<PAGE>
T O U C H S T O N E
-------------------------------------
TOUCHSTONE VARIABLE ANNUITY
( EMERGING GROWTH
( INTERNATIONAL EQUITY
( GROWTH & INCOME
( BALANCED
( INCOME OPPORTUNITY
( BOND
( STANDBY INCOME
( FIXED ACCOUNT
- --------------------------------------------------------------------------------
PROSPECTUS
<PAGE>
THIS BOOKLET CONTAINS THE PROSPECTUS FOR TOUCHSTONE VARIABLE ANNUITY, A FLEXIBLE
PURCHASE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACT, ISSUED BY WESTERN-SOUTHERN
LIFE ASSURANCE COMPANY. THIS BOOKLET ALSO INCLUDES THE PROSPECTUS FOR INVESTMENT
PORTFOLIOS UNDERLYING THE TOUCHSTONE VARIABLE ANNUITY. THESE PROSPECTUSES ARE
BOUND TOGETHER FOR YOUR CONVENIENCE.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
MAY 1, 1995
AS AMENDED NOVEMBER 14, 1995
<TABLE>
<S> <C>
UNITS OF INTEREST UNDER WESTERN-SOUTHERN LIFE
FLEXIBLE PURCHASE ASSURANCE COMPANY
PAYMENT DEFERRED SEPARATE ACCOUNT 1
VARIABLE ANNUITY 400 BROADWAY
CONTRACTS CINCINNATI, OHIO 45202
</TABLE>
- --------------------------------------------------------------------------------
This Prospectus describes individual variable annuity contracts (each a
"CONTRACT" and collectively the "CONTRACTS") offered by Western-Southern Life
Assurance Company (the "COMPANY"), a life insurance company which is a wholly
owned subsidiary of The Western and Southern Life Insurance Company ("WESTERN &
SOUTHERN"). The Contracts are designed for individual investors and group plans
that desire to accumulate capital on a tax-deferred basis for retirement or
other long term objectives. Contracts may be purchased on either a non-qualified
basis or on a qualified basis in connection with qualified retirement and
pension plans. Generally, non-qualified Contracts may be purchased by making a
payment of at least $2,000, and qualified Contracts may be purchased by making a
payment of at least $1,000. Subsequent payments to a Contract must be at least
$100. Payments will be invested as the Contract Owner directs in one or more
sub-accounts (each a "SUB-ACCOUNT") of Western-Southern Life Assurance Company
Separate Account 1 (the "VARIABLE ACCOUNT") each of which invests in a
corresponding portfolio (a "PORTFOLIO") of Select Advisors Variable Insurance
Trust or of Select Advisors Portfolios, each of which is an open-end diversified
management investment company, or in a fixed-rate option funded through the
Company's general account (the "FIXED ACCOUNT").
The Sub-Accounts in which Contract Owners may invest are: Emerging Growth,
International Equity, Growth & Income, Balanced, Income Opportunity, Bond and
Standby Income. Information regarding these investment options is set forth
under the caption THE VARIABLE ACCOUNT herein. Of the seven Sub-Accounts, five,
Emerging Growth, International Equity, Balanced, Income Opportunity and Standby
Income, invest in corresponding Portfolios of Select Advisors Variable Insurance
Trust (the "VI TRUST"). This Prospectus is valid only when accompanied by the
current prospectus for the VI Trust (the "VI TRUST PROSPECTUS"). The remaining
two Sub-Accounts, Growth & Income and Bond, invest in the Growth & Income
Portfolio II and Bond Portfolio II of Select Advisors Portfolios (the "SA
TRUST") under a Hub and Spoke-Registered Trademark-arrangement. Unlike the
Portfolios of the VI Trust, which receive investments only from Sub-Accounts of
the Variable Account, the SA Trust may also receive investments for its Growth &
Income Portfolio II and Bond Portfolio II from other insurance company separate
accounts registered as investment companies under the Investment Company Act of
1940. See "Special Information Concerning Hub and Spoke-Registered Trademark-"
in this Prospectus. Hub and Spoke-Registered Trademark- is a registered service
mark of Signature Financial Group, Inc.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE CONTRACTS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE INCOME OPPORTUNITY PORTFOLIO OF THE VI TRUST MAY INVEST UP TO 100% OF
ITS TOTAL ASSETS IN NON-INVESTMENT GRADE BONDS (COMMONLY KNOWN AS "JUNK BONDS")
ISSUED BY BOTH U.S. AND FOREIGN ISSUERS, WHICH ENTAIL GREATER RISK OF UNTIMELY
INTEREST AND PRINCIPAL PAYMENTS, DEFAULT AND PRICE VOLATILITY THAN HIGHER RATED
SECURITIES, AND MAY PRESENT PROBLEMS OF LIQUIDITY AND VALUATION. SEE "INCOME
OPPORTUNITY PORTFOLIO" IN THE VI TRUST PROSPECTUS.
This Prospectus tells investors briefly the information they should know
before investing in the Contracts. Investors should read and retain this
Prospectus for future reference. Additional information about the Contract and
the Variable Account has been filed with the Securities and Exchange Commission
in a Statement of Additional Information dated May 1, 1995, as amended November
14, 1995. The Statement of Additional Information is incorporated by reference
in this Prospectus and is available without charge by calling the Touchstone
Variable Annuity Service Center at 1-800-669-2796. The table of contents of the
Statement of Additional Information appears on page 54 of this Prospectus.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY INTEREST OR PARTICIPATION IN
THE CONTRACTS OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM SUCH
OFFER WOULD BE UNLAWFUL THEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
PROSPECTUS CONTENTS
<TABLE>
<S> <C>
GLOSSARY............................................................................... 1
PART I -- DISCUSSION OF THE VARIABLE ANNUITY CONTRACT.................................. 3
FEE AND EXPENSE TABLES................................................................. 3
SUMMARY OF THE CONTRACT................................................................ 5
PERFORMANCE INFORMATION................................................................ 8
FACTS ABOUT THE COMPANY, THE VARIABLE ACCOUNT AND THE FIXED ACCOUNT.................... 9
The Company.......................................................................... 9
The Variable Account................................................................. 9
The VI Trust and the SA Trust........................................................ 10
Additions, Deletions and Substitutions of Investments................................ 11
The Fixed Account.................................................................... 11
THE CONTRACT........................................................................... 12
Purchase Of A Contract............................................................... 12
Free Look Privilege.................................................................. 13
Allocation Of Purchase Payments...................................................... 13
Accumulation Unit Value.............................................................. 13
Accumulation Unit Value -- VIT Sub-Accounts........................................ 14
Accumulation Unit Value -- Growth & Income and Bond Sub-Accounts................... 14
Fixed Account Value.................................................................. 15
Dollar Cost Averaging................................................................ 15
Transfers............................................................................ 15
Surrenders and Partial Withdrawals................................................... 16
Systematic Withdrawals............................................................. 17
Selection Of Annuity Income Options.................................................. 18
Income Date Selection.............................................................. 18
Annuity Payout Plans............................................................... 18
Death Benefit........................................................................ 19
CHARGES................................................................................ 19
Premium Taxes........................................................................ 19
Other Taxes.......................................................................... 19
Administrative Charges............................................................... 19
Contract Maintenance Charge........................................................ 20
Contract Administration Charge..................................................... 20
Mortality And Expense Risk Charge.................................................... 20
Surrender Charge..................................................................... 20
Expenses of VIT Portfolios and SAT Portfolios; Expense Caps.......................... 21
OTHER INFORMATION...................................................................... 22
Distribution of the Contracts........................................................ 22
Reports to Contract Owners........................................................... 22
Adjustment of Units and Values....................................................... 23
Voting Rights........................................................................ 23
Substituted Securities............................................................... 24
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
OTHER CONTRACT PROVISIONS.............................................................. 24
Misstatement of Age or Sex........................................................... 24
Assignment........................................................................... 24
Loans................................................................................ 24
No Dividends......................................................................... 24
FEDERAL INCOME TAX INFORMATION......................................................... 24
Qualification as an "Annuity Contract"............................................... 25
Diversification.................................................................... 25
Excessive Control.................................................................. 25
Required Distributions............................................................. 26
Multiple Contracts................................................................. 26
Federal Income Taxation.............................................................. 27
General............................................................................ 27
Tax Treatment of Assignments....................................................... 27
Tax Treatment of Withdrawals -- Non-Qualified Contracts............................ 27
Qualified Contracts and Qualified Plans............................................ 28
Section 401 Qualified Pension or Profit-Sharing Plans............................ 28
Section 403(b) Plans............................................................. 29
Individual Retirement Annuities.................................................. 29
Simplified Employee Pension Plans................................................ 30
Section 457 -- Deferred Compensation Plans......................................... 30
Tax Treatment of Withdrawals -- Qualified Contracts................................ 31
Tax-Sheltered Annuities -- Withdrawal Limitations.................................. 32
LEGAL PROCEEDINGS...................................................................... 32
PART II -- DISCUSSION OF SELECT ADVISORS PORTFOLIOS.................................... 33
SUMMARY................................................................................ 33
General.............................................................................. 33
Risks................................................................................ 33
Advisors............................................................................. 33
Sub-Accounts......................................................................... 34
Other Investors...................................................................... 34
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS....................................... 34
Growth & Income Portfolio............................................................ 34
Bond Portfolio....................................................................... 35
SPECIAL INFORMATION CONCERNING HUB AND SPOKE-Registered Trademark-..................... 35
MANAGEMENT OF THE PORTFOLIOS........................................................... 37
General.............................................................................. 37
Consultant to the Advisor............................................................ 37
Portfolio Advisors................................................................... 38
Expenses............................................................................. 38
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
RISK FACTORS, RESTRICTIONS AND INVESTMENT TECHNIQUES................................... 38
Techniques and Risk Factors.......................................................... 38
Derivatives........................................................................ 38
Foreign Securities................................................................. 39
Risks Associated with "Emerging Markets" Securities................................ 39
Currency Exchange Rates............................................................ 40
Medium and Lower Rated ("Junk Bonds") and Unrated Securities....................... 40
ADRs, EDRs and CDRs................................................................ 41
Fixed-Income and Other Debt Instrument Securities.................................. 41
U.S. Government Securities......................................................... 42
Mortgage Related Securities........................................................ 42
Stripped Mortgage Related Securities............................................... 43
Zero Coupon Securities............................................................. 43
Custodial Receipts................................................................. 44
When-Issued and Delayed-Delivery Securities........................................ 44
Repurchase Agreements.............................................................. 45
Reverse Repurchase Agreements and Forward Roll Transactions........................ 45
Lending Portfolio Securities....................................................... 45
Illiquid Securities................................................................ 46
Non-Publicly Traded ("Restricted") Securities and Rule 144A Securities............. 46
Temporary Investments.............................................................. 46
Futures Contracts and Related Options.............................................. 46
Options on Stock................................................................... 47
Options on Securities Indexes...................................................... 47
Forward Currency Contracts......................................................... 48
Asset Coverage....................................................................... 49
Certain Investment Restrictions...................................................... 49
Portfolio Turnover................................................................... 49
MANAGEMENT OF THE SA TRUST............................................................. 49
Board of Trustees.................................................................... 49
Administrator........................................................................ 50
Custodian............................................................................ 50
Sponsor.............................................................................. 50
Allocation of Expenses of the Portfolios............................................. 50
PURCHASE AND VALUATION................................................................. 51
Purchase............................................................................. 51
Valuation............................................................................ 51
ADDITIONAL INFORMATION................................................................. 52
Description of Shares, Voting Rights and Liabilities................................. 52
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION............................... 54
</TABLE>
iii
<PAGE>
GLOSSARY
ACCUMULATION UNIT -- An accounting unit of measure used to calculate the
Variable Account Value prior to the Income Date.
ACCUMULATION UNIT VALUE -- The dollar value of an Accumulation Unit in a
Sub-Account of the Variable Account.
ANNUITANT -- The natural person whose life is used to determine the duration
and amount of any annuity payments.
BENEFICIARY -- The person(s) to whom the Death Benefit will be paid if the
Annuitant dies before the Income Date.
CODE -- The Internal Revenue Code of 1986, as amended.
COMPANY -- Western-Southern Life Assurance Company.
CONTRACT -- An individual variable annuity contract, including the
Application Form and any amendments, riders or endorsements, offered by the
Company as set forth in this Prospectus.
CONTRACT ANNIVERSARY -- The same day and month as the Contract Date in each
subsequent year.
CONTRACT DATE -- The date, as set forth on page 3 of the Contract, on which
the Contract becomes effective, which generally will be within one business day
after receipt of the initial Purchase Payment and Application Form in good order
at the Touchstone Variable Annuity Service Center.
CONTRACT VALUE -- The total value of the Contract at any time prior to or on
the Income Date, representing the sum of the Variable Account Value and the
Fixed Account Value.
CONTRACT YEAR -- A year which starts with the Contract Date or with a
Contract Anniversary.
FIXED ACCOUNT -- A Contract option under which some or all of the Purchase
Payments are allocated to the Company's general account. The Company credits
interest to the amounts allocated to the Fixed Account at rates declared by the
Company from time to time and guaranteed for one year periods.
FIXED ACCOUNT VALUE -- At any given time, (1) the sum of all Purchase
Payments allocated to the Fixed Account, plus (2) any Variable Account Value
transferred to the Fixed Account, plus (3) interest credited by the Company to
the Fixed Account, less (4) any amounts transferred from the Fixed Account to
the Variable Account, less (5) any amounts withdrawn for charges, deductions or
surrenders (which includes Surrender Charges, if any).
INCOME DATE -- The date on which annuity payments are scheduled to begin,
changeable by written notice to the Company.
OWNER OR JOINT OWNER -- The person(s) owning all rights under the Contract.
PORTFOLIO -- An investment portfolio of the VI Trust or of the SA Trust,
each of which is a registered open-end management investment company. A VIT
PORTFOLIO is a Portfolio of the VI Trust and an SAT PORTFOLIO is either the
Growth & Income Portfolio II ("GROWTH & INCOME PORTFOLIO") or the Bond Portfolio
II ("BOND PORTFOLIO") of the SA Trust. Each Portfolio corresponds to a
Sub-Account of the Variable Account.
PURCHASE PAYMENT -- An amount paid to the Company under the Contract prior
to deduction of any applicable premium tax.
QUALIFIED AND NON-QUALIFIED CONTRACTS -- A QUALIFIED CONTRACT is a Contract
purchased in connection with a plan which qualifies for favorable federal income
tax treatment under Sections 401, 403(b) or 408 of the Code. A NON-QUALIFIED
CONTRACT is any other Contract.
SA TRUST -- Select Advisors Portfolios, a trust formed under New York law
that includes portfolios in which certain of the Sub-Accounts invest.
1
<PAGE>
SUB-ACCOUNT -- A division of the Variable Account which invests in a
Portfolio of the VI Trust or the SA Trust. Purchase Payments allocated to the
Variable Account are further allocated among Sub-Accounts as designated by the
Owner.
SURRENDER CHARGE -- A declining contingent deferred sales charge, ranging
from 7% during the first two years after a Purchase Payment is received to 0%
after seven years from receipt of a Purchase Payment.
SURRENDER VALUE -- The Contract Value less any applicable Surrender Charge
and Contract Maintenance Charge. This is the amount payable to an Owner upon
surrender of the Contract prior to the Income Date during the Annuitant's
lifetime.
VALUATION DATE -- Each day on which valuation of the Sub-Accounts is
required by applicable law, including every day that the New York Stock Exchange
is open.
VALUATION PERIOD -- The period of time beginning at the close of trading on
the New York Stock Exchange on one Valuation Date and ending at the close of
trading on the New York Stock Exchange on the next succeeding Valuation Date.
VARIABLE ACCOUNT -- A contract option under which some or all of the
Purchase Payments are allocated to the Western-Southern Life Assurance Company
Separate Account 1, a separate investment account of the Company.
VARIABLE ACCOUNT VALUE -- At any given time, the value of all Accumulation
Units credited to the Sub-Accounts pursuant to the Contract.
VI TRUST -- Select Advisors Variable Insurance Trust, a business trust
formed under Massachusetts law that includes portfolios in which certain of the
Sub-Accounts invest.
TERMS DEFINED ELSEWHERE IN THE PROSPECTUS
The following terms have the meanings given such terms at the pages
indicated in this table:
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------- ---------
<S> <C>
Administrative Services and Fund Accounting
Agreement.................................... 50
Administrator/Signature....................... 11
Advisor....................................... 11
Advisors Act.................................. 38
Advisory Agreement............................ 37
Benefit determination date.................... 19
Board of Trustees/Trustees.................... 37
Custodian..................................... 50
Death Benefit................................. 19
Designated beneficiary........................ 26
Distributor................................... 22
Expense Cap................................... 3
Expense risk.................................. 20
Fort Washington............................... 37
Free look..................................... 6
Free look period.............................. 13
IFS........................................... 22
IRA........................................... 29
Mortality risk................................ 20
PIN........................................... 16
<CAPTION>
TERM PAGE
- ---------------------------------------------- ---------
<S> <C>
Portfolio Advisors............................ 11
Qualified Plans............................... 28
RogersCasey................................... 11
SAT Net Investment Factor..................... 14
SEC........................................... 9
SEP........................................... 30
Signature/Administrator....................... 11
Signature Financial........................... 35
Sponsor....................................... 3
Sponsor Agreements............................ 3
Surrender..................................... 7
Touchstone Variable Annuity Service Center.... 6
Treasury Department........................... 25
Trustees/Board of Trustees.................... 37
VIT Net Investment Factor..................... 14
VIT Sub-Account............................... 14
VI Trust Prospectus........................... cover
Western & Southern............................ 9
1933 Act...................................... 11
1940 Act...................................... 9
</TABLE>
2
<PAGE>
PART I -- DISCUSSION OF THE VARIABLE ANNUITY CONTRACT
FEE AND EXPENSE TABLES
The following tables provide information concerning Contract Owner
transaction expenses and annual operating expenses of the Variable Account and
each Sub-Account. For these purposes, expenses of the Portfolio in which each
Sub-Account invests are treated as if they were expenses of that Sub-Account,
since that is their practical effect. It is expected that the combined expenses
per Accumulation Unit of each Sub-Account and its corresponding Portfolio will,
at a minimum, be approximately equal to and may be less than the expenses that
would be incurred by each Sub-Account alone if, instead of investing in such
Portfolio, the Sub-Account retained an investment advisor and portfolio advisors
and invested directly in the types of securities held by the Portfolio. For
additional information regarding these expenses, see "Charges."
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Contingent Deferred Sales Charge*.............. 7%
</TABLE>
RANGE OF CONTINGENT DEFERRED SALES CHARGE* OVER TIME
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
COMPLETED YEARS CHARGE AS PERCENTAGE OF
FROM DATE OF AMOUNT OF PURCHASE
PURCHASE PAYMENT PAYMENT WITHDRAWN
- ---------------- ---------------------------
<S> <C>
less than 1 7%
1 7%
2 6%
3 5%
4 4%
5 2%
6 1%
7 and later 0%
</TABLE>
<TABLE>
<S> <C>
Annual Contract Maintenance Charge................................................... $ 35
Variable Account Annual Expenses (as a percentage of average account value)
Mortality and Expense Risk Charges............................................... 1.20%
Contract Administration Charge................................................... .15%
-----
Total Variable Account Annual Expenses........................................... 1.35%
</TABLE>
*Also referred to as a "Surrender Charge." See "Surrender Charge."
PORTFOLIO EXPENSES
The estimated expenses of each of the VIT Portfolios and each of the SAT
Portfolios shown below are assessed at the underlying Portfolio level and are
not direct charges against the assets of the Sub-Accounts or reductions from
Contract Value, although such charges are borne indirectly by Contract Owners.
Actual Portfolio expenses are taken into consideration in computing the net
asset value of each Portfolio, which is the price used to calculate the Variable
Account Value. However, under agreements (the "SPONSOR AGREEMENTS") with the VI
Trust and the SA Trust, Touchstone Advisors, Inc., as sponsor of the two trusts
(the "SPONSOR"), has agreed to reimburse each Portfolio for those annual
operating expenses of the Portfolio exceeding a specified percentage (the
"EXPENSE CAP")
3
<PAGE>
of the Portfolio's average daily net assets. For additional information
regarding the Sponsor Agreements, see "Sponsor." Operating expenses for this
purpose include fees of the Advisor, fees of the Administrator, amortization of
organizational expenses, legal and accounting fees and Sponsor fees, but do not
include interest, taxes, brokerage commissions and other portfolio transaction
expenses, capital expenditures and extraordinary expenses. For purposes of this
table, the column headed "Total Estimated Expenses" shows the Expense Cap for
each Portfolio (I.E., the maximum expenses that the Portfolio will bear after
reimbursement by the Sponsor pursuant to the applicable Sponsor Agreement). The
column headed "Other Estimated Expenses" shows the total expenses for each
Portfolio less the relevant advisory fee.
<TABLE>
<CAPTION>
OTHER TOTAL
ADVISOR ESTIMATED ESTIMATED
VIT PORTFOLIOS FEES (1) EXPENSES (1) EXPENSES (2)
- ------------------------------------------------------------------ ---------- ------------ ------------
<S> <C> <C> <C>
Emerging Growth................................................... 0.80% 0.35% 1.15%
International Equity.............................................. 0.95% 0.30% 1.25%
Balanced.......................................................... 0.70% 0.20% 0.90%
Income Opportunity................................................ 0.65% 0.20% 0.85%
Standby Income.................................................... 0.25% 0.25% 0.50%
<CAPTION>
SAT PORTFOLIOS
- ------------------------------------------------------------------
<S> <C> <C> <C>
Growth & Income................................................... 0.75% 0.10% 0.85%
Bond.............................................................. 0.55% 0.20% 0.75%
</TABLE>
- ------------------------
(1) Fees and expenses in the table are expressed as a percentage of average
daily net assets.
(2) A Sponsor Agreement may be terminated by the Sponsor as to any Portfolio, as
of the end of any calendar quarter after December 31, 1995, by giving at
least 30 days prior written notice, and will be terminated if the Sponsor
ceases to be the investment advisor for the Portfolio. If a Sponsor
Agreement is terminated, actual Portfolio expenses may exceed those shown in
the table. For more information regarding each Portfolio's expenses, see
"Expenses of the VIT Portfolios and SAT Portfolios; Expense Caps" herein,
the VI Trust Prospectus, and the Statement of Additional Information
(available on request from the Touchstone Variable Annuity Service Center).
EXAMPLE
The following charts depict the expenses that would be incurred under the
Contract assuming a $1,000 investment in each Sub-Account and a 5% annual return
on that investment. Portfolio expenses have been estimated at the Expense Cap
for each Portfolio. THE DOLLAR FIGURES IN EACH CHART ARE ILLUSTRATIVE ONLY AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The effect of the Contract
Maintenance Charge is calculated by expressing it as a percentage of the average
Contract Value, which is assumed, for this purpose only, to be $25,000. Premium
taxes currently are imposed by certain states and municipalities on Purchase
Payments made under the Contracts. Premium taxes are not reflected in the
samples below; where applicable, such taxes may decrease the amount of each
Purchase Payment available for allocation.
4
<PAGE>
An Owner surrendering a Contract at the end of the applicable time period
would pay the following aggregate Contract and Portfolio expenses on a $1,000
investment in each Sub-Account, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 3
YEAR YEARS
--- ---
<S> <C> <C>
Emerging Growth............................................. $97 $137
International Equity........................................ $98 $140
Balanced.................................................... $94 $129
Income Opportunity.......................................... $94 $128
Standby Income.............................................. $90 $117
Growth & Income............................................. $94 $128
Bond........................................................ $93 $125
</TABLE>
An Owner annuitizing a Contract (with a minimum 5 year payout) at the end of
the applicable time period would pay the following aggregate Contract and
Portfolio expenses on the same investment:
<TABLE>
<CAPTION>
1 3
YEAR YEARS
--- ---
<S> <C> <C>
Emerging Growth............................................. $97 $83
International Equity........................................ $98 $86
Balanced.................................................... $94 $75
Income Opportunity.......................................... $94 $74
Standby Income.............................................. $90 $63
Growth & Income............................................. $94 $74
Bond........................................................ $93 $71
</TABLE>
An Owner who does not surrender a Contract at the end of the applicable time
period would pay the following aggregate Contract and Portfolio expenses on the
same investment:
<TABLE>
<CAPTION>
1 3
YEAR YEARS
--- ---
<S> <C> <C>
Emerging Growth............................................. $27 $83
International Equity........................................ $28 $86
Balanced.................................................... $24 $75
Income Opportunity.......................................... $24 $74
Standby Income.............................................. $20 $63
Growth & Income............................................. $24 $74
Bond........................................................ $23 $71
</TABLE>
SUMMARY OF THE CONTRACT
GENERAL
The purpose of the Contract is to permit an Owner to accumulate funds on a
tax-deferred basis by investing in one or more alternatives, and to permit the
Owner or the Owner's designee to receive annuity income payments starting on the
Income Date. An Owner may invest in one or more of seven Sub-Accounts of the
Variable Account and in the Company's Fixed Account. Each Sub-Account will, in
turn, invest solely in one of seven Portfolios, five of which are Portfolios of
the VI Trust and two of which are Portfolios of the SA Trust. Each Trust is an
open-end diversified management investment company. The VI Trust is organized as
a Massachusetts business trust and the
5
<PAGE>
SA Trust is organized as a New York trust. For further information regarding
these two trusts, see "The VI Trust and the SA Trust." An investment in the
Fixed Account will be held and managed by the Company through its general
account. See "The Fixed Account."
The Variable Account is a separate account of the Company. Its assets are
segregated from other assets of the Company. Owners bear the investment risk
with respect to the Sub-Accounts which they select, and there is no guarantee
that amounts invested by the Owner in the Sub-Accounts will increase or retain
their value. See "The Variable Account." The Company guarantees that amounts
allocated by an Owner to the Fixed Account will earn interest at a rate
determined periodically by the Company and in effect at the time of each
investment. See "The Fixed Account."
MINIMUM AND MAXIMUM INVESTMENTS
A Contract may be purchased on a Non-Qualified basis or on a Qualified basis
as part of a plan which qualifies for favorable federal income tax treatment
under Sections 401, 403(b) or 408 of the Code. The initial Purchase Payment must
be at least $2,000 for Non-Qualified Contracts and $1,000 for Qualified
Contracts. Each subsequent payment must be at least $100. If payments are made
under an automatic or scheduled installment plan, the minimums may be satisfied
by purchase payments made on an annualized basis of not less than $600. The
cumulative total of all Purchase Payments under a Contract may not exceed
$500,000 without the prior consent of the Company. See "Purchase Of A Contract."
VARIABLE ANNUITY SERVICE CENTER
Investments in or withdrawals from a Contract, transfers of amounts to or
from the Variable Account and other directions with respect to the investment of
Purchase Payments should be directed to the Company at the Touchstone Variable
Annuity Service Center, P.O. Box 419707, Kansas City, Missouri 64179-0849 (the
"TOUCHSTONE VARIABLE ANNUITY SERVICE CENTER").
TEN-DAY FREE LOOK
To be sure that the Owner is satisfied with the Contract, the Owner has a
ten-day "FREE LOOK." Within ten days of the date the Contract is received by the
Owner, it may be returned to the Company at the Touchstone Variable Annuity
Service Center. If the Contract is received by the Company within such time, the
Company will void the Contract, and the Contract Value, plus any amount deducted
from the initial Purchase Payment prior to allocation to the Sub-Accounts or the
Fixed Account, will then be refunded in full unless otherwise required by state
or federal law. See "Free Look Privilege."
INVESTMENT OPTIONS
Purchase Payments will be invested by the Company, in the proportions that
the Owner directs, in the Fixed Account and the Sub-Accounts. See "Allocation of
Purchase Payments." The Variable Account currently has seven Sub-Accounts, each
of which invests exclusively in one of the VIT Portfolios or one of the SAT
Portfolios. The VIT Portfolios are Emerging Growth, International Equity,
Balanced, Income Opportunity and Standby Income. The SAT Portfolios are Growth &
Income and Bond. Information regarding the investment options presented by the
VIT Portfolios and the SAT Portfolios is set forth under the caption "The VI
Trust and the SA Trust" herein. More detailed information regarding the SAT
Portfolios will be found under the caption "Investment Objectives, Policies and
Restrictions" in this Prospectus. Detailed information regarding the VIT
Portfolios will be found in the VI Trust Prospectus. Owners may transfer funds
between Sub-Accounts once every thirty days. Transfers from the Variable
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Account to the Fixed Account may be made once during any Contract Year.
Transfers from the Fixed Account to the Variable Account also may be made once
during any Contract Year; such transfers are permitted up to a maximum of 25% of
the Fixed Account Value. See "Transfers."
PURCHASE PAYMENTS
The Owner may elect to allocate Purchase Payments to the Sub-Accounts or the
Fixed Account or any combination of these alternatives. Purchase Payments will
be processed by the Company on the day received at the Touchstone Variable
Annuity Service Center, if received in good order no later than 3:00 p.m.
Central Time on any Valuation Date. Payments received in good order later in the
day, or on any day not a Valuation Date, will be processed on the next Valuation
Date. Purchases by the Sub-Accounts of shares of the corresponding VIT
Portfolios or of interests in the corresponding SAT Portfolio will be made on
the next Valuation Date following processing, at the value of the corresponding
Portfolio on the date of processing. As the value of the investments in the Sub-
Accounts increases or decreases, the Variable Account Value increases or
decreases. See "Allocation of Purchase Payments."
WITHDRAWAL; SURRENDER
Prior to the Income Date, the Owner may withdraw all or part of the Contract
Value. A withdrawal of all of the Contract Value is a "SURRENDER." During the
first seven years following the receipt of a Purchase Payment, such withdrawals
generally will be subject to a Surrender Charge. See "Surrender Charge." This
charge is 7% of the amount of any Purchase Payment withdrawn less than two years
following receipt and decreases over time, reducing to zero after the seventh
year from the receipt of a Purchase Payment. The minimum partial withdrawal is
$250, and the Contract Value following any partial withdrawal must be at least
$2,000. Where permitted by applicable law, the Company will waive the Surrender
Charge if the Annuitant is confined to a long term health care facility or
hospital for at least 30 days prior to surrender, and reserves the right to
waive the Surrender Charge in certain other circumstances. See "Surrenders and
Partial Withdrawals" and "Surrender Charge." Certain withdrawals may be subject
to an additional tax on premature distributions as well as to federal income
tax. See "Federal Income Taxation."
INCOME OPTIONS
The Contract offers four fixed annuity income options, unless otherwise
limited by applicable state insurance laws. Income may be paid in installments,
either for a fixed period of one to 30 years or in a fixed amount. Income also
may be paid under one of two life income alternatives. Other payout plans may be
selected with prior approval of the Company. If no income option is selected by
the Owner, the Contract provides for a monthly annuity payment, beginning on the
Income Date if the Annuitant is then living, payable for life with ten years
certain. See "Selection of Annuity Income Options." If the Annuitant dies after
the Income Date, the amount and manner of any continuing payments will depend
upon the income option selected.
BENEFIT UPON DEATH
If the Annuitant dies before the Income Date, the Company will pay a Death
Benefit to the Beneficiary selected by the Owner. See "Death Benefit."
