select Ten Plus Division March is March 31, 1999. The inception date for the VIP Growth Portfolio and VIP III Mid Cap Portfolio is May 1, 1999. Because the VIP Growth Portfolio, VIP III Mid Cap Portfolio and Select Ten Plus Division March had not yet begun operations as of the end of 1998, we have provided no data for these Variable Account Options. 49 APPENDIX B ILLUSTRATION OF A MARKET VALUE ADJUSTMENT Contribution: $50,000.00 GRO Account duration: 7 Years Guaranteed Interest Rate: 5% Annual Effective Rate The following examples illustrate how the Market Value Adjustment and the contingent withdrawal charge may affect the values of a contract upon a withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the Example under "Table of Annual Fees and Expenses" in this Prospectus. In these examples, the withdrawal occurs at the end of the three year period after the initial contribution. The Market Value Adjustment operates in a similar manner for transfers. Contingent withdrawal charges don't apply to transfers. The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of the GRO Account. After three years, the GRO Value is $57,881.25. It is also assumed for these examples that you haven't made any prior partial withdrawals or transfers. The Market Value Adjustment will be based on the rate we are crediting (at the time of the withdrawal) on new contributions to GRO Accounts of the same duration as the time remaining in your GRO Account, rounded to the next lower number of complete months. If we don't declare a rate for the exact time remaining, we'll use a formula to find a rate using GRO Accounts of durations closest to (next higher and next lower) the remaining period described above. Three years after the initial contribution, there would have been four years remaining in your GRO Account. These examples also show the withdrawal charge, which would be calculated separately. EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT: A downward Market Value Adjustment results from a full or partial withdrawal that occurs when interest rates have increased. Assume interest rates have increased three years after the initial contribution and that at that time, we're crediting 6.25% for a four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment, applying the above formula would be: 48/12 48/12 -0.0551589 = [(1 + .05) / (1 + .0625 + .0025) ] - 1 The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value: -$3,192.67 = -0.0551589 X $57,881.25 The Market Adjusted Value would be: $54,688.58 = $57,881.25 - $3,192.67 A withdrawal charge of 6% would be assessed against the $50,000 original contribution: $3,000.00 = $50,000.00 X .06 Thus, the amount payable on a full withdrawal would be: $51,688.58 = $57,881.25 - $3,192.67 - $3,000.00 50 If instead of a full withdrawal, $20,000 was requested, we would first determine the free withdrawal amount: $5,788.13 = $57,881.25 X .10 Free Amount = $5,788.13 The non-free amount would be: $14,211.87 = $20,000.00 - $5,788.13 The Market Value Adjustment, which is only applicable to the non-free amount, would be - $783.91 = -0.0551589 X $14,211.87 The withdrawal charge would be: $957.18 = [($14,211.87+ $783.91)/(1 - .06)] - ($14,211.87+ 783.91) Thus, the total amount needed to provide $20,000 after the Market Value Adjustment and withdrawal charge would be: $21,741.09 = $20,000.00 + $783.91 + $957.18 The ending Account Value would be: $36,140.16 = $57,881.25 - $21,741.09 EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT: An upward Market Value Adjustment results from a full or partial withdrawal that occurs when interest rates have decreased. Assume interest rates have decreased three years after the initial contribution and we're crediting 4% for a four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment, applying the formula set forth in the prospectus, would be: 48/12 48/12 .0290890 = [(1 + .05) / (1 + .04 + .0025) ] - 1 The Market Value Adjustment is an increase of $1,683.71 to the GRO Value: $1,683.71 = .0290890 X $57,881.25 The Market Adjusted Value would be: $59,564.96 = $57,881.25 + $1,683.71 A withdrawal charge of 6% would be assessed against the $50,000 original contribution: $3,000.00 = $50,000.00 X .06 Thus, the amount payable on a full withdrawal would be: $56,564.96 = $57,881.25 + $1,683.71 - $3,000.00 If instead of a full withdrawal, $20,000 was requested, the free withdrawal amount and non-free amount would first be determined as above: 51 Free Amount = $ 5,788.13 Non-Free Amount = $14,211.87 The Market Value Adjustment would be: $413.41 = .0290890 X $14,211.87 The withdrawal charge would be: $880.75 = [($14,211.87 - $413.41)/(1 - .06)] - ($14,211.87 - $413.41) Thus, the total amount needed to provide $20,000 after the Market Value Adjustment and withdrawal charge would be: $20,467.34 = $20,000.00 - $413.41 + $880.75 The ending Account Value would be: $37,413.91 = $57,881.25 - $20,467.34 Actual Market Value Adjustments may have a greater or lesser impact than shown in the examples, depending on the actual change in interest crediting rate and the timing of the withdrawal or transfer in relation to the time remaining in the GRO Account. Also, the Market Value Adjustment can never decrease the Account Value below your premium plus 3% interest, before any applicable charges. Account values less than $50,000 will be subject to a $30 annual charge. The above examples will be adjusted to comply with applicable state regulation requirements for contracts issued in certain states. 52 APPENDIX C - TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION Part 1 - Integrity and Custodian Part 2 - Distribution of the Contracts Part 3 - Investment Restrictions and Policies of the Select Ten Plus Divisions Part 4 - Management of Separate Account Ten Part 5 - Portfolio Transactions and Brokerage Part 6 - Performance Information Part 7 - Determination of Accumulation Unit Values Part 8 - Tax Favored Retirement Programs Part 9 - Financial Statements If you would like to receive a copy of the Statement of Additional Information, please complete the form below and send it to: Administrative Office Integrity Life Insurance Company P.O. Box 740074 Louisville, KY 40201-0074 ATTN: Request for SAI of Separate Account II (Pinnacle) and Separate Account Ten Name: ------------------------------------------------- Address ----------------------------------------------- City: State: Zip: --------------- -------- --------------- 53 STATEMENT OF ADDITIONAL INFORMATION MAY 1, 1999 FOR PINNACLE FLEXIBLE PREMIUM VARIABLE ANNUITY ISSUED BY INTEGRITY LIFE INSURANCE COMPANY AND FUNDED THROUGH ITS SEPARATE ACCOUNT II AND SEPARATE ACCOUNT TEN TABLE OF CONTENTS
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. . . . . . . . . . . . . . . . . . . . . . 7 Part 6 - Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Part 7 - Determination of Accumulation Unit Values . . . . . . . . . . . . . . . . . . .15 Part 8 - Tax-Favored Retirement Programs . . . . . . . . . . . . . . . . . . . . . . . .15 Part 9 - Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
This Statement of Additional Information (SAI) is not a prospectus. It should be read in conjunction with the prospectus for the contracts, dated May 1, 1999. For definitions of special terms used in the SAI, please refer to the prospectus. A copy of the prospectus to which this SAI relates is available at no charge by writing the Administrative Office at Integrity Life Insurance Company ("Integrity"), P.O. Box 740074, Louisville, Kentucky 40201-0074, or by calling 1-800-325-8583. 1 PART 1 - INTEGRITY AND CUSTODIAN Integrity Life Insurance Company is an Ohio stock life insurance company organized in 1966 that sells life insurance and annuities. Its principal executive offices are located at 515 West Market Street, Louisville, Kentucky, 40202. Integrity, the depositor of Separate Account II and Separate Account Ten, is a wholly owned subsidiary of Integrity Holdings, Inc., a Delaware corporation that's a holding company engaged in no active business. Integrity owns 100% of the stock of National Integrity Life Insurance Company, a New York stock life insurance corporation. All outstanding shares of Integrity Holdings, Inc. are owned by ARM Financial Group, Inc. (ARM), a Delaware corporation that's a financial services company focusing on the long-term savings and retirement marketplace by providing retail and institutional products and services throughout the United States. ARM owns 100% of the stock of (i) ARM Securities Corporation (ARM SECURITIES), a Minnesota corporation, registered with the SEC as a broker-dealer and a member of the National Association of Securities Dealers, Inc., (ii) Integrity Capital Advisors, Inc., a Delaware corporation registered with the SEC as an investment adviser, (iii) SBM Certificate Company, a Minnesota corporation registered with the SEC as an issuer of face-amount certificates, and (iv) ARM Transfer Agency, Inc., a Delaware corporation registered with the SEC as a transfer and dividend disbursing agency. ARM is 100% publicly owned, trading on the New York Stock Exchange (NYSE). No one has the direct or indirect power to control ARM, except power he or she may have by virtue of his or her capacity as a director or executive officer of ARM; no individual beneficially owns more than 5% of the common shares. ARM has provided substantially all of the services required to be performed on behalf of Separate Account II since 1994, and on behalf of Separate Account Ten since its inception. Total fees paid to ARM by Integrity for management services, including services applicable to Separate Account II and Separate Account Ten, in 1996 were $13,823,048, in 1997 were $19,307,552 and in 1998 were $27,158,002. Integrity is the custodian for the shares of Portfolios owned by Separate Account II. Investors Fiduciary Trust Company is the custodian for the shares of stocks owned by Separate Account Ten. The shares are held in book-entry form. Reports and marketing materials, from time to time, may include information concerning the rating of Integrity, as determined by A.M. Best Company, Moody's Investors Service, Inc., Standard & Poor's Corporation, Duff & Phelps Corporation, or other recognized rating services. Integrity is currently rated "A" (Excellent) by A.M. Best Company, and has received claims paying ability ratings of "A" (Good) from Standard & Poor's Corporation, "Baa1" (Adequate) from Moody's Investors Service, Inc., and "A+" (High) from Duff and Phelps Credit Rating Company. However, Integrity doesn't guarantee the investment performance of the portfolios, and these ratings don't reflect protection against investment risk. Under prior management, Integrity was subject to a consent order in the State of Florida that precluded it from writing new business in Florida from May, 1992 to November, 1994. The consent order was entered into on May 6, 1992 as a result of noncompliance with certain investment restrictions under Florida law. Due to the substantial asset restructuring and capital infusions involved with Integrity's acquisition by ARM in November, 1993, Integrity was able to comply with the investment limitations of the State of Florida. A request for full relief from the consent order was granted by the Florida Department of Insurance on November 4, 1994. TAX STATUS OF INTEGRITY Integrity is taxed as a life insurance company under Part I of Subchapter L of the Internal Revenue Code of 1986, as amended (the CODE). Since the Separate Accounts aren't separate entities from us and their operations form a part of us, they aren't taxed separately as "regulated investment companies" under Subchapter M of the Code. Investment income and realized capital gains on the assets of the Separate Accounts are reinvested and taken into account in determining the accumulation value. Under existing federal income tax law, the Separate Accounts' investment income, including realized net capital gains, isn't taxed to us. We can make a tax deduction if federal tax laws change to include these items in our taxable income. PART 2 - DISTRIBUTION OF THE CONTRACTS ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter of the contracts. ARM Securities is registered with the SEC as a broker-dealer and is a member in good standing of the National Association of Securities 2 Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville, Kentucky 40202. The contracts are offered through ARM Securities on a continuous basis. We generally pay a maximum distribution allowance of 7.5% of initial contributions, plus .50% trail commission paid on Account Value after the eighth Contract Year. The amount of distribution allowances paid was $12,537,715 for the year ended December 31, 1998, $1,570,251 for the year ended December 31, 1997 and $617,264 for the year ended December 31, 1996. Distribution allowances weren't retained by ARM Securities during these years. Integrity may from time to time pay or allow additional promotional incentives, in the form of cash or other compensation, to broker-dealers that sell contracts. In some instances, those types of incentives may be offered only to certain broker-dealers that sell or are expected to sell certain minimum amounts of the contracts during specified time periods. PART 3 - INVESTMENT RESTRICTIONS AND POLICIES OF THE SELECT TEN PLUS DIVISIONS INVESTMENT RESTRICTIONS The investment objective of each Division is to seek total return. The Divisions' investment strategy, objective and policies are described in Part II of the prospectus under the captions "Investment Strategy" and "Investment Objective and Policies." The following are the Divisions' fundamental investment limitations, which can't be changed without shareholder approval. Each Division: 1. May not borrow money, except that each Division may borrow up to 5% of its total assets (not including the amount borrowed) from a bank for temporary or emergency purposes (but not for leverage or the purchase of investments). 2. May not issue senior securities, except as permitted under the 1940 Act. May not act as an underwriter of another issuer's securities, except to the extent that the Divisions may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of portfolio securities. 3. May not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments. 4. May not make loans if, as a result, more than 33 1/3% of that Division's total assets would be lent to other persons, except through (i) purchases of debt securities or other debt instruments, or (ii) engaging in repurchase agreements. 5. May not purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this won't prohibit the Divisions from purchasing or selling securities or other instruments backed by real estate or of issuers engaged in real estate activities). The following are the Divisions' non-fundamental operating policies, which may be changed by the Board of Managers of the Divisions without shareholder approval. Each Division may not: 1. Sell securities short, unless the Division owns or has the right to obtain securities equivalent in kind and amount to the securities sold short, or unless it covers such short sale as required by the current rules and positions of the SEC or its staff. 2. Purchase securities on margin, except that each Division may obtain such short-term credits as are necessary for the clearance of transactions. 3. Invest in illiquid securities if, as a result of such investment, more than 15% of its net assets would be invested in illiquid securities, or such other amounts as may be permitted under the 1940 Act. 3 4. Purchase securities of other investment companies except in compliance with the 1940 Act and applicable state law. 5. Make any loans other than loans of portfolio securities, except through (i) purchases of debt securities or other debt instruments, or (ii) engaging in repurchase agreements. Except for the fundamental investment limitations listed above and the Divisions' investment objective, the other investment policies described in the prospectus and this SAI aren't fundamental and may be changed with the approval of the Divisions' Board of Managers. Unless noted otherwise, if a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage resulting from a change in the Divisions' assets (i.e., due to cash inflows or redemptions) or in market value of the investment or the Divisions' assets won't be considered a violation of that restriction. INVESTMENT POLICIES AND TECHNIQUES The following information supplements the discussion of the Divisions' investment strategy, objective, policies and techniques that are described in Part II of the prospectus under the captions "Investment Strategy," "Investment Objective and Policies" and "Risk Factors." LENDING OF PORTFOLIO SECURITIES. Each Division is authorized to lend up to 33 1/3% of the total value of its portfolio securities to broker-dealers or institutional investors that the investment adviser and sub-adviser determine are qualified, but only when the borrower maintains with the Divisions' custodian bank collateral, either in cash or money market instruments, in an amount at least equal to the market value of the securities loaned, plus accrued interest and dividends, determined on a daily basis and adjusted accordingly. Although each Division is authorized to lend, the Divisions don't presently intend to engage in lending. In determining whether to lend securities to a particular broker-dealer or institutional investor, the investment adviser and sub-adviser will consider, and during the period of the loan will monitor, all relevant facts and circumstances, including the creditworthiness of the borrower. The Divisions will retain authority to terminate any loans at any time. The Divisions may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or money market instruments held as collateral to the borrower or placing broker. The Divisions will receive reasonable interest on the loan or a flat fee from the borrower and amounts equivalent to any dividends, interest or other distributions on the securities loaned. The Divisions will retain record ownership of loaned securities to exercise beneficial rights, such as voting and subscription rights and rights to dividends, interest or other distributions, when retaining such rights is considered to be in the Divisions' interest. REPURCHASE AGREEMENTS. The Divisions may enter into repurchase agreements with certain banks or non-bank dealers. In a repurchase agreement, a Division buys a security at one price, and at the time of sale, the seller agrees to repurchase the obligation at a mutually agreed upon time and price (usually within seven days). The repurchase agreement, thereby, determines the yield during the purchaser's holding period, while the seller's obligation to repurchase is secured by the value of the underlying security. The investment adviser and sub-adviser will monitor, on an ongoing basis, the value of the underlying securities to ensure that the value always equals or exceeds the repurchase price plus accrued interest. Repurchase agreements could involve certain risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon the Divisions' ability to dispose of the underlying securities. Although no definitive creditworthiness criteria are used, the investment adviser reviews the creditworthiness of the banks and non-bank dealers with which any Division enters into repurchase agreements to evaluate those risks. The Divisions may, under certain circumstances, deem repurchase agreements collateralized by U.S. government securities to be investments in U.S. government securities. PART 4 - MANAGEMENT OF SEPARATE ACCOUNT TEN BOARD OF MANAGERS OF SEPARATE ACCOUNT TEN The business and affairs of Separate Account Ten are managed under the direction of a Board of Managers, currently consisting of four (4) members, or Managers, according to a set of rules adopted by the Board of Managers called "Rules 4 and Regulations of Separate Account Ten". The Board of Managers has responsibility for the investment management related operations of Separate Account Ten and matters arising under the 1940 Act. The Board of Managers doesn't have responsibility for the payment of obligations under the contracts and administration of the contracts. These matters are Integrity's responsibility. The day-to-day operations of Separate Account Ten are the responsibility of its officers. The names, addresses, and ages of the Managers and the officers of Separate Account Ten, together with information as to their principal business occupations during the past five years, are listed below. NAME, AGE, AND ADDRESS OF PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS - ------------------------- ------------------------------------------- MANAGER - ------- John R. Lindholm (50)* President of Integrity and Vice President-Chief 515 West Market Street Marketing Officer of National Integrity since Louisville, KY 40202 November 26, 1993; Executive Vice President-Chief Marketing Officer of ARM Financial Group, Inc. since July 27, 1993; since March 1992 Chief Marketing Officer of Analytical Risk Management L.P. From June 1990 to February 1992, Chief Marketing Officer and a Managing Director of the ICH Capital Management Group, ICH Corporation, Louisville, Kentucky; prior thereto, Chief Marketing Officer and Managing Director for Capital Holding Corporation's Accumulation and Investment Group. Director of The Legends Fund, Inc. since October, 1993. Director of the mutual funds in the State Bond Group of mutual funds from June 1995 to December 1996. John Katz (60) Investment banker since January 1991; Chairman 10 Hemlock Road and chief Executive Officer, Sam's Restaurant Hartsdale, NY 10530 Group, Inc. (a restaurant holding company), from June 1991 to August 1992; Executive Vice President (from January 1989 to January 1991) and Senior Vice President (from December 1985 to January 1989), Equitable Investment Corporation (an indirect wholly-owned subsidiary of The Equitable Life Assurance Society of the United States, through which it owned and managed its investment operations). Director of The Legends Fund, Inc. since November, 1992. Director of the mutual funds in the State Bond Group of mutual funds from June 1995 to December 1996. William B. Faulkner (71) Director since November 1996. President, William 240 East Plato Blvd. Faulkner & Associates (business and institutional St. Paul, MN 55107 adviser), since 1986; Consultant to American Hoist & Derrick Company (construction equipment manufacturer), from 1986 to 1989; prior thereto, Vice President and Assistant to the President, American Hoist & Derrick Company. Director of The Legends Fund, Inc. since November, 1995. Director of the mutual funds in the State Bond Group of mutual funds from June 1995 to December 1996. Chris LaVictoire Mahai (44) President, clavm, inc. (a firm that provides 425 Portland Avenue consulting, project management and infomediary Minneapolis, MN 55488 services to organizations interested in creating and implementing innovative business, community and marketplace strategies and initiatives); Poynter Fellow, the Poynter Institute for Media Studies; Board Member (Cowles Media) Star Tribune Foundation, from September, 1992 to June, 1998; Senior Vice President, Cowles Media Company/Star Tribune, from August, 1993 to June 1998; Director of The Legends Fund, Inc. since February of 1998; Director of the mutual funds in the State Bond Group of mutual funds, June 1984 to December 1996. * Mr. Lindholm is an INTERESTED PERSON, as defined in the 1940 Act, by virtue of his position with ARM Financial Group, Inc. 5 THE INVESTMENT ADVISER Integrity Capital Advisors is the investment adviser to Separate Account Ten under an investment advisory agreement. Integrity Capital Advisors is a wholly owned subsidiary of ARM and is registered as an investment adviser under the Investment Advisers Act of 1940. Its offices are located at 515 West Market Street, Louisville, Kentucky 40202. Subject to the direction of the Board of Managers, Integrity Capital Advisors is responsible for providing all supervisory and management services reasonably necessary for the operation of Separate Account Ten other than those investment advisory services performed by the sub-adviser. These services include, but aren't limited to, (i) coordinating all matters relating to the functions of the sub-adviser, custodian, accountants, attorneys, and other parties performing services or operational functions for Separate Account Ten, (ii) providing Separate Account Ten, at Integrity Capital Advisor's expense, with the services of a adequate competent staff to perform such administrative and clerical functions as are necessary to provide effective supervision and administration of Separate Account Ten, (iii) making its officers and employees available to the Board of Managers and officers of Separate Account Ten for consultation and discussions regarding the supervision and administration of Separate Account Ten, (iv) maintaining or supervising the maintenance by the sub-adviser or third parties approved by Separate Account Ten of such books and records as may be required by applicable federal or state law, (v) preparing or supervising the preparation by third parties approved by Separate Account Ten of all federal, state and local tax returns and reports of Separate Account Ten required by applicable law, (vi) preparing, filing and arranging for the distribution of proxy materials and periodic reports to Owners as required by applicable law, (vii) preparing and arranging for the filing of such registration statements and other documents with the SEC and other federal and state regulatory authorities as may be required by applicable law, (viii) taking such other action with respect to Separate Account Ten as may be required by applicable law, including without limitation, the rules and regulations of the SEC and other regulatory agencies, and (ix) providing Separate Account Ten, at Integrity Capital Advisor's expense, with adequate personnel, office space, communications facilities, and other facilities necessary for its operations as contemplated in the investment advisory agreement. Other responsibilities of Integrity Capital Advisors are described in the prospectus. Integrity Capital Advisors is authorized to exercise full investment discretion and make all determinations with respect to the investment of the Division's assets and the purchase and sale of securities for the Divisions if at any time a sub-adviser isn't engaged to manage the Divisions' assets. If that should occur, Integrity Capital Advisors will be entitled to a fee that would otherwise be paid to the sub-adviser. This fee would be in addition to its usual compensation for services as investment adviser. The Divisions pay Integrity Capital Advisors a monthly fee based on an annual rate of .50% of the Division's average daily net assets. Integrity Capital Advisors will pay a portion of those fees to National Asset Management Corporation (NATIONAL ASSET) for its services under the sub-advisory agreement at an annual rate of .10% of the Division's average daily net assets up to $100 million and .05% of the Division's average daily net assets in excess of $100 million. Integrity Capital Advisers has guaranteed a minimum sub-advisory fee of $25,000 to National Asset during the Divisions' first year of operations. Integrity Capital Advisors has agreed to reimburse the Divisions for operating expenses (excluding management fees) above an annual rate of .35% of average net assets for the Divisions. Integrity Capital Advisors has reserved the right to withdraw or modify its policy of expense reimbursement for the Portfolios, but has no current intention to do so during 1999. The following table shows the amount of advisory fees the Divisions (other than Select Ten Plus Division March, which had not yet begun operations) paid to Integrity Capital Advisors, and the amount of sub-advisory fees Integrity Capital Advisors paid to National Asset, for the period ended December 31, 1998.
- -------------------------------------------------------------------------------- Amount Integrity Amount Division Capital Advisors Paid to Integrity Paid to National Capital Advisors Asset - -------------------------------------------------------------------------------- Select Ten Plus Division June $ 4,961.03 $3,997.83 - -------------------------------------------------------------------------------- Select Ten Plus Division September $14,134.01 $2,826.84 - -------------------------------------------------------------------------------- Select Ten Plus Division December $ 199 $ 0 - --------------------------------------------------------------------------------
6 THE SUB-ADVISER National Asset is the sub-adviser to the Divisions and in that capacity provides investment advisory services for the Divisions including security selection. Under the supervision of the Board of Managers and Integrity Capital Advisors, National Asset will provide a continuous investment program for the Divisions and will determine the composition of its assets, including determinations about the purchase, retention and sale of securities, cash and other investments contained in the Division's portfolio. National Asset will also provide investment research and conduct a continuous program of evaluation, investment, sales and reinvestment of the Division's assets. National Asset will receive a monthly fee for its services based on an annual rate of .10% of the Division's average daily net assets up to $100 million and .05% of the Division's average daily net assets in excess of $100 million. Integrity Capital Advisers has guaranteed a minimum sub-advisory fee of $25,000 to National Asset during the Divisions' first year of operations. The table above shows actual sub-advisory fee amounts paid. PART 5 - PORTFOLIO TRANSACTIONS AND BROKERAGE National Asset makes investment decisions for the Divisions, under the supervision of the Board of Managers of Separate Account Ten and Integrity Capital Advisors. National Asset has investment advisory clients other than the Divisions. A particular security may be bought or sold by National Asset for certain clients even though it could have been bought or sold for other clients at the same time. In the event that two or more clients simultaneously purchase or sell the same security, each day's transactions in that security are, as much as possible, allocated between the clients in a manner deemed fair and reasonable by National Asset. Although there is no specified formula for allocating these transactions, the various allocation methods used by National Asset, and the results of those allocations, are subject to the periodic review by Integrity Capital Advisors and the Board of Managers of Separate Account Ten. National Asset places all orders for the purchase and sale of securities, options, and futures contracts for the Divisions through a substantial number of brokers and dealers. In executing transactions, National Asset will attempt to obtain the best execution for the Divisions, taking into account such factors as price (including the applicable brokerage commission or dollar spread), size of order, the nature of the market for the security, the timing of the transaction, the reputation, experience and financial stability of the broker-dealer involved, the quality of the service, the difficulty of execution and operational facilities of the firms involved, and the firm's risk in positioning a block of securities. In transactions on stock exchanges in the United States, payments of brokerage commissions are negotiated. In making purchases and sales of securities on U.S. stock exchanges for the Divisions, National Asset may pay higher commission rates than the lowest available when National Asset believes there is value in doing so in the form of the brokerage and research services provided by the broker effecting the transaction, as described below. In the case of securities traded on some foreign stock exchanges, brokerage commissions may be fixed and National Asset may be unable to negotiate commission rates for these transactions. In the case of securities traded on the over-the-counter markets, there is generally no stated commission, but the price includes an undisclosed commission or markup. It has for many years been a common practice in the investment advisory business for advisers of investment companies and other institutional investors to receive research services from broker-dealers which execute portfolio transactions for the advisers' clients. Consistent with this practice, National Asset may receive research services for the Divisions from many broker-dealers with which National Asset places the Divisions' portfolio transactions. These services, which in some cases may also be purchased for cash, include such matters as general economic and security market reviews, industry and company reviews, evaluations of securities and recommendations as to the purchase and sale of securities. Some of these services may be of value to National Asset and its affiliates in advising its various clients (including the Divisions), although not all of these services are necessarily useful and of value in managing the Divisions. The sub-advisory fee paid by Integrity Capital Advisors to National Asset isn't reduced because National Asset and its affiliates receive such services. Section 28(e) of the Securities Exchange Act of 1934, allows National Asset to cause the Divisions to pay a broker-dealer a disclosed commission for handling a securities transaction for the Divisions that is more than the commission that another broker-dealer would have charged for the same transaction because of the value of the "brokerage and research services" provided by the broker-dealer. Brokerage and research services include (i) furnishing advice as to the value of securities, the advisability of investing in purchasing or selling securities, and the availability of securities or purchasers or sellers of securities, (ii) furnishing analyses and reports concerning issuers, industries, securities, 7 economic factors and trends, portfolio strategy, and the performance of accounts, and (iii) effecting securities transactions and performing functions incidental thereto (e.g., clearance, settlement, and custody). National Asset may place orders for the purchase and sale of exchange-listed portfolio securities with a broker-dealer that is an affiliate of National Asset where, in the judgment of National Asset, that firm will be able to obtain a price and execution at least as favorable as other qualified brokers. Pursuant to rules of the SEC, a broker-dealer that is an affiliate of the investment adviser or sub-adviser, or, if it is also a broker-dealer, the sub-adviser, may be paid for handling portfolio transactions for an account on a national securities exchange of which the broker-dealer is a member if the transaction is "executed" on the floor of the exchange by another broker that isn't an "associated person" of the affiliated broker-dealer or sub-adviser, and if there is in effect a written contract between the sub-adviser and the account expressly permitting the affiliated broker-dealer or sub-adviser to receive payment. The sub-advisory agreement provides that National Asset may retain compensation on transactions effected for the Divisions in accordance with the terms of these rules. SEC rules further require that commissions paid to an affiliated broker-dealer or sub-adviser by the account on exchange transactions not exceed "usual and customary brokerage commission". The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time". The Board of Managers has adopted procedures for evaluating the reasonableness of commissions paid to broker-dealers that are affiliated with National Asset and will review these procedures periodically. PART 6 - PERFORMANCE INFORMATION Each Variable Account Option may from time to time include the Average Annual Total Return, the Cumulative Total Return, and Yield of its units in advertisements or in other information furnished to shareholders. The Janus Aspen Money Market Option may also from time to time include the Yield and Effective Yield of its units in information furnished to shareholders. Performance information is computed separately for each Option in accordance with the formulas described below. At any time in the future, total return and yields may be higher or lower than in the past and there is no guarantee that any historical results will continue. TOTAL RETURNS Total returns reflect all aspects of an Option's return, including the automatic reinvestment by the Option of all distributions and the deduction of all applicable charges to the Option on an annual basis, including mortality risk and expense charges, the annual administrative charge and other charges against contract values. Quotations also will assume a termination (surrender) at the end of the particular period and reflect the deductions of the contingent withdrawal charge, if applicable. Total returns may be shown at the same time that don't take into account deduction of the contingent withdrawal charge, and/or the annual administrative charge. Nonstandardized "total return" will be calculated in a similar manner and for the same time periods as the average annual total return and for three years except total return will assume an initial investment of $60,000 and won't reflect the deduction of any applicable contingent withdrawal charge, which, if reflected, would decrease the level of performance shown. The contingent withdrawal charge isn't reflected because the contracts are designed for long term investment. We use an assumed initial investment of $60,000 because that figure more closely approximates the size of a typical contract than does the $1,000 figure used in calculating the standardized average annual total return quotations. The amount of the hypothetical initial investment assumed affects performance because the annual administrative charge is a fixed per contract charge. For purposes of determining these investment results, the actual investment performance of each fund is reflected as of the date each fund commenced operations, although the Contracts weren't available at that time. An AVERAGE ANNUAL TOTAL RETURN shows the hypothetical yearly return that would produce the same cumulative total return if the Investment Option experienced exactly the same return each year for the entire period shown. Because the performance will fluctuate on a year-by-year basis, the average annual total returns tend to show a smooth result that won't mirror the actual performance, even though the end result will be the same. Investors should realize that the Option's performance isn't constant over time, but changes from year to year, and that the average annual 8 returns represent the averages of historical figures as opposed to the actual historical performance of an Option during any portion of the period illustrated. Average annual returns are calculated pursuant to the following formula: P(1+T) TO THE POWER OF n = ERV, where P is a hypothetical initial payment of $1,000, T is the average annual total return, n is the number of years, and ERV is the withdrawal value at the end of the period. CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change in the value of a hypothetical investment in the Option over a stated period of time. In addition to the period since inception, cumulative total returns may be calculated on a year-to-date basis at the end of each calendar month in the current calendar year. The last day of the period for year-to-date returns is the last day of the most recent calendar month at the time of publication. YIELDS Some Options may advertise yields. Yields quoted in advertising reflect the change in value of a hypothetical investment in the Option over a stated period of time, not taking into account capital gains or losses or the imposition of any contingent withdrawal charge. Yields are annualized and stated as a percentage. CURRENT YIELD and EFFECTIVE YIELD are calculated for the Janus Money Market Option. Current Yield is based on the change in the value of a hypothetical investment (exclusive of capital changes) over a particular 7-day period, less a hypothetical charge reflecting deductions from contract values during the period (the BASE PERIOD), and stated as a percentage of the investment at the start of the base period (the BASE PERIOD RETURN). The base period return is then annualized by multiplying by 365/7, with the resulting yield figure carried to at least the nearest hundredth of one percent. Effective yield assumes that all dividends received during an annual period have been reinvested. This compounding effect causes effective yield to be higher than current yield. Calculation of effective yield begins with the same base period return used in the calculation of current yield, which is then annualized to reflect weekly compounding pursuant to the following formula: 365/7 Effective Yield = {(Base Period Return) + 1) } - 1 9
SEC Standardized Average Annual Return (1). All figures are unaudited. ----------------------------------------------------------------------- FOR THE PERIOD ENDING: 12/31/98 ACCOUNT VARIABLE OPTIONS INCEPTION LIFE OF DATE (2) 1 YEAR 5 YEAR 10 YEAR ACCOUNT BT Insurance Funds Trust - EAFE Equity Index 10/22/97 12.97% n/a n/a 5.01% BT Insurance Funds Trust - Equity 500 Index 10/1/97 19.98 n/a n/a 17.23 BT Insurance Funds Trust - Small Cap Index 10/7/97 -10.50 n/a n/a -13.13 Fidelity's VIP Equity-Income 10/2/97 3.12 n/a n/a 3.04 Fidelity's VIP II Contrafund 10/2/97 21.23 n/a n/a 14.00 Fidelity's VIP III Growth & Income 10/2/97 20.84 n/a n/a 18.82 Fidelity's VIP III Growth Opportunities 10/2/97 15.93 n/a n/a 15.13 Harris Bretall Sullivan & Smith Equity Growth 12/7/92 26.83 21.40 n/a 17.23 Janus Aspen Series Balanced 10/9/97 25.47 n/a n/a 19.84 Janus Aspen Series Capital Appreciation 10/10/97 48.98 n/a n/a 32.18 Janus Aspen Series Worldwide Growth 10/2/97 20.18 n/a n/a 10.65 JP Morgan Bond 10/2/97 -.45 n/a n/a 1.23 JP Morgan International Opportunities 10/2/97 -3.68 n/a n/a -9.03 MSDW Universal Funds Asian Equity 10/22/97 -14.71 n/a n/a -24.94 MSDW Universal Funds Emerging Markets Debt 10/3/97 -36.33 n/a n/a -35.31 MSDW Universal Funds High Yield 10/16/97 -3.61 n/a n/a -2.07 MSDW Universal Funds U.S. Real Estate 10/16/97 -19.06 n/a n/a -14.93 Scudder Kemper Value 12/21/92 9.79 20.74 n/a 18.07 Zweig Asset Allocation 12/14/92 -10.39 8.91 n/a 9.70 Zweig Equity (Small Cap) 1/4/93 -8.94 10.29 n/a 9.80 Select Ten Plus June 6/30/98 n/a n/a n/a .72 Select Ten Plus September 9/30/98 n/a n/a n/a 2.73 Select Ten Plus December 12/31/98 n/a n/a n/a -107.87
1) Standard average annual return reflects past fund performance based on a $10,000 hypothetical investment over the period indicted. The performance figures reflect the deduction of mortality and expense and administrative charges totaling 1.35%. They also reflect any withdrawal charges that would apply if any owner terminated the policy at the end of the period, but exclude deductions for applicable premium tax charges. Surrender charges are 8% in year one, declining 1% annually in years one through seven, 0% thereafter. (2) Inception date of the variable account option represents first trade date. Returns for accounts in operation for less than one year aren't annualized. 10 FOR THE PERIOD ENDING: 12/31/98 RETURNS WITHOUT SURRENDER CHARGES (1) All figures are unaudited.
