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As filed with the Securities and Exchange Commission on October 9, 1997
Registration No. 333-29705
Registration No. 811-8420
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
------------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. [ ]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 8 [X]
(Check appropriate box or boxes)
-----------------------------------------
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
(Exact Name of Registrant)
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(Name of Depositor)
400 Broadway
Cincinnati, Ohio 45202
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number (513) 629-1800
-----------------------------------------
Copy to:
DONALD J. WUEBBLING, ESQ. J. LELAND BREWSTER II, ESQ.
400 Broadway Frost & Jacobs LLP
Cincinnati, Ohio 45202 2500 PNC Center
(Name and Address of Agent for Service) 201 East Fifth Street
Cincinnati, Ohio 45202
Approximate Date of Proposed Public Offering:
As soon as practical after the effective date of this Registration Statement.
--------------------------------------
Select Variable Annuity Contracts -- Pursuant to Rule 24f-2(a)(1) under the
Investment Company Act of 1940, the Registrant hereby declares that an
indefinite amount of securities is being registered by this Registration
Statement.
Select Advisors Portfolios has also executed this Registration Statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 1
(SELECT VARIABLE ANNUITY)
CROSS-REFERENCE SHEET
REQUIRED BY RULE 495(a)
PART I - DISCUSSION OF THE VARIABLE ANNUITY CONTRACT
<TABLE>
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PART A - PROSPECTUS
FORM N-4 ITEM NO. HEADING IN PROSPECTUS
<S> <C>
1. Cover Page Cover Page
2. Definitions Glossary
3. Synopsis Fee and Expense Tables; Summary of the
Contract
4. Condensed Financial Information
(a) Accumulation Unit Values Not Applicable
(b) Performance Information Performance Information
(c) Financial Statements Financial Statements
5. General Description of Registrant, Depositor and
Portfolio Companies
(a) Depositor The Company
(b) Registrant The Variable Account; The Fixed Account
(c) Portfolio Company The VI Trust and the SA Trust
(d) Prospectus The VI Trust and the SA Trust
(e) Voting Voting Rights
(f) Administrator The VI Trust and the SA Trust; Charges
6. Deductions and Expenses
(a) Deductions Charges
(b) Sales load Surrender Charge
(c) Special purchase plans Surrender Charge; Dollar Cost Averaging; Purchase of a
Contract
(d) Commissions Distribution of the Contracts
(e) Portfolio company deductions Expenses of the VIT Portfolios and SAT Portfolios;
Expense Caps
(f) Registrant's expenses Charges
(g) Organizational expenses Administrative Charges
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<TABLE>
<CAPTION>
FORM N-4 ITEM NO. HEADING IN PROSPECTUS
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7. General description of variable annuity contracts
(a) Rights Summary of the Contract; Allocation of Purchase
Payments; Surrenders and Partial Withdrawals; Death
Benefit; Death Provisions; Selection of Income Payment
Option; Statements to Contract Owners; Voting Rights;
Other Contract Provisions
(b) Provisions and limitations Allocation of Purchase Payments; Transfers
(c) Changes in contracts or operations The Variable Account
(d) Contract owner inquiries Cover Page; Summary of the Contract
8. Annuity Period
(a) Level of benefits Selection of Income Payment Option
(b) Annuity commencement date Income Date Selection
(c) Annuity payments Income Payment Options
(d) Assumed investment return Selection of Income Payment Option
(e) Minimums Income Payment Options
(f) Rights to change options or transfer Selection of Income Payment Options
contract value
9. Death Benefit
(a) Death benefit calculation Death Benefit; Death Provisions
(b) Forms of benefits Income Payment Option, Death Benefit; Death Provisions
10. Purchases and Contract Values
(a) Procedures for purchases Purchase of a Contract
(b) Accumulation unit values Accumulation Unit Value
(c) Calculation of accumulation unit values Allocation of Purchase Payments; Accumulation Unit Value
(d) Principal underwriter Distribution of the Contracts
11. Redemptions
(a) Redemption procedures Surrenders and Partial Withdrawals
(b) Texas Optional Retirement Program Not Applicable
(c) Delay Surrenders and Partial Withdrawals
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<TABLE>
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FORM N-4 ITEM NO. HEADING IN PROSPECTUS
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(d) Lapse Surrenders and Partial Withdrawals
(e) Revocation rights Free Look Privilege
12. Taxes
(a) Tax consequences Federal Income Tax Information
(b) Qualified plans Federal Income Tax Information
(c) Impact of taxes Federal Income Tax Information
13. Legal Proceedings Legal Proceedings
14. Table of Contents for Statement of Additional Table of Contents of Statement of Additional Information
Information
PART B - SAI
FORM N-4 ITEM NO. HEADING IN SAI
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and History
(a) Name change Not Applicable
(b) Attribution of assets Not Applicable
(c) Control of depositor The Company (Prospectus)
18. Services
(a) Fees, expenses and costs Administrative Services; Charges (Prospectus); Expenses
of the VIT Portfolios and the SAT Portfolios
(Prospectus); Expense Caps (Prospectus)
(b) Management-related services Not applicable
(c) Custodian and independent public Independent Accountants
accountant
(d) Other custodianship Safekeeping of Assets
(e) Administrative servicing The Company (Prospectus); The Variable Account
(Prospectus)
(f) Depositor as principal underwriter Not Applicable
19. Purchase of securities offered
(a) Manner of offering Distribution of the Contracts (Prospectus)
(b) Sales Load Surrender Charge (Prospectus)
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<TABLE>
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FORM N-4 ITEM NO. HEADING IN SAI
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20. Underwriters
(a) Depositor or affiliate as principal Distribution of Contracts (Prospectus)
underwriter
(b) Continuous offering Distribution of the Contracts (Prospectus)
(c) Underwriting commissions Distribution of the Contracts (Prospectus)
(d) Payments to underwriter Distribution of the Contracts (Prospectus)
20. Calculation of performance data Sub-Account Performance
22. Annuity payments Fixed Annuity Income Payments
23. Financial Statements
(a) Registrant Financial Statements
(b) Depositor Financial Statements
PART II - DISCUSSION OF SELECT ADVISORS PORTFOLIOS
PART A
FORM N-1A ITEM NO. HEADING IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Summary; Fee and Expense Tables (Prospectus Part I)
3. Condensed Financial Information
(a) Financial Highlights Financial Highlights
(b) Debt Not Applicable
(c) Performance Information Performance Information (Prospectus Part I)
4. General Description of the Registrant
(a)(i) Organization The Variable Account (Prospectus Part I)
(a)(ii) Investment Objectives Investment Objectives, Policies and Restrictions; Risk
Factors, Restrictions and Investment Techniques
5. Management of the Portfolios Management of the Portfolios
5A. Management's Discussion of Fund Performance Not Applicable
6. Capital Stock and Other Additional Information; Taxation (SAI)
7. Purchase of Securities Being Offered Purchase and Valuation; Special Information Concerning
Hub and Spoke(R) Structure; Management of the Portfolios
</TABLE>
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<TABLE>
<CAPTION>
FORM N-1A ITEM NO. HEADING IN PROSPECTUS
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8. Redemption or Purchase Special Information Concerning Hub and Spoke(R)
Structure; Description of Beneficial Interests, Voting
Rights and Liabilities
9. Pending Legal Proceedings Not Applicable
PART B
FORM N-1A ITEM NO. HEADING IN SAI
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Facts about the Company, The Variable Account and the
Fixed Account (Prospectus Part I)
13. Investment Objectives and Policies Investment Objectives, Techniques, Policies and
Restrictions
14. Management of the Fund Management of the SA Trust
15. Control Persons and Principal Holders of Management of the SA Trust; The Variable Account
Securities (Prospectus Part I)
16. Investment Advisory and Other Persons Management of the Portfolios (Prospectus Part II);
Advisors; Portfolio Advisors; Administrator, Fund
Accounting Agent, Custodian and Transfer Agent; Sponsor
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage Commissions
18. Capital Stock and Other Securities Organization of the SA Trust
19. Purchase, Redemption and Pricing of Securities Valuation of Securities; Redemption in Kind
Being Offered
20. Tax Status Taxation
20. Underwriters Distribution of the Contracts (Prospectus Part I)
21. Calculations of Performance Data Performance Information (Prospectus Part I)
22. Financial Statements Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of the Registration Statement.
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T O U C H S T O N E
-------------------------------------------
TOUCHSTONE SELECT VARIABLE ANNUITY
- EMERGING GROWTH
- INTERNATIONAL EQUITY
- GROWTH & INCOME
- BALANCED
- INCOME OPPORTUNITY
- BOND
- STANDBY INCOME
- FIXED ACCOUNT
-------------------------------------------
PROSPECTUS
, 1997
<PAGE> 8
THIS BOOKLET CONTAINS THE PROSPECTUS FOR TOUCHSTONE SELECT VARIABLE ANNUITY, A
FLEXIBLE PREMIUM VARIABLE ANNUITY CONTRACT, ISSUED BY WESTERN-SOUTHERN LIFE
ASSURANCE COMPANY. THIS BOOKLET ALSO INCLUDES THE PROSPECTUS FOR INVESTMENT
PORTFOLIOS UNDERLYING THE TOUCHSTONE SELECT VARIABLE ANNUITY. THESE PROSPECTUSES
ARE BOUND TOGETHER FOR YOUR CONVENIENCE.
<PAGE> 9
PROSPECTUS
, 1997
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UNITS OF INTEREST UNDER WESTERN-SOUTHERN LIFE
FLEXIBLE PREMIUM VARIABLE ASSURANCE COMPANY
ANNUITY CONTRACTS SEPARATE ACCOUNT 1
(SELECT VARIABLE ANNUITY) 400 BROADWAY
CINCINNATI, OHIO 45202
</TABLE>
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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. The owner of a Contract may select any one of three
death benefit options. 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 $10,000, 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" and together called the "VARIABLE ACCOUNT"
(see further definitions in the Glossary)) of Western-Southern Life Assurance
Company Separate Account 1 ("SEPARATE ACCOUNT 1"). Each Sub-Account invests in a
corresponding 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 (the "FIXED ACCOUNT" (see further
definition in the Glossary)) funded through the Company's general 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. Five of the seven Sub-Accounts,
Emerging Growth, International Equity, Balanced, Income Opportunity and Standby
Income, invest in corresponding Portfolios of Select Advisors Variable Insurance
Trust, a Massachusetts business trust (the "VI TRUST"). THIS PROSPECTUS IS VALID
ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE VI TRUST (THE "VI TRUST
PROSPECTUS"), a copy of which is bound with this 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" (see
further definition in the Glossary)) under a Hub and Spoke(R) arrangement.
Unlike the Portfolios of the VI Trust, which receive investments only from
Separate Account 1 and other separate accounts of the Company, the SA Trust may
also receive investments for its Growth & Income Portfolio II and Bond Portfolio
II
3
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from other insurance company separate accounts registered as investment
companies under the Investment Company Act of 1940. See "Special Information
Concerning Hub and Spoke(R) Structure" in this Prospectus. Hub and Spoke(R) 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, THE NATIONAL CREDIT UNION
SHARE INSURANCE FUND OR ANY OTHER AGENCY. MUTUAL FUNDS AND VARIABLE ANNUITIES
INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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 , 1997. The Statement of
Additional Information is incorporated by reference in this Prospectus and is
available without charge by calling the Special Markets Service Center at
800-669-2796 (press 2). The table of contents of the Statement of Additional
Information appears on page of this Prospectus. The Securities and Exchange
Commission maintains a Web site (http://www.sec.gov.) that contains the
Statement of Additional Information, material incorporated by reference, and
other information regarding registrants (such as Separate Account 1) that file
electronically with the Commission.
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 OR 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.
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PROSPECTUS CONTENTS
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GLOSSARY............................................................................... 1
PART I -- DISCUSSION OF THE VARIABLE ANNUITY CONTRACT.................................. 4
FEE AND EXPENSE TABLES................................................................. 4
SUMMARY OF THE CONTRACT................................................................ 8
PERFORMANCE INFORMATION................................................................ 12
FACTS ABOUT THE COMPANY, THE VARIABLE ACCOUNT AND THE FIXED ACCOUNT.................... 13
The Company.......................................................................... 13
The Variable Account................................................................. 13
The VI Trust and the SA Trust...................................................... 14
Advisors and Service Providers..................................................... 15
Additions, Deletions and Substitutions of Investments.............................. 15
The Fixed Account.................................................................... 16
THE CONTRACT........................................................................... 16
Purchase of a Contract............................................................... 16
General............................................................................ 16
Minimum/Maximum Investments........................................................ 17
Purchase Procedure................................................................. 17
Issue Age Limits................................................................... 17
Free Look Privilege.................................................................. 17
Allocation of Purchase Payments...................................................... 18
Accumulation Unit Value.............................................................. 18
Accumulation Unit Value of VIT Sub-Accounts........................................ 18
Accumulation Unit Value of Growth & Income and Bond Sub-Accounts................... 19
Fixed Account Value.................................................................. 20
Dollar Cost Averaging................................................................ 20
Transfers............................................................................ 21
Surrenders and Partial Withdrawals................................................... 22
Systematic Withdrawals............................................................. 23
Selection of Income Payment Option................................................... 23
Income Date Selection.............................................................. 23
Income Payment Options............................................................. 24
Death Benefit........................................................................ 25
Death Benefit Options.............................................................. 25
Death Provisions..................................................................... 26
Death of Owner..................................................................... 26
Death of Annuitant................................................................. 27
CHARGES................................................................................ 27
Premium Taxes........................................................................ 27
Other Taxes.......................................................................... 27
Administrative Charges............................................................... 27
Contract Maintenance Charge........................................................ 28
Contract Administration Charge..................................................... 28
Mortality and Expense Risk Charge.................................................... 28
Surrender Charge..................................................................... 29
Expenses of VIT Portfolios and SAT Portfolios; Expense Caps.......................... 30
</TABLE>
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<TABLE>
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OTHER INFORMATION...................................................................... 31
Distribution of the Contracts........................................................ 31
Statements to Contract Owners........................................................ 31
Adjustment of Units and Values....................................................... 31
Voting Rights........................................................................ 32
Substituted Securities............................................................... 33
OTHER CONTRACT PROVISIONS.............................................................. 33
Misstatement of Age or Sex........................................................... 33
Assignment........................................................................... 33
Loans................................................................................ 33
No Dividends......................................................................... 33
FEDERAL INCOME TAX INFORMATION......................................................... 34
Qualification as an "Annuity Contract"............................................... 34
Diversification.................................................................... 34
Excessive Control.................................................................. 35
Required Distributions............................................................. 35
Multiple Contracts................................................................. 36
Federal Income Taxation.............................................................. 37
General............................................................................ 37
Tax Treatment of Assignments....................................................... 38
Tax Treatment of Withdrawals -- Non-Qualified Contracts............................ 38
Qualified Contracts and Qualified Plans............................................ 38
Section 401 Qualified Pension or Profit-Sharing Plans............................ 39
Section 403(b) Plans............................................................. 40
Loans from Section 403(b) Plans.................................................. 40
Individual Retirement Annuities.................................................. 40
Simplified Employee Pension Plans................................................ 41
Savings Incentive Match Plans for Employees (SIMPLE)............................. 42
Section 457 -- Deferred Compensation Plans....................................... 42
Tax Treatment of Withdrawals -- Qualified Contracts................................ 43
Tax-Sheltered Annuities -- Withdrawal Limitations.................................. 45
LEGAL PROCEEDINGS...................................................................... 46
FINANCIAL STATEMENTS................................................................... 46
PART II -- DISCUSSION OF SELECT ADVISORS PORTFOLIOS.................................... 46
SUMMARY................................................................................ 46
General.............................................................................. 46
Risks................................................................................ 47
Advisors............................................................................. 47
Sub-Accounts......................................................................... 47
Other Investors...................................................................... 48
FINANCIAL HIGHLIGHTS................................................................... 48
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS....................................... 49
Growth & Income Portfolio............................................................ 49
Bond Portfolio....................................................................... 50
SPECIAL INFORMATION CONCERNING HUB AND SPOKE(R) STRUCTURE.............................. 51
MANAGEMENT OF THE PORTFOLIOS........................................................... 52
General.............................................................................. 52
Consultant to the Advisor............................................................ 53
</TABLE>
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<TABLE>
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Portfolio Advisors................................................................... 54
Expenses............................................................................. 55
RISK FACTORS, RESTRICTIONS AND INVESTMENT TECHNIQUES................................... 55
Techniques and Risk Factors.......................................................... 55
Convertible Securities Derivatives................................................. 55
Derivatives........................................................................ 56
Foreign Securities................................................................. 56
Risks Associated with "Emerging Markets" Securities................................ 57
Currency Exchange Rates............................................................ 57
Medium and Lower Rated and Unrated Securities...................................... 57
ADRs, EDRs and CDRs................................................................ 59
Fixed-Income and Other Debt Instrument Securities.................................. 59
U.S. Government Securities......................................................... 60
Mortgage Related Securities........................................................ 60
Stripped Mortgage Related Securities............................................... 61
Zero Coupon Securities............................................................. 62
Custodial Receipts................................................................. 62
When-Issued and Delayed-Delivery Securities........................................ 63
Repurchase Agreements.............................................................. 63
Reverse Repurchase Agreements and Forward Roll Transactions........................ 63
Lending Portfolio Securities....................................................... 64
Illiquid Securities................................................................ 64
Non-Publicly Traded ("Restricted") Securities and Rule 144A Securities............. 64
Temporary Investments.............................................................. 65
Futures Contracts and Related Options.............................................. 65
Options on Stock................................................................... 66
Options on Securities Indexes...................................................... 66
Forward Currency Contracts......................................................... 67
Real Estate Investment Trusts...................................................... 68
Standard & Poor's Depositary Receipts ("SPDRs").................................... 68
Asset Coverage....................................................................... 68
Certain Investment Restrictions...................................................... 69
Portfolio Turnover................................................................... 69
MANAGEMENT OF THE SA TRUST............................................................. 69
Board of Trustees.................................................................... 69
Administrator, Fund Accounting Agent, Custodian and Transfer Agent................... 70
Sponsor.............................................................................. 70
Allocation of Expenses of the Portfolios............................................. 71
PURCHASE AND VALUATION................................................................. 71
Purchase............................................................................. 71
Valuation............................................................................ 71
ADDITIONAL INFORMATION................................................................. 72
Description of Beneficial Interests, Voting Rights and Liabilities................... 72
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION............................... 75
</TABLE>
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GLOSSARY
ACCUMULATION UNIT -- An accounting unit of measure used to calculate an
Owner's share of 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
Owner dies before the Income Date.