CHARGES
The Company does not deduct a sales charge from Purchase Payments made for
Contracts. However, if any part of the Contract Value is withdrawn, the Company
will, with certain exceptions, deduct from the Owner's Contract Value a
Surrender Charge not to exceed 7% of the lesser of (i) the total of all purchase
payments made
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within 84 months prior to the date of the request to surrender, and (ii) the
amount surrendered. This charge, when applicable, is imposed to permit the
Company to recover sales expenses that have been incurred by the Company. See
"Surrenders and Partial Withdrawals" and "Surrender Charge."
In addition, on each Contract Anniversary (or upon surrender) the Company
will deduct an annual Contract Maintenance Charge of $35 from the Contract
Value. The Company also will deduct on a daily basis a Contract Administration
Charge equal to an annual rate of 0.15% of the Variable Account Value. These
charges are to reimburse the Company for administrative expenses related to the
issue and maintenance of the Contract. The Company does not expect to recover
from these charges an amount in excess of accumulated administrative expenses.
See "Administrative Charges."
The Company deducts on a daily basis a Mortality Risk Charge equal to an
annual rate of 0.80% of the Variable Account Value for mortality risk assumed by
the Company. The Company also deducts on a daily basis an Expense Risk Charge
equal to an annual rate of 0.40% of the Variable Account Value as compensation
for the Company's risk in agreeing not to increase administrative charges on the
Contracts regardless of actual administrative costs. See "Mortality and Expense
Risk Charge."
Premium taxes payable to any governmental entity will be charged against the
Contracts. See "Premium Taxes" and "Other Taxes."
The Company may include as a component of the Net Investment Factor (see
"Accumulation Unit Value") a charge or credit for any taxes reserved, which are
determined by the Company to have resulted from the investment operations of any
Sub-Account. See "Allocation of Purchase Payments" and "Other Taxes."
The Portfolios of the VI Trust and of the SA Trust accrue management fees
and other expenses daily and pay them monthly. See "Expenses of VIT Portfolios
and SAT Portfolios; Expense Caps."
THIS SUMMARY IS INTENDED TO PROVIDE ONLY AN OVERVIEW OF THE MORE SIGNIFICANT
ASPECTS OF THE CONTRACT. DETAILED INFORMATION IS PROVIDED IN SUBSEQUENT SECTIONS
OF THIS PROSPECTUS AND IN THE CONTRACT. THE CONTRACT (INCLUDING ANY AMENDMENTS,
RIDERS AND ENDORSEMENTS) TOGETHER WITH THE APPLICATION FORM CONSTITUTES THE
ENTIRE AGREEMENT BETWEEN THE OWNER AND THE COMPANY AND SHOULD BE RETAINED BY THE
OWNER.
PERFORMANCE INFORMATION
GENERAL
The Variable Account may advertise certain performance information regarding
the Sub-Accounts from time to time. Such performance information will be based
upon historical performance and is not intended to predict future performance
under an actual Contract.
Average annual total return quotations represent the average compounded rate
of return on a hypothetical initial investment of $1,000. Average annual total
return reflects all historical investment results, less all charges and
deductions applied against a Sub-Account (including any Surrender Charge that
might apply if an Owner terminated the Contract at the end of the indicated
period, but excluding any deductions for premium taxes). The rate for each
Sub-Account is computed by comparing a hypothetical initial investment of $1,000
in the Sub-Account to the hypothetical Surrender Value of that investment at the
end of specifically defined 1, 5 and 10 year periods or for the life of the
Contract.
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Each Sub-Account also may advertise standardized yield performance, which is
a method of showing the rate of income that a Sub-Account earns as a percentage
of the value of the Sub-Account's Accumulation Units. Such yield is computed by
dividing the average daily net investment income per Accumulation Unit of the
Sub-Account earned during a specified 30-day base period, less any Contract
Maintenance Charge for that period, by the Accumulation Unit Value on the last
day of the same period, and then annualizing that result. The calculation takes
into account the average daily number of Accumulation Units outstanding in the
Sub-Account during the period and includes all applicable charges, expenses and
fees (except any Surrender Charge or any premium taxes due at annuitization).
It is important to note that yield and total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes in more detail the methods used to
determine yield and total return.
RATINGS; INDEXES
In reports or other communications to shareholders or in advertising
material, a Sub-Account may also quote non-standardized total return figures,
such as non-annualized figures (provided that these figures are accompanied by
standardized total return figures calculated as described above), as well as
compare its performance with that of other separate accounts as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of separate accounts. The performance
information also may include evaluations of the separate accounts published by
nationally recognized ranking services and by financial publications that are
nationally recognized.
Additional information regarding the calculation of performance information
appears in the Statement of Additional Information.
FACTS ABOUT THE COMPANY, THE VARIABLE ACCOUNT AND THE FIXED ACCOUNT
THE COMPANY
The Company is a stock life insurance company organized under the laws of
the State of Ohio on December 1, 1980. The Company is a wholly-owned subsidiary
of The Western and Southern Life Insurance Company, a mutual life insurance
company originally organized under the laws of the State of Ohio on February 23,
1888 ("WESTERN & SOUTHERN"). Both companies are in the business of issuing
insurance and annuity contracts. The executive offices of both companies are
located at 400 Broadway, Cincinnati, Ohio 45202 and their telephone number is
(513) 629-1800.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of the Company
established pursuant to Ohio law on July 27, 1992. It is used to support the
Contracts described in this Prospectus and for other purposes permitted by law.
The Variable Account is registered with the Securities and Exchange Commission
(the "SEC") as a unit investment trust under the Investment Company Act of 1940
(the "1940 ACT").
The Company owns the assets of the Variable Account. As required by law,
however, the assets of the Variable Account are kept separate from the Company's
general account assets and any other separate account assets and are held
exclusively for the benefit of Owners and Beneficiaries of the Contracts. These
assets may not be charged with liabilities from any other business which the
Company may conduct. The Company is obligated to pay all benefits provided under
the Contracts.
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Each Sub-Account of the Variable Account is administered and accounted for
as part of the general business of the Company; however, the income, capital
gains or capital losses of each Sub-Account are credited to or charged against
the assets held in that Sub-Account in accordance with the terms of each
Contract without regard to the income, capital gains or capital losses of any
other Sub-Account or arising out of any other business of the Company.
Each Sub-Account invests either in a Portfolio of the VI Trust or in a
Portfolio of the SA Trust. The VI Trust is a Massachusetts business trust and
the SA Trust is a New York trust. Each Trust is registered as an open-end
management investment company under the 1940 Act. The Portfolios are described
generally below. Owners periodically may transfer funds between Sub-Accounts or
change allocations among Sub-Accounts. See "Transfers."
THE VI TRUST AND THE SA TRUST
The Variable Account consists of seven Sub-Accounts, each of which invests
exclusively in one of the VIT Portfolios or in one of the SAT Portfolios. The
investment objective of each Sub-Account is the same as the corresponding
Portfolio, each of which is described briefly below. There is no assurance that
any Contract or Portfolio will meet its investment objective.
VIT PORTFOLIOS
EMERGING GROWTH PORTFOLIO has a primary investment objective of capital
appreciation with income as a secondary investment objective. The Portfolio
attempts to achieve its investment objective through investment primarily in the
common stock of smaller, rapidly growing companies.
INTERNATIONAL EQUITY PORTFOLIO has an investment objective of long term
capital appreciation through investment primarily in equity securities of
companies based outside the United States.
BALANCED PORTFOLIO has an investment objective of growth of capital and
income through investment in common stocks and fixed-income securities.
INCOME OPPORTUNITY PORTFOLIO has an investment objective of high current
income through investment in high yield, non-investment grade debt securities
(commonly known as "junk bonds") of both U.S. and non U.S. issuers and in
mortgage-related securities.
STANDBY INCOME PORTFOLIO has an investment objective of high current income
to the extent consistent with relative stability of principal which it attempts
to achieve through investment in short-term, investment grade debt securities.
SAT PORTFOLIOS
GROWTH & INCOME PORTFOLIO has an investment objective of long term capital
appreciation and dividend income through investment primarily in common stocks
of high quality companies.
BOND PORTFOLIO has an investment objective of providing a high level of
current income primarily through investment in investment grade bonds.
Several of the Portfolios invest in non-investment grade (or "junk") bonds,
which entail greater risk of untimely interest and principal payments, default
and price volatility than higher rated securities and may present
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problems of liquidity and valuation. The Income Opportunity Portfolio and the
International Equity Portfolio of the VI Trust, which are described in more
detail in the VI Trust Prospectus, may invest up to 100% and 35%, respectively,
of their total assets in non-investment grade bonds. See "Income Opportunity
Portfolio," "International Equity Portfolio" and "Medium and Lower Rated ("Junk
Bonds") and Unrated Securities" in the VI Trust Prospectus. The Growth & Income
Portfolio and Bond Portfolio of the SA Trust, which are described more fully in
Part II of this Prospectus, may invest up to 5% and 35%, respectively, of their
total assets in non-investment grade bonds. See "Growth & Income Portfolio,"
"Bond Portfolio" and "Medium and Lower Rated ("Junk Bonds") and Unrated
Securities." Such investments may not be appropriate for all investors.
Both the VI Trust and the SA Trust have entered into investment advisory
agreements with Touchstone Advisors, Inc. (the "ADVISOR"). The Advisor, in turn,
has entered into investment advisory agreements with separate investment
advisors selected for each Portfolio (the "PORTFOLIO ADVISORS"). It is the
responsibility of the Advisor to select the Portfolio Advisors, subject to the
review and approval of the trustees of the VI Trust or the SA Trust, as the case
may be, and to review the ongoing investment strategy of each Portfolio Advisor
and the performance of the Portfolios. Each of the Trusts has entered into an
agreement with Signature Financial Services, Inc. ("SIGNATURE" or the
"ADMINISTRATOR") pursuant to which Signature provides administrative and fund
accounting services for such Trusts. The Advisor employs, at its expense, the
services of RogersCasey Consulting, Inc. ("ROGERSCASEY"), a research firm
specializing in appraisal and comparison of investment managers, as a consultant
to assist in evaluating portfolio advisors. See "Consultant to the Advisor."
MORE COMPLETE INFORMATION ABOUT THE FIVE PORTFOLIOS OF THE VI TRUST,
INCLUDING THE ASSOCIATED RISKS, IS SET FORTH IN THE VI TRUST PROSPECTUS. SIMILAR
INFORMATION WITH RESPECT TO THE GROWTH & INCOME AND THE BOND PORTFOLIOS OF THE
SA TRUST IS CONTAINED IN PART II OF THIS PROSPECTUS. PROSPECTIVE PURCHASERS OF
CONTRACTS SHOULD READ THE VI TRUST PROSPECTUS AND PART II OF THIS PROSPECTUS IN
CONJUNCTION WITH THE INFORMATION REGARDING THE VARIABLE ACCOUNT CONTAINED
HEREIN.
ADDITIONS, DELETIONS AND SUBSTITUTIONS OF INVESTMENTS
The Company may from time to time make additional Sub-Accounts available.
These Sub-Accounts will invest in investment portfolios that the Company deems
suitable for the Contracts. The Company also has the right, upon approval of
affected Contract Owners or approval of the SEC, to substitute a new investment
portfolio or similar investment option for the Portfolio in which a Sub-Account
invests. A substitution may become necessary if, in the Company's judgment, the
Portfolio or other investment option no longer suits the purposes of the
Contracts. This may happen due to unsatisfactory investment performance, a
change in laws or regulations, a change in a Portfolio's investment objectives
or restrictions, because the Portfolio is no longer available for investment, or
for some other reason. The Company would obtain prior approval from the SEC to
the extent required and any other required approvals before making such a
substitution. The Company also reserves the right to eliminate Sub-Accounts from
the Variable Account or to combine two or more Sub-Accounts, and the right to
operate the Variable Account as a management investment company under the 1940
Act or any other form permitted by law or to deregister the Variable Account
under the 1940 Act in the event such registration no longer is required.
THE FIXED ACCOUNT
Due to exemptive and exclusionary provisions, interests in the Fixed Account
have not been registered under the Securities Act of 1933 (the "1933 ACT") and
the Company's general account has not been registered as an
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investment company under the 1940 Act. Accordingly, interests in the Fixed
Account are not subject to the provisions of those acts, and the Company has
been advised that the staff of the SEC has not reviewed the disclosures in this
Prospectus relating to the Fixed Account.
As noted earlier, a Contract Owner may allocate purchase payments or
transfer all or part of the Owner's Contract Value to the Fixed Account. Funds
allocated or transferred to the Fixed Account will not fluctuate with the
investment experience of the Company's general account. The Company guarantees
that the portion of an Owner's Contract Value that is held in the Fixed Account
will accrue interest at an effective annual rate of at least 3%. When a Purchase
Payment is received or an amount is transferred into the Fixed Account, an
interest rate will be assigned to that amount. That rate will be guaranteed by
the Company for one year from the receipt of the Purchase Payment or transferred
amount. At the end of that year, a new interest rate, which will be guaranteed
by the Company for at least one year, will be assigned to that Purchase Payment
or transferred amount and related earnings. Thereafter, interest rates assigned
to that amount and to subsequent Purchase Payments or to subsequent transferred
amounts allocated to the Fixed Account will be similarly guaranteed for
successive periods of at least one year. Therefore, different interest rates may
apply to different amounts in the Fixed Account depending upon when the amount
was initially allocated by the Owner, and the interest rate applicable to any
particular amount may vary over time. The interest rate credited to a Purchase
Payment or transferred amount by the Company may differ from the rate being
earned by the Company's general account and may differ from the interest rates
being credited to other funds in the general account, whether such funds were
received at the same time as the Purchase Payment or transferred amount or at a
different time. In no event will any interest rate credited be less than an
effective annual rate of 3%. The amount of an Owner's Fixed Account Value and
the amount of interest credited will be included in statements sent to Contract
Owners.
THE CONTRACT
PURCHASE OF A CONTRACT
The Company offers Contracts only in states in which it has received the
necessary regulatory approvals to do so. Contracts may be Qualified or
Non-Qualified. Qualified Contracts are accorded special federal income tax
treatment under the Code. Generally, Qualified Contracts may be purchased only
in connection with plans which qualify under Sections 401, 403(b) or 408 under
the Code. Qualified Contracts contain provisions restricting the timing and
amount of payments to and distributions from such Contracts. See "Federal Income
Taxation."
The purchase of a Non-Qualified Contract requires a minimum initial Purchase
Payment of $2000. The minimum initial Purchase Payment for a Qualified Contract
is $1000. Initial payments of $50 (or $600 annualized) are permitted if such
payments are made under an automatic or scheduled installment plan, such as
pre-authorized checking account deduction, salary deduction or electronic funds
transfer. If no Purchase Payments have been received for two full years and both
(a) the total Purchase Payments less any partial withdrawals and (b) the
Contract Value are less than $2,000, the Company requires that the deficiency be
paid within 14 days of notice to the Owner. If it is not paid, the Company may
terminate the Contract and pay the Surrender Value to the Owner. Subsequent
Purchase Payments under both types of Contracts must be at least $100 (at least
$50 if made under an automatic or scheduled installment plan), and may be made
at any time. The maximum cumulative total of all Purchase Payments under any
Contract may not exceed $500,000 without prior approval by the Company.
To purchase a Contract, the purchaser must submit the initial Purchase
Payment and the completed Application Form in good order to the Company at the
Touchstone Variable Annuity Service Center. The proposed
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Annuitant must be no older than 85 years old. The Contract becomes effective on
the Contract Date, which is stated on page 3 of the Contract, and generally is
the Valuation Date on which the initial Purchase Payment and the Application
Form are received in good order at the Touchstone Variable Annuity Service
Center. Any such receipt must be by 3:00 p.m. Central Time on a Valuation Date;
if later, the effective date of the Contract will be the following Valuation
Date. Purchase Payments will be allocated among the Sub-Accounts (and, if
applicable, the Fixed Account) according to the instructions of the Owner. See
"Allocation of Purchase Payments." If an incomplete Application Form is
received, the Company will request additional information to complete the
application. If the Application Form remains incomplete for five business days
after its receipt, the Company will return the initial Purchase Payment unless
the purchaser consents to a delay.
FREE LOOK PRIVILEGE
A Contract may be returned for a refund within 10 days after the Owner
receives it (the "FREE LOOK PERIOD"). If the Owner chooses not to retain the
Contract, it must be returned to the Company at the Touchstone Variable Annuity
Service Center within the free look period. In such circumstances, the Company
will cancel the Contract and refund promptly an amount that in most cases will
be equal to the Owner's Contract Value, plus any amount deducted from the
initial Purchase Payment prior to allocation to the Sub-Accounts or the Fixed
Account. The laws of certain states require the Company to return other amounts
to Owners pursuant to the free look privilege; in such states, such amounts will
be returned. Similarly, the laws of certain states require a free look period
longer than 10 days; Owners living in such states will have a free look period
conforming to applicable state law.
ALLOCATION OF PURCHASE PAYMENTS
Allocation of the initial Purchase Payment will be made according to the
instructions given by the Owner on the Application Form. Each allocation must be
in whole percentages of at least 5%, and the sum of the allocation percentages
must equal 100%. Absent written instructions from the Owner, subsequent Purchase
Payments will be allocated in the same manner as the most recent written
allocation, or the initial allocation, if unchanged. Contract Owners should
periodically review their allocations under the Contract in light of market
conditions and their own financial objectives.
For all Purchase Payments allocated to Sub-Accounts (other than the initial
such payment, which is allocated as of the Contract Date), Accumulation Units
will be credited at the Accumulation Unit Value calculated as of the close of
business on the Valuation Date such Purchase Payment is received in good order
by the Company at the Touchstone Variable Annuity Service Center if received
before 3:00 p.m. Central Time on such Valuation Date. For payments received
after such time, Accumulation Units will be credited at the Accumulation Unit
Value calculated as of the next following Valuation Date. The number of
Accumulation Units for each Sub-Account of the Variable Account is determined by
dividing the amount of the Purchase Payment allocated to the Sub-Account by the
Accumulation Unit Value for the Sub-Account as of the close of business on the
Valuation Date on which the Company is deemed to have received the Purchase
Payment. The Accumulation Unit Value for each Sub-Account was set arbitrarily at
$10 when the first Portfolio interest was purchased by the Sub-Account.
Thereafter, Accumulation Unit Value fluctuates from day to day depending upon
the investment performance of the Portfolio in which the Sub-Account is
invested.
ACCUMULATION UNIT VALUE
The following material describes the procedures used to calculate
Accumulation Unit Value for, respectively, the five Sub-Accounts (Emerging
Growth, International Equity, Balanced, Income Opportunity and Standby Income)
that invest in Portfolios of the VI Trust and the two Sub-Accounts (Growth &
Income and Bond) that
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invest in Portfolios of the SA Trust. The procedures do not produce different
results. Rather, they reflect different accounting treatment at the Portfolio
level, with interests in the VI Trust being calculated on a per share basis and
interests in the SA Trust being calculated on a percentage basis.
ACCUMULATION UNIT VALUE -- VIT SUB-ACCOUNTS
The value of an Accumulation Unit at the close of any Valuation Period is
determined for each Sub-Account that invests in an VIT Portfolio (a "VIT
SUB-ACCOUNT") by multiplying the Accumulation Unit Value of the Sub-Account at
the close of the immediately preceding Valuation Period by the "VIT NET
INVESTMENT FACTOR" (described below). Depending upon investment performance of
the Portfolio in which the Sub-Account is invested, the Accumulation Unit Value
may increase or decrease. Accordingly, the VIT Net Investment Factor may be
greater or less than one.
The VIT Net Investment Factor for each VIT Sub-Account, for any Valuation
Period, is determined by dividing (a) by (b) and subtracting (c) from the
result, where:
(a) is:
(1) the net asset value per share of the corresponding VIT Portfolio at
the end of the current Valuation Period, plus
(2) the per share amount of any dividend or capital gain distribution
made by the VIT Portfolio on shares held in the Sub-Account if the
"ex-dividend" date occurs during the current Valuation Period, plus
or minus
(3) a per share charge or credit for any taxes reserved, which are
determined by the Company to have
resulted from the investment operations of the Sub-Account during the
current Valuation Period; and
(b) is:
(1) the net asset value per share of the corresponding VIT Portfolio
determined at the end of the immediately preceding Valuation Period,
plus or minus
(2) a per share charge or credit for any taxes reserved for the
immediately preceding Valuation Period; and
(c) is a factor representing the charges deducted from the Sub-Account on a
daily basis for the daily portion of the annual Mortality and Expense
Risk Charge (1.20%) and the annual Contract Administration Charge
(0.15%).
ACCUMULATION UNIT VALUE -- GROWTH & INCOME AND BOND SUB-ACCOUNTS
The value of an Accumulation Unit at the close of any Valuation Period is
determined for the Growth & Income and Bond Sub-Accounts by multiplying the
Accumulation Unit Value at the close of the immediately preceding Valuation
Period by the "SAT NET INVESTMENT FACTOR" (described below). Depending upon
investment performance of the SAT Portfolio in which the Sub-Account is
invested, the Accumulation Unit Value may increase or decrease. Accordingly, the
SAT Net Investment Factor may be greater or less than one.
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The SAT Net Investment Factor for each of the Growth & Income and Bond
Sub-Accounts for any Valuation Period is equal to one plus the net result of (a)
divided by (b) where:
(a) is the accrued gain or loss in the Sub-Account for the Valuation Period,
including investment income, capital gains and losses, adjusted by:
(1) charging the Sub-Account a dollar amount representing the portion of
the annual Mortality and Expense Risk Charge (1.20%) and the annual
Contract Administration Charge (0.15%) that is allocable to the
Sub-Account for the Valuation Period, and
(2) charging or crediting the Sub-Account for any tax charge or tax
credit determined by the Company to have resulted from the investment
operations of the Sub-Account during the Valuation Period; and
(b) is the value of the Sub-Account as of the close of the immediately
preceding Valuation Period.
FIXED ACCOUNT VALUE
Fixed Account Value is calculated on a daily basis, and consists of (i) the
sum of all Purchase Payments allocated to the Fixed Account, plus (ii) any
Variable Account Value transferred to the Fixed Account, plus (iii) interest
credited by the Company to the Fixed Account, less (iv) any amounts transferred
from the Fixed Account to the Variable Account, less (v) any amounts withdrawn
for charges, deductions or surrenders (which includes Surrender Charges, if
any). See "The Fixed Account."
DOLLAR COST AVERAGING
A Contract Owner may direct the Company automatically to transfer specified
dollar amounts from the Fixed Account or from the Standby Income Sub-Account to
other Sub-Accounts on a monthly or quarterly basis. This automatic transfer is
known as Dollar Cost Averaging. Dollar Cost Averaging may be selected by a
Contract Owner for periods of between 12 and 36 months. The minimum Dollar Cost
Averaging transfer is $200, with a minimum allocation per Sub-Account of 5% of
the total amount transferred. The maximum amount that may be transferred from
the Fixed Account in any Contract Year is 25% of the Fixed Account Value at the
beginning of the Contract Year. Dollar Cost Averaging is available only if the
Contract Value is at least $10,000. All Dollar Cost Averaging transfers for all
Contracts will be made effective on the monthly or quarterly anniversary of the
Contract Date, at the election of the Owner. Contract Owners may elect to
participate in Dollar Cost Averaging by notifying the Company in writing. Forms
for this purpose are available from the Touchstone Variable Annuity Service
Center. Dollar Cost Averaging will terminate when any of the following occurs:
(1) the number of designated transfers has been completed; (2) the portion of
the Contract Value in the Fixed Account or in the Standby Income Sub-Account is
insufficient to complete the next scheduled transfer; (3) the Contract Owner
requests termination in writing; or (4) the Contract is terminated. There is no
charge at this time for Dollar Cost Averaging, but the Company reserves the
right to charge a fee for this service. The Company also reserves the right to
terminate Dollar Cost Averaging, on a prospective basis, upon 30 days' written
notice to Contract Owners.
TRANSFERS
Subject to the conditions described below, an Owner may transfer all or part
of the Contract Value among the Sub-Accounts and the Fixed Account.
The minimum transfer amount is $250. Transfers among Sub-Accounts other than
by Dollar Cost Averaging may be made once every thirty days, and not less than
5% of the total amount transferred can be directed to any
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other Sub-Account. An Owner may only transfer from one or more Sub-Accounts to
the Fixed Account once each Contract Year, and from the Fixed Account to one or
more Sub-Accounts once each Contract Year (except in the case of Dollar Cost
Averaging). When transferring from the Fixed Account, the amount of the transfer
(including Dollar Cost Averaging transfers) is limited to a maximum of 25% of
the Fixed Account Value as of the beginning of the Contract Year. The Company
currently imposes no charges for any such transfer, but reserves the right to
modify availability of and conditions for transfers at any time, including the
right to charge transfer fees.
The Company will effect transfers pursuant to proper written or telephone
instructions received at the Touchstone Variable Annuity Service Center which
clearly specify the requested changes. Requests received in good order by the
Company at the Touchstone Variable Annuity Service Center by 3:00 p.m. Central
Time on any Valuation Date will be effected that day; requests received after
that time will be effected on the next Valuation Date.
The Company will not honor telephone transfer instructions unless proper
authorization has been provided either (i) in the completed Application Form, or
(ii) in a properly completed telephone transfer authorization form. If the
proper authorization is on file at the Touchstone Variable Annuity Service
Center, requests for transfers may be made by calling 1-800-669-2796 between
8:00 a.m. and 3:00 p.m. Central Time on any Valuation Date. Such telephone
transfer request must include a precise identification of the Owner's Contract
and Social Security number. A personal identification number ("PIN") also may be
required. The Company will accept telephone requests for transfers from any
person presenting the required information and claiming to be the Owner. All or
part of any telephone conversation relating to transfer instructions may be
recorded by the Company without prior disclosure.
Telephone transfer instructions apply only to previously invested Purchase
Payments and may not be employed to change the investment allocation of future
Purchase Payments under the Contract. Allocation of future Purchase Payments can
be changed only by proper written request. See "Allocation of Purchase
Payments."
The Company will not be liable for following instructions received by
telephone that it reasonably believes to be genuine. The Company has established
certain procedures, some of which are described above, to confirm that telephone
instructions are genuine. If it does not follow reasonable procedures, it may be
liable for any losses due to unauthorized or fraudulent instructions.
The Company reserves the right to modify, suspend or discontinue the
telephone transfer privilege at any time and without prior notice.
SURRENDERS AND PARTIAL WITHDRAWALS
While the Contract is in force and prior to the Income Date or the death of
the Annuitant, the Company will, upon proper written notification by the Owner,
allow the Owner to surrender all, or withdraw part, of the Contract Value, less
any Surrender Charge. See "Surrender Charge." A withdrawal may not be less than
$250, and it may not reduce the Contract Value to less than $2,000.
Any amount withdrawn will result in the liquidation of Accumulation Units
from each applicable Sub-Account and liquidation of value from the Fixed Account
in the ratio that the value of each Sub-Account and the Fixed Account bears to
the total Contract Value. The Owner must specify in writing in advance which
Accumulation Units or value are to be liquidated if some other ratio is desired.
16
<PAGE>
All surrenders and partial withdrawals will be paid within seven days of
receipt of written notification, subject to postponement of either calculation
or payment, or both, for any of the following reasons:
(1) The New York Stock Exchange is closed other than for customary weekend
and holiday closings;
(2) Trading on the New York Stock Exchange is restricted;
(3) An emergency exists as a result of which disposal of securities is not
reasonably practicable or it is not reasonably practicable to fairly
determine the value of the net assets of the Variable Account;
(4) The SEC, by order, permits postponement of payments for the protection
of security holders; or
(5) The request for surrender or withdrawal is not made in writing.
Applicable regulations of the SEC shall determine whether the conditions
prescribed in (2) and (3) exist.
Payments resulting from surrenders or withdrawals from the Fixed Account may
be deferred for up to six months.
Since the Owner assumes the investment risk with respect to amounts held in
the Sub-Accounts and because certain surrenders and partial withdrawals are
subject to a Surrender Charge, the total amount paid upon surrenders and partial
withdrawals under the Contracts may be more or less than the Purchase Payments
made.
Certain tax penalties and restrictions may apply to surrenders and partial
withdrawals. For example, the Internal Revenue Service imposes a penalty tax
equal to 10% of the amount treated as taxable income on most surrenders and
partial withdrawals made from Contracts prior to the Contract Owner or the
Annuitant (as applicable) reaching age 59 1/2. See "Tax Treatment of Withdrawals
- -- Non-Qualified Contracts" and -- Qualified Contracts."
SYSTEMATIC WITHDRAWALS
A Contract Owner may elect to take systematic withdrawals by withdrawing a
specified dollar amount of at least $100 on a monthly, quarterly, semiannual or
annual basis. Systematic withdrawals will be accomplished by liquidating, on a
pro rata basis, Accumulation Units from all Sub-Accounts to which Contract Value
is allocated and value from the Fixed Account. Surrender Charges may apply to
such withdrawals. However, Accumulation Units representing income earned, if
any, on the Contract will be liquidated first to satisfy systematic withdrawals,
and no Surrender Charges will apply to liquidations of such Accumulation Units.
Surrender Charges will apply in the event of systematic withdrawals which
require liquidation of Accumulation Units representing Purchase Payments. See
"Surrender Charge." An Owner may discontinue systematic withdrawals at any time
by notifying the Company in writing. The Company reserves the right to
discontinue offering systematic withdrawals, on a prospective basis, upon 30
days' written notice to Contract Owners. The Company also reserves the right to
assess a processing fee for this service. Based upon the Company's present
costs, the Company does not expect that such fee would exceed $5.00 per
transaction.
The Internal Revenue Service imposes a penalty tax equal to 10% of the
amount treated as taxable income on most surrenders and partial withdrawals made
from Contracts prior to the Contract Owner or the Annuitant (as applicable)
reaching age 59 1/2. See "Tax Treatment of Withdrawals -- Non-Qualified
Contracts" and -- Qualified Contracts."
17
<PAGE>
SELECTION OF ANNUITY INCOME OPTIONS
INCOME DATE SELECTION
For a Non-Qualified Contract, the Income Date is the later of the Contract
Anniversary on or following the Annuitant's 80th birthday and the 10th Contract
Anniversary, unless otherwise indicated on Page 3 of the Contract. The Income
Date can be changed to any date by written request to the Company, if such
written request is received at least 31 days prior to the scheduled Income Date.
The Income Date for a Qualified Contract with issue age less than 70 is the
Contract Anniversary on or before April 1 of the year following the year in
which the Annuitant reaches age 70 1/2, unless otherwise indicated by the Owner.
The Income Date for any Qualified Contract with issue age greater than age 69 is
the 10th Contract Anniversary, unless otherwise indicated by the Owner. Special
rules apply to the selection of Income Dates for Qualified Contracts. See "Tax
Treatment of Withdrawals -- Qualified Contracts."
ANNUITY PAYOUT PLANS
The Owner may apply the Surrender Value less any applicable premium tax
under any one of the annuity payout plans specified in the Contract and
described below. A change of annuity payout plan is permitted prior to the
Income Date upon 31 days' prior written notice to the Company. In the absence of
an election, annuity payments will be made in accordance with Life Income Plan
A, described below, with monthly payments guaranteed for ten years. Annuity
payments will be made monthly (or, if requested, quarterly, semiannually or
annually) except that: (i) proceeds of less than $1,000 shall be paid in a
single sum and (ii) the Company may change the frequency of payment to avoid
periodic payments of less than $50.