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN ----------------------- --------------------- FUND INCEPTION LIFE OF VARIABLE OPTIONS DATE (3) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR BT Insurance Funds Trust - EAFE Equity Index 6/21/96 n/a n/a n/a 21.58% 19.97% n/a n/a n/a BT Insurance Funds Trust - Equity 500 Index 12/31/92 93.72 148.10 n/a 159.40 26.98 24.66 19.93 n/a BT Insurance Funds Trust - Small Cap Index 8/13/96 n/a n/a n/a 32.51 -3.50 n/a n/a n/a Fidelity's VIP Equity-Income 10/9/86 56.89 120.85 272.77 339.65 10.12 16.20 17.17 14.06 Fidelity's VIP II Contrafund 1/3/95 87.77 n/a n/a 158.87 28.23 23.37 n/a n/a Fidelity's VIP III Growth & Income 12/31/96 n/a n/a n/a 64.07 27.84 n/a n/a n/a Fidelity's VIP III Growth Opportunities 1/3/95 83.87 n/a n/a 140.42 22.93 22.51 n/a n/a Harris Bretall Sullivan & Smith Equity Growth 12/8/92 99.97 166.68 n/a 164.19 33.83 25.99 21.67 n/a Janus Aspen Series Balanced 9/13/93 82.88 123.99 n/a 139.14 32.47 22.29 17.50 n/a Janus Aspen Series Capital Appreciation 5/1/97 n/a n/a n/a 95.69 55.98 n/a n/a n/a Janus Aspen Series Worldwide Growth 9/13/93 95.08 145.54 n/a 191.26 27.18 24.95 19.68 n/a JP Morgan Bond 1/3/95 15.13 n/a n/a 30.51 6.55 4.81 n/a n/a JP Morgan International Opportunities 1/3/95 19.95 n/a n/a 28.54 3.32 6.25 n/a n/a MSDW Universal Funds Asian Equity 12/31/91 -46.75 -53.58 n/a 17.03 -7.71 -18.95 -14.23 n/a MSDW Universal Funds Emerging Markets Debt 2/1/94 21.57 n/a n/a 16.38 -29.33 6.73 n/a n/a MSDW Universal Funds High Yield 8/31/92 30.08 48.68 n/a 76.70 3.39 9.16 8.26 n/a MSDW Universal Funds U.S. Real Estate 1/31/95 48.62 n/a n/a 77.71 -12.06 14.12 n/a n/a Scudder Kemper Value 12/14/92 84.56 159.64 n/a 174.15 16.79 22.66 21.02 n/a Zweig Asset Allocation 12/14/92 31.70 56.24 n/a 77.02 -3.39 9.61 9.33 n/a Zweig Equity (Small Cap) 1/4/93 41.45 66.16 n/a 78.00 -1.94 12.25 10.69 n/a Select Ten Plus Division - June 6/30/98 n/a n/a n/a 4.30 n/a n/a n/a n/a Select Ten Plus Division - September 9/30/98 n/a n/a n/a 2.60 n/a n/a n/a n/a Select Ten Plus Division - December 12/31/98 n/a n/a n/a -1.80 n/a n/a n/a n/a CALENDAR YEAR RETURN(2) ----------------------- LIFE OF VARIABLE OPTIONS FUND 1993 1994 1995 1996 1997 1998 BT Insurance Funds Trust - EAFE Equity Index 8.04% n/a n/a n/a 0.94% 0.40% 19.97% BT Insurance Funds Trust - Equity 500 Index 17.22 4.55 -3.08 32.15 20.35 26.76 26.98 BT Insurance Funds Trust - Small Cap Index 12.54 n/a n/a n/a 10.76 23.98 -3.50 Fidelity's VIP Equity-Income 12.87 16.70 5.01 34.05 12.73 26.38 10.12 Fidelity's VIP II Contrafund 26.91 n/a n/a 37.86 19.57 22.47 28.23 Fidelity's VIP III Growth & Income 28.11 n/a n/a n/a n/a 28.34 27.84 Fidelity's VIP III Growth Opportunities 24.58 n/a n/a 30.76 16.67 28.20 22.93 Harris Bretall Sullivan & Smith Equity Growth 17.37 -1.38 2.64 29.93 12.42 32.92 33.83 Janus Aspen Series Balanced 17.89 6.77 -.51 23.11 14.60 20.45 32.47 Janus Aspen Series Capital Appreciation 49.58 n/a n/a n/a n/a 25.46 55.98 Janus Aspen Series Worldwide Growth 22.36 18.62 .17 25.66 27.28 20.51 27.18 JP Morgan Bond 6.90 n/a n/a 13.36 .54 7.47 6.55 JP Morgan International Opportunities 6.49 n/a n/a 7.16 11.62 4.01 3.32 MSDW Universal Funds Asian Equity 2.27 102.53 -17.14 5.21 1.88 -43.37 -7.71 MSDW Universal Funds Emerging Markets Debt 3.14 n/a -23.87 25.75 48.64 15.74 -29.33 MSDW Universal Funds High Yield 9.41 18.31 -5.76 21.29 13.10 11.24 3.39 MSDW Universal Funds U.S. Real Estate 16.11 n/a n/a 19.58 37.53 22.89 -12.06 Scudder Kemper Value 18.22 4.86 -2.07 43.65 22.78 28.71 16.79 Zweig Asset Allocation 9.91 13.32 -.92 19.75 13.32 20.30 -3.39 Zweig Equity (Small Cap) 10.11 7.38 -1.97 19.54 16.87 23.42 -1.94 Select Ten Plus Division - June n/a n/a n/a n/a n/a n/a 4.30 Select Ten Plus Division - September n/a n/a n/a n/a n/a n/a 2.60 Select Ten Plus Division - December n/a n/a n/a n/a n/a n/a -1.80
(1) Non-standard returns reflect all historical investment results, less mortality and expense and administrative charges totaling 1.35%. The calculation assumes the policy is still in force and therefore doesn't take withdrawal charges into consideration. (2) Italicized returns are calculated from the inception date through year-end. (3) Represents the inception date of the underlying funds. Performance data for periods prior to the actual inception of the variable account options is hypothetical and based on the performance of the underlying funds. This performance data has been adjusted to include all insurance company contract charges and management fees of the underlying funds. 11 PERFORMANCE COMPARISONS Performance information for an Option may be compared, in reports and advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or other unmanaged indices generally regarded as representative of the securities markets; (2) other variable annuity separate accounts or other investment products tracked by Lipper Analytical Services, Inc. (LIPPER) or the Variable Annuity Research and Data Service, which are widely used independent research firms that rank mutual funds and other investment companies by overall performance, investment objectives, and assets; and (3) the Consumer Price Index (measure of inflation) to assess the real rate of return from an investment in a contract. Unmanaged indices may assume the reinvestment of dividends but generally don't reflect deductions for annuity charges, investment management costs, brokerage costs and other transaction costs that are normally paid when directly investing in securities. Each Option may, from time to time, also include the ranking of its performance figures relative to such figures for groups of mutual funds categorized by Lipper as having the same or similar investment objectives or by similar services that monitor the performance of mutual funds. Each Option may also from time to time compare its performance to average mutual fund performance figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS. Advertisements or information furnished to present shareholders or prospective investors may also include evaluations of an Option published by nationally recognized ranking services and by financial publications that are nationally recognized such as BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING TIMES, CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING, FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S FINANCIAL DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR MUTUAL FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGE'S INVESTMENT ADVISER, VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY SERVICE AND USA TODAY. The performance figures described above may also be used to compare the performance of an Option's units against certain widely recognized standards or indices for stock and bond market performance. Following are representative indices against which the Options may compare performance: The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market value-weighted and unmanaged index showing the changes in the total market value of 500 stocks compared to the base period 1941-43. The S&P 500 Index is composed almost entirely of common stocks of companies listed on the NYSE, although the common stocks of a few companies listed on the American Stock Exchange or traded OTC are included. The S&P 500 Index represents about 80% of the market value of all issues traded on the NYSE. The Dow Jones Composite Average (or its component averages) is an unmanaged index composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial Average), 15 utilities company stocks and 20 transportation stocks. Comparisons of performance assume reinvestment of dividends. The New York Stock Exchange composite or component indices are unmanaged indices of all industrial, utilities, transportation and finance company stocks listed on the New York Stock Exchange. The Wilshire 5000 Equity Index (or its component indices) represents the return of the market value of all common equity securities for which daily pricing is available. Comparisons of performance assume reinvestment of dividends. The Morgan Stanley Capital International EAFE Index is an arithmetic, market value-weighted average of the performance of over 900 securities on the stock exchanges of countries in Europe, Australia and the Far East. The Morgan Stanley Capital International All Country World Index Free (ex-U.S.) is an unmanaged index that measures developed and emerging foreign stock market performance. The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a measure of the market value of all public obligations of the U.S. Treasury; all publicly issued debt of all agencies of the U.S. Government and all quasi-federal corporations; and all corporate debt guaranteed by the U.S. Government. Mortgage-backed securities, flower bonds and foreign targeted issues aren't included in the Lehman Government Index. 12 The Lehman Brothers Government/Corporate Bond Index (the LEHMAN GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately 5,300 bonds with a face value currently in excess of $1 million, which have at least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE) by a nationally recognized statistical rating agency. The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN GOVERNMENT/CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by the Lehman Brothers Government/Corporate Bond Index with maturities between one and 9.99 years. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization. The Value Line (Geometric) Index is an unweighted index of the approximately 1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY. The Salomon Brothers GNMA Index includes pools of mortgages originated by private lenders and guaranteed by the mortgage pools of the Government National Mortgage Association. The Salomon Brothers Broad Investment-Grade Bond Index contains approximately 3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or higher, a stated maturity of at least one year, and a par value outstanding of $25 million or more. The index is weighted according to the market value of all bond issues included in the index. The Salomon Brothers High Grade Corporate Bond Index consists of publicly issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total return index, including approximately 800 issues with maturities of 12 years or grater. The Salomon Brothers World Bond Index measures the total return performance of high-quality securities in major sectors of the international bond market. The index covers approximately 600 bonds from 10 currencies: Australian dollars, Canadian dollars, European Currency Units, French francs, Japanese yen, Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German deutsche marks. The J.P. Morgan Global Government Bond Index is a total return, market capitalization weighted index, rebalanced monthly consisting of the following countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, United Kingdom and United States. The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the Russell 3000 Index, and represents approximately 11% of the total U.S. equity market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S. companies by market capitalization. The smallest company has a market value of roughly $20 million. The Consumer Price Index (or Cost of Living Index), published by the United States Bureau of Labor Statistics is a statistical measure of change, over time, in the price of goods and services in major expenditure groups. Historical data supplied by the research departments of various broker dealers, analysts or pricing services, including but not limited to First Boston Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch and Bloomberg L.P. In reports or other communications to shareholders, the Funds may also describe general economic and market conditions affecting the Portfolios and may compare the performance of the Portfolios with (1) that of mutual funds included in the rankings prepared by Lipper or similar investment services that monitor the performance of insurance company separate accounts or mutual funds, (2) IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment securities and averages for peer universe of funds which are described in this SAI, or (4) data developed by Integrity or any of the sub-advisers derived from such indices or averages. 13 For those Variable Account Options which haven't been investment divisions within the Separate Accounts for one of the quoted periods, the standardized average annual total return and nonstandardized total return quotations will show the investment performance those Options would have achieved (reduced by the applicable charges) if they had been investment divisions within the Separate Accounts for the period quoted. 14 INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS Integrity may, from time to time, use computer-based software available through Morningstar, CDA/Wiesenberger and/or other firms to provide registered representatives and existing and/or potential owners of the contracts with individualized hypothetical performance illustrations for some or all of the Variable Account Options. These illustrations may include, without limitation, graphs, bar charts and other types of formats presenting the following information: (i) the historical results of a hypothetical investment in a single Option; (ii) the historical fluctuation of the value of a single Option (actual and hypothetical); (iii) the historical results of a hypothetical investment in more than one Option; (iv) the historical performance of two or more market indices in relation to one another and/or one or more Options; (v) the historical performance of two or more market indices in comparison to a single Option or a group of Options; (vi) a market risk/reward scatter chart showing the historical risk/reward relationship of one or more mutual funds or Options to one or more indices and a broad category of similar anonymous variable annuity subaccounts; and (vii) Option data sheets showing various information about one or more Options (such as information concerning total return for various periods, fees and expenses, standard deviation, alpha and beta, investment objective, inception date and net assets). We can republish figures independently provided by Morningstar or any similar agency or service. PART 7 - DETERMINATION OF ACCUMULATION UNIT VALUES The accumulation unit value of an Option will be determined on each day the New York Stock Exchange is open for trading. The accumulation units are valued as of the close of business on the New York Stock Exchange, which currently is 4:00 p.m., Eastern time. Each Option's accumulation unit value is calculated separately. For all Options other than the Janus Money Market Option, the accumulation unit value is computed by dividing the value of the securities held by the Option plus any cash or other assets, less its liabilities, by the number of outstanding units. For the Janus Money Market Option, accumulation unit value is computed by dividing the value of the investments and other assets minus liabilities by the number of units outstanding. Securities are valued using the amortized cost method of valuation, which approximates market value. Under this method of valuation, the difference between the acquisition cost and value at maturity is amortized by assuming a constant (straight-line) accretion of a discount or amortization of a premium to maturity. Cash, receivables and current payables are generally carried at their face value. PART 8 - TAX-FAVORED RETIREMENT PROGRAMS The contracts described in this Prospectus may be used in connection with certain tax-favored retirement programs, for groups and for individuals. Following are brief descriptions of various types of qualified plans in connection with which Integrity may issue a contract. Integrity reserves the right to change its administrative rules, such as minimum contribution amounts, as needed to comply with the Code as to tax-favored retirement programs. TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES Code Section 408(b) permits eligible individuals to contribute to an individual retirement program known as a Traditional IRA. An individual who receives compensation and who hasn't reached age 70-1/2 by the end of the tax year may establish a Traditional IRA and make contributions up to the deadline for filing his or her federal income tax return for that year (without extensions). Traditional IRAs are limited on the amount that may be contributed, the persons who may be eligible, and the time when distributions may begin. An individual may also roll over amounts distributed from another Traditional IRA or another tax-favored retirement program to a Traditional IRA contract. Your Traditional IRA contract will be issued with a rider outlining the special terms of your contract that apply to Traditional IRAs. The Owner will be deemed to have consented to any other amendment unless the Owner notifies us that he or she doesn't consent within 30 days from the date we mail the amendment. ROTH INDIVIDUAL RETIREMENT ANNUITIES Section 408A of the Code permits eligible individuals to contribute to an individual retirement program known as a Roth IRA. An individual who receives compensation may establish a Roth IRA and make contributions up to the deadline for filing his or her federal income tax return for that year (without extensions). Roth IRAs are limited on 15 the amount that may be contributed, the persons who are eligible to contribute, and the time when tax-favored distributions may begin. An individual may also roll over amounts distributed from another Roth IRA or Traditional IRA to a Roth IRA contract. Your Roth IRA contract will be issued with a rider outlining the special terms of your contract that apply to Roth IRAs. Any amendment made to comply with provisions of the Code and related regulations may be made without your consent. The Owner will be deemed to have consented to any other amendment unless the Owner notifies us that he or she doesn't consent within 30 days from the date we mail the amendment. SIMPLIFIED EMPLOYEE PENSIONS Section 408(k) of the Code allows employers to establish simplified employee pension plans (SEP-IRAS) for their employees, using the employees' IRAs for such purposes, if certain criteria are met. Under these plans the employer may, within specified limits, make deductible contributions on behalf of the employees to IRAs. Employers intending to use the contract in connection with such plans should seek competent advice. The SEP-IRA will be issued with a rider outlining the special terms of the contract. SIMPLE INDIVIDUAL RETIREMENT ANNUITIES Currently, we don't issue Individual Retirement Annuities known as a "SIMPLE IRA" as defined in Section 408(p) of the Code. TAX SHELTERED ANNUITIES Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA) by employees of public schools and certain charitable, educational and scientific organizations described in Section 501(c)(3) of the Code. The contract isn't intended to accept other than employee contributions. Such contributions aren't counted as part of the gross income of the employee until the employee receives distributions from the contract. The amount of contributions to the TSA is limited to certain maximums imposed by Code sections 403(b), 415 and 402(g). The Code also sets forth additional restrictions governing such items as transferability, distributions and withdrawals. An employee under this type of plan should consult a tax adviser as to the tax treatment and suitability of such an investment. Your contract will be issued with a rider outlining the special terms that apply to a TSA. CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS Sections 401(a) and 403(a) of the Code permit corporate employers to establish various types of tax-favored retirement plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed individuals to also establish tax-favored retirement plans for themselves and their employees. Tax-favored retirement plans may permit the purchase of the contract to provide benefits under the plans. Employers intending to use the contract in connection with tax-favored plans should seek competent advice. The Company can request documentation to substantiate that a qualified plan exists and is being properly administered. Integrity doesn't administer these types of plans. DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS Section 457 of the Code permits employees of state and local governments and tax-exempt organizations to defer a portion of their compensation without paying current taxes. The employees must be participants in an eligible deferred compensation plan. To the extent the contracts are used in connection with an eligible plan, employees are considered general creditors of the employer and the employer as Owner of the contract has the sole right to the proceeds of the contract. However, Section 457(g) provides that on and after August 20, 1996, a plan maintained by an eligible governmental employer must hold all assets and income of the plan in a trust, custodial account, or annuity contract for the exclusive benefit of participants and their beneficiaries. Loans to employees may be permitted under such plans; however, a Section 457 plan isn't required to allow loans. Contributions to a contract in connection with an eligible government plan are limited. Those who intend to use the contracts in connection with such plans should seek competent advice. The Company can request documentation to substantiate that a qualified plan exists and is being properly administered. Integrity doesn't administer such plans. 16 DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMs Distributions from tax-favored plans are subject to certain restrictions. Participants in qualified plans, with the exception of five-percent owners, must begin receiving distributions by April 1 of the calendar year following the later of either (i) the year in which the employee reaches age 70-1/2, or (ii) the calendar year in which the employee retires. Participants in Traditional IRAs must begin receiving distributions by April 1 of the calendar year following the year in which the employee reaches age 70-1/2. Additional distribution rules apply after the participant's death. If you don't take mandatory distributions you may owe a 50% penalty tax on any difference between the required distribution amount and the amount distributed. The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory distribution of minimum amounts from Roth IRAs when the Owner reaches age 70-1/2. Distributions from a tax-favored plan (not including a Traditional IRA or a Roth IRA) to an employee, surviving spouse, or former spouse who is an alternate payee under a qualified domestic relations order, in the form of a lump sum settlement or periodic annuity payments for a fixed period of fewer than 10 years are subject to mandatory income tax withholding of 20% of the taxable amount of the distribution, unless (1) the payee directs the transfer of the amounts in cash to another plan or Traditional IRA; or (2) the payment is a minimum distribution required under the Code. The taxable amount is the amount of the distribution less the amount allocable to after-tax contributions. All other types of taxable distributions are subject to withholding unless the payee doesn't elect to have withholding apply. We aren't permitted to make distributions from a contract unless you make a request. It's your responsibility to comply with the minimum distribution rules. You should consult your tax adviser regarding these rules. This description of the federal income tax consequences of the different types of tax-favored retirement plans that can be funded by the contract is only a brief summary and isn't intended as tax advice. The rules governing the provisions of plans are extremely complex and often difficult to comprehend. Anything less than full compliance with all applicable rules, all of which are subject to change, may have adverse tax consequences. A prospective Owner considering adopting a plan and buying a contract to fund the plan should first consult a qualified and competent tax adviser, with regard to the suitability of the contract as an investment vehicle for the plan. PART 9 - FINANCIAL STATEMENTS Ernst & Young LLP, Suite 2100, 400 West Market Street, Louisville, Kentucky 40202, is our independent auditor and serves as independent auditor of the Separate Accounts. Ernst & Young LLP on an annual basis will audit certain financial statements prepared by management and express an opinion on such financial statements based on their audits. The financial statements of Separate Account II and Separate Account Ten as of December 31, 1998, and for the periods indicated in the financial statements, and the statutory-basis financial statements of Integrity as of and for the years ended December 31, 1998 and 1997 included herein have been audited by Ernst & Young LLP as set forth in their reports. The financial statements of Integrity should be distinguished from the financial statements of the Separate Accounts and should be considered only as they relate to the ability of Integrity to meet its obligations under the contracts. They shouldn't be considered as relating to the investment performance of the assets held in the Separate Accounts. 17 Financial Statements Separate Account II of Integrity Life Insurance Company DECEMBER 31, 1998 WITH REPORT OF INDEPENDENT AUDITORS Separate Account II of Integrity Life Insurance Company Financial Statements December 31, 1998 CONTENTS Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . .1 Audited Financial Statements Statement of Assets and Liabilities. . . . . . . . . . . . . . . . . . . . . .2 Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Statements of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . . .6 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 10
Report of Independent Auditors Contract Holders Separate Account II of Integrity Life Insurance Company We have audited the accompanying statement of assets and liabilities of Separate Account II of Integrity Life Insurance Company (comprising, respectively, the Zweig Asset Allocation, Harris Bretall Sullivan & Smith Equity Growth, Scudder Kemper Value, Zweig Equity (Small Cap), EAFE Equity Index, Equity 500 Index, Small Cap Index, VIP Equity-Income, VIP II Contrafund, VIP III Growth & Income, VIP III Growth, Janus Aspen Capital Appreciation, Janus Aspen Balanced, Janus Aspen Worldwide Growth, Janus Aspen Money Market, JPM International Opportunities, JPM Bond, Morgan Stanley Emerging Markets Debt, Morgan Stanley High Yield, Morgan Stanley U.S. Real Estate, and Morgan Stanley Asian Equity Divisions) as of December 31, 1998 and the related statements of operations and changes in net assets for the periods indicated therein. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of mutual fund shares owned in The Legends Fund, Inc., BT Insurance Funds Trust, Variable Insurance Products Fund, Variable Insurance Products Fund II, Variable Insurance Products Fund III, Janus Aspen Series, J.P. Morgan Series Trust II, and Morgan Stanley Universal Funds, Inc. (collectively the "Funds") as of December 31, 1998, by correspondence with the transfer agents of the Funds. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the respective divisions constituting Separate Account II of Integrity Life Insurance Company at December 31, 1998, the results of their operations and changes in their net assets for each of the periods indicated therein, in conformity with generally accepted accounting principles. Louisville, Kentucky /s/ ERNST & YOUNG April 9, 1999 1 Separate Account II of Integrity Life Insurance Company Statement of Assets and Liabilities December 31, 1998
HARRIS ZWEIG BRETALL ASSET SULLIVAN & SMITH SCUDDER ZWEIG EQUITY EAFE EQUITY EQUITY 500 ALLOCATION EQUITY GROWTH KEMPER VALUE (SMALL CAP) INDEX INDEX DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION -------------------------------------------------------------------------------------- ASSETS Investments at value (aggregate cost of $303,440,179) $ 31,191,369 $ 35,539,893 $ 37,991,022 $ 10,346,590 $ 2,008,101 $ 20,164,616 Receivable from (payable to) the general account of Integrity (5,173) (1,875) 5,503 247 (46) 8,030 -------------------------------------------------------------------------------------- NET ASSETS $ 31,186,196 $ 35,538,018 $ 37,996,525 $ 10,346,837 $ 2,008,055 $ 20,172,646 -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- Unit value $ 17.70 $ 26.42 $ 27.42 $ 17.80 $ 11.30 $ 12.90 -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- Units outstanding 1,761,932 1,345,118 1,385,723 581,283 177,704 1,563,771 -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- VIP III SMALL CAP VIP EQUITY- VIP II VIP III GROWTH INDEX INCOME CONTRAFUND GROWTH & INCOME OPPORTUNITIES DIVISION DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------ ASSETS Investments at value (aggregate cost of $303,440,179) $ 3,549,139 $ 13,354,532 $ 11,138,907 $ 11,254,421 $ 7,790,296 Receivable from (payable to) the general account of Integrity 1,019 10,319 2,851 7,701 2,718 ------------------------------------------------------------------------ NET ASSETS $ 3,550,158 $ 13,364,851 $ 11,141,758 $ 11,262,122 $ 7,793,014 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Unit value $ 9.11 $ 11.08 $ 12.47 $ 13.10 $ 12.62 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Units outstanding 389,699 1,206,214 893,485 859,704 617,513 ------------------------------------------------------------------------ ------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 2 Separate Account II of Integrity Life Insurance Company Statement of Assets and Liabilities (continued) December 31, 1998
JANUS ASPEN JANUS ASPEN JPM CAPITAL JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL APPRECIATION BALANCED GROWTH MONEY MARKET OPPORTUNITIES JPM BOND DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------------------- ASSETS Investments at value (aggregate cost of $303,440,179) $ 10,519,896 $ 73,168,168 $ 15,979,791 $ 17,912,594 $ 1,310,257 $ 16,285,915 Receivable from (payable to) the general account of Integrity 553 11,719 5,669 (325) 4,187 (12,282) ------------------------------------------------------------------------------------- NET ASSETS $ 10,520,449 $ 73,179,887 $ 15,985,460 $ 17,912,269 $ 1,314,444 $ 16,273,633 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- Unit value $ 14.77 $ 13.19 $ 12.04 $ 10.48 $ 9.59 $ 10.85 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- Units outstanding 712,285 5,548,134 1,327,696 1,709,186 137,064 1,499,874 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- MORGAN STANLEY EMERGING MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY MARKETS DEBT HIGH YIELD U.S. REAL ESTATE ASIAN EQUITY DIVISION DIVISION DIVISION DIVISION TOTAL -------------------------------------------------------------------------------- ASSETS Investments at value (aggregate cost of $303,440,179) $ 3,970,346 $ 6,048,834 $ 2,256,269 $ 3,677,229 $335,458,185 Receivable from (payable to) the general account of Integrity (9,387) (3,572) 1,181 43,221 72,258 ------------------------------------------------------------------------------- NET ASSETS $ 3,960,959 $ 6,045,262 $ 2,257,450 $ 3,720,450 $335,530,443 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Unit value $ 6.52 $ 10.45 $ 8.93 $ 7.81 ---------------------------------------------------------------- ---------------------------------------------------------------- Units outstanding 607,509 578,494 252,794 476,370 ---------------------------------------------------------------- ----------------------------------------------------------------
SEE ACCOMPANYING NOTES. 3 Separate Account II of Integrity Life Insurance Company Statement of Operations Year Ended December 31, 1998
HARRIS BRETALL ZWEIG ASSET SULLIVAN & SMITH SCUDDER KEMPER ZWEIG EQUITY EAFE EQUITY EQUITY ALLOCATION EQUITY GROWTH VALUE (SMALL CAP) INDEX 500 INDEX DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 5,328,845 $ 3,203,222 $ 4,210,088 $ 2,374,578 $ 27,404 $ 533,396 EXPENSES Mortality and expense risk and administrative charges 494,294 385,621 471,461 145,729 13,413 134,375 ------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 4,834,551 2,817,601 3,738,627 2,228,849 13,991 399,021 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments 2,395,680 2,569,793 4,216,224 929,199 36,558 1,321,174 Net unrealized appreciation (depreciation) of investments: Beginning of period 9,197,585 5,303,939 3,271,286 2,206,200 229 211,601 End of period 602,115 8,718,048 724,207 (1,338,045) 97,828 2,008,463 ------------------------------------------------------------------------------------- Change in net unrealized appreciation/ depreciation during the period (8,595,470) 3,414,109 (2,547,079) (3,544,245) 97,599 1,796,862 ------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (6,199,790) 5,983,902 1,669,145 (2,615,046) 134,157 3,118,036 ------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (1,365,239) $ 8,801,503 $ 5,407,772 $ (386,197) $ 148,148 $ 3,517,057 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- VIP III VIP III SMALL CAP VIP EQUITY- VIP II GROWTH & GROWTH INDEX INCOME CONTRAFUND INCOME OPPORTUNITIES DIVISION DIVISION DIVISION DIVISION DIVISION ----------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 68,631 $ 160,081 $ 94,350 $ 11,577 $ 50,361 EXPENSES Mortality and expense risk and administrative charges 27,595 100,404 74,267 72,558 51,450 ----------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 41,036 59,677 20,083 (60,981) (1,089) REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments (51,131) (29,386) 40,316 28,315 18,272 Net unrealized appreciation (depreciation) of investments: Beginning of period (3,373) 32,071 9,019 5,855 20,242 End of period (82,250) 588,535 1,551,494 1,555,137 943,831 ----------------------------------------------------------------------- Change in net unrealized appreciation/ depreciation during the period (78,877) 556,464 1,542,475 1,549,282 923,589 ----------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (130,008) 527,078 1,582,791 1,577,597 941,861 ----------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (88,972) $ 586,755 $ 1,602,874 $ 1,516,616 $ 940,772 ----------------------------------------------------------------------- -----------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 4 Separate Account II of Integrity Life Insurance Company Statement of Operations (continued) Year Ended December 31, 1998
JANUS ASPEN JANUS ASPEN JPM CAPITAL JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL APRECIATION BALANCED GROWTH MONEY MARKET OPPORTUNITIES DIVISION DIVISION DIVISION DIVISION DIVISION ------------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 5,678 $ 2,748,300 $ 295,388 $ 625,901 $ 52,114 EXPENSES Mortality and expense risk and administrative charges 49,795 848,900 107,868 163,173 13,893 ------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) (44,117) 1,899,400 187,520 462,728 38,221 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments 156,476 816,346 164,053 -- (121,252) Net unrealized appreciation (depreciation) of investments: Beginning of period 17,388 741,775 25,860 268 (43,743) End of period 2,102,262 16,041,640 1,077,814 -- (23,705) ------------------------------------------------------------------------------- Change in net unrealized appreciation/ depreciation during the period 2,084,874 15,299,865 1,051,954 (268) 20,038 ------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 2,241,350 16,116,211 1,216,007 (268) (101,214) ------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,197,233 $ 18,015,611 $ 1,403,527 $ 462,460 $ (62,993) ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- MORGAN STANLEY MORGAN STANLEY EMERGING MORGAN STANLEY U.S. REAL MORGAN STANLEY JPM BOND MARKETS DEBT HIGH YIELD ESTATE ASIAN EQUITY DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL -------------------------------------------------------------------------------------- INVESTMENT INCOME Reinvested dividends $ 611,128 $ 470,978 $ 376,207 $ 61,693 $ 29,757 $ 21,339,677 EXPENSES Mortality and expense risk and administrative charges 129,371 72,431 47,328 23,720 47,333 3,474,979 -------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 481,757 398,547 328,879 37,973 (17,576) 17,864,698 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on sales of investments 162,102 (259,162) (32,519) (64,792) (351,346) 11,944,920 Net unrealized appreciation (depreciation) of investments: Beginning of period (94,734) 272,291 (33,966) 1,510 (270,549) 20,870,754 End of period (98,685) (1,723,265) (264,977) (192,191) (270,250) 32,018,006 -------------------------------------------------------------------------------------- Change in net unrealized appreciation/ depreciation during the period (3,951) (1,995,556) (231,011) (193,701) 299 11,147,252 -------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 158,151 (2,254,718) (263,530) (258,493) (351,047) 23,092,172 -------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 639,908 $ (1,856,171) $ 65,349 $ (220,520) $ (368,623) $ 40,956,870 -------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 5 Separate Account II of Integrity Life Insurance Company Statement of Changes in Net Assets Year Ended December 31, 1998
HARRIS BRETALL ZWEIG ASSET SULLIVAN & SMITH SCUDDER ZWEIG EQUITY EAFE EQUITY ALLOCATION EQUITY GROWTH KEMPER VALUE (SMALL CAP) INDEX DIVISION DIVISION DIVISION DIVISION DIVISION -------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income $ 4,834,551 $ 2,817,601 $ 3,738,627 $ 2,228,849 $ 13,991 (loss) Net realized gain (loss) on sales of investments 2,395,680 2,569,793 4,216,224 929,199 36,558 Change in net unrealized appreciation/ depreciation during the period (8,595,470) 3,414,109 (2,547,079) (3,544,245) 97,599 -------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (1,365,239) 8,801,503 5,407,772 (386,197) 148,148 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 1,234,928 4,514,417 7,070,279 924,803 978,249 Contract terminations and benefits (4,025,170) (3,316,966) (3,183,115) (1,408,182) (239,690) Net transfers among investment options (3,263,051) (27,888) (1,300,018) 470,524 936,226 -------------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions (6,053,293) 1,169,563 2,587,146 (12,855) 1,674,785 -------------------------------------------------------------------------- Contribution by Integrity -- -- -- -- -- Redemption of contributions by Integrity -- -- -- -- -- Change in amounts retained in Separate Account II by Integrity -- -- -- -- -- -------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (7,418,532) 9,971,066 7,994,918 (399,052) 1,822,933 Net assets, beginning of year 38,604,728 25,566,952 30,001,607 10,745,889 185,122 -------------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 31,186,196 $ 35,538,018 $ 37,996,525 $ 10,346,837 $ 2,008,055 -------------------------------------------------------------------------- -------------------------------------------------------------------------- UNIT TRANSACTIONS Contributions 68,159 204,596 279,804 50,952 94,539 Terminations and benefits (234,294) (149,607) (126,122) (79,350) (23,408) Net transfers (179,122) (5,056) (46,255) 17,621 86,921 -------------------------------------------------------------------------- Net increase (decrease) in units (345,313) 49,933 107,427 (10,777) 158,052 -------------------------------------------------------------------------- -------------------------------------------------------------------------- VIP III VIP III EQUITY 500 SMALL CAP VIP EQUITY- VIP II GROWTH & GROWTH INDEX INDEX INCOME CONTRAFUND INCOME OPPORTUNITIES DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION ---------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income $ 399,021 $ 41,036 $ 59,677 $ 20,083 $ (60,981) $ (1,089) (loss) Net realized gain (loss) on sales of investments 1,321,174 (51,131) (29,386) 40,316 28,315 18,272 Change in net unrealized appreciation/ depreciation during the period 1,796,862 (78,877) 556,464 1,542,475 1,549,282 923,589 ---------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 3,517,057 (88,972) 586,755 1,602,874 1,516,616 940,772 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 10,963,980 2,391,039 9,091,118 6,163,372 5,922,478 3,955,196 Contract terminations and benefits (427,670) (50,118) (179,508) (224,727) (176,897) (142,596) Net transfers among investment options 4,875,813 635,162 2,301,955 2,341,556 2,775,467 2,237,515 ---------------------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 15,412,123 2,976,083 11,213,565 8,280,201 8,521,048 6,050,115 Contribution by Integrity -- -- -- -- -- -- Redemption of contributions by Integrity (9,729,547) -- -- -- -- -- Change in amounts retained in Separate Account II by Integrity 8,690,000 -- -- -- -- -- ---------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 17,889,633 2,887,111 11,800,320 9,883,075 10,037,664 6,990,887 Net assets, beginning of year 2,283,013 663,047 1,564,531 1,258,683 1,224,458 802,127 ---------------------------------------------------------------------------------- NET ASSETS, END OF YEAR $20,172,646 $ 3,550,158 $13,364,851 $11,141,758 $11,262,122 $7,793,014 ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- UNIT TRANSACTIONS Contributions 956,008 255,725 855,122 569,423 522,872 353,335 Terminations and benefits (38,163) (6,837) (17,631) (20,472) (21,318) (12,080) Net transfers 421,220 70,573 213,203 215,173 238,574 198,078 ---------------------------------------------------------------------------------- Net increase (decrease) in units 1,339,065 319,461 1,050,694 764,124 740,128 539,333 ---------------------------------------------------------------------------------- ----------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 6 Separate Account II of Integrity Life Insurance Company Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
JANUS ASPEN JANUS ASPEN JPM CAPITAL JANUS ASPEN WORLDWIDE JANUS ASPEN INTERNATIONAL APPRECIATION BALANCED GROWTH MONEY MARKET OPPORTUNITIES DIVISIOM DIVISION DIVISION DIVISION DIVISION --------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income(loss) $ (44,117) $ 1,899,400 $ 187,520 $ 462,728 $ 38,221 Net realized gain (loss) on sales of investments 156,476 816,346 164,053 -- (121,252) Change in net unrealized appreciation/ depreciation during the period 2,084,874 15,299,865 1,051,954 (268) 20,038 --------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 2,197,233 18,015,611 1,403,527 462,460 (62,993) INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 4,507,817 4,674,910 9,514,601 11,006,841 1,387,817 Contract terminations and benefits (132,661) (6,671,434) (135,207) (2,330,776) (22,715) Net transfers among investment options 3,074,983 832,974 3,765,741 2,380,514 (374,307) --------------------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 7,450,139 (1,163,550) 13,145,135 11,056,579 990,795 --------------------------------------------------------------------------------- Contribution by Integrity -- -- -- -- -- Redemption of contributions by Integrity -- -- -- -- -- Change in amounts retained in Separate Account II by Integrity -- -- -- -- -- --------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 9,647,372 16,852,061 14,548,662 11,519,039 927,802 Net assets, beginning of year 873,077 56,327,826 1,436,798 6,393,230 386,642 --------------------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 10,520,449 $ 73,179,887 $ 15,985,460 $ 17,912,269 $ 1,314,444 --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- UNIT TRANSACTIONS Contributions 375,465 414,291 857,969 1,068,361 142,087 Terminations and benefits (12,429) (605,433) (16,099) (225,163) (2,410) Net transfers 257,055 78,188 334,105 231,739 (44,277) --------------------------------------------------------------------------------- Net increase (decrease) in units 620,091 (112,954) 1,175,975 1,074,937 95,400 --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- MORGAN MORGAN STANLEY MORGAN STANLEY EMERGING STANLEY U.S. REAL MORGAN STANLEY JPM BOND MARKETS DEBT HIGH YIELD ESTATE ASIAN EQUITY DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL ----------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 481,757 $ 398,547 $ 328,879 $ 37,973 $ (17,576) $ 17,864,698 Net realized gain (loss) on sales of investments 162,102 (259,162) (32,519) (64,792) (351,346) 11,944,920 Change in net unrealized appreciation/ depreciation during the period (3,951) (1,995,556) (231,011) (193,701) 299 11,147,252 ----------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 639,908 (1,856,171) 65,349 (220,520) (368,623) 40,956,870 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 7,908,411 690,761 4,057,709 1,707,287 363,137 99,029,150 Contract terminations and benefits (1,149,660) (557,483) (135,447) (35,824) (292,329) (24,838,175) Net transfers among investment options 4,678,780 (346,707) 1,351,740 122,833 (77,162) 27,392,650 ----------------------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 11,437,531 (213,429) 5,274,002 1,794,296 (6,354) 101,583,625 ----------------------------------------------------------------------------------- Contribution by Integrity -- -- -- -- -- -- Redemption of contributions by Integrity (3,976,222) -- -- -- -- (13,705,769) Change in amounts retained in Separate Account II by Integrity 3,912,700 -- -- -- -- 12,602,700 ----------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 12,013,917 (2,069,600) 5,339,351 1,573,776 (374,977) 141,437,426 Net assets, beginning of year 4,259,716 6,030,559 705,911 683,674 4,095,427 194,093,017 ----------------------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 16,273,633 $ 3,960,959 $ 6,045,262 $ 2,257,450 $3,720,450 $335,530,443 ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- UNIT TRANSACTIONS Contributions 763,490 75,799 393,649 178,078 46,969 Terminations and benefits (111,482) (70,196) (15,424) (5,455) (38,663) Net transfers 429,837 (51,459) 130,446 12,814 (16,029) ----------------------------------------------------------------------------------- Net increase (decrease) in units 1,081.845 (45,856) 508,671 185,437 (7,723) ----------------------------------------------------------------------------------- -----------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 7 Separate Account II of Integrity Life Insurance Company Statement of Changes in Net Assets Year Ended December 31, 1997
HARRIS BRETALL NICHOLAS- SULLIVAN & RENAISSANCE ZWEIG ASSET APPLEGATE SMITH EQUITY SCUDDER BALANCED ALLOCATION BALANCED GROWTH KEMPER VALUE DIVISION (1) DIVISION DIVISION (1) DIVISION DIVISION ----------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 2,574,854 $ (53,722) $ 4,736,118 $ 1,359,127 $ 4,607,603 Net realized gain (loss) on sales of investments 390,362 1,826,513 6,643,936 1,657,678 2,895,358 Change in net unrealized appreciation/ depreciation during the period (1,075,003) 5,146,496 (4,981,432) 2,834,577 (1,407,548) ----------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 1,890,213 6,919,287 6,398,622 5,851,382 6,095,413 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 239,307 960,854 553,462 1,849,299 3,061,202 Contract terminations and benefits (1,955,314) (3,276,103) (5,444,946) (2,068,659) (2,362,975) Net transfers among investment options (19,426,994) (3,072,161) (40,879,178) 2,350,763 2,785,843 ----------------------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions (21,143,001) (5,387,410) (45,770,662) 2,131,403 3,484,070 ----------------------------------------------------------------------------------- Contribution by Integrity - - - - - Transfer of Integrity contributions - - - - - Redemption of contributions by Integrity - - - - - Change in amounts retained in Separate Account II by Integrity - - - - - ----------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS (19,252,788) 1,531,877 (39,372,040) 7,982,785 9,579,483 Net assets, beginning of year 19,252,788 37,072,851 39,372,040 17,584,167 20,422,124 ----------------------------------------------------------------------------------- NET ASSETS, END OF YEAR $ - $ 38,604,728 $ - $ 25,566,952 $ 30,001,607 ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- UNIT TRANSACTIONS Contributions 15,583 54,696 30,942 99,659 140,705 Terminations and benefits (134,658) (196,743) (319,281) (114,760) (110,644) Net transfers (1,295,531) (184,907) (2,268,287) 126,167 128,601 ----------------------------------------------------------------------------------- Net increase (decrease) in units (1,414,606) (326,954) (2,556,626) 111,066 158,662 ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ARM CAPITAL MORGAN STANLEY ZWEIG EQUITY PINNACLE FIXED ADVISORS MORGAN STANLEY WORLDWIDE (SMALL CAP) INCOME MONEY MARKET ASIAN GROWTH HIGH INCOME DIVISION DIVISION (1) DIVISION (1) DIVISION (1) DIVISION (1) ----------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 331,732 $ 585,680 $ 180,215 $ (75,872) $ 1,320,028 Net realized gain (loss) on sales of investments 581,172 119,741 - (3,580,422) (307,315) Change in net unrealized appreciation/ depreciation during the period 1,045,228 (178,025) - (643,373) (582,804) ----------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 1,958,132 527,396 180,215 (4,299,667) 429,909 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 372,847 99,454 2,377,697 200,769 273,104 Contract terminations and benefits (686,221) (499,685) (1,914,055) (717,549) (404,944) Net transfers among investment options 385,912 (3,247,591) (4,783,860) (5,457,768) (6,293,754) ----------------------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 72,538 (3,647,822) (4,320,218) (5,974,548) (6,425,594) ----------------------------------------------------------------------------------- Contribution by Integrity - - - - - Transfer of Integrity contributions - (4,393,502) - - - Redemption of contributions by Integrity - (829,601) - - - Change in amounts retained in Separate Account II by Integrity - 4,889,484 - - - ----------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 2,030,670 (3,454,045) (4,140,003) (10,274,215) (5,995,685) Net assets, beginning of year 8,715,219 3,454,045 4,140,003 10,274,215 5,995,685 ----------------------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 10,745,889 $ - $ - $ - $ - ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- UNIT TRANSACTIONS Contributions 21,227 8,404 215,787 20,532 18,520 Terminations and benefits (42,891) (42,854) (173,350) (73,751) (27,984) Net transfers 21,255 (266,425) (422,952) (927,145) (425,321) ----------------------------------------------------------------------------------- Net increase (decrease) in units (409) (300,875) (380,515) (980,364) (434,785) ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- EAFE EQUITY EQUITY 500 SMALL CAP VIP EQUITY- INDEX INDEX INDEX INCOME DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) -------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (237) $ (3,380) $ (1,256) $ (1,962) Net realized gain (loss) on sales of investments (1,410) 24,320 (2,087) (1,026) Change in net unrealized appreciation/ depreciation during the period 229 211,601 (3,373) 32,071 -------------------------------------------------------------------- Net increase (decrease)in net assets resulting from operations (1,418) 232,541 (6,716) 29,083 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 156,248 1,369,486 412,616 1,086,187 Contract terminations and benefits - (2,233) (1,119) (3,254) Net transfers among investment options 30,292 873,219 258,266 452,515 -------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 186,540 2,240,472 669,763 1,535,448 -------------------------------------------------------------------- Contribution by Integrity - 10,000,000 - - Transfer of Integrity contributions - - - - Redemption of contributions by Integrity - (1,500,000) - - Change in amounts retained in Separate Account II by Integrity - (8,690,000) - - -------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 185,122 2,283,013 663,047 1,564,531 Net assets, beginning of year - - - - -------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 185,122 $ 2,283,013 $ 663,047 $ 1,564,531 -------------------------------------------------------------------- -------------------------------------------------------------------- UNIT TRANSACTIONS Contributions 16,374 137,771 43,324 110,542 Terminations and benefits - (222) (122) (329) Net transfers 3,278 87,157 27,036 45,307 -------------------------------------------------------------------- Net increase (decrease) in units 19,652 224,706 70,238 155,520 -------------------------------------------------------------------- --------------------------------------------------------------------
(1) For the period January 1, 1997 to November 14, 1997 (date of substitution) (2) For the period October 1, 1997 (commencement of operations) to December 31, 1997 SEE ACCOMPANYING NOTES. 8 Separate Account II of Integrity Life Insurance Company Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