CODE -- The Internal Revenue Code of 1986, as amended.
COMPANY -- Western-Southern Life Assurance Company.
CONTINGENT ANNUITANT -- The person named by the Owner who becomes the
Annuitant if the named Annuitant dies before the Income Date.
CONTRACT -- An individual flexible premium 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 Special Markets 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
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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. 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 under Sections 401, 403(b),
408 or 457 of the Code. A NON-QUALIFIED CONTRACT is any other Contract.
SAT PORTFOLIO -- Either the Growth & Income Portfolio II ("Growth & Income
Portfolio") or the Bond Portfolio II ("Bond Portfolio") of the SA Trust.
SA TRUST -- Select Advisors Portfolios, a trust formed under New York law
that includes portfolios in which certain of the Sub-Accounts invest. Part II of
this Prospectus, beginning at page , contains information regarding the SA
Trust and such Portfolios.
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 8% during the first year to 0% after seven years from receipt of each
Purchase Payment.
SURRENDER VALUE -- The Contract Value less any applicable Surrender Charge
and Contract Maintenance Charge. This amount, less any applicable premium tax,
is 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.
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VARIABLE ACCOUNT VALUE -- At any given time, the value of all Accumulation
Units credited to the Sub-Accounts pursuant to the Contract.
VIT PORTFOLIO -- A Portfolio of the VI Trust.
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
- ---- ----
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Administrative Services and Fund Accounting
Agreement....................................
Adjusted Contract Value.......................
Administrator.................................
Advisor.......................................
Advisors Act..................................
Advisory Agreement............................
Benefit Determination Date....................
Board of Trustees/Trustee.....................
Contract Administration Charge................
Contract Maintenance Charge...................
Custodian.....................................
Death Benefit.................................
Death Benefit Accumulation Rate...............
Death Benefit Options.........................
Designated beneficiary........................
Dollar Cost Averaging.........................
Distributor...................................
Expense Cap...................................
Expense Risk Charge...........................
Fort Washington...............................
Free amount...................................
Free look.....................................
Free look period..............................
IFS...........................................
Individual retirement arrangement.............
Investors Bank................................
IRA...........................................
Maximum Accumulated Death Benefit.............
Mortality and Expense Risk Charge.............
Mortality Risk Charge.........................
PIN...........................................
Portfolio Advisors............................
Qualified Plans...............................
RogersCasey...................................
SAT Net Investment Factor.....................
SEC...........................................
SEP...........................................
Separate Account 1............................ Cover
SIMPLE........................................
Special Markets Service Center................
Sponsor.......................................
Sponsor Agreements............................
Surrender.....................................
Treasury Department...........................
Trustees/Board of Trustees....................
VIT Net Investment Factor.....................
VIT Sub-Account...............................
VI Trust...................................... Cover
VI Trust Prospectus........................... Cover
Western & Southern............................ Cover
1933 Act......................................
1940 Act......................................
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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
Maximum Contingent Deferred Sales Charge*.............. 8%
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 8%
1 7%
2 6%
3 5%
4 4%
5 2%
6 1%
7 and later 0%
</TABLE>
Annual Contract Maintenance Charge**....................................... $ 40
4
<PAGE> 18
<TABLE>
<CAPTION>
Variable Account Annual Expenses (as a percentage of average account value)
Six Percent
Standard Annual Step-Up Accumulating
Benefit Death Benefit Death Death Benefit
----------------------------------------------------
<S> <C> <C> <C>
Mortality and Expense
Risk Charges............................................... 1.20% 1.30% 1.40%
---- ---- ----
Contract Administration
Charge..................................................... 0.15% 0.15% 0.15%
---- ---- ----
Total Variable Account
Annual Expenses............................................ 1.35% 1.45% 1.55%
==== ==== ====
</TABLE>
*Also referred to as a "Surrender Charge." See "Surrender Charge."
**In certain states in which it has received the necessary regulatory
approvals, the Company may waive, reduce or eliminate the annual Contract
Maintenance Charge. This charge is not assessed against Contracts having a
Contract Value of more than $50,000. After the tenth Contract Anniversary the
charge for any Contract having a Contract Value of less than $50,000 is the
lesser of (a) $40 and (b) 0.14% of the Contract Value.
PORTFOLIO EXPENSES
The 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. 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")
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. Fees and expenses in
the table are expressed as a percentage of average daily net assets.
5
<PAGE> 19
<TABLE>
<CAPTION>
Advisor Fee Other Expenses Total Expenses (1)
(After Expense (After Expense (After Expense
VIT PORTFOLIOS Reimbursement) Reimbursement) Reimbursement)
- -------------- -------------- -------------- ------------------
<S> <C> <C> <C>
Emerging Growth 0.80% 0.35% 1.15%
International Equity 0.95% 0.30% 1.25%
Balanced 0.80%* 0.10% 0.90%
Income Opportunity 0.65% 0.20% 0.85%
Standby Income 0.25% 0.25% 0.50%
SAT PORTFOLIOS
- --------------
Growth & Income 0.80% 0.05% 0.85%
Bond 0.55% 0.20% 0.75%
</TABLE>
- -------------------------
(1) Total Portfolio expenses absent reimbursement by the Sponsor would have been
as follows: Emerging Growth - 3.14%; International Equity - 2.84%; Balanced
- 2.65%; Income Opportunity - 2.79%; Standby Income - 1.52%; Growth & Income
- 1.76%; and Bond - 1.72%. A Sponsor Agreement may be terminated by the
Sponsor as to any Portfolio, as of the end of any calendar quarter after
December 31, 1998, 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 Special Markets
Service Center).
* The advisory fee for the Balanced Portfolio was 0.70% prior to May 1, 1997,
and the advisory fee for the Growth & Income Portfolio was 0.75% prior to
September 18, 1997. The information under "Advisor Fee" and "Other Expenses"
in the table for these two Portfolios has been restated to reflect the
current advisory fees.
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
examples below; where applicable, such taxes may decrease the amount of each
Purchase Payment available for allocation.
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:
6
<PAGE> 20
<TABLE>
<CAPTION>
Standard Death Annual Step-Up Six Percent Accumulating
Benefit Death Benefit Death Benefit
1 Year 3 Years 1 Year 3 Years 1 Year 3 Years
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth............................................. $107 $138 $108 $141 $109 $144
International Equity........................................ $108 $141 $109 $144 $110 $147
Balanced.................................................... $105 $130 $106 $133 $107 $136
Income Opportunity.......................................... $104 $128 $105 $132 $106 $135
Standby Income.............................................. $101 $117 $102 $121 $103 $124
Growth & Income............................................. $104 $128 $105 $132 $106 $135
Bond........................................................ $103 $125 $104 $128 $105 $132
</TABLE>
An Owner annuitizing a Contract (with a minimum 5 year income payment
option) at the end of the applicable time period would pay the following
aggregate Contract and Portfolio expenses on the same investment:
<TABLE>
<CAPTION>
Standard Death Annual Step-Up Six Percent Accumulating
Benefit Death Benefit Death Benefit
1 Year 3 Years 1 Year 3 Years 1 Year 3 Years
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth............................................. $107 $84 $108 $87 $109 $90
International Equity........................................ $108 $87 $109 $90 $110 $93
Balanced.................................................... $105 $76 $106 $79 $107 $82
Income Opportunity.......................................... $104 $74 $105 $78 $106 $81
Standby Income.............................................. $101 $63 $102 $67 $103 $70
Growth & Income............................................. $104 $74 $105 $78 $106 $81
Bond........................................................ $103 $71 $104 $74 $105 $78
</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>
Standard Death Annual Step-Up Six Percent Accumulating
Benefit Death Benefit Death Benefit
1 Year 3 Years 1 Year 3 Years 1 Year 3 Years
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth............................................. $27 $84 $28 $87 $29 $90
International Equity........................................ $28 $87 $29 $90 $30 $93
Balanced.................................................... $25 $76 $26 $79 $27 $82
Income Opportunity.......................................... $24 $74 $25 $78 $26 $81
Standby Income.............................................. $21 $63 $22 $67 $23 $70
Growth & Income............................................. $24 $74 $25 $78 $26 $81
Bond........................................................ $23 $71 $24 $74 $25 $78
</TABLE>
The purpose of the above tables is to assist an Owner in understanding the
various costs and expenses that an Owner will bear directly or indirectly.
OTHER PORTFOLIO FINANCIAL INFORMATION
Additional financial information regarding the Growth & Income and Bond
Portfolios may be found on page of this Prospectus and similar information
regarding the Emerging Growth, International Equity, Balanced, Income
Opportunity and Standby Income Portfolios may be found in the VI Prospectus,
which follows and is bound with this Prospectus.
7
<PAGE> 21
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 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."
Assets allocated by Contract Owners to the Variable Account are held by
Separate Account 1. Such assets are segregated from other assets of the Company
but not from assets attributable to other variable annuity contracts issued
through Separate Account 1. 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 under Sections 401, 403(b), 408 or 457 of the
Code. The initial Purchase Payment must be at least $10,000 for Non-Qualified
Contracts and $1,000 for Qualified Contracts (or $50 for Qualified Contracts if
payments will be made under an automatic or scheduled installments plan). Each
subsequent payment must be at least $100 for either Contract. However, monthly
Purchase Payments of not less than $50 will be permitted for either Contract
under an automatic or scheduled installment plan. 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 will, after 14 days prior written notice to the Owner, terminate the
Contract and pay the Surrender Value to the Owner. 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 -- Minimum/Maximum
Investments."
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
8
<PAGE> 22
should be directed to the Company at the Touchstone Special Markets Service
Center, P.O. Box 2850, Cincinnati, Ohio 45201-2850 (the "Special Markets 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 Special Markets 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
among Sub-Accounts once every thirty days. Transfers from the Variable 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 Special Markets Service
Center, if received in good order no later than 4:00 p.m. Eastern 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."
9
<PAGE> 23
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
(to the extent they exceed any available "free" amounts, as described under the
caption "Surrender Charge -- 'Free' Amounts") generally will be subject to a
Surrender Charge. This charge is 8% of the amount of any Purchase Payment
withdrawn less than one year following receipt of such payment 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 Owner or the
Annuitant is confined to a long term care facility or hospital (as defined in
the Contract) 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 PAYMENT OPTIONS
The Contract offers five fixed income payment 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 a life income alternative, either with or without a guaranteed
payment period. In addition, life income may be paid over the lifetimes of the
Annuitant and another designated person. Other income payment options 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 Income Payment Option." If the Annuitant dies after
the Income Date, the amount and manner of any continuing payments will depend
upon the income option selected. See "Income Payment Options."
DEATH BENEFIT
If the Owner dies before the Income Date, the Company will pay a Death
Benefit to the Beneficiary selected by the Owner. See "Death Benefit." The Death
Benefit paid will be the greatest of three alternative values calculated as of
the Valuation Date by which satisfactory proof of death, death benefit payment
instructions and election of settlement option have been received in good order
by the Company (the "BENEFIT DETERMINATION DATE"). One such value, the Contract
Value, applies in all cases, regardless of the age of the Owner or any option
selected by the Owner. A second value, the return of Purchase Payments (less
prior withdrawals), also applies in all cases. The third value will be
determined pursuant to one of three available Death Benefit Options, which must
be selected by the Owner when the Contract is first issued. See "Death Benefit
- - Death Benefit Options."
10
<PAGE> 24
CHARGES
Surrender Charge. 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 8% of the lesser of (i) the
total of all purchase payments made 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."
Contract Maintenance and Contract Administration Charges. In addition, on
each Contract Anniversary (and upon surrender) the Company will deduct an annual
maintenance charge (the "CONTRACT MAINTENANCE CHARGE") of not more than $40 from
the Contract Value. In certain states, the Company may waive, reduce or
eliminate such charge. No Contract Maintenance Charge will be incurred if the
Contract Value is $50,000 or more on the date when the Contract Maintenance
Charge is deducted. The Company also will deduct on a daily basis an
administration charge (the "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."
Mortality and Expense Risk Charge. The Company deducts on a daily basis a
charge to compensate for the mortality risk assumed by the Company (the
"MORTALITY RISK CHARGE"). The charge ranges from 0.85% to 1.05%, depending upon
the Death Benefit Option selected by the Owner. The charge is 0.85% if the Owner
selects the Standard Death Benefit Option, 0.95% for the Annual Step-Up Death
Benefit Option and 1.05% for the Six Percent Accumulating Death Benefit Option.
In addition, the Company deducts on a daily basis a charge equal to an annual
rate of 0.35% 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 (the "EXPENSE RISK CHARGE"). The
Mortality Risk Charge and Expense Risk Charge are together referred to as the
"MORTALITY AND EXPENSE RISK CHARGE." For additional information, see "Mortality
and Expense Risk Charge" and "Death Benefit."
Other. 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."
11
<PAGE> 25
THE FOREGOING 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.
It is important to note that 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
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.
12
<PAGE> 26
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 held by the Company's Separate Account 1, a separate
investment account of the Company established pursuant to Ohio law on July 27,
1992. Separate Account 1 is used to support the Contracts described in this
Prospectus and other variable annuity contracts of the Company and for other
purposes permitted by law. Separate Account 1 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"). Separate Account 1 consists of
Variable Account assets held for the benefit of Contract Owners and assets held,
through similar accounts, for the benefit of owners of other variable annuity
contracts issued by Separate Account 1.
The Company owns the assets of Separate Account 1. As required by law,
however, the assets of Separate Account 1 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 and of
other variable annuity contracts issued by Separate Account 1. 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 and all benefits provided under other variable annuity contracts
issued by Separate Account 1.
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."
13
<PAGE> 27
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. To the extent consistent with
its primary objective, the Portfolio will also seek capital appreciation.
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 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
14
<PAGE> 28
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.
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.
ADVISORS AND SERVICE PROVIDERS
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 Trust has entered into agreements
with Investors Bank and Trust Company ("INVESTORS BANK" or the "ADMINISTRATOR")
pursuant to which Investors Bank provides administrative and fund accounting
services for each Trust. The Advisor employs, at its expense, the services of
RogersCasey Sponsor Services, 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."
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.
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<PAGE> 29
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 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 any part
of a Purchase Payment is allocated to the Fixed Account 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
GENERAL
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), 408 or 457 of
the Code. Qualified Contracts contain provisions restricting the timing and
amount of payments to and distributions from such Contracts. See "Federal Income
Taxation."
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<PAGE> 30
MINIMUM/MAXIMUM INVESTMENTS
The purchase of a Non-Qualified Contract requires a minimum initial Purchase
Payment of $10,000. The minimum initial Purchase Payment for a Qualified
Contract is $1,000 or $50 if payments will be made under an automatic or
scheduled installment plan. 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. 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 will terminate the Contract and pay the Surrender
Value to the Owner.
PURCHASE PROCEDURE
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
Special Markets Service Center. The Contract becomes effective on the Contract
Date, which is stated on page 3 of the Contract, and generally is within one
business date after the Valuation Date on which the initial Purchase Payment and
the Application Form are received in good order at the Special Markets Service
Center. Any such receipt must be effected by 4:00 p.m. Eastern 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.
ISSUE AGE LIMITS
The maximum age at issue of the proposed Owner depends on the Death Benefit
Option selected. See "Death Benefit." Owners electing the Standard Death Benefit
may not be older than 85. Owners electing the Annual Step-up Death Benefit or
the 6% Accumulating Death Benefit may not be older than 75. The proposed
Annuitant, whether the Owner or another, must be no older than 85.
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 Special Markets 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
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<PAGE> 31
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 Special Markets Service Center if received before 4:00
p.m. Eastern 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 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 OF 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 a VIT Portfolio (a "VIT
SUB-ACCOUNT") by multiplying the Accumulation Unit Value of the Sub-Account at
the close of the immediately preceding Valuation
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<PAGE> 32
Period by the "VIT NET INVESTMENT FACTOR" (described below). Depending upon
investment performance of the VIT Portfolio in which the Sub-Account is
invested, the Accumulation Unit Value may increase or decrease.
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;
(b) is the net asset value per share of the corresponding VIT Portfolio
determined at the end of 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% to 1.40%, depending on the Death Benefit Option
selected) and the annual Contract Administration Charge (0.15%).
ACCUMULATION UNIT VALUE OF 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.
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%
to 1.40%, depending
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<PAGE> 33
on the Death Benefit Option selected) 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 or deductions, or in connection with any surrenders or partial
withdrawals (which include Surrender Charges, if any, and any share of the
Contract Maintenance Charge taken from the Fixed Account). See "The Fixed
Account."
DOLLAR COST AVERAGING
A Contract Owner may direct the Company, at any time prior to the Income
Date, automatically to transfer specified dollar or percentage amounts (or
earnings 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,
known as "DOLLAR COST AVERAGING", may be selected by a Contract Owner for a
period of at least 12 months. The minimum Dollar Cost Averaging transfer is
$200, with a minimum allocation per Sub-Account of 5% of the total amount
transferred. 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 Special Markets 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.