The annuity payout plans currently available under the Contract are as
follows, unless limited in some jurisdictions by applicable state insurance
laws:
Installment Income Plans
A. Fixed period -- Paid in equal monthly payments for the number of
years selected, but not more than 30 years.
B. Fixed Amount -- Paid in equal monthly installments of $5 or more for
each $1,000 applied until the full amount, with compound interest at
not less than 3% a year, is used up.
Life Income Plans
A. One Life -- Paid in equal monthly payments during the lifetime of
the Annuitant. The Company guarantees payments for either 10 years or
20 years, and for as long as the Annuitant lives. The amount of the
monthly payment is based on the Annuitant's sex and age on the date
of the first payment and on the number of years for which payments
are guaranteed. Payments may not be commuted.
B. Joint and Survivor -- Paid in equal monthly payments during the
lifetimes of the Annuitant and another designated person. Payments
will continue as long as either person is living. The amount of each
payment is based on both persons' sex and age on the date of the
first payment. If either one dies before the due date of the first
payment, the Company will make payments during the survivor's
lifetime under Life Income Plan A, with payments guaranteed for 10
years. Payments may not be commuted.
Under a Qualified Contract, the Owner must make an affirmative election
before the Company makes any annuity payments.
18
<PAGE>
DEATH BENEFIT
If the Annuitant dies before the Income Date, the Company will pay a death
benefit to the Beneficiary designated by the Owner (the "DEATH BENEFIT"). The
Death Benefit will be calculated as of the Valuation Date on which satisfactory
proof of death and Death Benefit payout instructions are received in good order
by the Company (the "BENEFIT DETERMINATION DATE"). If the Annuitant dies prior
to the first day of the calendar month after the Annuitant's 80th birthday, the
Death Benefit will equal the greatest of (1) the Contract Value on the Benefit
Determination Date, (2) the sum of all Purchase Payments less any amounts
withdrawn (which include any Surrender Charge thereon) and, (3) if the Annuitant
dies after the seventh Contract Anniversary, the Contract Value on the most
recent septennial Contract Anniversary (i.e., years 7, 14, 21, etc.), plus any
Purchase Payments made since such Contract Anniversary and less any amounts
withdrawn since that Contract Anniversary.
If the Annuitant dies on or after the first day of the calendar month after
the Annuitant's 80th birthday (but before the Income Date), the Death Benefit
will equal the Contract Value on the Benefit Determination Date. If the Company
does not receive Death Benefit payout instructions within 60 days of receipt of
satisfactory proof of death, it reserves the right to make payment of the Death
Benefit in a lump sum.
No Surrender Charge is made in connection with the payment of a Death
Benefit.
If the Annuitant dies after the Income Date, the benefits, if any, remaining
to be paid will depend upon the annuity payout plan in effect. See "Annuity
Payout Plans."
CHARGES
All charges under the Contract are described below.
PREMIUM TAXES
Certain states or other governmental entities impose premium taxes, with
rates that range up to as much as 3.5% of the Purchase Payment. Some states
assess the tax at the time Purchase Payments are made, and others assess at the
time annuity payments begin. The Company will pay the premium tax at the time
imposed by applicable law. The Company reserves the right to deduct for the tax,
however, at the time the tax is paid, at the time the Contract is surrendered or
amounts are withdrawn, when the Death Benefit is paid or when the annuity
payments begin.
OTHER TAXES
The Company reserves the right to deduct the amount of certain taxes (other
than premium taxes) that it may have to pay. See "Federal Income Tax
Information."
ADMINISTRATIVE CHARGES
The Company incurs costs in establishing and maintaining the Contracts, and
in maintaining records and systems and issuing reports to Owners. The
administrative charges discussed below have been established at the levels
indicated to reimburse the Company for its expected actual costs of
administering the Contracts over time.
19
<PAGE>
CONTRACT MAINTENANCE CHARGE
On each Contract Anniversary before the Income Date, an annual maintenance
charge is deducted from the Contract Value to cover such costs. The maintenance
charge is also deducted on any date not a Contract Anniversary on which the
Owner fully surrenders the Contract, or on the Income Date. The contract
maintenance charge for the first ten Contract Years is $35. After the tenth
Contract Anniversary the charge is the lesser of (a) $35 and (b) 0.17% of the
Contract Value. This charge will be deducted by liquidating on a pro-rata basis
Accumulation Units from all Sub-Accounts to which Contract Value is allocated
and value from the Fixed Account. Due to certain state insurance law
requirements, the contract maintenance charge may be reduced or eliminated in
such states.
CONTRACT ADMINISTRATION CHARGE
On each Valuation Date, the Company deducts from the Accumulation Unit Value
a charge equal to a percentage of such value that is the daily equivalent of an
effective annual rate of .15%. This charge is assessed only against the
Sub-Accounts of the Variable Account and is not imposed against the portion, if
any, of the Contract Value allocated to the Fixed Account.
MORTALITY AND EXPENSE RISK CHARGE
As compensation for its assumption of mortality and expense risks, the
Company deducts from the Accumulation Unit Value a charge equal to a percentage
of such value that is the daily equivalent of an effective annual rate of 1.20%.
This charge is not imposed against any portion of the Contract Value allocated
to the Fixed Account. The Company bears a "MORTALITY RISK" because the Company
is taking the risk that its actuarial estimate of mortality rates may prove
inaccurate. This would result if the Annuitant lives longer than expected, or if
the Annuitant dies prior to the Income Date at a time when the Death Benefit
guaranteed by the Company is higher than the Contract Value. The Company bears
an "EXPENSE RISK" because the costs of issuing and administering Contracts may
be greater than expected when setting the administrative charges. Of the 1.20%
total charge, 0.80% is for assuming the mortality risk and 0.40% is for assuming
the expense risk. The Company may realize a gain from the charge for these risks
to the extent that the charge is not needed to provide for benefits and expenses
under the Contracts.
If the Surrender Charge is insufficient to cover the distribution expenses
of the Contracts, the deficiency will be met from the Company's general account,
including amounts derived from the Mortality and Expense Risk Charge.
SURRENDER CHARGE
SURRENDERS AND WITHDRAWALS. Since no deduction for a sales charge is made
from the Purchase Payments, a Surrender Charge is imposed on certain surrenders
and partial withdrawals to cover expenses relating to the promotion, sale and
distribution of the Contracts. The Surrender Charge is assessed on each Purchase
Payment (except for certain "free" amounts described below) from which amounts
are being withdrawn and is based upon the number of years since the Purchase
Payment was received. For purposes of computing the Surrender Charge, amounts
will be deemed to be withdrawn from Purchase Payments first, and in the order
they were received, before any amounts in excess of Purchase Payments are
withdrawn from the Contract Value. To the extent permitted by applicable law, no
Surrender Charge shall be assessed (i) at the death of the Annuitant, or (ii)
if, at the time of withdrawal, the Annuitant has been confined to a long-term
health care facility or hospital for at least 30 days.
20
<PAGE>
The Surrender Charge applies to Purchase Payments (except for certain "free"
amounts described below) as follows:
<TABLE>
<CAPTION>
SURRENDER CHARGE AS
COMPLETED YEARS PERCENTAGE OF
FROM DATE OF AMOUNT OF PURCHASE
PURCHASE PAYMENT PAYMENT WITHDRAWN
- ---------------- ---------------------------
<S> <C>
less than 1 7%
1 7%
2 6%
3 5%
4 4%
5 2%
6 1%
7 and later 0%
</TABLE>
The Company reserves the right to reduce or eliminate the Surrender Charge
when Contracts are sold to a trustee, employer or similar entity pursuant to a
retirement plan or when Contracts are otherwise sold to a group such that the
Company saves sales expenses. Whether the Surrender Charge will be reduced or
eliminated depends upon a number of factors, including the size of the group,
the total amount of Purchase Payments received from the group and the manner in
which they are made, the type of plan involved, the type of individuals that
participate in the plan, the costs to the Company of distribution and other
circumstances, all as evaluated at the sole discretion of the Company. In no
event will reduction or elimination of the Surrender Charge be permitted where
such reduction or elimination will unfairly discriminate against any person or
where prohibited by state law.
ANNUITIZATION. A Surrender Charge is also imposed if annuity payments begin
during the first seven Contract Years. However, if the Contract Owner elects an
Income Date that is at least two years after the Contract Date and selects a
payout plan with at least five years of level payments, the Surrender Charge
will be waived. If the Owner later (but within seven years after the Contract
Date) elects, where permitted, to take the commuted value of the remaining
payments, a Surrender Charge will be imposed at the rates shown in the above
table, calculated as of the date of commutation.
"FREE" AMOUNTS. Any Purchase Payment received more than seven years prior
to the withdrawal (less any amounts previously withdrawn) may be withdrawn free
of any Surrender Charge. In addition, for any Purchase Payment that has been in
the Contract for at least one year and less than seven years, the Owner may
withdraw up to 10% of the Purchase Payment (to the extent not already withdrawn)
without a Surrender Charge. This free withdrawal privilege is non-cumulative and
is available each Contract Year for amounts of eligible Purchase Payments not
already withdrawn. Free withdrawal amounts are deemed withdrawn on a first-in,
first-out basis; that is, withdrawals are deemed to come from the oldest
Purchase Payments first.
EXPENSES OF VIT PORTFOLIOS AND SAT PORTFOLIOS; EXPENSE CAPS
Each VIT Portfolio and each SAT Portfolio incurs various operating expenses.
For the VIT Portfolios these expenses are more fully described in the prospectus
for the VIT Portfolios. For the Growth & Income and Bond Portfolios, they are
described in Part II of this Prospectus. All such expenses are borne indirectly
by Owners in that they reduce the net asset value of the Portfolios.
21
<PAGE>
Under Sponsor Agreements with the VI Trust and the SA Trust, the Sponsor has
agreed to reimburse each Portfolio for the amounts by which total operating
expenses, on an annual basis, exceed the following percentages of the average
daily net assets of the various Portfolios:
<TABLE>
<CAPTION>
VI TRUST
- ---------------------------------------------------------------------------------------
<S> <C>
Emerging Growth Portfolio.............................................................. 1.15%
International Equity Portfolio......................................................... 1.25%
Balanced Portfolio..................................................................... 0.90%
Income Opportunity Portfolio........................................................... 0.85%
Standby Income Portfolio............................................................... 0.50%
<CAPTION>
SA TRUST
- ---------------------------------------------------------------------------------------
<S> <C>
Growth & Income Portfolio.............................................................. 0.85%
Bond Portfolio......................................................................... 0.75%
</TABLE>
Operating expenses, for purposes of expense reimbursement, include fees of
the Advisor, fees of the Administrator, amortization of organizational expenses,
legal and accounting fees and Sponsor fees, but do not include interest, taxes,
brokerage commissions and other portfolio transaction expenses, capital
expenditures and extraordinary expenses. The Sponsor Agreements may be
terminated by the Sponsor as of the end of any calendar quarter after December
31, 1995 upon not less than 30 days prior written notice. The Sponsor's
agreement to reimburse a Portfolio also terminates as to a Portfolio if the
Sponsor ceases to be the investment advisor to that Portfolio. See "Sponsor."
OTHER INFORMATION
DISTRIBUTION OF THE CONTRACTS
Contracts are distributed through Touchstone Securities, Inc. (the
"DISTRIBUTOR"), which is a wholly-owned subsidiary of IFS Financial Services,
Inc. ("IFS"), in turn a wholly-owned subsidiary of the Company. The principal
business address of the Distributor is 318 Broadway, Cincinnati, Ohio 45202. The
Distributor will pay sales commissions to those individuals or entities who sell
the Contracts. Commissions may be calculated as a percentage of the Purchase
Payments received or as a trail commission that is determined as a percentage of
the Contract Value. In addition, under certain circumstances the Distributor may
pay production bonuses which take into account, among other things, the total
Purchase Payments that have been made under Contracts associated with the
broker-dealer. Additional payments may be made for other services not directly
related to the sale of the Contracts. These expenses are not passed on to the
Owner of the Contract except to the extent absorbed by any Mortality and Expense
Risk Charges or by Surrender Charges on Purchase Payments withdrawn during the
first seven years following their receipt. See "Surrender Charge" and "Mortality
and Expense Risk Charge."
REPORTS TO CONTRACT OWNERS
Prior to the Income Date, a confirmation of each Purchase Payment and
certain other transactions, such as transfers and partial withdrawals, will be
sent to the Owner.
At least once in each Contract Year prior to the Income Date, each Owner
will be sent a report that includes a statement of the Variable Account Value
and the Fixed Account Value as of a date not more than four months prior to the
mailing date of such report. Each Owner whose Contract Value is measured in any
part by Accumulation
22
<PAGE>
Units in the Variable Account also will receive semiannual reports containing
financial statements for the Variable Account. At least one such report in each
year will be accompanied by a list of portfolio securities of each of the
Portfolios underlying the Sub-Accounts and any other information required by
applicable law or regulation.
ADJUSTMENT OF UNITS AND VALUES
The Company reserves the right to change the number and value of the
Accumulation Units credited to any Contract, without the consent of the Owner or
any other person, provided strict equity is preserved and the change does not
otherwise affect the benefits, provisions or investment return of the Contract.
VOTING RIGHTS
Prior to the Income Date the Company will vote shares of each VIT Portfolio
and the interest in each SAT Portfolio owned by the Variable Account according
to instructions received from Owners whose Contract Value includes Accumulation
Units in the Variable Account. However, if the 1940 Act or any related
regulations or interpretations should change and the Company decides it may be
permitted to vote shares (or interests) of the Portfolios in its own right, it
may do so.
Persons entitled to give voting instructions will be determined as of the
record date for meetings of shareholders of any or all of the Portfolios. Prior
to the Income Date, the Owner has the right to direct the vote by the Company at
such meetings of that portion of the shares of any VIT Portfolio (or interest in
any SAT Portfolio) held in the Sub-Account that is attributable to the Owner's
Contract.
The Company calculates that portion of the shares (interest, in the case of
the SA Trust) in the Portfolio that the Owner may direct the Company to vote by
applying the Owner's percentage interest, if any, in a particular Sub-Account to
the total number of shares (interest, in the case of the SA Trust) attributable
to such Sub-Account as of the record date. Fractional votes will be counted. The
Company reserves the right to modify the manner in which it calculates the
weight given to voting instructions where such change is necessary to comply
with then-current federal regulations or interpretations of those regulations.
The Company will determine 90 days or less before the applicable meeting the
number of shares in each VIT Portfolio (or, in the case of the SA Trust, the
portion of the interest in each SAT Portfolio) that each Contract Owner can
instruct the Company to vote. At least 14 days before such meeting, the Company
will mail such person materials enabling him or her to instruct the Company how
to vote.
If voting instructions are not received from an Owner, the Company will vote
the shares of the VI Trust (or interest in the SAT Portfolio) attributable to
such Owner in the same proportion as the voting instructions which are received
from other Contract Owners. The Company also will vote shares or interest it
holds in the Sub-Accounts that are not attributable to Contract Owners in the
same manner. Under certain circumstances, the Company may be required by state
regulatory authorities to disregard voting instructions. This could happen if
such instructions would change the sub-classification or investment objectives
of the Portfolios, or result in approval or disapproval of an investment
advisory contract.
Under federal regulations, the Company also may disregard instructions to
vote for Owner-initiated changes in investment policies or the investment
advisor if the Company disapproves of the proposed changes. The Company would
disapprove of a proposed change only if it were contrary to state law,
prohibited by state regulatory authorities or if the Company concluded that the
change would result in overspeculative or unsound investment practices. If the
Company disregards voting instructions, it will include a summary of its actions
in the next report to Contract Owners.
23
<PAGE>
SUBSTITUTED SECURITIES
Shares of the VIT Portfolios or interests in the SAT Portfolios may not
always be available for purchase by the Sub-Accounts of the Variable Account, or
the Company may decide that further investment in any such shares or interest or
in any such Portfolios is no longer appropriate in view of the purposes of the
Variable Account. In either event, shares of or an interest in another open-end
investment company or unit investment trust may be substituted both for the
Portfolio shares or interest already purchased by the corresponding Sub-Accounts
and/or as the security to be purchased in the future, provided that these
substitutions have been approved by the Securities and Exchange Commission. In
the event of any substitution pursuant to this provision, the Company may make
an appropriate endorsement to the Contract to reflect the substitution.
OTHER CONTRACT PROVISIONS
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Annuitant is misstated to the Company, the Company
will change any benefits under the Contract to those which the proceeds would
have purchased had the correct age and sex been stated. If the misstatement is
not discovered until after annuity payments have started, any overpayments will
be charged, with compound interest, against subsequent payments. Any amount the
Company owes as the result of underpayments will be paid, with compound
interest, in a lump sum.
ASSIGNMENT
An Owner may assign a Non-Qualified Contract in writing, but may not assign
a Qualified Contract except as may be allowed under applicable law. The Company
will not be bound by any assignment until written notice of the assignment is
received and recorded at the Touchstone Variable Annuity Service Center. The
rights of the Owner and any Beneficiary will be affected by an assignment, and
the Company disclaims any responsibility for the validity or tax consequences of
any assignment.
LOANS
Loans are permitted only under Qualified Contracts purchased in connection
with a plan established under Section 403(b) of the Code. Loans are not
permitted under any other type of Contract.
NO DIVIDENDS
The Contracts are "non-participating." That means that they do not provide
for dividends. Investment results under the Contracts are reflected in benefits.
FEDERAL INCOME TAX INFORMATION
PROSPECTIVE OWNERS SHOULD CONSULT THEIR OWN TAX ADVISORS PRIOR TO PURCHASING
A CONTRACT.
THE FOLLOWING DISCUSSION IS NOT INTENDED AND SHOULD NOT BE RELIED UPON AS
TAX ADVICE, BUT MERELY AS A SYNOPSIS OF CERTAIN FEDERAL INCOME TAX LAWS.
ALTHOUGH THE FOLLOWING DISCUSSION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
FEDERAL INCOME TAX LAWS AS CURRENTLY INTERPRETED, THERE IS NO GUARANTEE THAT
THOSE LAWS AND INTERPRETATIONS WILL NOT CHANGE. THE DISCUSSION DOES NOT TAKE
INTO ACCOUNT STATE OR LOCAL TAX LAWS WHICH MAY AFFECT THE PURCHASE OF A CONTRACT
OR THE BENEFITS PAID OUT UNDER A CONTRACT, AND DOES NOT CONSIDER FEDERAL ESTATE
AND GIFT TAXES AND STATE AND LOCAL ESTATE, INHERITANCE AND OTHER SIMILAR TAXES
WHICH WILL DEPEND UPON THE INDIVIDUAL SITUATION OF EACH OWNER OR BENEFICIARY.
24
<PAGE>
QUALIFICATION AS AN "ANNUITY CONTRACT"
The following discussion is based upon the Company's assumption that the
Contract will be treated as an "annuity contract" under the Code. The Company
does not guarantee the tax status of any Contract. A purchaser bears the
complete risk that the Contract may not be treated as an "annuity contract"
under federal income tax laws. Disqualification of the Contract as an annuity
contract generally would result in imposition of federal income tax to the Owner
with respect to yearly earnings allocable to the Contract prior to the receipt
of payments under the Contract.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of all variable annuity contracts. The Code generally provides
that a variable contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("TREASURY DEPARTMENT"), adequately diversified. The Code contains a safe harbor
provision which provides that variable contracts such as the Contracts meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards prescribed elsewhere in the Code for
an entity to be classified as a regulated investment company and no more than
fifty-five percent (55%) of the total assets consist of cash, cash items, U.S.
government securities and securities of other regulated investment companies.
In March 1989, the Treasury Department issued regulations (Treas. Reg.
Section1.817-5), which established diversification requirements for the
investment portfolios such as the Portfolios underlying variable contracts such
as the Contracts. The regulations amplify the diversification requirements for
variable contracts set forth in the Code and provide an alternative to the safe
harbor provision described in Section 817(h) of the Code. Under the Regulations,
an investment portfolio will be deemed adequately diversified if: (1) no more
than 55% of the value of the total assets of the investment portfolio is
represented by any one investment; (2) no more than 70% of the value of the
total assets of the investment portfolio is represented by any two investments;
(3) no more than 80% of the value of the total assets of the investment
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the investment portfolio is represented by any
four investments.
The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States Government
agency or instrumentality shall be treated as a separate issuer."
The Variable Account, through each of the VIT Portfolios and each of the SAT
Portfolios, intends to comply with the diversification requirements of the Code
and the regulations. The Advisor has agreed to manage the Portfolios so as to
comply with such requirements.
EXCESSIVE CONTROL
The Treasury Department has from time to time suggested that guidelines may
be forthcoming under which a variable annuity contract will not be treated as an
annuity contract for tax purposes if the owner of the contract has excessive
control over the investments underlying the contract (I.E., by being able to
transfer values among Sub-Accounts with only limited restrictions). If a
variable contract is not treated as an annuity contract, the owner of such
contract would be considered the owner of the assets of a separate account, and
income and gains from that account would be included each year in the owner's
gross income. No such guidelines have been issued to date.
25
<PAGE>
The issuance of such guidelines, or regulations or rulings dealing with
excessive control issues, might require the Company to impose limitations on an
Owner's right to transfer all or part of the Contract Value among the Sub-
Accounts and the Fixed Account or to make other changes in the Contract as
necessary to attempt to prevent an Owner from being considered the owner of any
assets of the Variable Account. The Company therefore reserves the right to make
such changes. It is not known whether any such guidelines, regulations or
rulings, if adopted, would have retroactive effect.
REQUIRED DISTRIBUTIONS
Additionally, in order to qualify as an annuity contract under the Code, a
Non-Qualified Contract must meet certain requirements regarding distributions in
the event of the death of the Owner. In general, if the Owner dies before the
entire value of the Contract is distributed, the remaining value of the Contract
must be distributed according to provisions of the Code. Upon the death of an
Owner prior to commencement of annuity payments, the amounts accumulated under a
Contract must be distributed within five years, or, if distributions to a
designated beneficiary within the meaning of Section 72 of the Code (a
"DESIGNATED BENEFICIARY") begin within one year of the Owner's death,
distributions are permitted over a period not extending beyond the life (or life
expectancy) of the designated beneficiary. The above rules are modified if the
designated beneficiary is the surviving spouse. The surviving spouse is not
required to take distributions from the Contract and may continue the Contract
as if the surviving spouse was the original Owner. If distributions have begun
prior to the death of the Owner, distributions must continue at least as rapidly
as under the method in effect at the date of the Owner's death (unless the
method in effect provides that payments cease at the death of the Owner).
For Qualified Contracts issued in connection with tax-qualified plans and
individual retirement annuities, the plan documents and rules will determine
mandatory distribution rules. However, under the Code, distributions generally
must commence no later than April 1 of the calendar year following the calendar
year in which the employee reaches age 70 1/2 and such distributions must be
made over a period that does not exceed the life expectancy of the employee or
the joint and last survivor life expectancy of the employee and a designated
beneficiary. A special rule for Contracts issued and qualified under Code
Section 403(b) (but not other Qualified Plans) may permit persons employed by
certain governmental or church employers to defer distributions until April 1 of
the calendar year after the calendar year in which they retire or reach age
70 1/2, whichever is later. A penalty tax of 50% is imposed on any amount by
which the required minimum distribution in any year exceeds the amount actually
distributed.
If the Contract is a Qualified Contract issued in connection with an
individual retirement annuity, the Company will send a notice to the Owner when
the Owner reaches age 70 1/2. The notice will summarize the required minimum
distribution rules and advise the Owner of the date that such distributions must
begin from the Qualified Contract or other individual retirement annuities of
the Owner. The Owner has sole responsibility for requesting distributions under
the Qualified Contract or other individual retirement annuities that will
satisfy the minimum distribution rules.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year period to the same contract owner by one company
or its affiliates are treated as one annuity contract for purposes of
determining the tax consequences of any distribution. Such treatment may result
in adverse tax consequences, including accelerated taxation of the gain deemed
distributed from such combination of contracts. Owners should consult a tax
advisor prior to purchasing more than one non-qualified annuity contract in any
calendar year period.
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FEDERAL INCOME TAXATION
GENERAL
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Variable Account is not a separate entity from the
Company and its operations form a part of the Company.
Section 72 of the Code governs taxation of annuities in general. Except as
described below for Owners who are not natural persons, an Owner is not taxed on
increases in the value of a Contract. Instead, an Owner is taxed only when
distribution occurs, either in the form of a lump sum payment or as annuity
payments under the payout plan selected. For a lump sum payment received as a
total surrender (total redemption), the recipient is taxed on the portion of the
payment that exceeds the cost basis of the Contract. For Non-Qualified
Contracts, this cost basis is generally the sum of the Purchase Payments, while
for a Qualified Contract there may be no cost basis in the Contract within the
meaning of Section 72 of the Code. The taxable portion of the lump sum payment
is taxed at ordinary income tax rates.
For annuity payments under the Contracts, a fixed portion of each payment is
excludable from gross income as a tax-free recovery of the Owner's Purchase
Payments (if any), and the balance is taxed at ordinary income tax rates. The
excludable portion can be determined by dividing (i) the Owner's Purchase
Payments (adjusted for any period-certain or refund guarantee), less any
withdrawals from those Purchase Payments, by (ii) the number of years over which
it is anticipated that the annuity will be paid. If annuity payments continue
beyond the anticipated number of years, such payments will be fully taxable.
Owners who are not natural persons generally must include in income any
increase in the excess of the Contract's Value over the "investment in the
contract" during the taxable year. As a result, Contracts used in connection
with unfunded deferred compensation plans of private employers (sometimes called
"top hat" plans) generally are currently subject to income tax on such increase
in value. There are some exceptions to this rule, including an exception for
Contracts owned by certain tax-qualified plans. A prospective Owner that is not
a natural person may wish to discuss availability of these exceptions with its
own tax advisor.
Annuity payments or other amounts received under all Contracts are subject
to income tax withholding under the Code unless the recipient elects not to have
taxes withheld. However, annuity payments to former employees under deferred
compensation plans pursuant to Section 457 of the Code are subject to tax
withholding as if such payments are wages. Amounts so withheld will vary among
recipients depending upon the tax status of the recipient and the type of
payment.
Owners, Annuitants and Beneficiaries under the Contracts should seek
financial advice about the tax consequences of any withdrawals or other
distributions.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult their tax advisors should they wish to assign their Contracts.
TAX TREATMENT OF WITHDRAWALS -- NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of all payments (including
withdrawals of Contract Value) from annuity contracts. Applied to a Contract, it
provides that if the Contract Value exceeds the aggregate Purchase Payments
made, any payment that is not received as an annuity payment will be treated as
coming first from earnings and then, only after the earnings portion is
exhausted, as coming from the principal. If the Contract
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contains investments in the Contract made prior to August 14, 1982, special
taxation rules apply to such withdrawals and related earnings. These special
rules provide that any amount withdrawn that is not received as an annuity
payment will be treated as coming first from principal and then, only after the
principal portion is exhausted, as coming from earnings. Withdrawn earnings are
includable in gross income.
Section 72 further provides that a ten percent (10%) penalty will apply to
the income portion of amounts received other than: (a) on or after the date the
taxpayer reaches age 59 1/2; (b) on or after the death of the Contract Owner;
(c) if the taxpayer is totally disabled (as defined in Section 72(m)(7) of the
Code); (d) in a series of substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy) of the taxpayer or
for the joint lives (or joint life expectancies) of the taxpayer and the joint
annuitant; (e) under an immediate annuity; or (f) amounts attributable to
investment in the Contract prior to August 14, 1982.
The above paragraph does not apply to Qualified Contracts. However, separate
withdrawal restrictions and tax penalties and restrictions may apply to such
Qualified Contracts. See "Tax Treatment of Withdrawals -- Qualified Contracts."
QUALIFIED CONTRACTS AND QUALIFIED PLANS
The Qualified Contracts offered by this Prospectus are designed to be
suitable for use under various types of plans which qualify for favorable
federal income tax treatment under Sections 401, 403(b) or 408 of the Code
("QUALIFIED PLANS"). Because of the minimum purchase payment requirements, such
Contracts may not be appropriate for some retirement plans. Taxation of
participants in each Qualified Plan varies with the type of plan and terms and
conditions of each specific plan.
Owners, Annuitants and Beneficiaries are cautioned that benefits under a
Qualified Plan usually are subject to the terms and conditions of such plan
regardless of the terms and conditions of Qualified Contracts issued pursuant to
such plan. Although the Company provides administration for Qualified Contracts,
it does not provide administrative support for Qualified Plans. Qualified
Contracts may include special provisions restricting Contract provisions that
may otherwise be available and described in this Prospectus. Generally,
Qualified Contracts issued pursuant to Qualified Plans are not transferable
except upon surrender or annuitization. Various penalty and excise taxes may
apply to contributions or distributions made in violation of applicable
limitations. Furthermore, certain withdrawal penalties and restrictions may
apply to surrenders from Qualified Contracts. See "Tax Treatment of Withdrawals
- -- Qualified Contracts."
On July 8, 1983, the Supreme Court decided in ARIZONA GOVERNING COMMITTEE V.
NORRIS that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. Accordingly, Contracts sold by the Company in
connection with Qualified Plans (excluding individual retirement annuities) will
utilize annuity tables which do not differentiate on the basis of sex.
The following are general descriptions of the types of Qualified Plans with
which the Qualified Contracts may be used. Such descriptions are not exhaustive
and are for general informational purposes only. The tax rules regarding
Qualified Plans are complex and will have differing applications depending on
individual facts and circumstances. Each purchaser should obtain tax advice
prior to purchasing a Contract issued under a Qualified Plan.
SECTION 401 QUALIFIED PENSION OR PROFIT-SHARING PLANS
Section 401 of the Code permits self-employed individuals to establish
various types of Qualified Plans for themselves and their employees, commonly
referred to as "H.R. 10" or "Keogh" plans. Section 401 of the Code also
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permits corporate employers to establish various types of Qualified Plans for
employees. These retirement plans may permit the purchase of the Contracts to
provide benefits under the plans. Permissible contributions to such plans for
the benefit of such persons will not be includable in the gross income of such
persons until distributed from the plans.
The tax consequences to participants may vary depending upon the particular
plan design. However, the Code places limitations and restrictions on all such
plans including on such items as: amounts of allowable contributions; form,
manner and timing of distributions; vesting and nonforfeitability of interests;
nondiscrimination in eligibility and participation; and the tax treatment of
distributions, withdrawals and surrenders. See "Tax Treatment of Withdrawals --
Qualified Contracts."
SECTION 403(B) PLANS
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includable in the gross income of
employees until the employees receive distributions from the Contracts. The
amount of contributions to a tax-sheltered annuity is limited to certain
maximums imposed by the Code. Contributions also must comply with
nondiscrimination rules, which may further limit contributions for highly
compensated employees. Furthermore, the Code sets forth additional restrictions
governing such items as transferability, distributions and withdrawals. See "Tax
Treatment of Withdrawals -- Qualified Contracts."
Section 403(b) Plans are qualified employer plans covered under Section
72(p) of the Code. Under the Contract, an Owner may, subject to certain
requirements, receive loans from a Contract that is issued as a 403(b) tax
sheltered annuity beginning 30 days after date of issue.
The Contract provides for loans conforming to the specific terms set forth
in the Contract and Code Section 72(p). In general, the maximum amount and other
terms and conditions of loans from a Contract are determined as though the
Contract was a qualified plan covered under Title I of ERISA. Among other
things, the Contract specifically requires that each such loan must be a minimum
of $1,000 and that the maximum term for repayment of loans (other than
residential purchase loans) is 5 years, at an interest rate comparable to that
charged by commercial lenders for similar loans. Residential purchase loans may
be repaid over a 15-year period.