VIP III VIP III JANUS ASPEN VIP II GROWTH & GROWTH CAPITAL JANUS ASPEN CONTRAFUND INCOME OPPORTUNITIES APPRECIATION BALANCED DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (1,911) $ 24,939 $ (1,102) $ 1,441 $ 383,781 Net realized gain (loss) on sales of investments (1,143) 871 719 (275) 7,630 Change in net unrealized appreciation/ depreciation during the period 9,019 5,855 20,242 17,388 741,775 -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 5,965 31,665 19,859 18,554 1,133,186 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 943,451 723,054 496,323 435,970 636,465 Contract terminations and benefits (3,648) (2,262) (1,547) (2,522) (616,133) Net transfers among investment options 312,915 472,001 287,492 421,075 55,174,308 -------------------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 1,252,718 1,192,793 782,268 854,523 55,194,640 -------------------------------------------------------------------------------- Contribution by Integrity - - - - - Transfer of Integrity contributions - - - - - Redemption of contributions by Integrity - - - - - Change in amounts retained in Separate Account II by Integrity - - - - - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 1,258,683 1,224,458 802,127 873,077 56,327,826 Net assets, beginning of year - - - - - -------------------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 1,258,683 $ 1,224,458 $ 802,127 $ 873,077 $ 56,327,826 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNIT TRANSACTIONS Contributions 98,124 72,438 49,718 47,193 64,763 Terminations and benefits (380) (228) (154) (273) (62,625) Net transfers 31,617 47,366 28,616 45,274 5,658,950 -------------------------------------------------------------------------------- Net increase (decrease) in units 129,361 119,576 78,180 92,194 5,661,088 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- JANUS ASPEN JPM WORLDWIDE JANUS ASPEN INTERNATIONAL GROWTH MONEY MARKET OPPORTUNITIES JPM BOND DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) --------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 250 $ 34,101 $ 43,908 $ 212,964 Net realized gain (loss) on sales of investments (6,364) - (3,034) 6,293 Change in net unrealized appreciation/ depreciation during the period 25,860 268 (43,743) (94,734) --------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 19,746 34,369 (2,869) 124,523 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 1,035,639 939,640 170,010 556,426 Contract terminations and benefits (2,927) (492,006) (1,401) (7,958) Net transfers among investment options 384,340 5,911,227 220,902 3,647,188 --------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 1,417,052 6,358,861 389,511 4,195,656 --------------------------------------------------------------- Contribution by Integrity - - - - Transfer of Integrity contributions - - - 4,393,502 Redemption of contributions by Integrity - - - (541,265) Change in amounts retained in Separate Account II by Integrity - - - (3,912,700) --------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 1,436,798 6,393,230 386,642 4,259,716 Net assets, beginning of year - - - - --------------------------------------------------------------- NET ASSETS, END OF YEAR $ 1,436,798 $ 6,393,230 $ 386,642 $ 4,259,716 --------------------------------------------------------------- --------------------------------------------------------------- UNIT TRANSACTIONS Contributions 109,924 93,550 18,674 55,298 Terminations and benefits (310) (48,943) (152) (787) Net transfers 42,107 589,642 23,142 363,518 --------------------------------------------------------------- Net increase (decrease) in units 151,721 634,249 41,664 418,029 --------------------------------------------------------------- --------------------------------------------------------------- MORGAN STANLEY EMERGING MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY MARKETS DEBT HIGH YIELD U.S. REAL ESTATE ASIAN EQUITY DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) TOTAL -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 209,867 $ 42,041 $ 17,346 $ (1,883) $ 16,524,670 Net realized gain (loss) on sales of investments 15,980 40 (2,302) (9,713) 10,255,522 Change in net unrealized appreciation/ depreciation during the period 272,291 (33,966) 1,510 (270,549) 1,049,860 -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 498,138 8,115 16,554 (282,145) 27,830,052 INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT RELATED TRANSACTIONS Contributions from contract holders 281,945 547,063 603,425 203,790 20,585,733 Contract terminations and benefits (53,434) (191) (1,043) (31,589) (20,553,718) Net transfers among investment options 5,303,910 150,924 64,738 4,205,371 531,895 -------------------------------------------------------------------------------- Net increase (decrease) in net assets from contract related transactions 5,532,421 697,796 667,120 4,377,572 563,910 -------------------------------------------------------------------------------- Contribution by Integrity - - - - 10,000,000 Transfer of Integrity contributions - - - - - Redemption of contributions by Integrity - - - - (2,870,866) Change in amounts retained in Separate Account II by Integrity - - - - (7,713,216) -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 6,030,559 705,911 683,674 4,095,427 27,809,880 Net assets, beginning of year - - - - 166,283,137 -------------------------------------------------------------------------------- NET ASSETS, END OF YEAR $ 6,030,559 $ 705,911 $ 683,674 $ 4,095,427 $194,093,017 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNIT TRANSACTIONS Contributions 31,830 54,841 61,162 22,387 Terminations and benefits (5,948) (19) (105) (3,706) Net transfers 627,483 15,001 6,300 465,412 -------------------------------------------------------------------------------- Net increase (decrease) in units 653,365 69,823 67,357 484,093 -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
(1) For the period January 1, 1997 to November 14, 1997 (date of substitution) (2) For the period October 1, 1997 (commencement of operations) to December 31, 1997 SEE ACCOMPANYING NOTES. 9 Separate Account II of Integrity Life Insurance Company Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF OPERATIONS Integrity Life Insurance Company ("Integrity") established Separate Account II (the "Separate Account") on May 21, 1992, for the purpose of issuing flexible premium variable annuity contracts ("contracts"). The Separate Account is a unit investment trust registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The operations of the Separate Account are part of Integrity. Integrity is an indirect wholly owned subsidiary of ARM Financial Group, Inc. ("ARM"). ARM specializes in the growing asset accumulation business with particular emphasis on retirement savings and investment products. Contract holders may allocate or transfer their account values to one or more investment divisions of the Separate Account or to one or more fixed guaranteed rate options or systematic transfer options of Integrity's Separate Account GPO. The Separate Account divisions invest in shares of the corresponding portfolios of the following funds or insurance trust funds ("Funds"): BT Insurance Funds Trust ("BT Funds Trust"); Variable Insurance Products Fund ("VIP"), Variable Insurance Products Fund II ("VIP II"), and Variable Insurance Products Fund III ("VIP III"), part of the Fidelity Investments group of companies (collectively, "Fidelity's VIP Funds"); The Legends Fund, Inc. ("Legends Fund"); Janus Aspen Series; J.P. Morgan Series Trust II ("JPM Series"); and Morgan Stanley Universal Funds, Inc. ("Morgan Stanley Universal Funds"). Bankers Trust Global Asset Management Services, a unit of Bankers Trust Company, is the investment manager of the BT Funds Trust. Fidelity Management and Research Company serves as investment adviser to Fidelity's VIP Funds. Integrity Capital Advisors, Inc., a wholly owned subsidiary of ARM, is the investment adviser of the Legends Fund. Janus Capital Corporation serves as investment adviser to the Janus Aspen Series. J.P. Morgan Investment Management Inc. is the investment adviser to the JPM Series. Morgan Stanley Dean Witter Asset Management Inc. ("MSDW") serves as investment adviser to the Morgan Stanley Universal Funds except for Morgan Stanley High Yield Portfolio, for 10 Separate Account II of Integrity Life Insurance Company Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) which Miller Anderson & Sherrerd, LLP serves as investment adviser. MSDW is a wholly owned subsidiary of Morgan Stanley Dean Witter & Co. ("Morgan Stanley"). Prior to ARM's secondary public offering of its common stock in May, 1998, Morgan Stanley and ARM were considered affiliates. On July 23, 1997, Integrity filed an application (amended on October 9, 1997) with the Securities and Exchange Commission ("SEC") pursuant to Section 26(b) of the Investment Company Act for an order to approve a substitution of certain divisions of the Separate Account (the "Substitution"). The Substitution involved the transfer of assets from a division within the Separate Account to a new division which invests in shares of corresponding investment portfolios of an insurance trust mutual fund ("New Division") deemed to have (i) substantially similar investment strategies and (ii) historically stronger investment performance and/or lower expense ratios (after waivers and reimbursements). The Substitution was approved by the SEC on November 14, 1997, and was effected on that day. The divisions of the Separate Account affected by the Substitution and the New Divisions which received the assets are as follows: Original Division New Division - ----------------- ------------ Renaissance Balanced Janus Aspen Balanced Nicholas-Applegate Balanced Janus Aspen Balanced Pinnacle Fixed Income JPM Bond ARM Capital Advisors Money Market Janus Aspen Money Market Morgan Stanley Asian Growth Morgan Stanley Asian Equity Morgan Stanley Worldwide High Income Morgan Stanley Emerging Markets Debt Units of each division of the Separate Account affected by the Substitution were redeemed in-kind and the redemption proceeds were used to purchase units of the New Division. The costs of the Substitution were borne by Integrity, and no fees, transfer 11 Separate Account II of Integrity Life Insurance Company Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) charges or sales charges to effect the Substitution were imposed on the Separate Account or the contract holders. Prior to and immediately following the Substitution, the account values of contract holders were the same. In addition, the Substitution did not alter the tax or insurance benefits to contract holders or the contractual obligation of Integrity. The contract holder's account value in a Separate Account division will vary depending on the performance of the corresponding portfolio. The Separate Account currently has twenty-one investment divisions available. The investment objective of each division and its corresponding portfolio are the same. Set forth below is a summary of the investment objectives of the portfolios of the Funds. ZWEIG ASSET ALLOCATION PORTFOLIO seeks long term capital appreciation with investments from the 1,000 most liquid stocks. The Portfolio's sub-adviser strives to do this while protecting principal and reducing exposure to market risk. The 1,000 most liquid stocks are those that the sub-adviser considers comparable to those included in the Standard & Poor's 500 Composite Price Index ("S&P 500"), and that have a minimum of $400 million market capitalization, average daily trading volume of 50,000 share or $425 million in total assets, and that are traded on the New York Stock Exchange ("NYSE"), American Stock Exchange ("AMEX"), over-the-counter ("OTC") or on foreign exchanges. Zweig/Glaser Advisers is the sub-adviser to the Portfolio. HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation. It primarily invests in stocks of established companies with proven records of superior and consistent growth. The Portfolio may invest in U.S. government securities, cash and cash equivalents when that appears to be a better choice in light of the Portfolio's investment objective or when justified by market conditions. Harris Bretall Sullivan & Smith, LLC is the sub-adviser to the Portfolio. SCUDDER KEMPER VALUE PORTFOLIO seeks primarily long-term capital appreciation with a secondary objective of current income. It invests principally in a diversified portfolio of securities believed by the sub- adviser to be undervalued. The sub-adviser's philosophy centers on identifying stocks of large, well-known companies with solid financial strength and large dividend payment histories that have low price- 12 Separate Account II of Integrity Life Insurance Company Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) earnings ratios and have been generally overlooked by the market. Scudder Kemper Investors, Inc. is sub-adviser to the Portfolio. ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation. It invests primarily in "small company stocks," consistent with preservation of capital and reduction of portfolio exposure to market risk, as determined by the sub-adviser. Current income is not an objective. "Small company stocks" are the 2,000 stock positions immediately after the 1,000 largest stocks ranked in terms of market capitalization and/or trading volume, and which are traded on the NYSE, AMEX, OTC or on foreign exchanges. Zweig/Glaser Advisers is the sub-adviser to the Portfolio. EAFE EQUITY INDEX PORTFOLIO seeks to replicate as closely as possible (before the deduction of expenses) the total return of the Morgan Stanley Capital International Europe, Australia, Far East (EAFE) Index, a capitalization-weighted index containing approximately 1,100 equity securities of companies located outside the United States. The Portfolio will be invested primarily in equity securities of business enterprises organized and domiciled outside of the United States or for which the principal trading market is outside the United States. Statistical methods will be employed to replicate the EAFE Index by buying most of the EAFE Index securities. Securities purchased for the portfolio will generally, but not necessarily, be traded on a foreign securities exchange. Bankers Trust Global Asset Management Services is the investment adviser to the Portfolio. EQUITY 500 INDEX PORTFOLIO seeks to replicate as closely as possible (before the deduction of expenses) the total return of the S&P 500, an index emphasizing large-capitalization stocks. The Portfolio will include the common stock of those companies included in the S&P 500, other than Bankers Trust New York Corporation, selected on the basis of computer generated statistical data, that are deemed representative of the industry diversification of the entire S&P 500. Bankers Trust Global Asset Management Services is the investment adviser to the Portfolio. 13 Separate Account II of Integrity Life Insurance Company Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SMALL CAP INDEX PORTFOLIO seeks to replicate as closely as possible (before the deduction of expenses) the total return of the Russell 2000 Small Stock Index (the "Russell 2000"), an index consisting of 2,000 small-capitalization common stocks. The Portfolio will include the common stock of companies included in the Russell 2000, on the basis of computer-generated statistical data, that are deemed representative of the industry diversification of the entire Russell 2000. Bankers Trust Global Asset Management Services is the investment adviser to the Portfolio. VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily in income producing equity securities, with the potential for capital appreciation as a consideration. It normally invests at least 65% of its assets in income-producing equity securities. Fidelity Management and Research Company serves as the investment adviser to the Portfolio. VIP II CONTRAFUND PORTFOLIO seeks long-term capital appreciation. The Portfolio invests primarily in common stocks and in securities whose value the sub-adviser believes is not fully recognized by the public. The types of companies in which the Portfolio may invest include companies experiencing positive fundamental change such as a new management team or product launch, a significant cost-cutting initiative, a merger or acquisition, or a reduction in industry capacity that should lead to improved pricing; companies whose earnings potential has increased or is expected to increase more than generally perceived; companies that have enjoyed recent market popularity but which appear to have temporarily fallen out of favor for reasons that are considered non-recurring or short-term; and companies that are undervalued in relation to securities of other companies in the same industry. Fidelity Management and Research Company serves as the investment adviser to the Portfolio. VIP III GROWTH & INCOME PORTFOLIO seeks high total return through a combination of current income and capital appreciation by investing mainly in equity securities. It invests primarily in stocks of companies that offer potential for growth in earnings while paying dividends, but offer the potential for capital appreciation on future income. The Portfolio may also invest in bonds, including lower-quality debt securities, as well as stocks that are not currently paying dividends, but offer prospects for future income or capital appreciation. Fidelity Management and Research Company serves as the investment adviser to the Portfolio. 14 Separate Account II of Integrity Life Insurance Company Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) VIP III GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by investing primarily in common stocks. The Portfolio may also invest in bonds, lower quality debt securities, as well as stocks that are not currently paying dividends but offer prospects for future income or capital appreciation. Fidelity Management and Research Company serves as the investment adviser to the Portfolio. JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO seeks long-term growth of capital. It is a non-diversified portfolio that pursues its objective by investing primarily in common stocks of issuers selected for their growth potential. The Portfolio may invest in companies of any size, from larger, well-established companies to smaller emerging growth companies. Janus Capital Corporation serves as the investment adviser to the Portfolio. JANUS ASPEN BALANCED PORTFOLIO seeks long-term capital growth, consistent with current income. It is a diversified portfolio that, under normal circumstances, pursues its objective by investing 40-60% of its assets in securities selected primarily for their growth potential and 40-60% of its assets in securities selected primarily for their income potential. The portfolio normally invests at least 25% of its assets in fixed-income senior securities. Janus Capital Corporation serves as the investment adviser to the Portfolio. JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in a manner consistent with the preservation of capital. It is a diversified portfolio that pursues its objective primarily through investments in common stocks of any size throughout the world. Janus Aspen Worldwide Growth portfolio normally invests in issuers from at least five different countries, including the United States. The portfolio may at any time invest in fewer than five countries or even a single country. Janus Capital Corporation serves as the investment adviser to the Portfolio. JANUS ASPEN MONEY MARKET PORTFOLIO seeks maximum current income to the extent consistent with stability of capital. There can be no assurance that the Portfolio will achieve its investment objective or be able to maintain a stable net asset value of $1.00 per share. The portfolio will invest only in eligible high quality, short-term money market instruments that present minimal credit risks, as determined by Janus Capital Corporation, the Portfolio's investment adviser, pursuant to procedures. 15 Separate Account II of Integrity Life Insurance Company Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The portfolio may invest only in United States dollar-denominated instruments that have a remaining maturity of 397 days or less and will maintain a dollar-weighted average portfolio maturity of 90 days or less. Janus Capital Corporation serves as the investment adviser to the Portfolio. JPM INTERNATIONAL OPPORTUNITIES PORTFOLIO seeks to provide a high total return from a portfolio of equity securities of foreign corporations. Total return will consist of realized and unrealized capital gains and losses plus income less expenses. The Portfolio is designed for investors with a long-term investment horizon who want to diversify their investments by adding international equities and take advantage of investment opportunities outside the United States. The Portfolio seeks to achieve its investment objective through country allocation and stock valuation and selection. J.P. Morgan Investment Management Inc. is the investment adviser to the Portfolio. JPM BOND PORTFOLIO seeks to provide a high total return consistent with moderate risk of capital and maintenance of liquidity. Total return will consist of realized and unrealized capital gains and losses plus income less expenses. Although the net asset value of the portfolio will fluctuate, the portfolio attempts to preserve the value of its investments to the extent consistent with its objective. J.P. Morgan Investment Management Inc. is the investment adviser to the Portfolio. MORGAN STANLEY ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing primarily in equity securities of Asian issuers (excluding Japan) using an approach that is oriented to the selection of individual stocks that the adviser believes are undervalued. The portfolio intends to invest primarily in equity securities that are traded on recognized stock exchanges of countries in Asia and in equity securities of companies organized under the laws of an Asian country whose business is conducted principally in Asia. MSDW serves as the investment adviser to the Portfolio. MORGAN STANLEY EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing primarily in fixed income securities of government and government-related issuers located in emerging market countries, which securities provide a high level of current income, while at the same time striving for investment growth. MSDW serves as the investment adviser to the Portfolio. 16 Separate Account II of Integrity Life Insurance Company Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MORGAN STANLEY HIGH YIELD PORTFOLIO seeks above-average total return over a market cycle of three to five years by investing primarily in a diversified portfolio of high yield securities, including corporate bonds and other fixed income securities of both U.S. and non-U.S. issuers and derivatives. High yield securities are rated below investment grade and are commonly referred to as "junk bonds." The portfolio's average weighted maturity will ordinarily exceed five years. Miller Anderson & Sherrerd, LLP serves as the investment adviser to the Portfolio. MORGAN STANLEY U.S. REAL ESTATE PORTFOLIO seeks above-average current income and long-term capital appreciation by investing primarily in equity securities of United States and non-United States companies principally engaged in the United States real estate industry, including real estate investment trusts ("REITs") and real estate operating companies. MSDW serves as the investment adviser to the Portfolio. The assets of the Separate Account are owned by Integrity. The portion of the Separate Account's assets supporting the contracts may not be used to satisfy liabilities arising out of any other business of Integrity. BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for unit investment trusts. INVESTMENTS Investments in shares of the Funds are valued at the net asset values of the respective portfolios, which approximates fair value. The difference between cost and fair value is reflected as unrealized appreciation and depreciation of investments. 17 Separate Account II of Integrity Life Insurance Company Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Share transactions are recorded on the trade date. Realized gains and losses on sales of the Funds' shares are determined based on the identified cost basis. Dividends from income and capital gain distributions are recorded on the ex-dividend date. Dividends and distributions from the Funds' portfolios are reinvested in the respective portfolios and are reflected in the unit value of the divisions of the Separate Account. UNIT VALUE Unit values for the Separate Account divisions are computed at the end of each business day. The unit value is equal to the unit value for the preceding business day multiplied by a net investment factor. This net investment factor is determined based on the value of the underlying mutual fund portfolios of the Separate Account, reinvested dividends and capital gains, new premium deposits or withdrawals, and the daily asset charge for the mortality and expense risk and administrative charges. Unit values are adjusted daily for all activity in the Separate Account. TAXES Operations of the Separate Account are included in the income tax return of Integrity which is taxed as a life insurance company under the Internal Revenue Code. The Separate Account will not be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code. Under the provisions of the policies, Integrity has the right to charge the Separate Account for federal income tax attributable to the Separate Account. No charge is currently being made against the Separate Account for such tax since, under current tax law, Integrity pays no tax on investment income and capital gains reflected in variable life insurance policy reserves. However, Integrity retains the right to charge for any federal income tax incurred which is attributable to the Separate Account if the law is changed. Charges for state and local taxes, if any, attributable to the Separate Account may also be made. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 18 2. INVESTMENTS The aggregate cost of portfolio shares purchased and proceeds from portfolio shares sold during the year ended December 31, 1998 and the cost of shares held at December 31, 1998 for each division were as follows:
DIVISION PURCHASES SALES COST - -------------------------------------------------------------------------------- Zweig Asset Allocation $ 7,526,711 $ 8,748,810 $ 30,589,254 Harris Bretall Equity Growth 9,358,761 5,371,005 26,821,845 Scudder Kemper Value 19,502,378 13,183,147 37,266,815 Zweig Equity (Small Cap) 5,144,423 2,929,947 11,684,635 EAFE Equity Index 2,101,454 412,621 1,910,273 Equity 500 Index 17,472,745 11,398,207 18,156,153 Small Cap Index 3,781,100 764,879 3,631,389 VIP Equity-Income 11,981,559 718,942 12,765,997 VIP II Contrafund 8,984,949 687,198 9,587,413 VIP III Growth & Income 8,764,172 312,333 9,699,284 VIP III Growth Opportunities 6,372,068 326,148 6,846,465 Janus Aspen Capital Appreciation 8,464,683 1,059,082 8,417,634 Janus Aspen Balanced 8,655,246 7,958,324 57,126,528 Janus Aspen Worldwide Growth 14,332,860 1,005,818 14,901,977 Janus Aspen Money Market 30,080,015 18,562,914 17,912,594 JPM International Opportunities 1,887,704 859,309 1,333,962 JPM Bond 15,759,538 7,801,407 16,384,600 Morgan Stanley Emerging Markets Debt 1,636,884 1,439,790 5,693,611 Morgan Stanley High Yield 7,411,738 1,805,118 6,313,811 Morgan Stanley U.S. Real Estate 2,390,878 560,030 2,448,460 Morgan Stanley Asian Equity 1,258,197 1,350,054 3,947,479 ------------- $ 303,440,179 ------------- -------------
19 Separate Account II of Integrity Life Insurance Company Notes to Financial Statements (continued) 3. EXPENSES Integrity assumes mortality and expense risks and incurs certain administrative expenses related to the operations of the Separate Account and deducts a charge from the assets of the Separate Account at an annual rate of 1.20% and 0.15% of net assets, respectively, to cover these risks and expenses. In addition, an annual charge of $30 per contract is assessed if the participant's account value is less than $50,000 at the end of any participation year prior to the participant's retirement date (as defined by the participant's contract). 4. AMOUNT RETAINED BY INTEGRITY Integrity may allocate amounts to certain Separate Account divisions to facilitate the commencement of operations. Such amounts are not subject to charges for mortality and expense risks and administrative expenses. Amounts retained in the Separate Account by Integrity may be transferred by Integrity to its general account. In 1997, Integrity allocated $10.0 million to the Equity 500 Index Division and, as a part of the substitution of certain divisions of the Separate Account, transferred all amounts retained by Integrity in the Pinnacle Fixed Income Division to the JPM Bond Division. Also during 1997, Integrity transferred to its general account $1.5 million and $541,265 retained by Integrity in the Equity 500 Index Division and JPM Bond Division, respectively. During 1998, Integrity transferred to its general account all amounts retained by Integrity in the Equity 500 Index Division and the JPM Bond Division. 20 Financial Statements Separate Account Ten DECEMBER 31, 1998 WITH REPORT OF INDEPENDENT AUDITORS Report of Independent Auditors The Unit Holders and Board of Directors Separate Account Ten of Integrity Life Insurance Company We have audited the accompanying statements of assets and liabilities of Separate Account Ten of Integrity Life Insurance Company (the Separate Account) (comprised of Select Ten Plus Division-June, Select Ten Plus Division-September and Select Ten Plus Division-December), including the schedules of investments, as of December 31, 1998, and the related statements of operations and changes in net assets and financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Separate Account's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned at December 31, 1998, by correspondence with the custodian. As to securities relating to uncompleted transactions, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the divisions of the Separate Account at December 31, 1998, and the results of their operations, changes in their net assets, and financial highlights for each of the periods indicated therein in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Kansas City, Missouri January 29, 1999 2 Select Ten Plus Division - June Statement of Assets and Liabilities
DECEMBER 31, 1998 ----------------- ASSETS Investments in securities, at value (cost $1,977,918)--See accompanying schedule $ 2,056,681 Cash 12,864 Dividends, interest and other receivables 8,776 ----------------- TOTAL ASSETS 2,078,321 LIABILITIES Accrued expenses 22,641 Payable for investment securities purchased 12,660 ----------------- TOTAL LIABILITIES 35,301 ----------------- NET ASSETS $ 2,043,020 ----------------- ----------------- UNIT VALUE, offering and redemption price per unit $ 10.43 ----------------- ----------------- Units outstanding 195,841 ----------------- ----------------- Statement of Operations JUNE 30, 1998 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 1998 ----------------- INVESTMENT INCOME - DIVIDENDS $ 26,883 EXPENSES Mortality and expense risk and administrative charges 13,473 Investment advisory and management fees 4,990 Custody and accounting fees 10,377 Professional fees 3,524 Directors' fees and expenses 3,150 Printing and filing fees 3,312 Other expenses 3,069 ----------------- Total expenses before reimbursement 41,895 Less: expense reimbursement (19,956) ----------------- Net expenses 21,939 ----------------- Net investment income 4,944 Realized and Unrealized Gain on Investments Net realized gain on investment securities 925 Unrealized appreciation on investment securities 78,763 ----------------- Net gain on investments 79,688 ----------------- Net increase in net assets resulting from operations $ 84,632 ----------------- -----------------
SEE ACCOMPANYING NOTES. 3 Select Ten Plus Division - June Statement of Changes in Net Assets
JUNE 30, 1998 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 1998 ----------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income $ 4,944 Net realized gain on investments 925 Change in net unrealized appreciation 78,763 ----------------- Net increase in net assets resulting from operations 84,632 Contract related transactions: Contributions from contract holders (196,589 units) 1,965,893 Cost of units redeemed (748 units) (7,505) ----------------- Net increase in net assets resulting from unit transactions 1,958,388 TOTAL INCREASE IN NET ASSETS 2,043,020 NET ASSETS Beginning of period - ----------------- End of period $ 2,043,020 ----------------- ----------------- SEE ACCOMPANYING NOTES. Financial Highlights JUNE 30,1998 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 1998 ----------------- SELECTED PER-UNIT DATA Unit value, beginning of period $ 10.00 Income from investment operations: Net investment income 0.03 Net realized and unrealized gain on investments 0.40 ----------------- Total from investment operations 0.43 ----------------- Unit value, end of period $ 10.43 ----------------- ----------------- TOTAL RETURN 4.30% RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 2,043 Ratio of net investment income to average net assets 0.50% Ratio of expenses to average net assets 2.20% Ratio of net investment income to average net assets before voluntary expense reimbursement (1.50%) Ratio of expenses to average net assets before voluntary expense reimbursement 4.20% Portfolio turnover rate 0.86%
PERCENTAGE AMOUNTS ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER RATE. 4 Select Ten Plus Division - June Schedule of Investments December 31, 1998
NUMBER OF SHARES VALUE --------- ----- COMMON STOCKS (100%) BASIC MATERIALS (10.6%) International Paper Company 4,864 $ 217,968 CAPITAL GOODS (18.0%) Caterpillar, Inc. 4,207 193,522 Minnesota Mining & Manufacturing 2,478 176,248 ----------- 369,770 COMMUNICATION SERVICES (13.0%) AT&T Corporation 3,546 266,836 CONSUMER CYCLICAL (20.5%) Eastman Kodak Company 2,851 205,272 General Motors Corporation 3,025 216,477 ----------- 421,749 CONSUMER STAPLE (13.3 %) Philip Morris Company, Inc. 5,123 274,080 ENERGY (20.4 %) Chevron Corporation 2,471 204,939 Exxon Corporation 2,937 214,768 ----------- 419,707 FINANCIAL (4.2%) J.P. Morgan Company, Inc. 824 86,571 ----------- TOTAL COMMON STOCKS (Cost $1,977,918) 2,056,681 ----------- TOTAL INVESTMENTS (100.0%) $ 2,056,681 ----------- -----------
OTHER INFORMATION: Purchases and sales of securities, excluding short-term securities, for the period ended December 31, 1998 aggregated $1,993,850 and $16,857, respectively. At December 31, 1998, net unrealized appreciation for tax purposes aggregated $78,763 of which $152,941 related to appreciated investment securities and $74,178 related to depreciated investment securities. The aggregate cost of securities is the same for book and tax purposes. SEE ACCOMPANYING NOTES. 5 Select Ten Plus Division - September Statement of Assets and Liabilities
DECEMBER 31, 1998 ----------------- ASSETS Investments in securities, at value (cost $10,746,149)--See accompanying schedule $ 11,014,215 Dividends, interest and other receivables 30,869 Cash 2,306 ----------------- TOTAL ASSETS 11,047,390 LIABILITIES Accrued expenses 32,854 Payable for investment securities purchased 2,150 ----------------- TOTAL LIABILITIES 35,004 ----------------- NET ASSETS $ 11,012,386 ----------------- ----------------- UNIT VALUE, offering and redemption price per unit $ 10.26 ----------------- ----------------- Units outstanding 1,072,954 ----------------- ----------------- Statement of Operations SEPTEMBER 30, 1998 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 1998 ----------------- INVESTMENT INCOME - DIVIDENDS $ 78,307 EXPENSES Mortality and expense risk and administrative charges 38,162 Investment advisory and management fees 14,134 Custody and accounting fees 5,127 Professional fees 3,504 Directors' fees and expenses 3,133 Printing and filing fees 3,294 Other expenses 3,052 ----------------- Total expenses before reimbursement 70,406 Less: expense reimbursement (8,263) ----------------- Net expenses 62,143 ----------------- Net investment income 16,164 REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investment securities 2,620 Unrealized appreciation on investment securities 268,066 ----------------- Net gain on investments 270,686 ----------------- Net increase in net assets resulting from operations $ 286,850 ----------------- -----------------
SEE ACCOMPANYING NOTES. 6 Select Ten Plus Division - September Statement of Changes in Net Assets
SEPTEMBER 30, 1998 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 1998 ----------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income $ 16,164 Net realized gain on investments 2,620 Change in net unrealized appreciation 268,066 ----------------- Net increase in net assets resulting from operations 286,850 Contract related transactions: Contributions from contract holders (1,084,432 units) 10,841,972 Cost of units redeemed (11,478 units) (116,436) ----------------- Net increase in net assets resulting from unit transactions 10,725,536 ----------------- TOTAL INCREASE IN NET ASSETS 11,012,386 NET ASSETS Beginning of period - ----------------- End of period $ 11,012,386 ----------------- ----------------- SEE ACCOMPANYING NOTES. Financial Highlights SEPTEMBER 30, 1998 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 31, 1998 ----------------- SELECTED PER-UNIT DATA Unit value, beginning of period $ 10.00 Income from investment operations: Net investment income 0.02 Net realized and unrealized gain on investments 0.24 ----------------- Total from investment operations 0.26 ----------------- Unit value, end of period $ 10.26 ----------------- ----------------- TOTAL RETURN 2.60% RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 11,012 Ratio of net investment income to average net assets 0.57% Ratio of expenses to average net assets 2.20% Ratio of net investment income to average net assets before voluntary expense reimbursement 0.28% Ratio of expenses to average net assets before voluntary expense reimbursement 2.49% Portfolio turnover rate 1.35%
PERCENTAGE AMOUNTS ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER RATE. 7 Select Ten Plus Division - September Schedule of Investments December 31, 1998
NUMBER OF SHARES VALUE --------- ----- COMMON STOCKS (100%) BASIC MATERIALS (8.6%) Du Pont (E.I.) de Nemours and Company 17,921 $ 950,933 CAPITAL GOODS (18.6%) Caterpillar, Inc. 22,733 1,045,718 Minnesota Mining & Manufacturing 14,134 1,005,281 ------------ 2,050,999 CONSUMER CYCLICAL (30.6%) Eastman Kodak Company 13,561 976,392 General Motors Corporation 18,902 1,352,674 The Goodyear Tire & Rubber Company 20,599 1,038,962 ------------ 3,368,028 CONSUMER STAPLE (11.2%) Philip Morris Company, Inc. 23,025 1,231,838 ENERGY (19.4%) Chevron Corporation 12,421 1,030,167 Exxon Corporation 15,104 1,104,480 ------------ 2,134,647 FINANCIAL (11.6%) J.P. Morgan Company, Inc. 12,162 1,277,770 ------------ TOTAL COMMON STOCKS (Cost $10,746,149) 11,014,215 ------------ TOTAL INVESTMENTS (100.0%) $ 11,014,215 ------------ ------------
OTHER INFORMATION: Purchases and sales of securities, excluding short-term securities, for the period ended December 31, 1998 aggregated $10,891,121 and $147,592, respectively. At December 31, 1998, net unrealized appreciation for tax purposes aggregated $268,066 of which $659,286 related to appreciated investment securities and $391,220 related to depreciated investment securities. The aggregate cost of securities is the same for book and tax purposes. SEE ACCOMPANYING NOTES. 8 Select Ten Plus Division - December Statement of Assets and Liabilities
DECEMBER 31, 1998 ----------------- ASSETS Investments in securities, at value (cost $14,784,736)--See accompanying schedule $ 14,519,611 Cash 14,786,409 ----------------- TOTAL ASSETS 29,306,020 LIABILITIES Payable for investment securities purchased 14,784,736 Accrued expenses 844 ----------------- TOTAL LIABILITIES 14,785,580 ----------------- NET ASSETS $ 14,520,440 ----------------- ----------------- UNIT VALUE, offering and redemption price per unit $ 9.82 ----------------- ----------------- Units outstanding 1,478,641 ----------------- ----------------- Statement of Operations FOR THE ONE DAY PERIOD ENDED DECEMBER 31, 1998 (COMMENCEMENT OF OPERATIONS) ----------------- INVESTMENT INCOME - DIVIDENDS $ - EXPENSES Mortality and expense risk and administrative charges 537 Investment advisory and management fees 199 Custody and accounting fees 55 Professional fees 14 Directors' fees and expenses 17 Other expenses 22 ----------------- Net expenses 844 ----------------- Net investment loss (844) Unrealized Loss on Investments Unrealized depreciation on investment securities (265,125) ----------------- Net loss on investments (265,125) ----------------- Net decrease in net assets resulting from operations $ (265,969) ----------------- -----------------
SEE ACCOMPANYING NOTES. 9 Select Ten Plus Division - December Statement of Changes in Net Assets
FOR THE ONE DAY PERIOD ENDED DECEMBER 31, 1998 (COMMENCEMENT OF OPERATIONS) ----------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment loss $ (844) Change in net unrealized depreciation (265,125) ----------------- Net decrease in net assets resulting from operations (265,969) Contract related transactions: Contributions from contract holders (1,478,641 units) 14,786,409 ----------------- TOTAL INCREASE IN NET ASSETS 14,520,440 NET ASSETS Beginning of period - ----------------- End of period $ 14,520,440 ----------------- ----------------- SEE ACCOMPANYING NOTES. Financial Highlights FOR THE ONE DAY PERIOD ENDED DECEMBER 31, 1998 (COMMENCEMENT OF OPERATIONS) ----------------- SELECTED PER-UNIT DATA Unit value, beginning of period $ 10.00 Loss from investment operations: Net investment loss -* Net realized and unrealized loss on investments (0.18) ----------------- Total from investment operations (0.18) ----------------- Unit value, end of period $ 9.82 ----------------- ----------------- TOTAL RETURN (1.80%) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in thousands) $ 14,520 Ratio of net investment loss to average net assets (2.12%) Ratio of expenses to average net assets 2.12% Portfolio turnover rate -
* Less than $0.01 PERCENTAGE AMOUNTS ARE ANNUALIZED, EXCEPT TOTAL RETURN AND PORTFOLIO TURNOVER RATE. 10 Select Ten Plus Division - December Statement of Changes in Net Assets
NUMBER OF SHARES VALUE --------- ----- COMMON STOCKS (100%) BASIC MATERIALS (19.9%) Du Pont (E.I.) de Nemours and Company 26,340 $ 1,397,666 International Paper Company 33,360 1,494,945 ------------ 2,892,611 CAPITAL GOODS (19.7%) Caterpillar, Inc. 31,425 1,445,550 Minnesota Mining & Manufacturing 19,990 1,421,789 ------------ 2,867,339 CONSUMER CYCLICAL (30.5%) Eastman Kodak Company 20,570 1,481,040 General Motors Corporation 20,520 1,468,463 The Goodyear Tire & Rubber Company 29,230 1,474,288 ------------ 4,423,791 CONSUMER STAPLE (10.0%) Philip Morris Company, Inc. 27,000 1,444,500 ENERGY (10.0%) Chevron Corporation 17,520 1,453,065 FINANCIAL (9.9%) J.P. Morgan Company, Inc. 13,690 1,438,305 ------------ TOTAL COMMON STOCKS (Cost $14,784,736) 14,519,611 ------------ TOTAL INVESTMENTS (100.0%) $ 14,519,611 ------------ ------------
OTHER INFORMATION: Purchases of securities, excluding short-term securities, for the period ended December 31, 1998 aggregated $14,784,736. At December 31, 1998, net unrealized depreciation for tax purposes aggregated $265,125 of which $282,695 related to depreciated investment securities and $17,570 related to appreciated investment securities. The aggregate cost of securities is the same for book and tax purposes. SEE ACCOMPANYING NOTES. 11 Separate Account Ten of Integrity Life Insurance Company Notes to Financial Statements December 31, 1998 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Separate Account Ten of Integrity Life Insurance Company (the "Separate Account") was formed on February 4, 1998. The Separate Account is registered under the Investment Company Act of 1940 as a management investment company. Contributions to the Separate Account are currently limited to PINNACLE contract holders and SYNDICATED SELECT TEN PLUS contract holders. PINNACLE and SYNDICATED SELECT TEN PLUS are flexible premium variable annuity products issued by Integrity Life Insurance Company ("Integrity"). The Separate Account is currently divided into four divisions: Select Ten Plus Division-March, Select Ten Plus Division-June, Select Ten Plus Division-September, and Select Ten Plus Division-December ("Division(s)"). Each Division is a non-diversified investment company which invests directly in securities. The Divisions seek total return by acquiring the ten highest yielding stocks in the Dow Jones Industrial Average ("DJIA") in equal weights and holding them for approximately twelve months. Each Division is open for new investments on only one day of each year. The twelve month holding period begins on the last business day of the month for which the Division is named. For example, the Select Ten Plus Division-June invests only on the last business day of June each year. As of December 31, 1998, the March Division was the only Division that did not have invested assets. The assets of the Separate Account are owned by Integrity. ARM Securities Corporation ("ARM Securities"), a registered broker-dealer under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers, Inc., distributes units of the Separate Account. Integrity Capital Advisors, Inc. ("Integrity Capital"), an investment adviser registered under the Investment Advisers Act of 1940, provides management services to the Separate Account pursuant to a management agreement. National Asset Management Corporation ("National Asset"), an investment adviser registered under the Investment Advisers Act of 1940, serves as the sub-adviser of the Divisions pursuant to a sub-advisory agreement. ARM Financial Group, Inc. ("ARM") is the ultimate parent of Integrity, Integrity Capital and ARM Securities. ARM specializes in the growing asset accumulation business with particular emphasis on retirement savings and investment products. At December 31, 1998, ARM had approximately $9.9 billion of assets under management. 12 Separate Account Ten of Integrity Life Insurance Company Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for investment companies. SECURITY VALUATION Common stocks are valued at the last sale price on the exchange on which they are primarily traded. SECURITY TRANSACTIONS Securities transactions are accounted for as of trade date net of brokerage fees, commissions and transfer fees. Dividend income is recorded on the ex-dividend date. Interest income is accrued daily. Realized gains and losses on sales of investments are determined on the basis of the first-in, first-out method for all of the Divisions. FEDERAL INCOME TAX MATTERS Operations of the Separate Account are included in the income tax return of Integrity, which is taxed as a life insurance company under the Internal Revenue Code. The Separate Account will not be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code. Under existing federal income tax law, no taxes are payable on the investment income or on the capital gains of the Separate Account. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. EXPENSES Integrity assumes mortality and expense risks and incurs certain administrative expenses related to the operations of the Separate Account and deducts a charge from the assets of the Divisions at an annual rate of 1.20% and 0.15% of average daily net assets, respectively, to cover these risks and expenses. In addition, an annual charge of $30 per contract is assessed if the contract holder's account value is less than $50,000 at the end of any participation year prior to the contract holder's retirement date (as defined by the contract). 13 Separate Account Ten of Integrity Life Insurance Company Notes to Financial Statement (continued) 3. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES Integrity Capital serves as investment adviser for the Divisions and National Asset serves as the sub-adviser for the Divisions. For providing investment management services to the Divisions, Integrity Capital receives a monthly fee based on an annual rate of .50% of each Division's average daily net assets. Integrity Capital, not the Separate Account, pays sub-advisory fees to National Asset for its services under a sub-advisory agreement at an annual rate of .10% of the Divisions' average daily net assets up to $100 million, and .05% of the Divisions' average daily net assets in excess of $100 million. Integrity Capital has guaranteed it will pay National Asset a minimum sub-advisory fee of $25,000 during the Separate Account's first year of operations. Integrity Capital has agreed to reimburse each Division for operating expenses (excluding management fees and mortality and expense charges) above an annual rate of .35% of the Divisions' average net assets. Certain officers and directors of the Separate Account are also officers of ARM, ARM Securities, Integrity Capital, and Integrity. The Separate Account does not pay any amounts to compensate these individuals. 14 Financial Statements (Statutory Basis) Integrity Life Insurance Company YEARS ENDED DECEMBER 31, 1998 AND 1997 WITH REPORT OF INDEPENDENT AUDITORS Integrity Life Insurance Company Financial Statements (Statutory Basis) Years Ended December 31, 1998 and 1997 CONTENTS Report of Independent Auditors..........................................................................1 Audited Financial Statements Balance Sheets (Statutory Basis)........................................................................3 Statements of Income (Statutory Basis)..................................................................5 Statements of Changes in Capital and Surplus (Statutory Basis)..........................................6 Statements of Cash Flows (Statutory Basis)..............................................................7 Notes to Financial Statements (Statutory Basis).........................................................9
Report of Independent Auditors Board of Directors Integrity Life Insurance Company We have audited the accompanying statutory basis balance sheets of Integrity Life Insurance Company as of December 31, 1998 and 1997, and the related statutory basis statements of income, changes in capital and surplus, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1 to the financial statements, the Company presents its financial statements in conformity with accounting practices prescribed or permitted by the Ohio Department of Insurance, which practices differ from generally accepted accounting principles. The variances between such practices and generally accepted accounting principles and the effects on the accompanying financial statements are described in Note 1. In our opinion, because of the effects of the matter described in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial position of Integrity Life Insurance Company at December 31, 1998 and 1997, or the results of its operations or its cash flows for the years then ended. 1 However, in our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Integrity Life Insurance Company at December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with accounting practices prescribed or permitted by the Ohio Department of Insurance. /s/ Ernst & Young LLP Louisville, Kentucky February 9, 1999 2 Integrity Life Insurance Company Balance Sheets (Statutory Basis)
DECEMBER 31, 1998 1997 ------------------------- (In thousands) ADMITTED ASSETS Cash and invested assets: Bonds $4,562,340 $3,444,659 Preferred stocks 32,704 58,369 Investment in common stock of subsidiary 59,503 54,028 Mortgage loans 11,719 13,186 Policy loans 102,305 99,531 Cash and short-term investments 412,074 201,242 Other invested assets 53,435 27,591 ---------- ---------- Total cash and invested assets 5,234,080 3,898,606 Separate account assets 2,124,250 1,822,557 Accrued investment income 47,091 38,247 Reinsurance balances receivable 1,048 4,837 Other admitted assets 2,097 207 ---------- ---------- Total admitted assets $7,408,566 $5,764,454 ---------- ---------- ---------- ----------
3
DECEMBER 31, 1998 1997 ---------------------------- (In thousands) LIABILITIES AND CAPITAL AND SURPLUS Liabilities: Policy and contract liabilities: Life and annuity reserves $ 1,512,538 $ 1,603,893 Funding agreement and GIC deposit fund liabilities 3,508,124 2,039,202 Unpaid claims 120 207 Deposits on policies to be issued, net 83 (1,715) ----------- ----------- Total policy and contract liabilities 5,020,865 3,641,587 Separate account liabilities 2,101,750 1,798,069 Accounts payable and accrued expenses 3,502 2,538 Transfers to separate accounts due or accrued, net (59,632) (42,028) Reinsurance balances payable 9,194 14,602 Federal income taxes 64 763 Asset valuation reserve 34,578 23,368 Interest maintenance reserve 38,637 42,272 Other liabilities 12,920 71,523 ----------- ----------- Total liabilities 7,161,878 5,552,694 Capital and surplus: Common stock, $2 par value, 1,500,000 shares authorized, issued and outstanding 3,000 3,000 Paid-in surplus 122,006 113,109 Unassigned surplus 121,682 95,651 ----------- ----------- Total capital and surplus 246,688 211,760 ----------- ----------- Total liabilities and capital and surplus $ 7,408,566 $ 5,764,454 ----------- ----------- ----------- -----------
See accompanying notes. 4 Integrity Life Insurance Company Statements of Income (Statutory Basis)