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<PAGE> 34
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 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 (excluding
Dollar Cost Averaging transfers) is limited to a maximum of 25% of the Fixed
Account Value. 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 Special Markets Service Center which clearly
specify the requested changes. Requests received in good order by the Company at
the Special Markets Service Center by 4:00 p.m. Eastern 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 Special Markets Service Center, requests
for transfers may be made by calling 1-800-669-2796 (press 2) between 8:00 a.m.
and 4:00 p.m. Eastern 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.
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.
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SURRENDERS AND PARTIAL WITHDRAWALS
While the Contract is in force and prior to the Income Date or the death of
the Owner, 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 and any applicable Contract Maintenance Charge and premium
taxes. See "Surrender Charge." A withdrawal may not be less than $250, and it
may not reduce the Contract Value to less than $2,000. For information regarding
amounts that may be withdrawn without any Surrender Charge (so called "free"
amounts), see "Surrender Charge -- 'Free Amounts'."
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.
All surrenders and partial withdrawals from the Variable Account 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 or is not
received in good form (i.e., accurate, complete and understandable).
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.
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<PAGE> 36
Tax Matters. The Internal Revenue Code 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 (in
the case of a Qualified Contract) reaching age 59 1/2. See "Tax Treatment of
Withdrawals -- Non-Qualified Contracts" and "-- Qualified Contracts."
SYSTEMATIC WITHDRAWALS
A Contract Owner may elect in writing to withdraw from the Contract a
specified dollar amount of at least $100 on a monthly, quarterly, semiannual or
annual basis. If such systematic withdrawals exceed 10% of Contract Value in any
year, a Surrender Charge may apply. The 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.
Alternatively, the Owner may elect to withdraw future earnings only, with no
specified dollar amount, on a monthly, quarterly, semiannual or annual schedule.
Under this election, Accumulation Units and value from the Fixed Account
representing only such income earned on the Contract will be liquidated to
satisfy the systematic withdrawals, and no Surrender Charges will apply to such
liquidations.
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. Any such discontinuation would not affect systematic withdrawal
plans already in operation. 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.
Tax Matters. The Internal Revenue Code 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 (in
the case of a Qualified Contract) reaching age 59 1/2. See "Tax Treatment of
Withdrawals -- Non-Qualified Contracts" and "-- Qualified Contracts."
SELECTION OF INCOME PAYMENT OPTION
INCOME DATE SELECTION
Unless otherwise required by plan documents or current tax law, or unless
otherwise indicated by the Owner, the Income Date is the later of the Contract
Anniversary on or following the Annuitant's 80th birthday and the 10th Contract
Anniversary (see 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 on
or prior to the scheduled Income Date. See "Tax Treatment of Withdrawals --
Non-Qualified Contracts" and "-- Qualified Contracts."
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<PAGE> 37
INCOME PAYMENT OPTIONS
Annuity payments will be made to the payee(s) designated by the Owner. If no
payee is designated, the Owner will be the payee. The Owner may change payee(s)
at any time by written notice to the Company.
The Owner may apply the Surrender Value less any applicable premium tax
under any one of the income payment options specified in the Contract and
described below. A change of income payment option is permitted on or prior to
the Income Date upon written notice to the Company. In the absence of an
election, annuity payments will be made in accordance with Option 2, described
below, with monthly payments guaranteed for ten years and payable for life.
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 income payment options currently available under the Contract are
described below. Unless limited in any jurisdiction by applicable state
insurance laws, each of the plans is available under Non-Qualified Contracts.
Option 1. Fixed Period -- Paid in equal monthly payments for the number of
years selected, but not more than 30 years.
Option 2. Life with Guaranteed Period -- 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.
Option 3. 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.
Option 4. Life Only -- Paid in equal monthly installments during the
lifetime of the Annuitant. The amount depends on the age and sex
of the Annuitant on the date of first payment. Payments will cease
upon the death of the Annuitant.
Option 5. Joint and Survivor -- Paid in equal monthly payments during the
lifetimes of the Annuitant and another designated person. Upon the
death of either, payments will continue to the survivor at a
preselected percentage (100%, 75%, 66 2/3% or 50%) of the original
payment. The amount of each monthly payment depends the sexes and
ages of both persons on the date of the first payment, and the
pre-selected percentage for continuing payments.
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<PAGE> 38
All options are also available under Qualified Contracts, but Options 1, 2
and 3 are available only if any period certain does not extend beyond the life
expectancy of the Annuitant.
Under Options 1 and 3 payments may be commuted (i.e., paid in a lump sum);
under Options 2, 4 and 5 they may not.
DEATH BENEFIT
If the Owner dies before the Income Date, the Company will pay to the
Beneficiary an amount equal to the greatest of (i) the Death Benefit Option
(defined below) previously selected by the Owner, (ii) the sum of all Purchase
Payments less any amounts withdrawn (including any surrender charges) and (iii)
the Contract Value determined as of the Benefit Determination Date. The amount
so determined is the "DEATH BENEFIT". No Surrender Charge is made if payment of
the Death Benefit results from the death of the Owner prior to the Income Date.
DEATH BENEFIT OPTIONS
Prior to the issuance of the Contract, the Owner may select from among three
death benefit options (the "DEATH BENEFIT OPTIONS"). The option selected may not
be changed after the Contract is issued. The three options are the Standard
Death Benefit, the Annual Step-Up Death Benefit and the 6% Accumulating Death
Benefit. The characteristics of the three Death Benefit Options are as follows:
The "Standard Death Benefit" will apply if the Owner does not select one
of the other two options. This option provides no special benefit.
Accordingly, the benefit paid will be limited to the greater of the other
two values that are considered in all cases, that is, the Contract Value and
an amount equal to the sum of all Purchase Payments less any amounts
withdrawn.
The "Annual Step-Up Death Benefit" equals the greatest Adjusted Contract
Value (defined below) for each Contract Anniversary up to and including the
Contract Anniversary immediately following the Owner's 80th birthday,
calculated as of the Benefit Determination Date. For this purpose, "ADJUSTED
CONTRACT VALUE" means an amount equal to the Contract Value on the relevant
Contract Anniversary increased by all Purchase Payments and less a reduction
for all partial withdrawals made between such Contract Anniversary and the
Benefit Determination Date. The reduction for partial withdrawals is made in
the same proportion that the Contract Value was reduced on the date of
withdrawal.
The "6% Accumulating Death Benefit" is based upon the initial Purchase
Payment, which is increased by (i) interest earned at the Death Benefit
Accumulation Rate (as defined below) and (ii) additional Purchase Payments,
and is decreased by any partial withdrawals made during the life of the
Contract. The benefit continues to accumulate until it equals the Maximum
Accumulated Death Benefit (defined below). The "DEATH BENEFIT ACCUMULATION
RATE" is a weighted average rate based on the allocation of Contract Value.
For amounts allocated to the Fixed Account, the Standby Income Sub-
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<PAGE> 39
Account and the Bond Sub-Account, the rate is the lesser of six percent per
annum or the actual rate at which the account has accumulated (or decreased)
over the relevant period. The rate for amounts allocated to all other
Sub-Accounts is a fixed six percent per annum. The "MAXIMUM ACCUMULATED
DEATH BENEFIT" is initially equal to two times the initial Purchase Payment
made on the Contract Date. It is increased by two times any additional
Purchase Payments and reduced, in accordance with a formula, for amounts
that are later withdrawn. The amount of reduction will be made (i)
dollar-for-dollar to the extent that the withdrawal is taken from earnings
(earnings being the excess of Contract Value over aggregate Purchase
Payments less partial withdrawals) and (ii) in proportion to the reduction
in Contract Value to the extent that the withdrawal is taken from Purchase
Payments. For further information concerning the Maximum Accumulated Death
Benefit, see the Statement of Additional Information.
The Death Benefit Options are subject to certain limitations and to
different mortality and risk expense charges, as follows:
<TABLE>
<CAPTION>
MAXIMUM AGE MORTALITY AND
DEATH BENEFIT OPTION AT ISSUE EXPENSE RISK CHARGE
---------------------------------------------------------------------
<S> <C> <C>
Standard 85 1.20%
Annual Step-Up 75 1.30%
6% Accumulating 75 1.40%
</TABLE>
DEATH PROVISIONS
DEATH OF OWNER
If the Contract is owned by a sole Owner who dies prior to the Income Date,
the Beneficiary will be paid the Death Benefit. The sole Owner's estate will be
the Beneficiary if no Beneficiary designation is in effect, or if the designated
Beneficiary has predeceased the Owner. Any Death Benefit will be paid to the
Beneficiary either in one sum or under one of the payment options of the
Contract. If the Company does not receive Death Benefit payment instructions
within sixty (60) days of receipt of satisfactory proof of death, it reserves
the right to make payment of the Death Benefit in a lump sum.
Payments must be completed by December 31 of the fifth calendar year
following the year of the Owner's death, except that, if the Beneficiary is an
individual and so elects, the payments may be made (i) over the life of the
Beneficiary or (ii) according to a fixed schedule which does not extend beyond
the life expectancy of the Beneficiary.
If an Owner dies on or after the Income Date, any payments that remain to be
made must be made at least as rapidly as under the Income Payment Option in
effect on the date of the Owner's death.
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DEATH OF ANNUITANT
If the Annuitant dies prior to the Income Date, and a Contingent Annuitant
has been named, the Contingent Annuitant becomes the Annuitant (unless the Owner
is not an individual, in which case the Death Benefit becomes payable). If there
is no Contingent Annuitant when the Annuitant dies prior to the Income Date, the
Owner will become the Annuitant. The Owner may designate a new Annuitant within
60 days of the death of the Annuitant.
If there is no Contingent Annuitant when the Annuitant dies prior to the
Income Date and the Owner is not a natural person, the Beneficiary will be paid
the Death Benefit then due. The Beneficiary will be as provided in the
Beneficiary designation then in effect. If no Beneficiary designation is in
effect, or if there is no designated Beneficiary living, the Owner will be the
Beneficiary. If the Annuitant was the sole Owner and there is no Beneficiary
designation, the Annuitant's estate will be the Beneficiary.
Regardless of whether a Death Benefit is payable, if the Annuitant dies and
any Owner is not a natural person, such death will be subject to distribution
rules imposed by Federal tax law
If the Annuitant dies after the Income Date, the benefits, if any, remaining
to be paid will depend upon the income payment option in effect. See "Income
Payment Options."
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.
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<PAGE> 41
CONTRACT MAINTENANCE CHARGE
On each Contract Anniversary before the Income Date, an annual Contract
Maintenance Charge is deducted from the Contract Value of any Contract having a
Contract Value of less than $50,000. The Contract 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 $40. After the tenth Contract Anniversary
the charge for any Contract having a Contract Value of less than $50,000 is the
lesser of (a) $40 and (b) 0.14% 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. In states in which it has received regulatory approval, the Company may
waive, reduce or eliminate the Contract Maintenance Charge for certain Qualified
Contracts.
CONTRACT ADMINISTRATION CHARGE
On each Valuation Date, the Company deducts from the Accumulation Unit Value
a Contract Administration Charge equal to a percentage of such value that is the
daily equivalent of an effective annual rate of 0.15%. 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 Mortality and Expense Risk
Charge equal to a percentage of such value that is determined by the Death
Benefit Option selected by the Owner. If the Owner selects the Standard Death
Benefit, the charge is 1.20% of the assets in the respective Sub-Accounts. If
the Owner selects one of the other Death Benefit Options, the charge will be
1.30% for the Annual Step-Up Death Benefit and 1.40% for the 6% Accumulating
Death Benefit. 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 Owner lives longer than
expected, or if the Owner 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
total charge, 0.35% is for assuming the expense risk and the balance, ranging
from 0.85% to 1.05%, is for assuming the mortality 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.
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<PAGE> 42
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 (except for
systematic withdrawals of future earnings only), 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 Owner, or (ii) if, at the time of
withdrawal, the Owner or the Annuitant has been confined to a long-term care
facility or hospital (as defined in the Contract) for at least 30 days or (iii)
with respect to Contracts in 403(b) plans, in the event of a disability (as
defined by the Social Security Administration) of the Owner/Annuitant, hardship
(as defined in the plan) of the Owner/Annuitant or any required minimum
distributions.
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 8%
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 (except in states where such reduction or
elimination is prohibited). 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 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.
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<PAGE> 43
Annuitization (Commencement of Annuity Payments). 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 an income payment option with at least five
years of level payments, the Surrender Charge will be waived. If the Owner
later (but within seven years after the last Purchase Payment) 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 Payments 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 Purchase Payments that have been in
the Contract for less than eight years, the Owner may withdraw, without a
Surrender Charge, up to 10% of the Contract Value. This free withdrawal
privilege is non-cumulative and is available each Contract Year. 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. With
respect to Contracts owned by charitable remainder trusts, the Contract Owner
may, in states where regulatory approval has been received, withdraw without
Surrender Charge the amount by which the Contract Value at any given time
exceeds the aggregate Purchase Payments.
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.
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%
SA TRUST
--------
Growth & Income Portfolio 0.85%
Bond Portfolio 0.75%
</TABLE>
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<PAGE> 44
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, 1998 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."
Under the Sponsor Agreements, the Sponsor is entitled to an annual fee of 0.20%
of average daily net assets, but the Sponsor has waived such fees through April
30, 1999.
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 311 Pike Street, 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."
STATEMENTS 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 statement that includes 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 statement. Each Owner whose Contract Value is measured in any part
by Accumulation Units in the Variable Account also will receive semiannual
reports containing financial statements for the Separate Account 1. 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
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<PAGE> 45
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
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<PAGE> 46
Company disregards voting instructions, it will include a summary of its actions
in the next report to Contract Owners.
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 and
the documents governing the plan. The Company will not be bound by any
assignment until written notice of the assignment is received and recorded at
the Special Markets 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 may be permitted under Qualified Contracts purchased by the
Company in connection with a plan established under Section 403(b). Plan
documents also must permit such loans. 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.
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<PAGE> 47
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.
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.
Section 1.817-5), 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
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<PAGE> 48
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.
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 under the above rules as a
beneficiary and may continue the Contract and take distributions under the above
rules as if the surviving spouse was the original
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<PAGE> 49
Owner. If distributions have begun prior to the death of the Owner, such
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 from
Contracts issued under Qualified Plans (other than individual retirement
annuities and certain governmental or church-sponsored Qualified Plans) for
employees who are not 5% owners of the sponsoring employer generally must
commence no later than April 1 of the calendar year following the calendar year
in which the employee terminates employment or reaches age 70 1/2, whichever is
later, 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. Distributions from
Contracts issued under individual retirement annuities or to 5% owners of the
sponsoring employer from Contracts issued under Qualified Plans (other than
certain governmental or church-sponsored Qualified Plans) must commence by April
1 of the calendar year after the calendar year in which the individuals reach
age 70 1/2 even if they have not terminated employment. 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, a SIMPLE account, or a plan which qualifies under
Sections 403(b), 408 or 457 of the Code, the Company will send a notice to the
Owner when the Annuitant 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. In the
case of a distribution from a Contract issued under a Qualified Plan which
qualifies under Section 401 of the Code, the Company will not send a notice when
the Annuitant reaches age 70 1/2, and the Owner (or the employer sponsoring the
Qualified Plan) has sole responsibility for requesting distributions under the
Qualified Contract 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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<PAGE> 50
FEDERAL INCOME TAXATION
GENERAL
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, neither Separate Account 1 nor the Variable Account
is a separate entity from the Company and their 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 the Contract when those increases occur. Instead,
an Owner is taxed only when distribution occurs, either in the form of a lump
sum payment or as annuity payments under the income payment option 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 from Non-Qualified 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 (in the case of Non-Qualified Contracts only, as 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. The method of determining the number of years over
which payments are anticipated is different for Qualified and Non-Qualified
Contracts. 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
income 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.
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<PAGE> 51
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 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) from a Contract issued under a plan that qualifies for
favorable federal income tax treatment under Sections 401(a), 403(a), or 403(b)
of the Code or that is an individual retirement account or individual retirement
annuity; (f) amounts attributable to investment in the Contract prior to August
14, 1982; (g) from a Contract that is issued under a Qualified Plan; (h) under
an immediate annuity within the meaning of Code Section 72(u)(4); or (i) which
is purchased by an employer upon termination of a plan described in Section
401(a) or 403(a) of the Code and is held by the employer until the employee
separates from service (some of the above exceptions may not apply to Contracts
issued as Non-Qualified Contracts).
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 under Sections 401,
403(b) or 408 of the Code ("QUALIFIED PLANS") and under plans which qualify
under Section 457 of the Code. 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.
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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, change frequently 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 (which
includes persons conducting a trade or business through a partnership) 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
permits corporate employers and certain non-profit organizations 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 for federal income tax
purposes 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" and "Tax Sheltered Annuities -- Withdrawal
Limitations."
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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 for federal income tax purposes 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
may need to 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 concerning loans from plans. 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.
LOANS FROM SECTION 403(b) PLANS
With respect to Section 403(b) Plans, the Contract provides for loans
that conform 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 if applicable.
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 for federal
income tax purposes. 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 includable in federal taxable gross income 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,
(iii) are active participants (or have spouses who are active participants) in
another tax-qualified retirement plan but are married, file a joint tax return
and have adjusted gross incomes of $40,000 or less, or (iv) are not active
participants (even if they
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<PAGE> 54
have spouses who are active participants) in another tax-qualified retirement
plan but are married and file a separate federal income tax return. Individuals
who are active participants in other retirement plans and whose adjusted gross
income exceeds the above $25,000 or $40,000 limits, as applicable, by less than
$10,000 are entitled to make deductible contributions in proportionately reduced
amounts. Persons who are active participants in another qualified retirement
plan, are married, file a separate federal income tax return, and have adjusted
gross incomes of $10,000 or less are entitled to make deductible contributions
in reduced amounts.