A Contract cannot be surrendered or annuitized while a Contract loan is
outstanding, unless the Contract Value can be reduced by the outstanding loan
balance plus interest and such reduction satisfies Section 403(b)(11) of the
Code, which places limitations on premature distributions of contributions that
are salary reduction amounts and earnings thereon.
INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which may be deductible from the individual's gross income. Tax-deductible
contributions to individual retirement annuities under Section 408(b) of the
Code are limited to the lesser of $2,000 or 100% of compensation for individuals
who (i) are not (and whose spouses are not) active participants in another tax-
qualified retirement plan, (ii) are active participants in another such plan but
are unmarried and have adjusted gross incomes of $25,000 or less or (iii) are
active participants (or have spouses who are active participants) in another
tax-qualified retirement plan but are married and have adjusted gross incomes of
$40,000 or less.
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Such individuals also may establish an IRA for a spouse who does not work
outside the home and receives no compensation during the tax year. Individuals
who are active participants in other retirement plans and whose adjusted gross
income exceeds the above limits by less than $10,000 are entitled to make
deductible contributions in proportionately reduced amounts. An individual may
make nondeductible contributions to the extent of the excess of (i) the lesser
of $2,000 ($2,250 for a spousal individual retirement annuity) or 100% of
compensation over (ii) the deduction limit with respect to the individual.
Under certain conditions, distributions from other individual retirement
accounts, individual retirement annuities or Qualified Plans may be rolled over
or transferred to an IRA on a tax-deferred basis. IRAs are subject to
limitations on eligibility, contributions, transferability and distributions.
See "Tax Treatment of Withdrawals -- Qualified Contracts." Sales of Contracts
for use with IRAs are subject to special requirements imposed by the Code,
including the requirement that certain informational disclosure be given to
persons desiring to establish an IRA. Purchasers of Contracts to be qualified as
Individual Retirement Annuities should obtain tax advice as to the tax treatment
and suitability of such an investment.
SIMPLIFIED EMPLOYEE PENSION PLANS
Employers may establish what is known as a simplified employee pension plan
("SEP") under Section 408(k) of the Code. Employer contributions to a SEP can be
invested in an individual retirement annuity selected by a participant in the
SEP. Contributions generally must be made as a uniform percentage of employee
compensation and are excluded from gross income of the employee for federal
income tax purposes. Employer contributions to a SEP cannot exceed the lesser of
$30,000 or 15% of an employee's eligible compensation (which may not exceed
$150,000 for the year 1995, indexed to reflect certain cost-of-living changes
for 1996 and later years). The Code also permits employees of certain small
employers to have SEP contributions made on the basis of salary reduction. Such
salary reduction contributions may not exceed $9,240, indexed for inflation.
The tax consequences to participants may vary depending upon the particular
plan design. However, the Code places limitations and restrictions on all such
plans including on such items as: amounts of allowable contributions; form,
manner and timing of distributions; vesting and nonforfeitability of interests;
nondiscrimination in eligibility and participation, and the tax treatment of
distributions, withdrawals and surrenders. See "Tax Treatment of Withdrawals --
Qualified Contracts."
SECTION 457 -- DEFERRED COMPENSATION PLANS
Under Section 457 of the Code, governmental and certain other tax exempt
employers may establish deferred compensation plans for the benefit of their
employees which may invest in annuity contracts. Under such plans, contributions
made for the benefit of the employees will not be includable in the employees'
gross income until distributed from the Plan. If the program is considered an
"eligible deferred compensation plan" under the Code, an individual generally
may contribute, on a tax-deferred basis, the lesser of $7,500 or 33 1/3% of
gross income from the employer, reduced by contributions to any Section 403(b)
plan. Amounts so deferred may be used by the employer to purchase Contracts
pursuant to this Prospectus.
Under a Section 457 plan, all the plan assets, including any Contract, must
remain solely the property of the employer subject only to the claims of the
employer's general creditors until such time as made available to the
participant or beneficiary. The employee has no present rights or vested
interest in the Contract and is entitled to payment only under the terms of the
plan. Distributions from such plans generally are not permitted prior to
termination of employment except in cases of unforeseeable emergencies.
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TAX TREATMENT OF WITHDRAWALS -- QUALIFIED CONTRACTS
The following discussion applies to Qualified Plans other than IRAs.
Distributions from Qualified Contracts purchased under Qualified Plans (but
not from IRAs) that are "eligible rollover distributions" are subject to certain
"direct rollover" and federal income tax withholding rules. The Qualified Plan
is required to give the Contract Owner, Annuitant or Beneficiary (as applicable)
the choice of having payments that are eligible rollover distributions paid
either as (a) a "direct rollover" to an individual retirement account or an
individual retirement annuity (an "INDIVIDUAL RETIREMENT ARRANGEMENT") or to
another Qualified Plan, or (b) a payment to the Contract Owner, Annuitant or
Beneficiary. Nonspouse Beneficiaries cannot elect direct rollovers. If a direct
rollover is chosen, the payment will be made directly to the individual
retirement arrangement or other Qualified Plan, and will not be taxed in the
year the direct rollover is made, but will be taxed later when it is taken out
of the individual retirement arrangement or other Qualified Plan. If a payment
to the Contract Owner, Annuitant or Beneficiary is chosen, he or she will
receive only 80% of the payment because the Qualified Plan administrator is
required to withhold 20% of the payment and send it to the Internal Revenue
Service to be credited against federal income taxes. Also, the Contract Owner,
Annuitant or Beneficiary will be taxed on the payment for the year it is made
unless he or she rolls it over to an individual retirement arrangement or
another Qualified Plan within 60 days of receiving the payment. Nonspouse
Beneficiaries cannot make such rollovers. If the Contract Owner, Annuitant or
Beneficiary wants to roll over 100% of a payment, he or she must find other
funds to replace the 20% that was withheld. Distributions are not "eligible
rollover contributions" and cannot be paid as a direct rollover if they
represent the return of "after-tax" employee contributions, are made for a
period of ten years or more, are required minimum payments made after age 70 1/2
or are made for certain other reasons. The administrator of the Qualified Plan
will provide additional information about these tax rules when a distribution is
made.
Distributions from Qualified Contracts purchased under Qualified Plans that
are not rolled over to an individual retirement arrangement or another Qualified
Plan are taxable as ordinary income, except to the extent allocable to an
employee's after-tax contributions. If an employee or the Beneficiary receives
from an exempt employees' trust a "lump sum distribution" under the Code, the
taxable portion of the distribution may be subject to special tax treatment. For
most individuals receiving lump sum distributions after age 59 1/2, the tax rate
may be determined under five-year income averaging provisions of the Code. Those
reaching age 50 on or before January 1, 1986 instead may elect to use a ten-year
income averaging. In addition, such individuals may elect capital gains
treatment for the taxable portion of a lump sum distribution attributable to
years of service before 1974.
Section 72(t) of the Code imposes a 10% penalty tax on the taxable portion
of any distribution from qualified retirement plans, including Contracts issued
and qualified under Code Sections 401, 403(b) and 408(b). To the extent amounts
are not includable in gross income because they have been properly rolled over
(as direct rollovers or as rollovers of other payments) to an individual
retirement arrangement or to another eligible Qualified Plan, no tax penalty
will be imposed. The tax penalty will not apply to the following distributions:
(a) distributions made on or after the date on which the Contract Owner or
Annuitant (as applicable) reaches age 59 1/2; (b) distributions following the
death or disability of the Contract Owner or Annuitant (as applicable)
(disability is defined in Section 72(m)(7) of the Code); (c) after separation
from service, distributions that are part of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the Contract Owner or Annuitant (as applicable) or the joint
lives (or joint life expectancies) of such Contract Owner or Annuitant (as
applicable) and the designated beneficiary; (d) distributions to a Contract
Owner or Annuitant (as applicable) who has separated from service after
attaining age 55; (e) distributions made to the Contract Owner or Annuitant (as
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applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Contract Owner or Annuitant (as
applicable) for amounts paid during the taxable year for medical care; and (f)
distributions made to an alternate payee pursuant to a qualified domestic
relations order.
Distributions from a Qualified Contract issued in connection with a
Qualified Plan or an IRA generally must commence by April 1 of the calendar year
after the calendar year in which the Contract Owner or Annuitant reaches age
70 1/2, and must be made in minimum annual amounts determined under rules issued
by the Internal Revenue Service. See "Required Distributions." However, in the
case of Contracts issued and qualified under Code Section 403(b), persons
employed by certain governmental or church employers may be able to postpone the
commencement of distributions until April 1 of the calendar year following the
calendar year in which they retire or reach age 70 1/2, whichever is later.
Other rules apply to a Qualified Contract issued in connection with a
Qualified Plan or an IRA to determine when and how required minimum
distributions must be made in the event of the death of the Contract Owner or
Annuitant. The plan or IRA documents will contain such rules. In addition, if
the Contract Owner's or Annuitant's surviving spouse is the beneficiary of the
interest in the Qualified Plan or the IRA, the surviving spouse may be able to
elect to defer the commencement of distributions past the commencement date that
otherwise would apply, to roll over a distribution to the surviving spouse's own
individual retirement arrangement or to treat an IRA as his or her own.
Under certain conditions, distributions from other IRAs and other Qualified
Plans may be rolled over or transferred on a tax-deferred basis into an IRA or
another Qualified Plan. Persons seeking to roll over distributions in such a
manner should obtain tax advice as to the limitations imposed by the Code on
such rollovers.
TAX-SHELTERED ANNUITIES -- WITHDRAWAL LIMITATIONS
Effective January 1, 1989, the Code limits the withdrawal of amounts
attributable to contributions made pursuant to a salary reduction agreement (as
defined in Section 403(b)(11) of the Code) to circumstances only: (1) when the
Owner attains age 59 1/2; (2) separates from service; (3) dies; (4) becomes
disabled (within the meaning of Section 72(m)(7) of the Code); or (5) in the
case of hardship. However, withdrawals for hardship are restricted to the
portion of the Owner's Contract Value which represents contributions by the
Owner and does not include any investment results. The limitations on
withdrawals apply only to salary reduction contributions made after December 31,
1988 and to income attributable to such contributions and to income attributable
to amounts held as of December 31, 1988. The limitations on withdrawals do not
affect rollovers between certain Qualified Plans. Owners should consult their
own tax counsel or other tax advisor regarding any distributions.
LEGAL PROCEEDINGS
There are no material legal proceedings, other than ordinary routine
litigation incidental to the businesses of the Company, the Variable Account,
the Distributor, the Advisor or IFS, to which any of these entities is a party
or to which any of their respective property is subject.
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PART II -- DISCUSSION OF SELECT ADVISORS PORTFOLIOS
SUMMARY
GENERAL
Select Advisors Portfolios (the "SA TRUST") is a diversified, open-end
management investment company which was organized as a trust under the laws of
the State of New York on February 7, 1994. The SA Trust includes seven separate
portfolios, two of which, the Growth & Income Portfolio and the Bond Portfolio
(sometimes herein called the "SAT PORTFOLIOS"), are discussed in this Part II.
Each of the SAT Portfolios has a different investment objective and different
policies and practices:
GROWTH & INCOME PORTFOLIO has an investment objective of long term capital
appreciation and dividend income through investment primarily in common
stocks of high quality companies.
BOND PORTFOLIO has an investment objective of providing a high level of
current income primarily through investment in investment grade bonds.
The Growth & Income Portfolio and Bond Portfolio of the SA Trust, which are
described in this Part II, may invest up to 5% and 35%, respectively, of their
total assets in non-investment grade bonds. See "Growth & Income Portfolio,"
"Bond Portfolio" and "Medium and Lower Rated ("Junk Bonds") and Unrated
Securities." For further information regarding the investment objectives,
policies and restrictions of each of the SAT Portfolios, see "Investment
Objectives, Policies and Restrictions."
RISKS
There are certain risks associated with the investment policies of each SAT
Portfolio. The value of a Sub-Account will fluctuate with the value of the
underlying securities in the corresponding SAT Portfolio in which all of the
Sub-Account's assets are invested. To the extent that a Portfolio invests in
income securities, the market value of those securities will be affected by
general changes in interest rates, which may result in either increases or
decreases in the value of those securities. To the extent that a Portfolio
invests in securities of non-U.S. issuers and foreign currencies, the Portfolio
may face risks that are different from those associated with investment in
domestic securities, including the effect of different economies, change in
relative currency exchange rates, future political and economic developments,
the possible imposition of exchange controls or other governmental confiscation
or restrictions, and less availability of data on companies and the securities
industry as well as less regulation of stock exchanges, brokers and issuers. For
additional information, see "Investment Objectives, Policies and Restrictions"
and "Risk Factors, Restrictions and Investment Techniques."
ADVISORS
Each SAT Portfolio is managed by one or more Portfolio Advisors selected by
the Board of Trustees of the SA Trust based on the recommendations of the
Advisor. The Advisor is paid advisory fees for the general management of the SAT
Portfolios. The Portfolio Advisors are paid fees by the Advisor to manage the
assets of each of the SAT Portfolios. See "Management of the Portfolios."
There can, of course, be no assurance that the investment objectives of the
SAT Portfolios can be achieved. Except for certain investment restrictions
designated as fundamental in this Prospectus or the Statement of Additional
Information, the investment objectives and policies of any SAT Portfolio may be
changed by the Trustees of the SA Trust without the approval of the investors in
the respective Portfolio.
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SUB-ACCOUNTS
Each Portfolio corresponds to a Sub-Account of the Variable Account. The
investment objectives of each Sub-Account are the same as the investment
objectives of its corresponding SAT Portfolio, and each Sub-Account invests the
funds it receives from Contract Owners only in an interest in the corresponding
SAT Portfolio.
Contract Owners electing to allocate a portion of their Purchase Payments to
the Variable Account acquire interests in the Sub-Account(s) which they select,
and do not invest directly in the corresponding SAT Portfolios. Instead,
Purchase Payments of Owners are allocated to the Sub-Accounts. Each Sub-Account,
in turn, holds an interest in the corresponding SAT Portfolio. See "Purchase
Payments." Similarly, Owners that surrender or make withdrawals from their
Contracts do not directly redeem interests in the Portfolios. See "Surrenders
and Partial Withdrawals."
Although Owners who allocate all or any portion of their Purchase Payments
to the various Sub-Accounts do not directly own interests in the SAT Portfolios
or the SA Trust, they do have voting rights in certain circumstances. If at any
time any Sub-Account is requested to vote on a matter regarding the
corresponding SAT Portfolio, the Company will solicit the directions of each
Owner who has allocated Contract Value to such Sub-Account and will cast the
votes of the Sub-Account in accordance with the directions received from such
Owners. See "Voting Rights."
OTHER INVESTORS
Owners should be aware that each SAT Portfolio receives investments from
other insurance company separate accounts. Owners should be aware that other
investors in an SAT Portfolio could control the results of voting on any matter
submitted to investors in that Portfolio. In certain instances, such as a change
in an SAT Portfolio's fundamental policies, it might be advisable for the
affected Sub-Account (subject to receipt of required approvals) to redeem its
investment in the Portfolio. Substantial redemptions could result in that
Portfolio effecting any such redemption by means of a distribution in kind of
Portfolio securities. Any such distribution in kind could adversely affect the
diversification and liquidity of the Sub-Accounts' investments. In addition, the
Sub-Account could incur brokerage and other transaction costs in order to
convert the resulting securities to cash.
As is true with many investments generally, investors in the SAT Portfolios
(including the Sub-Accounts) may be affected by the actions of other large or
controlling investors. For example, the decision of a large investor to redeem
its shares could result in higher operating expenses and a corresponding
reduction in return. Large redemptions could, as well, cause a Sub-Account's
holdings to become less diverse, resulting in increased risk.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
GROWTH & INCOME PORTFOLIO
The investment objective of the Portfolio is long term capital appreciation
and dividend income through investment primarily in a diversified portfolio of
common stocks of high quality companies that, in the Portfolio Advisor's
opinion, have above average growth potential at the time of purchase. In
general, these securities are characterized as having above average dividend
yields and below average price earnings ratios relative to the stock market in
general, as measured by the S&P 500. Other factors, such as earnings and
dividend growth prospects as well as industry outlook and market share, also are
considered. Under normal conditions, at least 80% of the Portfolio's assets will
be invested in common stocks and at least 65% of the Portfolio's assets will be
invested in common stocks that, at the time of investment, will be expected to
pay regular dividends.
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The Portfolio will generally invest a majority of its assets in common
stocks of issuers with total market capitalization of $1 billion or greater at
the time of purchase, but may invest in securities of companies having various
levels of market capitalization, including smaller companies whose securities
may be more volatile and less liquid than securities issued by larger companies
with higher levels of net worth. Investments will be in companies in various
industries.
The Portfolio may also invest up to 20% of its total assets in foreign
securities, including securities of foreign issuers in the form of ADRs. The
Portfolio may not invest more than 5% of its total assets in the securities of
companies based in an emerging market. See "Foreign Securities."
The Portfolio may invest under normal circumstances up to 20% of its total
assets in preferred stock, convertible bonds and other fixed income instruments
rated at least Baa by Moody's or BBB by S&P. The Portfolio may invest up to 5%
of its total assets in bonds rated below Baa by Moody's or BBB by S&P (commonly
known as "junk bonds"). See "Medium and Lower-Rated ("Junk Bonds") and Unrated
Securities."
BOND PORTFOLIO
The investment objective of the Portfolio is to provide high current income
primarily through investments in investment grade bonds. Investment grade bonds
are those rated at least Baa by Moody's or BBB by S&P or unrated bonds
considered by the Portfolio Advisor to be of comparable quality. Under normal
circumstances, at least 65% of the value of the Portfolio's total assets will be
invested in bonds or debentures (as described in the first sentence of the next
paragraph). The average maturity of the Portfolio will be between five and
fifteen years. The average maturity of the Portfolio's holdings may be shortened
in order to preserve capital if the Portfolio Advisor anticipates a rise in
interest rates. Conversely, the maturity may be lengthened to maximize returns
if interest rates are expected to decline.
This Portfolio invests in U.S. Treasury obligations, corporate bonds,
debentures, mortgage related securities issued by various governmental agencies,
such as GNMA and government related organizations, such as FNMA and FHLMC,
including collateralized mortgage obligations ("CMOs"), privately issued
mortgage related securities (including CMOs), stripped U.S. Government and
mortgage related securities, non-publicly registered securities, asset backed
securities and Eurodollar certificates of deposit and Eurodollar bonds. It will
also invest in preferred stock. No more than 60% of the Portfolio's total assets
will be invested in mortgage related securities. The Portfolio will not invest
in any bond rated lower than B by S&P or by Moody's. The Portfolio will invest
less than 35% of its assets in U.S. or foreign non-investment grade (or "junk")
bonds and preferred stock. High risk, lower quality debt securities are regarded
as predominantly speculative with respect to the issuer's ability to pay
interest and repay principal in accordance with the terms of the obligation. See
"Medium and Lower-Rated ("Junk Bonds") and Unrated Securities." Up to 20% of the
Portfolio's assets may be invested in fixed-income securities denominated in
foreign currencies. These foreign securities must meet the same rating and
quality standards as the Portfolio's U.S. dollar-denominated investments. See
"Foreign Securities."
SPECIAL INFORMATION CONCERNING HUB AND SPOKE-REGISTERED TRADEMARK-
The SA Trust is utilizing certain proprietary rights, know-how and financial
services referred to as Hub and Spoke-Registered Trademark- from Signature
Financial Group, Inc. ("SIGNATURE FINANCIAL"), of which the Administrator is a
wholly owned subsidiary. Hub and Spoke-Registered Trademark- is a registered
service mark of Signature Financial.
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The Growth & Income and Bond Sub-Accounts seek to achieve their investment
objectives by investing all of their respective assets in the corresponding SAT
Portfolio, each of which is a series of a separate registered investment company
with the same investment objectives as the Sub-Account. In addition to selling
an interest to the corresponding Sub-Account, each SAT Portfolio may sell
interests to other insurance company separate accounts. Such investors will
invest in an SAT Portfolio on the same terms and conditions and will pay a
proportionate share of that Portfolio's expenses. However, the other investors
investing in the SAT Portfolio are not required to sell their shares at the same
public offering price as the Sub-Account due to variations in sales commissions
and other operating expenses. Therefore, Owners investing in either the Bond or
Growth & Income Sub-Account should be aware that these differences may result in
differences in returns experienced by investors in the different investment
vehicles that invest in a Portfolio. Such differences in returns are also
present in other mutual fund structures. Information concerning other holders of
interests in an SAT Portfolio is available from the Distributor at (513)
684-1400.
The Hub and Spoke-Registered Trademark- structure has been developed
relatively recently, so shareholders should carefully consider this investment
approach.
The investment objective of an SAT Portfolio may also be changed without the
approval of the investors in the Portfolio, but not without written notice
thereof to the investors in the Portfolio (and notice by the corresponding
Sub-Account to its Owners) thirty days prior to implementing the change. If
there were a change in a Sub-Account's investment objective, Owners should
consider whether the Sub-Account remains an appropriate investment in light of
their then-current financial positions and needs. There can, of course, be no
assurance that the investment objective of any SAT Portfolio will be achieved.
Smaller investors in an SAT Portfolio may be materially affected by the
actions of larger investors in the Portfolio. For example, if a larger investor
withdraws from a Portfolio, the remaining investors may experience higher pro
rata operating expenses, thereby producing lower returns. Additionally, a
Portfolio may become less diverse, resulting in increased portfolio risk.
(However, this possibility exists as well for traditionally structured
investment vehicles which have large or institutional investors.) Also,
investors with a greater pro rata ownership in an SAT Portfolio could have
effective voting control of the operations of the Portfolio. Whenever a
Sub-Account is requested to vote on matters pertaining to the corresponding
Portfolio (other than a vote by the Sub-Account to continue the operation of the
Portfolio upon the withdrawal of another investor in the Portfolio), the Company
will hold a meeting of Owners investing in the Sub-Account and will cast all of
its votes in the same proportion as the votes of these Owners. Owners who do not
vote will not affect the Sub-Account's vote at the Portfolio meeting. The
percentage of a Sub-Account's votes representing Owners not voting will be voted
by the Company in the same proportion as the Sub-Account Owners who do, in fact,
vote. Certain changes in a Portfolio's investment objective, policies or
restrictions might cause a Sub-Account to withdraw its interest in an SAT
Portfolio. Any such withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the Portfolio). If
securities are distributed, a Sub-Account could incur brokerage, tax or other
charges in converting the securities to cash. In addition, the distribution in
kind may result in a less diversified portfolio of investments or adversely
affect the liquidity of a Sub-Account. Notwithstanding the above, there are
other means for meeting shareholder redemption requests, such as borrowing.
For more information about each Portfolio's policies, management and
expenses, see "Investment Objectives, Policies and Restrictions," "Management of
the Portfolios" and "Risk Factors, Restrictions and Investment Techniques." For
more information about each Portfolio's investment restrictions, see the
Statement of Additional Information.
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MANAGEMENT OF THE PORTFOLIOS
GENERAL
The business of the SA Trust is governed by a board of trustees (the
"TRUSTEES" or "BOARD OF TRUSTEES") who are elected by a vote of the investors in
the Portfolios. The Trustees exercise broad supervision over the affairs of the
SA Trust. They have retained the services of the Advisor, a subsidiary of IFS
(in turn a subsidiary of the Company) under terms of an investment advisory
agreement (the "ADVISORY AGREEMENT"), pursuant to which the Advisor has been
engaged as investment advisor to each of the SAT Portfolios. Under terms of the
Advisory Agreement it is the Advisor's responsibility to select, subject to
review and approval by the Trustees, one or more Portfolio Advisors. The Advisor
is responsible for the continuing evaluation, selection and monitoring of the
Portfolio Advisors. In this regard, the Advisor employs the services of
RogersCasey, a research firm specializing in appraisal and comparison of
investment advisers, to assist it in evaluating the Portfolio Advisors and
candidates for those positions. See "Consultant to the Advisor."
Each Portfolio Advisor has discretion, subject to oversight by the Trustees,
to purchase and sell portfolio assets, except as limited by each Portfolio's
investment objectives, policies and restrictions and by specific investment
strategies developed by the Advisor. See "Investment Objectives, Policies and
Restrictions" and "Risk Factors, Restrictions and Investment Techniques."
For its services, the Advisor receives an advisory fee from each SAT
Portfolio. See "Expenses." A part of the fee paid to the Advisor is used by the
Advisor to pay the advisory fees of the Portfolio Advisors. Such fees are paid
by the Advisor and not by the SAT Portfolio. Any Portfolio Advisor may waive any
or all of such fees. The allocation of the fees paid to the Advisor, showing the
amount received by the Advisor and the amounts paid by it to the two Portfolio
Advisors is set forth below. Such fees are computed daily and paid monthly at
the annual rate specified below of the value of the average daily net assets of
the SAT Portfolio:
<TABLE>
<CAPTION>
GROWTH & INCOME BOND PORTFOLIO
---------------- --------------
<S> <C> <C>
Advisor............................................................... 0.75% 0.55%
Portfolio Advisor..................................................... 0.45% 0.30%
</TABLE>
The Portfolio Advisor for the Growth & Income and Bond Portfolios is Fort
Washington Investment Advisors, Inc. ("FORT WASHINGTON"). See "Portfolio
Advisors," below. Because Fort Washington is a subsidiary of Western & Southern
and, hence, an affiliate of the Advisor, the Advisor is subject to a conflict of
interest when making decisions regarding the retention and compensation of that
particular Portfolio Advisor. However, the Advisor's decisions, including the
identity of a Portfolio Advisor and the specific amount of the Advisor's
compensation to be paid to the Portfolio Advisor, are subject to review and
approval by a majority of the Board of Trustees and separately by a majority of
such Trustees who are not affiliated with the Advisor or any of its affiliates.
CONSULTANT TO THE ADVISOR
RogersCasey, located at One Parklands Drive, Darien, Connecticut 06829, has
been engaged in the business of rendering portfolio advisor evaluations since
1976. The staff at RogersCasey is experienced in acting as investment
consultants and in developing, implementing and managing multiple portfolio
advisor programs. RogersCasey provides asset management consulting services to
various institutional and individual clients and provides the Advisor with
investment consulting services with respect to development, implementation and
management of the SA Trust's multiple portfolio manager program. RogersCasey is
employed by, and its fees and expenses are paid by, the Advisor (not the SA
Trust). As consultant, RogersCasey provides research concerning registered
investment
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advisors to be retained by the Advisor as Portfolio Advisors, monitors and
assists the Advisor with the periodic reevaluation of existing Portfolio
Advisors and makes periodic reports to the Advisor and the Board of Trustees of
the SA Trust.
PORTFOLIO ADVISORS
The following sets forth certain information about each of the Portfolio
Advisors. The individuals employed by the Portfolio Advisor who are primarily
responsible for the day-to-day investment management of the Portfolio are named
below. The annual total return information shown below includes the effect of
deducting each Portfolio's expenses, but does not include charges attributable
to the Contract. See "Fee and Expense Tables."
FORT WASHINGTON serves as the Portfolio Advisor to the Growth & Income
Portfolio. Fort Washington is a wholly-owned subsidiary of Western & Southern.
Fort Washington has been registered as an investment advisor under the
Investment Advisers Act of 1940, as amended, (the "ADVISORS ACT") since
September 14, 1990. Fort Washington provides investment advisory services to
individual and institutional clients. As of June 30, 1995, Fort Washington had
assets under management of approximately $6.8 billion. John J. O'Connor is
primarily responsible for the day-to-day investment management of the Growth &
Income Portfolio. Mr. O'Connor (CFA and CPA) joined Western & Southern/Fort
Washington in 1988 and is the Senior Portfolio Manager and Director of
Investment Research. Fort Washington's principal executive offices are located
at 550 East Fourth Street, Cincinnati, Ohio 45202.
Fort Washington also serves as Portfolio Advisor to the Bond Portfolio.
Roger M. Lanham and Rance Duke are the individuals primarily responsible for the
day-to-day investment management of the Bond Portfolio. Mr. Lanham is a CFA and
has been with Western & Southern/Fort Washington since 1981. Mr. Duke has been
with Western & Southern/Fort Washington since 1978.
EXPENSES
The SA Trust pays all of its expenses of operations, other than those borne
by the Advisor. In particular, the SA Trust pays: the compensation of its
Trustees who are not affiliated with the Advisor and its affiliates;
governmental fees; interest charges; taxes; membership dues in trade
associations; fees and expenses of independent auditors and legal counsel of the
SA Trust; insurance premiums; amortization of organizational expenses; and
expenses of calculating the net asset value and net income of each of the
Portfolios; expenses related to the execution, recording and settlement of
security transactions; fees and expenses of the custodian; expenses of preparing
and mailing reports to investors and to governmental officers and commissions;
expenses of meetings of investors; and the advisory fees payable to the Advisor
under the Advisory Agreement.
RISK FACTORS, RESTRICTIONS AND INVESTMENT TECHNIQUES
TECHNIQUES AND RISK FACTORS
The following are descriptions of certain types of securities invested in by
the SAT Portfolios, certain investment techniques employed by those Portfolios
and risks associated with utilizing either the securities or the investment
techniques.
DERIVATIVES. The Portfolios may invest in various instruments that are
commonly known as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on, or "derived" from, a traditional
security, asset, or market index. Some "derivatives" such as certain
mortgage-related and other asset-backed securities are in many respects like any
other investment, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
derivatives and many different ways to
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use them. There is a range of risks associated with those uses. Futures and
options are commonly used for traditional hedging purposes to attempt to protect
a fund from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. However, some
derivatives are used for leverage, which tends to magnify the effects of an
instrument's price changes as market conditions change. Leverage involves the
use of a small amount of money to control a large amount of financial assets,
and can in some circumstances, lead to significant losses. A Portfolio Advisor
will use derivatives only in circumstances where the Portfolio Advisor believes
they offer the most economic means of improving the risk/reward profile of the
Portfolio. Derivatives will not be used to increase portfolio risk above the
level that could be achieved using only traditional investment securities or to
acquire exposure to changes in the value of assets or indexes that by themselves
would not be purchased for the Portfolio. The use of derivatives for non-hedging
purposes may be considered speculative. A description of the derivatives that
the Portfolios may use and some of their associated risks is found below.
FOREIGN SECURITIES
Investing in securities issued by foreign companies and governments involves
considerations and potential risks not typically associated with investing in
obligations issued by the U.S. government and domestic corporations. Less
information may be available about foreign companies than about domestic
companies and foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic companies. The values of
foreign investments are affected by changes in currency rates or exchange
control regulations, restrictions or prohibitions on the repatriation of foreign
currencies, application of foreign tax laws, including withholding taxes,
changes in governmental administration or economic or monetary policy (in the
United States or abroad) or changed circumstances in dealings between nations.
Costs are also incurred in connection with conversions between various
currencies. In addition, foreign brokerage commissions and custody fees are
generally higher than those charged in the United States, and foreign securities
markets may be less liquid, more volatile and less subject to governmental
supervision than in the United States. Investments in foreign countries could be
affected by other factors not present in the United States, including
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards and potential difficulties in enforcing contractual obligations and
could be subject to extended clearance and settlement periods.