YEAR ENDED DECEMBER 31, 1998 1997 ------------------------- (In thousands) PREMIUMS AND OTHER REVENUES: Premiums and annuity considerations $ 7,313 $ 13,386 Deposit-type funds 1,868,553 2,191,350 Net investment income 321,469 239,514 Amortization of the interest maintenance reserve 2,243 2,561 Income from separate account seed money investment -- 469 Other revenues 20,409 16,988 ---------- ---------- Total premiums and other revenues 2,219,987 2,464,268 Benefits paid or provided: Death benefits 5,528 5,136 Annuity benefits 240,573 136,630 Surrender benefits 297,863 408,615 Interest on funds left on deposit 162,137 84,652 Payments on supplementary contracts 10,982 10,659 Increase in reserves and deposit fund liabilities 1,216,263 945,161 ---------- ---------- Total benefits paid or provided 1,933,346 1,590,853 ---------- ---------- Insurance and other expenses: Commissions 31,144 29,189 General expenses 23,542 15,869 Taxes, licenses and fees 1,483 1,111 Net transfers to separate accounts 186,486 785,374 Other expenses 1,710 3,354 ---------- ---------- Total insurance and other expenses 244,365 834,897 ---------- ---------- Gain from operations before federal income taxes and net realized capital gains 42,276 38,518 ---------- ---------- Federal income tax expense 5,456 2,871 ---------- ---------- Gain from operations before net realized capital gains 36,820 35,647 Net realized capital gains, excluding realized capital gains (losses), net of tax, transferred to the interest maintenance reserve (1998-$(1,392); 1997-$6,239) 945 2,512 ---------- ---------- Net income $ 37,765 $ 38,159 ---------- ---------- ---------- ----------
See accompanying notes. 5 Integrity Life Insurance Company Statements of Changes in Capital and Surplus (Statutory Basis) Years Ended December 31, 1998 and 1997
TOTAL COMMON PAID-IN UNASSIGNED CAPITAL AND STOCK SURPLUS SURPLUS SURPLUS ---------------------------------------------------------------------- (IN THOUSANDS) Balance, January 1, 1997 $ 3,000 $ 87,535 $ 73,299 $ 163,834 Net income 38,159 38,159 Net change in unrealized gain of subsidiary 5,756 5,756 Increase in asset valuation reserve (9,563) (9,563) Capital contribution, net 25,574 25,574 Dividends to shareholder (12,000) (12,000) -------- --------- --------- --------- Balance, December 31, 1997 3,000 113,109 95,651 211,760 Net income 37,765 37,765 Net change in unrealized gain of subsidiary 5,475 5,475 Net change in nonadmitted assets and related items 1 1 Increase in asset valuation reserve (11,210) (11,210) Capital contribution 8,897 8,897 Dividends to shareholder (6,000) (6,000) -------- --------- --------- --------- Balance, December 31, 1998 $ 3,000 $ 122,006 $ 121,682 $ 246,688 -------- --------- --------- --------- -------- --------- --------- ---------
SEE ACCOMPANYING NOTES. 6
YEAR ENDED DECEMBER 31, 1998 1997 ---------------------------- (In thousands) OPERATIONS: Premiums, policy proceeds, and other considerations received $ 1,875,866 $ 2,204,736 Net investment income received 315,760 230,747 Commission and expense allowances received on reinsurance ceded 904 3,838 Benefits paid (555,176) (561,208) Insurance expenses paid (55,204) (46,819) Other income received net of other expenses paid 17,100 9,092 Net transfers to separate accounts (204,091) (789,869) Federal income taxes paid (1,814) (5,501) --------- --------- Net cash provided by operations 1,393,345 1,045,016 INVESTMENT ACTIVITIES: Proceeds from sales, maturities, or repayments of investments: Bonds 4,854,879 3,407,120 Preferred stocks 86,730 87,435 Mortgage loans 1,467 19,760 Real estate -- 359 Other invested assets 63,054 10,216 Net gains (losses) on cash and short-term investments 580 (24) Miscellaneous proceeds 1,050 3,436 --------- --------- Total investment proceeds 5,007,760 3,528,302 Benefits recovered (taxes paid) on capital gains (3,264) 175 --------- --------- Net proceeds from sales, maturities, or repayments of investments 5,004,496 3,528,477
7 Integrity Life Insurance Company Statements of Cash Flows (Statutory Basis) (continued)
YEAR ENDED DECEMBER 31, 1998 1997 --------------------------- (In thousands) Cost of investments acquired: Bonds 5,980,098 4,376,185 Preferred and common stocks 60,158 101,175 Other invested assets 85,759 31,931 Miscellaneous applications 2,731 -- ---------- --------- Total cost of investments acquired 6,128,746 4,509,291 Net increase in policy loans and premium notes 2,773 1,320 ---------- --------- Net cash used in investment activities (1,127,023) (982,134) FINANCING AND MISCELLANEOUS ACTIVITIES: Other cash provided: Capital and surplus paid-in 8,897 40,000 Other sources 7,631 52,548 ---------- --------- Total other cash provided 16,528 92,548 Other cash applied: Dividends to shareholder 6,000 12,000 Other applications, net 66,018 29,197 ---------- --------- Total other cash applied 72,018 41,197 ---------- --------- Net cash provided by (used in) financing and miscellaneous activities (55,490) 51,351 ---------- --------- Net increase in cash and short-term investments 210,832 114,233 Cash and short-term investments at beginning of year 201,242 87,009 ---------- --------- Cash and short-term investments at end of year $ 412,074 $ 201,242 ---------- --------- ---------- ---------
See accompanying notes. 8 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis) December 31, 1998 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION Integrity Life Insurance Company (the "Company") is an indirect wholly owned subsidiary of ARM Financial Group, Inc. ("ARM"). ARM acquired the Company and its wholly owned insurance subsidiary, National Integrity Life Insurance Company ("National Integrity"), on November 26, 1993 from The National Mutual Life Association of Australasia Limited. The Company is domiciled in the state of Ohio. The Company, currently licensed in 46 states and the District of Columbia, and National Integrity specialize in the growing asset accumulation business with particular emphasis on retirement savings and investment products. In June 1997, ARM completed an initial public offering of 9.2 million shares of its common stock of which 5.75 million shares were sold by ARM for net proceeds of $78.8 million. The remaining 3.45 million shares were sold by certain private equity funds sponsored by Morgan Stanley Dean Witter & Co. ("Morgan Stanley Stockholders"). On June 30, 1997, ARM used a portion of such net proceeds to make a $40 million capital contribution to the Company, thereby strengthening the Company's capital base to provide for future growth. Simultaneously, the Company paid a $14.4 million dividend of bonds held by the Company to ARM for a net capital contribution of $25.6 million. In May 1998, ARM completed a secondary public offering of approximately 12.4 million shares of common stock held by the Morgan Stanley Stockholders. As a result of the secondary public offering, the Morgan Stanley Stockholders no longer own any shares of ARM's outstanding stock. BASIS OF PRESENTATION The accompanying financial statements of the Company have been prepared in conformity with accounting practices prescribed or permitted by the Ohio Department of Insurance. Such practices vary from generally accepted accounting principles ("GAAP"). The more significant variances from GAAP are as follows: 9 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED) INVESTMENTS Investments in bonds and preferred stocks are reported at amortized cost or fair value based on the National Association of Insurance Commissioners' ("NAIC") rating; for GAAP, such fixed maturity investments are designated at purchase as held-to-maturity, trading or available-for-sale. Held-to-maturity fixed investments are reported at amortized cost, and the remaining fixed maturity investments are reported at fair value with unrealized holding gains and losses reported in operations for those designated as trading and as a separate component of shareholder's equity for those designated as available-for-sale. In addition, fair values of certain investments in bonds and stocks are based on values specified by the NAIC, rather than on actual or estimated fair values used for GAAP. Realized gains and losses are reported in income net of income tax and transfers to the interest maintenance reserve. Changes between cost and admitted investment asset amounts are credited or charged directly to unassigned surplus rather than to a separate surplus account. The Asset Valuation Reserve is determined by an NAIC prescribed formula and is reported as a liability rather than unassigned surplus. Under a formula prescribed by the NAIC, the Company defers the portion of realized gains and losses on sales of fixed income investments, principally bonds and mortgage loans, attributable to changes in the general level of interest rates and amortizes those deferrals over the remaining period to maturity of the individual security sold using the seriatim method. The net deferral is reported as the Interest Maintenance Reserve in the accompanying balance sheets. Under GAAP, realized gains and losses are reported in the income statement on a pretax basis in the period that the asset giving rise to the gain or loss is sold and include provisions when there has been a decline in asset values deemed other than temporary. SUBSIDIARY The accounts and operations of the Company's subsidiary are not consolidated with the accounts and operations of the Company as would be required under GAAP. 10 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED) POLICY ACQUISITION COSTS Costs of acquiring and renewing business are expensed when incurred. Under GAAP, acquisition costs related to investment-type products, to the extent recoverable from future gross profits, are amortized generally in proportion to the emergence of gross profits over the estimated term of the underlying policies. NONADMITTED ASSETS Certain assets designated as "nonadmitted," principally receivables greater than 90 days past due, are excluded from the accompanying balance sheets and are charged directly to unassigned surplus. PREMIUMS AND BENEFITS Revenues include premiums and deposits received and benefits include death benefits paid and the change in policy reserves. Under GAAP, such premiums and deposits received are accounted for as a deposit liability and therefore not recognized as premium revenue; benefits paid equal to the policy account value are accounted for as a return of deposit instead of benefit expense. BENEFIT RESERVES Certain policy reserves are calculated using statutorily prescribed interest and mortality assumptions rather than on expected experience or actual account balances as would be required under GAAP. FEDERAL INCOME TAXES Deferred federal income taxes are not provided for differences between the financial statement amounts and tax bases of assets and liabilities. 11 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED) STATEMENT OF CASH FLOWS Cash and short-term investments in the statement of cash flows represent cash balances and investments with initial maturities of one year or less. Under GAAP, the corresponding captions of cash and cash equivalents include cash balances and investments with initial maturities of three months or less. The effects of the foregoing variances from GAAP on the accompanying statutory basis financial statements are as follows:
YEAR ENDED DECEMBER 31, 1998 1997 ---------------------------- (In thousands) Net income as reported in the accompanying statutory basis financial statements $ 37,765 $ 38,159 Deferred policy acquisition costs, net of amortization 22,694 19,174 Adjustments to customer deposits (7,082) (10,224) Adjustments to invested asset carrying values at acquisition date (226) (69) Amortization of value of insurance in force (5,426) (8,423) Amortization of interest maintenance reserve (2,243) (2,561) Adjustments for realized investment gains (losses) (4,043) 217 Adjustments for federal income tax expense (4,623) (4,419) Investment in subsidiary 11,561 6,009 Eliminate dividend income from subsidiary (2,771) - Other 2,237 3,300 --------- --------- Net income, GAAP basis $ 47,843 $ 41,163 --------- --------- --------- ---------
12 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 1997 ---------------------------- (In thousands) Capital and surplus as reported in the accompanying statutory basis financial statements $ 246,688 $ 211,760 Adjustments to customer deposits (165,471) (150,973) Adjustments to invested asset carrying values at acquisition date 436 (2,342) Asset valuation reserve and interest maintenance reserve 73,215 65,481 Value of insurance in force 27,097 35,924 Goodwill 2,968 3,997 Deferred policy acquisition costs 79,679 54,175 Adjustments to investment in subsidiary excluding net unrealized gains (losses) 25,497 22,182 Net unrealized gains (losses) on available-for-sale securities (123,124) 21,317 Other 29,517 28,596 --------- --------- Shareholder's equity, GAAP basis $ 196,502 $ 290,117 --------- --------- --------- ---------
Other significant accounting practices are as follows: INVESTMENTS Bonds, preferred stocks, common stocks, and short-term investments are stated at values prescribed by the NAIC, as follows: Bonds and short-term investments are reported at cost or amortized cost. The discount or premium on bonds is amortized using the interest method. For loan-backed bonds and structured securities, anticipated prepayments are considered when determining the amortization of discount or premium. Prepayment assumptions for loan-backed bonds and structured securities are obtained from broker-dealer survey values or internal estimates. These assumptions are consistent with the current interest rate and economic environment. The retrospective adjustment method is used to value all such securities. 13 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED) Preferred stocks are reported at cost. The Company's investment in its insurance subsidiary is reported at the equity in the underlying statutory basis of National Integrity's net assets. Changes in the admitted asset carrying amount of the investment are credited or charged directly to unassigned surplus. Short-term investments includes investments with maturities of less than one year at the date of acquisition. Mortgage loans and policy loans are reported at unpaid principal balances. Realized capital gains and losses are determined using the average cost method. BENEFITS Life and annuity reserves are developed by actuarial methods and are determined based on published tables using statutorily specified interest rates and valuation methods that will provide, in the aggregate, reserves that are greater than or equal to the minimum or guaranteed policy cash values or the amounts required by the Ohio Department of Insurance. The Company waives deduction of deferred fractional premiums upon the death of life and annuity policy insureds and does not return any premium beyond the date of death. Surrender values on policies do not exceed the corresponding benefit reserve. Policies issued subject to multiple table substandard extra premiums are valued on the standard reserve basis which recognizes the non-level incidence of the excess mortality costs. Additional reserves are established when the results of cash flow testing under various interest rate scenarios indicate the need for such reserves. Tabular interest, tabular less actual reserve released, and tabular cost have been determined by formula as prescribed by the NAIC. Interest on funds left on deposit represents interest credited on funding agreements and GIC deposit fund liabilities. Interest credited on all other life and annuity reserves is included as a component of annuity or surrender benefits. 14 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED) REINSURANCE Reinsurance premiums, benefits and expenses are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums, benefits and expenses, and the reserves for policy and contract liabilities are reported net, rather than gross, of reinsured amounts. SEPARATE ACCOUNTS Separate account assets and liabilities reported in the accompanying financial statements represent funds that are separately administered, principally for variable annuity contracts and institutional funding agreements. Separate account assets are reported at fair value. Surrender charges collectible by the general account in the event of variable annuity contract surrenders are reported as a negative liability rather than an asset pursuant to prescribed NAIC accounting practices. Policy related activity involving cashflows, such as premiums and benefits, are reported in the accompanying statements of income in separate line items combined with related general account amounts. Investment income and interest credited on deposits held in guaranteed separate accounts are included in the accompanying statements of income as a net amount included in net transfers to (from) separate accounts. The Company receives administrative fees for managing the nonguaranteed separate accounts and other fees for assuming mortality and certain expense risks. Such fees are included in other revenues. USE OF ESTIMATES The preparation of financial statements in compliance with statutory accounting practices requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the presentation of the 1998 financial statements. These reclassifications had no effect on previously reported net income or surplus. 15 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 2. PERMITTED STATUTORY ACCOUNTING PRACTICES The Company's statutory basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the Ohio Department of Insurance. "Prescribed" statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the NAIC. "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. In 1998, both the NAIC and the Ohio Department of Insurance adopted codified statutory accounting principles ("Codification") with an effective date of January 1, 2001. Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that the Company uses to prepare its statutory-basis financial statements. The Company has not yet determined the impact of Codification to its statutory-basis financial statements. 3. INVESTMENTS The cost or amortized cost and the fair value of investments in bonds are summarized as follows:
Cost or Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value -------------------------------------------------------------------- (In thousands) At December 31, 1998: Mortgage-backed securities $ 1,969,989 $ - $ - $ 1,969,989 Corporate securities 1,803,209 5,445 53,873 1,754,781 Asset-backed securities 497,116 - - 497,116 U.S. Treasury securities and obligations of U.S. government agencies 258,659 206 741 258,124 Foreign governments 29,412 - 999 28,413 States and political subdivisions 3,955 158 - 4,113 ------------- ------------- ------------- ------------- Total bonds $ 4,562,340 $ 5,809 $ 55,613 $ 4,512,536 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
16 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 3. INVESTMENTS (CONTINUED)
Cost or Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value -------------------------------------------------------------------- (In thousands) At December 31, 1997: Mortgage-backed securities $ 1,606,968 $ - $ - $ 1,606,968 Corporate securities 1,132,531 13,329 7,533 1,138,327 Asset-backed securities 374,841 - - 374,841 U. S. Treasury securities and obligations of U.S. government agencies 276,801 714 7 277,508 Foreign governments 49,513 121 437 49,197 States and political subdivisions 4,005 160 - 4,165 ------------- ------------- ------------- ------------- Total bonds $ 3,444,659 $ 14,324 $ 7,977 $ 3,451,006 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
Fair values are based on published quotations of the Securities Valuation Office of the NAIC. Fair values generally represent quoted market value prices for securities traded in the public marketplace, or analytically determined values using bid or closing prices for securities not traded in the public marketplace. However, for certain investments for which the NAIC does not provide a value, the Company uses the amortized cost amount as a substitute for fair value in accordance with prescribed guidance. As of December 31, 1998 and 1997, the fair value of investments in bonds includes $3.8 billion and $2.9 billion, respectively, of bonds that were valued at amortized cost. 17 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 3. INVESTMENTS (CONTINUED) A summary of the cost or amortized cost and fair value of the Company's investments in bonds at December 31, 1998, by contractual maturity, is as follows:
Cost or Amortized Fair Cost Value ------------------------------------ (In thousands) Years to maturity: One or less $ 22,292 $ 22,254 After one through five 131,959 129,762 After five through ten 338,367 326,435 After ten 1,602,617 1,566,980 Asset-backed securities 497,116 497,116 Mortgage-backed securities 1,969,989 1,969,989 ------------- ------------- Total $ 4,562,340 $ 4,512,536 ------------- ------------- ------------- -------------
The expected maturities in the foregoing table may differ from the contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties and because asset-backed and mortgage-backed securities (including floating-rate securities) provide for periodic payments throughout their life. Proceeds from the sales of investments in bonds during 1998 and 1997 were $4.1 billion and $2.9 billion; gross gains of $26.5 million and $34.9 million, and gross losses of $26.8 million and $26.9 million were realized on those sales, respectively. At December 31, 1998 and 1997, bonds with an admitted asset value of $7,521,000 and $7,664,000, respectively, were on deposit with state insurance departments to satisfy regulatory requirements. 18 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 3. INVESTMENTS (CONTINUED) Unrealized gains and losses on investment in subsidiary are reported directly in surplus and do not affect operations. The gross unrealized gains and losses on, and the cost and fair value of, the investment are summarized as follows:
Gross Gross Cost Unrealized Unrealized Gains Losses Fair Value ------------------------------------------------------------------ (In thousands) At December 31, 1998: Subsidiary $ 17,823 $ 41,680 $ - $ 59,503 --------- --------- ------- --------- --------- --------- ------- --------- At December 31, 1997: Subsidiary $ 17,823 $ 36,205 $ - $ 54,028 --------- --------- ------- --------- --------- --------- ------- ---------
The Company's mortgage loan portfolio is primarily comprised of agricultural loans. The Company made no new investments in mortgage loans during 1998. The maximum percentage of any one loan to the value of the security at the time of the loan exclusive of any purchase money mortgages was 75%. Fire insurance is required on all properties covered by mortgage loans. As of December 31, 1998, the Company held no mortgages with interest more than one year past due. During 1998, no interest rates of outstanding mortgage loans were reduced. No amounts have been advanced by the Company. 19 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 3. INVESTMENTS (CONTINUED) Major categories of the Company's net investment income are summarized as follows:
Year Ended December 31, 1998 1997 ------------------------------- (In thousands) Income: Bonds $ 299,122 $ 216,166 Preferred stocks 3,226 6,042 Dividend from subsidiary 2,771 - Mortgage loans 1,100 5,619 Real estate - 158 Policy loans 7,544 6,842 Cash and short-term investments 15,335 7,072 Other investment income 2,091 880 ------------- ------------- Total investment income 331,189 242,779 Investment expenses (2,807) (3,265) Interest expense on repurchase agreements (6,913) - ------------- ------------- Net investment income $ 321,469 $ 239,514 ------------- ------------- ------------- -------------
4. DERIVATIVE INSTRUMENTS The Company offers equity-indexed products through its separate accounts that meet consumer demand for equity investments with downside protection. In connection with this product the Company acquired 356 S&P 500 futures contracts during 1998. The Company acquired the futures through the use of a margin account whereby the Company maintains a minimum cash balance of approximately $10,000 per contract. Should the S&P 500 fall below the level determined at the acquisition date, the Company would be required to add additional cash to the margin account based on the change in the S&P 500's market value. Should the S&P 500 increase from its level at the inception of the contract, cash would be added by the counterparty to the margin account. Unrealized market value gains on the futures are recorded in the separate accounts statement of operations to hedge against the Company's obligation to pay equity-indexed returns to policyholders. As of December 31, 1998, outstanding futures had unrealized gains of approximately $5.8 million. 20 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 4. DERIVATIVE INSTRUMENTS (CONTINUED) During 1998, the Company purchased an interest rate cap for $5,225,000 and sold an interest rate floor for $1,425,000, each having a contractrual notional amount of $1.0 billion. The objective for holding these instruments is to limit exposure to volatility of interest credited payments for variable rate institutional spread deposits. Both the purchase price of the cap and the proceeds from the floor will be amortized into operations using the interest method over the lives of the cap and floor, respectively. Payments received from the cap or made on the floor are recorded in the statement of operations as an offset to interest on contract or policy funds. The Company holds institutional spread deposits in its general account. The Company uses interest rate swaps to reduce the interest rate exposure arising from mismatches between the assets and liabilities related to the deposits. The Company agreed to exchange with other parties a fixed-rate of interest it receives on certain investment securities for floating-rate interest amounts calculated by reference to agreed-upon notional principal amounts. On certain contracts entered into during 1998, the Company received $1,138,750 of consideration as part of the swaps that will be amortized into operating earnings over the life of the swaps. A single net payment is made by one counterparty at each date. The Company has approximately $346 million of notional principal contracts outstanding in the general account at December 31, 1998. During 1998, the Company entered into total yield swap transactions with two affiliates of the Company, 312 Certificate Company ("312CC") and 212 Certificate Company ("212CC"). 312CC and 212CC were established as special purpose entities to offer privately placed certificates. These swaps are considered off-balance sheet items. The swap transactions generally provide that the Company pays an amount that approximates the interest credited to be paid to certificate holders plus outside credit enhancement fees and receives the book income of the 312CC and 212CC investment portfolios, less investment advisory expenses. The Company accounts for the swap activity in its guaranteed separate account. During 1998, the Company recorded approximately $962,000 and $414,000 of net investment income from 312CC and 212CC, respectively, in its separate account summary of operations. 21 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 4. DERIVATIVE INSTRUMENTS (CONTINUED) The 312CC swap transaction provides that the Company increase the fair market value of the 312CC investment portfolio to equal the account value of the certificate ("account value") if the ratio of the investment portfolio fair value to account value is less than 97%. The 212CC swap transaction provides that the Company maintains the fair value of the 212CC investment portfolio to be no less than 97% of the account value. However, from time to time ARM may make capital contributions to 312CC and 212CC as necessary to maintain the fair value of the investment portfolios at or near account value. Such infusions would serve to mitigate the Company's obligation to make the above payments under the swaps. During 1998, ARM made a $6 million capital contribution to 312CC. Certain events may cause the 312CC and 212CC certificates to be paid prior to their stated maturity dates. If such an event occurs and the fair value of the 312CC or 212CC investment portfolio is less than account value, the swap transactions provide that the Company contribute the difference. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to the financial instruments, but does not expect any counterparties to fail to meet their obligations given their high credit ratings. 5. REINSURANCE Consistent with prudent business practices and the general practice of the insurance industry, the Company reinsures risks under certain of its insurance products with other insurance companies through reinsurance agreements. Through these reinsurance agreements, substantially all mortality risks associated with single premium endowment and variable annuity deposits and substantially all risks associated with variable life business have been reinsured with non-affiliated insurance companies. A contingent liability exists with respect to insurance ceded which would become a liability should the reinsurer be unable to meet the obligations assumed under these reinsurance agreements. 22 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 5. REINSURANCE (CONTINUED) The effect of reinsurance on premiums, annuity considerations and deposit-type funds is as follows:
Year Ended December 31, 1998 1997 ---------------------------- (In thousands) Direct premiums and amounts assessed against policyholders $ 421,637 $ 1,005,583 Reinsurance assumed 1,474,079 1,217,681 Reinsurance ceded (19,850) (18,528) ---------- ----------- Net premiums, annuity considerations and deposit-type funds $ 1,875,866 $ 2,204,736 ----------- ----------- ----------- -----------
In 1998 and 1997, the Company assumed $1.5 billion and $1.1 billion, respectively, in funding agreement and GIC deposits through a 50% coinsurance agreement with General American Life Insurance Company. 6. FEDERAL INCOME TAXES The Company files a consolidated return with National Integrity. The method of allocation between the companies is based on separate return calculations with current benefit being given for the use of National Integrity's losses and credits in the consolidated return. Income before income taxes differs from taxable income principally due to value of insurance in force, interest maintenance reserves, and differences in policy and contract liabilities and investment income for tax and financial reporting purposes. The prior year tax provision was calculated including a consolidated net operating loss carryover benefit of $12.4 million. 23 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 7. SURPLUS The ability of the Company to pay dividends is limited by state insurance laws. Under Ohio insurance laws, the Company may pay dividends, without the approval of the Ohio Director of Insurance, only from earned surplus and those dividends may not exceed (when added to other dividends paid in the proceeding 12 months) the greater of (i) 10% of the Company's statutory capital and surplus as of the preceding December 31, or (ii) the Company's statutory net income for the preceding year. The maximum dividend payments that may be made by the Company to ARM during 1999 are $37.8 million. Under New York insurance laws, National Integrity may pay dividends to the Company only out of its earnings and surplus, subject to at least thirty days prior notice to the New York Insurance Superintendent and no disapproval from the Superintendent prior to the date of such dividend. The Superintendent may disapprove a proposed dividend if the Superintendent finds that the financial condition of National Integrity does not warrant such distribution. During 1998, the Company received dividends of $2.8 million from National Integrity. The NAIC's Risk-Based Capital ("RBC") requirements attempt to evaluate the adequacy of a life insurance company's adjusted statutory capital and surplus in relation to investment, insurance and other business risks. The RBC formula is used by the states as an early warning tool to identify possible under-capitalized companies for the purpose of initiating regulatory action and is not designed to be a basis for ranking the financial strength of insurance companies. In addition, the formula defines a new minimum capital standard which supplements the previous system of low fixed minimum capital and surplus requirements. The RBC requirements provide for four different levels of regulatory attention depending on the ratio of the company's adjusted capital and surplus to its RBC. As of December 31, 1998 and 1997, the adjusted capital and surplus of the Company is substantially in excess of the minimum level of RBC that would require regulatory response. 24 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 8. ANNUITY RESERVES At December 31, 1998 and 1997, the Company's general and separate account annuity reserves and deposit fund liabilities that are subject to discretionary withdrawal (with adjustment), subject to discretionary withdrawal without adjustment, and not subject to discretionary withdrawal provisions are summarized as follows:
Amount Percent ---------------------------- (In thousands) At December 31, 1998: Subject to discretionary withdrawal (with adjustment): With market value adjustment $ 404,623 6.0% At book value less surrender charge of 5% or more 215,430 3.2 At market value 1,019,880 15.1 ---------- ---------- Total with adjustment or at market value 1,639,933 24.3 Subject to discretionary withdrawal (without adjustment) at book value with minimal or no charge or adjustment 4,500,408 66.7 Not subject to discretionary withdrawal 607,460 9.0 ---------- ---------- Total annuity reserves and deposit fund liabilities (before reinsurance) 6,747,801 100.0% ---------- ---------- Less reinsurance ceded (28,045) ---------- Net annuity reserves and deposit fund liabilities $6,719,756 ---------- ---------- At December 31, 1997: Subject to discretionary withdrawal (with adjustment): With market value adjustment $ 348,451 7.0% At book value less surrender charge of 5% or more 235,360 4.7 At market value 711,105 14.3 ---------- ---------- Total with adjustment or at market value 1,294,916 26.0 Subject to discretionary withdrawal (without adjustment) at book value with minimal or no charge or adjustment 3,095,701 62.1 Not subject to discretionary withdrawal 594,781 11.9 ---------- ---------- Total annuity reserves and deposit fund liabilities (before reinsurance) 4,985,398 100.0% ---------- ---------- Less reinsurance ceded (34,721) ---------- Net annuity reserves and deposit fund liabilities $4,950,677 ---------- ----------
25 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 9. SEPARATE ACCOUNTS The Company's guaranteed separate accounts include indexed products (i.e., equity-indexed annuities and an institutional funding agreement) and non-indexed products and options (i.e., guaranteed rate options and systematic transfer options). The guaranteed rate options are sold as a fixed annuity product or as an investment option within the Company's variable annuity products. The Company's equity-indexed annuities provide participation in the S&P 500 Price Index. The Company's nonguaranteed separate accounts primarily include variable annuities. The net investment experience of variable annuities is credited directly to the policyholder and can be positive or negative. Assets held in separate accounts are carried at estimated fair values. Information regarding the separate accounts of the Company as of and for the year ended December 31, 1998 is as follows:
Separate Accounts With Guarantees --------------------------------- Nonindexed Nonguaranteed Guaranteed Separate Indexed More Than 4% Accounts Total --------------------------------------------------------------------- (In thousands) Premiums, deposits and other considerations $ 33,456 $ 132,280 $ 185,181 $ 350,917 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Reserves for separate accounts with assets at fair value $ 587,033 $ 409,143 $ 1,053,699 $ 2,049,875 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Reserves for separate accounts by withdrawal characteristics: Subject to discretionary withdrawal (with adjustment): With market adjustment $ 45,784 $ 358,839 $ - $ 404,623 At book value without market value adjustment and with current surrender charge of 5% or more - 50,304 - 50,304 At market value - - 1,053,699 1,053,699 ------------- ------------- ------------- ------------- Total with adjustment or at market value 45,784 409,143 1,053,699 1,508,626 Not subject to discretionary withdrawal 541,249 - - 541,249 ------------- ------------- ------------- ------------- Total separate accounts reserves $ 587,033 $ 409,143 $ 1,053,699 $ 2,049,875 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
26 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 9. SEPARATE ACCOUNTS (CONTINUED) A reconciliation of the amounts transferred to and from the separate accounts for the years ended December 31, 1998 and 1997 is presented below:
1998 1997 ---------------------------- (In thousands) Transfers as reported in the Summary of Operations of the Separate Accounts Statement: Transfers to separate accounts $ 350,917 $ 874,585 Transfers from separate accounts (166,508) (91,038) --------- --------- Net transfers to separate accounts 184,409 783,547 Reconciling adjustments: Policy deductions and other expense reported as other revenues 2,077 1,827 --------- --------- Transfers as reported in the Summary of Operations of the Life, Accident and Health Annual Statement $ 186,486 $ 785,374 --------- --------- --------- ---------
10. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about all financial instruments, including insurance liabilities classified as investment contracts, unless specifically exempted. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of such instruments. For financial instruments not separately disclosed below, the carrying amount is a reasonable estimate of fair value. 27 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
December 31, 1998 December 31, 1997 ----------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------------------------------------------------------------------- (In thousands) Assets: Bonds $ 4,562,340 $ 4,390,941 $ 3,444,659 $ 3,484,364 Preferred stocks 32,704 32,643 58,369 59,964 Mortgage loans 11,719 11,719 13,186 13,186 Cash and short-term investments 412,074 412,074 201,242 201,242 Liabilities: Life and annuity reserves for investment-type contracts and deposit fund liabilities $ 4,705,091 $ 4,669,365 $ 3,320,869 $ 3,379,388 Separate accounts annuity reserves 2,016,056 2,001,161 1,630,787 1,607,081
BONDS AND PREFERRED STOCKS Fair values for bonds and preferred stocks are based on quoted market prices where available. For bonds and preferred stocks for which a quoted market price is not available, fair values are estimated using internally calculated estimates or quoted market prices of comparable investments. MORTGAGE LOANS AND CASH AND SHORT-TERM INVESTMENTS The carrying amount of mortgage loans and cash and short-term investments approximates their fair value. LIFE AND ANNUITY RESERVES FOR INVESTMENT-TYPE CONTRACTS AND DEPOSIT FUND LIABILITIES The fair value of single premium immediate annuity reserves are based on discounted cash flow calculations using a market yield rate for assets with similar durations. The fair value amount of institutional deposits represents the estimated present value of cash flows using current market rates and the duration of the liabilities. The fair value amounts of deposit fund 28 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) liabilities and the remaining annuity reserves are primarily based on the cash surrender values of the underlying contracts. SEPARATE ACCOUNTS ANNUITY RESERVES The fair value of separate accounts annuity reserves for investment-type products equals the cash surrender values. 11. RELATED PARTY TRANSACTIONS Effective January 1, 1995, the Company entered into an Administrative Services and an Investment Services Agreement with ARM. ARM performs certain administrative and special services for the Company to assist with its business operations. The services include policyholder services; accounting, tax and auditing; underwriting; marketing and product development; functional support services; payroll functions; personnel functions; administrative support services; and investment functions. During 1998 and 1997, the Company was charged $27.2 million and $19.3 million, respectively, for these services in accordance with the requirements of applicable insurance law and regulations. 12. YEAR 2000 (UNAUDITED) ARM has undertaken a Year 2000 project that includes all of its subsidiaries, including the Company. ARM's Year 2000 compliance project, as it relates to the Company, is provided for under the Investment Services Agreement and Administrative Services Agreement between ARM and the Company. The cost of ARM's Year 2000 initiatives is not expected to be material to ARM's results of operations or financial condition. Likewise, any cost to the Company related to Year 2000 compliance is not expected to be material to the Company's results of operations or financial condition. ARM has completed the assessment phase of the project for all production applications, hardware (personal computers and servers), system software, vendors, and business partners. Although ARM is still receiving information from a few vendors and business partners and assessing various logistic concerns with its facilities, ARM's major production systems are substantially Year 2000 compliant. Where Year 2000 problems were found, the necessary upgrades and repairs have begun and are scheduled for completion no later than May 31, 1999. 29 Integrity Life Insurance Company Notes to Financial Statements (Statutory Basis)(continued) 12. YEAR 2000 (UNAUDITED) (CONTINUED) As well as assessing its facilities, ARM is also in the repair and certification testing phase of its project. The testing phase will serve to verify the results of repairs and assessments. Steps needed to correct any problems uncovered during testing will begin immediately at that time. ARM's Year 2000 project is well underway and because management believes that it will be Year 2000 compliant by May 31, 1999, it currently has no contingency plans for system issues in place beyond its normal disaster recovery procedures. As a precaution, ARM is developing a contingency and business resumption plan to address various logistic concerns with its facilities. The contingency and business resumption plan is scheduled for completion no later than September 30, 1999. Although ARM anticipates no major interruption of business activities, that will depend, in part, upon the activity of third parties. Even though ARM has assessed and continues to assess third party issues, it has no direct ability to influence the compliance actions of such parties. Accordingly, while ARM believes its actions in this regard should have the effect of reducing Year 2000 risks, it is unable to eliminate them or to estimate the ultimate effect Year 2000 risks will have on the Company's operations. The estimated date on which ARM believes it will complete its Year 2000 compliance efforts, and the expenses related to ARM's Year 2000 compliance efforts are based upon management's best estimates, which were based on assumptions of future events, including the availability of certain resources, third party modification plans and other factors. There can be no assurance that these results and estimates will be achieved, and the actual results could materially differ from those anticipated. PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (a) FINANCIAL STATEMENTS INCLUDED IN PART A: Part 1 - Financial Information FINANCIAL STATEMENTS INCLUDED IN PART B: SEPARATE ACCOUNT II: Report of Independent Auditors Statement of Assets and Liabilities as of December 31, 1998 Statement of Operations for the Year Ended December 31, 1998 Statements of Changes in Net Assets for the Years Ended December 31, 1998 and 1997 Notes to Financial Statements SEPARATE ACCOUNT TEN: Report of Independent Auditors Statement of Assets and Liabilities as of December 31, 1998 Statement of Operations for the Year Ended December 31, 1998 Statement of Changes in Net Assets for the Year Ended December 31, 1998 Notes to Financial Statements INTEGRITY LIFE INSURANCE COMPANY: Report of Independent Auditors Balance Sheets (Statutory Basis) as of December 31, 1998 and 1997 Statements of Income (Statutory Basis) for the Years Ended December 31, 1998 and 1997 Statements of Changes in Capital and Surplus (Statutory Basis) for the Years Ended December 31, 1998 and 1997 Statements of Cash Flows (Statutory Basis) for the Years Ended December 31, 1998 and 1997 Notes to Financial Statements (Statutory Basis) (b) EXHIBITS: The following exhibits are filed herewith: 1. Resolutions of the Board of Directors of Integrity Life Insurance Company (INTEGRITY) and Certification of the Chief Executive Officer authorizing the establishment of Separate Account II, the Registrant. Incorporated by reference to Registrant's Form N-4 registration statement filed on August 24, 1992. 2. Not applicable. 3.(a) Form of Selling/General Agent Agreement between Integrity and Painewebber Incorporated. Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 registration statement on Form N-4 filed on November 9, 1992. 3.(b) Form of Variable Contract Principal Underwriter Agreement with ARM Securities Corporation. Incorporated by reference to Registrant's Form N-4 registration statement (File 1 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. 8.(g) Form of Participation Agreement Among Insurance Series, Federated Securities Corp. and Integrity. 8.(h) Form of Participation Agreement Between Janus Aspen Series and Integrity. 8.(i) Form of Participation Agreement Between JPM Series Trust II and Integrity. 8.(j) Form of Participation Agreement Between Morgan Stanley Universal Funds, Inc., Morgan Stanley Asset Management Inc., Miller Anderson & Sherrerd, LLP and Integrity. 9. Opinion and Consent of Kevin L. Howard, incorporated by reference to Registrant's registration statement on Form N-4 (File No. 33-51268) filed October 22, 1997. 10. Consents of Ernst & Young LLP. 11. Not applicable. 12. Not applicable. 13. Schedule for computation of performance quotations. Incorporated by reference to Registrant's Form N-4 registration statement (File No. 33-51268) on May 1, 1996. 14. Not applicable. ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR Set forth below is information regarding the directors and principal officers of Integrity, the Depositor: Directors: - ---------- Name and Principal Business Address Position and Offices with Depositor - ----------------------------------- ----------------------------------- Mark A. Adkins Director and Operations Control Officer Integrity Life Insurance Company 200 East Wilson Bridge Road Worthington, OH 43085 John R. Lindholm Director and President Integrity Life Insurance Company 515 West Market Street Louisville, KY 40202 Susan M. McEntire Director Integrity Life Insurance Company 200 East Wilson Bridge Road Worthington, OH 43085 3 John R. McGeeney Director Integrity Life Insurance Company 515 West Market Street Louisville, KY 40202 William H. Guth Director and Product Administration Integrity Life Insurance Company Officer 515 West Market Street Louisville, KY 40202 Martin H. Ruby Director, Chairman of the Board and Integrity Life Insurance Company Chief Executive Officer 515 West Market Street Louisville, KY 40202 SELECTED OFFICERS: (The business address for each of the principal officers listed below is 515 West Market Street, Louisville, Kentucky 40202.) Name and Principal Business Address Position and Offices with Depositor - ----------------------------------- ----------------------------------- Martin H. Ruby Chairman of the Board, Chief Executive Officer John R. Lindholm President John R. McGeeney Executive Vice President and General Counsel Dennis L. Carr Executive Vice President and Chief Actuary David E. Ferguson Executive Vice President and Chief Technology Officer William H. Panning Executive Vice President and Chief Investment Officer Edward L. Zeman Executive Vice President and Chief Financial Officer Michael A. Cochran Tax Officer Peter S. Resnik Treasurer Barry G. Ward Controller Patricia L. Tackett Secretary ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH INTEGRITY OR REGISTRANT Integrity, the depositor of Separate Account II, is a wholly owned subsidiary of Integrity Holdings, Inc., a Delaware corporation which is a holding company engaged in no active business. Integrity owns 100% of stock of National Integrity Life Insurance Company, a New York stock life insurance corporation. All outstanding shares of Integrity Holdings, Inc. are owned by ARM Financial Group, Inc., (ARM) a Delaware corporation which is a financial services company focusing on the long-term savings and retirement marketplace by providing retail and institutional products and services throughout the United States. ARM owns 100% of the stock of (i) ARM Securities Corporation (ARM SECURITIES), a Minnesota corporation, registered with the SEC as a broker-dealer and a member of the National Association of Securities Dealers, Inc., (ii) Integrity Capital Advisors, Inc., a New York corporation 4 registered with the SEC as an investment adviser, (iii) SBM Certificate Company, a Minnesota corporation registered with the SEC as an issuer of face-amount certificates, and (iv) ARM Transfer Agency, Inc., a Delaware corporation registered with the SEC as a transfer and dividend disbursing agency. In June 1997, ARM Financial completed an initial public offering (the "IPO") of 9.2 million shares of common stock, of which 5.75 million shares were sold by ARM Financial and 3.45 million shares were sold by investment funds sponsored by Morgan Stanley, Dean Witter, Discover & Co. (the "MSDW Funds"). Following the IPO, the MSDW Funds owned in the aggregate approximately 53% of the outstanding shares of common stock of ARM Financial. On May 8, 1998, the MSDW Funds sold their entire remaining interest in ARM Financial pursuant to a secondary public offering of shares of common stock. As a result, ARM Financial is 100% publicly owned. ITEM 27. NUMBER OF CONTRACT OWNERS As of December 31, 1998 there were 4,626 contract owners of Separate Account II of Integrity. ITEM 28. INDEMNIFICATION BY-LAWS OF INTEGRITY. Integrity's By-Laws provide, in Article V, as follows: Section 5.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND INCORPORATORS. To the extent permitted by the laws of the State of Ohio, subject to all applicable requirements thereof: (a) The Corporation shall indemnify or agree to indemnify any person who was or is a party or is threatened to be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the Corporation, by reason of the fact that he is or was a Director, officer, employee, or agent of the Corporation or is or was serving at the request of the Corporation as a Director, trustee, officer, employee, or agent of another corporation, domestic or foreign, non-profit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorney's fees, judgements, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall indemnify or agree to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, trustee, officer, employee, or agent of another corporation, domestic or foreign, non-profit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorney's fees, actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect to any of the following: (1) Any claim, issue, or matter as to which such person is adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless, and only to the extent the court of common pleas or the court in which such action or suit was brought determines upon application that, despite the adjudication of liability, but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court of common pleas or such other court shall deem proper; 5 (2) Any action of suit in which the only liability asserted against a Director is pursuant to Section 1701.95 of the Ohio Revised Code. (c) To the extent that a Director, trustee, officer, employee, or agent has been successful in the merits or otherwise in defense of any action, suit, or proceeding referred to in division (a) and (b) of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses, including attorney's fees, actually and reasonably incurred by him in connection with the action, suit, or proceeding. (d) Any indemnification under divisions (a) and (b) of this Article, unless ordered by a court, shall be made by the Corporation only as authorized in the specific case upon the determination that indemnification of the Director, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in divisions (a) and (b) of this Article. Such determination shall be made as follows: (1) By a majority vote of a quorum consisting of Directors of the Corporation who were not and are not parties to or threatened with any such action, suit, or proceeding; (2) If the quorum described in division (d)(1) of this Article is not obtainable or if a majority vote of a quorum of disinterested Directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the Corporation or any person to be indemnified within the past five years; (3) By the Shareholders; or (4) By the court of common pleas or the court in which such action, suit or proceeding was brought. Any determination made by the disinterested Directors under Article (d)(1) or by independent legal counsel under Article (d)(2) shall be promptly communicated to the person who threatened or brought the action or suit by in the right of the Corporation under (b) of this Article, and within ten days after receipt of such notification, such person shall have the right to petition the court of common pleas or the court in which such action or suit was brought to review the reasonableness of such determination. (e) (1) Expenses, including attorney's fees, incurred by a Director in defending the action, suit, or proceeding shall be paid by the Corporation as they are incurred, in advance of the final disposition of the action, suit, or proceeding upon receipt of an undertaking by or on behalf of the Director in which he agrees to do both of the following: (i) Repay such amount if it is proved by clear and convincing evidence in a court of competent jurisdiction that his action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the Corporation or undertaken with reckless disregard for the best interests of the Corporation; (ii) Reasonably cooperate with the Corporation concerning the action, suit or proceeding. (2) Expenses, including attorney's fees, incurred by a Director, officer, employee, or agent in defending any action, suit, or proceeding referred to in divisions (a) and (b) of this Article, may be paid by the Corporation as they are incurred, in advance of the final disposition of the action, suit, or proceeding as authorized by the Directors in the specific case upon receipt of an undertaking by or on behalf of the Director, officer, employee, or agent to repay such amount, if it ultimately is determined that he is not entitled to be indemnified by the Corporation. (f) The indemnification authorized by this section shall not be exclusive of, and shall be in addition to, any other rights granted to those seeking indemnification under the Articles or the Regulations for any agreement, vote of Shareholders or disinterested Directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. 