Subject to the rules in the prior paragraph about persons who are
active participants in other tax-qualified retirement plans, a deductible
contribution also may be made to an IRA for a spouse who receives little or no
compensation during the tax year such as a spouse who does not work outside the
home (a "nonworking spouse"). The nonworking spouse must file a joint federal
income tax return with his or her working spouse for the year to be eligible to
contribute to an IRA. The maximum deductible contribution for the nonworking
spouse is the lesser of $2,000 or the total of the compensation includable in
the nonworking spouse's own federal taxable gross income (if any) plus the
compensation includable in the federal taxable gross income of his or her
working spouse minus the working spouse's IRA contribution for the year.
An individual may make nondeductible contributions to an IRA equal to
$2,000 minus the limit on deductible contributions to an IRA with respect to
that individual for the year.
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 $160,000 for the year 1997, indexed to reflect certain cost-of-living
changes for 1998 and later years). The Code also permits employees of certain
small employers to have SEP contributions made on the basis of salary reduction
if the SEP was established as a salary reduction SEP no later than December 31,
1996. Such salary reduction contributions may not exceed $9,500, indexed
annually 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
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<PAGE> 55
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."
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE)
Employers which establish Savings Incentive Match Plans for Employees
("SIMPLE" IRAs) under Section 408(p) of the Code may make employee salary
deferral contributions and employer contributions to individual retirement
annuities established for the eligible employees. Employees who have earned or
expect to earn $5,000 or more annually may defer the lesser of $6,000 or 100% of
earned income through a salary deferral arrangement. Employee salary deferrals
are not includable in the employee's federal taxable gross income. The employer
must make a company contribution based on one of two schedules. The schedules
are either a dollar for dollar matching contribution for all employees who make
salary deferral contributions (not to exceed $6,000 annually) based on the
employee's salary deferral up to a maximum of 3% of the employee's
compensation, or a 2% nonelective contribution for all eligible employees based
on compensation (which may not exceed $160,000 for 1997). Employers sponsoring
SIMPLE IRAs may not maintain other qualified retirement plans.
The Code places certain limitations and restrictions on these plans
including: manner and timing of contributions; vesting and nonforfeitability of
interests; nondiscrimination in eligibility and participation; tax treatment of
distributions, withdrawals and surrenders; frequency of notification and
eligibility to participate; and annual employee reporting. 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 and may purchase annuity contracts in connection with those
plans. Under such plans, contributions made for the benefit of the employees
will not be includable in the employees' gross income for federal income tax
purposes 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 amounts excluded from income under
Sections 403(b) (tax sheltered annuities), 402(e)(3) (elective salary deferrals
under Sections 401(k) or 403(b) plans), 402(h)(1)(B) (elective salary deferrals
under Simplified Employee Pensions) or 402(k) (SIMPLE IRAs) of the Code or for
which a deduction is allowed under Section 501(c)(18) (for certain "employee
pay-all" plans created before June 25, 1959) for the taxable year. Amounts so
deferred may be used by the employer to purchase Contracts pursuant to this
Prospectus.
Under a Section 457 plan that is not a governmental 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.
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The employee has no present rights or vested interest in the Contract and is
entitled to payment only under the terms of the plan.
Under a governmental Section 457 plan that is maintained by a state, a
political subdivision of a state, or any agency or instrumentality of a state or
political subdivision, all assets of a Section 457 plan must be held in a trust,
a custodial account or an annuity contract for the exclusive benefit of
participants and their beneficiaries.
Distributions from such plans generally are not permitted prior to
termination of employment except in cases of unforeseeable emergencies (as
defined in Treas. Reg. Section 1.457-2(b)(4)).
TAX TREATMENT OF WITHDRAWALS -- QUALIFIED CONTRACTS
The discussion in the following paragraph applies to Qualified Plans
other than IRAs. It does not apply to Section 457 plans.
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 certain other types of Qualified Plans, 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 subject to federal income tax 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 certain other types of Qualified Plans
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 distributions" and cannot
be paid as a direct rollover if they represent the return of "after-tax"
employee contributions, are part of a series of payments made for a period of
ten years or more, to the extent the distributions are "required minimum
distributions" that are made after age 70 1/2 and are required by law, 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 (or are not eligible to be rolled over) are taxable as ordinary
income, except to the extent allocable to an employee's after-
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tax contributions. If an employee or the Beneficiary receives from a Qualified
Plan (not including distributions from an individual retirement account,
individual retirement annuity or tax-sheltered annuity) a "lump sum
distribution" as defined in Section 402(d)(4) of 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 and on or before
December 31, 1999, the tax rate may be determined under five-year income
averaging provisions of the Code. Those who reached 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 Plans and IRAs, including Contracts
issued in connection with plans that are qualified under Code Sections 401,
403(b), 408(a) 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) 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 (provided that if the Qualified Plan
is other than an IRA, distributions do not begin before the Contract Owner or
Annuitant separates from service); (d) for Qualified Plans other than IRAs,
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 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; (f) for Qualified Plans other than IRAs, distributions
made to an alternate payee pursuant to a qualified domestic relations order; and
(g) distributions to unemployed individuals for health insurance premiums under
certain conditions.
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 (or, if later, by April 1 of the calendar year after the calendar year in
which he or she terminates employment in the case of a Qualified Plan but not in
the case of an IRA), and must be made in minimum annual amounts determined under
rules issued pursuant to the Internal Revenue Code. See "Required
Distributions." Distributions from a Qualified Contract issued in connection
with an IRA and distributions to 5% owners of the sponsoring employer from
Contracts issued under Qualified Plans (other than certain governmental or
church-sponsored Qualified Plans) 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, even if he or she has not terminated employment.
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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.
Distributions from a Contract issued in connection with a Section 457
Plan generally must meet the same rules as distributions from Qualified Plans.
See "Required Distributions." However, in the case of a distribution from such a
Contract which does not begin before the death of the Contract Owner or
Annuitant, distributions must be made over a period not exceeding fifteen years
(or the life expectancy of the surviving spouse if that spouse is the
beneficiary).
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.
Because contributions to a SIMPLE IRA are placed in individual
retirement annuities, many of the IRA rules apply to SIMPLE IRAs. In addition,
during the first two years after the individual first participates in any salary
reduction arrangement that is part of a SIMPLE IRA, any amounts distributed from
the SIMPLE IRA are subject to a 25% early withdrawal penalty imposed by the IRS
unless the distributions are rolled over to another SIMPLE retirement account or
unless one of the exceptions to the Section 72(t) tax, as discussed above,
applies. During this first two year period, employees may transfer SIMPLE IRAs
to other SIMPLE IRAs without a 25% early withdrawal penalty. Employees who have
not reached age 59 1/2 and do not qualify for one of the exceptions to the
Section 72(t) tax must wait two years after first participating in the SIMPLE
IRA before transferring employee and/or employer contributions to other IRAs or
IRA rollover annuities under Section 408(d)(3). After the two-year period, the
normal IRA rules regarding withdrawals apply to SIMPLE IRAs.
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
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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.
FINANCIAL STATEMENTS
Financial Statements of the Company may be found in the Statement of
Additional Information, which may be obtained without charge by calling the
Special Markets Service Center at 1-800-669-2796 (press 2).
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 eight 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."
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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.
SUB-ACCOUNTS
Each SAT 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."
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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 also receives
investments from certain sub-accounts of other variable annuity contracts issued
by Separate Account 1, and may also receive investments from other insurance
company separate accounts of the Company or of other insurance companies. 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.
FINANCIAL HIGHLIGHTS
The following table shows ratios to average net assets and other
financial data for each SAT Portfolio for the period indicated and was derived
from financial statements audited by Coopers & Lybrand L.L.P., the SA Trust's
independent accountants, whose report thereon appears in the SA Trust's Annual
Report which is incorporated by reference into the SA Trust's Statement of
Additional Information.
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<TABLE>
<CAPTION>
GROWTH & INCOME
PORTFOLIO II BOND PORTFOLIO II
------------------------------------- -----------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1996 1995 1994(a) 1996 1995 1994(a)
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ratios and supplemental data (b):
Net assets at end of period (000's) ...... $ 21,971 $ 13,894 $ 9,923 $ 14,979 $ 12,304 $ 10,104
Ratios to average net assets:
Expenses ................................. 0.85% 0.85% 0.85% 0.75% 0.75% 0.75%
Net investment income .................... 1.07% 1.27% 2.06% 6.16% 6.91% 6.76%
Expenses, without waiver and reimbursement 1.71% 1.77% 2.94% 1.72% 1.58% 2.67%
Portfolio Turnover ......................... 69% 96% 0% 79% 80% 0%
Average commission rate(c) ................. $ 0.0571 --
</TABLE>
- ------------------------
(a) The Portfolios commenced operations on November 21, 1994.
(b) Ratios are annualized. Portfolio turnover is not annualized.
(c) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary between
periods and funds depending on the volume and character of trades
executed in various markets whose trading practices and commission rate
structures may differ.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
GROWTH & INCOME PORTFOLIO
The investment objective of the Portfolio is long term capital
appreciation and dividend income by investing primarily in a diversified
portfolio of dividend-paying common stocks, preferred stock and securities
convertible into common stocks. The Portfolio may also purchase such securities
which do not pay current dividends but which offer prospects for growth of
capital and future income. Convertible securities (which may be current coupon
or zero coupon securities) are bonds, notes, debentures, preferred stocks and
other securities which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. The Portfolio may also
invest in non-convertible preferred stocks consistent with the Portfolio's
objective. Under normal conditions, at least 80% of the Portfolio's total assets
will be invested in common stocks and at least 65% of the Portfolio's total
assets will be invested in common stocks that, at the time of investment, will
be expected to pay regular dividends.
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
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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 "Risk Factors, Restrictions and
Certain Investment Techniques -- Foreign Securities" and "-- Risks Associated
with 'Emerging Markets' Securities."
The Portfolio may invest under normal circumstances up to 20% of its
total assets in preferred stocks, convertible preferred stock, bonds,
convertible debentures and other fixed-income instruments (the "Fixed Income
Instruments"). Within this 20% limitation, the Portfolio may invest in any
combination of Fixed Income Instruments subject to the following additional
limitations: (1) the Portfolio may invest up to 20% of its total assets in
convertible preferred stock and convertible debentures rated at least Ba by
Moody's Investors Services, Inc. ("Moody's") or BB by Standard & Poor's Rating
Service, a division of McGraw-Hill Companies ("S&P"), (2) the Portfolio may
invest up to 20% of its total assets in non-convertible fixed income instruments
rated at least Baa by Moody's or BBB by S&P and (3) the Portfolio may invest up
to 5% of its total assets in non-convertible debt rated below Baa by Moody's or
BBB by S&P. See "Risk Factors, Restrictions and Certain Investment Techniques --
Convertible Securities" and "-- Medium and Lower Rated ('Junk Bonds') and
Unrated Debt Securities."
The Portfolio may invest up to 10% of its total assets in real estate
investment trusts ("REITs"), which pool investors' funds for investment
primarily in income-producing real estate or real estate-related loans or
interests. See "Risk Factors, Restrictions and Certain Investment Techniques --
Real Estate Investment Trusts."
The Portfolio may also invest up to 5% of its total assets in Standard
& Poor's Depositary Receipts ("SPDRs") in order to invest uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions, or to minimize
trading costs. SPDRs represent ownership in a unit investment trust that holds a
portfolio of stocks designed to track the performance of the S&P 500 Index.
SPDRs are traded on the American Stock Exchange. See "Risk Factors, Restrictions
and Certain Investment Techniques -- Standard & Poor's Depositary Receipts."
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
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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(R) STRUCTURE
The SA Trust is utilizing certain proprietary rights, know-how and
financial services referred to as Hub and Spoke(R) from Signature Financial
Group, Inc.
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 certain sub-accounts of other variable annuity
contracts issued by Separate Account 1, and to other separate accounts of the
Company or of other insurance companies. 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 (800)
669-2796 (press 3).
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,
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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.
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
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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>
Portfolio Advisor Portfolio Advisor
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Growth & Income 0.80% of the first $150 million of 0.50% of the first $150 million of
such assets; and such assets; and
0.75% of such assets in excess of 0.45% of such assets in excess of
$150 million $150 million
Bond 0.55% 0.30%
</TABLE>
The Portfolio Advisor for the Bond Portfolio 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 06820,
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 advisors to be retained by the Advisor as Portfolio
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Advisors, monitors and assists the Advisor with the periodic revaluation 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.
FORT WASHINGTON serves as the Portfolio Advisor to the Bond 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, 1997, Fort Washington had assets under
management of $8.2 billion. Roger M. Lanham and Brendan White 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. White is a CFA and has been with
Western & Southern/Fort Washington since 1993. Prior to 1993, Mr. White was with
Ohio Casualty Insurance Co. for six years, managing high yield and mortgage
backed assets. Fort Washington's principal executive offices are located at 420
East Fourth Street, Cincinnati, Ohio 45202.
SCUDDER, STEVENS & CLARK, INC. ("Scudder") serves as Portfolio Advisor
to the Growth & Income Portfolio. All of the outstanding voting and nonvoting
securities of Scudder are held of record by Stephen R. Beckwith, Juris Padegs,
Daniel Pierce, and Edmond D. Villani in their capacity as the representatives
of the beneficial owners of such securities. Scudder has been registered as an
investment advisor under the Advisors Act since 1943. As of July 31, 1997,
Scudder had assets under management in excess of $125 billion. Scudder's
principal executive offices are located at 345 Park Avenue, New York, New York.
On June 26, 1997, Scudder entered in a Transaction Agreement (the
"Transaction Agreement") with Zurich Insurance Company ("Zurich"). Under the
terms of the Transaction Agreement, Zurich will acquire a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, will become
part of Scudder. Scudder's name will be changed to Scudder Kemper Investments,
Inc. These transactions are subject to a number of conditions and are expected
to close during the fourth quarter of 1997.
Robert T. Hoffman, Lori Ensinger, Deborah Chaplin, Benjamin W.
Thorndike and Kathleen T. Millard are the individuals primarily responsible for
the day-to-day management of the Growth & Income Portfolio. Mr. Hoffman, Lead
Product Manager, joined Scudder in 1990. He has 13 years of experience in the
investment industry, including several years of pension fund management
experience. Lori Ensinger, Lead Portfolio Manager, focuses on stock selection
and investment strategy. She has worked as a portfolio manager since 1983 and
joined Scudder in 1993. Deborah Chaplin, Portfolio Manager, also focuses on
stock selection and investment strategy. Ms. Chaplin, who joined Scudder in
1996, has over four years of experience as a securities analyst and portfolio
manager. Prior to joining Scudder, Ms.
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Chaplin was a research fellow in the Faculty of Letters at Kyoto University,
Japan. Benjamin W. Thorndike, Portfolio Manager, is the Growth & Income
Portfolio's chief analyst and strategist for convertible securities. Mr.
Thorndike, who has 18 years of investment experience, joined Scudder in 1983.
Kathleen T. Millard, Portfolio Manager, has been involved in the investment
industry since 1983 and has worked as a portfolio manager since 1986. Ms.
Millard, who joined Scudder in 1991, focuses on strategy and stock selection.
Scudder may use its affiliated broker to execute portfolio
transactions for the Growth & Income Portfolio provided the commissions paid to
the affiliated broker are reasonable and fair in comparison to commissions paid
to other brokers in connection with comparable transactions. The Board of
Trustees reviews transactions executed through an affiliated broker on a
quarterly basis.
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.
Convertible Securities
Convertible securities may offer higher income than the common stocks
into which they are convertible and include fixed-income or zero coupon debt
securities, which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. Prior to their
conversion, convertible securities may have characteristics similar to both
non-convertible debt securities and equity securities.
While convertible securities generally offer lower yields than
non-convertible debt securities of similar quality, their prices may reflect
changes in the value of the underlying common stock. Convertible securities
entail less credit risk than the issuer's common stock.
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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.
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.
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Risks Associated with "Emerging Markets" Securities
"Emerging Markets" securities include the securities of issuers based
in some of the world's underdeveloped markets, including Eastern Europe. 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) the smaller size of the market 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.
So long as the Communist Party continues to exercise a significant or,
in some cases, a dominant role in Eastern European countries, 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 And Unrated Securities
Securities rated in the fourth highest category by S&P or Moody's, BBB
and Baa, respectively, 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.
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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 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.
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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.
ADRs, EDRs and CDRs
American Depositary Receipts ("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.
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."
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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
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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 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.
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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 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
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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 or liquid securities 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 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.
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. If
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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 (excluding 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.
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.
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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 a 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 a 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, a 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, a 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 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.
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,
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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.
Real Estate Investment Trusts
The Growth & Income Portfolio may invest in REIT's, which can
generally be classified as equity REITs, mortgage REITs and hybrid REITs.
Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments on real estate
mortgages in which they are invested. Hybrid REITs combine the characteristics
of both equity REITs and mortgage REITs.
Investment in REITs is subject to risks similar to those associated
with the direct ownership of real estate (in addition to securities markets
risks). REITs are sensitive to factors such as changes in real estate values
and property taxes, interest rates, cash flow of underlying real estate assets,
supply and demand, and the management skill and creditworthiness of the issuer.
REITs may also be affected by tax and regulatory requirements.
Standard & Poor's Depositary Receipts ("SPDRs")
The Growth & Income Portfolio may invest in SPDRs. SPDRs typically
trade like a share of common stock and provide investment results that
generally correspond to the price and yield performance of the component common
stocks of the S&P 500 Index. There can be no assurance that this can be
accomplished as it may not be possible for the Portfolio to replicate and
maintain exactly the composition and relative weightings of the S&P 500 Index
securities. SPDRs are subject to the risks of an investment in a broadly based
portfolio of common stocks, including the risk that the general level of stock
prices may decline, thereby adversely affecting the value of such investment.
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 liquid securities in
an amount at all
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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 (excluding 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 turnover rates of the Growth & Income Portfolio and
the Bond Portfolio for 1996 and 1995 were 82% and 96% and 79% and 80%,
respectively.