RISKS ASSOCIATED WITH "EMERGING MARKETS" SECURITIES
"Emerging Markets" securities include the securities of issuers based in
markets with developing economies. These typically include countries where per
capita GNP is less than $8,355. Investments in securities of issuers based in
such countries entail all of the risks of investing in foreign issuers outlined
in this section but to a heightened degree. These heightened risks include: (i)
expropriation, confiscatory taxation, nationalization, and less social,
political and economic stability; (ii) smaller markets for such securities and a
low or nonexistent volume of trading, resulting in a lack of liquidity and in
price volatility; (iii) certain national policies that may restrict a
Portfolio's investment opportunities including restrictions on investing in
issuers in industries deemed sensitive to relevant national interests; and (iv)
in the case of Eastern Europe, the absence of developed capital markets and
legal structures governing private or foreign investment and private property
and the possibility that recent favorable economic and political developments
could be slowed or reversed by unanticipated events.
In certain of the these markets, the Communist Party, despite the fall of
communist dominated governments, continues to exercise a significant or, in some
countries, a dominant role. So long as this situation continues or
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currently controlling parties remain vulnerable to sudden removal from power,
investments in such countries will involve risk of nationalization,
expropriation and confiscatory taxation. The former communist governments of a
number of Eastern European countries expropriated large amounts of private
property in the past, and in many cases without adequate compensation. There is
no assurance that such expropriation will not occur in the future at the hands
of either an existing non-communist regime or upon the return to power of the
Communist Party. In the event of any such expropriation, a Portfolio could lose
a substantial portion of any investments it has made in the affected countries.
Finally, even though the currencies of less developed countries may be
convertible into U.S. dollars, the conversion rates may be artificial in
relation to the actual market values and may be adverse to Portfolio
shareholders.
CURRENCY EXCHANGE RATES
A Portfolio's share value may change significantly when the currencies,
other than the U.S. dollar, in which the Portfolio's investments are denominated
strengthen or weaken against the U.S. dollar. Currency exchange rates generally
are determined by the forces of supply and demand in the foreign exchange
markets and the relative merits of investments in different countries as seen
from an international perspective. Currency exchange rates can also be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
by currency controls or political developments in the United States or abroad.
MEDIUM AND LOWER RATED ("JUNK BONDS") AND UNRATED SECURITIES
Securities rated in the fourth highest category by S&P or Moody's, although
considered investment grade, possess speculative characteristics, and changes in
economic or other conditions are more likely to impair the ability of issuers of
these securities to make interest and principal payments than is the case with
respect to issuers of higher grade bonds.
Generally, medium or lower rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds," offer a higher
current yield than is offered by higher rated securities, but also (i) will
likely have some quality and protective characteristics that, in the judgment of
the rating organizations, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (ii) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The yield of junk bonds will
fluctuate over time.
The market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher quality bonds. In addition, medium and lower rated
securities and comparable unrated securities generally present a higher degree
of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium and lower rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. Since the risk of
default is higher for lower-rated securities, the Portfolio Advisor's research
and credit analysis are an especially important part of managing securities of
the type held by a Portfolio. In light of these risks, the Board of Trustees has
instructed the Portfolio Advisor, in evaluating the creditworthiness of an
issue, whether rated or unrated, to take various factors into consideration,
which may include, as applicable, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
In addition, the market value of securities in lower rated categories is
more volatile than that of higher quality securities, and the markets in which
medium and lower rated or unrated securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the
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Portfolios to obtain accurate market quotations for purposes of valuing their
respective portfolios and calculating their respective net asset values.
Moreover, the lack of a liquid trading market may restrict the availability of
securities for the Portfolios to purchase and may also have the effect of
limiting the ability of a Portfolio to sell securities at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Portfolio may
have to replace the security with a lower yielding security, resulting in a
decreased return for shareholders. Also, as the principal value of bonds moves
conversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by a Portfolio may decline relatively
proportionately more than a portfolio consisting of higher rated securities. If
a Portfolio experiences unexpected net redemptions, it may be forced to sell its
higher rated bonds, resulting in a decline in the overall credit quality of the
securities held by the Portfolio and increasing the exposure of the Portfolio to
the risks of lower rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Portfolio, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event will require sale of these securities by the
Portfolio, but the Portfolio Advisor will consider this event in its
determination of whether the Portfolio should continue to hold the securities.
ADRS, EDRS AND CDRS
ADRs are U.S. dollar-denominated receipts typically issued by domestic banks
or trust companies that represent the deposit with those entities of securities
of a foreign issuer. ADRs are publicly traded on exchanges or over-the-counter
in the United States. European Depositary Receipts ("EDRs"), which are sometimes
referred to as Continental Depositary Receipts ("CDRs"), may also be purchased
by the Portfolios. EDRs and CDRs are generally issued by foreign banks and
evidence ownership of either foreign or domestic securities. Certain
institutions issuing ADRs or EDRs may not be sponsored by the issuer of the
underlying foreign securities. A non-sponsored depository may not provide the
same shareholder information that a sponsored depository is required to provide
under its contractual arrangements with the issuer of the underlying foreign
securities.
FIXED-INCOME AND OTHER DEBT INSTRUMENT SECURITIES
Fixed-income and other debt instrument securities include all bonds, high
yield or "junk" bonds, municipal bonds, debentures, U.S. Government securities,
mortgage-related securities including government stripped mortgage-related
securities, zero coupon securities and custodial receipts. The market value of
fixed-income obligations of the Portfolios will be affected by general changes
in interest rates which will result in increases or decreases in the value of
the obligations held by the Portfolios. The market value of the obligations held
by a Portfolio can be expected to vary inversely to changes in prevailing
interest rates. Shareholders also should recognize that, in periods of declining
interest rates, a Portfolio's yield will tend to be somewhat higher than
prevailing market rates and, in periods of rising interest rates, a Portfolio's
yield will tend to be somewhat lower. Also, when interest rates are falling, the
inflow of net new money to a Portfolio from the continuous sale of its shares
will tend to be invested in instruments producing lower yields than the balance
of its portfolio, thereby reducing the Portfolio's current yield. In periods of
rising interest rates, the opposite can be expected to occur. In addition,
securities in which a Portfolio may invest may not yield as high a level of
current income as might be achieved by investing in securities with less
liquidity, less creditworthiness or longer maturities.
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Ratings made available by S&P and Moody's are relative and subjective and
are not absolute standards of quality. Although these ratings are initial
criteria for selection of portfolio investments, a Portfolio Advisor also will
make its own evaluation of these securities. Among the factors that will be
considered are the long-term ability of the issuers to pay principal and
interest and general economic trends.
Fixed-income securities may be purchased on a when-issued or
delayed-delivery basis. See "When-Issued and Delayed-Delivery Securities."
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in U.S. Government securities, which are
obligations issued or guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities. Some U.S. government securities, such as U.S.
Treasury bills, Treasury notes and Treasury bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States. Others are supported by: (i) the right of
the issuer to borrow from the U.S. Treasury, such as securities of the Federal
Home Loan Banks; (ii) the discretionary authority of the U.S. government to
purchase the agency's obligations, such as securities of the FNMA; or (iii) only
the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. Government will provide
financial support in the future to U.S. government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States.
Securities guaranteed as to principal and interest by the U.S. government,
its agencies, authorities or instrumentalities include: (i) securities for which
the payment of principal and interest is backed by an irrevocable letter of
credit issued by the U.S. Government or any of its agencies, authorities or
instrumentalities; and (ii) participation interests in loans made to foreign
governments or other entities that are so guaranteed. The secondary market for
certain of these participation interests is limited and, therefore, may be
regarded as illiquid.
MORTGAGE RELATED SECURITIES
Each Portfolio may invest in mortgage related securities. There are several
risks associated with mortgage related securities generally. One is that the
monthly cash inflow from the underlying loans may not be sufficient to meet the
monthly payment requirements of the mortgage related security.
Prepayment of principal by mortgagors or mortgage foreclosures will shorten
the term of the underlying mortgage pool for a mortgage related security. Early
returns of principal will affect the average life of the mortgage related
securities remaining in a Portfolio. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. In periods of rising interest rates, the rate of
prepayment tends to decrease, thereby lengthening the average life of a pool of
mortgage related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life of
a pool. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of a Portfolio. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that a Portfolio will have to reinvest the proceeds of prepayments at
lower interest rates than those at which the assets were previously invested. If
this occurs, a Portfolio's yield will correspondingly decline. Thus, mortgage
related securities may have less potential for capital appreciation in periods
of falling interest rates than other fixed-income securities of comparable
maturity, although these securities may have a comparable risk of decline in
market value in periods of rising interest rates. To the extent that a Portfolio
purchases mortgage related securities at a premium, unscheduled prepayments,
which are made at par, will result in a loss equal to any unamortized premium.
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CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage related securities. Payments of principal and interest on the mortgages
are passed through to the holders of the CMOs on the same schedule as they are
received, although certain classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages. Therefore, depending on
the type of CMOs in which a Portfolio invests, the investment may be subject to
a greater or lesser risk of prepayment than other types of mortgage related
securities.
Mortgage related securities may not be readily marketable. To the extent any
of these securities are not readily marketable in the judgment of the Portfolio
Advisor, the investment restriction limiting a Portfolio's investment in
illiquid instruments to not more than 15% of the value of its net assets will
apply.
STRIPPED MORTGAGE RELATED SECURITIES
These securities are either issued and guaranteed, or privately-issued but
collateralized by securities issued, by GNMA, FNMA or FHLMC. These securities
represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only") on
mortgage related certificates issued by GNMA, FNMA or FHLMC, as the case may be.
The certificates underlying the stripped mortgage related securities represent
all or part of the beneficial interest in pools of mortgage loans. The Portfolio
will invest in stripped mortgage related securities in order to enhance yield or
to benefit from anticipated appreciation in value of the securities at times
when its Portfolio Advisor believes that interest rates will remain stable or
increase. In periods of rising interest rates, the expected increase in the
value of stripped mortgage related securities may offset all or a portion of any
decline in value of the securities held by the Portfolio.
Investing in stripped mortgage related securities involves the risks
normally associated with investing in mortgage related securities. See "Mortgage
Related Securities" above. In addition, the yields on stripped mortgage related
securities are extremely sensitive to the prepayment experience on the mortgage
loans underlying the certificates collateralizing the securities. If a decline
in the level of prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal will be
accelerated, thereby reducing the yield to maturity on interest-only stripped
mortgage related securities and increasing the yield to maturity on
principal-only stripped mortgage related securities. Sufficiently high
prepayment rates could result in a Portfolio not fully recovering its initial
investment in an interest-only stripped mortgage related security. Under current
market conditions, the Portfolio expects that investments in stripped mortgage
related securities will consist primarily of interest-only securities. Stripped
mortgage related securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that the Portfolio will be able to effect a trade of a stripped mortgage related
security at a time when it wishes to do so. The Portfolio will acquire stripped
mortgage related securities only if a secondary market for the securities exists
at the time of acquisition. Except for stripped mortgage related securities
based on fixed rate FNMA and FHLMC mortgage certificates that meet certain
liquidity criteria established by the Board of Trustees, the Portfolios will
treat stripped mortgage related securities as illiquid and will limit its
investments in these securities, together with other illiquid investments, to
not more than 15% of net assets.
ZERO COUPON SECURITIES
Zero coupon U.S. Government securities are debt obligations that are issued
or purchased at a significant discount from face value. The discount
approximates the total amount of interest the security will accrue and compound
over the period until maturity or the particular interest payment date at a rate
of interest reflecting the market rate of the security at the time of issuance.
Zero coupon securities do not require the periodic payment of interest. These
investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a
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higher rate of return to attract investors who are willing to defer receipt of
cash. These investments may experience greater volatility in market value than
U.S. Government securities that make regular payments of interest. A Portfolio
accrues income on these investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Portfolio's distribution obligations, in which case the Portfolio will
forego the purchase of additional income producing assets with these funds. Zero
coupon securities include STRIPS, that is, securities underwritten by securities
dealers or banks that evidence ownership of future interest payments, principal
payments or both on certain notes or bonds issued by the U.S. Government, its
agencies, authorities or instrumentalities. They also include Coupons Under Book
Entry System ("CUBES"), which are component parts of U.S. Treasury bonds and
represent scheduled interest and principal payments on the bonds.
CUSTODIAL RECEIPTS
Custodial receipts or certificates, such as Certificates of Accrual on
Treasury Securities ("CATS"), Treasury Investors Growth Receipts ("TIGRs") and
Financial Corporation certificates ("FICO Strips"), are securities underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, authorities or instrumentalities. The
underwriters of these certificates or receipts purchase a U.S. Government
security and deposit the security in an irrevocable trust or custodial account
with a custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the U.S. Government Security. Custodial receipts evidencing specific
coupon or principal payments have the same general attributes as zero coupon
U.S. Government securities, described above. Although typically under the terms
of a custodial receipt a Portfolio is authorized to assert its rights directly
against the issuer of the underlying obligation, the Portfolio may be required
to assert through the custodian bank such rights as may exist against the
underlying issuer. Thus, if the underlying issuer fails to pay principal and/or
interest when due, a Portfolio may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Portfolio had
purchased a direct obligation of the issuer. In addition, if the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
respect of any taxes paid.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
To secure prices deemed advantageous at a particular time, each Portfolio
may purchase securities on a when-issued or delayed-delivery basis, in which
case delivery of the securities occurs beyond the normal settlement period;
payment for or delivery of the securities would be made prior to the reciprocal
delivery or payment by the other party to the transaction. A Portfolio will
enter into when-issued or delayed-delivery transactions for the purpose of
acquiring securities and not for the purpose of leverage. When-issued securities
purchased by the Portfolio may include securities purchased on a "when, as and
if issued" basis under which the issuance of the securities depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring.
Securities purchased on a when-issued or delayed-delivery basis may expose a
Portfolio to risk because the securities may experience fluctuations in value
prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.
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REPURCHASE AGREEMENTS
Each of the Portfolios may engage in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, a Portfolio would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Portfolio's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Portfolio's holding period. A Portfolio may enter into repurchase
agreements with respect to U.S. government securities with member banks of the
Federal Reserve System and certain non-bank dealers approved by the respective
Board of Trustees. Under each repurchase agreement, the selling institution is
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. The Portfolio Advisor, acting
under the supervision of the Advisor and the Board of Trustees, reviews on an
ongoing basis the value of the collateral and the creditworthiness of those
non-bank dealers with whom the Portfolio enters into repurchase agreements. In
entering into a repurchase agreement, a Portfolio bears a risk of loss in the
event that the other party to the transaction defaults on its obligations and
the Portfolio is delayed or prevented from exercising its rights to dispose of
the underlying securities, including the risk of a possible decline in the value
of the underlying securities during the period in which the Portfolio seeks to
assert its rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or a part of the income from
the agreement. Repurchase agreements are considered to be collateralized loans
under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS AND FORWARD ROLL TRANSACTIONS
The Portfolios may enter into reverse repurchase agreements and forward roll
transactions. In a reverse repurchase agreement the Portfolio agrees to sell
portfolio securities to financial institutions such as banks and broker-dealers
and to repurchase them at a mutually agreed date and price. Forward roll
transactions are equivalent to reverse repurchase agreements but involve
mortgage-backed securities and involve a repurchase of a substantially similar
security. At the time the Portfolio enters into a reverse repurchase agreement
or forward roll transaction it will place in a segregated custodial account
cash, U.S. Government securities or high grade, liquid debt obligations having a
value equal to the repurchase price, including accrued interest. Reverse
repurchase agreements and forward roll transactions involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of the securities. Reverse repurchase agreements and forward
roll transactions are considered to be borrowings by a Portfolio for purposes of
the limitations described in "Certain Investment Restrictions" below and in the
Trust's Statement of Additional Information.
LENDING PORTFOLIO SECURITIES
To generate income for the purpose of helping to meet its operating
expenses, each Portfolio may lend securities to brokers, dealers and other
financial organizations. These loans, if and when made, may not exceed 30% of a
Portfolio's assets taken at value. A Portfolio's loans of securities will be
collateralized by cash, letters of credit or U.S. Government securities. The
cash or instruments collateralizing a Portfolio's loans of securities will be
maintained at all times in a segregated account with the Portfolio's custodian,
or with a designated subcustodian, in an amount at least equal to the current
market value of the loaned securities. In lending securities to brokers, dealers
and other financial organizations, a Portfolio is subject to risks, which, like
those associated with other extensions of credit, include delays in recovery and
possible loss of rights in the collateral should the borrower fail financially.
For further information regarding measures to be taken to protect a lending
Portfolio, see the Statement of Additional Information.
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ILLIQUID SECURITIES
No Portfolio may invest more than 15% of its net assets in securities which
are illiquid or otherwise not readily marketable. If a security becomes illiquid
after purchase by the Portfolio, the Portfolio will normally sell the security
unless to do so would not be in the best interests of shareholders.
NON-PUBLICLY TRADED ("RESTRICTED") SECURITIES AND RULE 144A SECURITIES
Each Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under SEC Rule 144A or under an exemption from such laws. If a
dealer or institutional trading market in such securities exists, these
restricted securities or Rule 144A securities are treated as exempt from the
Portfolio's 15% limit on illiquid securities. The Board of Trustees of the SA
Trust, with advice and information from the respective Portfolio Advisor, will
determine the liquidity of restricted securities or Rule 144A securities by
looking at factors such as trading activity and the availability of reliable
price information and, through reports from such Portfolio Advisor, the Board of
Trustees of the Portfolio Trust will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how the markets for Rule 144A securities will develop. If institutional trading
in restricted securities or Rule 144A securities were to decline, a Portfolio's
illiquidity could be increased and the Portfolio could be adversely affected.
No Portfolio will invest more than 10% of its total assets in restricted
securities (including Rule 144A securities).
TEMPORARY INVESTMENTS
For temporary defensive purposes during periods when the Portfolio Advisor
of a Portfolio believes, in consultation with the Advisor, that pursuing the
Portfolio's basic investment strategy may be inconsistent with the best
interests of its shareholders, the Portfolio may invest its assets without limit
in the following money market instruments: U.S. Government securities (including
those purchased in the form of custodial receipts), repurchase agreements,
certificates of deposit and bankers' acceptances issued by banks or savings and
loan associations having assets of at least $500 million as of the end of their
most recent fiscal year and high quality commercial paper.
In addition, for the same purposes the Portfolio Advisor may invest without
limit in obligations issued or guaranteed by foreign governments or by any of
their political subdivisions, authorities, agencies or instrumentalities that
are rated at least AA by S&P or Aa by Moody's or, if unrated, are determined by
the Portfolio Advisor to be of equivalent quality. Each Portfolio also may hold
a portion of its assets in money market instruments or cash in amounts designed
to pay expenses, to meet anticipated redemptions or pending investments in
accordance with its objectives and policies. Any temporary investments may be
purchased on a when-issued basis.
FUTURES CONTRACTS AND RELATED OPTIONS
Each Portfolio may enter into futures contracts and purchase and write
(sell) options on these contracts, including but not limited to interest rate,
securities index and foreign currency futures contracts and put and call options
on these futures contracts. These contracts will be entered into only upon the
concurrence of the Portfolio Advisor that such contracts are necessary or
appropriate in the management of the Portfolio's assets. These contracts will be
entered into on exchanges designated by the Commodity Futures Trading Commission
("CFTC") or, consistent with CFTC regulations, on foreign exchanges. These
transactions may be entered into for bona fide hedging and other permissible
risk management purposes including protecting against anticipated changes in the
value of securities a Portfolio intends to purchase.
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No Portfolio will hedge more than 25% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. In addition, no
Portfolio will buy futures or write puts whose underlying value exceeds 25% of
its total assets, and no Portfolio will buy calls with a value exceeding 5% of
its total assets.
A Portfolio will not enter into futures contracts and related options for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's assets after taking into account unrealized profits and
unrealized losses on any contracts it has entered into.
A Portfolio may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the
Portfolio's futures and options positions may not prove to be perfectly or even
highly correlated with changes in the value of its portfolio securities.
Successful use of futures and related options is subject to a Portfolio
Advisor's ability to predict correctly movements in the direction of the
securities markets generally, which ability may require different skills and
techniques than predicting changes in the prices of individual securities.
Moreover, futures and options contracts may only be closed out by entering into
offsetting transactions on the exchange where the position was entered into (or
a linked exchange), and as a result of daily price fluctuation limits there can
be no assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a Portfolio may realize
a loss on a futures contract or option that is not offset by an increase in the
value of its portfolio securities that are being hedged or a Portfolio may not
be able to close a futures or options position without incurring a loss in the
event of adverse price movements. For additional information, see "Futures
Contracts and Options on Futures Contracts" in the Statement of Additional
Information.
OPTIONS ON STOCK
Each Portfolio may write and purchase options on stocks. A call option gives
the purchaser of the option the right to buy, and obligates the writer to sell,
the underlying stock at the exercise price at any time during the option period.
Similarly, a put option gives the purchaser of the option the right to sell, and
obligates the writer to buy the underlying stock at the exercise price at any
time during the option period. A covered call option with respect to which the
Portfolio owns the underlying stock sold by the Portfolio exposes the Portfolio
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying stock or to possible
continued holding of a stock which might otherwise have been sold to protect
against depreciation in the market price of the stock. A covered put option sold
by the Portfolio exposes the Portfolio during the term of the option to a
decline in price of the underlying stock.
To close out a position when writing covered options, the Portfolio may make
a "closing purchase transaction" which involves purchasing an option on the same
stock with the same exercise price and expiration date as the option which it
has previously written on the stock. The Portfolio will realize a profit or loss
for a closing purchase transaction if the amount paid to purchase an option is
less or more, as the case may be, than the amount received from the sale
thereof. To close out a position as a purchaser of an option, the Portfolio may
make a "closing sale transaction" which involves liquidating the Portfolio's
position by selling the option previously purchased. See also "Options on
Securities" in the Statement of Additional Information.
OPTIONS ON SECURITIES INDEXES
Each Portfolio may purchase and write put and call options on securities
indexes listed on domestic and, in the case of those Portfolios which may invest
in foreign securities, on foreign exchanges. A securities index fluctuates with
changes in the market values of the securities included in the index.
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Options on securities indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a security
index gives the holders the right to receive a cash "exercise settlement amount"
equal to (a) the among, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
(b) a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the index upon which the option is based being greater than, in
the case of a call, or less than, in the case of a put, the exercise price of
the option. The amount of cash received will be equal to such difference between
the closing price of the index and the exercise price of the option expressed in
dollars or a foreign currency, as the case may be, times a specified multiple.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. The writer may offset its position in securities
index options prior to expiration by entering into a closing transaction on an
exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular security, whether the Portfolio
will realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of securities prices in the market generally
or, in the case of certain indexes, in an industry or market segment, rather
than movements in price of a particular security. Accordingly, successful use by
a Portfolio of options on security indexes will be subject to the Portfolio
Advisor's ability to predict correctly movement in the direction of that
securities market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities. For further information regarding index options, see "Options on
Securities Indexes" in the Statement of Additional Information.
FORWARD CURRENCY CONTRACTS
Each Portfolio may hold currencies to meet settlement requirements for
foreign securities and may engage in currency exchange transactions in order to
protect against uncertainty in the level of future exchange rates between a
particular foreign currency and the U.S. dollar or between foreign currencies in
which the Portfolio's securities are or may be denominated. Forward currency
contracts are agreements to exchange one currency for another, for example, to
exchange a certain amount of U.S. dollars for a certain amount of French francs
at a future date. The date (which may be any agreed-upon fixed number of days in
the future), the amount of currency to be exchanged and the price at which the
exchange will take place will be negotiated with a currency trader and fixed for
the term of the contract at the time that the Portfolio enters into the
contract.
In hedging specific portfolio positions, a Portfolio may enter into a
forward contract with respect to either the currency in which the positions are
denominated or another currency deemed appropriate by the Portfolio Advisor. The
amount the Portfolio may invest in forward currency contracts is limited to the
amount of the Portfolio's aggregate investments in foreign currencies. Risks
associated with entering into forward currency contracts include the possibility
that the market for forward currency contracts may be limited with respect to
certain currencies and, upon a contract's maturity, the inability of a Portfolio
to negotiate with the dealer to enter into an offsetting transaction. Forward
currency contracts may be closed out only by the parties entering into an
offsetting contract. In addition, the correlation between movements in the
prices of those contracts and movements in the price of the currency hedged or
used for cover will not be perfect. There is no assurance that an active forward
currency contract market will always exist. These factors will restrict a
Portfolio's ability to hedge against the risk of devaluation of currencies in
which a Portfolio holds a substantial quantity of securities and are unrelated
to the qualitative rating that may be assigned to any particular security. See
also "Forward Currency Contracts" in the Statement of Additional Information for
further information concerning forward currency contracts.
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ASSET COVERAGE
To assure that a Portfolio's use of futures and related options, as well as
when-issued and delayed-delivery transactions, forward currency contracts and
swap transactions, are not used to achieve investment leverage, the Portfolio
will cover such transactions, as required under applicable SEC interpretations,
either by owning the underlying securities or by establishing a segregated
account with the SA Trust's custodian containing high grade liquid debt
securities in an amount at all times equal to or exceeding the Portfolio's
commitment with respect to these instruments or contracts.
CERTAIN INVESTMENT RESTRICTIONS
The SA Trust, on behalf of each SAT Portfolio, has adopted certain
investment restrictions that are enumerated in detail in the Statement of
Additional Information. Among other restrictions, each SAT Portfolio may not,
with respect to 75% of its total assets taken at market value, invest more than
5% of its total assets in the securities of any one issuer, except U.S.
Government securities, or acquire more than 10% of any class of the outstanding
voting securities of any one issuer. In addition, no Portfolio may invest more
than 25% of its total assets in securities of issuers in any one industry. Each
Portfolio may borrow money as a temporary measure from banks in an aggregate
amount not exceeding one-third of the value of the Portfolio's total assets to
meet redemptions and for other temporary or emergency purposes not involving
leveraging. Reverse repurchase agreements and forward roll transactions
involving mortgage-related securities will be aggregated with bank borrowings
for purposes of this calculation. No Portfolio may purchase securities while
borrowings exceed 5% of the value of the Portfolio's total assets. No Portfolio
will invest more than 15% of the value of its net assets in securities that are
illiquid, including certain government stripped mortgage related securities,
repurchase agreements maturing in more than seven days and that cannot be
liquidated prior to maturity and securities that are illiquid by virtue of the
absence of a readily available market. Securities that have legal or contractual
restrictions on resale but have a readily available market, such as certain Rule
144A securities, are deemed not illiquid for this purpose. No Portfolio may
invest more than 10% of its assets in restricted securities (including Rule 144A
securities). See "Illiquid Securities" and "Non-Publicly Traded ("Restricted")
Securities and Rule 144A Securities."
PORTFOLIO TURNOVER
Generally, the SAT Portfolios will not trade in securities for short-term
profits but, when circumstances warrant, securities may be sold without regard
to the length of time held. The SAT Portfolios may engage in active short-term
trading to benefit from yield disparities among different issues of securities,
to seek short-term profits during periods of fluctuating interest rates or for
other reasons. Active trading will increase a Portfolio's rate of turnover,
certain transaction expenses and the incidence of short-term capital gain
taxable as ordinary income. An annual turnover rate of 100% would occur when all
the securities held by the Portfolio are replaced one time during a period of
one year. The annual turnover rate of each SAT Portfolio is not expected to
exceed the following: Growth & Income Portfolio 75%; and Bond Portfolio 60%.
MANAGEMENT OF THE SA TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the SA Trust rests
with its Board of Trustees. The Trustees approve all significant agreements
between the SA Trust and the persons and companies that furnish services to the
SA Trust and the Portfolios, including agreements between the SA Trust and each
of the Custodian, the Advisor and the Administrator. Due to the services
provided by the Advisor and the Administrator, the Trust
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currently has no employees and its officers are not required to devote their
full time to the affairs of the SA Trust. The Statement of Additional
Information contains background information regarding each Trustee and executive
officer of the SA Trust.
ADMINISTRATOR
Signature, located at 6 St. James Avenue, Boston Massachusetts 02116, serves
as administrator and fund accounting agent to the SA Trust pursuant to an
agreement (the "ADMINISTRATIVE SERVICES AND FUND ACCOUNTING AGREEMENT"). Under
the Administrative Services and Fund Accounting Agreement, Signature provides
the SA Trust with general office facilities and supervises the overall
administration of the SA Trust, including, among other responsibilities, the
negotiation of contracts and fees with, and the monitoring of performance and
billings of, the independent contractors and agents of the SA Trust; the
preparation and filing of all documents required for compliance by the SA Trust
with applicable laws and regulations; and arranging for the maintenance of books
and records of the SA Trust.
For the services to be rendered and the facilities to be provided by
Signature, each SAT Portfolio shall pay to Signature an administrative services
and fund accounting fee computed and paid monthly that is equal on an annual
basis to a percentage of the average daily net assets of all registered
investment companies to which the Advisor (or an affiliate) and Signature
provide their respective services ranging from 0.20% to 0.05%, depending on the
total assets of all such investment companies. The fees so calculated will be
allocated among such investment companies in proportion to their respective
average daily net assets. See "Management of the Trust" in the VI Trust's
Statement of Additional Information.
In addition, each SAT Portfolio is subject to a minimum annual
administrative services and fund accounting fee of $60,000 ($40,000 in the first
year of operations). In the case of the SAT Portfolios, this minimum fee is
subject to increases depending on how many investors the Portfolio has. See the
Statement of Additional Information for more information.
CUSTODIAN
Investors Bank & Trust Company, located at 89 South Street, Boston
Massachusetts 02111, serves as custodian of the SA Trust's investments (the
"CUSTODIAN").
SPONSOR
Touchstone Advisors, Inc., as Sponsor to the SA Trust pursuant to a Sponsor
Agreement, provides oversight of the various service providers to the SA Trust,
including the Administrator and the Custodian. As Sponsor to the SA Trust,
Touchstone Advisors reserves the right to receive a sponsor fee from each
Portfolio equal on an annual basis to 0.20% of the average daily net assets of
that Portfolio for its then current fiscal year. The Sponsor Agreement may be
terminated by the Sponsor as of the end of any calendar quarter after December
31, 1995 on not less than 30 days prior written notice. The SA Trust may
terminate the Sponsor Agreement at any time on not less than 30 days prior
written notice. The Sponsor has advised the SA Trust that it will waive all fees
under the Sponsor Agreement through April 30, 1996.
ALLOCATION OF EXPENSES OF THE PORTFOLIOS
Each SAT Portfolio bears its own expenses, which generally include all costs
not specifically borne by the Advisor, the SAT Portfolio Advisors and the
Administrator. Included among a Portfolio's expenses are: costs incurred in
connection with its organization; investment management and administration fees;
sponsor fees; fees for necessary professional and brokerage services; fees for
any pricing service; the costs of regulatory compliance; and
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costs associated with maintaining the SA Trust's legal existence and shareholder
relations. Under separate agreements with the SA Trust, the Sponsor has agreed
to reimburse each SAT Portfolio to the extent that the aggregate operating
expenses of the Portfolio exceed agreed upon expense limitations (the "EXPENSE
CAPS"). The Sponsor's obligation to reimburse the SA Trust for such amounts may
be terminated by the Sponsor at the end of any calendar quarter after December
31, 1995. For more detailed information regarding the Expense Caps, see "Fee and
Expense Tables" and "Expenses of VIT Portfolios and SAT Portfolios; Expense
Caps."