6 (g) The Corporation may purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit, or self insurance, on behalf of or for any person who is or was a Director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee, or agent of another corporation, domestic or foreign, non-profit or for profit, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under this section. Insurance may be purchased from or maintained with a person in which the Corporation has a financial interest. BY-LAWS OF ARM SECURITIES. ARM Securities' By-Laws provide, in Sections 4.01 and 4.02, as follows: SECTION 4.01 INDEMNIFICATION. The Corporation shall indemnify its officers and directors for such expenses and liabilities, in such manner, under such circumstances, and to such extent, as required or permitted by Minnesota Statutes, Section 302A.521, as amended from time to time, or as required or permitted by other provisions of law. SECTION 4.02 INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person in such person's official capacity against any liability asserted against and incurred by such person in or arising from that capacity, whether or not the Corporation would otherwise be required to indemnify the person against the liability. INSURANCE. The directors and officers of Integrity and ARM Securities are insured under a policy issued by National Union. The total annual limit on such policy is $10 million, and the policy insures the officers and directors against certain liabilities arising out of their conduct in such capacities. AGREEMENTS. Integrity and ARM Securities, including each director, officer and controlling person of Integrity and ARM Securities, are entitled to indemnification against certain liabilities as described in Sections 5.2, 5.3 and 5.5 of the Selling/General Agent Agreement and Section 9 of the Form of Variable Contract Principal Underwriter Agreement incorporated as Exhibit 3 to this Registration Statement. Those sections are incorporated by reference into this response. In addition, Integrity and ARM Securities, including each director, officer and controlling person of Integrity and ARM Securities, are entitled to indemnification against certain liabilities as described in Article VIII of the Participation Agreement incorporated as Exhibits 8(a), 8(b) and 8(c) to this Registration Statement. That article is incorporated by reference into this response. Certain officers and directors of Integrity are officers and directors of ARM Securities (see Item 25 and Item 29 of this Part C). UNDERTAKING. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 29. PRINCIPAL UNDERWRITERS (a) ARM Securities is the principal underwriter for Separate Account II. ARM Securities also serves as an underwriter for Separate Account I, III and Ten of Integrity, Separate Accounts I and II of National Integrity Life Insurance Company, and The Legends Fund, Inc. Integrity is the Depositor of Separate Accounts II, I, III, Ten and VUL. (b) The names and business addresses of the officers and directors of, and their positions with, ARM Securities are as follows: Name and Principal Business Address Position and Offices with ARM Securities - ----------------------------------- ---------------------------------------- 7 Edward J. Haines Director and President 515 West Market Street Louisville, Kentucky 40202 John R. McGeeney Director, Secretary, General Counsel and 515 West Market Street Compliance Officer Louisville, Kentucky 40202 Peter S. Resnik Treasurer 515 West Market Street Louisville, Kentucky 40202 Dale C. Bauman Vice President 100 North Minnesota Street New Ulm, Minnesota 56073 Robert Bryant Vice President 1550 East Shaw #120 Fresno, California 93710 Ronald Geiger Vice President 100 North Minnesota Street New Ulm, Minnesota 56073 Barry G. Ward Controller 515 West Market Street Louisville, Kentucky 40202 Michael A. Cochran Tax Officer 515 West Market Street Louisville, Kentucky 40202 William H. Guth Operations Officer 515 West Market Street Louisville, Kentucky 40202 David L. Anders Marketing Officer 515 West Market Street Louisville, Kentucky 40202 (c) Not applicable. ITEM 30. LOCATION OF ACCOUNTS AND RECORDS The records required to be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder, are maintained by Integrity at 515 West Market Street, Louisville, Kentucky 40202. ITEM 31. MANAGEMENT SERVICES The contract under which management-related services are provided to Integrity is discussed under Part 1 of Part B. ITEM 32. UNDERTAKINGS 8 The Registrant hereby undertakes: (a) to file a post-effective amendment to this registration statement as frequently as is necessary to ensure that the audited financial statements in the registration statement are never more than 16 months old for so long as payments under the variable annuity contracts may be accepted; (b) to include either (1) as part of any application to purchase a contract offered by the prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a postcard or similar written communication affixed to or included in the prospectus that the applicant can remove to send for a Statement of Additional Information; and (c) to deliver any Statement of Additional Information and any financial statements required to be made available under this Form promptly upon written or oral request. Integrity represents that the aggregate charges under variable annuity contracts described in this Registration Statement are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by Integrity. 9 SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant and the Depositor have duly caused this amendment to the Registration Statement to be signed on their behalf, in the City of Louisville and State of Kentucky on this 21st day of April, 1999. SEPARATE ACCOUNT II OF INTEGRITY LIFE INSURANCE COMPANY (Registrant) By: Integrity Life Insurance Company (Depositor) By: /s/ John R. Lindholm --------------------------------- John R. Lindholm President INTEGRITY LIFE INSURANCE COMPANY (Depositor) By: /s/ John R. Lindholm --------------------------------- John R. Lindholm President 10 SIGNATURES As required by the Securities Act of 1933, this amendment to the Registration Statement has been signed by the following persons in the capacities and on the date indicated. PRINCIPAL EXECUTIVE OFFICER: /s/ John R. Lindholm ------------------------------------------ John R. Lindholm, President Date: 04/21/99 PRINCIPAL FINANCIAL OFFICER: /s/ Edward L. Zeman ------------------------------------------ Edward L. Zeman, Executive Vice President- Chief Financial Officer Date: 04/21/99 PRINCIPAL ACCOUNTING OFFICER: /s/ Barry G. Ward ------------------------------------------ Barry G. Ward, Controller Date: 04/21/99 DIRECTORS: /s/ Mark A. Adkins /s/ Susan M. McEntire - ------------------------------ ------------------------------------------ Mark A. Adkins Susan M. McEntire Date: 04/21/99 Date: 04/21/99 /s/ Paul E. Williams /s/ Martin H. Ruby - ------------------------------ ------------------------------------------ Paul E. Williams Martin H. Ruby Date: 04/21/99 Date: 04/21/99 /s/ John R. Lindholm - ------------------------------ John R. Lindholm Date: 04/21/99 /s/ John McGeeney - ------------------------------ John R. McGeeney Date: 04/21/99 /s/ William H. Guth - ------------------------------ William H. Guth Date: 04/21/99 11 EXHIBIT INDEX Exhibit No. 8.(f) Form of Participation Agreement Among BT Insurance Funds Trust, Bankers Trust Company and Integrity. 8.(g) Form of Participation Agreement Among Insurance Series, Federated Securities Corp. and Integrity. 8.(h) Form of Participation Agreement Between Janus Aspen Series and Integrity. 8.(i) Form of Participation Agreement Between JPM Series Trust II and Integrity. 8.(j) Form of Participation Agreement Between Morgan Stanley Universal Funds, Inc., Morgan Stanley Asset Management Inc., Miller Anderson & Sherrerd, LLP and Integrity. 10. Consents of Ernst & Young LLP. 12 EX-99.8(F) 2 EXHIBIT 99.8.(F) FUND PARTICIPATION AGREEMENT THIS AGREEMENT made as of the ____ day of _____________, 199__ by and among BT Insurance Funds Trust ("TRUST"), a Massachusetts business trust, Bankers Trust Company ("ADVISER"), a New York banking corporation, and ______________ ("LIFE COMPANY"), a life insurance company organized under the laws of the State of _____________. WHEREAS, TRUST is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940, as amended (the "'40 Act"), as an open-end, diversified management investment company; and WHEREAS, TRUST is comprised of several series funds (each a "Portfolio"), with those Portfolios currently available being listed on Appendix A hereto; and WHEREAS, TRUST was organized to act as the funding vehicle for certain variable life insurance and/or variable annuity contracts ("Variable Contracts") offered by life insurance companies through separate accounts ("Separate Accounts") of such life insurance companies ("Participating Insurance Companies"); and WHEREAS, TRUST may also offer its shares to certain qualified pension and retirement plans ("Qualified Plans"); and WHEREAS, TRUST has received an order from the SEC, granting Participating Insurance Companies and their separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the '40 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Portfolios of the TRUST to be sold to and held by Variable Contract Separate Accounts of both affiliated and unaffiliated Participating Insurance Companies and Qualified Plans ("Exemptive Order"); and WHEREAS, LIFE COMPANY has established or will establish one or more Separate Accounts to offer Variable Contracts and is desirous of having TRUST as one of the underlying funding vehicles for such Variable Contracts; and WHEREAS, ADVISER is a "bank" as defined in the Investment Advisers Act of 1940, as amended (the "Advisers Act") and as such is excluded from the definition of "Investment Adviser" and is not required to register as an investment adviser pursuant to the Advisers Act; and WHEREAS, ADVISER serves as the TRUST's investment adviser; and WHEREAS, to the extent permitted by applicable insurance laws and regulations, LIFE COMPANY intends to purchase shares of TRUST to fund the aforementioned Variable Contracts and TRUST is authorized to sell such shares to LIFE COMPANY at such shares' net asset value; 1 NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY, TRUST, and ADVISER agree as follows: Article I. SALE OF TRUST SHARES 1.1 TRUST agrees to make available to the Separate Accounts of LIFE COMPANY shares of the selected Portfolios as listed on Appendix B for investment of purchase payments of Variable Contracts allocated to the designated Separate Accounts as provided in TRUST's Registration Statement. 1.2 TRUST agrees to sell to LIFE COMPANY those shares of the selected Portfolios of TRUST which LIFE COMPANY orders, executing such orders on a daily basis at the net asset value next computed after receipt by TRUST or its designee of the order for the shares of TRUST. For purposes of this Section 1.2, LIFE COMPANY shall be the designee of TRUST for receipt of such orders from the designated Separate Account and receipt by such designee shall constitute receipt by TRUST; provided that LIFE COMPANY receives the order by 4:00 p.m. New York time and TRUST receives notice from LIFE COMPANY by telephone or facsimile (or by such other means as TRUST and LIFE COMPANY may agree in writing) of such order by 8:00 a.m. New York time on the next Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which TRUST calculates its net asset value pursuant to the rules of the SEC. 1.3 TRUST agrees to redeem on LIFE COMPANY's request, any full or fractional shares of TRUST held by LIFE COMPANY, executing such requests on a daily basis at the net asset value next computed after receipt by TRUST or its designee of the request for redemption, in accordance with the provisions of this Agreement and TRUST's Registration Statement. (In the event of a conflict between the provisions of this Agreement and the Trust's Registration Statement, the provisions of the Registration Statement shall govern.) For purposes of this Section 1.3, LIFE COMPANY shall be the designee of TRUST for receipt of requests for redemption from the designated Separate Account and receipt by such designee shall constitute receipt by TRUST; provided that LIFE COMPANY receives the request for redemption by 4:00 p.m. New York time and TRUST receives notice from LIFE COMPANY by telephone or facsimile (or by such other means as TRUST and LIFE COMPANY may agree in writing) of such request for redemption by 9:00 a.m. New York time on the next Business Day. 1.4 TRUST shall furnish, on or before each ex-dividend date, notice to LIFE COMPANY of any income dividends or capital gain distributions payable on the shares of any Portfolio of TRUST. LIFE COMPANY hereby elects to receive all such income dividends and capital gain distributions as are payable on a Portfolio's shares in additional shares of the Portfolio. TRUST shall notify LIFE COMPANY or its designee of the number of shares so issued as payment of such dividends and distributions. 1.5 TRUST shall make the net asset value per share for the selected Portfolio(s) available to LIFE COMPANY on a daily basis as soon as reasonably practicable after the net asset value per share is calculated but shall use its best efforts to make such net asset value available by 6:30 2 p.m. New York time. If TRUST provides LIFE COMPANY with materially incorrect share net asset value information through no fault of LIFE COMPANY, LIFE COMPANY on behalf of the Separate Accounts, shall be entitled to an adjustment to the number of shares purchased or redeemed to reflect the correct share net asset value. Any material error in the calculation of net asset value per share, dividend or capital gain information shall be reported promptly upon discovery to LIFE COMPANY. 1.6 At the end of each Business Day, LIFE COMPANY shall use the information described in Section 1.5 to calculate Separate Account unit values for the day. Using these unit values, LIFE COMPANY shall process each such Business Day's Separate Account transactions based on requests and premiums received by it by the close of trading on the floor of the New York Stock Exchange (currently 4:00 p.m. New York time) to determine the net dollar amount of TRUST shares which shall be purchased or redeemed at that day's closing net asset value per share. The net purchase or redemption orders so determined shall be transmitted to TRUST by LIFE COMPANY by 8:00 a.m. New York Time on the Business Day next following LIFE COMPANY's receipt of such requests and premiums in accordance with the terms of Sections 1.2 and 1.3 hereof. 1.7 If LIFE COMPANY's order requests the purchase of TRUST shares, LIFE COMPANY shall pay for such purchase by wiring federal funds to TRUST or its designated custodial account on the day the order is transmitted by LIFE COMPANY. If LIFE COMPANY's order requests a net redemption resulting in a payment of redemption proceeds to LIFE COMPANY, TRUST shall use its best efforts to wire the redemption proceeds to LIFE COMPANY by the next Business Day, unless doing so would require TRUST to dispose of Portfolio securities or otherwise incur additional costs. In any event, proceeds shall be wired to LIFE COMPANY within the time period permitted by the '40 Act or the rules, orders or regulations thereunder, and TRUST shall notify the person designated in writing by LIFE COMPANY as the recipient for such notice of such delay by 3:00 p.m. New York Time on the same Business Day that LIFE COMPANY transmits the redemption order to TRUST. If LIFE COMPANY's order requests the application of redemption proceeds from the redemption of shares to the purchase of shares of another Fund advised by ADVISER, TRUST shall so apply such proceeds on the same Business Day that LIFE COMPANY transmits such order to TRUST. 1.8 TRUST agrees that all shares of the Portfolios of TRUST will be sold only to Participating Insurance Companies which have agreed to participate in TRUST to fund their Separate Accounts and/or to Qualified Plans, all in accordance with the requirements of Section 817(h)(4) of the Internal Revenue Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of the TRUST's Portfolios will not be sold directly to the general public. 1.9 TRUST may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of the shares of or liquidate any Portfolio of TRUST if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board of Trustees of the TRUST (the "Board"), acting in good faith and in light of its duties under federal and any applicable state laws, deemed necessary, desirable or appropriate and in the best interests of the shareholders of such Portfolios. 3 1.10 Issuance and transfer of Portfolio shares will be by book entry only. Stock certificates will not be issued to LIFE COMPANY or the Separate Accounts. Shares ordered from Portfolio will be recorded in appropriate book entry titles for the Separate Accounts. Article II. REPRESENTATIONS AND WARRANTIES 2.1 LIFE COMPANY represents and warrants that it is an insurance company duly organized and in good standing under the laws of ___________________ and that it has legally and validly established each Separate Account as a segregated asset account under such laws, and that ___________________, the principal underwriter for the Variable Contracts, is registered as a broker-dealer under the Securities Exchange Act of 1934 (the "'34 Act"). 2.2 LIFE COMPANY represents and warrants that it has registered or, prior to any issuance or sale of the Variable Contracts, will register each Separate Account as a unit investment trust ("UIT") in accordance with the provisions of the '40 Act and cause each Separate Account to remain so registered to serve as a segregated asset account for the Variable Contracts, unless an exemption from registration is available. 2.3 LIFE COMPANY represents and warrants that the Variable Contracts will be registered under the Securities Act of 1933 (the "'33 Act") unless an exemption from registration is available prior to any issuance or sale of the Variable Contracts, and that the Variable Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws (including all applicable blue sky laws) and further that the sale of the Variable Contracts shall comply in all material respects with applicable state insurance law suitability requirements. 2.4 LIFE COMPANY represents and warrants that the Variable Contracts are currently and at the time of issuance will be treated as life insurance, endowment or annuity contracts under applicable provisions of the Code, that it will maintain such treatment and that it will notify TRUST immediately upon having a reasonable basis for believing that the Variable Contracts have ceased to be so treated or that they might not be so treated in the future. 2.5 TRUST represents and warrants that the Fund shares offered and sold pursuant to this Agreement will be registered under the '33 Act and sold in accordance with all applicable federal laws, and TRUST shall be registered under the '40 Act prior to and at the time of any issuance or sale of such shares. TRUST, subject to Section 1.9 above, shall amend its registration statement under the '33 Act and the '40 Act from time to time as required in order to effect the continuous offering of its shares. TRUST shall register and qualify its shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by TRUST. 2.6 TRUST represents and warrants that each Portfolio will comply with the diversification requirements set forth in Section 817(h) of the Code, and the rules and regulations thereunder, including without limitation Treasury Regulation 1.817-5, and will notify LIFE COMPANY immediately upon having a reasonable basis for believing any Portfolio has ceased to comply and 4 will immediately take all reasonable steps to adequately diversify the Portfolio to achieve compliance. 2.7 TRUST represents and warrants that each Portfolio invested in by the Separate Account will be treated as a "regulated investment company" under Subchapter M of the Code, and will notify LIFE COMPANY immediately upon having a reasonable basis for believing it has ceased to so qualify or might not so qualify in the future. 2.8 ADVISER represents and warrants that it shall perform its obligations hereunder in compliance in all material respects with any applicable state and federal laws. Article III. PROSPECTUS AND PROXY STATEMENTS 3.1 TRUST shall prepare and be responsible for filing with the SEC and any state regulators requiring such filing all shareholder reports, notices, proxy materials (or similar materials such as voting instruction solicitation materials), prospectuses and statements of additional information of TRUST. TRUST shall bear the costs of registration and qualification of shares of the Portfolios, preparation and filing of the documents listed in this Section 3.1 and all taxes and filing fees to which an issuer is subject on the issuance and transfer of its shares. 3.2 TRUST or its designee shall provide LIFE COMPANY, free of charge, with as many copies of the current prospectus (or prospectuses), statements of additional information, annual and semi-annual reports and proxy statements for the shares of the Portfolios as LIFE COMPANY may reasonably request for distribution to existing Variable Contract owners whose Variable Contracts are funded by such shares. TRUST or its designee shall provide LIFE COMPANY, at LIFE COMPANY's expense, with as many copies of the current prospectus (or prospectuses) for the shares as LIFE COMPANY may reasonably request for distribution to prospective purchasers of Variable Contracts. If requested by LIFE COMPANY, TRUST or its designee shall provide such documentation (including a "camera ready" copy of the current prospectus (or prospectuses) as set in type or, at the request of LIFE COMPANY, as a diskette in the form sent to the financial printer) and other assistance as is reasonably necessary in order for the parties hereto once a year (or more frequently if the prospectus (or prospectuses) for the shares is supplemented or amended) to have the prospectus for the Variable Contracts and the prospectus (or prospectuses) for the TRUST shares printed together in one document. The expenses of such printing will be apportioned between LIFE COMPANY and TRUST in proportion to the number of pages of the Variable Contract and TRUST prospectus, taking account of other relevant factors affecting the expense of printing, such as covers, columns, graphs and charts; TRUST shall bear the cost of printing the TRUST prospectus portion of such document for distribution only to owners of existing Variable Contracts funded by the TRUST shares and LIFE COMPANY shall bear the expense of printing the portion of such documents relating to the Separate Account; provided, however, LIFE COMPANY shall bear all printing expenses of such combined documents where used for distribution to prospective purchasers or to owners of existing Variable Contracts not funded by the shares. In the event that LIFE COMPANY requests that TRUST or its designee provide TRUST's prospectus in a "camera ready" or diskette format, TRUST shall be responsible for providing the rospectus (or 5 prospectuses) in the format in which it is accustomed to formatting prospectuses and shall bear the expense of providing the prospectus (or prospectuses) in such format (e.g. typesetting expenses), and LIFE COMPANY shall bear the expense of adjusting or changing the format to conform with any of its prospectuses. 3.3 TRUST will provide LIFE COMPANY with at least one complete copy of all prospectuses, statements of additional information, annual and semi-annual reports, proxy statements, exemptive applications and all amendments or supplements to any of the above that relate to the Portfolios promptly after the filing of each such document with the SEC or other regulatory authority. LIFE COMPANY will provide TRUST with at least one complete copy of all prospectuses, statements of additional information, annual and semi-annual reports, proxy statements, exemptive applications and all amendments or supplements to any of the above that relate to a Separate Account promptly after the filing of each such document with the SEC or other regulatory authority. Article IV. SALES MATERIALS 4.1 LIFE COMPANY will furnish, or will cause to be furnished, to TRUST and ADVISER, each piece of sales literature or other promotional material in which TRUST or ADVISER is named, at least fifteen (15) Business Days prior to its intended use. No such material will be used if TRUST or ADVISER objects to its use in writing within ten (10) Business Days after receipt of such material. 4.2 TRUST and ADVISER will furnish, or will cause to be furnished, to LIFE COMPANY, each piece of sales literature or other promotional material in which LIFE COMPANY or its Separate Accounts are named, at least fifteen (15) Business Days prior to its intended use. No such material will be used if LIFE COMPANY objects to its use in writing within ten (10) Business Days after receipt of such material. 4.3 TRUST and its affiliates and agents shall not give any information or make any representations on behalf of LIFE COMPANY or concerning LIFE COMPANY, the Separate Accounts, or the Variable Contracts issued by LIFE COMPANY, other than the information or representations contained in a registration statement or prospectus for such Variable Contracts, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports of the Separate Accounts or reports prepared for distribution to owners of such Variable Contracts, or in sales literature or other promotional material approved by LIFE COMPANY or its designee, except with the written permission of LIFE COMPANY. 4.4 LIFE COMPANY and its affiliates and agents shall not give any information or make any representations on behalf of TRUST or concerning TRUST other than the information or representations contained in a registration statement or prospectus for TRUST, as such registration statement and prospectus may be amended or supplemented from time to time, or in sales literature or other promotional material approved by TRUST or its designee, except with the written permission of TRUST. 6 4.5 For purposes of this Agreement, the phrase "sales literature or other promotional material" or words of similar import include, without limitation, advertisements (such as material published, or designed for use, in a newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures or other public media), sales literature (such as any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, or reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports and proxy materials, and any other material constituting sales literature or advertising under National Association of Securities Dealers, Inc. ("NASD") rules, the '40 Act, the '33 Act or rules thereunder. Article V. POTENTIAL CONFLICTS 5.1 The parties acknowledge that TRUST has received an order from the SEC granting relief from various provisions of the '40 Act and the rules thereunder to the extent necessary to permit TRUST shares to be sold to and held by Variable Contract separate accounts of both affiliated and unaffiliated Participating Insurance Companies and Qualified Plans. The Exemptive Order requires TRUST and each Participating Insurance Company to comply with conditions and undertakings substantially as provided in this Section 5. The TRUST will not enter into a participation agreement with any other Participating Insurance Company unless it imposes the same conditions and undertakings as are imposed on LIFE COMPANY hereby. 5.2 The Board will monitor TRUST for the existence of any material irreconcilable conflict between the interests of Variable Contract owners of all separate accounts and with participants of Qualified Plans investing in TRUST. An irreconcilable material conflict may arise for a variety of reasons, which may include: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling or any similar action by insurance, tax or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of TRUST are being managed; (e) a difference in voting instructions given by Variable Contract owners; (f) a decision by a Participating Insurance Company to disregard the voting instructions of Variable Contract owners and (g) if applicable, a decision by a Qualified Plan to disregard the voting instructions of plan participants. 5.3 LIFE COMPANY will report any potential or existing conflicts of which it becomes aware to the Board. LIFE COMPANY will be responsible for assisting the Board in carrying out its duties in this regard by providing the Board with all information reasonably necessary for the Board to consider any issues raised. The responsibility includes, but is not limited to, an obligation by the LIFE COMPANY to inform the Board whenever it has determined to disregard Variable Contract owner voting instructions. These responsibilities of LIFE COMPANY will be carried out with a view only to the interests of the Variable Contract owners. 7 5.4 If a majority of the Board or majority of its disinterested Trustees, determines that a material irreconcilable conflict exists affecting LIFE COMPANY, LIFE COMPANY, at its expense and to the extent reasonably practicable (as determined by a majority of the Board's disinterested Trustees), will take any steps necessary to remedy or eliminate the irreconcilable material conflict, including; (a) withdrawing the assets allocable to some or all of the Separate Accounts from TRUST or any Portfolio thereof and reinvesting those assets in a different investment medium, which may include another Portfolio of TRUST, or another investment company; (b) submitting the question as to whether such segregation should be implemented to a vote of all affected Variable Contract owners and as appropriate, segregating the assets of any appropriate group (i.e., variable annuity or variable life insurance Contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Variable Contract owners the option of making such a change; and (c) establishing a new registered management investment company (or series thereof) or managed separate account. If a material irreconcilable conflict arises because of LIFE COMPANY's decision to disregard Variable Contract owner voting instructions, and that decision represents a minority position or would preclude a majority vote, LIFE COMPANY may be required, at the election of TRUST, to withdraw the Separate Account's investment in TRUST, and no charge or penalty will be imposed as a result of such withdrawal. The responsibility to take such remedial action shall be carried out with a view only to the interests of the Variable Contract owners. For the purposes of this Section 5.4, a majority of the disinterested members of the Board shall determine whether or not any proposed action adequately remedies any irreconcilable material conflict, but in no event will TRUST or ADVISER (or any other investment adviser of TRUST) be required to establish a new funding medium for any Variable Contract. Further, LIFE COMPANY shall not be required by this Section 5.4 to establish a new funding medium for any Variable Contracts if any offer to do so has been declined by a vote of a majority of Variable Contract owners materially and adversely affected by the irreconcilable material conflict. 5.5 The Board's determination of the existence of an irreconcilable material conflict and its implications shall be made known promptly and in writing to LIFE COMPANY. 5.6 No less than annually, LIFE COMPANY shall submit to the Board such reports, materials or data as the Board may reasonably request so that the Board may fully carry out its obligations. Such reports, materials, and data shall be submitted more frequently if deemed appropriate by the Board. Article VI. VOTING 6.1 LIFE COMPANY will provide pass-through voting privileges to all Variable Contract owners so long as the SEC continues to interpret the '40 Act as requiring pass-through voting privileges for Variable Contract owners. Accordingly, LIFE COMPANY, where applicable, will vote shares of the Portfolio held in its Separate Accounts in a manner consistent with voting instructions timely received from its Variable Contract owners. LIFE COMPANY will be responsible for assuring that each of its Separate Accounts that participates in TRUST calculates 8 voting privileges in a manner consistent with other Participating Insurance Companies. LIFE COMPANY will vote shares for which it has not received timely voting instructions, as well as shares it owns, in the same proportion as its votes those shares for which it has received voting instructions. 6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if Rule 6e-3 is adopted, to provide exemptive relief from any provision of the '40 Act or the rules thereunder with respect to mixed and shared funding on terms and conditions materially different from any exemptions granted in the Exemptive Order, then TRUST, and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such Rules are applicable. Article VII. INDEMNIFICATION 7.1 INDEMNIFICATION BY LIFE COMPANY. LIFE COMPANY agrees to indemnify and hold harmless TRUST, ADVISER and each of their Trustees, directors, principals, officers, employees and agents and each person, if any, who controls TRUST or ADVISER within the meaning of Section 15 of the '33 Act (collectively, the "Indemnified Parties") against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of LIFE COMPANY, which consent shall not be unreasonably withheld) or litigation or threatened litigation (including legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of TRUST's shares or the Variable Contracts and: (a) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the Registration Statement or prospectus for the Variable Contracts or contained in the Variable Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished in writing to LIFE COMPANY by or on behalf of TRUST for use in the registration statement or prospectus for the Variable Contracts or in the Variable Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Variable Contracts or TRUST shares; or (b) arise out of or result from (i) statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature of TRUST not supplied by LIFE COMPANY, or persons under its control) or (ii) wrongful conduct of LIFE COMPANY or persons under its control, with respect to the sale or distribution of the Variable Contracts or TRUST shares; or 9 (c) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature of TRUST or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished in writing to TRUST by or on behalf of LIFE COMPANY; or (d) arise as a result of any failure by LIFE COMPANY to provide substantially the services and furnish the materials under the terms of this Agreement; or (e) arise out of or result from any material breach of any representation and/or warranty made by LIFE COMPANY in this Agreement or arise out of or result from any other material breach of this Agreement by LIFE COMPANY. 7.2 LIFE COMPANY shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party to the extent that such losses, claims, damages, liabilities or litigation are attributable to such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement. 7.3 LIFE COMPANY shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified LIFE COMPANY in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify LIFE COMPANY of any such claim shall not relieve LIFE COMPANY from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against an Indemnified Party, LIFE COMPANY shall be entitled to participate at its own expense in the defense of such action. LIFE COMPANY also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from LIFE COMPANY to such party of LIFE COMPANY's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and LIFE COMPANY will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 7.4 INDEMNIFICATION BY TRUST. TRUST agrees to indemnify and hold harmless LIFE COMPANY and each of its directors, officers, employees, and agents and each person, if any, who controls LIFE COMPANY within the meaning of Section 15 of the '33 Act (collectively, the "Indemnified Parties") against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of TRUST which consent shall not be unreasonably withheld) or litigation or threatened litigation (including legal and other expenses) 10 to which the Indemnified Parties may become subject under any statute, or regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of TRUST's shares or the Variable Contracts and: (a) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus or sales literature of TRUST (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished in writing to ADVISER or TRUST by or on behalf of LIFE COMPANY for use in the registration statement or prospectus for TRUST or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Variable Contracts or TRUST shares; or (b) arise out of or result from (i) statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature for the Variable Contracts not supplied by ADVISER or TRUST or persons under its control) or (ii) gross negligence or wrongful conduct or willful misfeasance of TRUST or persons under its control, with respect to the sale or distribution of the Variable Contracts or TRUST shares; or (c) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature covering the Variable Contracts, or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished in writing to LIFE COMPANY for inclusion therein by or on behalf of TRUST; or (d) arise as a result of (i) a failure by TRUST to provide substantially the services and furnish the materials under the terms of this Agreement; or (ii) a failure by a Portfolio(s) invested in by the Separate Account to comply with the diversification requirements of Section 817(h) of the Code; or (iii) a failure by a Portfolio(s) invested in by the Separate Account to qualify as a "regulated investment company" under Subchapter M of the Code; or (e) arise out of or result from any material breach of any representation and/or warranty made by TRUST in this Agreement or arise out of or result from any other material breach of this Agreement by TRUST. 11 7.5 TRUST shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party to the extent that such losses, claims, damages, liabilities or litigation are attributable to such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement. 7.6 TRUST shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified TRUST in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify TRUST of any such claim shall not relieve TRUST from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, TRUST shall be entitled to participate at its own expense in the defense thereof. TRUST also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from TRUST to such party of TRUST's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and TRUST will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. Article VIII. TERM; TERMINATION 8.1 This Agreement shall be effective as of the date hereof and shall continue in force until terminated in accordance with the provisions herein. 8.2 This Agreement shall terminate in accordance with the following provisions: (a) At the option of LIFE COMPANY or TRUST at any time from the date hereof upon 180 days' notice, unless a shorter time is agreed to by the parties; (b) At the option of LIFE COMPANY, if TRUST shares are not reasonably available to meet the requirements of the Variable Contracts as determined by LIFE COMPANY. Prompt notice of election to terminate shall be furnished by LIFE COMPANY, said termination to be effective ten days after receipt of notice unless TRUST makes available a sufficient number of shares to reasonably meet the requirements of the Variable Contracts within said ten-day period; (c) At the option of LIFE COMPANY, upon the institution of formal proceedings against TRUST by the SEC, the NASD, or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in LIFE COMPANY's reasonable judgment, materially impair TRUST's ability to meet and perform TRUST's obligations and duties hereunder. Prompt notice of election to terminate 12 shall be furnished by LIFE COMPANY with said termination to be effective upon receipt of notice; (d) At the option of TRUST, upon the institution of formal proceedings against LIFE COMPANY and/or its broker-dealer affiliates by the SEC, the NASD, or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in TRUST's reasonable judgment, materially impair LIFE COMPANY's ability to meet and perform its obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by TRUST with said termination to be effective upon receipt of notice; (e) In the event TRUST's shares are not registered, issued or sold in accordance with applicable state or federal law, or such law precludes the use of such shares as the underlying investment medium of Variable Contracts issued or to be issued by LIFE COMPANY. Termination shall be effective upon such occurrence without notice; (f) At the option of TRUST if the Variable Contracts cease to qualify as annuity contracts or life insurance contracts, as applicable, under the Code, or if TRUST reasonably believes that the Variable Contracts may fail to so qualify. Termination shall be effective upon receipt of notice by LIFE COMPANY; (g) At the option of LIFE COMPANY, upon TRUST's breach of any material provision of this Agreement, which breach has not been cured to the satisfaction of LIFE COMPANY within ten days after written notice of such breach is delivered to TRUST; (h) At the option of TRUST, upon LIFE COMPANY's breach of any material provision of this Agreement, which breach has not been cured to the satisfaction of TRUST within ten days after written notice of such breach is delivered to LIFE COMPANY; (i) At the option of TRUST, if the Variable Contracts are not registered, issued or sold in accordance with applicable federal and/or state law. Termination shall be effective immediately upon such occurrence without notice; In the event this Agreement is assigned without the prior written consent of LIFE COMPANY, TRUST, and ADVISER, termination shall be effective immediately upon such occurrence without notice. 8.3 Notwithstanding any termination of this Agreement pursuant to Section 8.2 hereof, TRUST at its option may elect to continue to make available additional TRUST shares, as provided below, for so long as TRUST desires pursuant to the terms and conditions of this Agreement, for all Variable Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, if 13 TRUST so elects to make additional TRUST shares available, the owners of the Existing Contracts or LIFE COMPANY, whichever shall have legal authority to do so, shall be permitted to reallocate investments in TRUST, redeem investments in TRUST and/or invest in TRUST upon the payment of additional premiums under the Existing Contracts. In the event of a termination of this Agreement pursuant to Section 8.2 hereof, TRUST and ADVISER, as promptly as is practicable under the circumstances, shall notify LIFE COMPANY whether TRUST elects to continue to make TRUST shares available after such termination. If TRUST shares continue to be made available after such termination, the provisions of this Agreement shall remain in effect and thereafter either TRUST or LIFE COMPANY may terminate the Agreement, as so continued pursuant to this Section 8.3, upon sixty (60) days' prior written notice to the other party. 8.4 Except as necessary to implement Variable Contract owner initiated transactions, or as required by state insurance laws or regulations, LIFE COMPANY shall not redeem the shares attributable to the Variable Contracts (as opposed to the shares attributable to LIFE COMPANY's assets held in the Separate Accounts), and LIFE COMPANY shall not prevent Variable Contract owners from allocating payments to a Portfolio that was otherwise available under the Variable Contracts until thirty (30) days after the LIFE COMPANY shall have notified TRUST of its intention to do so. Article IX. NOTICES Any notice hereunder shall be given by registered or certified mail return receipt requested to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to TRUST: BT Insurance Funds Trust c/o First Data Investor Services Group, Inc. One Exchange Place 53 State Street, Mail Stop BOS 865 Boston, MA 02109 Attn: Elizabeth Russell, Legal Dep't AND c/o BT Alex. Brown One South Street, Mail Stop 1-18-6 Baltimore, MD 21202 Attn: Brian Wixsted, Mutual Fund Services If to ADVISER: Bankers Trust Company - U.S. Investment Management 14 130 Liberty Street New York, NY 10006 Attn.: Vinay Mendiratta, Mail Stop 2355 If to LIFE COMPANY: Notice shall be deemed given on the date of receipt by the addressee as evidenced by the return receipt. Article X. MISCELLANEOUS 10.1 The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 10.2 This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 10.3 If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 10.4 This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of New York. It shall also be subject to the provisions of the federal securities laws and the rules and regulations thereunder and to any orders of the SEC granting exemptive relief therefrom and the conditions of such orders. 10.5 It is understood and expressly stipulated that neither the shareholders of shares of any Portfolio nor the Trustees or officers of TRUST or any Portfolio shall be personally liable hereunder. No Portfolio shall be liable for the liabilities of any other Portfolio. All persons dealing with TRUST or a Portfolio must look solely to the property of TRUST or that Portfolio, respectively, for enforcement of any claims against TRUST or that Portfolio. It is also understood that each of the Portfolios shall be deemed to be entering into a separate Agreement with LIFE COMPANY so that it is as if each of the Portfolios had signed a separate Agreement with LIFE COMPANY and that a single document is being signed simply to facilitate the execution and administration of the Agreement. 10.6 Each party shall cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 15 10.7 The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 10.8 If the Agreement terminates, the parties agree that Article 7 and Sections 10.5, 10.6 and 10.7 shall remain in effect after termination. 10.9 No provision of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by TRUST, ADVISER and the LIFE COMPANY. 10.10 No failure or delay by a party in exercising any right or remedy under this Agreement will operate as a waiver thereof and no single or partial exercise of rights shall preclude a further or subsequent exercise. The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law. IN WITNESS WHEREOF, the parties have caused their duly authorized officers to execute this Fund Participation Agreement as of the date and year first above written. BT INSURANCE FUNDS TRUST By: --------------------------------------- Name: Title: BANKERS TRUST COMPANY By: --------------------------------------- Name: Title: [Insert Name of LIFE COMPANY] By: --------------------------------------- Name: Title: 16 APPENDIX A To Participation Agreement by and among _______________, ________________ and ______________________. List of portfolios: APPENDIX B To Participation Agreement by and among ________________, _______________ and ______________________. List of variable separate accounts: EX-99.8(G) 3 EXHIBIT 99.8.(G) FUND PARTICIPATION AGREEMENT This AGREEMENT is made this day of ____________, 199_, by and between _______________________(the "Insurer"), a life insurance company domiciled in _________________, on its behalf and on behalf of the segregated asset accounts of the Insurer listed on Exhibit A to this Agreement (the "Separate Accounts"); Insurance Series (the "Fund"), a Massachusetts business trust; and Federated Securities Corp. (the "Distributor"), a Pennsylvania corporation. W I T N E S S E T H WHEREAS, the Fund is registered with the Securities and Exchange Commission ("SEC") as an open-end management investment company under the Investment Company Act of 1940, as amended ("1940 Act") and the Fund is authorized to issue separate classes of shares of beneficial interest ("shares"), each representing an interest in a separate portfolio of assets known as a "portfolio" and each portfolio has its own investment objective, policies, and limitations; and WHEREAS, the Fund is available to offer shares of one or more of its portfolios to separate accounts of insurance companies that fund variable annuity contracts ("Variable Contracts") and to serve as an investment medium for Variable Contracts offered by insurance companies that have entered into participation agreements substantially similar to this agreement ("Participating Insurance Companies"), and the Fund will be made available in the future to offer shares of one or more of its portfolios to separate accounts of insurance companies that fund variable life insurance policies (at which time such policies would also be "Variable Contracts" hereunder), and 1 WHEREAS, the Fund is currently comprised of eight separate portfolios, and other portfolios may be established in the future; and WHEREAS, the Fund has obtained an order from the SEC dated December 29, 1993 (File No. 812-8620), granting Participating Insurance Companies and variable annuity and variable life insurance separate accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund to be sold to and held by variable annuity and variable life insurance separate accounts of life insurance companies that may or may not be affiliated with one another (hereinafter the "Mixed and Shared Funding Exemptive Order"); and WHEREAS, the Distributor is registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934, as amended ("1934 Act"), and is a member in good standing of the National Association of Securities Dealers, Inc. ("NASD"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Insurer wishes to purchase shares of one or more of the Fund's portfolios on behalf of its Separate Accounts to serve as an investment medium for Variable Contracts funded by the Separate Accounts, and the Distributor is authorized to sell shares of the Fund's portfolios; NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants hereinafter set forth, the parties hereby agree as follows: ARTICLE I. SALE OF FUND SHARES 2 1.1 The Distributor agrees to sell to the Insurer those shares of the portfolios offered and made available by the Fund and identified on Exhibit B ("Portfolios") that the Insurer orders on behalf of its Separate Accounts, and agrees to execute such orders on each day on which the Fund calculates its net asset value pursuant to rules of the SEC ("business day") at the net asset value next computed after receipt and acceptance by the Fund or its agent of the order for the shares of the Fund. 1.2 The Fund agrees to make available on each business day shares of the Portfolios for purchase at the applicable net asset value per share by the Insurer on behalf of its Separate Accounts; provided, however, that the Board of Trustees of the Fund may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio, if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Trustees, acting in good faith and in light of the Trustees' fiduciary duties under applicable law, necessary in the best interests of the shareholders of any Portfolio. 1.3 The Fund and the Distributor agree that shares of the Portfolios of the Fund will be sold only to Participating Insurance Companies, their separate accounts, and other persons consistent with each Portfolio being adequately diversified pursuant to Section 817(h) of the Internal Revenue Code of 1986, as amended ("Code"), and the regulations thereunder. No shares of any Portfolio will be sold directly to the general public to the extent not permitted by applicable tax law. 1.4 The Fund and the Distributor will not sell shares of the Portfolios to any insurance company or separate account unless an agreement containing provisions 3 substantially the same as the provisions in Article IV of this Agreement is in effect to govern such sales. 1.5 Upon receipt of a request for redemption in proper form from the Insurer, the Fund agrees to redeem any full or fractional shares of the Portfolios held by the Insurer, ordinarily executing such requests on each business day at the net asset value next computed after receipt and acceptance by the Fund or its agent of the request for redemption, except that the Fund reserves the right to suspend the right of redemption, consistent with Section 22(e) of the 1940 Act and any rules thereunder. Such redemption shall be paid consistent with applicable rules of the SEC and procedures and policies of the Fund as described in the current prospectus. 