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
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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 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, FUND ACCOUNTING AGENT, CUSTODIAN AND TRANSFER AGENT
Investors Bank, 200 Clarendon Street, Boston, Massachusetts 02116,
serves as administrator, fund accounting agent, custodian and transfer agent
for the SA Trust. Investors Bank was organized in 1969 as a
Massachusetts-chartered trust company and is a wholly-owned subsidiary of
Investors Financial Services Corp., a publicly-held corporation and holding
company registered under the Bank Holding Company Act of 1956.
As administrator and fund accounting agent, Investors Bank provides, on
behalf of the SA Trust, accounting, clerical and bookkeeping services; the daily
calculation of net asset values; state securities registration services;
corporate secretarial services; assistance in the preparation of management
reports; preparation and filing of tax returns, registration statements, and
reports to shareholders and to the SEC. Investors Bank also provides personnel
to serve as certain officers of the SA Trust.
As custodian, Investors Bank holds cash, securities and other assets of
the SA Trust as required by the 1940 Act. As transfer agent, Investors Bank is
responsible for maintaining records of shareholder interests for the SA Trust.
For its services as fund accounting agent and administrator, each SAT
Portfolio shall pay fees to Investors Bank that are computed and paid monthly.
Such fees equal, in the aggregate, 0.12% on an annual basis of the average daily
net assets of all the portfolios and funds for which Investors Bank acts as fund
accounting agent and administrator up to $1 billion in assets and 0.08% on an
annual basis of average daily net assets which exceed $1 billion, subject to
certain annual minimum fees. As compensation for its services as custodian to
the SA Trust, Investors Bank receives fees, computed and paid monthly, that
aggregate 0.03% on an annual basis of the average daily net assets of all the
portfolios and funds for which Investors Bank acts as custodian up to $500
million and 0.02% on an annual basis of such average daily net assets for the
next $500 million and 0.01% on an annual basis of such average daily net assets
which exceed $1 billion.
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, Custodian and Transfer Agent. 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, 1998
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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, 1999.
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 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,
1998. 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
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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 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 BENEFICIAL INTERESTS, 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
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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-Accounts 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 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.
Separate Account 1 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 "Statements 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 corresponding
Statement of Additional Information, and in the Company'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 Company. 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.
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TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Part I - Discussion Regarding the Variable Annuity Contracts................................................
Part II - Discussion Regarding the Select Advisors Portfolios...............................................
Summary...................................................................................................
Investment Objectives, Techniques, Policies and Restriction...............................................
Investment Objectives...................................................................................
Investment Techniques...................................................................................
Investment Restrictions.................................................................................
Valuation of Securities; Redemption in Kind...............................................................
Management of the SA Trust................................................................................
Organization of the SA Trust..............................................................................
Taxation..................................................................................................
Financial Statements......................................................................................
</TABLE>
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WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 1
FLEXIBLE PREMIUM
VARIABLE ANNUITY CONTRACTS
(SELECT VARIABLE ANNUITY)
---------------
STATEMENT OF ADDITIONAL INFORMATION
---------------
This Statement of Additional Information is not a prospectus, but
contains information in addition to that set forth in the current prospectus
dated __________, 1997 (the "PROSPECTUS") for certain variable annuity contracts
("CONTRACTS") offered by Western-Southern Life Assurance Company (the "COMPANY")
through its Separate Account 1 (the "SEPARATE ACCOUNT 1"), and should be read in
conjunction with the Prospectus. Unless otherwise noted, the terms used in this
Statement of Additional Information have the same meanings as those set forth in
the Prospectus.
A copy of the Prospectus may be obtained by calling the Special Markets
Service Center at 1-800-669-2796 (press 2) or by written request to the Company
at 400 Broadway, Cincinnati, Ohio 45202.
_______, 1997
FORM ____________
<PAGE> 89
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PART I - DISCUSSION REGARDING THE VARIABLE ANNUITY CONTRACTS............... 3
General.................................................................. 3
Safekeeping of Assets.................................................... 3
Distribution of the Contracts............................................ 3
Sub-Account Performance.................................................. 3
Fixed Annuity Payments................................................... 5
Independent Accountants.................................................. 5
PART II - DISCUSSION REGARDING THE SELECT ADVISORS PORTFOLIOS.............. 6
SUMMARY.................................................................... 6
INVESTMENT OBJECTIVES, TECHNIQUES, POLICIES AND RESTRICTIONS............... 7
INVESTMENT OBJECTIVES...................................................... 7
INVESTMENT TECHNIQUES...................................................... 7
Certificates of Deposit and Bankers' Acceptances......................... 7
Commercial Paper......................................................... 7
Lower-Rated Debt Securities.............................................. 7
Illiquid Securities...................................................... 8
Foreign Securities:Special Considerations Concerning Eastern Europe...... 9
Lending Portfolio Securities.............................................10
Futures Contracts and Options on Futures Contracts.......................10
General................................................................10
Futures Contracts......................................................11
Options on Futures Contracts...........................................13
Options on Foreign Currencies..........................................14
Additional Risks of Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies...................................15
Options on Securities....................................................16
Options on Securities Indexes............................................19
Forward Currency Contracts...............................................19
Rating Services..........................................................21
INVESTMENT RESTRICTIONS....................................................21
Fundamental Policies.....................................................21
Additional Restrictions..................................................22
Portfolio Transactions and Brokerage Commissions.........................25
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VALUATION OF SECURITIES; REDEMPTION IN KIND................................27
MANAGEMENT OF THE SA TRUST.................................................29
Trustees of the SA Trust.................................................29
Officers of the SA Trust.................................................30
Trustee Compensation Table...............................................31
Advisor, Portfolio Advisors, Administrator and Sponsor...................32
Advisor................................................................32
Portfolio Advisors.....................................................33
Administrator, Custodian and Fund Accounting Agent.....................33
Sponsor................................................................34
Counsel and Independent Accountants......................................34
ORGANIZATION OF THE SA TRUST...............................................34
TAXATION...................................................................35
Taxation Of The Portfolios...............................................35
Sub-Account Diversification..............................................35
FINANCIAL STATEMENTS.......................................................35
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PART I - DISCUSSION REGARDING THE VARIABLE ANNUITY CONTRACTS
GENERAL
Except as otherwise indicated herein, all capitalized terms shall have
the meanings assigned to them in the Prospectus.
The Company is subject to regulation by the Ohio Department of
Insurance, which periodically examines its financial condition and operations.
The Company also is subject to the insurance laws and regulations of all
jurisdictions in which it offers Contracts. Copies of the Contract have been
filed with, and, where required, approved by insurance regulators in those
jurisdictions. The Company must submit annual statements of its operations,
including financial statements, to such state insurance regulators so that they
may determine solvency and compliance with applicable state insurance laws and
regulations.
The Company and Separate Account 1 have filed a Registration Statement
regarding the Contracts with the Securities and Exchange Commission under the
Investment Company Act of 1940 and the Securities Act of 1933. The Prospectus
and this Statement of Additional Information do not contain all of the
information in the Registration Statement.
SAFEKEEPING OF ASSETS
The assets of Separate Account 1 are held by the Company, separate
from the Company's general account assets and any other separate accounts which
the Company has or will establish. The Company maintains records of all
purchases and redemptions of the interests in the Portfolios held by the
Sub-Accounts. The Company maintains fidelity bond coverage for the acts of its
officers and employees.
DISTRIBUTION OF THE CONTRACTS
As disclosed in the Prospectus, the Contracts are distributed through
Touchstone Securities, Inc. (the "DISTRIBUTOR"), which is a wholly-owned
subsidiary of IFS Financial Services, Inc. ("IFS"). IFS is a wholly-owned
subsidiary of the Company. The Distributor is a member of the National
Association of Securities Dealers, Inc. The offering of the Contracts is
continuous, and the Company does not anticipate discontinuing offering the
Contracts, although it reserves the right to do so. Sales commissions
attributable to Separate Account 1 paid by the Company to the Distributor for
the period from February 23, 1995 to December 31, 1995, and for the year ended
December 31, 1996, totalled $159,807 and $1,902,186, respectively, and $26,967
and $305,688 of those amounts, respectively, were retained by the Distributor.
SUB-ACCOUNT PERFORMANCE
The performance of the Sub-Accounts may be quoted or advertised by the
Company in various ways. All performance information supplied by the Company in
advertising is based upon historical results of the Sub-Accounts and the
Portfolios and is not intended to indicate future performance of either one.
Total returns and other performance information may be
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quoted numerically or in a table, graph or similar illustration. The value of an
Accumulation Unit and total returns fluctuate in response to market conditions,
interest rates and other factors.
Average annual total returns are calculated by determining the average
annual compounded rates of return over one, five and ten year periods (or since
commencement of operations) that would equate an initial hypothetical investment
to the ending redeemable value according to the following formula:
P (1 + T)(n) = ERV
where:
P = a hypothetical initial Purchase Payment of $1,000
T = average annual total return
n = number of years and/or portion of a year
ERV = ending redeemable value of a hypothetical initial
Purchase Payment of $1,000 at the end of the
applicable period
While average annual total returns are convenient means of comparing
investment alternatives, investors should realize that any Sub-Account's
performance is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of any Sub-Account.
Average annual total return is calculated as required by applicable
regulations. In addition to average annual total returns, a Sub-Account may
quote cumulative total returns reflecting the simple change in value of any
investment over a stated period. Average annual and cumulative total returns may
be quoted as a percentage or as a dollar amount.
"Total return" or "average annual total return" quoted in advertising
reflects all aspects of a Sub-Account's return, including the effect of
reinvestment by the Variable Account of Portfolio income and capital gain
distributions and any change in the Sub-Account's value over the applicable
period. Such quotations reflect Contract Maintenance, Contract Administration
and Mortality and Expense Risk Charges. Since the Contract is intended as a
long-term investment, total return calculations will assume that no partial
withdrawals from the hypothetical Contract occurred during the applicable
period, but that a Surrender Charge would be incurred upon the hypothetical
withdrawal at the end of the applicable period.
Any total return quotation provided for a Sub-Account should not be
considered as representative of the performance of the Sub-Account in the
future, since the net asset value will vary based not only on the type, quality
and maturities of the securities held in the corresponding Portfolio, but also
on changes in the current value of such securities and on changes in the
expenses of the Sub-Account and the corresponding Portfolio. These factors and
possible differences in the methods used to calculate total return should be
considered when comparing the total return of a Sub-Account to total returns
published for other investment companies or other investment vehicles. Total
return reflects the performance of both principal and income.
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The Company may advertise examples of the effects of dollar cost
averaging, whereby an Owner periodically invests a fixed dollar amount in a
Sub-Account, thereby purchasing fewer Accumulation Units when prices are high
and more Accumulation Units when prices are low. While such a strategy does not
assure a profit nor guard against a loss in a declining market, the Owner's
average cost per Accumulation Unit can be lower than if fixed numbers of
Accumulation Units had been purchased at the same intervals. In evaluating
dollar cost averaging, Owners should consider their ability to continue
purchasing Accumulation Units during periods of low price levels.
Performance information for any Sub-Account may be compared, in reports
to Owners and in advertising, to stock indices, other variable annuity separate
accounts or other products tracked by Lipper Analytical Services, or other
widely used independent research firms which rank variable annuities and
investment companies by overall performance, investment objectives and assets.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges and investment management costs.
FIXED ANNUITY PAYMENTS
The Contracts provide only for fixed annuity payment options. The
amount of such payments is calculated by applying the Surrender Value, less any
applicable premium tax, at annuitization to the income payment rates for the
income payment option selected. Annuity payments will be the larger of:
(a) the income based on the rates shown in the Contract's Annuity
Tables for the income payment option chosen; and
(b) the income calculated by applying the proceeds as a single
premium at the Company's current rates in effect on the date
of the first annuity payment for the same option.
Annuity payments under any of the income payment options will not vary
in dollar amount and will not be affected by the future investment performance
of the Variable Account.
INDEPENDENT ACCOUNTANTS
The financial statements of Western-Southern Life Assurance Company
Separate Account 1 and the financial statements of Western-Southern Life
Assurance Company, included in this registration statement and described on
page , have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
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PART II - DISCUSSION REGARDING THE SELECT ADVISORS PORTFOLIOS
SUMMARY
Except as otherwise indicated herein, all capitalized terms have the
meanings assigned to them in the Prospectus.
As described in the Prospectus, the Variable Account seeks to achieve
the investment objectives of each Sub-Account by investing all the investable
assets of the Sub-Account in a diversified open-end management investment
company having the same investment objectives as such Sub-Account. These
investment companies are, respectively, Emerging Growth Portfolio, International
Equity Portfolio, Balanced Portfolio, Growth & Income Portfolio, Income
Opportunity Portfolio, Bond Portfolio and Standby Income Portfolio (each a
"PORTFOLIO" or, collectively, the "PORTFOLIOS"). Detailed information regarding
the Emerging Growth, International Equity, Balanced, Income Opportunity and
Standby Income Portfolios (the "VIT PORTFOLIOS") is contained in the separate
prospectus of the Select Advisors Variable Insurance Trust (the "VI TRUST") that
accompanies the Prospectus. Detailed information regarding the Bond Portfolio
and the Growth & Income Portfolio (the "SAT PORTFOLIOS") is contained in Part II
of the Prospectus and this Statement of Additional Information.
As disclosed in the Prospectus, Touchstone Advisors, Inc. (the
"ADVISOR") is the investment advisor of each Portfolio, and the specific
investments of each Portfolio are managed on a day-to-day basis by their
respective investment advisors (collectively, the "PORTFOLIO ADVISORS").
Investors Bank & Trust Company ("INVESTORS BANK" or the "ADMINISTRATOR") serves
as administrator and fund accounting agent to each Portfolio.
INVESTMENT OBJECTIVES, TECHNIQUES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objective(s) of each Sub-Account is described in the
Prospectus. There can be no assurance that any Sub-Account will achieve its
investment objective(s). See THE VI TRUST AND THE SA TRUST in the Prospectus.
INVESTMENT TECHNIQUES
Since the investment characteristics of each Sub-Account will
correspond directly to those of the corresponding SAT Portfolio, the following
is a discussion of certain investments of and techniques employed by the SAT
Portfolios.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES
Certificates of deposit are receipts issued by a depository institution
in exchange for the deposit of funds. The issuer agrees to pay the amount
deposited plus interest to the bearer of the receipt on the date specified on
the certificate. The certificate usually can be traded in the secondary market
prior to maturity. Bankers' acceptances typically arise from short-term credit
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arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a timedraft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see the Appendix.
LOWER-RATED DEBT SECURITIES
While the market for high yield corporate debt securities (commonly
known as "junk bonds") has been in existence for many years and has weathered
previous economic downturns, the 1980's brought a dramatic increase in the use
of such securities to fund highly leveraged corporate acquisitions and
restructuring. Past experience may not provide an accurate indication of future
performance of the high yield, high risk bond market, especially during periods
of economic recession. In fact, from 1989 to 1991, the percentage of lower-rated
debt securities that defaulted rose significantly above prior levels.
The market for junk bonds may be thinner and less active than that for
higher rated debt securities, which can adversely affect the prices at which the
former are sold. If market quotations are not available, such lower-rated debt
securities will be valued in accordance with procedures establish by the Board
of Trustees of the SA Trust, including the use of outside pricing services.
Judgment plays a greater role in valuing high yield, high risk corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the ability of outside pricing services
to value lower-rated debt securities and the ability to dispose of these
securities.
In considering investments for the Portfolio, the Portfolio Advisor
will attempt to identify those issuers of high yielding debt securities ("junk
bonds") whose financial condition is adequate to meet future obligations, has
improved or is expected to improve in the future. The Portfolio Advisor's
analysis focuses on relative values based on such factors as interest on
dividend coverage, asset coverage, earnings prospects and the experience and
managerial strength of the issuer.
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A Portfolio may choose, at its expense or in conjunction with others,
to pursue litigation or otherwise exercise its rights as a security holder to
seek to protect the interest of security holders if it determines this to be in
the best interest of the Portfolio.
For a description of bond ratings, see the Appendix to the Prospectus.
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "1933 ACT"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the 1933 Act are referred to as "private placements" or
"restricted securities" and are purchased directly from the issuer or in the
secondary market. Investment companies do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a
Portfolio might not be able to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A Portfolio might also have
to register such restricted securities in order to dispose of them, resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule
144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act of resales of certain securities to qualified institutional buyers. The
Advisor and each Portfolio Advisor anticipate that the market for certain
restricted securities such as institutional commercial paper will expand further
as a result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc.
Each Portfolio Advisor will monitor the liquidity of Rule 144A
securities in the respective Portfolio's portfolio under the supervision of the
SA Trust's Board of Trustees. In reaching liquidity decisions, each Portfolio
Advisor will consider, among other things, the following factors: (1) the
frequency of trades and quotes for the security; (2) the number of dealers and
other potential purchasers wishing to purchase or sell the security; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and of the marketplace trades
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(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING EASTERN EUROPE
Investments in companies domiciled in Eastern European countries may be
subject to potentially greater risks than those of other foreign issuers. These
risks include: (i) potentially less social, political and economic stability;
(ii) the small current size of the markets for such securities and the low
volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Portfolios'
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the Commonwealth of Independent States.
So long as the Communist Party continues to exercise a significant or,
in some cases, a dominant role in Eastern European countries, investments in
such countries will involve risks 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,
in many cases without adequate compensation, and there may be 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 such expropriation, a Portfolio could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to the interests of a Portfolio's shareholders.