PURCHASE AND VALUATION
PURCHASE
Interests in the Growth & Income and Bond Portfolios are not offered to the
public and are issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of the 1933
Act. Investments in the Growth & Income and Bond Portfolios may be made only by
a limited number of insurance company separate accounts. This Prospectus and its
accompanying Statement of Additional Information do not constitute an offer to
sell, or the solicitation of an offer to buy, any "security" (within the meaning
of the 1933 Act) of the Portfolios.
VALUATION
The net asset value of each SAT Portfolio is determined as of the close of
regular trading on the NYSE on each day on which the NYSE is open for trading,
by deducting the amount of the Portfolio's liabilities from the value of its
assets. At the close of each such business day, the value of each Sub-Account's
interest in the Portfolio will be determined by multiplying the net asset value
of the corresponding Portfolio by the percentage, effective for that day, that
represents the Sub-Account's share of the aggregate interests in that Portfolio.
Generally, a Portfolio's investments are valued at market value or, in the
absence of a market value, at fair value as determined by or under the direction
of the SA Trust's Board of Trustees.
Securities that are primarily traded on foreign exchanges are generally
valued at the preceding closing values of the securities on their respective
exchanges, except that, when an occurrence subsequent to the time a value was so
established is likely to have changed that value, the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Board of Trustees of the SA Trust. A security that is primarily
traded on a domestic or foreign stock exchange is valued at the last sales price
on that exchange or, if no sales occurred during the day, at the current quoted
bid price. All short-term dollar-denominated investments that mature in 60 days
or less are valued on the basis of amortized cost (which involves valuing an
investment at its cost and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of fluctuating
interest rates on the market value of the investment) when the Board of Trustees
of the SA Trust has determined that amortized cost represents fair value. An
option that is written by a Portfolio is generally valued at the last sale price
or, in the absence of the last sale price, the last offer price. An option that
is purchased by a Portfolio is generally valued at the last sale price or, in
the absence of the last sale price, the last bid price. The value of a futures
contract is equal to the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract. A settlement price may
not be used if the market makes the maximum price change in a single trading
session permitted by an exchange (a "limit move") with respect to a particular
futures contract or if the securities
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underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Board of Trustees of the SA Trust.
All assets and liabilities initially expressed in foreign currency values
will be converted into U.S. dollar values at the mean between the bid and
offered quotations of the currencies against U.S. dollars as last quoted by any
recognized dealer. If the bid and offered quotations are not available, the rate
of exchange will be determined in good faith by the Board of Trustees of the SA
Trust. In carrying out the valuation policies of the Board of Trustees of the SA
Trust, independent pricing services may be consulted. Further information
regarding the SA Trust's valuation policies is contained in the Statement of
Additional Information.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each investor in an SAT Portfolio, including the corresponding Sub-Account,
may add to or reduce its investment in the Portfolio on each day the Portfolio
determines its net asset value. At the close of each such business day, the
value of each investor's beneficial interest in the Portfolio will be determined
by multiplying the net asset value of the Portfolio by the percentage, effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals, which are to be
effected as of the close of business on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be re-computed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of business on such day plus or minus, as the case may be, the amount of
the net additions to or withdrawals from the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as of the close of business on the following business day.
The SA Trust was organized as a trust under the laws of the State of New
York pursuant to a Declaration of Trust dated February 7, 1994, at which time
the SAT Portfolios were established and designated as a separate series of this
SA Trust. The Declaration of Trust provides that the Sub-Account and other
entities investing in the Portfolios (E.G., other insurance company separate
accounts) will each be liable for all obligations of the corresponding
Portfolio. However, the risk of a Sub-Account incurring financial loss on
account of such liability is limited to circumstances in which both inadequate
insurance existed and the corresponding Portfolio itself was unable to meet its
obligations. Accordingly, the Trustees of the SA Trust believe that neither the
Sub-Account nor its Owners having Contract Value therein will for this reason be
adversely affected as a result of the Sub-Account investing in the Portfolios.
The interests in SA Trust are divided into separate series. No series of SA
Trust has any preference over any other series.
Each Sub-Account will be involved only in votes that affect the
corresponding SAT Portfolio. Owners investing in Sub-Accounts that are, in turn,
investing in the SAT Portfolios will, however, vote with other investors in all
of the SA Trust's Portfolios (of which there are seven) to elect Trustees of the
SA Trust and for certain other matters. Under certain circumstances the
investors of one or more series of the SA Trust (including the SAT
52
<PAGE>
Portfolios) could control the outcome of these votes. Holders of interests in
each Portfolio will vote separately on matters affecting only that Portfolio.
Under certain circumstances, other investors in a Portfolio could control the
outcome of these votes.
The Variable Account sends to each shareholder a semi-annual report and an
audited annual report. At least one such report in each year will include a list
of the investment securities held by the SAT Portfolios. See "Reports to
Contract Owners."
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the Variable
Account's Statement of Additional Information and in the Variable Account's
official sales literature in connection with the offering of interests in the
Contracts, and if given or made, such other information or representations must
not be relied upon as having been authorized by the Variable Account. This
Prospectus does not constitute an offer in any state in which, or to any person
to whom, such offer may not lawfully be made.
53
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Part I - Discussion Regarding the Variable Annuity Contracts................................................ 1
Part II - Discussion Regarding the Select Advisors Portfolios............................................... 5
Summary................................................................................................... 5
Investment Objectives, Techniques, Policies and Restrictions.............................................. 6
Investment Objectives................................................................................... 6
Investment Techniques................................................................................... 6
Investment Restrictions................................................................................. 21
Valuation of Securities; Redemption in Kind............................................................... 27
Management of the SA Trust................................................................................ 29
Organization of the SA Trust.............................................................................. 35
Taxation.................................................................................................. 35
Financial Statements...................................................................................... 37
</TABLE>
54
<PAGE>
APPENDIX
BOND, COMMERCIAL PAPER AND MUNICIPAL OBLIGATIONS RATINGS
Set forth below are descriptions of the ratings of Moody's and S&P, which
represent their opinions as to the quality of the Municipal Obligations and
securities which they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
MOODY'S BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal interest are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest principal payments or of maintenance of other
terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Unrated. Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
A-1
<PAGE>
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effect of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa-1,
A-1, Baa-1 and B-1.
S&P'S BOND RATING
AAA. Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from higher rated issues only in a small degree.
A. Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in the highest rated
categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC and C. Bonds rated BB, B, CCC, CC, and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of these obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties of major risk
exposures to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no interest is
being paid.
D. Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-). The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR. Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
A-2
<PAGE>
DESCRIPTION OF S&P MUNICIPAL BOND RATINGS:
AAA -- Prime -- These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds -- In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to remain,
substantial, stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant, earnings test for
issuance of additional bonds and debt service reserve requirements) are
rigorous. There is evidence of superior management.
AA -- High Grade -- The investment characteristics of bonds in this group
are only slightly less marked than those of the prime quality issues. Bonds
rated AA have the second strongest capacity for payment of debt service.
A -- Good Grade -- Principal and interest payments on bonds in this category
are regarded as safe although the bonds are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than bonds
in higher rated categories. This rating describes the third strongest capacity
for payment of debt service. Regarding municipal bonds, the rating differs from
the two higher ratings because:
General Obligations Bonds -- There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and expenditures,
or in quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provision, while satisfactory, are less stringent. Management performance
appearance appears adequate.
S&P's letter ratings may be modified by the addition of a plus or a minus
sigh, which is used to show relative standing within the major rating
categories, except in the AAA rating category.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gild edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally know as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
A-3
<PAGE>
Moody's may apply the numerical modifier in each generic rating
classification from Aa through B. The modified 1 indicates that the security
within its generic rating classification possesses the strongest investment
attributes.
DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS:
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, or -2) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given the designation of SP-1+.
Notes rated SP-2 have a satisfactory capacity to pay principal and interest.
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS:
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG1/VMIG1 are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both. Loans bearing the designation MIG2/VMIG2 are of high
quality, with ample margins of protection, although not as large as the
preceding group.
S&P'S COMMERCIAL PAPER RATINGS
A is the highest commercial paper rating category utilized by S&P, which
uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-terms promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by eternal conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
A-4
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- --------------------------------------------------------------------------------
PROSPECTUS
MAY 1, 1995
AS AMENDED NOVEMBER 14, 1995
<TABLE>
<S> <C>
SELECT ADVISORS TOUCHSTONE ADVISORS, INC.
VARIABLE INSURANCE 318 BROADWAY
TRUST CINCINNATI, OHIO 45202
</TABLE>
- --------------------------------------------------------------------------------
Select Advisors Variable Insurance Trust (the "Trust") is an open-end,
investment management company providing investment vehicles (each, a
"Portfolio") for variable annuity contracts of various insurance companies. The
Trust is professionally managed by Touchstone Advisors, Inc. (the "Advisor" or
"Touchstone Advisors"). Each Portfolio benefits from discretionary advisory
services by one or more investment advisor(s) (each, a "Portfolio Advisor")
identified, retained, supervised and compensated by the Advisor.
The Trust is a series company that currently consists of the following
Portfolios:
TOUCHSTONE EMERGING GROWTH PORTFOLIO
TOUCHSTONE INTERNATIONAL EQUITY PORTFOLIO
TOUCHSTONE BALANCED PORTFOLIO
TOUCHSTONE INCOME OPPORTUNITY PORTFOLIO
TOUCHSTONE STANDBY INCOME PORTFOLIO
THE INCOME OPPORTUNITY PORTFOLIO MAY INVEST UP TO 100% OF ITS TOTAL ASSETS
IN NON-INVESTMENT GRADE BONDS, COMMONLY KNOWN AS "JUNK BONDS" ISSUED BY BOTH
U.S. AND FOREIGN ISSUERS, WHICH ENTAIL GREATER RISK OF UNTIMELY INTEREST AND
PRINCIPAL PAYMENTS, DEFAULT AND PRICE VOLATILITY THAN HIGHER RATED SECURITIES,
AND MAY PRESENT PROBLEMS OF LIQUIDITY AND VALUATION. THE INTERNATIONAL EQUITY
PORTFOLIO AND THE INCOME OPPORTUNITY PORTFOLIO MAY INVEST UP TO 40% AND 65%,
RESPECTIVELY, OF ITS TOTAL ASSETS IN SECURITIES OF ISSUERS BASED IN EMERGING
MARKETS WHICH MAY PRESENT INCREASED RISK. INVESTORS SHOULD CAREFULLY CONSIDER
THESE RISKS PRIOR TO INVESTING. SEE "INVESTMENT OBJECTIVES, POLICIES AND RISKS"
ON PAGE 4; "RISK FACTORS AND CERTAIN INVESTMENT TECHNIQUES" ON PAGE 8; AND THE
APPENDIX ON PAGE A-1.
This Prospectus sets forth concisely certain information about the Trust,
including expenses, that prospective shareholders will find helpful in making an
investment decision. Shareholders are encouraged to read this Prospectus
carefully and retain it for future reference.
Additional information about the Trust is contained in a Statement of
Additional Information dated May 1, 1995, as amended November 14, 1995, which is
available upon request and without charge by calling the Touchstone Variable
Annuity Service Center at 1-800-669-2796 or writing the Trust at the address
listed above. The Statement of Addi-
tional Information, which has been filed with the Securities and Exchange
Commission (the "SEC"), is incorporated by reference into this Prospectus in its
entirety.
Shares of each Portfolio may only be purchased by the separate accounts of
insurance companies, for the purpose of funding variable annuity contracts.
Particular Portfolios may not be available in your state due to various
insurance regulations. Please check with the Touchstone Variable Annuity Service
Center for available Portfolios. Inclusion of a Portfolio in this Prospectus
which is not available in your state is not to be considered a solicitation.
This Prospectus should be read in conjunction with the prospectus of the
separate account of the specific insurance product which accompanies this
Prospectus.
THE SHARES OF EACH PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE TRUST'S
STATEMENT OF ADDITIONAL INFORMATION OR THE TRUST'S OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES, AND IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Table of Contents........................................................................................... 2
Financial Highlights........................................................................................ 3
Investment Objectives, Policies and Risks................................................................... 4
Risk Factors and Certain Investment Techniques.............................................................. 8
Advisor and Portfolio Advisors.............................................................................. 10
Additional Risks and Investment Techniques.................................................................. 14
Purchase and Redemption of Shares........................................................................... 24
Net Asset Value............................................................................................. 24
Management of the Trust..................................................................................... 25
Dividends, Distributions and Taxes.......................................................................... 27
Performance of the Portfolios............................................................................... 28
Additional Information...................................................................................... 29
Appendix.................................................................................................... A-1
</TABLE>
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows selected data for a share outstanding, total
investment return, ratios to average net assets and other supplemental data for
each Portfolio for the period indicated and has been audited by Coopers &
Lybrand L.L.P., the Trust's independent accountants, whose report thereon
appears in the Trust's Annual Report which is included in the Trust's Statement
of Additional Information.
FOR THE PERIOD NOVEMBER 21, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1994 SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD ARE AS FOLLOWS:
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME
GROWTH EQUITY BALANCED OPPORTUNITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00 $ 10.00
------ ------ ----------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.04 -- 0.05 0.12
Net realized and unrealized gain (loss) on investments 0.06 (0.49) 0.12 (0.70)
------ ------ ----------- ------
Total from investment operations 0.10 (0.49) 0.17 (0.58)
------ ------ ----------- ------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- -- --
Net capital gain -- -- -- --
------ ------ ----------- ------
Total dividends and distributions 0.00 0.00 0.00 0.00
------ ------ ----------- ------
Net asset value, end of period $ 10.10 $ 9.51 $ 10.17 $ 9.42
------ ------ ----------- ------
------ ------ ----------- ------
TOTAL RETURN (NOT ANNUALIZED) 1.00 % (4.90)% 1.70 % (5.80)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $ 2,020 $ 4,757 $ 2,034 $ 1,883
Ratios to average net assets (annualized):
Expenses 1.15 % 1.25 % 0.90 % 0.85 %
Net investment income (loss) 3.67 % 1.23 % 4.26 % 11.24 %
Ratios to average net assets without waiver and reimbursement (annualized):
Expenses 11.08 % 5.58 % 8.97 % 11.56 %
Portfolio turnover (not annualized) 0 % 0 % 3 % 45 %
<CAPTION>
STANDBY
INCOME
PORTFOLIO
-----------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.05
Net realized and unrealized gain (loss) on investments 0.03
-----------
Total from investment operations 0.08
-----------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.05)
Net capital gain --
-----------
Total dividends and distributions (0.05)
-----------
Net asset value, end of period $ 10.03
-----------
-----------
TOTAL RETURN (NOT ANNUALIZED) 0.30 %
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $ 5,013
Ratios to average net assets (annualized):
Expenses 0.50 %
Net investment income (loss) 4.90 %
Ratios to average net assets without waiver and reimbursement (
Expenses 3.67 %
Portfolio turnover (not annualized) 56 %
</TABLE>
3
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus.
THE TRUST. The Trust is a management investment company providing a
convenient means of investing in separate Portfolios each with distinct
investment objectives and policies. The Trust consists of the following five
diversified Portfolios:
EMERGING GROWTH PORTFOLIO has a primary investment objective of capital
appreciation with income as a secondary investment objective. The Portfolio
attempts to achieve its investment objectives through investment primarily
in the common stocks of smaller, rapidly growing companies.
INTERNATIONAL EQUITY PORTFOLIO has an investment objective of long term
capital appreciation through investment primarily in equity securities of
companies based outside the United States.
BALANCED PORTFOLIO has an investment objective of growth of capital and
income through investment in common stocks and fixed-income securities.
INCOME OPPORTUNITY PORTFOLIO has an investment objective of high current
income through investment in high yield, non-investment grade debt
securities (commonly known as "junk bonds") of both U.S. and non-U.S.
issuers and in mortgage related securities.
STANDBY INCOME PORTFOLIO has an investment objective of high current income
to the extent consistent with relative stability of principal which it
attempts to achieve through investment in short term, investment grade debt
securities.
There can be no assurance that the investment objective of any Portfolio
will be achieved. The investment objectives of each Portfolio may be changed
without approval by investors, but not without 30 days prior notice. If there is
a change in the investment objectives of a Portfolio, shareholders should
consider whether the Portfolio remains an appropriate investment in light of
their then-current financial position and needs.
EMERGING GROWTH PORTFOLIO
The primary investment objective of the Portfolio is capital appreciation
with income as a secondary investment objective. The Portfolio attempts to
achieve its investment objectives through investment primarily in the common
stock of smaller, rapidly growing companies. With respect to the Emerging Growth
Portfolio, "emerging growth" companies are smaller companies with total market
capitalization less than the average of Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500"), which is currently approximately $20 billion, which
the Portfolio Advisor believes have earnings that may be expected to grow faster
than the U.S. economy in general, because of new products, structural changes in
the economy or management changes.
Under normal circumstances, at least 65% of the Portfolio's total assets
will be invested in securities of emerging growth companies. In selecting
investments for the Portfolio, the Portfolio Advisor seeks emerging growth
companies that it believes are undervalued in the marketplace. These companies
typically possess a relatively high rate of return on invested capital so that
future growth can be financed from internal sources. Companies in which the
Portfolio is likely to invest may have limited product lines, markets or
financial resources and may lack management depth. The securities of these
companies may have limited marketability and may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the market averages in
4
<PAGE>
general. A portion of the Portfolio's assets may be invested in the securities
of larger companies which the Portfolio Advisor believes offer comparable
appreciation or to ensure sufficient liquidity. Since the Portfolio invests
primarily in smaller companies, the Portfolio invests only to a limited extent
in larger companies in emerging industries.
In addition to common stocks, the Portfolio may invest in preferred stocks,
convertible bonds and other fixed-income instruments not issued by emerging
growth companies which present opportunities for capital appreciation as well as
income. Such instruments include U.S. Treasury obligations, corporate bonds,
debentures, mortgage related securities issued by various governmental agencies,
such as Government National Mortgage Association ("GNMA") and government related
organizations, such as the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC"), including collateralized
mortgage obligations ("CMOs"), privately issued mortgage related securities
(including CMOs), stripped U.S. Government and mortgage related securities,
non-publicly registered securities, and asset backed securities. The Portfolio
will only invest in bonds and preferred stock rated at least Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation
("S&P") or, if unrated, determined by the Portfolio Advisor to be of comparable
quality. Bonds rated Baa or BBB possess some speculative characteristics.
The Portfolio may invest up to 20% of its assets in foreign securities
principally traded outside the United States and in American Depositary Receipts
("ADRs"). The Portfolio may not invest more than 10% of its total assets in the
securities of companies based in an emerging market. See "Risk Factors and
Certain Investment Techniques -- Foreign Securities" and "-- Risks Associated
With 'Emerging Markets' Securities."
INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the Portfolio is long term capital appreciation
by investing primarily in equity securities of companies based outside the
United States. The Portfolio expects that initially its investments will be
concentrated in Europe, Asia, the Far East, North and South America, Africa, the
Pacific Rim and Latin America.
The Portfolio may invest in securities of companies in emerging markets (see
"Risk Factors and Certain Investment Techniques -- Risks Associated With
'Emerging Markets' Securities"), but does not expect to invest more than 40% of
its total assets in securities of issuers in emerging markets. The Portfolio
will invest in issuers of companies from at least three countries outside the
United States.
Under normal market conditions, the Portfolio will invest a minimum of 80%
of its total assets in equity securities of non-U.S. issuers. With respect to
the International Equity Portfolio, "equity securities" means common stock and
preferred stock (including convertible preferred stock), bonds, notes and
debentures convertible into common or preferred stock, stock purchase warrants
and rights, equity interests in trusts and partnerships, and depository receipts
of companies.
The Portfolio may invest up to 20% of its total assets in debt securities
issued by U.S. or foreign banks, corporations or other business organizations,
or by U.S. or foreign governments or governmental entities (including
supranational organizations such as the International Bank for Reconstruction
and Development, I.E., the "World Bank"). The Portfolio may choose to take
advantage of opportunities for capital appreciation from debt securities by
reason of anticipated changes in such factors as interest rates, currency
relationships, or credit standing of individual issuers. The Portfolio will
invest less than 35% of its total assets in lower quality, high yielding
securities, commonly known as "junk bonds." See "Risk Factors and Certain
Investment Techniques -- Medium and Lower Rated ("Junk Bonds") and Unrated
Securities." The Portfolio will not invest in preferred stocks or debt
securities rated less than B by S&P and Moody's. Investing in securities issued
by foreign companies and governments
5
<PAGE>
involves considerations and potential risks not typically associated with
investing in obligations issued by the U.S. government and domestic
corporations. Investments in "emerging markets" securities include the
securities of issuers based in some of the world's underdeveloped markets,
including Eastern Europe. Investments in securities of issuers based in
underdeveloped countries entail all of the risks of investing in foreign issuers
to a heightened degree. See "Risk Factors and Certain Investment Techniques --
Foreign Securities" and "-- Risks Associated With 'Emerging Markets'
Securities."
The Portfolio will not invest in any illiquid securities except for Rule
144A securities. See "Additional Risks and Investment Techniques -- Illiquid
Securities" and "Non-Publicly Traded ("Restricted") Securities and Rule 144A
Securities."
BALANCED PORTFOLIO
The investment objective of the Portfolio is growth of capital and income
through investment in common stocks and fixed-income securities. Under normal
circumstances, the Advisor expects approximately 60% of the Portfolio's total
assets to be invested in equity securities and 40% of its total assets to be
invested in fixed-income securities. For this purpose, "equity securities"
includes warrants, preferred stock and securities convertible into equity
securities. The Portfolio will, under normal circumstances, invest at least 25%
of the Portfolio's total assets in fixed-income senior securities. For purposes
of this requirement, only the fixed-income component of a convertible bond will
be considered.
The Portfolio may invest in the types of fixed-income securities (including
preferred stock) rated at least B by S&P or by Moody's.
Up to one-third of the Portfolio's assets may be invested in foreign equity
or fixed-income securities. No more than 15% of the Portfolio's total assets
will be invested in the securities of issuers based in emerging markets. See
"Risk Factors and Certain Investment Techniques -- Foreign Securities" and
"--Risks Associated With 'Emerging Markets' Securities."
INCOME OPPORTUNITY PORTFOLIO
The investment objective of the Portfolio is high current income from
investment in a diversified portfolio of high yield, non-investment grade debt
securities of both U.S. and non-U.S. issuers. The Portfolio intends to invest a
portion of its assets in high risk, low quality debt securities of both
corporate and government issuers, commonly referred to as "junk bonds," and
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of obligation as
well as debt securities of issuers located in emerging market countries.
The Portfolio may invest in debt obligations (which may be denominated in
U.S. dollars or in non-U.S. currencies) issued or guaranteed by foreign
corporations, certain supranational entities (such as the World Bank) and
foreign governments (including political subdivisions having taxing authority)
or their agencies or instrumentalities, and debt obligations issued by U.S.
corporations denominated in non-U.S. currencies. These investments may include
debt obligations such as bonds (including sinking fund and callable bonds),
debentures and notes (including variable and floating rate instruments),
together with preferred stocks and zero coupon securities. The Portfolio may
also invest in loans, other direct debt obligations and loan participations.
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Up to 100% of the assets of the Portfolio may be invested in foreign
fixed-income securities, but no more than 30% of the total assets of the
Portfolio may be invested in non-U.S. dollar-denominated securities. The
Portfolio may invest up to 65% of its total assets in debt securities of issuers
located in emerging market countries. See "Risk Factors and Certain Investment
Techniques -- Foreign Securities."
The Portfolio will generally invest in securities rated BBB or lower by S&P
or Baa or lower by Moody's or, if unrated, of comparable quality in the opinion
of the Portfolio Advisor. Securities rated BBB by S&P or Baa by Moody's possess
some speculative characteristics. See the Appendix hereto for a description of
Moody's and S&P ratings and "Risk Factors and Certain Investment Techniques --
Medium and Lower Rated ("Junk Bonds") and Unrated Securities" for a description
of certain risks associated with lower rated securities.
In addition to high yield corporate bonds, the Portfolio will also invest in
mortgage related securities which represent pools of mortgage loans assembled
for sale to investors by various governmental agencies, such as GNMA and
government related organizations, such as FNMA and FHLMC as well as by private
issuers, such as commercial banks, savings and loan institutions, mortgage
bankers and private mortgage insurance companies.
The Portfolio may attempt to hedge against unfavorable changes in currency
exchange rates by engaging in forward currency transactions and trading currency
futures contracts and options thereon.
STANDBY INCOME PORTFOLIO
The investment objective of the Portfolio is high current income to the
extent consistent with relative stability of principal. Unlike money market
funds, however, the Portfolio does not attempt to maintain a constant $1.00 per
share net asset value.
Investments will be diversified among a broad range of money market
instruments including short term securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements with
respect to those securities. The Portfolio may also invest in corporate bonds,
commercial paper, certificates of deposit ("CDs") and bankers' acceptances.
Up to 50% of the Portfolio's total assets may be invested in U.S.
dollar-denominated Yankee Bonds or Eurodollar certificates of deposit issued by
U.S. banks. Yankee Bonds are instruments denominated in U.S. dollars which are
issued in the U.S. by foreign issuers. Eurodollar certificates of deposit are
dollar-denominated certificates of deposit which are issued in Europe. Up to 20%
of the Portfolio's total assets may be invested in fixed-income securities
denominated in foreign currencies. These securities include debt securities
issued by foreign banks, corporations, or other business organizations or by
foreign governments or governmental entities (including supra-national
organizations such as the World Bank). The value of securities denominated in
currencies other than the U.S. dollar will change in response to relative
currency values. See "Risk Factors and Certain Investment Techniques -- Foreign
Securities" and "-- Currency Exchange Rates."
The Portfolio invests only in investment grade securities (including foreign
securities) rated Baa or higher by Moody's or BBB or higher by S&P, or non-rated
securities which the Portfolio Advisor believes to be of comparable quality. The
Portfolio's dollar-weighted average maturity will normally be less than one
year. However, the Portfolio may invest in fixed-income corporate debt with
maturities of greater than twelve months; but, no individual security will have
a weighted average maturity (or average life in the case of mortgage backed
securities) of greater than five years. Bonds rated Baa by Moody's or BBB by S&P
have some speculative characteristics. See "Risk Factors and Certain Investment
Techniques."
7
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RISK FACTORS AND CERTAIN INVESTMENT TECHNIQUES
FOREIGN SECURITIES. Investing in securities issued by foreign companies and
governments involves considerations and potential risks not typically associated
with investing in obligations issued by the U.S. government and domestic
corporations. Less information may be available about foreign companies than
about domestic companies and foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.
RISKS ASSOCIATED WITH "EMERGING MARKETS" SECURITIES. "Emerging markets"
securities include the securities of issuers based in markets with developing
economies. These typically include countries where per capita GNP is less than
$8,355. Investments in securities of issuers based in underdeveloped countries
entail all of the risks of investing in foreign issuers outlined in this section
to a heightened degree. These heightened risks include: (i) expropriation,
confiscatory taxation, nationalization, and less social, political and economic
stability; (ii) smaller markets for such securities and a low or nonexistent
volume of trading, resulting in a lack of liquidity and in price volatility;
(iii) certain national policies which may restrict a Portfolio's investment
opportunities including restrictions on investing in issuers in industries
deemed sensitive to relevant national interests; and (iv) in the case of Eastern
Europe, the absence of developed capital markets and legal structures governing
private or foreign investment and private property and the possibility that
recent favorable economic and political developments could be slowed or reversed
by unanticipated events.
In certain of these markets, the Communist Party, despite the fall of
Communist-dominated governments, continues to exercise a significant or, in some
countries, dominant role. So long as the situation continues or currently
controlling parties remain vulnerable to sudden removal from power, investments
in such countries will involve risk of nationalization, expropriation and
confiscatory taxation. The former communist governments of a number of Eastern
European countries expropriated large amounts of private property in the past,
and in many cases without adequate compensation, and there is no assurance that
such expropriation will not occur in the future. In the event of any such
expropriation, a Portfolio could lose a substantial portion of any investments
it has made in the affected countries. Finally, even though certain eastern
European currencies may be convertible into U.S. dollars, the conversion rates
may be artificial in relation to the actual market values and may be adverse to
Portfolio shareholders.
CURRENCY EXCHANGE RATES. A Portfolio's share value may change significantly
when the currencies, other than the U.S. dollar, in which the Portfolio's
investments are denominated strengthen or weaken against the U.S. dollar.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange
8
<PAGE>
markets and the relative merits of investments in different countries as seen
from an international perspective. Currency exchange rates can also be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
by currency controls or political developments in the United States or abroad.
MEDIUM AND LOWER RATED ("JUNK BONDS") AND UNRATED SECURITIES. Securities
rated in the fourth highest category by S&P or Moody's, although considered
investment grade, may possess speculative characteristics, and changes in
economic or other conditions are more likely to impair the ability of issuers of
these securities to make interest and principal payments than is the case with
respect to issuers of higher grade bonds.
Generally, medium or lower rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds," offer a higher
current yield than is offered by higher rated securities, but also (i) will
likely have some quality and protective characteristics that, in the judgment of
the rating organizations, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (ii) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The yield of junk bonds will
fluctuate over time.
The market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher quality bonds. In addition, medium and lower rated
securities and comparable unrated securities generally present a higher degree
of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium and lower rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. Since the risk of
default is higher for lower rated debt securities, the Portfolio Advisor's
research and credit analysis are an especially important part of managing
securities of this type held by a Portfolio. In light of these risks, the Board
of Trustees has instructed the Portfolio Advisor, in evaluating the
creditworthiness of an issue, whether rated or unrated, to take various factors
into consideration, which may include, as applicable, the issuer's financial
resources, its sensitivity to economic conditions and trends, the operating
history of and the community support for the facility financed by the issue, the
ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower rated categories is
more volatile than that of higher quality securities, and the markets in which
medium and lower rated or unrated securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Portfolios to obtain accurate market
quotations for purposes of valuing their respective portfolios and calculating
their respective net asset values. Moreover, the lack of a liquid trading market
may restrict the availability of securities for the Portfolios to purchase and
may also have the effect of limiting the ability of a Portfolio to sell
securities at their fair value either to meet redemption requests or to respond
to changes in the economy or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Portfolio may
have to replace the security with a lower yielding security, resulting in a
decreased return for shareholders. Also, as the principal value of bonds moves
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by a Portfolio may decline relatively
proportionately more than a portfolio consisting of higher rated securities. If
a Portfolio experiences unexpected net redemptions, it may be forced to sell its
higher rated bonds, resulting in a decline in the overall credit quality of the
securities held by the Portfolio and increasing the exposure of the Portfolio to
the risks of lower rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
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Subsequent to its purchase by a Portfolio, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event will require sale of these securities by the
Portfolio, but the Portfolio Advisor will consider this event in its
determination of whether the Portfolio should continue to hold the securities.
ADVISOR AND PORTFOLIO ADVISORS
ADVISOR
Touchstone Advisors, Inc., located at 318 Broadway, Cincinnati, Ohio 45202,
serves as the investment advisor to the Trust and, accordingly, as investment
advisor to each of the Portfolios. The Advisor is a wholly-owned subsidiary of
IFS Financial Services, Inc., which is a wholly-owned subsidiary of
Western-Southern Life Assurance Company. Western-Southern Life Assurance Company
is a wholly-owned subsidiary of The Western and Southern Life Insurance Company.