1.6 For purposes of Sections 1.2 and 1.5, the Insurer shall be the agent of the Fund for the limited purpose of receiving and accepting purchase and redemption orders from each Separate Account and receipt of such orders by 4:00 p.m. Eastern time by the Insurer shall be deemed to be receipt by the Fund for purposes of Rule 22c-1 of the 1940 Act; provided that the Fund receives notice of such orders on the next following business day prior to 4:00 p.m. Eastern time on such day, although the Insurer will use its best efforts to provide such notice by 9:00 a.m. Eastern time. 1.7 The Insurer agrees to purchase and redeem the shares of each Portfolio in accordance with the provisions of the current prospectus for the Fund. 1.8 The Insurer shall pay for shares of the Portfolio on the next business day after it places an order to purchase shares of the Portfolio. Payment shall be in federal funds transmitted by wire. 4 1.9 Issuance and transfer of shares of the Portfolios will be by book entry only unless otherwise agreed by the Fund. Stock certificates will not be issued to the Insurer or the Separate Accounts unless otherwise agreed by the Fund. Shares ordered from the Fund will be recorded in an appropriate title for the Separate Accounts or the appropriate subaccounts of the Separate Accounts. 1.10 The Fund shall furnish same day notice (by wire or telephone, followed by written confirmation) to the Insurer of any income dividends or capital gain distributions payable on the shares of the Portfolios. The Insurer hereby elects to reinvest in the Portfolio all such dividends and distributions as are payable on a Portfolio's shares and to receive such dividends and distributions in additional shares of that Portfolio. The Insurer reserves the right to revoke this election in writing and to receive all such dividends and distributions in cash. The Fund shall notify the Insurer of the number of shares so issued as payment of such dividends and distributions. 1.11 The Fund shall instruct its recordkeeping agent to advise the Insurer on each business day of the net asset value per share for each Portfolio as soon as reasonably practical after the net asset value per share is calculated and shall use its best efforts to make such net asset value per share available by 7:00 p.m. Eastern time. ARTICLE II. REPRESENTATIONS AND WARRANTIES 2.1 The Insurer represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it is taxed as an insurance company under Subchapter L of the Code. 5 2.2 The Insurer represents and warrants that it has legally and validly established each of the Separate Accounts as a segregated asset account under the ____________________ Insurance Code, and that each of the Separate Accounts is a validly existing segregated asset account under applicable federal and state law. 2.3 The Insurer represents and warrants that the Variable Contracts issued by the Insurer or interests in the Separate Accounts under such Variable Contracts (1) are or, prior to issuance, will be registered as securities under the Securities Act of 1933 ("1933 Act") or, alternatively, (2) are not registered because they are properly exempt from registration under the 1933 Act or will be offered exclusively in transactions that are properly exempt from registration under the 1933 Act. 2.4 The Insurer represents and warrants that each of the Separate Accounts (1) has been registered as a unit investment trust in accordance with the provisions of the 1940 Act or, alternatively, (2) has not been registered in proper reliance upon an exclusion from registration under the 1940 Act. 2.5 The Insurer represents that it believes, in good faith, that the Variable Contracts issued by the Insurer are currently treated as annuity contracts or life insurance policies (which may include modified endowment contracts), whichever is appropriate, under applicable provisions of the Code. 2.6 The Fund represents and warrants that it is duly organized as a business trust under the laws of the Commonwealth of Massachusetts, and is in good standing under applicable law. 6 2.7 The Fund represents and warrants that the shares of the Portfolios are duly authorized for issuance in accordance with applicable law and that the Fund is registered as an open-end management investment company under the 1940 Act. 2.8 The Fund represents that it believes, in good faith, that the Portfolios currently comply with the diversification provisions of Section 817(h) of the Code and the regulations issued thereunder relating to the diversification requirements for variable life insurance policies and variable annuity contracts. 2.9 The Distributor represents and warrants that it is a member in good standing of the NASD and is registered as a broker-dealer with the SEC. ARTICLE III. GENERAL DUTIES 3.1 The Fund shall take all such actions as are necessary to permit the sale of the shares of each Portfolio to the Separate Accounts, including maintaining its registration as an investment company under the 1940 Act, and registering the shares of the Portfolios sold to the Separate Accounts under the 1933 Act for so long as required by applicable law. The Fund shall amend its Registration Statement filed with the SEC under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of the shares of the Portfolios. The Fund shall register and qualify the shares for sale in accordance with the laws of the various states to the extent deemed necessary by the Fund or the Distributor. 3.2 The Fund shall make every effort to maintain qualification of each Portfolio as a Regulated Investment Company under Subchapter M of the Code (or any successor or similar provision) and shall notify the Insurer immediately upon having a 7 reasonable basis for believing that a Portfolio has ceased to so qualify or that it might not so qualify in the future. 3.3 The Fund shall make every effort to enable each Portfolio to comply with the diversification provisions of Section 817(h) of the Code and the regulations issued thereunder relating to the diversification requirements for variable life insurance policies and variable annuity contracts and any prospective amendments or other modifications to Section 817 or regulations thereunder, and shall notify the Insurer immediately upon having a reasonable basis for believing that any Portfolio has ceased to comply. 3.4 The Insurer shall take all such actions as are necessary under applicable federal and state law to permit the sale of the Variable Contracts issued by the Insurer, including registering each Separate Account as an investment company to the extent required under the 1940 Act, and registering the Variable Contracts or interests in the Separate Accounts under the Variable Contracts to the extent required under the 1933 Act, and obtaining all necessary approvals to offer the Variable Contracts from state insurance commissioners. 3.5 The Insurer shall make every effort to maintain the treatment of the Variable Contracts issued by the Insurer as annuity contracts or life insurance policies, whichever is appropriate, under applicable provisions of the Code, and shall notify the Fund and the Distributor immediately upon having a reasonable basis for believing that such Variable Contracts have ceased to be so treated or that they might not be so treated in the future. 8 3.6 The Insurer shall offer and sell the Variable Contracts issued by the Insurer in accordance with applicable provisions of the 1933 Act, the 1934 Act, the 1940 Act, the NASD Rules of Fair Practice, and state law respecting the offering of variable life insurance policies and variable annuity contracts. 3.7 The Distributor shall sell and distribute the shares of the Portfolios of the Fund in accordance with the applicable provisions of the 1933 Act, the 1934 Act, the 1940 Act, the NASD Rules of Fair Practice, and state law. 3.8 During such time as the Fund engages in Mixed Funding or Shared Funding, a majority of the Board of Trustees of the Fund shall consist of persons who are not "interested persons" of the Fund ("disinterested Trustees"), as defined by Section 2(a)(19) of the 1940 Act and the rules thereunder, and as modified by any applicable orders of the SEC, except that if this provision of this Section 3.8 is not met by reason of the death, disqualification, or bona fide resignation of any Trustee or Trustees, then the operation of this provision shall be suspended (a) for a period of 45 days if the vacancy or vacancies may be filled by the Fund's Board; (b) for a period of 60 days if a vote of shareholders is required to fill the vacancy or vacancies; or (c) for such longer period as the SEC may prescribe by order upon application. 3.9 The Insurer and its agents will not in any way recommend any proposal or oppose or interfere with any proposal submitted by the Fund at a meeting of owners of Variable Contracts or shareholders of the Fund, and will in no way recommend, oppose, or interfere with the solicitation of proxies for Fund shares held by Contract Owners, without the prior written consent of the Fund, which consent may be withheld in the Fund's sole discretion. 9 3.10 Each party hereto shall cooperate with each other party and all appropriate governmental authorities having jurisdiction (including, without limitation, the SEC, the NASD, and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. ARTICLE IV. POTENTIAL CONFLICTS 4.1 During such time as the Fund engages in Mixed Funding or Shared Funding, the parties hereto shall comply with the conditions in this Article IV. 4.2 The Fund's Board of Trustees shall monitor the Fund for the existence of any material irreconcilable conflict (1) between the interests of owners of variable annuity contracts and variable life insurance policies, and (2) between the interests of owners of Variable Contracts ("Variable Contract Owners") issued by different Participating Life Insurance Companies that invest in the Fund. A material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretive letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio of the Fund are being managed; (e) a difference in voting instructions given by variable annuity and variable life insurance contract owners; or (f) a decision by a Participating Insurance Company to disregard the voting instructions of Variable Contract Owners. 10 4.3 The Insurer agrees that it shall report any potential or existing conflicts of which it is aware to the Fund's Board of Trustees. The Insurer will be responsible for assisting the Board of Trustees of the Fund in carrying out its responsibilities under the Mixed and Shared Funding Exemptive Order, or, if the Fund is engaged in Mixed Funding or Shared Funding in reliance on Rule 6e-2, 6e-3(T), or any other regulation under the 1940 Act, the Insurer will be responsible for assisting the Board of Trustees of the Fund in carrying out its responsibilities under such regulation, by providing the Board with all information reasonably necessary for the Board to consider any issues raised. This includes, but is not limited to, an obligation by the Insurer to inform the Board whenever Variable Contract Owner voting instructions are disregarded. The Insurer shall carry out its responsibility under this Section 4.3 with a view only to the interests of the Variable Contract Owners. 4.4 The Insurer agrees that in the event that it is determined by a majority of the Board of Trustees of the Fund or a majority of the Fund's disinterested Trustees that a material irreconcilable conflict exists, the Insurer shall, at its expense and to the extent reasonably practicable (as determined by a majority of the disinterested Trustees of the Board of the Fund), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (1) withdrawing the assets allocable to some or all of the Separate Accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including another portfolio of the Fund, or submitting the question as to whether such segregation should be implemented to a vote of all affected Variable Contract Owners and, as appropriate, segregating the assets of any appropriate group (I.E., annuity contract owners or life insurance contract owners of contracts issued by one or more Participating Insurance Companies), that votes in favor of such segregation, or offering to the affected Variable Contract Owners the option of making such a change; and (2) establishing a 11 new registered management investment company or managed separate account. If a material irreconcilable conflict arises because of the Insurer's decision to disregard Variable Contract Owners' voting instructions and that decision represents a minority position or would preclude a majority vote, the Insurer shall be required, at the Fund's election, to withdraw the Separate Accounts' investment in the Fund, provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested Trustees, and no charge or penalty will be imposed as a result of such withdrawal. These responsibilities shall be carried out with a view only to the interests of the Variable Contract Owners. A majority of the disinterested Trustees of the Fund shall determine whether or not any proposed action adequately remedies any material irreconcilable conflict, but in no event will the Fund or its investment adviser or the Distributor be required to establish a new funding medium for any Variable Contract. The Insurer shall not be required by this Section 4.4 to establish a new funding medium for any Variable Contract if any offer to do so has been declined by vote of a majority of Variable Contract Owners materially adversely affected by the material irreconcilable conflict. 4.5 The Insurer, at least annually, shall submit to the Fund's Board of Trustees such reports, materials, or data as the Board reasonably may request so that the Trustees of the Fund may fully carry out the obligations imposed upon the Board by the conditions contained in the application for the Mixed and Shared Funding Exemptive Order and said reports, materials, and data shall be submitted more frequently if deemed appropriate by the Board. 4.6 All reports of potential or existing conflicts received by the Fund's Board of Trustees, and all Board action with regard to determining the existence of a 12 conflict, notifying Participating Insurance Companies of a conflict, and determining whether any proposed action adequately remedies a conflict, shall be properly recorded in the minutes of the Board of Trustees of the Fund or other appropriate records, and such minutes or other records shall be made available to the SEC upon request. 4.7 The Board of Trustees of the Fund shall promptly notify the Insurer in writing of its determination of the existence of an irreconcilable material conflict and its implications. ARTICLE V. PROSPECTUSES AND PROXY STATEMENTS; VOTING 5.1 The Insurer shall distribute such prospectuses, proxy statements and periodic reports of the Fund to the owners of Variable Contracts issued by the Insurer as required to be distributed to such Variable Contract Owners under applicable federal or state law. 5.2 The Distributor shall provide the Insurer with as many copies of the current prospectus of the Fund as the Insurer may reasonably request. If requested by the Insurer in lieu thereof, the Fund shall provide such documentation (including a final copy of the Fund's prospectus as set in type or in camera-ready copy) and other assistance as is reasonably necessary in order for the Insurer to either print a stand-alone document or print together in one document the current prospectus for the Variable Contracts issued by the Insurer and the current prospectus for the Fund, or a document combining the Fund prospectus with prospectuses of other funds in which the Variable Contracts may be invested. The Fund shall bear the expense of printing copies of its current prospectus that will be distributed to existing Variable Contract Owners, and the Insurer shall bear the expense of printing copies of the Fund's 13 prospectus that are used in connection with offering the Variable Contracts issued by the Insurer. 5.3 The Fund and the Distributor shall provide, at the Fund's expense, such copies of the Fund's current Statement of Additional Information ("SAI") as may reasonably be requested, to the Insurer and to any owner of a Variable Contract issued by the Insurer who requests such SAI. 5.4 The Fund, at its expense, shall provide the Insurer with copies of its proxy materials, periodic reports to shareholders, and other communications to shareholders in such quantity as the Insurer shall reasonably require for purposes of distributing to owners of Variable Contracts issued by the Insurer. The Fund, at the Insurer's expense, shall provide the Insurer with copies of its periodic reports to shareholders and other communications to shareholders in such quantity as the Insurer shall reasonably request for use in connection with offering the Variable Contracts issued by the Insurer. If requested by the Insurer in lieu thereof, the Fund shall provide such documentation (including a final copy of the Fund's proxy materials, periodic reports to shareholders, and other communications to shareholders, as set in type or in camera-ready copy) and other assistance as reasonably necessary in order for the Insurer to print such shareholder communications for distribution to owners of Variable Contracts issued by the Insurer. 5.5 For so long as the SEC interprets the 1940 Act to require pass-through voting by Participating Insurance Companies whose Separate Accounts are registered as investment companies under the 1940 Act, the Insurer shall vote shares of each Portfolio of the Fund held in a Separate Account or a subaccount thereof, whether or not registered under the 1940 Act, at regular and special meetings of the Fund in 14 accordance with instructions timely received by the Insurer (or its designated agent) from owners of Variable Contracts funded by such Separate Account or subaccount thereof having a voting interest in the Portfolio. The Insurer shall vote shares of a Portfolio of the Fund held in a Separate Account or a subaccount thereof that are attributable to the Variable Contracts as to which no timely instructions are received, as well as shares held in such Separate Account or subaccount thereof that are not attributable to the Variable Contracts and owned beneficially by the Insurer (resulting from charges against the Variable Contracts or otherwise), in the same proportion as the votes cast by owners of the Variable Contracts funded by that Separate Account or subaccount thereof having a voting interest in the Portfolio from whom instructions have been timely received. The Insurer shall vote shares of each Portfolio of the Fund held in its general account, if any, in the same proportion as the votes cast with respect to shares of the Portfolio held in all Separate Accounts of the Insurer or subaccounts thereof, in the aggregate. 5.6 During such time as the Fund engages in Mixed Funding or Shared Funding, the Fund shall disclose in its prospectus that (1) the Fund is intended to be a funding vehicle for variable annuity and variable life insurance contracts offered by various insurance companies, (2) material irreconcilable conflicts possibly may arise, and (3) the Board of Trustees of the Fund will monitor events in order to identify the existence of any material irreconcilable conflicts and to determine what action, if any, should be taken in response to any such conflict. The Fund hereby notifies the Insurer that prospectus disclosure may be appropriate regarding potential risks of offering shares of the Fund to separate accounts funding both variable annuity contracts and variable life insurance policies and to separate accounts funding Variable Contracts of unaffiliated life insurance companies. 15 ARTICLE VI. SALES MATERIAL AND INFORMATION 6.1 The Insurer shall furnish, or shall cause to be furnished, to the Fund or its designee, each piece of sales literature or other promotional material in which the Fund (or any Portfolio thereof) or its investment adviser or the Distributor is named at least 15 days prior to the anticipated use of such material, and no such sales literature or other promotional material shall be used unless the Fund and the Distributor or the designee of either approve the material or do not respond with comments on the material within 10 days from receipt of the material. 6.2 The Insurer agrees that neither it nor any of its affiliates or agents shall give any information or make any representations or statements on behalf of the Fund or concerning the Fund other than the information or representations contained in the Registration Statement or prospectus for the Fund shares, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in sales literature or other promotional material approved by the Fund or its designee and by the Distributor or its designee, except with the permission of the Fund or its designee and the Distributor or its designee. 6.3 The Fund or the Distributor or the designee of either shall furnish to the Insurer or its designee, each piece of sales literature or other promotional material in which the Insurer or its Separate Accounts are named at least 15 days prior to the anticipated use of such material, and no such material shall be used unless the Insurer or its designee approves the material or does not respond with comments on the material within 10 days from receipt of the material. 16 6.4 The Fund and the Distributor agree that each and the affiliates and agents of each shall not give any information or make any representations on behalf of the Insurer or concerning the Insurer, the Separate Accounts, or the Variable Contracts issued by the Insurer, other than the information or representations contained in a registration statement or prospectus for such Variable Contracts, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports for the Separate Accounts or prepared for distribution to owners of such Variable Contracts, or in sales literature or other promotional material approved by the Insurer or its designee, except with the permission of the Insurer. 6.5 The Fund will provide to the Insurer at least one complete copy of the Mixed and Shared Funding Exemptive Application and any amendments thereto, all prospectuses, Statements of Additional Information, reports, proxy statements and other voting solicitation materials, and all amendments and supplements to any of the above, that relate to the Fund or its shares, promptly after the filing of such document with the SEC or other regulatory authorities. 6.6 The Insurer will provide to the Fund all prospectuses (which shall include an offering memorandum if the Variable Contracts issued by the Insurer or interests therein are not registered under the 1933 Act), Statements of Additional Information, reports, solicitations for voting instructions relating to the Fund, and all amendments or supplements to any of the above that relate to the Variable Contracts issued by the Insurer or the Separate Accounts which utilize the Fund as an underlying investment medium, promptly after the filing of such document with the SEC or other regulatory authority. 17 6.7 For purposes of this Article VI, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements (such as material published, or designed for use, in a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, computerized media, or other public media), sales literature (I.E., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees. ARTICLE VII. INDEMNIFICATION 7.1 INDEMNIFICATION BY THE INSURER 7.1(a) The Insurer agrees to indemnify and hold harmless the Fund, each of its Trustees and officers, any affiliated person of the Fund within the meaning of Section 2(a)(3) of the 1940 Act, and the Distributor (collectively, the "Indemnified Parties" for purposes of this Section 7.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Insurer) or litigation expenses (including legal and other expenses), to which the Indemnified Parties may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or litigation expenses are related to the sale or acquisition of the Fund's shares or the Variable Contracts issued by the Insurer and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus (which shall include an offering memorandum) for the Variable Contracts issued by the Insurer or sales literature for 18 such Variable Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Insurer by or on behalf of the Fund for use in the registration statement or prospectus for the Variable Contracts issued by the Insurer or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of such Variable Contracts or Fund shares; or (ii) arise out of or as a result of any statement or representation (other than statements or representations contained in the registration statement, prospectus or sales literature of the Fund not supplied by the Insurer or persons under its control) or wrongful conduct of the Insurer or any of its affiliates, employees or agents with respect to the sale or distribution of the Variable Contracts issued by the Insurer or the Fund shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature of the Fund or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such a statement or omission was made in reliance upon information furnished to the Fund by or on behalf of the Insurer; or (iv) arise out of or result from any material breach of any representation and/or warranty made by the Insurer in this Agreement or arise out of or result from any other material breach of this Agreement by the Insurer; except to the extent provided in Sections 7.1(b) and 7.1(c) hereof. 7.1(b) The Insurer shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation expenses to which an Indemnified 19 Party would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of the Indemnified Party's duties or by reason of the Indemnified Party's reckless disregard of obligations or duties under this Agreement or to the Fund. 7.1(c) The Insurer shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Party shall have notified the Insurer in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Party shall have received notice of such service on any designated agent), but failure to notify the Insurer of any such claim shall not relieve the Insurer from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Insurer shall be entitled to participate, at its own expense, in the defense of such action. The Insurer also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Insurer to such party of the Insurer's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Insurer will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 7.1(d) The Indemnified Parties shall promptly notify the Insurer of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Fund shares or the Variable Contracts issued by the Insurer or the operation of the Fund. 7.2 INDEMNIFICATION BY THE DISTRIBUTOR 20 7.2(a) The Distributor agrees to indemnify and hold harmless the Insurer, its affiliated principal underwriter of the Variable Contracts, and each of their directors and officers and any affiliated person of the Insurer within the meaning of Section 2(a)(3) of the 1940 Act (collectively, the "Indemnified Parties" for purposes of this Section 7.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Distributor) or litigation expenses (including legal and other expenses) to which the Indemnified Parties may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or litigation expenses are related to the sale or acquisition of the Fund's shares or the Variable Contracts issued by the Insurer and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus or sales literature of the Fund (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Distributor or the Fund or the designee of either by or on behalf of the Insurer for use in the registration statement or prospectus for the Fund or in sales literature (or any amendment or supplement) or otherwise for use in the registration statement or prospectus for the Fund or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Variable Contracts issued by the Insurer or Fund shares; or (ii) arise out of or as a result of any statement or representations (other than statements or representations contained in the registration statement, prospectus or sales literature for the Variable Contracts not supplied by the Distributor or any employees or agents thereof) or wrongful conduct of the Fund or Distributor, or the affiliates, employees, or agents of the Fund or the Distributor with respect to the sale or distribution of the Variable Contracts issued by the Insurer or Fund shares; or 21 (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature covering the Variable Contracts issued by the Insurer, or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement or statements therein not misleading, if such statement or omission was made in reliance upon information furnished to the Insurer by or on behalf of the Fund; or (iv) arise out of or result from any material breach of any representation and/or warranty made by the Distributor in this Agreement or arise out of or result from any other material breach of this Agreement by the Distributor; except to the extent provided in Sections 7.2(b) and 7.2(c) hereof. 7.2(b) The Distributor shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation expenses to which an Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of the Indemnified Party's duties or by reason of the Indemnified Party's reckless disregard of obligations or duties under this Agreement or to the Insurer or the Separate Accounts. 7.2(c) The Distributor shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Party shall have notified the Distributor in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Party shall have received notice of such service on any designated agent), but failure to notify the Distributor of any such claim shall not relieve the Distributor from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the 22 Indemnified Parties, the Distributor will be entitled to participate, at is own expense, in the defense thereof. The Distributor also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Distributor to such party of the Distributor's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Distributor will not be liable to such party under this Agreement for any legal or other expense subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 7.2(d) The Insurer shall promptly notify the Distributor of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of the Variable Contracts issued by the Insurer or the operation of the Separate Accounts. 7.3 INDEMNIFICATION BY THE FUND 7.3(a) The Fund agrees to indemnify and hold harmless the Insurer, its affiliated principal underwriter of the Variable Contracts, and each of their directors and officers and any affiliated person of the Insurer within the meaning of Section 2(a)(3) of the 1940 Act (collectively, the "Indemnified Parties" for purposes of this Section 7.3) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Fund) or litigation expenses (including legal and other expenses) to which the Indemnified Parties may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or litigation expenses are related to the sale or acquisition of the Fund's shares or the Variable Contracts issued by the Insurer and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus or sales literature of the Fund (or any 23 amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Distributor or the Fund or the designee of either by or on behalf of the Insurer for use in the registration statement or prospectus for the Fund or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Variable Contracts issued by the Insurer or Fund shares; or (ii) arise out of or as a result of any statement or representation (other than statements or representations contained in the registration statement, prospectus or sales literature for the Variable Contracts not supplied by the Distributor or any employees or agents thereof) or wrongful conduct of the Fund, or the affiliates, employees, or agents of the Fund, with respect to the sale or distribution of the Variable Contracts issued by the Insurer or Fund shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus or sales literature covering the Variable Contracts issued by the Insurer, or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement or statements therein not misleading, if such statement or omission was made in reliance upon information furnished to the Insurer by or on behalf of the Fund; or (iv) arise out of or result from any material breach of any representation and/or warranty made by the Fund in this Agreement or arise out of or result from any other material breach of this Agreement by the Fund; except to the extent provided in Sections 7.3(b) and 7.3(c) hereof. 7.3(b) The Fund shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation expenses to which an Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of the Indemnified Party's duties or by 24 reason of the Indemnified Party's reckless disregard of obligations or duties under this Agreement or to the Insurer or the Separate Accounts. 7.3(c) The Fund shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such party shall have notified the Fund in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Party shall have received notice of such service on any designated agent), but failure to notify the Fund of any such claim shall not relieve the Fund from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Fund will be entitled to participate, at its own expense, in the defense thereof. The Fund also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Fund to such party of the Fund's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Fund will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 7.3(d) The Insurer shall promptly notify the Fund of the com-mencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of the Variable Contracts issued by the Insurer or the sale of the Fund's shares. ARTICLE VIII. APPLICABLE LAW 25 8.1 This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of Pennsylvania. 8.2 This Agreement shall be subject to the provisions of the 1933, 1934, and 1940 Acts, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant (including, but not limited to, the Mixed and Shared Funding Exemptive Order), and the terms hereof shall be interpreted and construed in accordance therewith. ARTICLE IX. TERMINATION 9.1 This Agreement shall terminate: (a) at the option of any party upon 180 days advance written notice to the other parties; or (b) at the option of the Insurer if shares of the Portfolios are not reasonably available to meet the requirements of the Variable Contracts issued by the Insurer, as determined by the Insurer, and upon prompt notice by the Insurer to the other parties; or (c) at the option of the Fund or the Distributor upon institution of formal proceedings against the Insurer or its agent by the NASD, the SEC, or any state securities or insurance department or any other regulatory body regarding the Insurer's duties under this Agreement or related to the sale of the Variable Contracts issued by the Insurer, the operation of the Separate Accounts, or the purchase of the Fund shares; or 26 (d) at the option of the Insurer upon institution of formal proceedings against the Fund or the Distributor by the NASD, the SEC, or any state securities or insurance department or any other regulatory body; or (e) upon requisite vote of the Variable Contract Owners having an interest in the Separate Accounts (or any subaccounts thereof) to substitute the shares of another investment company for the corresponding shares of the Fund or a Portfolio in accordance with the terms of the Variable Contracts for which those shares had been selected or serve as the underlying investment media; or (f) in the event any of the shares of a Portfolio are not registered, issued or sold in accordance with applicable state and/or federal law, or such law precludes the use of such shares as the underlying investment media of the Variable Contracts issued or to be issued by the Insurer; or (g) by any party to the Agreement upon a determination by a majority of the Trustees of the Fund, or a majority of its disinterested Trustees, that an irreconcilable conflict, as described in Article IV hereof, exists; or (h) at the option of the Insurer if the Fund or a Portfolio fails to meet the requirements under Subchapter M of the Code for qualification as a Regulated Investment Company specified in Section 3.2 hereof or the diversi-fication requirements specified in Section 3.3 hereof. 9.2 Each party to this Agreement shall promptly notify the other parties to the Agreement of the institution against such party of any such formal proceedings as 27 described in Sections 9.1(c) and (d) hereof. The Insurer shall give 60 days prior written notice to the Fund of the date of any proposed vote of Variable Contract Owners to replace the Fund's shares as described in Section 9.1(e) hereof. 9.3 Except as necessary to implement Variable Contract Owner initiated transactions, or as required by state insurance laws or regulations, the Insurer shall not redeem Fund shares attributable to the Variable Contracts issued by the Insurer (as opposed to Fund shares attributable to the Insurer's assets held in the Separate Accounts), and the Insurer shall not prevent Variable Contract Owners from allocating payments to a Portfolio, until 60 days after the Insurer shall have notified the Fund or Distributor of its intention to do so. 9.4 Notwithstanding any termination of this Agreement, the Fund and the Distributor shall at the option of the Insurer continue to make available additional shares of the Fund pursuant to the terms and conditions of this Agreement, for all Variable Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, based upon instructions from the owners of the Existing Contracts, the Separate Accounts shall be permitted to reallocate investments in the Portfolios of the Fund and redeem investments in the Portfolios, and shall be permitted to invest in the Portfolios in the event that owners of the Existing Contracts make additional purchase payments under the Existing Contracts. If this Agreement terminates, the parties agree that Sections 3.10, 7.1, 7.2, 7.3, 8.1, and 8.2, and, to the extent that all or a portion of the assets of the Separate Accounts continue to be invested in the Fund or any Portfolio of the Fund, Articles I, II, and IV and Sections 5.5 and 5.6 will remain in effect after termination. 28 ARTICLE X. NOTICES Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Fund: Insurance Series Federated Investors Tower 1001 Liberty Avenue Pittsburgh, Pennsylvania 15222-3779 Attn.: John W. McGonigle If to the Distributor: Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue Pittsburgh, Pennsylvania 15222-3779 Attn.: John W. McGonigle If to the Insurer: ARTICLE XI: MISCELLANEOUS 11.1 The Fund and the Insurer agree that if and to the extent Rule 6e-2 or Rule 6e-3(T) under the 1940 Act is amended or if Rule 6e-3 is adopted in final form, to the extent applicable, the Fund and the Insurer shall each take such steps as may be necessary to comply with the Rule as amended or adopted in final form. 29 11.2 A copy of the Fund's Agreement and Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts and notice is hereby given that any agreements that are executed on behalf of the Fund by any Trustee or officer of the Fund are executed in his or her capacity as Trustee or officer and not individually. The obligations of this Agreement shall only be binding upon the assets and property of the Fund and shall not be binding upon any Trustee, officer or shareholder of the Fund individually. 11.3 Nothing in this Agreement shall impede the Fund's Trustees or shareholders of the shares of the Fund's Portfolios from exercising any of the rights provided to such Trustees or shareholders in the Fund's Agreement and Declaration of Trust, as amended, a copy of which will be provided to the Insurer upon request. 11.4 Administrative services to Variable Contract Owners shall be the responsibility of Insurer. Insurer, on behalf of its separate accounts will be the sole shareholder of record of Fund shares. Fund and Distributor recognize that they will derive a substantial savings in administrative expense by virtue of having a sole shareholder rather than multiple shareholders. In consideration of the administrative savings resulting from having a sole shareholder rather than multiple shareholders, Distributor agrees to pay to Insurer an amount computed at an annual rate of .25 of 1% of the average daily net asset value of shares held in subaccounts for which Insurer provides administrative services. Distributor's payments to Insurer are for administrative services only and do not constitute payment in any manner for investment advisory services. 11.5 It is understood that the name "Federated" or any derivative thereof or logo associated with that name is the valuable property of the Distributor and its 30 affiliates, and that the Insurer has the right to use such name (or derivative or logo) only so long as this Agreement is in effect. Upon termination of this Agreement the Insurer shall forthwith cease to use such name (or derivative or logo). 11.6 The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 11.7 This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 11.8 If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 11.9 This Agreement may not be assigned by any party to the Agree-ment except with the written consent of the other parties to the Agreement. 31 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. INSURANCE SERIES ATTEST: BY: ---------------------------- -------------------------------- Name: Name: ------------------------------ ------------------------------ Title: Title: ------------------------------ ----------------------------- FEDERATED SECURITIES CORP. ATTEST: BY: ---------------------------- -------------------------------- Name: Name: ------------------------------ ------------------------------ Title: Title: ------------------------------ ----------------------------- [INSURER NAME] ATTEST: BY: ---------------------------- -------------------------------- Name: Name: ------------------------------ ------------------------------ Title: Title: ------------------------------ ----------------------------- 32 EX-99.8(H) 4 EXHIBIT 99.8.(H) JANUS ASPEN SERIES FUND PARTICIPATION AGREEMENT THIS AGREEMENT is made this ___ day of _______, 199_, between JANUS ASPEN SERIES, an open-end management investment company organized as a Delaware business trust (the "Trust"), and ___________ Life Insurance Company, a life insurance company organized under the laws of the State of ________ (the "Company"), on its own behalf and on behalf of each segregated asset account of the Company set forth on Schedule A, as may be amended from time to time (the "Accounts"). W I T N E S S E T H: WHEREAS, the Trust has registered with the Securities and Exchange Commission as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and has registered the offer and sale of its shares under the Securities Act of 1933, as amended (the "1933 Act"); and WHEREAS, the Trust desires to act as an investment vehicle for separate accounts established for variable life insurance policies and variable annuity contracts to be offered by insurance companies that have entered into participation agreements with the Trust (the "Participating Insurance Companies"); and WHEREAS, the beneficial interest in the Trust is divided into several series of shares, each series representing an interest in a particular managed portfolio of securities and other assets (the "Portfolios"); and WHEREAS, the Trust has received an order from the Securities and Exchange Commission granting Participating Insurance Companies and their separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies and certain qualified pension and retirement plans (the "Exemptive Order"); and WHEREAS, the Company has registered or will register (unless registration is not required under applicable law) certain variable life insurance policies and/or variable annuity contracts under the 1933 Act (the "Contracts"); and WHEREAS, the Company has registered or will register (unless registration is not required under applicable law) each Account as a unit investment trust under the 1940 Act; and WHEREAS, the Company desires to utilize shares of one or more Portfolios as an investment vehicle of the Accounts; NOW, THEREFORE, in consideration of their mutual promises, the parties agree as follows: ARTICLE I SALE OF TRUST SHARES 1.1 The Trust shall make shares of its Portfolios available to the Accounts at the net asset value next computed after receipt of such purchase order by the Trust (or its agent), as established in accordance with the provisions of the then current prospectus of the Trust. Shares of a particular Portfolio of the Trust shall be ordered in such quantities and at such times as determined by the Company to be necessary to meet the requirements of the Contracts. The Trustees of the Trust (the "Trustees") may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Trustees acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.2 The Trust will redeem any full or fractional shares of any Portfolio when requested by the Company on behalf of an Account at the net asset value next computed after receipt by the Trust (or its agent) of the request for redemption, as established in accordance with the provisions of the then current prospectus of the Trust. The Trust shall make payment for such shares in the manner established from time to time by the Trust, but in no event shall payment be delayed for a greater period than is permitted by the 1940 Act. 1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints the Company as its agent for the limited purpose of receiving and accepting purchase and redemption orders resulting from investment in and payments under the Contracts. Receipt by the Company shall constitute receipt by the Trust provided that i) such orders are received by the Company in good order prior to the time the net asset value of each Portfolio is priced in accordance with its prospectus and ii) the Trust receives notice of such orders by 11:00 a.m. New York time on the next following Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which the Trust calculates its net asset value pursuant to the rules of the Securities and Exchange Commission. 1.4 Purchase orders that are transmitted to the Trust in accordance with Section 1.3 shall be paid for no later than 12:00 noon New York time on the same Business Day that the Trust receives notice of the order. Payments shall be made in federal funds transmitted by wire. 1.5 Issuance and transfer of the Trust's shares will be by book entry only. Stock certificates will not be issued to the Company or the Account. Shares ordered from the Trust will be recorded in the appropriate title for each Account or the appropriate subaccount of each Account. -2- 1.6 The Trust shall furnish prompt notice to the Company of any income dividends or capital gain distributions payable on the Trust's shares. The Company hereby elects to receive all such income dividends and capital gain distributions as are payable on a Portfolio's shares in additional shares of that Portfolio. The Trust shall notify the Company of the number of shares so issued as payment of such dividends and distributions. 1.7 The Trust shall make the net asset value per share for each Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated and shall use its best efforts to make such net asset value per share available by 6 p.m. New York time. 1.8 The Trust agrees that its shares will be sold only to Participating Insurance Companies and their separate accounts and to certain qualified pension and retirement plans to the extent permitted by the Exemptive Order. No shares of any Portfolio will be sold directly to the general public. The Company agrees that Trust shares will be used only for the purposes of funding the Contracts and Accounts listed in Schedule A, as amended from time to time. 1.9 The Trust agrees that all Participating Insurance Companies shall have the obligations and responsibilities regarding pass-through voting and conflicts of interest corresponding to those contained in Section 2.8 and Article IV of this Agreement. ARTICLE II OBLIGATIONS OF THE PARTIES 2.1 The Trust shall prepare and be responsible for filing with the Securities and Exchange Commission and any state regulators requiring such filing all shareholder reports, notices, proxy materials (or similar materials such as voting instruction solicitation materials), prospectuses and statements of additional information of the Trust. The Trust shall bear the costs of registration and qualification of its shares, preparation and filing of the documents listed in this Section 2.1 and all taxes to which an issuer is subject on the issuance and transfer of its shares. 2.2 At the option of the Company, the Trust shall either (a) provide the Company (at the Company's expense) with as many copies of the Trust's current prospectus, annual report, semi-annual report and other shareholder communications, including any amendments or supplements to any of the foregoing, as the Company shall reasonably request; or (b) provide the Company with a camera ready copy of such documents in a form suitable for printing. The Trust shall provide the Company with a copy of its statement of additional information in a form suitable for duplication by the Company. The Trust (at its expense) shall provide the Company with copies of any Trust-sponsored proxy materials in such quantity as the Company shall reasonably require for distribution to Contract owners. -3- 2.3 The Company shall bear the costs of printing and distributing the Trust's prospectus, statement of additional information, shareholder reports and other shareholder communications to owners of and applicants for policies for which the Trust is to serve as an investment vehicle. The Company shall bear the costs of distributing proxy materials (or similar materials such as voting solicitation instructions) to Contract owners. The Company assumes sole responsibility for ensuring that such materials are delivered to Contract owners in accordance with applicable federal and state securities laws, provided that Trust provides such materials in a prompt manner and in a form and format in accordance with applicable federal and state securities laws. 2.4 The Company agrees and acknowledges that the Trust's adviser, Janus Capital Corporation ("Janus Capital"), is the sole owner of the name and mark "Janus" and that all use of any designation comprised in whole or part of Janus (a "Janus Mark") under this Agreement shall inure to the benefit of Janus Capital. Except as provided in Section 2.5, the Company shall not use any Janus Mark on its own behalf or on behalf of the Accounts or Contracts in any registration statement, advertisement, sales literature or other materials relating to the Accounts or Contracts without the prior written consent of Janus Capital. Upon termination of this Agreement for any reason, the Company shall cease all use of any Janus Mark(s) as soon as reasonably practicable. 2.5 The Company shall furnish, or cause to be furnished, to the Trust or its designee, a copy of each Contract prospectus or statement of additional information in which the Trust or its investment adviser is named prior to the filing of such document with the Securities and Exchange Commission. The Company shall furnish, or shall cause to be furnished, to the Trust or its designee, each piece of sales literature or other promotional material in which the Trust or its investment adviser is named, at least fifteen Business Days prior to its use. No such material shall be used if the Trust or its designee reasonably objects to such use within fifteen Business Days after receipt of such material. 2.6 The Company shall not give any information or make any representations or statements on behalf of the Trust or concerning the Trust or its investment adviser in connection with the sale of the Contracts other than information or representations contained in and accurately derived from the registration statement or prospectus for the Trust shares (as such registration statement and prospectus may be amended or supplemented from time to time), reports of the Trust, Trust-sponsored proxy statements, or in sales literature or other promotional material approved by the Trust or its designee, except as required by legal process or regulatory authorities or with the written permission of the Trust or its designee. 2.7 The Trust shall not give any information or make any representations or statements on behalf of the Company or concerning the Company or its affiliates, the Accounts or the Contracts other than information or representations contained in and accurately derived from the registration statement or prospectus for the Contracts (as such registration statement and prospectus may be amended or supplemented from time to time), or in materials approved by the -4- Company for distribution including sales literature or other promotional materials, except as required by legal process or regulatory authorities or with the written permission of the Company. 