LENDING PORTFOLIO SECURITIES
By lending its securities, a Portfolio can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or obtaining yield in the
form of interest paid by the borrower when U.S. Government obligations are used
as collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. Each
Portfolio will adhere to the following conditions whenever its securities are
loaned: (i) the Portfolio must receive at least 100 percent cash collateral or
equivalent securities from the borrower; (ii) the borrower must increase this
collateral whenever the market value of the securities loaned, including accrued
interest, rises above the value of the collateral; (iii) the Portfolio must be
able to terminate the loan at any time; (iv) the Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities, and any increase in market value; (v)
the Portfolio may pay only reasonable custodian fees in connection with the
loan; and (vi) voting rights on the loaned securities may pass to the borrower;
provided, however, that if a material event adversely
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affecting the investment occurs, the Board of Trustees must terminate the loan
and regain the right to vote the securities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL
The successful use of futures contracts and options on futures
contracts draws upon the Portfolio Advisor's skill and experience with respect
to such instruments and usually depends on the Portfolio Advisor's ability to
forecast interest rate and currency exchange rate movements correctly. Should
interest or exchange rates move in an unexpected manner, an SAT Portfolio may
not achieve the anticipated benefits of futures contracts or options on futures
contracts or may realize losses and thus will be in a worse position than if
such strategies had not been used. In addition, the correlation between
movements in the price of futures contracts or options on futures contracts and
movements in the price of the securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses.
FUTURES CONTRACTS
An SAT Portfolio may enter into contracts for the purchase or sale for
future delivery of fixed-income securities or foreign currencies, or contracts
based on financial indices including any index of U.S. Government securities,
foreign government securities or corporate debt securities. U.S. futures
contracts have been designed by exchanges which have been designated "contracts
markets" by the Commodity Futures Trading Commission ("CFTC"), and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on a number of
exchange markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange. An SAT Portfolio may enter into futures contracts which are based on
debt securities that are backed by the full faith and credit of the U.S.
Government, such as long-term U.S. Treasury bonds, Treasury Notes, Government
National Mortgage Association ("GNMA") modified pass-through mortgage-backed
securities and three-month U.S. Treasury bills. An SAT Portfolio may also enter
into futures contracts which are based on bonds issued by entities other than
the U.S. Government.
At the same time a futures contract is purchased or sold, the SAT
Portfolio must allocate cash or securities as a deposit payment ("INITIAL
DEPOSIT"). It is expected that the initial deposit would be approximately 1-1/2%
to 5% of a contract's face value. Daily thereafter, the futures contract is
valued and the payment of "variation margin" may be required, since each day the
Portfolio would provide or receive cash that reflects any decline or increase in
the contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
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Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the SAT Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the acquisition or sale of a futures contract, in the
case of an SAT Portfolio which holds or intends to acquire fixed-income
securities, is to attempt to protect the Portfolio from fluctuations in interest
or foreign exchange rates without actually buying or selling fixed-income
securities or foreign currencies. For example, if interest rates were expected
to increase, the Portfolio might enter into futures contracts for the sale of
debt securities. Such a sale would have much the same effect as selling an
equivalent value of the debt securities owned by the Portfolio. If interest
rates did increase, the value of the debt security in the Portfolio would
decline, but the value of the futures contracts to the Portfolio would increase
at approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. The Portfolio could
accomplish similar results by selling debt securities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of futures
contracts as an investment technique allows the Portfolio to maintain a
defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, an SAT Portfolio could
take advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt securities
on the cash market. When a Portfolio enters into a futures contract for any
purpose, the Portfolio will establish a segregated account with the Portfolio's
custodian to collateralize or "cover" the Portfolio's obligation consisting of
cash or liquid securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the initial and variation margin payments made by the
Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are
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less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest rate trends by the Portfolio Advisor may still not result in a
successful transaction.
In addition, futures contracts entail risks. Although each applicable
Portfolio Advisor believes that use of such contracts will benefit the
respective Portfolio, if the Portfolio Advisor's investment judgment about the
general direction of interest rates is incorrect, a Portfolio's overall
performance would be poorer than if it had not entered into any such contract.
For example, if an SAT Portfolio has hedged against the possibility of an
increase in interest rates which would adversely affect the price of debt
securities held in its portfolio and interest rates decrease instead, the
Portfolio will lose part or all of the benefit of the increased value of its
debt securities which it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if a Portfolio has
insufficient cash, it may have to sell debt securities from its portfolio to
meet daily variation margin requirements. Such sales of bonds may be, but will
not necessarily be, at increased prices which reflect the rising market. An SAT
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
OPTIONS ON FUTURES CONTRACTS
Each SAT Portfolio may purchase and write options on futures contracts
for hedging purposes. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the price of
the futures contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of futures
contracts, when an SAT Portfolio is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or foreign currency which
is deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, an SAT Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Portfolio's holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
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The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Portfolio may purchase a put option on a futures contract to hedge
its portfolio against the risk of rising interest rates.
The amount of risk an SAT Portfolio assumes when it purchases an option
on a futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased.
An SAT Portfolio will not enter into any futures contracts or options
on futures contracts if immediately thereafter the amount of margin deposits on
all the futures contracts of the Portfolio and premiums paid on outstanding
options on futures contracts owned by the Portfolio would exceed 5% of the
market value of the total assets of the Portfolio.
OPTIONS ON FOREIGN CURRENCIES
Options on foreign currencies are used for hedging purposes in a manner
similar to that in which futures contracts on foreign currencies, or forward
contracts, are utilized. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such diminutions in the value of portfolio
securities, the Portfolio may purchase put options on the foreign currency. If
the value of the currency does decline, a Portfolio will have the right to sell
such currency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, an SAT Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
Options on foreign currencies may be written for the same types of
hedging purposes. For example, where an SAT Portfolio anticipates a decline in
the dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the SAT
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the
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Portfolio to hedge such increased cost up to the amount of the premium. As in
the case of other types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the premium, and
only if rates move in the expected direction. If this does not occur, the option
may be exercised and the Portfolio would be required to purchase or sell the
underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Portfolio
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in exchange rates.
Each SAT Portfolio may write covered call options on foreign
currencies. A call option written on a foreign currency by a Portfolio is
"covered" if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Portfolio in cash and liquid securities in a segregated account with its
custodian.
Each SAT Portfolio also may write call options on foreign currencies
that are not covered for cross-hedging purposes. A call option on a foreign
currency is for cross-hedging purposes if it is not covered, but is designed to
provide a hedge against a decline in the U.S. dollar value of a security which
the Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange rate. In
such circumstances, the Portfolio collateralizes the option by maintaining in a
segregated account with its custodian, cash or liquid securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES
Unlike transactions entered into by a Portfolio in futures contracts,
options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of forward contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
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Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transaction. In particular, all
foreign currency option positions entered into on a national securities exchange
are cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting an SAT Portfolio to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery or
currency, the fixing of dollar settlement prices or prohibitions on exercise.
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-traded currency options. An SAT
Portfolio's ability to terminate over-the-counter options will be more limited
than with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, each
Portfolio will treat purchased over-the-counter options and assets used to cover
written over-the-counter 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.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States of data on which to make trading decisions; (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (v) lesser trading volume.
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OPTIONS ON SECURITIES
The SAT Portfolios may write (sell), to a limited extent, only covered
call and put options ("COVERED OPTIONS") in an attempt to increase income.
However, the Portfolio may forgo the benefits of appreciation on securities sold
or may pay more than the market price on securities acquired pursuant to call
and put options written by the Portfolio.
When an SAT Portfolio writes a covered call option, it gives the
purchaser of the option the right to buy the underlying security at the price
specified in the option (the "EXERCISE PRICE") by exercising the option at any
time during the option period. If the option expires unexercised, the Portfolio
will realize income in an amount equal to the premium received for writing the
option. If the option is exercised, a decision over which the SAT Portfolio has
no control, the Portfolio must sell the underlying security to the option holder
at the exercise price. By writing a covered call option, the Portfolio forgoes,
in exchange for the premium less the commission ("NET PREMIUM"), the opportunity
to profit during the option period from an increase in the market value of the
underlying security above the exercise price.
When an SAT Portfolio writes a covered put option, it gives the
purchaser of the option the right to sell the underlying security to the
Portfolio at the specified exercise price at any time during the option period.
If the option expires unexercised, the Portfolio will realize income in the
amount of the premium received for writing the option. If the put option is
exercised, a decision over which the SAT Portfolio has no control, the Portfolio
must purchase the underlying security from the option holder at the exercise
price. By writing a covered put option, the Portfolio, in exchange for the net
premium received, accepts the risk of a decline in the market value of the
underlying security below the exercise price.
An SAT Portfolio may terminate its obligation as the writer of a call
or put option by purchasing an option with the same exercise price and
expiration date as the option previously written. This transaction is called a
"closing purchase transaction." Where the Portfolio cannot effect a closing
purchase transaction, it may be forced to incur brokerage commissions or dealer
spreads in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.
When an SAT Portfolio writes an option, an amount equal to the net
premium received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The amount
of the deferred credit will be subsequently marked to market to reflect the
current market value of the option written. The current market value of a traded
option is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the SAT Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written.
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When an SAT Portfolio writes a call option, it will "cover" its
obligation by segregating the underlying security on the books of the
Portfolio's custodian or by placing liquid securities in a segregated account at
the Portfolio's custodian. When an SAT Portfolio writes a put option, it will
"cover" its obligation by placing liquid securities in a segregated account at
the Portfolio's custodian.
An SAT Portfolio may purchase call and put options on any securities in
which it may invest. The Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The purchase
of a call option would entitle the Portfolio, in exchange for the premium paid,
to purchase a security at a specified price during the option period. The
Portfolio would ordinarily have a gain if the value of the securities increased
above the exercise price sufficiently to cover the premium and would have a loss
if the value of the securities remained at or below the exercise price during
the option period.
An SAT Portfolio would normally purchase put options in anticipation of
a decline in the market value of securities in its portfolio ("PROTECTIVE PUTS")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell a security, which may or may not be held in the Portfolio's portfolio, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
SAT Portfolio's portfolio securities. Put options also may be purchased by the
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. The Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
Each SAT Portfolio has adopted certain other nonfundamental policies
concerning option transactions which are discussed below. The Portfolio's
activities in options may also be restricted by the requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. It is impossible to
predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
An SAT Portfolio may engage in over-the-counter options transactions
with broker-dealers who make markets in these options. At present, approximately
ten broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-
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dealers who are primary government securities dealers recognized by the Federal
Reserve Bank of New York and who agree to (and are expected to be capable of)
entering into closing transactions, although there can be no guarantee that any
such option will be liquidated at a favorable price prior to expiration. The
Portfolio Advisor will monitor the creditworthiness of dealers with whom a
Portfolio enters into such options transactions under the general supervision of
the Board of Trustees.
OPTIONS ON SECURITIES INDEXES
Options on securities indexes give the holder the right to receive a
cash settlement during the term of the option based upon the difference between
the exercise price and the value of the index. Such options will be used for the
purposes described above under "Options on Securities" or, to the extent allowed
by law, as a substitute for investment in individual securities.
Options on securities indexes entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indexes is more likely to occur, although the
SAT Portfolio generally will only purchase or write such an option if the
Portfolio Advisor believes the option can be closed out.
Use of options on securities indexes also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. An SAT Portfolio will not purchase such options unless
the Advisor and the respective Portfolio Advisor each believes the market is
sufficiently developed such that the risk of trading in such options is no
greater than the risk of trading in options on securities.
Price movements in an SAT Portfolio's portfolio may not correlate
precisely with movements in the level of an index and, therefore, the use of
options on indexes cannot serve as a complete hedge. Because options on
securities indexes require settlement in cash, the Portfolio Advisor may be
forced to liquidate portfolio securities to meet settlement obligations.
When a Portfolio writes a put or call option on a securities index it
will cover the position by placing liquid securities in a segregated asset
account with the Portfolio's custodian.
FORWARD CURRENCY CONTRACTS
Because, when investing in foreign securities, a Portfolio buys and
sells securities denominated in currencies other than the U.S. dollar and
receives interest, dividends and sale proceeds in currencies other than the U.S.
dollar, such Portfolios from time to time may enter into forward currency
transactions to convert to and from different foreign currencies and to convert
foreign currencies to and from the U.S. dollar. A Portfolio either enters into
these transactions on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market or uses forward currency contracts to
purchase or sell foreign currencies.
A forward currency contract is an obligation by a Portfolio to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract. Forward currency contracts establish an
exchange rate at a future date. These contracts are transferable in the
interbank market conducted directly between currency traders (usually large
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commercial banks) and their customers. A forward currency contract generally has
no deposit requirement and is traded at a net price without commission. Each SAT
Portfolio maintains with its custodian a segregated account of liquid securities
in an amount at least equal to its obligations under each forward currency
contract. Neither spot transactions nor forward currency contracts eliminate
fluctuations in the prices of the Portfolio's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
An SAT Portfolio may enter into foreign currency hedging transactions
in an attempt to protect against changes in foreign currency exchange rates
between the trade and settlement dates of specific securities transactions or
changes in foreign currency exchange rates that would adversely affect a
portfolio position or an anticipated investment position. Since consideration of
the prospect for currency parities will be incorporated into a Portfolio
Advisor's long-term investment decisions, an SAT Portfolio will not routinely
enter into foreign currency hedging transactions with respect to security
transactions. However, the Portfolio Advisors believe that it is important to
have the flexibility to enter into foreign currency hedging transactions when it
determines that the transactions would be in a Portfolio's best interest.
Although these transactions tend to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of the hedged currency
increase. The precise matching of the forward currency contract amounts and the
value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of such securities between the date
the forward currency contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward currency contracts. In
such event the SAT Portfolio's ability to utilize forward currency contracts in
the manner set forth in the Prospectus may be restricted. Forward currency
contracts may reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the
Portfolio than if it had not entered into such contracts. The use of forward
currency contracts may not eliminate fluctuations in the underlying U.S. dollar
equivalent value of the prices of or rates of return on a Portfolio's foreign
currency denominated portfolio securities and the use of such techniques will
subject a Portfolio to certain risks.
The matching of the increase in value of a forward currency contract
and the decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedge generally will not be
precise. In addition, a Portfolio may not always be able to enter into forward
currency contracts at attractive prices and this will limit the SAT Portfolio's
ability to use such contract to hedge or cross-hedge its assets. Also, with
regard to a Portfolio's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying a Portfolio's cross-hedges and the movements in the exchange rates of
the foreign currencies in which the Portfolio's assets that are the subject of
such cross-hedges are denominated.
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<PAGE> 108
RATING SERVICES
The ratings of nationally recognized statistical ratings organizations
represent their opinions as to the quality of the securities that they undertake
to rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. Although these ratings are
an initial criterion for selection of portfolio investments, the Portfolio
Advisors also make their own evaluation of these securities, subject to review
by the Board of Trustees of the SA Trust. After purchase by a Portfolio, an
obligation may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event would require a Portfolio
to eliminate the obligation from its portfolio, but a Portfolio Advisor will
consider such an event in its determination of whether a Portfolio should
continue to hold the obligation. A description of the ratings used herein and in
the Funds' Prospectuses is set forth in the Appendix to this Statement of
Additional Information.
INVESTMENT RESTRICTIONS
The investment restrictions described below as "fundamental policies"
of each SAT Portfolio may not be changed with respect to any Portfolio without
the approval of a "majority of the outstanding voting securities" of the SAT
Portfolio. "MAJORITY OF THE OUTSTANDING VOTING SECURITIES" under the Investment
Company Act of 1940, as amended (the "1940 ACT"), and as used in this Statement
of Additional Information and the Prospectus, means, with respect to the
Portfolio, the lesser of (i) 67% or more of the outstanding voting securities of
the Portfolio present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Portfolio are present or represented by
proxy or (ii) more than 50% of the outstanding voting securities of the
Portfolio.
FUNDAMENTAL POLICIES
As a matter of fundamental policy, no SAT Portfolio may (except that no
investment restriction of the Portfolio shall prevent a Portfolio from investing
all of its assets in an open-end investment company with substantially the same
investment objectives):
(1) No SAT Portfolio may borrow money or mortgage or hypothecate assets
of the Portfolio, except that, in an amount not to exceed 1/3 of the current
value of the Portfolio's net assets, it may borrow money (including through
reverse repurchase agreements, forward roll transactions involving
mortgage-backed securities or other investment techniques entered into for the
purpose of leverage), and except that it may pledge, mortgage or hypothecate not
more than 1/3 of such assets to secure such borrowings, provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute; for additional related
restrictions, see clause (i) under the caption "Additional Restrictions" below.
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<PAGE> 109
(2) No SAT Portfolio may underwrite securities issued by other persons
except insofar as the Portfolio may technically be deemed an underwriter under
the 1933 Act in selling a portfolio security;
(3) No SAT Portfolio may make loans to other persons except: (a)
through the lending of the Portfolio's portfolio securities and provided that
any such loans not exceed 30% of the Portfolio's total assets (taken at market
value); (b) through the use of repurchase agreements or the purchase of
short-term obligations; or (c) by purchasing a portion of an issue of debt
securities of types distributed publicly or privately;
(4) The Bond Portfolio may not purchase or sell real estate (including
limited partnership interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the ordinary course
of business (except that the Portfolio may hold and sell, for its portfolio,
real estate acquired as a result of the Portfolio's ownership of securities);
(5) No SAT Portfolio may concentrate its investments in any particular
industry (excluding U.S. Government securities), but if it is deemed appropriate
for the achievement of a Portfolio's investment objective(s), up to 25% of its
total assets may be invested in any one industry;
(6) No SAT Portfolio may issue any senior security (as that term is
defined in the 1940 Act) if such issuance is specifically prohibited by the 1940
Act or the rules and regulations promulgated thereunder, provided that
collateral arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered to be the issuance
of a senior security for purposes of this restriction;
(7) No SAT Portfolio may with respect to 75% of its total assets taken
at market value, invest in assets other than cash and cash items (including
receivables), U.S. Government securities, securities of other investment
companies, and other securities for purposes of this calculation limited in
respect of any one issuer to an amount not greater in value than 5% of the value
of the total assets of the Portfolio and to not more than 10% of the outstanding
voting securities of such issuer.