The Trust has entered into an investment advisory agreement (the "Advisory
Agreement") with the Advisor which, in turn, has entered into a portfolio
advisory agreement ("Portfolio Agreement") with each Portfolio Advisor selected
by the Advisor for the Portfolios. It is the Advisor's responsibility to select,
subject to the review and approval of the Board of Trustees of the Trust,
portfolio advisors who have distinguished themselves by able performance in
their respective areas of expertise in asset management and to review their
continued performance.
Subject to the supervision and direction of the Board of Trustees, the
Advisor provides investment management evaluation services principally by
performing initial due diligence on prospective Portfolio Advisors and
thereafter monitoring Portfolio Advisor performance through quantitative and
qualitative analysis as well as periodic in-person, telephonic and written
consultations with Portfolio Advisors. In evaluating prospective Portfolio
Advisors, the Advisor considers, among other factors, each Portfolio Advisor's
level of expertise; relative performance and consistency of performance over a
minimum period of five years; level of adherence to investment discipline or
philosophy; personnel, facilities and financial strength; and quality of service
and client communications. The Advisor has responsibility for communicating
performance expectations and evaluations to each Portfolio Advisor and
ultimately recommending to the Board of Trustees of the Trust whether the
Portfolio Advisor's contract should be renewed, modified or terminated. The
Advisor provides written reports to the Board of Trustees regarding the results
of its evaluation and monitoring functions. The Advisor is also responsible for
conducting all operations of the Portfolios except those operations
subcontracted to the Portfolio Advisors, or contracted by the Trust to the
custodian, transfer agent and administrator.
The Portfolio Advisor of each Portfolio makes all the day-to-day decisions
to buy or sell particular portfolio securities.
The Emerging Growth Portfolio will be managed by two Portfolio Advisors,
each managing a portion of the Portfolio's assets. The Advisor will allocate
varying percentages of the assets of the Portfolio to each Portfolio Advisor,
which percentages will be adjusted from time to time by the Advisor based on its
evaluation of each Portfolio Advisor.
The Balanced Portfolio will also be managed by two Portfolio Advisors. One
Portfolio Advisor will manage the Portfolio's equity investments, while the
second will manage the Portfolio's fixed-income and cash equivalents
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investments. The Advisor may adjust from time to time the portion of the
Balanced Portfolio's assets invested in equities and fixed-income securities,
although the Portfolio is expected to remain relatively static in its investment
allocation between equities and fixed-income securities.
Each Portfolio pays the Advisor a fee for its services that is computed
daily and paid monthly at an annual rate equal to the percentage of the value of
the average daily net assets of the Portfolio as follows: Emerging Growth
Portfolio -- 0.80%; International Equity Portfolio -- 0.95%; Balanced Portfolio
- -- 0.70%; Income Opportunity Portfolio -- 0.65%; and Standby Income Portfolio --
0.25%. The investment advisory fee paid by the International Equity and Emerging
Growth Portfolios is higher than that of most mutual funds. The Advisor in turn
pays each Portfolio Advisor a fee for its services provided to the Portfolio
that is computed daily and paid monthly at an annual rate equal to the
percentage specified below of the value of the average daily net assets of the
Portfolio:
<TABLE>
<S> <C>
EMERGING GROWTH PORTFOLIO
David L. Babson & Company, Inc. 0.50%
Westfield Capital Management 0.45% of the first $10 million
Company, Inc. 0.40% of the next $40 million
0.35% thereafter
INTERNATIONAL EQUITY PORTFOLIO
BEA Associates 0.85% on the first $30 million
0.80% on the next $20 million
0.70% on the next $20 million
0.60% thereafter
BALANCED PORTFOLIO
Harbor Capital Management 0.50% of the first $75 million
Company Inc. 0.40% of the next $75 million
0.30% thereafter
Morgan Grenfell Capital 0.35% on the first $40 million
Management, Inc. 0.30% thereafter
INCOME OPPORTUNITY PORTFOLIO
Alliance Capital Management L.P. 0.40% on the first $50 million
0.35% on the next $20 million
0.30% on the next $20 million
0.25% thereafter
STANDBY INCOME PORTFOLIO
Fort Washington Investment 0.15%
Advisors, Inc.
</TABLE>
Fort Washington Investment Advisors, Inc. is an affiliate of the Advisor,
and shareholders should be aware that the Advisor may be subject to a conflict
of interest when making decisions regarding the retention and compensation of
Fort Washington and may be subject to such a conflict concerning other
particular Portfolio Advisors. However, the Advisor's decisions, including the
identity of a Portfolio Advisor and the specific amount of the
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Advisor's compensation to be paid to the Portfolio Advisor, are subject to
review and approval by a majority of the Board of Trustees and separately by a
majority of such Trustees who are not affiliated with the Advisor or any of its
affiliates.
CONSULTANT TO THE INVESTMENT ADVISOR
RogersCasey Consulting, Inc. ("RogersCasey") located at One Parklands Drive,
Darien, Connecticut 06829, has been engaged in the business of rendering
portfolio advisor evaluations since 1976. The staff at RogersCasey is
experienced in acting as investment consultants and in developing, implementing
and managing multiple portfolio advisor programs. RogersCasey provides asset
management consulting services to various institutional and individual clients
and provides the Advisor with investment consulting services with respect to
development, implementation and management of the Trust's multiple portfolio
manager program. RogersCasey is employed by and its fees are paid by the Advisor
(not the Trust). As consultant, RogersCasey provides research concerning
registered investment advisors to be retained by the Advisor as Portfolio
Advisors, monitors and assists the Advisor with the periodic reevaluation of
existing Portfolio Advisors and makes periodic reports to the Advisor and the
Board of Trustees.
PORTFOLIO ADVISORS
Subject to the supervision and direction of the Advisor and, ultimately, the
Board of Trustees, each Portfolio Advisor manages the securities held by the
Portfolio it serves in accordance with the Portfolio's stated investment
objective and policies, making investment decisions for the Portfolio and
placing orders to purchase and sell securities on behalf of the Portfolio.
The following sets forth certain information about each of the Portfolio
Advisors. The individuals employed by the Portfolio Advisor who are primarily
responsible for the day-to-day investment management of the Portfolio are named
below.
DAVID L. BABSON & COMPANY, INC. ("Babson") serves as one of two Portfolio
Advisors to EMERGING GROWTH PORTFOLIO. As of June 30, 1995, Babson became a
separate and distinct indirect subsidiary of MassMutual Holding Company. Babson
has been registered as an investment advisor under the Investment Advisors Act
of 1940, as amended, ("the Advisors Act"), since 1940. Babson provides
investment advisory services to individual and institutional clients. As of June
30, 1995, Babson and affiliates had assets under management of $11.5 billion.
Eugene H. Gardner, Jr., Peter C. Schliemann and Lance F. James are primarily
responsible for the day-to-day investment management of the portion of the
Portfolio's assets allocated to Babson by the Advisor. Mr. Gardner has been with
Babson since 1990; Mr. Schliemann has been with Babson since 1979; and Mr. James
has been with the firm since 1986. Babson's principal executive offices are
located at One Memorial Drive, Cambridge, Massachusetts 02142-1300.
WESTFIELD CAPITAL MANAGEMENT COMPANY, INC. ("Westfield") serves as the
second Portfolio Advisor to EMERGING GROWTH PORTFOLIO. Westfield is owned 100%
by the active members of its professional staff. Westfield has been registered
as an investment advisor under the Advisors Act since 1989. Westfield provides
investment advisory services to individual and institutional clients. As of June
30, 1995, Westfield had assets under management of $722 million. Michael J.
Chapman is primarily responsible for the day-to-day investment management of the
portion of the Portfolio's assets allocated to Westfield by the Advisor. Mr.
Chapman (CFA) has been with Westfield since 1990, after 9 years with Eaton Vance
Corporation in Boston, Massachusetts. Westfield's principal executive offices
are located at One Financial Center, Boston, Massachusetts 02111.
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<PAGE>
BEA ASSOCIATES serves as Portfolio Advisor to INTERNATIONAL EQUITY
PORTFOLIO. BEA Associates is a New York general partnership and is owned 80% by
Credit Swisse Capital Corporation and 20% by its general partners. BEA
Associates has been registered as an investment advisor under the Advisors Act
since 1968. BEA Associates provides investment advisory services to individual
and institutional clients. As of June 30, 1995, BEA Associates had assets under
management of $28.9 billion. Emilio Bassini is primarily responsible for the
day-to-day investment management of the Portfolio. Mr. Bassini (CPA) joined BEA
Associates in 1984 and became international equity portfolio manager
specializing in emerging markets, Latin America and Europe in 1986. BEA
Associates' principal executive offices are located at 153 East 53rd Street, New
York, New York 10022.
HARBOR CAPITAL MANAGEMENT COMPANY, INC. ("Harbor") serves as Portfolio
Advisor to the equity portion of BALANCED PORTFOLIO. Harbor is 85% owned by the
employees of the firm and 15% by Baer Holding Limited of Zurich. Harbor has been
registered as an investment advisor under the Advisors Act since 1979. Harbor
provides investment advisory services to individual and institutional clients.
As of June 30, 1995, Harbor had assets under management of $2.7 billion. Malcolm
Pirnie, Alan S. Fields and Ben Niedermeyer are primarily responsible for the
day-to-day investment management of the equity portion of the Portfolio. Mr.
Pirnie (CFA) has been a Managing Director at Harbor since 1979 and became
President in 1993. Mr. Fields has been a Managing Director at Harbor since 1979
and Chairman of the Executive Committee since 1993. Mr. Niedermeyer (CFA) has
been a Vice President and portfolio manager with Harbor since 1992. Harbor's
principal executive offices are located at 125 High Street, 26th Floor, Boston,
Massachusetts 02110.
MORGAN GRENFELL CAPITAL MANAGEMENT, INC. ("Morgan Grenfell") serves as
Portfolio Advisor to the fixed-income portion of BALANCED PORTFOLIO. Morgan
Grenfell is owned 100% by Deutsche Bank. Morgan Grenfell has been registered as
an investment advisor under the Advisors Act since 1985. Morgan Grenfell
provides investment advisory services to individual and institutional clients.
As of June 30, 1995, Morgan Grenfell had assets under management of $6.88
billion. David W. Baldt is primarily responsible for the day-to-day investment
management of the fixed-income portion of the Portfolio. Mr. Baldt (CFA) joined
Morgan Grenfell in 1989. Morgan Grenfell's principal executive offices are
located at 885 Third Avenue, New York, New York 10022.
ALLIANCE CAPITAL MANAGEMENT L.P. ("Alliance") serves as Portfolio Advisor to
INCOME OPPORTUNITY PORTFOLIO. Alliance is owned 8% by its employees and 59% by
wholly-owned subsidiaries of The Equitable Life Assurance Society of the United
States. The balance of its units are held by the public. Alliance has been
registered as an investment advisor under the Advisors Act since 1971. Alliance
provides investment advisory services to individual and institutional clients.
As of June 30, 1995, Alliance had assets under management of $135.8 billion.
Wayne Lyski and Vicki Fuller are primarily responsible for the day-to-day
investment management of the Portfolio. Mr. Lyski has been with Alliance since
1983 and has 21 years of investment experience. Ms. Fuller (CPA) has been with
Alliance, and its predecessors, since 1985 and has 14 years of investment
experience. Alliance's principal executive offices are located at 1345 Avenue of
the Americas, New York, New York 10105.
FORT WASHINGTON INVESTMENT ADVISORS, INC. ("Fort Washington") serves as
Portfolio Advisor to the STANDBY INCOME PORTFOLIO. Fort Washington is owned by
The Western and Southern Life Insurance Company. Fort Washington has been
registered as an investment advisor under the Advisors Act since 1990. Fort
Washington provides investment advisory services to individuals and
institutional clients. As of June 30, 1995, Fort Washington had assets under
management of approximately $6.8 billion. Christopher J. Mahony is primarily
responsible for the day-to- day investment management of the Standby Income
Portfolio. Mr. Mahony joined Fort Washington in 1994 after eight years of
investment experience as portfolio manager with Neuberger & Berman.
13
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ADDITIONAL RISKS AND INVESTMENT TECHNIQUES
The following are descriptions of types of securities invested in by the
Portfolios, certain investment techniques employed by those Portfolios and risks
associated with utilizing either the securities or the investment technique.
DERIVATIVES. The Portfolios may invest in various instruments that are
commonly known as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on, or "derived" from, a traditional
security, asset, or market index. Some "derivatives" such as certain
mortgage-related and other asset-backed securities are in many respects like any
other investment, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
derivatives and many different ways to use them. There is a range of risks
associated with those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and as a
low cost method of gaining exposure to a particular securities market without
investing directly in those securities. However, some derivatives are used for
leverage, which tends to magnify the effects of an instrument's price changes as
market conditions change. Leverage involves the use of a small amount of money
to control a large amount of financial assets, and can in some circumstances,
lead to significant losses. A Portfolio Advisor will use derivatives only in
circumstances where the Portfolio Advisor believes they offer the most economic
means of improving the risk/reward profile of the Portfolio. Derivatives will
not be used to increase portfolio risk above the level that could be achieved
using only traditional investment securities or to acquire exposure to changes
in the value of assets or indexes that by themselves would not be purchased for
the Portfolio. The use of derivatives for non-hedging purposes may be considered
speculative. A description of the derivatives that the Portfolios may use and
some of their associated risks is found below.
ADRS, EDRS AND CDRS. ADRs are U.S. dollar-denominated receipts typically
issued by domestic banks or trust companies that represent the deposit with
those entities of securities of a foreign issuer. ADRs are publicly traded on
exchanges or over-the-counter in the United States. European Depositary Receipts
("EDRs"), which are sometimes referred to as Continental Depositary Receipts
("CDRs"), may also be purchased by the Portfolios. EDRs and CDRs are generally
issued by foreign banks and evidence ownership of either foreign or domestic
securities. Certain institutions issuing ADRs or EDRs may not be sponsored by
the issuer of the underlying foreign securities. A non-sponsored depository may
not provide the same shareholder information that a sponsored depository is
required to provide under its contractual arrangements with the issuer of the
underlying foreign securities.
FIXED-INCOME AND OTHER DEBT INSTRUMENT SECURITIES. Fixed-income and other
debt instrument securities include all bonds, high yield or "junk" bonds,
municipal bonds, debentures, U.S. Government securities, mortgage related
securities including government stripped mortgage related securities, zero
coupon securities and custodial receipts. The market value of fixed-income
obligations of the Portfolios will be affected by general changes in interest
rates which will result in increases or decreases in the value of the
obligations held by the Portfolios. The market value of the obligations held by
a Portfolio can be expected to vary inversely to changes in prevailing interest
rates. Shareholders also should recognize that, in periods of declining interest
rates, a Portfolio's yield will tend to be somewhat higher than prevailing
market rates and, in periods of rising interest rates, a Portfolio's yield will
tend to be somewhat lower. Also, when interest rates are falling, the inflow of
net new money to a Portfolio from the continuous sale of its shares will tend to
be invested in instruments producing lower yields than the balance of its
portfolio, thereby reducing the Portfolio's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which a Portfolio may invest may not yield as high a level of current income
as might be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.
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<PAGE>
Ratings made available by S&P and Moody's are relative and subjective and
are not absolute standards of quality. Although these ratings are initial
criteria for selection of portfolio investments, a Portfolio Advisor also will
make its own evaluation of these securities. Among the factors that will be
considered are the long term ability of the issuers to pay principal and
interest and general economic trends.
Fixed-income securities may be purchased on a when-issued or
delayed-delivery basis. See "When-Issued and Delayed-Delivery Securities" below.
U.S. GOVERNMENT SECURITIES. Each Portfolio may invest in U.S. Government
securities, which are obligations issued or guaranteed by the U.S. Government,
its agencies, authorities or instrumentalities. Some U.S. Government securities,
such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ
only in their interest rates, maturities and times of issuance, are supported by
the full faith and credit of the United States. Others are supported by: (i) the
right of the issuer to borrow from the U.S. Treasury, such as securities of the
Federal Home Loan Banks; (ii) the discretionary authority of the U.S. government
to purchase the agency's obligations, such as securities of the FNMA; or (iii)
only the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. Government will provide
financial support in the future to U.S. Government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States.
Securities guaranteed as to principal and interest by the U.S. Government,
its agencies, authorities or instrumentalities include: (i) securities for which
the payment of principal and interest is backed by an irrevocable letter of
credit issued by the U.S. Government or any of its agencies, authorities or
instrumentalities; and (ii) participation interests in loans made to foreign
governments or other entities that are so guaranteed. The secondary market for
certain of these participation interests is limited and, therefore, may be
regarded as illiquid.
MORTGAGE RELATED SECURITIES. Each Portfolio may invest in mortgage related
securities. There are several risks associated with mortgage related securities
generally. One is that the monthly cash inflow from the underlying loans may not
be sufficient to meet the monthly payment requirements of the mortgage related
security.
Prepayment of principal by mortgagors or mortgage foreclosures will shorten
the term of the underlying mortgage pool for a mortgage related security. Early
returns of principal will affect the average life of the mortgage related
securities remaining in a Portfolio. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. In periods of rising interest rates, the rate of
prepayment tends to decrease, thereby lengthening the average life of a pool of
mortgage related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life of
a pool. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of a Portfolio. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that a Portfolio will have to reinvest the proceeds of prepayments at
lower interest rates than those at which the assets were previously invested. If
this occurs, a Portfolio's yield will correspondingly decline. Thus, mortgage
related securities may have less potential for capital appreciation in periods
of falling interest rates than other fixed-income securities of comparable
maturity, although these securities may have a comparable risk of decline in
market value in periods of rising interest rates. To the extent that a Portfolio
purchases mortgage related securities at a premium, unscheduled prepayments,
which are made at par, will result in a loss equal to any unamortized premium.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage related securities. Payments of principal and interest on the mortgages
are passed through to the holders of the CMOs on the same schedule as
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they are received, although certain classes of CMOs have priority over others
with respect to the receipt of prepayments on the mortgages. Therefore,
depending on the type of CMOs in which a Portfolio invests, the investment may
be subject to a greater or lesser risk of prepayment than other types of
mortgage related securities.
Mortgage related securities may not be readily marketable. To the extent any
of these securities are not readily marketable in the judgment of the Portfolio
Advisor, the investment restriction limiting a Portfolio's investment in
illiquid instruments to not more than 15% of the value of its net assets will
apply.
STRIPPED MORTGAGE RELATED SECURITIES. These securities are either issued
and guaranteed, or privately-issued but collateralized by securities issued, by
GNMA, FNMA or FHLMC. These securities represent beneficial ownership interests
in either periodic principal distributions ("principal-only") or interest
distributions ("interest-only") on mortgage related certificates issued by GNMA,
FNMA or FHLMC, as the case may be. The certificates underlying the stripped
mortgage related securities represent all or part of the beneficial interest in
pools of mortgage loans. The Portfolio will invest in stripped mortgage related
securities in order to enhance yield or to benefit from anticipated appreciation
in value of the securities at times when its Portfolio Advisor believes that
interest rates will remain stable or increase. In periods of rising interest
rates, the expected increase in the value of stripped mortgage related
securities may offset all or a portion of any decline in value of the securities
held by the Portfolio.
Investing in stripped mortgage related securities involves the risks
normally associated with investing in mortgage related securities. See "Mortgage
Related Securities" above. In addition, the yields on stripped mortgage related
securities are extremely sensitive to the prepayment experience on the mortgage
loans underlying the certificates collateralizing the securities. If a decline
in the level of prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal will be
accelerated, thereby reducing the yield to maturity on interest-only stripped
mortgage related securities and increasing the yield to maturity on
principal-only stripped mortgage related securities. Sufficiently high
prepayment rates could result in a Portfolio not fully recovering its initial
investment in an interest-only stripped mortgage related security. Under current
market conditions, the Portfolio expects that investments in stripped mortgage
related securities will consist primarily of interest-only securities. Stripped
mortgage related securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that the Portfolio will be able to effect a trade of a stripped mortgage related
security at a time when it wishes to do so. The Portfolio will acquire stripped
mortgage related securities only if a secondary market for the securities exists
at the time of acquisition. Except for stripped mortgage related securities
based on fixed rate FNMA and FHLMC mortgage certificates that meet certain
liquidity criteria established by the Board of Trustees, the Portfolios will
treat government stripped mortgage related securities and privately-issued
mortgage related securities as illiquid and will limit its investments in these
securities, together with other illiquid investments, to not more than 15% of
net assets.
ZERO COUPON SECURITIES. Zero coupon U.S. Government securities are debt
obligations that are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the security at
the time of issuance. Zero coupon securities do not require the periodic payment
of interest. These investments benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than U.S. Government securities
that make regular payments of interest. A Portfolio accrues income on these
investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations, in which case the Portfolio
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will forego the purchase of additional income producing assets with these funds.
Zero coupon securities include STRIPS that is, securities underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain notes or bonds issued by the U.S.
government, its agencies, authorities or instrumentalities. They also include
Coupons Under Book Entry System ("CUBES"), which are component parts of U.S.
Treasury bonds and represent scheduled interest and principal payments on the
bonds.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. These are instruments in amounts
owed by a corporate, governmental or other borrower to another party. They may
represent amounts owed to lenders or lending syndicates (loans and loan
participations), to suppliers of goods of services (trade claims or other
receivables) or to other parties. Direct debt instruments purchased by a
Portfolio may have a maturity of any number of days or years, may be secured or
unsecured, and may be of any credit quality. Direct debt instruments involve the
risk of loss in the case of default or insolvency of the borrower. Direct debt
instruments may offer less legal protection to a Portfolio in the event of fraud
or misrepresentation. In addition, loan participations involve a risk of
insolvency of the lending bank or other financial intermediary. Direct debt
instruments also may include standby financing commitments that obligate a
Portfolio to supply additional cash to the borrower on demand at the time when a
Portfolio would not have otherwise done so, even if the borrower's condition
makes it unlikely that the amount will ever be repaid.
These instruments will be considered illiquid securities and so will be
limited, along with a Portfolio's other illiquid securities, to not more than
15% of the Portfolio's net assets.
SWAP AGREEMENTS. To help enhance the value of its portfolio or manage its
exposure to different types of investments, the Portfolios may enter into
interest rate, currency and mortgage swap agreements and may purchase and sell
interest rate "caps," "floors" and "collars."
In a typical interest rate swap agreement, one party agrees to make regular
payments equal to a floating interest rate on a specified amount (the "notional
principal amount") in return for payments equal to a fixed interest rate on the
same amount for a specified period. If a swap agreement provides for payment in
different currencies, the parties may also agree to exchange the notional
principal amount. Mortgage swap agreements are similar to interest rate swap
agreements, except that notional principal amount is tied to a reference pool of
mortgages.
In a cap or floor, one party agrees, usually in return for a fee, to make
payments under particular circumstances. For example, the purchaser of an
interest rate cap has the right to receive payments to the extent a specified
interest rate exceeds an agreed level; the purchaser of an interest rate floor
has the right to receive payments to the extent a specified interest rate falls
below an agreed level. A collar entitles the purchaser to receive payments to
the extent a specified interest rate falls outside an agreed range.
Swap agreements may involve leverage and may be highly volatile; depending
on how they are used, they may have a considerable impact on the Portfolio's
performance. Swap agreements involve risks depending upon the other party's
creditworthiness and ability to perform, as judged by the Portfolio Advisor, as
well as the Portfolio's ability to terminate its swap agreements or reduce its
exposure through offsetting transactions.
All swap agreements are considered as illiquid securities and, therefore,
will be limited, along with all of a Portfolio's other illiquid securities, to
15% of that Portfolio's net assets.
CUSTODIAL RECEIPTS. Custodial receipts or certificates, such as
Certificates of Accrual on Treasury Securities ("CATS"), Treasury Investors
Growth Receipt ("TIGRs") and Financial Corporation certificates ("FICO Strips"),
are securities underwritten by securities dealers or banks that evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. Government, its agencies, authorities or
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instrumentalities. The underwriters of these certificates or receipts purchase a
U.S. Government security and deposit the security in an irrevocable trust or
custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the U.S. Government security. Custodial
receipts evidencing specific coupon or principal payments have the same general
attributes as zero coupon U.S. Government securities, described above. Although
typically under the terms of a custodial receipt a Portfolio is authorized to
assert its rights directly against the issuer of the underlying obligation, the
Portfolio may be required to assert through the custodian bank such rights as
may exist against the underlying issuer. Thus, if the underlying issuer fails to
pay principal and/or interest when due, a Portfolio may be subject to delays,
expenses and risks that are greater than those that would have been involved if
the Portfolio had purchased a direct obligation of the issuer. In addition, if
that the trust or custodial account in which the underlying security has been
deposited is determined to be an association taxable as a corporation, instead
of a non-taxable entity, the yield on the underlying security would be reduced
in respect of any taxes paid.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed
advantageous at a particular time, each Portfolio may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. A Portfolio will enter into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Portfolio
may include securities purchased on a "when, as and if issued" basis under which
the issuance of the securities depends on the occurrence of a subsequent event,
such as approval of a merger, corporate reorganization or debt restructuring.
Securities purchased on a when-issued or delayed-delivery basis may expose a
Portfolio to risk because the securities may experience fluctuations in value
prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.
REPURCHASE AGREEMENTS. Each of the Portfolios may engage in repurchase
agreement transactions. Under the terms of a typical repurchase agreement, a
Portfolio would acquire an underlying debt obligation for a relatively short
period (usually not more than one week) subject to an obligation of the seller
to repurchase, and the Portfolio to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Portfolio's holding
period. This arrangement results in a fixed rate of return that is not subject
to market fluctuations during the Portfolio's holding period. A Portfolio may
enter into repurchase agreements with respect to U.S. Government securities with
member banks of the Federal Reserve System and certain non-bank dealers approved
by the Board of Trustees. Under each repurchase agreement, the selling
institution is required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price. The Portfolio
Advisor, acting under the supervision of the Advisor and the Board of Trustees,
reviews on an ongoing basis the value of the collateral and the creditworthiness
of those non-bank dealers with whom the Portfolio enters into repurchase
agreements. In entering into a repurchase agreement, a Portfolio bears a risk of
loss in the event that the other party to the transaction defaults on its
obligations and the Portfolio is delayed or prevented from exercising its rights
to dispose of the underlying securities, including the risk of a possible
decline in the value of the underlying securities during the period in which the
Portfolio seeks to assert its rights to them, the risk of incurring expenses
associated with
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asserting those rights and the risk of losing all or a part of the income from
the agreement. Repurchase agreements are considered to be collateralized loans
under the Investment Company Act of 1940, as amended (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS AND FORWARD ROLL TRANSACTIONS. The Portfolios
may enter into reverse repurchase agreements and forward roll transactions. In a
reverse repurchase agreement the Portfolio agrees to sell portfolio securities
to financial institutions such as banks and broker-dealers and to repurchase
them at a mutually agreed date and price. Forward roll transactions are
equivalent to reverse repurchase agreements but involve mortgage backed
securities and involve a repurchase of a substantially similar security. At the
time the Portfolio enters into a reverse repurchase agreement or forward roll
transaction it will place in a segregated custodial account cash, U.S.
Government securities or high grade, liquid debt obligations having a value
equal to the repurchase price, including accrued interest. Reverse repurchase
agreements and forward roll transactions involve the risk that the market value
of the securities sold by the Portfolio may decline below the repurchase price
of the securities. Reverse repurchase agreements and forward roll transactions
are considered to be borrowings by a Portfolio for purposes of the limitations
described in "Certain Investment Restrictions" below and in the Trust's
Statement of Additional Information.
LENDING PORTFOLIO SECURITIES. To generate income for the purpose of helping
to meet its operating expenses, each Portfolio may lend securities to brokers,
dealers and other financial organizations. These loans, if and when made, may
not exceed 30% of a Portfolio's assets taken at value. A Portfolio's loans of
securities will be collateralized by cash, letters of credit or U.S. Government
securities. The cash or instruments collateralizing a Portfolio's loans of
securities will be maintained at all times in a segregated account with the
Portfolio's custodian, or with a designated subcustodian, in an amount at least
equal to the current market value of the loaned securities. In lending
securities to brokers, dealers and other financial organizations, a Portfolio is
subject to risks, which, like those associated with other extensions of credit,
include delays in recovery and possible loss of rights in the collateral should
the borrower fail financially.
ILLIQUID SECURITIES. No Portfolio may invest more than 15% of its net
assets in securities which are illiquid or otherwise not readily marketable. The
Trustees of the Trust have adopted a policy that the International Equity
Portfolio may not invest in illiquid securities other than Rule 144A securities.
If a security becomes illiquid after purchase by the Portfolio, the Portfolio
will normally sell the security unless to do so would not be in the best
interests of shareholders.
NON-PUBLICLY TRADED ("RESTRICTED") SECURITIES AND RULE 144A
SECURITIES. Each Portfolio may purchase securities in the United States that
are not registered for sale under federal securities laws but which can be
resold to institutions under SEC Rule 144A or under an exemption from such laws.
Provided that a dealer or institutional trading market in such securities
exists, these restricted securities or Rule 144A securities are treated as
exempt from the Portfolio's 15% limit on illiquid securities. The Board of
Trustees of the Trust, with advice and information from the respective Portfolio
Advisor, will determine the liquidity of restricted securities or Rule 144A
securities by looking at factors such as trading activity and the availability
of reliable price information and, through reports from such Portfolio Advisor,
the Board of Trustees of the Trust will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how the markets for Rule 144A securities will develop. If institutional trading
in restricted securities or Rule 144A securities were to decline, a Portfolio's
illiquidity could be increased and the Portfolio could be adversely affected.
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No Portfolio will invest more than 10% of its total assets in restricted
securities (including Rule 144A securities).
TEMPORARY INVESTMENTS. For temporary defensive purposes during periods when
the Portfolio Advisor of a Portfolio believes, in consultation with the Advisor,
that pursuing the Portfolio's basic investment strategy may be inconsistent with
the best interests of its shareholders, the Portfolio may invest its assets
without limit in the following money market instruments: U.S. Government
securities (including those purchased in the form of custodial receipts),
repurchase agreements, certificates of deposit and bankers' acceptances issued
by banks or savings and loan associations having assets of at least $500 million
as of the end of their most recent fiscal year and high quality commercial
paper.
In addition, for the same purposes the Portfolio Advisor of International
Equity Portfolio may invest without limit in obligations issued or guaranteed by
foreign governments or by any of their political subdivisions, authorities,
agencies or instrumentalities that are rated at least AA by S&P or Aa by Moody's
or, if unrated, are determined by the Portfolio Advisor to be of equivalent
quality. Each Portfolio also may hold a portion of its assets in money market
instruments or cash in amounts designed to pay expenses, to meet anticipated
redemptions or pending investments in accordance with its objectives and
policies. Any temporary investments may be purchased on a when-issued basis.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Portfolio may enter into
futures contracts and purchase and write (sell) options on these contracts,
including but not limited to interest rate, securities index and foreign
currency futures contracts and put and call options on these futures contracts.
These contracts will be entered into only upon the concurrence of the Portfolio
Advisor that such contracts are necessary or appropriate in the management of
the Portfolio's assets. These contracts will be entered into on exchanges
designated by the Commodity Futures Trading Commission ("CFTC") or, consistent
with CFTC regulations, on foreign exchanges. These transactions may be entered
into for bona fide hedging and other permissible risk management purposes
including protecting against anticipated changes in the value of securities a
Portfolio intends to purchase.