2.8 So long as, and to the extent that the Securities and Exchange Commission interprets the 1940 Act to require pass-through voting privileges for variable policyowners, the Company will provide pass-through voting privileges to owners of policies whose cash values are invested, through the Accounts, in shares of the Trust. The Trust shall require all Participating Insurance Companies to calculate voting privileges in the same manner and the Company shall be responsible for assuring that the Accounts calculate voting privileges in the manner as reasonably established by the Trust. With respect to each Account, the Company will vote shares of the Trust held by the Account and for which no timely voting instructions from policyowners are received as well as shares it owns that are held by that Account, in the same proportion as those shares for which voting instructions are received. The Company and its agents will in no way recommend or oppose or interfere with the solicitation of proxies for Trust shares held by Contract owners without the prior written consent of the Trust, which consent may be withheld in the Trust's sole discretion. 2.9 The Company shall notify the Trust of any applicable state insurance laws that restrict the Portfolios' investments or otherwise affect the operation of the Trust and shall notify the Trust of any changes in such laws. ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1 The Company represents and warrants that it is an insurance company duly organized and in good standing under the laws of the State of _________ and that it has legally and validly established each Account as a segregated asset account under such law on the date set forth in Schedule A. 3.2 The Company represents and warrants that each Account (1) has been registered or, prior to any issuance or sale of the Contracts, will be registered as a unit investment trust in accordance with the provisions of the 1940 Act or, alternatively (2) has not been registered in proper reliance upon an exclusion from registration under the 1940 Act. 3.3 The Company represents and warrants that the Contracts or interests in the Accounts (1) are or, prior to issuance, will be registered as securities under the 1933 Act or, alternatively (2) are not registered because they are properly exempt from registration under the 1933 Act or will be offered exclusively in transactions that are properly exempt from registration under the 1933 Act. The Company further represents and warrants that the Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws; and the sale of the Contracts shall comply in all material respects with state insurance suitability requirements. -5- 3.4 The Trust represents and warrants that it is duly organized and validly existing under the laws of the State of Delaware. 3.5 The Trust represents and warrants that the Trust shares offered and sold pursuant to this Agreement will be registered under the 1933 Act and the Trust shall be registered under the 1940 Act prior to any issuance or sale of such shares. The Trust shall amend its registration statement under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. The Trust shall register and qualify its shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Trust. 3.6 The Trust represents and warrants that the investments of each Portfolio will comply with the diversification requirements set forth in Section 817(h) of the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder. ARTICLE IV POTENTIAL CONFLICTS 4.1 The parties acknowledge that the Trust's shares may be made available for investment to other Participating Insurance Companies. In such event, the Trustees will monitor the Trust for the existence of any material irreconcilable conflict between the interests of the contract owners of all Participating Insurance Companies. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; or (f) a decision by an insurer to disregard the voting instructions of contract owners. The Trustees shall promptly inform the Company if they determine that an irreconcilable material conflict exists and the implications thereof. 4.2 The Company agrees to promptly report any potential or existing conflicts of which it is aware to the Trustees. The Company will assist the Trustees in carrying out their responsibilities under the Exemptive Order by providing the Trustees with all information reasonably necessary for the Trustees to consider any issues raised including, but not limited to, information as to a decision by the Company to disregard Contract owner voting instructions. 4.3 If it is determined by a majority of the Trustees, or a majority of its disinterested Trustees, that a material irreconcilable conflict exists that affects the interests of Contract owners, the Company shall, in cooperation with other Participating Insurance Companies whose contract owners are also affected, at its expense and to the extent reasonably practicable (as determined -6- by the Trustees) take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, which steps could include: (a) withdrawing the assets allocable to some or all of the Accounts from the Trust or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Trust, or submitting the question of whether or not such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any appropriate group (I.E., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Contract owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 4.4 If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Trust's election, to withdraw the affected Account's investment in the Trust and terminate this Agreement with respect to such Account; provided, however that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested Trustees. Any such withdrawal and termination must take place within six (6) months after the Trust gives written notice that this provision is being implemented. Until the end of such six (6) month period, the Trust shall continue to accept and implement orders by the Company for the purchase and redemption of shares of the Trust. 4.5 If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the affected Account's investment in the Trust and terminate this Agreement with respect to such Account within six (6) months after the Trustees inform the Company in writing that it has determined that such decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested Trustees. Until the end of such six (6) month period, the Trust shall continue to accept and implement orders by the Company for the purchase and redemption of shares of the Trust. 4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority of the disinterested Trustees shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Company be required to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. In the event that the Trustees determine that any proposed action does not adequately remedy any irreconcilable material conflict, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six (6) months after the Trustees inform the Company in writing of the foregoing determination; provided, however, that such withdrawal and -7- termination shall be limited to the extent required by any such material irreconcilable conflict as determined by a majority of the disinterested Trustees. 4.7 The Company shall at least annually submit to the Trustees such reports, materials or data as the Trustees may reasonably request so that the Trustees may fully carry out the duties imposed upon them by the Exemptive Order, and said reports, materials and data shall be submitted more frequently if deemed appropriate as reasonably determined by the Trustees. 4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Exemptive Order) on terms and conditions materially different from those contained in the Exemptive Order, then the Trust and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable. ARTICLE V INDEMNIFICATION 5.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold harmless the Trust and each of its Trustees, officers, employees and agents and each person, if any, who controls the Trust within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Article V) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or expenses (including the reasonable costs of investigating or defending any alleged loss, claim, damage, liability or expense and reasonable legal counsel fees incurred in connection therewith) (collectively, "Losses"), to which the Indemnified Parties may become subject under any statute or regulation, or at common law or otherwise, insofar as such Losses: (a) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in a registration statement or prospectus for the Contracts or in the Contracts themselves or in sales literature generated or approved by the Company on behalf of the Contracts or Accounts (or any amendment or supplement to any of the foregoing) (collectively, "Company Documents" for the purposes of this Article V), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this indemnity shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and was accurately derived from written information furnished to the Company by or on behalf of the Trust for use in Company Documents or otherwise for use in connection with the sale of the Contracts or Trust shares; or -8- (b) arise out of or result from statements or representations (other than statements or representations contained in and accurately derived from Trust Documents as defined in Section 5.2(a)) or wrongful conduct of the Company or persons under its control, with respect to the sale or acquisition of the Contracts or Trust shares; or (c) arise out of or result from any untrue statement or alleged untrue statement of a material fact contained in Trust Documents as defined in Section 5.2(a) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission was made in reliance upon and accurately derived from written information furnished to the Trust by or on behalf of the Company; or (d) arise out of or result from any failure by the Company to provide the services or furnish the materials required under the terms of this Agreement; or (e) arise out of or result from any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company. 5.2 INDEMNIFICATION BY THE TRUST. The Trust agrees to indemnify and hold harmless the Company and each of its directors, officers, employees and agents and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Article V) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Trust) or expenses (including the reasonable costs of investigating or defending any alleged loss, claim, damage, liability or expense and reasonable legal counsel fees incurred in connection therewith) (collectively, "Losses"), to which the Indemnified Parties may become subject under any statute or regulation, or at common law or otherwise, insofar as such Losses: (a) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement or prospectus for the Trust or in sales literature generated or approved by the Trust or its investment adviser on behalf of the Trust (or any amendment or supplement thereto), (collectively, "Trust Documents" for the purposes of this Article V), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this indemnity shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and was accurately derived from written information furnished to the Trust by or on behalf of the Company for use in Trust Documents or otherwise for use in connection with the sale of the Contracts or Trust shares; or -9- (b) arise out of or result from statements or representations (other than statements or representations contained in and accurately derived from Company Documents) or wrongful conduct of the Trust or persons under its control, with respect to the sale or acquisition of the Contracts or Trust shares; or (c) arise out of or result from any untrue statement or alleged untrue statement of a material fact contained in Company Documents or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission was made in reliance upon and accurately derived from written information furnished to the Company by or on behalf of the Trust; or (d) arise out of or result from any failure by the Trust to provide the services or furnish the materials required under the terms of this Agreement; or (e) arise out of or result from any material breach of any representation and/or warranty made by the Trust in this Agreement or arise out of or result from any other material breach of this Agreement by the Trust. 5.3 Neither the Company nor the Trust shall be liable under the indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect to any Losses incurred or assessed against an Indemnified Party that arise from such Indemnified Party's willful misfeasance, bad faith or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement. 5.4 Neither the Company nor the Trust shall be liable under the indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the other party in writing within a reasonable time after the summons, or other first written notification, giving information of the nature of the claim shall have been served upon or otherwise received by such Indemnified Party (or after such Indemnified Party shall have received notice of service upon or other notification to any designated agent), but failure to notify the party against whom indemnification is sought of any such claim shall not relieve that party from any liability which it may have to the Indemnified Party in the absence of Sections 5.1 and 5.2. 5.5 In case any such action is brought against the Indemnified Parties, the indemnifying party shall be entitled to participate, at its own expense, in the defense of such action. The indemnifying party also shall be entitled to assume the defense thereof, with counsel reasonably satisfactory to the party named in the action. After notice from the indemnifying party to the Indemnified Party of an election to assume such defense, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the indemnifying party will not be liable to the Indemnified Party under this Agreement for any legal or other expenses subsequently -10- incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. ARTICLE VI TERMINATION 6.1 This Agreement may be terminated by either party for any reason by one hundred eighty (180) days advance written notice delivered to the other party. 6.2 Notwithstanding any termination of this Agreement, the Trust shall, at the option of the Company, continue to make available additional shares of the Trust (or any Portfolio) pursuant to the terms and conditions of this Agreement for all Contracts in effect on the effective date of termination of this Agreement, provided that the Company continues to pay the costs set forth in Section 2.3. 6.3 The provisions of Article V shall survive the termination of this Agreement, and the provisions of Article IV and Section 2.8 shall survive the termination of this Agreement as long as shares of the Trust are held on behalf of Contract owners in accordance with Section 6.2. ARTICLE VII NOTICES Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Trust: Janus Aspen Series 100 Fillmore Street Denver, Colorado 80206 Attention: General Counsel If to the Company: ____________ Life Insurance Company 515 West Market Street, 8th Floor Louisville, KY 40202 Attention: General Counsel - Retail Business Division -11- ARTICLE VIII MISCELLANEOUS 8.1 The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 8.2 This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 8.3 If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 8.4 This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of State of Colorado. 8.5 The parties to this Agreement acknowledge and agree that all liabilities of the Trust and/or the Accounts arising, directly or indirectly, under this Agreement, of any and every nature whatsoever, shall be satisfied solely out of the assets of the Trust and/or the Accounts and that no Trustee, officer, agent or holder of shares of beneficial interest of the Trust or the Accounts shall be personally liable for any such liabilities. 8.6 Each party shall cooperate with each other party and all appropriate governmental authorities (including without limitation the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 8.7 The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 8.8 The parties to this Agreement acknowledge and agree that this Agreement shall not be exclusive in any respect. 8.9 Neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the prior written approval of the other party. 8.10 No provisions of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by both parties. -12- IN WITNESS WHEREOF, the parties have caused their duly authorized officers to execute this Participation Agreement as of the date and year first above written. JANUS ASPEN SERIES By: /s/ Bonnie Howe ----------------------------- Name: Bonnie Howe --------------------------- Title: Assistant Vice President -------------------------- LIFE INSURANCE COMPANY By: /s/ John R. Lindholm ----------------------------- Name: John R. Lindholm --------------------------- Title: President -------------------------- -13- SCHEDULE A SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS Name of Separate Account and Contracts Funded Date Established by Board of Directors By Separate Account - -------------------------------------- ------------------- Separate Account II Pinnacle Flexible Premium Variable May 21, 1992 Annuity -14- EX-99.8(I) 5 EXHIBIT 99.8.(I) FUND PARTICIPATION AGREEMENT This Agreement is entered into as of the ___ day of ______, 199_, between __________ ("Insurance Company"), a life insurance company organized under the laws of the State of __________, and JPM Series Trust II ("Fund"), a business trust organized under the laws of Delaware, with respect to the Fund's portfolio or portfolios set forth on Schedule 1 hereto, as such Schedule may be revised from time to time (the "Series"; if there are more than one Series to which this Agreement applies, the provisions herein shall apply severally to each such Series). ARTICLE I 1. DEFINITIONS 1.1 "Act" shall mean the Investment Company Act of 1940, as amended. 1.2 "Board" shall mean the Board of Trustees of the Fund having the responsibility for management and control of the Fund. 1.3 "Business Day" shall mean any day for which the Fund calculates net asset value per share as described in the Fund's Prospectus. 1.4 "Commission" shall mean the Securities and Exchange Commission. 1.5 "Contract" shall mean a variable annuity or variable life insurance contract that uses the Fund as an underlying investment medium. Individuals who participate under a group Contract are "Participants". 1.6 "Contractholder" shall mean any entity that is a party to a Contract with a Participating Company. 1.7 "Disinterested Board Members" shall mean those members of the Board that are not deemed to be "interested persons" of the Fund, as defined by the Act. 1.8 "Participating Companies" shall mean any insurance company (including Insurance Company), which offers variable annuity and/or variable life insurance contracts to the public and which has entered into an agreement with the Fund for the purpose of making Fund shares available to serve as the underlying investment medium for the aforesaid Contracts. 1.9 "Plans" shall mean qualified pension and retirement benefit plans. 1.10 "Prospectus" shall mean the Fund's current prospectus and statement of additional information, as most recently filed with the Commission, with respect to the Series. 1.11 "Separate Account" shall mean Separate Account II Company Variable Annuity Separate Account, a separate account established by Insurance Company in accordance with the laws of the State of __________. 1.12 "Software Program" shall mean the software program used by the Fund for providing Fund and account balance information including net asset value per share. 1.13 "Insurance Company's General Account(s)" shall mean the general account(s) of Insurance Company and its affiliates which invest in the Fund. ARTICLE II 2. REPRESENTATIONS 1.14 Insurance Company represents and warrants that (a) it is an insurance company duly organized and in good standing under applicable law; (b) it has legally and validly established the Separate Account pursuant to the ______________ Insurance Code for the purpose of offering to the public certain individual variable annuity contracts; (c) it has registered the Separate Account as a unit investment trust under the Act to serve as the segregated investment account for the Contracts; (d) each Separate Account is eligible to invest in shares of the Fund without such investment disqualifying the Fund as an investment medium for insurance company separate accounts supporting variable annuity contracts or variable life insurance contracts; and (e) each Separate Account shall comply with all applicable legal requirements. 1.15 Insurance Company represents and warrants that (a) the Contracts will be described in a registration statement filed under the Securities Act of 1933, as amended ("1933 Act"); (b) the Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws; and (c) the sale of the Contracts shall comply in all material respects with state insurance law requirements. Insurance Company agrees to inform the Fund promptly of any investment restrictions imposed by state insurance law and applicable to the Fund. 1.16 Insurance Company represents and warrants that the income, gains and losses, whether or not realized, from assets allocated to the Separate Account are, in accordance with the applicable Contracts, to be credited to or charged against such Separate Account without regard to other income, gains or losses from assets allocated to any other accounts of Insurance Company. Insurance Company represents and warrants that the assets of the Separate Account are and will be kept separate from Insurance Company's General Account and any other separate accounts Insurance Company may have, and will not be charged with liabilities from any business that Insurance Company may conduct or the liabilities of any companies affiliated with Insurance Company. 1.17 Fund represents and warrants that the Fund is registered with the Commission under the Act as an open-end management investment company and possesses, and shall maintain, all legal and regulatory licenses, approvals, consents and/or exemptions required for the Fund to operate and offer its shares as an underlying investment medium for Participating Companies. The Fund has established five portfolios and may in the future establish other portfolios. 1.18 Fund represents and warrants that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify Insurance Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 1.19 Insurance Company represents and agrees that the Contracts are currently, and at the time of issuance will be, treated as life insurance policies or annuity contracts, whichever is appropriate, under applicable provisions of the Code, and that it will make every effort to maintain such treatment and that it will notify the Fund and its investment adviser immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. Insurance Company agrees that any prospectus offering a Contract that is a "modified endowment contract," as that term is defined in Section 7702A of the Code, will identify such Contract as a modified endowment contract (or policy). 1.20 Fund represents and warrants that the Fund's assets shall be managed and invested in a manner that complies with the requirements of Section 817(h) of the Code. 1.21 Insurance Company agrees that the Fund shall be permitted (subject to the other terms of this Agreement) to make Series' shares available to other Participating Companies and contractholders and to Plans. 1.22 Fund represents and warrants that any of its trustees, officers, employees, investment advisers, and other individuals/entities who deal with the money and/or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage in an amount not less than that required by Rule 17g-1 under the Act. The aforesaid Bond shall include coverage for larceny and embezzelement and shall be issued by a reputable bonding company. 1.23 Insurance Company represents and warrants that all of its employees and agents who deal with the money and/or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage in an amount not less than $5,000,000. The aforesaid Bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 1.24 Insurance Company agrees that the Fund's investment adviser shall be deemed a third party beneficiary under this Agreement and may enforce any and all rights conferred by virtue of this Agreement. ARTICLE III 3. FUND SHARES 1.25 The Contracts funded through the Separate Account will provide for the investment of certain amounts in the Series' shares. 1.26 Fund agrees to make the shares of its Series available for purchase at the then applicable net asset value per share by Insurance Company and the Separate Account on each Business Day pursuant to rules of the Commission. Notwithstanding the foregoing, the Fund may refuse to sell the shares of any Series to any person, or suspend or terminate the offering of the shares of any Series if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board, acting in good faith and in light of its fiduciary duties under federal and any applicable state laws, necessary and in the best interests of the shareholders of such Series. 1.27 Fund agrees that shares of the Fund will be sold only to Participating Companies and their separate accounts and to the general accounts of those Participating Companies and their affiliates and to Plans. No shares of any Series will be sold to the general public. 1.28 Fund shall use its best efforts to provide closing net asset value, dividend and capital gain information for each Series available on a per-share and Series basis to Insurance Company by 6:30 p.m. Eastern Time on each Business Day. Any material errors in the calculation of net asset value, dividend and capital gain information shall be reported immediately upon discovery to Insurance Company. Non-material errors will be corrected in the next Business Day's net asset value per share for the Series in question. 1.29 At the end of each Business Day, Insurance Company will use the information described in Sections 3.2 and 3.4 to calculate the Separate Account unit values for the day. Using this unit value, Insurance Company will process the day's Separate Account transactions received by it by the close of trading on the floor of the New York Stock Exchange (currently 4:00 p.m. Eastern time) to determine the net dollar amount of Series shares which will be purchased or redeemed at that day's closing net asset value per share for such Series. The net purchase or redemption orders will be transmitted to the Fund by Insurance Company by 9:00 a.m. Eastern Time on the Business Day next following Insurance Company's receipt of that information. Subject to Sections 3.6 and 3.8, all purchase and redemption orders for Insurance Company's General Accounts shall be effected at the net asset value per share of the relevant Series next calculated after receipt of the order by the Fund or its Transfer Agent. 1.30 Fund appoints Insurance Company as its agent for the limited purpose of accepting orders for the purchase and redemption of shares of each Series for the Separate Account. Fund will execute orders for any Series at the applicable net asset value per share determined as of the close of trading on the day of receipt of such orders by Insurance Company acting as agent ("effective trade date"), provided that the Fund receives notice of such orders by 9:00 a.m. Eastern Time on the next following Business Day and, if such orders request the purchase of Series shares, the conditions specified in Section 3.8, as applicable, are satisfied. A redemption or purchase request for any Series that does not satisfy the conditions specified above and in Section 3.8, as applicable, will be effected at the net asset value computed for such Series on the Business Day immediately preceding the next following Business Day upon which such conditions have been satisfied. 1.31 Insurance Company will make all reasonable efforts to notify Fund in advance of any unusually large purchase or redemption orders. 1.32 If Insurance Company's order requests the purchase of Series shares, Insurance Company will pay for such purchases by wiring Federal Funds to Fund or its designated custodial account on the day the order is transmitted. Insurance Company shall make all reasonable efforts to transmit to the Fund payment in Federal Funds by 12:00 noon Eastern Time on the Business Day the Fund receives the notice of the order pursuant to Section 3.5. Fund will execute such orders at the applicable net asset value per share determined as of the close of trading on the effective trade date if Fund receives payment in Federal Funds by 12:00 midnight Eastern Time on the Business Day the Fund receives the notice of the order pursuant to Section 3.5. If payment in Federal Funds for any purchase is not received or is received by the Fund after 12:00 noon Eastern Time on such Business Day, Insurance Company shall promptly upon the Fund's request, reimburse the Fund for any charges, costs, fees, interest or other expenses incurred by the Fund in connection with any advances to, or borrowings or overdrafts by, the Fund, or any similar expenses incurred by the Fund, as a result of portfolio transactions effected by the Fund based upon such purchase request. If Insurance Company's order requests the redemption of Series shares valued at or greater than $1 million dollars, the Fund may wire such amount to Insurance Company within seven days of the order or as required by law, whichever is sooner. 1.33 Fund has the obligation to ensure that Series shares are registered with applicable federal and state agencies at all times. 1.34 Fund will confirm each purchase or redemption order made by Insurance Company. Transfer of Series shares will be by book entry only. No share certificates will be issued to Insurance Company. Insurance Company will record shares ordered from Fund in an appropriate title for the corresponding account. 1.35 Fund shall credit Insurance Company with the appropriate number of shares. 1.36 On each ex-dividend date of the Fund or, if not a Business Day, on the first Business Day thereafter, Fund shall communicate to Insurance Company the amount of dividend and capital gain, if any, per share of each Series. All dividends and capital gains of any Series shall be automatically reinvested in additional shares of the relevant Series at the applicable net asset value per share of such Series on the payable date. Fund shall, on the day after the payable date or, if not a Business Day, on the first Business Day thereafter, notify Insurance Company of the number of shares so issued. ARTICLE IV 4. STATEMENTS AND REPORTS 1.37 Fund shall provide monthly statements of account as of the end of each month for all of Insurance Company's accounts by the fifteenth (15th) Business Day of the following month. 1.38 Fund shall distribute to Insurance Company copies of the Fund's Prospectuses, proxy materials, notices, periodic reports and other printed materials (which the Fund customarily provides to its shareholders) in quantities as Insurance Company may reasonably request for distribution to each Contractholder and Participant. 1.39 Fund will provide to Insurance Company at least one complete copy of all registration statements, Prospectuses, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, contemporaneously with the filing of such document with the Commission or other regulatory authorities. 1.40 Insurance Company will provide to the Fund at least one copy of all registration statements, Prospectuses, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Contracts or the Separate Account, contemporaneously with the filing of such document with the Commission. ARTICLE V 5. EXPENSES 1.41 The charge to the Fund for all expenses and costs of the Series, including but not limited to management fees, administrative expenses and legal and regulatory costs, will be made in the determination of the relevant Series' daily net asset value per share so as to accumulate to an annual charge at the rate set forth in the Fund's Prospectus. Excluded from the expense limitation described herein shall be brokerage commissions and transaction fees and extraordinary expenses. 1.42 Except as provided in this Article V and, in particular in the next sentence, Insurance Company shall not be required to pay directly any expenses of the Fund or expenses relating to the distribution of its shares. Insurance Company shall pay the following expenses or costs: a. Such amount of the production expenses of any Fund materials, including the cost of printing the Fund's Prospectus, or marketing materials for prospective Insurance Company Contractholders and Participants as the Fund's investment adviser and Insurance Company shall agree from time to time. b. Distribution expenses of any Fund materials or marketing materials for prospective Insurance Company Contractholders and Participants. c. Distribution expenses of Fund materials or marketing materials for Insurance Company Contractholders and Participants. 2. Except as provided herein, all other Fund expenses shall not be borne by Insurance Company. ARTICLE VI 6. EXEMPTIVE RELIEF 2.1 Insurance Company has reviewed a copy of the order dated December, 1996 of the Securities and Exchange Commission under Section 6(c) of the Act and, in particular, has reviewed the conditions to the relief set forth in the related Notice. As set forth therein, Insurance Company agrees to report any potential or existing conflicts promptly to the Board, and in particular whenever contract voting instructions are disregarded, and recognizes that it will be responsible for assisting the Board in carrying out its responsibilities under such application. Insurance Company agrees to carry out such responsibilities with a view to the interests of existing Contractholders. 2.2 If a majority of the Board, or a majority of Disinterested Board Members, determines that a material irreconcilable conflict exists with regard to Contractholder investments in the Fund, the Board shall give prompt notice to all Participating Companies. If the Board determines that Insurance Company is responsible for causing or creating said conflict, Insurance Company shall at its sole cost and expense, and to the extent reasonably practicable (as determined by a majority of the Disinterested Board Members), take such action as is necessary to remedy or eliminate the irreconcilable material conflict. Such necessary action may include, but shall not be limited to: a. Withdrawing the assets allocable to the Separate Account from the Series and reinvesting such assets in a different investment medium, or submitting the question of whether such segregation should be implemented to a vote or all affected Contractholders; and/or b. Establishing a new registered management investment company. 2.3 If a material irreconcilable conflict arises as a result of a decision by Insurance Company to disregard Contractholder voting instructions and said decision represents a minority position or would preclude a majority vote by all Contractholders having an interest in the Fund, Insurance Company may be required, at the Board's election, to withdraw the Separate Account's investment in the Fund. 2.4 For the purpose of this Article, a majority of the Disinterested Board Members shall determine whether or not any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to bear the expense of establishing a new funding medium for any Contract. Insurance Company shall not be required by this Article to establish a new funding medium for any Contract if an offer to do so has been declined by vote of a majority of the Contractholders materially adversely affected by the irreconcilable material conflict. 2.5 No action by Insurance Company taken or omitted, and no action by the Separate Account or the Fund taken or omitted as a result of any act or failure to act by Insurance Company pursuant to this Article VI shall relieve Insurance Company of its obligations under, or otherwise affect the operation of, Article V. ARTICLE VII 7. VOTING OF FUND SHARES 2.6 Fund shall provide Insurance Company with copies at no cost to Insurance Company, of the Fund's proxy material, reports to shareholders and other communications to shareholders in such quantity as Insurance Company shall reasonably require for distributing to Contractholders or Participants. Insurance Company shall: (a) solicit voting instructions from Contractholders or Participants on a timely basis and in accordance with applicable law; (b) vote the Series shares in accordance with instructions received from Contractholders or Participants; and (c) vote Series shares for which no instructions have been received in the same proportion as Series shares for which instructions have been received. Insurance Company agrees at all times to vote its General Account shares in the same proportion as Series shares for which instructions have been received from Contractholders or Participants. Insurance Company further agrees to be responsible for assuring that voting Series shares for the Separate Account is conducted in a manner reasonably consistent with other Participating Companies. 2.7 Insurance Company agrees that it shall not, without the prior written consent of the Fund and its investment adviser, solicit, induce or encourage Contractholders to (a) change or supplement the Fund's current investment adviser or (b) change, modify, substitute, add to or delete the Fund from the current investment media for the Contracts. ARTICLE VIII 8. MARKETING AND REPRESENTATIONS 2.8 The Fund or its underwriter shall periodically furnish Insurance Company with the following documents, in quantities as Insurance Company may reasonably request: a. Current Prospectus and any supplements thereto; b. other marketing materials, including (to the extent available) but not limited to performance summaries, market outlooks and portfolio highlight sheets. Expenses for the production of such documents shall be borne by Insurance Company in accordance with Section 5.2 of this Agreement. 2.9 Insurance Company shall designate certain persons or entities which shall have the requisite licenses to solicit applications for the sale of Contracts. No representation is made as to the number or amount of Contracts that are to be sold by Insurance Company. Insurance Company shall make reasonable efforts to market the Contracts and shall comply in all material respects with all applicable federal and state laws in connection therewith. 2.10 Insurance Company shall furnish, or shall cause to be furnished, to the Fund, each piece of sales literature or other promotional material in which the Fund, its investment adviser or the administrator is named, at least fifteen Business Days prior to its use. No such material shall be used unless the Fund approves such material. Such approval (if given) must be in writing and shall be presumed not given if not received within ten Business Days after receipt of such material. The Fund shall use all reasonable efforts to respond within ten days of receipt. 2.11 Insurance Company shall not give any information or make any representations or statements on behalf of the Fund or concerning the Fund or any Series in connection with the sale of the Contracts other than the information or representations contained in the registration statement or Prospectus, as may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in sales literature or other promotional material approved by the Fund. 2.12 Fund shall furnish, or shall cause to be furnished, to Insurance Company, each piece of the Fund's sales literature or other promotional material in which Insurance Company or the Separate Account is named, at least fifteen Business Days prior to its use. No such material shall be used unless Insurance Company approves such material. Such approval (if given) must be in writing and shall be presumed not given if not received within ten Business Days after receipt of such material. Insurance Company shall use all reasonable efforts to respond within ten days of receipt. 2.13 Fund shall not, in connection with the sale of Series shares, give any information or make any representations on behalf of Insurance Company or concerning Insurance Company, the Separate Account, or the Contracts other than the information or representations contained in a registration statement or prospectus for the Contracts, as may be amended or supplemented from time to time, or in published reports for the Separate Account which are in the public domain or approved by Insurance Company for distribution to Contractholders or Participants, or in sales literature or other promotional material approved by Insurance Company. 2.14 For purposes of this Agreement, the phrase "sales literature or other promotional material" or words of similar import include, without limitation, advertisements (such as material published, or designed for use, in a newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures or other public media), sales literature (such as any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, or reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports and proxy materials, and any other material constituting sales literature or advertising under National Association of Securities Dealers, Inc. rules, the Act or the 1933 Act. ARTICLE IX 9. INDEMNIFICATION 2.15 Insurance Company agrees to indemnify and hold harmless the Fund, its investment adviser, any sub-investment adviser of a Series, and their affiliates, and each of their directors, trustees, officers, employees, agents and each person, if any, who controls or is associated with any of the foregoing entities or persons within the meaning of the 1933 Act (collectively, the "Indemnified Parties" for purposes of Section 9.1), against any and all losses, claims, damages or liabilities joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted) for which the Indemnified Parties may become subject, under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect to thereof) (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in information furnished by Insurance Company for use in the registration statement or Prospectus or sales literature or advertisements of the Fund or with respect to the Separate Account or Contracts, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) arise out of Insurance Company's incorrect calculation and/or untimely reporting of net purchase or redemption orders; provided that Insurance Company shall have no obligation to indemnify and hold harmless the Indemnified Parties if the incorrect calculation or incorrect or untimely reporting was the result of incorrect information furnished by the Indemnified Parties or information furnished untimely by the Indemnified Parties or otherwise as a result of or relating to a breach of this Agreement by the Indemnified Parties; and provided, further, that Insurance Company shall not be liable for special, consequential or incidental damages; or (iii) arise out of any breach by Insurance Company of a material term of this Agreement or as a result of any failure by Insurance Company to provide the services and furnish the materials or to make any payments provided for in this Agreement. Insurance Company will reimburse any legal or other expenses reasonably incurred in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that Insurance Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or omission or alleged omission made in such registration statement, prospectus, sales literature, or advertisement in conformity with written information furnished to Insurance Company by the Fund specifically for use therein. This indemnity agreement will be in addition to any liability which Insurance Company may otherwise have. 2.16 The Fund agrees to indemnify and hold harmless Insurance Company and each of its affiliates, directors, officers, employees, agents and each person, if any, who controls or is associated with any of the foregoing entities and persons within the meaning of the 1933 Act against any and all losses, claims, damages or liabilities to which Insurance Company or any such director, officer, employee, agent or controlling person may become subject, under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted) for which the Indemnified Parties may become subject, under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) (1) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in information furnished by Fund or its investment adviser or sub-adviser for use in the registration statement or Prospectus or sales literature or advertisements of the Fund or with respect to the Separate Account or Contracts; (2) arise out of or are based upon the omission to state in the registration statement or Prospectus or sales literature or advertisements of the Fund any material fact required to be stated therein or necessary to make the statements therein not misleading; (3) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or Prospectus or sales literature or advertisements with respect to the Separate Account or the Contracts and such statements were based on information provided to Insurance Company by the Fund, or (4) arise out of any breach by the Fund of a material term of this Agreement or as a result of any failure by the Fund to provide the services and furnish the materials or to make any payments provided for in or related to this Agreement; and the Fund will reimburse any legal or other expenses reasonably incurred by Insurance Company or any such affiliate, director, officer, employee, agent or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Fund will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or omission or alleged omission made in such Registration Statement, Prospectus, sales literature or advertisements in conformity with written information furnished to the Fund by Insurance Company specifically for use therein; and provided, further, that the Fund shall not be liable for special, consequential or incidental damages. This indemnity agreement will be in addition to any liability which the Fund may otherwise have. 2.17 The Fund shall indemnify and hold Insurance Company harmless against any and all liability, loss, damages, costs or expenses which Insurance Company may incur, suffer or be required to pay due to the Fund's (1) incorrect calculation of the daily net asset value, dividend rate or capital gain distribution rate of a Series; (2) incorrect reporting of the daily net asset value, dividend rate or capital gain distribution rate; and (3) untimely reporting of the net asset value, dividend rate or capital gain distribution rate; provided that the Fund shall have no obligation to indemnify and hold harmless Insurance Company if the incorrect calculation or incorrect or untimely reporting was the result of incorrect information furnished by Insurance Company or information furnished untimely by Insurance Company or otherwise as a result of or relating to a breach of this Agreement by Insurance Company; and provided, further, that the Fund shall not be liable for special, consequential or incidental damages. 2.18 Promptly after receipt by an indemnified party under this Article of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Article, notify the indemnifying party of the commencement thereof. The omission to so notify the indemnifying party will not relieve the indemnifying party from any liability under this Article IX, except to the extent that the omission results in a failure of actual notice to the indemnifying party and such indemnifying party is damaged solely as a result of the failure to give such notice. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and to the extent that the indemnifying party has given notice to such effect to the indemnified party and is performing its obligations under this Article, the indemnifying party shall not be liable for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof. Notwithstanding the foregoing, in any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent. A successor by law of the parties to this Agreement shall be entitled to the benefits of the indemnification contained in this Article IX. 2.19 Insurance Company shall indemnify and hold the Fund, its investment adviser and any sub-investment adviser of a Series harmless against any tax liability incurred by the Fund under Section 851 of the Code arising from purchases or redemptions by Insurance Company's General Accounts or the account of its affiliates, except to the extent such liability is attributable to the negligence or conduct of the Fund, its investment adviser or any sub-investment adviser. 9.6 The Fund shall indemnify and hold Insurance Company harmless against any tax liability incurred by the Insurance Company or the Separate Account under Section 817(h) or Subchapter M of the Code, except to the extent such liability is attributable to the negligence or conduct of the Insurance Company or the Separate Account . ARTICLE X 10. COMMENCEMENT AND TERMINATION 2.20 This Agreement shall be effective as of the date hereof and shall continue in force until terminated in accordance with the provisions herein. 2.21 This Agreement shall terminate without penalty as to one or more Series at the option of the terminating party: a. At the option of Insurance Company or the Fund at any time from the date hereof upon 180 days' notice, unless a shorter time is agreed to by the parties; b. At the option of Insurance Company, if shares of any Series are not reasonably available to meet the requirements of the Contracts as determined by Insurance Company. Prompt notice of election to terminate shall be furnished by Insurance Company, said termination to be effective ten days after receipt of notice unless the Fund makes available a sufficient number of shares to meet the requirements of the Contracts within said ten-day period; c. At the option of Insurance Company, upon the institution of formal proceedings against the Fund by the Commission, National Association of Securities Dealers or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in Insurance Company's reasonable judgment, materially impair the Fund's ability to meet and perform the Fund's obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by Insurance Company with said termination to be effective upon receipt of notice; d. At the option of the Fund, upon the institution of formal proceedings against Insurance Company by the Commission, National Association of Securities Dealers or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in the Fund's reasonable judgment, materially impair Insurance Company's ability to meet and perform Insurance Company's obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by the Fund with said termination to be effective upon receipt of notice; e. At the option of either party, if such party shall determine, in its sole judgment reasonably exercised in good faith, that the Insurance Company, on the one hand, or the Fund, on the other hand, has suffered a material adverse change in its business or financial condition or is the subject of material adverse publicity and such material adverse change or material adverse publicity is likely to have a material adverse impact upon the business and operation of the Insurance Company, on the one hand, or the Fund or its investment adviser, on the other hand, such party shall notify the other party in writing of such determination and its intent to terminate this Agreement, and after considering the actions taken by the Insurance Company or the Fund, as the case may be, and any other changes in circumstances since the giving of such notice, such determination shall continue to apply on the sixtieth (60th) day following the giving of such notice, which sixtieth day shall be the effective date of termination; f. Upon termination of the Investment Advisory Agreement between the Fund and its investment adviser or its successors unless Insurance Company specifically approves the selection of a new Fund investment adviser. The Fund shall immediately furnish notice of such termination to Insurance Company; g. In the event the Fund's shares are not registered, issued or sold in accordance with applicable federal law, or such law precludes the use of such shares as the underlying investment medium of Contracts issued or to be issued by Insurance Company. Termination shall be effective immediately upon such occurrence, and notice shall be provided immediately to Company. h. At the option of the Fund upon a determination by the Board in good faith that it is no longer advisable and in the best interests of shareholders for the Fund to continue to operate pursuant to this Agreement. Termination pursuant to this Subsection (h) shall be effective upon notice by the Fund to Insurance Company of such termination; i. At the option of the Fund if the Contracts cease to qualify as annuity contracts or life insurance policies, as applicable, under the Code, or if the Fund reasonably believes in judgment exercised in good faith that the Contracts may fail to so qualify; j. At the option of either party to this Agreement, upon another party's breach of any material provision of this Agreement; k. At the option of the Fund, if the Contracts are not registered, issued or sold in accordance with applicable federal and/or state law; or l. Upon assignment of this Agreement, unless made with the written consent of the non-assigning party. Any such termination pursuant to Section 10.2a, 10.2d, 10.2e, 10.2f or 10.2k herein shall not affect the operation of Article V of this Agreement. Any termination of this Agreement shall not affect the operation of Article IX of this Agreement. 2.22 Notwithstanding any termination of this Agreement pursuant to Section 10.2 hereof, the Fund and its investment adviser may, at the option of the Fund, continue to make available additional Series shares for so long as the Fund desires pursuant to the terms and conditions of this Agreement as provided below, for all Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, if the Fund so elects to make additional Series shares available, the owners of the Existing Contracts or Insurance Company, whichever shall have legal authority to do so, shall be permitted to reallocate investments in the Series, redeem investments in the Fund and/or invest in the Fund upon the making of additional purchase payments under the Existing Contracts. In the event of a termination of this Agreement pursuant to Section 10.2 hereof, the Fund, as promptly as is practicable under the circumstances, shall notify Insurance Company whether the Fund will continue to make Series shares available after such termination. If Series shares continue to be made available after such termination, the provisions of this Agreement shall remain in effect and thereafter either the Fund or Insurance Company may terminate the Agreement, as so continued pursuant to this Section 10.3, upon prior written notice to the other party, such notice to be for a period that is reasonable under the circumstances but, if given by the Fund, need not be for more than six months. ARTICLE XI 11. AMENDMENTS 2.23 Any other changes in the terms of this Agreement shall be made by agreement in writing between Insurance Company and Fund. ARTICLE XII 12. NOTICE 2.24 Each notice required by this Agreement shall be given by certified mail, return receipt requested, to the appropriate parties at the following addresses: Insurance Company: Attn: Fund: JPM Series Trust II c/o Morgan Guaranty Trust Company 522 Fifth Avenue New York, New York 10036 Attention: Sharon J. Weinberg Notice shall be deemed to be given on the date of receipt by the addresses as evidenced by the return receipt. ARTICLE XIII 13. MISCELLANEOUS 2.25 This Agreement has been executed on behalf of the Fund by the undersigned officer of the Fund in his capacity as an officer of the Fund. The obligations of this Agreement shall only be binding upon the assets and property of the Fund and shall not be binding upon any Trustee, officer or shareholder of the Fund individually. ARTICLE XIV 14. LAW 2.26 This Agreement shall be construed in accordance with the internal laws of the State of New York, without giving effect to principles of conflict of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be duly executed and attested as of the date first above written. [Insurance Company] By: ------------------------------- Its: ------------------------------ JPM SERIES TRUST II By: ------------------------------- Its: ------------------------------ SCHEDULE 1 Name of Series - -------------- JPM Bond Portfolio JPM International Equity Portfolio EX-99.8(J) 6 EXHIBIT 99.8.(J) PARTICIPATION AGREEMENT AMONG MORGAN STANLEY UNIVERSAL FUNDS, INC., MORGAN STANLEY ASSET MANAGEMENT INC. MILLER ANDERSON & SHERRERD, LLP AND _______________ LIFE INSURANCE COMPANY DATED AS OF ________________, 1997 TABLE OF CONTENTS