(8) The Growth & Income Portfolio may not purchase or sell real estate
except that (a) the Portfolio may invest in (i) securities of entities that
invest or deal in real estate, mortgages, or interests therein and (ii)
securities secured by real estate or interests therein and (b) the Portfolio
may hold and sell real estate acquired as a result of the Portfolio's ownership
of securities.
(9) The Growth & Income Portfolio may not purchase or sell interests
in oil, gas or mineral leases, commodities or commodity contracts (except
futures and option contracts) in the ordinary course of business.
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<PAGE> 110
ADDITIONAL RESTRICTIONS
Neither SAT Portfolio will, as a matter of operating policy (changeable
by the respective Board of Trustees without a shareholder vote) (except that no
operating policy shall prevent a Portfolio from investing all of its assets in
an open-end investment company with substantially the same investment
objectives), do any of the following:
(i) borrow money (including through reverse repurchase agreements
or forward roll transactions involving mortgage-backed
securities or similar investment techniques entered into for
leveraging purposes), except that the Portfolio may borrow for
temporary or emergency purposes up to 10% of its total assets;
provided, however, that no Portfolio may purchase any security
while outstanding borrowings exceed 5%;
(ii) pledge, mortgage or hypothecate for any purpose in excess of
10% of the Portfolio's total assets (taken at market value),
provided that collateral arrangements with respect to options
and futures, including deposits of initial deposit and
variation margin, and reverse repurchase agreements are not
considered a pledge of assets for purposes of this
restriction;
(iii) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be necessary
for the clearance of purchases and sales of securities may be
obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(iv) sell any security which it does not own unless by virtue of
its ownership of other securities it has at the time of sale a
right to obtain securities, without payment of further
consideration, equivalent in kind and amount to the securities
sold and provided that if such right is conditional the sale
is made upon the same conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase,
though not made in the open market, is part of a plan of
merger or consolidation; provided, however, that securities of
any investment company will not be purchased for the Portfolio
if such purchase at the time thereof would cause: (a) more
than 10% of the Portfolio's total assets (taken at the greater
of cost or market value) to be invested in the securities of
such issuers; (b) more than 5% of the Portfolio's total assets
(taken at the greater of cost or market value) to be invested
in any one investment company; or (c) more than 3% of the
outstanding voting securities of any such issuer to be held
for the Portfolio; provided further that, except in the case
of a merger or consolidation, the Portfolio shall not purchase
any securities of any open-end investment company unless the
Portfolio (1) waives the investment advisory fee, with respect
to assets invested in other open-end investment companies and
(2) incurs no sales charge in connection with the investment;
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<PAGE> 111
(vii) invest more than 15% of the Portfolio's net assets (taken at
the greater of cost or market value) in securities that are
illiquid or not readily marketable (defined as a security that
cannot be sold in the ordinary course of business within seven
days at approximately the value at which the Portfolio has
valued the security) excluding (a) Rule 144A securities
determined to be liquid by the Board of Trustees of the SA
Trust; and (b) commercial paper that is sold under Section
4(2) of the Securities Act of 1933 which is not traded flat or
in default as to interest or principal and either (i) is rated
in one of the two highest categories by at least two
nationally recognized statistical rating organizations and the
Board of Trustees of the SA Trust have determined the
commercial paper to be liquid; or (ii) is rated in one of the
two highest categories by one nationally recognized
statistical rating agency and the Board of Trustees of the SA
Trust have determined that the commercial paper is equivalent
quality and is liquid);
(viii) invest more than 5% of the Portfolio's total assets in
securities issued by issuers that (including the period of
operation of any predecessor or unconditional guarantor of
such issuer) have been in operation less than three years;
(ix) invest more than 10% of the Portfolio's total assets in
securities that are restricted from being sold to the public
without registration under the Securities Act of 1933 (other
than Rule 144A securities deemed to be liquid by the Trustees
of the SA Trust);
(x) purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio to hold more than 10% of any
class of securities of such issuer, for which purposes all
indebtedness of an issuer shall be deemed a single class and
all preferred stock of an issuer shall be deemed a single
class, except that futures or option contracts shall not be
subject to this restriction;
(xi) purchase or retain in the Portfolio's portfolio any securities
issued by an issuer any of whose officers, directors, trustees
or security holders is an officer or Trustee of the SA Trust,
or is an officer or partner of the Advisor, if after the
purchase of the securities of such issuer for the Portfolio
one or more of such persons owns beneficially more than 1/2 of
1% of the shares or securities, or both, all taken at market
value, of such issuer, and such persons owning more than 1/2
of 1% of such shares or securities together own beneficially
more than 5% of such shares or securities, or both, all taken
at market value;
(xii) invest more than 5% of the Portfolio's net assets in warrants
(valued at the lower of cost or market) (other than warrants
acquired by the Portfolio as part of a unit or attached to
securities at the time of purchase), but not more than 2% of
the Portfolio's net assets may be invested in warrants not
listed on the New York Stock Exchange Inc. ("NYSE") or the
American Stock Exchange;
(xiii) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into
or exchangeable, without payment of any further consideration,
for securities of the same issue and equal in amount to, the
securities sold short, and unless not more than 10% of the
Portfolio's net assets (taken at market value) is represented
by
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<PAGE> 112
such securities, or securities convertible into or
exchangeable for such securities, at any one time (the
Portfolios have no current intention to engage in short
selling);
(xiv) purchase puts, calls, straddles, spreads and any combination
thereof if by reason thereof the value of the Portfolio's
aggregate investment in such classes of securities will exceed
5% of its total assets;
(xv) write puts and calls on securities unless each of the
following conditions are met: (a) the security underlying the
put or call is within the investment policies of the Portfolio
and the option is issued by the OCC, except for put and call
options issued by non-U.S. entities or listed on non-U.S.
securities or commodities exchanges; (b) the aggregate value
of the obligations underlying the puts determined as of the
date the options are sold shall not exceed 50% of the
Portfolio's net assets; (c) the securities subject to the
exercise of the call written by the Portfolio must be owned by
the Portfolio at the time the call is sold and must continue
to be owned by the Portfolio until the call has been
exercised, has lapsed, or the Portfolio has purchased a
closing call, and such purchase has been confirmed, thereby
extinguishing the Portfolio's obligation to deliver securities
pursuant to the call it has sold; and (d) at the time a put is
written, the Portfolio establishes a segregated account with
its custodian consisting of cash or liquid securities equal in
value to the amount the Portfolio will be obligated to pay
upon exercise of the put (this account must be maintained
until the put is exercised, has expired, or the Portfolio has
purchased a closing put, which is a put of the same series as
the one previously written); and
(xvi) buy and sell puts and calls on securities, stock index futures
or options on stock index futures, or financial futures or
options on financial futures unless such options are written
by other persons and: (a) the options or futures are offered
through the facilities of a national securities association or
are listed on a national securities or commodities exchange,
except for put and call options issued by non-U.S. entities or
listed on non-U.S. securities or commodities exchanges; (b)
the aggregate premiums paid on all such options which are held
at any time do not exceed 20% of the Portfolio's total net
assets; and (c) the aggregate margin deposits required on all
such futures or options thereon held at any time do not exceed
5% of the Portfolio's total assets.
Each Portfolio also will comply with the applicable investment
limitations found in the laws and regulations of any state in which the
corresponding Sub-Account investing in the Portfolio is registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Portfolio Advisors for the SAT Portfolios are responsible for
decisions to buy and sell securities, futures contracts and options on such
securities and futures for each SAT Portfolio, the selection of brokers, dealers
and futures commission merchants to effect transactions and the negotiation of
brokerage commissions, if any. Broker-dealers may receive brokerage commissions
on portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon the
exercise of
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options. Orders may be directed to any broker-dealer or futures commission
merchant, including to the extent and in the manner permitted by applicable law,
the Advisor, the Portfolio Advisors or their subsidiaries or affiliates.
Purchases and sales of certain portfolio securities on behalf of a Portfolio are
frequently placed by the Portfolio Advisor with the issuer or a primary or
secondary market-maker for these securities on a net basis, without any
brokerage commission being paid by the Portfolio. Trading does, however, involve
transaction costs. Transactions with dealers serving as market-makers reflect
the spread between the bid and asked prices. Purchases of underwritten issues
may be made which will include an underwriting fee paid to the underwriter.
The Portfolio Advisors seek to evaluate the overall reasonableness of
any brokerage commissions paid through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions. In placing orders for the purchase and sale
of securities for a Portfolio, the Portfolio Advisors take into account such
factors as price, commission (if any, negotiable in case of national securities
exchange transactions), size of order, difficulty of execution and skill
required of the executing broker-dealer. The Portfolio Advisors review on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
The Portfolio Advisors are authorized, consistent with Section 28(e) of
the Securities Exchange Act of 1934, as amended, when placing portfolio
transactions for a Portfolio with a broker to pay a brokerage commission (to the
extent applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. A Portfolio Advisor may use this research
information in managing an SAT Portfolio's assets, as well as the assets of
other clients.
Consistent with the policy stated above, the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. and such other policies as
the Board of Trustees may determine, the Portfolio Advisors may consider sales
of shares of the SA Trust and of other investment company clients of the Advisor
or the Portfolio Advisor as a factor in the selection of broker-dealers to
execute portfolio transactions. The Portfolio Advisor will make such allocations
if commissions are comparable to those charged by nonaffiliated, qualified
broker-dealers for similar services.
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or dealers or
groups thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to a Portfolio and to the corresponding
Portfolio Advisor, it is the opinion of the management of the Portfolios that
such information is only supplementary to the Portfolio Advisor's own research
effort, since the information must still be analyzed, weighed and
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<PAGE> 114
reviewed by the Portfolio Advisor's staff. Such information may be useful to the
Portfolio Advisor in providing services to clients other than the SAT
Portfolios, and not all such information is used by the Portfolio Advisor in
connection with such Portfolios. Conversely, such information provided to the
Portfolio Advisor by brokers and dealers through whom other clients of the
Portfolio Advisor effect securities transactions may be useful to the Portfolio
Advisor in providing services to the Portfolios.
In certain instances there may be securities which are suitable for an
SAT Portfolio as well as for one or more of the Advisor's other clients,
including Portfolios of the SA Trust that are not available to the Sub-Accounts.
Investment decisions for a Portfolio and for the Portfolio Advisor's other
clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment advisor, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as a Portfolio is
concerned. However, it is believed that the ability of a Portfolio to
participate in volume transactions will produce better executions for the
Portfolio.
For the period November 21, 1994 (commencement of operations) to
December 31, 1994, and for the fiscal years ended December 31, 1995 and 1996,
the aggregate brokerage commissions paid by each Portfolio is as follows:
<TABLE>
<CAPTION>
GROWTH & INCOME BOND
AGGREGATE COMMISSIONS PORTFOLIO PORTFOLIO
- ----------------------- --------- ---------
Period Ended December 31,
<S> <C> <C>
1996 $40,690 None
1995 $30,788 None
1994 $ 4,982 None
</TABLE>
VALUATION OF SECURITIES; REDEMPTION IN KIND
The value of each security for which readily available market
quotations exists is based on a decision as to the broadest and most
representative market for such security. The value of such security is based
either on the last sale price on a national securities exchange, or, in the
absence of recorded sales, at the readily available closing bid price on such
exchanges, or at the quoted bid price in the over-the-counter market. Securities
listed on a foreign exchange are valued at the last quoted sale price available
before the time net assets are valued. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market. Debt
securities are valued by a pricing service which determines valuations based
upon market transactions for normal, institutional-size trading units of similar
securities. Securities or other
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assets for which market quotations are not readily available are valued at fair
value in accordance with procedures established by the SA Trust. Such procedures
include the use of independent pricing services, which use prices based upon
yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. All
portfolio securities with a remaining maturity of less than 60 days are valued
at amortized cost, which approximates market.
The accounting records of the Portfolios are maintained in U.S.
dollars. The market value of investment securities, other assets and liabilities
and forward contracts denominated in foreign currencies are translated into U.S.
dollars at the prevailing exchange rates at the end of the period. Purchases and
sales of securities, income receipts, and expense payments are translated at the
exchange rate prevailing on the respective dates of such transactions. Reported
net realized gains and losses on foreign currency transactions represent net
gains and losses from sales and maturities of forward currency contracts,
disposition of foreign currencies, currency gains and losses realized between
the trade and settlement dates on securities transactions and the difference
between the amount of net investment income accrued and the U.S. dollar amount
actually received.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the:
type of security involved, financial statements, cost at date
of purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as
to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
To the extent that an SAT Portfolio purchases securities which are
restricted as to resale or for which current market quotations are not
available, the Portfolio Advisor will value such securities based upon all
relevant factors as outlined in FRR 1.
Each SAT Portfolio reserves the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption or repurchase
order by making payment in whole or in part in readily marketable securities
chosen by the SA Trust or the Portfolio, as the case may be, and valued as they
are for purposes of computing the Portfolio's net asset value (a redemption in
kind). If payment is made in securities, an investor, including the
corresponding Sub-Account, may incur transactions expenses in converting these
securities into cash. The SA Trust, on behalf of each Portfolio, has elected,
however, to be governed by Rule 18f-1 under the 1940 Act as a result of which
each Portfolio is obligated to redeem shares or beneficial interests, as the
case may be, with respect to any one investor during any 90-day period, solely
in cash up
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to the lesser of $250,000 or 1% of the net asset value of the Portfolio, as the
case may be, at the beginning of the period.
Each investor in an SAT Portfolio, including the corresponding
Sub-Account, may add to or reduce its investment in the Portfolio on each day
that the NYSE is open for business. As of 4:00 p.m., New York time, on each such
day, the value of each investor's interest in a Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage representing
that investor's share of the aggregate beneficial interests in the Portfolio.
Any additions or reductions which are to be effected on that day will then be
effected. The investor's percentage of the aggregate beneficial interests in a
Portfolio will then be recomputed 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 4:00 p.m. on such day plus or minus, as the case may be, the
amount of net additions to or reductions in the investor's investment in the
Portfolio effected on such day and (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of 4:00 p.m. on such day plus or
minus, as the case may be, the amount of net additions to or reductions in 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 4:00 p.m. on the following day the
NYSE is open for trading.
MANAGEMENT OF THE SA TRUST
The Trustees and officers of the SA Trust and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. Asterisks indicate those Trustees who are
"interested persons" (as defined in the 1940 Act) of the SA Trust. Unless
otherwise indicated, the address of each Trustee and officer is 311 Pike Street,
Cincinnati, Ohio 45202. The Trustees and officers of the SA Trust also serve in
the same positions with the VI Trust and with two affiliated trusts of the SA
Trust, the Select Advisors Trust A and Select Advisors Trust C (collectively,
the "Fund Complex").
TRUSTEES OF THE SA TRUST
*EDWARD G. HARNESS, JR., (Age 48) -- Chairman of the Board of Trustees,
President and Chief Executive Officer; Director, President and Chief Executive
Officer, Touchstone Advisors, Inc. (since February, 1994); Director and Chief
Executive Officer, Touchstone Securities, Inc. (since October, 1991); President,
Touchstone Securities, Inc. (since March, 1996); President, IFS Financial
Services, Inc. (since January, 1991); President, IFS Systems, Inc. (since
August, 1991).
*WILLIAM J. WILLIAMS, (Age 81) -- Trustee; Chairman of the Board of
Directors, The Western and Southern Life Insurance Company (since March, 1984);
Chief Executive Officer, The Western and Southern Life Insurance Company (from
March, 1984 to March, 1994). His address is 400 Broadway, Cincinnati, OH 45202.
JOSEPH S. STERN, JR., (Age 79), -- Trustee; Retired Professor Emeritus,
College of Business, University of Cincinnati. His address is 3 Grandin Place,
Cincinnati, OH 45208.
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PHILLIP R. COX, (Age 49) -- Trustee; President and Chief Executive
Officer, Cox Financial Corp. (since 1972); Director, Federal Reserve Bank of
Cleveland; Director, Cincinnati Bell Inc.; Director, PNC Bank; Director, Cinergy
Corporation; Director, BDM International, Inc. His address is 105 East Fourth
Street, Cincinnati, OH 45202.
ROBERT E. STAUTBERG, (Age 62) -- Trustee; Chairman of the Board of
Trustees, Good Samaritan Hospital; Retired Partner and Director, KPMG Peat
Marwick. His address is 4815 Drake Road, Cincinnati, OH 45243.
DAVID POLLAK, (Age 79) -- Trustee; President, The Ultimate Distributing
Company (1986-1993); Director Emeritus, Fifth Third Bank. His address is 1313
Kemper Road, Suite 111, Cincinnati, OH 45246.
OFFICERS OF THE SA TRUST
EDWARD S. HEENAN, (Age 53) -- Controller; Vice President and
Controller, Touchstone Advisors, Inc. (since December, 1993); Director,
Controller, Touchstone Securities, Inc. (since October, 1991); Vice President
and Comptroller, The Western and Southern Life Insurance Company (since 1987).
His address is 400 Broadway, Cincinnati, OH 45202.
JAMES J. VANCE, (Age ) -- Treasurer; Treasurer, The Western and
Southern Life Insurance Company (since , 1994); Corporate Finance
Manager, Eastman Kodak Company ( , 1988 to 1994);
, Taft, Stettinius & Hollister ( , 1979 to , 1985).
His address is , Cincinnati, OH 45202.
BRIAN J. MANLEY, (Age 33) -- Assistant Treasurer; Vice President and
Chief Financial Officer, Touchstone Advisors, Inc. (since December, 1993); Vice
President and Chief Financial Officer, Touchstone Securities, Inc.