No Portfolio will hedge more than 25% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. In addition, no
Portfolio will buy futures or write puts whose underlying value exceeds 25% of
its total assets, and no Portfolio will buy calls with a value exceeding 5% of
its total assets.
A Portfolio will not enter into futures contracts and related options for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's assets after taking into account unrealized profits and
unrealized losses on any contracts it has entered into.
A Portfolio may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the
Portfolio's futures and options positions may not prove to be perfectly or even
highly correlated with changes in the value of its portfolio securities.
Successful use of futures and related options is subject to a Portfolio
Advisor's ability to predict correctly movements in the direction of the
securities markets generally, which ability may require different skills and
techniques than predicting changes in the prices of individual securities.
Moreover, futures and options contracts may only be closed out by entering into
offsetting transactions on the exchange where the position was entered into (or
a linked exchange), and as a result of daily price fluctuation limits there can
be no assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a
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Portfolio may realize a loss on a futures contract or option that is not offset
by an increase in the value of its portfolio securities that are being hedged or
a Portfolio may not be able to close a futures or options position without
incurring a loss in the event of adverse price movements.
OPTIONS ON FOREIGN CURRENCIES. Each Portfolio that may invest in foreign
securities may write covered put and call options and purchase put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. The Portfolio may use options on currency to
cross-hedge, which involves writing or purchasing options on one currency to
hedge against changes in exchange rates for a different, but related currency.
As with other types of options, however, the writing of an option on foreign
currency will constitute only a partial hedge up to the amount of the premium
received, and the Portfolio could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may be used to hedge against
fluctuations in exchange rates although, in the event of exchange rate movements
adverse to the Portfolio's position, it may not forfeit the entire amount of the
premium plus related transaction costs. In addition, the Portfolio may purchase
call options on currency when the Portfolio Advisor anticipates that the
currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular option, or at any particular time. If the
Portfolio is unable to effect a closing purchase transaction with respect to
covered options it has written, the Portfolio will not be able to sell the
underlying currency or dispose of assets held in a segregated account until the
options expire. Similarly, if the Portfolio is unable to effect a closing sale
transaction with respect to options it has purchased, it would have to exercise
the options in order to realize any profit and will incur transaction costs upon
the purchase or sale of underlying currency. The Portfolio pays brokerage
commissions or spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which may not
be present in the case of exchange-rated currency options. The Portfolio's
ability to terminate over-the-counter options ("OTC Options") will be more
limited than the exchange-traded options. It is also possible that
broker-dealers participating in OTC Options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, the
Portfolio will treat purchased OTC Options and assets used to cover written OTC
Options as illiquid securities. With respect to options written with primary
dealers in U.S. Government securities pursuant to an agreement requiring a
closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the repurchase formula.
OPTIONS ON STOCK. Each Portfolio may write and purchase options on stocks.
A call option gives the purchaser of the option the right to buy, and obligates
the writer to sell, the underlying stock at the exercise price at any time
during the option period. Similarly, a put option gives the purchaser of the
option the right to sell, and obligates the writer to buy the underlying stock
at the exercise price at any time during the option period. A covered call
option with respect to which the Portfolio owns the underlying stock sold by the
Portfolio exposes the Portfolio during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
stock or to possible continued holding of a stock which might otherwise have
been sold to protect against depreciation in the market price of the stock. A
covered put option sold by the Portfolio exposes the Portfolio during the term
of the option to a decline in price of the underlying stock.
To close out a position when writing covered options, the Portfolio may make
a "closing purchase transaction" which involves purchasing an option on the same
stock with the same exercise price and expiration date as the
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option which it has previously written on the stock. The Portfolio will realize
a profit or loss for a closing purchase transaction if the amount paid to
purchase an option is less or more, as the case may be, than the amount received
from the sale thereof. To close out a position as a purchaser of an option, the
Portfolio may make a "closing sale transaction" which involves liquidating the
Portfolio's position by selling the option previously purchased.
OPTIONS ON SECURITIES INDEXES. Each Portfolio may purchase and write put
and call options on securities indexes listed on domestic and, in the case of
those Portfolios which may invest in foreign securities, on foreign exchanges. A
securities index fluctuates with changes in the market values of the securities
included in the index.
Options on securities indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a security
index gives the holders the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
(b) a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the index upon which the option is based being greater than, in
the case of a call, or less than, in the case of a put, the exercise price of
the option. The amount of cash received will be equal to such difference between
the closing price of the index and the exercise price of the option expressed in
dollars or a foreign currency, as the case may be, times a specified multiple.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. The writer may offset its position in securities
index options prior to expiration by entering into a closing transaction on an
exchange or the option may expire unexercised.
To the extent permitted by U.S. federal or state securities laws, the
International Equity Portfolio may invest in options on foreign stock indexes in
lieu of direct investment in foreign securities. The Portfolio may also use
foreign stock index options for hedging purposes.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular security, whether the Portfolio
will realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of securities prices in the market generally
or, in the case of certain indexes, in an industry or market segment, rather
than movements in price of a particular security. Accordingly, successful use by
a Portfolio of options on security indexes will be subject to the Portfolio
Advisor's ability to predict correctly movement in the direction of that
securities market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities.
FORWARD CURRENCY CONTRACTS. Each Portfolio that may invest in foreign
currency-denominated securities may hold currencies to meet settlement
requirements for foreign securities and may engage in currency exchange
transactions in order to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which the Portfolio's securities are or may be
denominated. Forward currency contracts are agreements to exchange one currency
for another, for example, to exchange a certain amount of U.S. dollars for a
certain amount of French francs at a future date. The date (which may be any
agreed-upon fixed number of days in the future), the amount of currency to be
exchanged and the price at which the exchange will take place will be negotiated
with a currency trader and fixed for the term of the contract at the time that
the Portfolio enters into the contract.
In hedging specific portfolio positions, a Portfolio may enter into a
forward contract with respect to either the currency in which the positions are
denominated or another currency deemed appropriate by the Portfolio Advisor. The
amount the Portfolio may invest in forward currency contracts is limited to the
amount of the Portfolio's
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aggregate investments in foreign currencies. Risks associated with entering into
forward currency contracts include the possibility that the market for forward
currency contracts may be limited with respect to certain currencies and, upon a
contract's maturity, the inability of a Portfolio to negotiate with the dealer
to enter into an offsetting transaction. Forward currency contracts may be
closed out only by the parties entering into an offsetting contract. In
addition, the correlation between movements in the prices of those contracts and
movements in the price of the currency hedged or used for cover will not be
perfect. There is no assurance that an active forward currency contract market
will always exist. These factors will restrict a Portfolio's ability to hedge
against the risk of devaluation of currencies in which a Portfolio holds a
substantial quantity of securities and are unrelated to the qualitative rating
that may be assigned to any particular security. See the Statement of Additional
Information for further information concerning forward currency contracts.
ASSET COVERAGE. To assure that a Portfolio's use of futures and related
options, as well as when-issued and delayed-delivery transactions, forward
currency contracts and swap transactions, are not used to achieve investment
leverage, the Portfolio will cover such transactions, as required under
applicable SEC interpretations, either by owning the underlying securities or by
establishing a segregated account with the Trust's custodian containing high
grade liquid debt securities in an amount at all times equal to or exceeding the
Portfolio's commitment with respect to these instruments or contracts.
CERTAIN INVESTMENT RESTRICTIONS
The Trust, on behalf of each Portfolio, has adopted certain investment
restrictions that are enumerated in detail in the Statement of Additional
Information. Among other restrictions, each Portfolio may not, with respect to
75% of its total assets taken at market value, invest more than 5% of its total
assets in the securities of any one issuer, except U.S. Government securities,
or acquire more than 10% of any class of the outstanding voting securities of
any one issuer. In addition, no Portfolio may invest more than 25% of its total
assets in securities of issuers in any one industry. Each Portfolio may borrow
money as a temporary measure from banks in an aggregate amount not exceeding
one-third of the value of the Portfolio's total assets to meet redemptions and
for other temporary or emergency purposes not involving leveraging. Reverse
repurchase agreements and forward roll transactions involving mortgage related
securities will be aggregated with bank borrowings for purposes of this
calculation. No Portfolio may purchase securities while borrowings exceed 5% of
the value of the Portfolio's total assets. No Portfolio will invest more than
15% of the value of its net assets in securities that are illiquid, including
certain government stripped mortgage related securities, repurchase agreements
maturing in more than seven days and that cannot be liquidated prior to maturity
and securities that are illiquid by virtue of the absence of a readily available
market. Securities that have legal or contractual restrictions on resale but
have a readily available market, such as certain Rule 144A securities, are
deemed not illiquid for this purpose. No Portfolio may invest more than 10% of
its assets in restricted securities (including Rule 144A securities). See "Risk
Factors and Certain Investment Techniques -- Illiquid Securities" and "--
Non-Publicly Traded ("Restricted") Securities and Rule 144A Securities."
PORTFOLIO TURNOVER
No Portfolio, other than the Standby Income Portfolio will trade in
securities for short term profits but, when circumstances warrant, securities
may be sold without regard to the length of time held. An annual turnover rate
of 100% would occur when all the securities held by the Portfolio are replaced
one time during a period of one year. The annual turnover rate of each Portfolio
is not expected to exceed the following percentages: Emerging Growth Portfolio
- -- 60%; International Equity Portfolio -- 125%; Balanced Portfolio -- 120%
(equity investments -- 90%, fixed-income investments -- 150%); Income
Opportunity Portfolio -- between 200% and 250%; and Standby
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Income Portfolio -- 200%. The projected portfolio turnover rates of the Income
Opportunity Portfolio and the Standby Income Portfolio are higher than those of
other mutual funds. A Portfolio with a higher portfolio turnover rate will have
higher brokerage transaction expenses and a higher incidence of realized capital
gains.
PURCHASE AND REDEMPTION OF SHARES
OPENING AN ACCOUNT
SINCE YOU MAY NOT PURCHASE A PORTFOLIOS' SHARES DIRECTLY, YOU SHOULD READ
THE PROSPECTUS OF THE INSURANCE COMPANY'S SEPARATE ACCOUNT TO OBTAIN
INSTRUCTIONS FOR PURCHASING A VARIABLE ANNUITY CONTRACT.
SHARE PRICE
The term "net asset value" or NAV refers to the worth of one share. The NAV
is computed by adding the value of each Portfolio's investments, cash and other
assets, deducting liabilities and dividing the result by the number of shares
outstanding. Each Portfolio is open for business each day the New York Stock
Exchange Inc. ("NYSE") is open. The price of one share is its NAV which is
normally calculated at the close of regular trading on the NYSE (currently 4:00
p.m. New York time).
INVESTMENTS
Your investments in a Portfolio may be made only through separate accounts
established and maintained by insurance companies for the purpose of funding
variable contracts. Please refer to the prospectus of your insurance company's
separate account for information on how to invest in each Portfolio.
Investments by separate accounts in each Portfolio are expressed in terms of
full and fractional shares of each Portfolio. All investments in the Portfolios
are credited to an insurance company's separate account immediately upon
acceptance of the investment by a Portfolio. Investments will be processed at
the NAV calculated after an order is received and accepted by a Portfolio.
The offering of shares of any Portfolio may be suspended for a period of
time and each Portfolio reserves the right to reject any specific purchase
order. Purchase orders may be refused if, in the Advisor's opinion, they are of
a size that would disrupt the management of a Portfolio.
REDEMPTIONS
Shares of any Portfolio may be redeemed by the insurance company to make
benefit or surrender payments on any business day. Redemptions are effected at
the per share NAV next determined after receipt of the redemption request has
been accepted by a Portfolio. Redemption proceeds will normally be wired to the
insurance company on the next business day after receipt of the redemption
instructions by a Portfolio but in no event later than 7 days following receipt
of instructions. Each Portfolio may suspend redemptions or postpone payment
dates on days when the NYSE is closed (other than weekend of holidays), when
trading on the NYSE is restricted, or as permitted by the SEC.
NET ASSET VALUE
Each Portfolio's net asset value per share is calculated on each day, Monday
through Friday, except on days on which the NYSE is closed. Net asset value per
share is determined as of the close of regular trading on the NYSE (currently
4:00 p.m. New York time) and is computed by dividing the value of a Portfolio's
net assets by the total
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number of its shares outstanding. The net asset value of each Portfolio is
determined as of the close of regular trading on the NYSE on each day on which
the NYSE is open for trading, by deducting the amount of the Portfolio's
liabilities from the value of its assets.
Generally, a Portfolio's investments are valued at market value or, in the
absence of a market value, at fair value as determined by or under the direction
of the Board of Trustees.
Securities that are primarily traded on foreign exchanges are generally
valued at the preceding closing values of the securities on their respective
exchanges, except that, when an occurrence subsequent to the time a value was so
established is likely to have changed that value, the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Board of Trustees. A security that is primarily traded on a
domestic or foreign stock exchange is valued at the last sale price on that
exchange or, if no sales occurred during the day, at the current quoted bid
price. All short term dollar-denominated investments that mature in 60 days or
less are valued on the basis of amortized cost (which involves valuing an
investment at its cost and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of fluctuating
interest rates on the market value of the investment) which the Board of
Trustees has determined represents fair value. An option that is written by a
Portfolio is generally valued at the last sale price or, in the absence of the
last sale price, the last offer price. An option that is purchased by a
Portfolio is generally valued at the last sale price or, in the absence of the
last sale price, the last bid price. The value of a futures contract is equal to
the unrealized gain or loss on the contract that is determined by marking the
contract to the current settlement price for a like contract on the valuation
date of the futures contract. A settlement price may not be used if the market
makes the maximum price change in a single trading session permitted by an
exchange (a "limit move") with respect to a particular futures contract or if
the securities underlying the futures contract experience significant price
fluctuations after the determination of the settlement price. When a settlement
price cannot be used, futures contracts will be valued at their fair market
value as determined by or under the direction of the Board of Trustees.
All assets and liabilities initially expressed in foreign currency values
will be converted into U.S. dollar values at the mean between the bid and
offered quotations of the currencies against U.S. dollars as last quoted by any
recognized dealer. If the bid and offered quotations are not available, the rate
of exchange will be determined in good faith by the Board of Trustees. In
carrying out the valuation policies of the Board of Trustees, independent
pricing services may be consulted. Further information regarding the valuation
policies is contained in the Statement of Additional Information.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust rests
with the Board of Trustees. The Trustees approve all significant agreements
between the Trust and the persons and companies that furnish services to the
Trust. See "Management of the Trust" in the Statement of Additional Information
for more information about the Trustees and officers of the Trust.
SPONSOR
Touchstone Advisors, as sponsor to the Trust (the "Sponsor"), pursuant to an
agreement (the "Sponsor Agreement") provides oversight of the various service
providers to the Trust, including the administrator and the custodian. As
Sponsor to the Trust, Touchstone Advisors reserves the right to receive a
sponsor fee from each Portfolio equal on an annual basis to 0.20% of the average
daily net assets of that Portfolio for its then-current fiscal
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year. The Sponsor Agreement may be terminated by the Sponsor at the end of any
calendar quarter after December 31, 1995 or by the Trust on not less than 30
days prior written notice. The Sponsor has advised the Trust that it will waive
all fees under the Sponsor Agreement through April 30, 1996.
ADMINISTRATOR
Signature Financial Services, Inc. ("Signature"), located at 6 St. James
Avenue, Boston Massachusetts 02116, serves as administrator and fund accounting
agent to the Trust (the "Administrator") pursuant to an agreement
("Administrative Services and Fund Accounting Agreement"). Pursuant to the
Administrative Services and Fund Accounting Agreement, Signature provides the
Trust with general office facilities and supervises the overall administration
of the Trust, including, among other responsibilities, the negotiation of
contracts and fees with, and the monitoring of performance and billings of, the
independent contractors and agents of the Trust; the preparation and filing of
all documents required for compliance by the Trust with applicable laws and
regulations; and arranging for the maintenance of books and records of the
Trust. Signature provides persons satisfactory to the Board of Trustees of the
Trust to serve as certain officers of the Trust. Such officers, as well as
certain other employees and Trustees of the Trust, may be directors, officers or
employees of Signature or its affiliates.
For the services to be rendered by Signature, each Portfolio shall pay to
Signature administrative services and fund accounting fees computed and paid
monthly that are equal, in the aggregate, to 0.16% on an annual basis of the
average daily net assets of all the Portfolios. After $100 million of total
assets, this fee is reduced according to an asset schedule down to a minimum of
0.05%. After the total fees owing to Signature are determined, each Portfolio
will be allocated its pro-rata share on the basis of average daily net assets.
In addition, each Portfolio is subject to a minimum annual administrative
services and fund accounting fee. See "Management of the Trust" in the Statement
of Additional Information.
DISTRIBUTOR
Touchstone Securities, Inc., an affiliate of the Advisor, acts as principal
underwriter of the shares of each Portfolio pursuant to a distribution agreement
with the Trust.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company ("IBT") is located at 89 South Street,
Boston, Massachusetts 02111, and serves as custodian of each Portfolio's
investments. IBT also serves as the Trust's transfer agent.
ALLOCATION OF EXPENSES OF THE PORTFOLIOS
Each Portfolio bears its own expenses, which generally include all costs not
specifically borne by the Advisor, the Portfolio Advisors and the Administrator.
Included among a Portfolio's expenses are: costs incurred in connection with its
organization; investment management and administration fees; fees for necessary
professional and brokerage services; fees for any pricing service; the costs of
regulatory compliance; and costs associated with maintaining the Trust's legal
existence and shareholder relations. Pursuant to the Sponsor Agreement, the
Sponsor has agreed to waive or reimburse certain fees and expenses of each
Portfolio such that after such waivers and reimbursements, the aggregate
Operating Expenses of each Portfolio (as used herein, "Operating Expenses"
include amortization of organizational expenses but is exclusive of interest,
taxes, brokerage commissions and other portfolio transaction expenses, capital
expenditures and extraordinary expenses) do not exceed that Portfolio's expense
cap (the "Expense Cap"). Each Portfolio's Expense Cap is as follows: Emerging
Growth Portfolio -- 1.15%;
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International Equity Portfolio -- 1.25%; Balanced Portfolio -- .90%; Income
Opportunity Portfolio -- .85%; and Standby Income Portfolio -- .50%. An Expense
Cap may be terminated with respect to a Portfolio upon 30 days prior written
notice by the Sponsor at the end of any calendar quarter after December 31,
1995.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income (I.E., income other than long and short term capital
gains) and net realized long and short term capital gains will be determined
separately for each Portfolio. Dividends derived from net investment income and
distributions of net realized long and short term capital gains paid by a
Portfolio to a shareholder will be automatically reinvested (at current net
asset value) in additional shares of that Portfolio (which will be deposited in
the shareholder's account) unless the shareholder instructs the Trust, in
writing, to pay all dividends and distributions in cash. Dividends attributable
to the net investment income of the Standby Income Portfolio will be declared
daily and paid monthly. Shareholders of that Portfolio receive dividends from
the day following the purchase up to and including the date of redemption.
Dividends attributable to the net investment income of the Income Opportunity
Portfolio are declared and paid monthly. Dividends attributable to the net
investment income of the Balanced Portfolio are declared and paid quarterly.
Dividends attributable to the net investment income of the Emerging Growth
Portfolio and International Equity Portfolio are declared and paid annually.
Distributions of any net realized long term and short term capital gains earned
by a Portfolio will be made annually.
TAXES
Because each Portfolio is treated as a separate entity for federal income
tax purposes, the amounts of net income and net realized capital gains subject
to tax will be determined separately for each Portfolio (rather than on a
Trust-wide basis).
Each Portfolio separately intends to qualify each year as a regulated
investment company for federal income tax purposes. The requirements for
qualification by a Portfolio may cause it, among other things, to restrict the
extent of its short term trading or its transactions in warrants, currencies,
options, futures or forward contracts and will cause each Portfolio to maintain
a diversified asset portfolio.
A regulated investment company will not be subject to federal income tax on
its net income and its capital gains that it distributes to shareholders, so
long as it meets certain overall distribution requirements and other conditions
under the Internal Revenue Code of 1986, as amended (the "Code"). Each Portfolio
intends to satisfy these overall distribution requirements and any other
required conditions. In addition, each Portfolio is subject to a 4%
nondeductible excise tax measured with respect to certain undistributed amounts
of ordinary income and capital gains. The Trust intends to have each Portfolio
pay additional dividends and make additional distributions as are necessary in
order to avoid application of the excise tax, if such payments and distributions
are determined to be in the best interest of the Portfolio's shareholders.
Dividends declared by a Portfolio in October, November or December of any
calendar year and payable to shareholders of record on a specified date in such
a month shall be deemed to have been received by each shareholder on December 31
of such calendar year and to have been paid by the Portfolio not later than such
December 31 provided that such dividend is actually paid by the Portfolio during
January of the following year.
Dividends declared by a Portfolio of net income and distributions of a
Portfolio's net realized short term capital gains (including short term gains
from Portfolio investments in tax exempt obligations) will be taxable to
shareholders as ordinary income for federal income tax purposes, regardless of
how long shareholders have held their Portfolio
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shares and whether the dividends or distributions are received in cash or
reinvested in additional shares. Distributions by a Portfolio of net realized
long term capital gains (including long term gains from Portfolio investments in
tax exempt obligations) will be taxable to shareholders as long term capital
gains for federal income tax purposes, regardless of how long a shareholder has
held his Portfolio shares and whether the distributions are received in cash or
reinvested in additional shares.
A portion of the dividends and short term gain distributions paid by the
Portfolios and distributions of capital gains paid by all the Portfolios will
not qualify for the dividend received deduction for corporations. As a general
rule, dividends paid by a Portfolio, to the extent derived from dividends
attributable to certain types of stock issued by U.S. corporations, will qualify
for the dividend received deduction for corporations.
Some states, if certain asset and diversification requirements are
satisfied, permit shareholders to treat their portions of a Portfolio's
dividends that are attributable to interest on U.S. Treasury securities and
certain U.S. Government securities as income that is exempt from state and local
income taxes. Dividends attributable to repurchase agreement earnings are, as a
general rule, subject to state and local taxation.
Net income or capital gains earned by a Portfolio investing in foreign
securities may be subject to foreign income taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries that
entitle the Portfolios to a reduced rate of tax or exemption from tax on this
related income and gains. It is impossible to determine the effective rate of
foreign tax in advance since the amount of these Portfolios' assets to be
invested within various countries is not known. Furthermore, if a Portfolio
qualifies as a regulated investment company, if certain distribution
requirements are satisfied, and if more than 50% of the value of the Portfolio's
assets at the close of the taxable year consists of stocks or securities of
foreign corporations, the Portfolio may elect, for U.S. federal income tax
purposes, to treat foreign income taxes paid by the Portfolio that can be
treated as income taxes under U.S. income tax principles as paid by its
shareholders. The Trust anticipates that the International Equity Portfolio will
qualify for and make this election in most, but not necessarily all, of its
taxable years. If a Portfolio were to make an election, an amount equal to the
foreign income taxes paid by the Portfolio would be included in the income of
its shareholders and the shareholders would be entitled to credit their portions
of this amount against their U.S. tax liabilities, if any, or to deduct such
portions from their U.S. taxable income, if any. Shortly after any year for
which it makes an election, a Portfolio will report to its shareholders, in
writing, the amount per share of foreign tax that must be included in each
shareholder's gross income and the amount which will be available for deduction
or credit. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. Certain limitations will be imposed on the extent
to which the credit (but not the deduction) for foreign taxes may be claimed.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Shareholders will also receive, if
appropriate, various written notices after the close of the Portfolios' taxable
year with respect to certain foreign taxes paid by the Portfolios and certain
dividends and distributions that were, or were deemed to be, received by
shareholders from the Portfolios during the Portfolios' prior taxable year.
PERFORMANCE OF THE PORTFOLIOS
PERFORMANCE
EACH PORTFOLIO'S PERFORMANCE MAY BE QUOTED IN ADVERTISING IN TERMS OF YIELD
AND TOTAL RETURN IF ACCOMPANIED BY PERFORMANCE OF THE INSURANCE COMPANY'S
SEPARATE ACCOUNT. Performance is based on historical results and not intended to
indicate future performance.
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YIELD
For the Income Opportunity Portfolio and the Balanced Portfolio, from time
to time, the Trust may advertise the 30-day "yield." The yield of a Portfolio
refers to the income generated by an investment in the Portfolio over the 30-day
period identified in the advertisement and is computed by dividing the net
investment income per share earned by the Portfolio during the period by the net
asset value per share on the last day of the period. This income is "annualized"
by assuming that the amount of income is generated each month over a one-year
period and is compounded semi-annually. The annualized income is then shown as a
percentage of the net asset value.
TOTAL RETURN
From time to time, the Trust may advertise a Portfolio's "average annual
total return" over various periods of time. This total return figure shows the
average percentage change in value of an investment in the Portfolio from the
beginning date of the measuring period to the ending date of the measuring
period. The figure reflects changes in the price of the Portfolio's shares and
assumes that any income, dividends and/or capital gains distributions made by
the Portfolio during the period are reinvested in shares of the Portfolio.
Figures will be given for recent one-, five-and ten-year periods (if applicable)
and may be given for other periods as well (such as from commencement of the
Portfolio's operations or on a year-by-year basis). When considering average
total return figures for periods longer than one year, shareholders should note
that a Portfolio's annual total return for any one year in the period might have
been greater or less than the average for the entire period. A Portfolio also
may use aggregate total return figures for various periods, representing the
cumulative change in value of an investment in the Portfolio for the specific
period (again reflecting changes in the Portfolio's share price, the effect of
the maximum sales charge during the period and assuming reinvestment of
dividends and distributions). Aggregate total returns may be shown by means of
schedules, charts or graphs, and may indicate subtotals of the various
components of total return (that is, the change in value of initial investment,
income dividends and capital gains distributions). A Portfolio may also quote
non-standardized total return figures, such as non-annualized figures or figures
that do not reflect the maximum sales charge (provided that these figures are
accompanied by standardized total return figures calculated as described above).
GENERAL
It is important to note that yield and total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes in more detail the method used to
determine a Portfolio's yield and total return.
YIELDS AND TOTAL RETURNS FOR THE PORTFOLIOS INCLUDE THE EFFECT OF DEDUCTING
EACH PORTFOLIO'S EXPENSES, BUT MAY NOT INCLUDE CHARGES AND EXPENSES ATTRIBUTABLE
TO ANY PARTICULAR INSURANCE PRODUCT. SINCE SHARES OF THE PORTFOLIOS MAY ONLY BE
PURCHASED THROUGH A VARIABLE ANNUITY OR VARIABLE LIFE CONTRACT, YOU SHOULD
CAREFULLY REVIEW THE PROSPECTUS OF THE INSURANCE PRODUCT YOU HAVE CHOSEN FOR
INFORMATION ON RELEVANT CHARGES AND EXPENSES. Excluding these charges from
quotations of each Portfolio's performance has the effect of increasing the
performance quoted. You should bear in mind the effect of these charges when
comparing a Portfolio's performance to that of other mutual funds.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (par value $0.00001
per share). The Trust currently consists of five series of shares. The shares of
each series participate equally in the earnings, dividends and assets of the
particular series. The Trust may create
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and issue additional series of shares. The Trust's Declaration of Trust permits
the Trustees to divide or combine the shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in a
series. Each share represents an equal proportionate interest in a series with
each other share. Shares have no pre-emptive or conversion rights. Shares when
issued are fully paid and non-assessable, except as set forth below.
Shareholders are entitled to one vote for each share held.
The Trust is not required to hold annual meetings of shareholders but the
Trust will hold special meetings of shareholders when in the judgement of the
Trustees it is necessary or desirable to submit matters for a shareholder vote.
Shareholders have under certain circumstances the right to communicate with
other shareholders in connection with requesting a meeting of shareholders for
the purpose of removing one or more Trustees without a meeting. Upon liquidation
of a Portfolio, shareholders of that Portfolio would be entitled to share pro
rata in the net assets of the Portfolio available for distribution to
shareholders.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
When matters are submitted for shareholder vote, shareholders of each
Portfolio will have one vote for each full share held and proportionate,
fractional vote for fractional shares held. A separate vote of each Portfolio is
required on any matter affecting a Portfolio on which shareholders are entitled
to vote. Shareholders of a Portfolio are not entitled to vote on Trust matters
that do not affect the Portfolio and do not require a separate vote of the
Portfolio. There normally will be no meeting of shareholders for the purpose of
electing Trustees of the Trust unless and until such time as less than a
majority of the Trust's Trustees holding office have been elected by
shareholders, at which time the Trust's Trustees then in office will call a
shareholder's meeting for the election of trustees. Any Trustee of the Trust may
be removed from office upon the vote of shareholders holding at least two-thirds
of the Trust's outstanding shares at a meeting called for that purpose. The
Trustees are required to call such a meeting upon the written request of
shareholders holding at least 10% of the Trust's outstanding shares. The Trust
will also assist shareholders in communicating with one another as provided for
in the 1940 Act.
The Trust sends to each shareholder a semi-annual report and an audited
annual report, each of which includes a list of the investment securities held
by the Portfolios.
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APPENDIX
BOND AND COMMERCIAL PAPER RATINGS
Set forth below are descriptions of the ratings of Moody's and S&P, which
represent their opinions as to the quality of the securities which they
undertake to rate. It should be emphasized, however, that ratings are relative
and subjective and are not absolute standards of quality.
MOODY'S BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal interest are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest principal payments or of maintenance of other
terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Unrated. Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
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Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa-1,
A-1, Baa-1 and B-1.
S&P'S BOND RATING
AAA. Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A. Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in the highest rated
categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, and C. Bonds rated BB, B, CCC, CC, and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of this obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties of major risk
exposures to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no interest is
being paid.
D. Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-). The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR. Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
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DESCRIPTION OF S&P MUNICIPAL BOND RATINGS:
AAA -- Prime -- These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds -- In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to remain,
substantial, stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant, earnings test for
issuance of additional bonds and debt service reserve requirements) are
rigorous. There is evidence of superior management.
AA -- High Grade -- The investment characteristics of bonds in this group
are only slightly less marked than those of the prime quality issues. Bonds
rated AA have the second strongest capacity for payment of debt service.
A -- Good Grade -- Principal and interest payments on bonds in this category
are regarded as safe although the bonds are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than bonds
in higher rated categories. This rating describes the third strongest capacity
for payment of debt service. Regarding municipal bonds, the rating differs from
the two higher ratings because:
General Obligations Bonds -- There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and expenditures,
or in quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provision, while satisfactory, are less stringent. Management performance
appearance appears adequate.
S&P's letter ratings may be modified by the addition of a plus or a minus
sigh, which is used to show relative standing within the major rating
categories, except in the AAA rating category.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gild edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally know as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
A-3
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DISTRIBUTOR
Touchstone Securities, Inc.
318 Broadway
Cincinnati, Ohio 45202
(800) 669-2796
INVESTMENT ADVISOR & SPONSOR
Touchstone Advisors, Inc.
318 Broadway
Cincinnati, Ohio 45202
VARIABLE ANNUITY SERVICE CENTER
Touchstone Variable Annuity Service Center
P.O. Box 419707
Kansas City, Missouri 64179-0819
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
201 East Fourth Street
Cincinnati, Ohio 45202
LEGAL COUNSEL
Frost & Jacobs
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
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T O U C H S T O N E
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FORM 7126-9511 THE MARK OF EXCELLENCE IN INVESTMENT MANAGEMENT-SM-