Page ---- ARTICLE I. Purchase of Fund Shares 2 ARTICLE II Representations and Warranties 4 ARTICLE III. Prospectuses, Reports to Shareholders and Proxy Statements, Voting 6 ARTICLE IV. Sales Material and Information 8 ARTICLE V Fees and Expenses 9 ARTICLE VI. Diversification 10 ARTICLE VII. Potential Conflicts 10 ARTICLE VIII. Indemnification 12 ARTICLE IX. Applicable Law 18 ARTICLE X. Termination 18 ARTICLE XI. Notices 20 ARTICLE XII. Miscellaneous 21 SCHEDULE A Separate Accounts and Contracts A-1 SCHEDULE B Portfolios of Morgan Stanley Universal Funds, Inc. B-1 SCHEDULE C Proxy Voting Procedures C-1
THIS AGREEMENT, made and entered into as of the ___ day of _____, 1997 by and among _________ LIFE INSURANCE COMPANY (hereinafter the "Company"), an ____ corporation, on its own behalf and on behalf of each separate account of the Company set forth on Schedule A hereto as may be amended from time to time (each such account hereinafter referred to as the "Account"), and MORGAN STANLEY UNIVERSAL FUNDS, INC. (hereinafter the "Fund"), a Maryland corporation, and MORGAN STANLEY ASSET MANAGEMENT INC. and MILLER ANDERSON & SHERRERD, LLP (hereinafter collectively the "Advisers" and individually the "Adviser"), a Delaware corporation and a Pennsylvania limited liability partnership, respectively. WHEREAS, the Fund engages in business as an open-end management investment company and is available to act as (i) the investment vehicle for separate accounts established by insurance companies for individual and group life insurance policies and annuity contracts with variable accumulation and/or pay-out provisions (hereinafter referred to individually and/or collectively as "Variable Insurance Products") and (ii) the investment vehicle for certain qualified pension and retirement plans (hereinafter "Qualified Plans"); and WHEREAS, insurance companies desiring to utilize the Fund as an investment vehicle under their Variable Insurance Contracts enter into participation agreements with the Fund and the Advisers (the "Participating Insurance Companies"); WHEREAS, shares of the Fund are divided into several series of shares, each representing the interest in a particular managed portfolio of securities and other assets, any one or more of which may be made available under this Agreement, as may be amended from time to time by mutual agreement of the parties hereto (each such series hereinafter referred to as a "Portfolio"); and WHEREAS, the Fund has obtained an order from the Securities and Exchange Commission, dated September 19, 1996 (File No. 812-10118), granting Participating Insurance Companies and Variable Insurance Product separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended (hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund to be sold to and held by Variable Annuity Product separate accounts of both affiliated and unaffiliated life insurance companies and Qualified Plans (hereinafter the "Shared Funding Exemptive Order"); and WHEREAS, the Fund is registered as an open-end management investment company under the 1940 Act and its shares are registered under the Securities Act of 1933, as amended (hereinafter the "1933 Act"); and WHEREAS, each Adviser is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and any applicable state securities laws; and WHEREAS, each Adviser manages certain Portfolios of the Fund; and WHEREAS, Morgan Stanley & Co. Incorporated (the "Underwriter") is registered as a broker/dealer under the Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"), is a member in good standing of the National Association of Securities Dealers, Inc. (hereinafter "NASD") and serves as principal underwriter of the shares of the Fund; and WHEREAS, the Company has registered or will register certain Variable Insurance Products under the 1933 Act; and WHEREAS, each Account is a duly organized, validly existing segregated asset account, established by resolution or under authority of the Board of Directors of the Company, on the date shown for such Account on Schedule A hereto, to set aside and invest assets attributable to the aforesaid Variable Insurance Product; and WHEREAS, the Company has registered or will register each Account as a unit investment trust under the 1940 Act; and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase, on behalf of each Account, shares in the Portfolios set forth in Schedule B attached to this Agreement, to fund certain of the aforesaid Variable Insurance Products and the Underwriter is authorized to sell such shares to each such Account at net asset value; NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund and the Underwriter agree as follows: ARTICLE I. PURCHASE OF FUND SHARES 1.1. The Fund agrees to make available for purchase by the Company shares of the Fund and shall execute orders placed for each Account on a daily basis at the net asset value next computed after receipt by the Fund or its designee of such order. For purposes of this Section 1.1, the Company shall be the designee of the Fund for receipt of such orders from each Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice of such order by 10:00 a.m. Eastern time on the next following Business Day. "Business Day" shall mean any day on which 2 the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the Securities and Exchange Commission. 1.2. The Fund, so long as this Agreement is in effect, agrees to make its shares available indefinitely for purchase at the applicable net asset value per share by the Company and its Accounts on those days on which the Fund calculates its net asset value pursuant to rules of the Securities and Exchange Commission and the Fund shall use all reasonable efforts to calculate such net asset value on each day which the New York Stock Exchange is open for trading. Notwithstanding the foregoing, the Board of Directors of the Fund (hereinafter the "Board") may refuse to permit the Fund to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.3. The Fund agrees that shares of the Fund will be sold only to Participating Insurance Companies and their separate accounts and to certain Qualified Plans. No shares of any Portfolio will be sold to the general public. 1.4. The Fund agrees to redeem for cash, on the Company's request, any full or fractional shares of the Fund held by the Company, executing such requests on a daily basis at the net asset value next computed after receipt by the Fund or its designee of the request for redemption. For purposes of this Section 1.4, the Company shall be the designee of the Fund for receipt of requests for redemption from each Account and receipt by such designee shall constitute receipt by the Fund, provided that the Fund receives notice of such request for redemption on the next following Business Day. 1.5. The Company agrees that purchases and redemptions of Portfolio shares offered by the then current prospectus of the Fund shall be made in accordance with the provisions of such prospectus. The Variable Insurance Products issued by the Company, under which amounts may be invested in the Fund (hereinafter the "Contracts"), are listed on Schedule A attached hereto and incorporated herein by reference, as such Schedule A may be amended from time to time by mutual written agreement of all of the parties hereto. 1.6. The Company shall pay for Fund shares on the next Business Day after an order to purchase Fund shares is made in accordance with the provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire no later than 2:30 p.m. For purposes of Section 2.10 and 2.11, upon receipt by the Fund of the federal funds so wired, such funds shall cease to be the responsibility of the Company and shall become the responsibility of the Fund. 3 1.7. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Shares ordered from the Fund will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. 1.8. The Fund shall furnish same day notice (by wire or telephone, followed by written confirmation) to the Company of any income, dividends or capital gain distributions payable on the Fund's shares. The Company hereby elects to receive all such income dividends and capital gain distributions as are payable on the Portfolio shares in additional shares of that Portfolio. The Company reserves the right to revoke this election and to receive all such income dividends and capital gain distributions in cash. The Fund shall notify the Company of the number of shares so issued as payment of such dividends and distributions. 1.9. The Fund shall make the net asset value per share for each Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated (normally by 6:30 p.m. Eastern time) and shall use its best efforts to make such net asset value per share available by 7:00 p.m. Eastern time. ARTICLE II. REPRESENTATIONS AND WARRANTIES 2.1. The Company represents and warrants that the Contracts are or will be registered under the 1933 Act; that the Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws and that the sale of the Contracts shall comply in all material respects with state insurance suitability requirements. The Company further represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it has legally and validly established each Account prior to any issuance or sale thereof as a segregated asset account under applicable _____ law and has registered or, prior to any issuance or sale of the Contracts, will register each Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts. 2.2. The Fund represents and warrants that Fund shares sold pursuant to this Agreement shall be registered under the 1933 Act, duly authorized for issuance and sold in compliance with the laws of the State of Maryland and all applicable federal and state securities laws and that the Fund is and shall remain registered under the 1940 Act. The Fund shall amend the registration statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. The Fund shall register and qualify the shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Fund. 4 2.3. The Fund represents that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 2.4. The Company represents that the Contracts are currently treated as life insurance policies or annuity contracts, under applicable provisions of the Code and that it will make every effort to maintain such treatment and that it will notify the Fund immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.5. The Fund represents that to the extent that it decides to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund undertakes to have a board of directors, a majority of whom are not interested persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. 2.6. The Fund makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) complies with the insurance laws or regulations of the various states except that the Fund represents that the Fund's investment policies, fees and expenses are and shall at all times remain in compliance with the laws of the State of Maryland and the Fund represents that their respective operations are and shall at all times remain in material compliance with the laws of the State of Maryland to the extent required to perform this Agreement. 2.7. The Fund represents that it is lawfully organized and validly existing under the laws of the State of Maryland and that it does and will comply in all material respects with the 1940 Act. 2.8. Each Adviser represents and warrants that it is and shall remain duly registered in all material respects under all applicable federal and state securities laws and that it will perform its obligations for the Fund in compliance in all material respects with the laws of its state of domicile and any applicable state and federal securities laws. 2.9. The Fund represents and warrants that its directors, officers, employees, and other individuals/entities dealing with the money and/or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid blanket fidelity bond shall include 5 coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 2.10. The Company represents and warrants that all of its directors, officers, employees, investment advisers, and other individuals/entities dealing with the money and/or securities of the Fund are covered by a blanket fidelity bond or similar coverage, in an amount not less $5 million. The aforesaid includes coverage for larceny and embezzlement is issued by a reputable bonding company. The Company agrees to make all reasonable efforts to see that this bond or another bond containing these provisions is always in effect, and agrees to notify the Fund and the Underwriter in the event that such coverage no longer applies. ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING 3.1. The Fund or its designee shall provide the Company with as many printed copies of the Fund's current prospectus and statement of additional information as the Company may reasonably request. If requested by the Company, in lieu of providing printed copies the Fund shall provide camera-ready film or computer diskettes containing the Fund's prospectus and statement of additional information, and such other assistance as is reasonably necessary in order for the Company once each year (or more frequently if the prospectus and/or statement of additional information for the Fund is amended during the year) to have the prospectus for the Contracts and the Fund's prospectus printed together in one document, and to have the statement of additional information for the Fund and the statement of additional information for the Contracts printed together in one document. Alternatively, the Company may print the Fund's prospectus and/or its statement of additional information in combination with other fund companies' prospectuses and statements of additional information. 3.2. Except as provided in this Section 3.2., all expenses of printing and distributing Fund prospectuses and statements of additional information shall be the expense of the Company. For prospectuses and statements of additional information provided by the Company to its existing owners of Contracts who currently own shares of one or more of the Fund's Portfolios, in order to update disclosure as required by the 1933 Act and/or the 1940 Act, the cost of printing shall be borne by the Fund. If the Company chooses to receive camera-ready film or computer diskettes in lieu of receiving printed copies of the Fund's prospectus, the Fund will reimburse the Company in an amount equal to the product of x and y where x is the number of such prospectuses distributed to owners of the Contracts who currently own shares of one or more of the Fund's Portfolios, and y is the Fund's per unit cost of typesetting and printing the Fund's prospectus. The same procedures shall be followed with respect to the Fund's statement of additional information. The Company agrees to provide the Fund or its designee with such information as may be reasonably requested by the 6 Fund to assure that the Fund's expenses do not include the cost of printing any prospectuses or statements of additional information other than those actually distributed to existing owners of the Contracts. 3.3. The Fund's statement of additional information shall be obtainable from the Fund, the Company or such other person as the Fund may designate, as agreed upon by the parties. 3.4. The Fund, at its expense, shall provide the Company with copies of its proxy statements, reports to shareholders, and other communications (except for prospectuses and statements of additional information, which are covered in section 3.1) to shareholders in such quantity as the Company shall reasonably require for distributing to Contract owners. 3.5. If and to the extent required by law the Company shall: (i) solicit voting instructions from Contract owners; (ii) vote the Fund shares in accordance with instructions received from Contract owners; and (iii) vote Fund shares for which no instructions have been received in the same proportion as Fund shares of such Portfolio for which instructions have been received, so long as and to the extent that the Securities and Exchange Commission continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners. The Company reserves the right to vote Fund shares held in any segregated asset account in its own right, to the extent permitted by law. The Fund and the Company shall follow the procedures, and shall have the corresponding responsibilities, for the handling of proxy and voting instruction solicitations, as set forth in Schedule C attached hereto and incorporated herein by reference. Participating Insurance Companies shall be responsible for ensuring that each of their separate accounts participating in the Fund calculates voting privileges in a manner consistent with the standards set forth on Schedule C, which standards will also be provided to the other Participating Insurance Companies. 3.6. The Fund will comply with all provisions of the 1940 Act requiring voting by shareholders, and in particular the Fund will either provide for annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund is not one of the trusts described in Section 16(c) of that Act) as well as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in accordance with the Securities and Exchange Commission's interpretation of the requirements of Section 16(a) with respect 7 to periodic elections of directors and with whatever rules the Commission may promulgate with respect thereto. 3.7. The Fund shall use reasonable efforts to provide Fund prospectuses, reports to shareholders, proxy materials and other Fund communications (or camera-ready equivalents) to the Company sufficiently in advance of the Company's mailing dates to enable the Company to complete, at reasonable cost, the printing, assembling and/or distribution of the communications in accordance with applicable laws and regulations. ARTICLE IV. SALES MATERIAL AND INFORMATION 4.1. The Company shall furnish, or shall cause to be furnished, to the Fund or its designee, each piece of sales literature or other promotional material in which the Fund or the Adviser(s) is named, at least ten Business Days prior to its use. No such material shall be used if the Fund or its designee reasonably objects to such use within ten Business Days after receipt of such material. The Fund agrees to use its best efforts to provide all comments on such material within ten Business Days. 4.2. The Company shall not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement or prospectus for the Fund shares, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in sales literature or other promotional material approved by the Fund or its designee, except with the permission of the Fund. 4.3. The Fund or its designee shall furnish, or shall cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company and/or its separate account(s) is named at least ten Business Days prior to its use. No such material shall be used if the Company or its designee reasonably objects to such use within ten Business Days after receipt of such material. The Company agrees to use its best efforts to provide all comments on such material within ten Business Days. 4.4. The Fund and the Advisers shall not give any information or make any representations on behalf of the Company or concerning the Company, each Account, or the Contracts, other than the information or representations contained in a registration statement or prospectus for the Contracts, as such registration statement and prospectus may be amended or supplemented from time to time, or in published reports for each Account which are in the public domain or approved by the Company for distribution to Contract owners, or in sales literature or other promotional material approved by the Company or its designee, except with the permission of the Company. 8 4.5. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, which are relevant to the Company or the Contracts. 4.6. The Company will provide to the Fund at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no action letters, and all amendments to any of the above, that relate to the investment in the Fund under the Contracts. 4.7. For purposes of this Article IV, the phrase "sales literature or other promotional material" includes, but is not limited to, any of the following that refer to the Fund or any affiliate of the Fund: advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media), sales literature (I.E., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, and registration statements, prospectuses, statements of additional information, shareholder reports, and proxy materials. ARTICLE V. FEES AND EXPENSES 5.1. The Fund shall pay no fee or other compensation to the Company under this Agreement, except that if the Fund or any Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance distribution expenses, then the Underwriter may make payments to the Company or to the underwriter for the Contracts if and in amounts agreed to by the Underwriter in writing. 5.2. All expenses incident to performance by the Fund under this Agreement shall be paid by the Fund. The Fund shall see to it that all its shares are registered and authorized for issuance in accordance with applicable federal law and, if and to the extent deemed advisable by the Fund, in accordance with applicable state laws prior to their sale. The Fund shall bear the expenses for the cost of registration and qualification of the Fund's shares, preparation and filing of the Fund's prospectus and registration statement, proxy materials and reports, setting the prospectus in type, setting in type 9 and printing the proxy materials and reports to shareholders (including the costs of printing a prospectus that constitutes an annual report), the preparation of all statements and notices required by any federal or state law, and all taxes on the issuance or transfer of the Fund's shares. 5.3. The Company shall bear the expenses of distributing the Fund's prospectus, proxy materials and reports to owners of Contracts issued by the Company. ARTICLE VI. DIVERSIFICATION 6.1. The Fund represents and warrants that it will at all times invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable contracts under the Code and the regulations issued thereunder. Without limiting the scope of the foregoing, the Fund will at all times comply with Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulations. In the event of a breach of this Article VI by the Fund, it will take all reasonable steps (a) to notify Company of such breach and (b) to adequately diversify the Fund so as to achieve compliance within the grace period afforded by Regulation 817-5. ARTICLE VII. POTENTIAL CONFLICTS 7.1. The Board will monitor the Fund for the existence of any material irreconcilable conflict between the interests of the contract owners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by Variable Insurance Product owners; or (f) a decision by a Participating Insurance Company to disregard the voting instructions of contract owners. The Board shall promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. 7.2. The Company will report any potential or existing conflicts of which it is aware to the Board. The Company will assist the Board in carrying out its responsibilities under the Shared Funding Exemptive Order, by providing the Board with all information reasonably necessary for the Board to consider any issues raised. 10 This includes, but is not limited to, an obligation by the Company to inform the Board whenever contract owner voting instructions are disregarded. 7.3. If it is determined by a majority of the Board, or a majority of its disinterested members, that a material irreconcilable conflict exists, the Company and other Participating Insurance Companies shall, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested directors), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (1) withdrawing the assets allocable to some or all of the separate accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any appropriate group (I.E., annuity contract owners, life insurance policy owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change; and (2) establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account (at the Company's expense); provided, however that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account within six months after the Board informs the Company in writing that it has determined that such decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. Until the end of the foregoing six month period, the Underwriter and Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a majority of the disinterested members of the Board shall determine whether any proposed action 11 adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. 7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Shared Funding Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. ARTICLE VIII. INDEMNIFICATION 8.1. INDEMNIFICATION BY THE COMPANY 8.1(a) The Company agrees to indemnify and hold harmless the Fund and each member of the Board and officers, and each Adviser and each director, officer and employee of each Adviser, and each person, if any, who controls the Fund or the Adviser within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and individually, "Indemnified Party," for purposes of this Section 8.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or litigation (including legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of the Fund's shares or the Contracts and: (i) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement or prospectus for the Contracts or contained in the Contracts or sales literature for the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not 12 misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Company by or on behalf of the Fund for use in the registration statement or prospectus for the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature of the Fund not supplied by the Company, or persons under its control and other than statements or representations authorized by the Fund or an Adviser) or unlawful conduct of the Company or persons under its control, with respect to the sale or distribution of the Contracts or Fund shares; or (iii) arise out of or as a result of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature of the Fund or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such a statement or omission was made in reliance upon and in conformity with information furnished to the Fund by or on behalf of the Company; or (iv) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company, as limited by and in accordance with the provisions of Sections 8.1(b) and 8.1(c) hereof. 8.1(b). The Company shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement. 13 8.1(c). The Company shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Company in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Company of any such claim shall not relieve the Company from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Company shall be entitled to participate, at its own expense, in the defense of such action. The Company also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Company to such party of the Company's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Company will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.1(d). The Indemnified Parties will promptly notify the Company of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Fund shares or the Contracts or the operation of the Fund. 8.2. INDEMNIFICATION BY THE ADVISERS 8.2(a). Each Adviser agrees, with respect to each Portfolio that it manages, to indemnify and hold harmless the Company and each of its directors, officers and employees and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and individually, "Indemnified Party," for purposes of this Section 8.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Adviser) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of shares of the Portfolio that it manages or the Contracts and: 14 (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus or sales literature of the Fund (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Fund by or on behalf of the Company for use in the registration statement or prospectus for the Fund or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Portfolio shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature for the Contracts not supplied by the Fund or persons under its control and other than statements or representations authorized by the Company) or unlawful conduct of the Fund, Adviser(s) or Underwriter or persons under their control, with respect to the sale or distribution of the Contracts or Portfolio shares; or (iii) arise out of or as a result of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature covering the Contracts, or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement or statements therein not misleading, if such statement or omission was made in reliance upon information furnished to the Company by or on behalf of the Fund; or (iv) arise as a result of any failure by the Fund to provide the services and furnish the materials under the terms of this Agreement; or 15 (v) arise out of or result from any material breach of any representation and/or warranty made by the Adviser in this Agreement or arise out of or result from any other material breach of this Agreement by the Adviser; as limited by and in accordance with the provisions of Sections 8.2(b) and 8.2(c) hereof. 8.2(b). An Adviser shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement. 8.2(c). An Adviser shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Adviser in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Adviser of any such claim shall not relieve the Adviser from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Adviser will be entitled to participate, at its own expense, in the defense thereof. The Adviser also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Adviser to such party of the Adviser's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Adviser will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.2(d). The Company agrees promptly to notify the Adviser of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of the Contracts or the operation of each Account. 16 8.3. INDEMNIFICATION BY THE FUND 8.3(a). The Fund agrees to indemnify and hold harmless the Company, and each of its directors, officers and employees and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (hereinafter collectively, the "Indemnified Parties" and individually, "Indemnified Party," for purposes of this Section 8.3) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Fund) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements result from the gross negligence, bad faith or willful misconduct of the Board or any member thereof or any officer of the Fund, are related to the operations of the Fund and: (i) arise as a result of any failure by the Fund to provide the services and furnish the materials under the terms of this Agreement; or (ii) arise out of or result from any material breach of any representation and/or warranty made by the Fund in this Agreement or arise out of or result from any other material breach of this Agreement by the Fund; 8.3(b). The Fund shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party as may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement. 8.3(c). The Fund shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Fund in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Fund of any such claim shall not relieve the Fund from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification 17 provision. In case any such action is brought against the Indemnified Parties, the Fund will be entitled to participate, at its own expense, in the defense thereof. The Fund also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Fund to such party of the Fund's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Fund will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.3(d). The Company agrees promptly to notify the Fund of the commencement of any litigation or proceedings against it or any of its respective officers or directors in connection with this Agreement, the issuance or sale of the Contracts, with respect to the operation of either Account, or the sale or acquisition of shares of the Fund. ARTICLE IX. APPLICABLE LAW 9.1. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of New York. 9.2. This Agreement shall be subject to the provisions of the 1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the Securities and Exchange Commission may grant (including, but not limited to, the Shared Funding Exemptive Order) and the terms hereof shall be interpreted and construed in accordance therewith. ARTICLE X. TERMINATION 10.1. This Agreement shall continue in full force and effect until the first to occur of: (a) termination by any party for any reason by sixty (60) days advance written notice delivered to the other parties; or (b) termination by the Company by written notice to the Fund and the Adviser with respect to any Portfolio based upon the Company's determination that shares of such Portfolio is not reasonably available to meet the requirements of the Contracts; or 18 (c) termination by the Company by written notice to the Fund and the Adviser with respect to any Portfolio in the event any of the Portfolio's shares are not registered, issued or sold in accordance with applicable state and/or federal law or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by the Company; or (d) termination by the Company by written notice to the Fund and the Adviser with respect to any Portfolio in the event that such Portfolio ceases to qualify as a Regulated Investment Company under Subchapter M of the Code or under any successor or similar provision, or if the Company reasonably believes that the Fund may fail to so qualify; or (e) termination by the Company by written notice to the Fund and the Adviser with respect to any Portfolio in the event that such Portfolio falls to meet the diversification requirements specified in Article VI hereof; or (f) termination by either the Fund by written notice to the Company if the Fund shall determine, in its sole judgment exercised in good faith, that the Company and/or its affiliated companies has suffered a material adverse change in its business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity, or (g) termination by the Company by written notice to the Fund and the Adviser, if the Company shall determine, in its sole judgment exercised in good faith, that either the Fund or the Adviser has suffered a material adverse change in its business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity; or 10.2. Notwithstanding any termination of this Agreement, the Fund shall at the option of the Company, continue to make available additional shares of the Fund pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, the owners of the Existing Contracts shall be permitted to direct reallocation of investments in the Fund, redemption of investments in the Fund and/or investment in the Fund upon the making of additional purchase payments under the Existing Contracts. 19 The parties agree that this Section 10.2 shall not apply to any terminations under Article VII and the effect of such Article VII terminations shall be governed by Article VII of this Agreement. 10.3. The Company shall not redeem Fund shares attributable to the Contracts (as distinct from Fund shares attributable to the Company's assets held in the Account) except (i) as necessary to implement Contract Owner initiated or approved transactions, or (ii) as required by state and/or federal laws or regulations or judicial or other legal precedent of general application (hereinafter referred to as a "Legally Required Redemption") or (iii) as permitted by an order of the Securities and Exchange Commission pursuant to Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish to the Fund the opinion of counsel for the Company (which counsel shall be reasonably satisfactory to the Fund) to the effect that any redemption pursuant to clause (ii) above is a Legally Required Redemption. Furthermore, except in cases where permitted under the terms of the Contracts, the Company shall not prevent Contract Owners from allocating payments to a Portfolio that was otherwise available under the Contracts without first giving the Fund 90 days prior written notice of its intention to do so. ARTICLE XI. NOTICES Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Fund: Morgan Stanley Universal Funds, Inc. c/o Morgan Stanley Asset Management Inc. 1221 Avenue of the Americas New York, New York 10020 Attention: Harold J. Schaaff, Jr., Esq. If to Adviser: Morgan Stanley Asset Management Inc. 1221 Avenue of the Americas New York, New York 10020 Attention: Harold J. Schaaff, Jr., Esq. 20 If to Adviser: Miller Anderson & Sherrerd, LLP One Tower Bridge West Conshohocken, Pennsylvania 19428 Attention: Lorraine Truten If to the Company: __________ Life Insurance Company 515 West Market Street, 8th Floor Louisville, Kentucky 40202 Attention: Kevin L. Howard, Esq. ARTICLE XII. MISCELLANEOUS 12.1. All persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the Board, officers, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund. 12.2. Subject to the requirements of legal process and regulatory authority, each party hereto shall treat as confidential the names and addresses of the owners of the Contracts and all information reasonably identified as confidential in writing by any other party hereto and, except as permitted by this Agreement, shall not disclose, disseminate or utilize such names and addresses and other confidential information until such time as it may come into the public domain without the express written consent of the affected party. 12.3. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 12.4. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 12.5. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 21 12.6. Each party hereto shall cooperate with each other party and all appropriate governmental authorities (including without limitation the Securities and Exchange Commission, the National Association of Securities Dealers and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. Notwithstanding the generality of the foregoing, each party hereto further agrees to furnish the California Insurance Commissioner with any information or reports in connection with services provided under this Agreement which such Commissioner may request in order to ascertain whether the insurance operations of the Company are being conducted in a manner consistent with the California Insurance Regulations and any other applicable law or regulations. 12.7. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations at law or in equity, which the parties hereto are entitled to under state and federal laws. 12.8. This Agreement or any of the rights and obligations hereunder may not be assigned by any party without the prior written consent of all parties hereto; provided, however, that an Adviser may assign this Agreement or any rights or obligations hereunder to any affiliate of or company under common control with the Adviser, if such assignee is duly licensed and registered to perform the obligations of the Adviser under this Agreement and such assignment would not cause a termination of this Agreement under the 1940 Act. 12. 9 The Company shall furnish, or shall cause to be furnished, to the Fund or its designee copies of the following reports: (a) the Company's annual statement (prepared under statutory accounting principles) and annual report (prepared under generally accepted accounting principles ("GAAP"), if any), as soon as practical and in any event within 90 days after the end of each fiscal year; (b) the Company's quarterly statements (statutory) (and GAAP, if any), as soon as practical and in any event within 45 days after the end of each quarterly period: 22 (c) any financial statement, proxy statement, notice or report of the Company sent to stockholders and/or policyholders, as soon as practical after the delivery thereof to stockholders; (d) any registration statement (without exhibits) and financial reports of the Company filed with the Securities and Exchange Commission or any state insurance regulator, as soon as practical after the filing thereof; (e) any other publicly available reports submitted to the Company by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company, as soon as practical after the receipt thereof. 12. 10 The Fund shall, upon request of the Company, furnish, or cause to be furnished, to Company or its designee copies of the following reports: (a) any registration statement (without exhibits) and financial reports of the Fund filed with the Securities and Exchange Commission or any state securities regulator, as soon as practical after the filing thereof with the Securities and Exchange Commission; (b) any financial statement, proxy statement, notice or report of the Fund sent to shareholders relating to any of the Portfolios of the Fund listed on Schedule B, as soon as practical after filing with the Securities and Exchange Commission; and (c) any other publicly available reports submitted to the Fund by independent accountants in connection with any annual, interim or special audit made by them of the books of the company as soon as practical after the receipt thereof. 23 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by its duly authorized representative and its seal to be hereunder affixed hereto as of the date specified above. LIFE INSURANCE COMPANY By: ------------------------------ NAME: TITLE: MORGAN STANLEY UNIVERSAL FUNDS, INC. By: ------------------------------ NAME: TITLE: MORGAN STANLEY ASSET MANAGEMENT INC. By: ------------------------------ NAME: TITLE: MILLER ANDERSON & SHERRERD, LLP By: ------------------------------ NAME: TITLE: 24 SCHEDULE A SEPARATE ACCOUNTS AND CONTRACTS NAME OF SEPARATE ACCOUNT AND FORM NUMBER AND NAME OF CONTRACT DATE ESTABLISHED BY BOARD OF DIRECTORS FUNDED BY SEPARATE ACCOUNT - -------------------------------------- -------------------------- Separate Account II Pinnacle Flexible Premium Variable established May 21, 1992 Annuity File No. 811-7134 A-1 SCHEDULE B PORTFOLIOS OF MORGAN STANLEY UNIVERSAL FUNDS, INC. Emerging Markets Debt Portfolio High Yield Portfolio U.S. Real Estate Portfolio Asian Equity Portfolio B-1 SCHEDULE C PROXY VOTING PROCEDURES The following is a list of procedures and corresponding responsibilities for the handling of proxies and voting instructions relating to the Fund. The defined terms herein shall have the meanings assigned in the Participation Agreement except that the term "Company" shall also include the department or third party assigned by the Company to perform the steps delineated below. - - The proxy proposals are given to the Company by the Fund as early as possible before the date set by the Fund for the shareholder meeting to enable the Company to consider and prepare for the solicitation of voting instructions from owners of the Contracts and to facilitate the establishment of tabulation procedures. At this time the Fund will inform the Company of the Record, Mailing and Meeting dates. This will be done verbally approximately two months before meeting. - - Promptly after the Record Date, the Company will perform a "tape run", or other activity, which will generate the names, addresses and number of units which are attributed to each contract owner/policyholder (the "Customer") as of the Record Date. Allowance should be made for account adjustments made after this date that could affect the status of the Customers' accounts as of the Record Date. Note: The number of proxy statements is determined by the activities described in this Step #2. The Company will use its best efforts to call in the number of Customers to the Fund , as soon as possible, but no later than two weeks after the Record Date. - - The Fund's Annual Report must be sent to each Customer by the Company either before or together with the Customers' receipt of voting, instruction solicitation material. The Fund will provide the last Annual Report to the Company pursuant to the terms of Section 3.3 of the Agreement to which this Schedule relates. - - The text and format for the Voting Instruction Cards ("Cards" or "Card") is provided to the Company by the Fund. The Company, at its expense, shall produce and personalize the Voting Instruction Cards. The Fund or its affiliate must approve the Card before it is printed. Allow approximately 2-4 business days for printing information on the Cards. Information commonly found on the Cards includes: C-1 - name (legal name as found on account registration) - address - fund or account number - coding to state number of units - individual Card number for use in tracking and verification of votes (already on Cards as printed by the Fund). (This and related steps may occur later in the chronological process due to possible uncertainties relating to the proposals.) - - During this time, the Fund will develop, produce and pay for the Notice of Proxy and the Proxy Statement (one document). Printed and folded notices and statements will be sent to Company for insertion into envelopes (envelopes and return envelopes are provided and paid for by the Company). Contents of envelope sent to Customers by the Company will include: - Voting Instruction Card(s) - One proxy notice and statement (one document) - return envelope (postage pre-paid by Company) addressed to the Company or its tabulation agent - "urge buckslip" - optional, but recommended. (This is a small, single sheet of paper that requests Customers to vote as quickly as possible and that their vote is important. One copy will be supplied by the Fund.) - cover letter - optional, supplied by Company and reviewed and approved in advance by the Fund. - - The above contents should be received by the Company approximately 3-5 business days before mail date. Individual in charge at Company reviews and approves the contents of the mailing package to ensure correctness and completeness. Copy of this approval sent to the Fund. - - Package mailed by the Company. * The Fund must allow at least a 15-day solicitation time to the Company as the shareowner. (A 5-week period is recommended.) Solicitation time is calculated as calendar days from (but NOT including,) the meeting, counting backwards. - - Collection and tabulation of Cards begins. Tabulation usually takes place in another department or another vendor depending on process used. An often used procedure is to sort Cards on arrival by proposal into vote categories of all yes, no, or mixed replies, and to begin data entry. C-2 Note: Postmarks are not generally needed. A need for postmark information would be due to an insurance company's internal procedure and has not been required by the Fund in the past. - - Signatures on Card checked against legal name on account registration which was printed on the Card. Note: For Example, if the account registration is under "John A. Smith, Trustee," then that is the exact legal name to be printed on the Card and is the signature needed on the Card. - - If Cards are mutilated, or for any reason are illegible or are not signed properly, they are sent back to Customer with an explanatory letter and a new Card and return envelope. The mutilated or illegible Card is disregarded and considered to be NOT RECEIVED for purposes of vote tabulation. Any Cards that have been "kicked out" (e.g. mutilated, illegible) of the procedure are "hand verified," i.e., examined as to why they did not complete the system. Any questions on those Cards are usually remedied individually. - - There are various control procedures used to ensure proper tabulation of votes and accuracy of that tabulation. The most prevalent is to sort the Cards as they first arrive into categories depending upon their vote; an estimate of how the vote is progressing may then be calculated. If the initial estimates and the actual vote do not coincide, then an internal audit of that vote should occur. This may entail a recount. - - The actual tabulation of votes is done in units which is then converted to shares. (It is very important that the Fund receives the tabulations stated in terms of a percentage and the number of SHARES.) The Fund must review and approve tabulation format. - - Final tabulation in shares is verbally given by the Company to the Fund on the morning of the meeting not later than 10:00 a.m. Eastern time. The Fund may request an earlier deadline if reasonable and if required to calculate the vote in time for the meeting. - - A Certification of Mailing and Authorization to Vote Shares will be required from the Company as well as an original copy of the final vote. The Fund will provide a standard form for each Certification. C-3 - - The Company will be required to box and archive the Cards received from the Customers. In the event that any vote is challenged or if otherwise necessary for legal, regulatory, or accounting purposes, the Fund will be permitted reasonable access to such Cards. - - All approvals and "signing-off' may be done orally, but must always be followed up in writing. C-4 EX-99.10 7 EXHIBIT 99.10 Exhibit 10 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Financial Statements" in Post-Effective Amendment No. 13 to the Registration Statement (Form N-4 No. 33-51268) and Amendment No. 14 to the Registration Statement (Form N-4 No. 811-7134) and related Prospectuses of Separate Account II of Integrity Life Insurance Company and to the use of our reports (a) dated February 9, 1999, with respect to the statutory basis financial statements of Integrity Life Insurance Company, and (b) dated April 9, 1999, with respect to the financial statements of Separate Account II of Integrity Life Insurance Company, both included in the Registration Statement (Form N-4) for 1998 filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Louisville, Kentucky April 21, 1999 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Financial Statements" in Post-Effective Amendment No. 13 to the Registration Statement (Form N-4 No. 33-51268) and Amendment No. 14 to the Registration Statement (Form N-4 No. 811-7134) and related Prospectus of Separate Account Ten of Integrity Life Insurance Company and to the use of our report dated January 29, 1999, with respect to the financial statements of Separate Account Ten included in the Registration Statement (Form N-4) for 1998 filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Kansas City, Missouri April 21, 1999 -----END PRIVACY-ENHANCED MESSAGE-----