ANDREW S. JOSEF, (Age 33) -- Secretary; Director, Legal Administration,
Investors Bank (since May, 1997); Associate, Sullivan & Worcester LLP (November,
1995 to May, 1997); Associate, Goodwin, Procter & Hoar LLP (January, 1993 to
November, 1995); Associate, Simpson, Thacher & Bartlett LLP (prior to January,
1993). His address is 200 Clarendon Street, Boston, MA 02116.
SUSAN C. MOSHER, (Age 42) -- Assistant Secretary; Director, Fund
Administration - Legal Administration, Investors Bank (since August, 1995).
Associate Counsel, 440 Financial Group of Worcester, Inc. (January, 1993 to
August, 1995). Her address is 200 Clarendon Street, Boston, MA 02116.
KEVIN M. CONNERTY, (Age 32) -- Assistant Treasurer; Director, Fund
Administration - Reporting and Compliance, Investors Bank (since October, 1992).
His address is 200 Clarendon Street, Boston, MA 02116.
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PAUL J. JASINSKI (age 50) - Assistant Treasurer; Managing Director -
Fund Administration, Investors Bank (since July, 1985). His address is 200
Clarendon Street, Boston, MA 02116.
Ms. Mosher and Messrs. Josef, Connerty and Jasinski also hold similar
positions for other investment companies for which Investors Bank or an
affiliate serves as administrator or principal underwriter.
No director, officer or employee of the Advisor, the Portfolio
Advisors, the Distributor, the Administrator or any of their affiliates will
receive any compensation from the SA Trust or the VI Trust for serving as an
officer or Trustee of the SA Trust. The Fund Complex pays each Trustee who is
not a director, officer or employee of the Advisor, the Portfolio Advisors, the
Distributor, the Administrator or any of their affiliates an annual fee of
$5,000 plus $1,000 per meeting attended and reimburses them for travel and
out-of-pocket expenses. The annual and meeting fees are allocated among the four
trusts in proportion to their respective net assets. For the year ended December
31, 1996, the SA Trust incurred $ 23,825 in Trustee fees and expenses.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation from the
Name of Person Aggregate Compensation from SA Trust Fund Complex Paid to Trustees
- ---------------- ------------------------------------ -----------------------------
<S> <C> <C>
Phillip R. Cox $5,916 $10,000
Trustee
David Pollak $5,354 $9,000
Trustee
Robert E. Stautberg $5,916 $10,000
Trustee
Joseph S. Stern, Jr. $5,354 $9,000
Trustee
Edward G. Harness, Jr. none none
Trustee
William J. Williams none none
Trustee
</TABLE>
As of February 1, 1997, the Trustees and officers of the SA Trust owned
in the aggregate less than 1% of the interests of any Portfolio or the SA Trust
(all series taken together, including series in which the Sub-Accounts do not
invest).
ADVISOR, PORTFOLIO ADVISORS, ADMINISTRATOR AND SPONSOR
ADVISOR
The Advisor provides service to each Portfolio of the SA Trust pursuant
to an Investment Advisory Agreement with the SA Trust (the "ADVISORY
AGREEMENT"). The services provided by the Advisor consist of directing and
supervising each Portfolio Advisor, reviewing and evaluating the performance of
each Portfolio Advisor and determining whether or not any Portfolio Advisor
should be replaced. The Advisor furnishes at its own expense all facilities and
personnel necessary in connection with providing these services. The Advisory
Agreement will continue in effect if such continuance is specifically approved
at least annually by the Board of Trustees of
30
<PAGE> 119
the SA Trust and by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party, at a meeting called
for the purpose of voting on the Advisory Agreement.
The Advisory Agreement is terminable, with respect to a Portfolio,
without penalty on not more than 60 days' nor less than 30 days' written notice
by the SA Trust, when authorized either by majority vote of the investors in the
Portfolio (with the vote of each being in proportion to the amount of their
investment) or by a vote of a majority of the Board of Trustees or by the
Advisor, and will automatically terminate in the event of its assignment. The
Advisory Agreement provides that neither the Advisor nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in its services to the Portfolios,
except for willful misfeasance, bad faith or gross negligence or reckless
disregard of its or their obligations and duties under the Advisory Agreement.
The Prospectus contains a description of fees payable to the Advisor
for services under the Advisory Agreement.
For the period November 21, 1994 (commencement of operations) to
December 31, 1994 and for the fiscal years ended December 31, 1995 and 1996,
each SAT Portfolio incurred the following investment advisory fees equal on an
annual basis to the following percentages of the average daily net assets of the
Portfolio.
<TABLE>
<CAPTION>
PORTFOLIO YEAR RATE AMOUNT
- ---------- ---- ---- ------
<S> <C> <C> <C>
Growth & Income* 1996 0.75% $127,974
1995 0.75% $88,934
1994 0.75% $8,015
Bond 1996 0.55% $72,116
1995 0.55% $61,568
1994 0.55% $6,064
</TABLE>
*As of September 18, 1997, the rate is 0.80%.
For the period November 21, 1994 to December 31, 1994, and for the
fiscal years ended December 31, 1995 and 1996, the Advisor, under the terms of
the Sponsor Agreement, reimbursed the Growth & Income Portfolio $14,346, $85,300
and $34,126, and reimbursed the Bond Portfolio $15,160, $69,754 and $26,226,
respectively. See "Sponsor."
PORTFOLIO ADVISORS
The Advisor has, in turn, entered into a portfolio advisory agreement
(each a "PORTFOLIO AGREEMENT") with each Portfolio Advisor selected by the
Advisor for a Portfolio. Under the direction of the Advisor and, ultimately, of
the Board of Trustees of the SA Trust, each Portfolio Advisor is responsible for
making all of the day-to-day investment decisions for the respective Portfolio.
31
<PAGE> 120
Each Portfolio Advisor furnishes at its own expense all facilities and
personnel necessary in connection with providing these services. Each Portfolio
Agreement contains provisions similar to those described above with respect to
the Advisory Agreement.
ADMINISTRATOR, CUSTODIAN AND FUND ACCOUNTING AGENT
Pursuant to Administration and Fund Accounting Agreements, Investors
Bank supervises the overall administration of the Trust, including but not
limited to, accounting, clerical and bookkeeping services; daily calculation of
net asset values; preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations. Investors Bank
also provides persons to serve as officers of the Trust. As custodian, Investors
Bank holds cash, securities and other assets of the Trust.
The Trust's Prospectus contains a description of fees payable to
Investors Bank for its services as administrator, fund accounting agent and
custodian.
Prior to December 1, 1996, Signature Financial Services, Inc.
("Signature") served as administrator and fund accounting agent to the Trust.
Each of the Administration, Fund Accounting and Custodian Agreements
(collectively, the "Agreements") provide that neither Investors Bank nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission, except for wilful misfeasance, bad faith or negligence (gross
negligence in respect of the Custodian Agreement) in the performance of its or
their duties or by reason of disregard (reckless disregard in respect of the
Custodian Agreement) of its or their obligations and duties under the
Agreements.
Each Agreement may not be assigned without the consent of the
non-assigning party, and may be terminated after its initial term, with respect
to a Portfolio, without penalty by majority vote of the shareholders of the
Portfolio or by either party on not more than 60 days' written notice.
State Street Bank and Trust Company ("State Street") serves as transfer
agent of the Trust pursuant to a transfer agency agreement. Under its transfer
agency agreement with the Trust, State Street maintains the shareholder account
records for each Fund, handles certain communications between shareholders and
the Trust and causes to be distributed any dividends and distributions payable
by the Trust. State Street may be reimbursed by the Trust for its out-of-pocket
expenses.
For the period November 21, 1994 (commencement of operations) to
December 31, 1994, and for the fiscal years ended December 31, 1995 and 1996,
the Growth & Income Portfolio incurred $4,384, $46,743 and $56,786,
respectively, in administrative and fund accounting fees, including
out-of-pocket expenses. For the same periods, the Bond Portfolio incurred
$4,384, $47,124 and $56,396, respectively, in administrative and fund accounting
fees, including out-of-pocket expenses.
32
<PAGE> 121
SPONSOR
Touchstone Advisors, Inc. serves also (in addition to its services as
Advisor to each Portfolio of the SA Trust) as the sponsor ("SPONSOR") of each
SAT Portfolio pursuant to a sponsor agreement (the "SPONSOR AGREEMENT"). Under
each Sponsor Agreement, the Sponsor provides oversight of the various service
providers to each of the SA Trust and the SAT Portfolios, including the
Administrator and the Custodian. For its services in this regard, the Sponsor is
paid a fee, on an annual basis, equal to 0.20% of the average daily net assets
of each Portfolio. The Sponsor Agreement may be terminated by the Sponsor on not
less than 30 days prior written notice and by the SA Trust, as to any Portfolio.
The Sponsor has advised the SA Trust that it will waive all fees under the
Sponsor Agreement through April 30, 1998.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Frost & Jacobs LLP, 2500 PNC Center, 201 East 5th Street, Cincinnati,
Ohio 45202, serves as counsel to the SA Trust and each SAT Portfolio. Coopers &
Lybrand, L.L.P., One Post Office Square, Boston, Massachusetts 02109, acts as
independent accountants of the SA Trust and each SAT Portfolio.
ORGANIZATION OF THE SA TRUST
Interests in the SA Trust do not have cumulative voting rights, which
means that holders of more than 50% of such interests (which includes the
interests held by other investors in the SAT Portfolios (Growth & Income and
Bond) and the interests of other investors in Portfolios of the SA Trust that
are not available for investment by the Sub-Accounts) voting for the election of
Trustees can elect all Trustees. Accordingly, it is unlikely that Owners having
Contract Value in the Sub-Accounts that invest in the SAT Portfolios will be
able to control the election of any of the Trustees. Matters affecting the SAT
Portfolios are generally decided by separate vote of each SAT Portfolio, except
with respect to the election of Trustees and the ratification of the selection
of independent accountants.
The SA Trust, in the Portfolios of which all of the assets of the
corresponding Sub-Accounts will be invested, is organized as a trust under the
laws of the State of New York. Each Sub-Account and other entity investing in an
SAT Portfolio (e.g., other investment companies, insurance company separate
accounts and common and commingled trust funds) will each be liable for all
obligations of the 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 Portfolio itself was unable to meet
its obligations. Accordingly, the SA Trust's Trustees believe that no
Sub-Account (or any Owner having Contract Value therein) will be adversely
affected by reason of the Sub-Account's investing in the corresponding
Portfolio.
TAXATION
TAXATION OF THE PORTFOLIOS
Each of the Portfolios will be classified as a partnership for federal
income tax purposes. Furthermore, none of the Portfolios will be a "publicly
traded partnership" for purposes of Section 7704 of the Code. Consequently, the
Portfolios will not be subject to federal income
33
<PAGE> 122
taxation. Instead, each entity that invests in a Portfolio must take into
account, in computing its federal income tax liability, its share of the
Portfolio's income, gains, losses, deductions, credits and tax preference items
for the year, without regard to the amount of cash distributions it has
received during the year from the Portfolio. Although no Portfolio will be
subject to federal income tax, each will file appropriate income tax returns as
required by the Code.
SUB-ACCOUNT DIVERSIFICATION
Each Sub-Account that invests in a Portfolio will be treated as owning
a proportionate interest in the assets held by the Portfolio for purposes of
determining whether the Sub-Account is adequately diversified within the
meaning of Section 817(h) of the Code. The diversification requirement must be
satisfied in order for the Contract to be treated as an "annuity contract"
under the Code.
FINANCIAL STATEMENTS
The following financial statements for Western-Southern Life Assurance
Company Separate Account 1 at and for the fiscal periods indicated are attached
hereto.
(1) Report of Coopers & Lybrand L.L.P.
(2) Statement of Net Assets as of December 31, 1996.
(3) Statement of Operations and Changes in Net Assets for the year ended
December 31, 1996 and for the period from February 23, 1995 to
December 31, 1995.
(4) Supplementary Information-Selected Per Unit Data and Ratios for the
year ended December 31, 1996 and for the period from February 23,
1995 to December 31, 1995.
(5) Statement of Net Assets June 30, 1997 (unaudited).
(6) Statement of Operations and Changes in Net Assets for the period
from January 1, 1997 to June 30, 1997 (unaudited) and for the year
ended December 31, 1996.
(7) Supplementary Information - Selected Per Unit Data and Ratios for
the six months ended June 30, 1997 (unaudited), for the year ended
December 31, 1996, and for the period from February 23, 1995 to
December 31, 1995.
The following financial statements for Western-Southern Life Assurance
Company at and for the fiscal periods indicated are attached hereto.
(1) Report of Coopers & Lybrand L.L.P.
(2) Balance Sheets as of December 31, 1996 and 1995.
34
<PAGE> 123
(3) Summaries of Operations for the Years Ended December 31, 1996,
1995 and 1994.
(3) Statements of Changes in Shareholder's Equity for the Years Ended
December 31, 1996, 1995 and 1994.
(4) Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994.
The following financial statements for Select Advisors Portfolio
(Growth & Income Portfolio II and Bond Portfolio II) at and for the fiscal
periods indicated are incorporated by reference from their current reports to
shareholders filed with the Securities and Exchange Commission pursuant to
Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder. A copy of each such
report will be provided to each person receiving this Statement of Additional
Information.
(1) Report of Coopers & Lybrand L.L.P.
(2) Schedule of Investments December 31, 1996.
(3) Statement of Assets and Liabilities December 31, 1996.
(4) Statement of Operations for the year ended December 31, 1996.
(5) Statement of Changes in Net Assets for the years ended December
31, 1996.
(6) Supplementary Data for the years ended December 31, 1996.
(7) Schedule of Investments June 30, 1997 (unaudited).
(8) Statement of Assets and Liabilities June 30, 1997 (unaudited).
(9) Statement of Operations for the six months ended June 30, 1997
(unaudited)
(10) Statement of Changes in Net Assets for the six month period ended
June 30, 1997 (unaudited) and for the year ended December 31, 1996.
(11) Supplementary Data for the six months ended June 30, 1997
(unaudited) and for the year ended December 31, 1996.
35
<PAGE> 124
DISTRIBUTOR
Touchstone Securities, Inc. SUB-ACCOUNTS
311 Pike Street
Cincinnati, Ohio 45202 -Emerging Growth
(800) 669-2796 (press 3) -International Equity
-Growth & Income
INVESTMENT ADVISOR AND SPONSOR -Balanced
-Income Opportunity
Touchstone Advisors, Inc. -Bond
311 Pike Street -Standby Income
Cincinnati, Ohio 45202
SPECIAL MARKETS SERVICE CENTER
Touchstone Special Markets Service Center
P.O. Box 2850
Cincinnati, Ohio 45201-2850
(800) 669-2796 (press 2)
TRANSFER AGENT
State Street Bank and Trust Company
P.O. Box 8578
Boston, Massachusetts 02266-8518
ADMINISTRATOR, CUSTODIAN
AND FUND ACCOUNTING AGENT
Investors Bank & Trust Company STATEMENT OF
200 Clarendon Street ADDITIONAL INFORMATION
Boston, Massachusetts 02116 ________________, 1997
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
312 Walnut Street
Cincinnati, Ohio 45202
LEGAL COUNSEL
Frost & Jacobs LLP
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
36
<PAGE> 125
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 1
AUDIT OF FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE PERIOD FROM FEBRUARY 23, 1995 TO DECEMBER 31, 1995
<PAGE> 126
CONTENTS
PAGES
Report of Independent Accountants .................................... 1
Financial Statements:
Statement of Net Assets as of December 31, 1996 .................. 2
Statement of Operations and Changes in Net Assets for the
year ended December 31, 1996 .................................. 3
Statement of Operations and Changes in Net Assets for the
Period from February 23, 1995 (Commencement of
Operations) to December 31, 1995 .............................. 4
Notes to Financial Statements ................................. 5-7
<PAGE> 127
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contractholders and Board of
Directors of Western-Southern Life
Assurance Company
We have audited the accompanying statement of net assets of Western-Southern
Life Assurance Company Separate Account 1 as of December 31, 1996, and the
related statements of operations, changes in net assets and selected per unit
data and ratios for the year ended December 31, 1996 and the period from
February 23, 1995 to December 31, 1995. These financial statements and per unit
data and ratios are the responsibility of the Separate Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per unit data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodians. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected per unit data and ratios
referred to above present fairly, in all material respects, the financial
position of Western-Southern Life Assurance Company Separate Account 1 as of
December 31, 1996, the results of operations, the changes in its net assets and
the selected per unit data and ratios for the year ended December 31, 1996 and
the period from February 23, 1995 to December 31, 1995 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 9, 1997
1
<PAGE> 128
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
STATEMENT OF NET ASSETS
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
<S> <C>
ASSETS
Investments at current market value:
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio (248,630 shares, cost $2,988,315) $ 3,033,286
International Equity Portfolio (281,546 shares, cost $3,010,751) 3,116,718
Balanced Portfolio (286,519 shares, cost $3,514,348) 3,678,904
Income Opportunity Portfolio (468,704 shares, cost $5,213,572) 5,254,175
Standby Income Portfolio (328,211 shares, cost $3,284,974) 3,285,388
Select Advisors Portfolios
Growth & Income Portfolio II (29.067174% beneficial interest, cost $6,075,563) 6,388,814
Bond Portfolio II (17.882497% beneficial interest, cost $2,587,104) 2,678,135
-----------
Total investments 27,435,420
-----------
Total assets 27,435,420
-----------
LIABILITIES
Accounts payable to Western-Southern Life Assurance Company 55
-----------
Total net assets $27,435,365
-----------
-----------
NET ASSETS
Variable Annuity Contracts 27,434,455
Retained in the variable account by Western-Southern Life Assurance
Company 910
-----------
Total net assets $27,435,365
-----------
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
2
<PAGE> 129
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INTER-
EMERGING NATIONAL INCOME
GROWTH EQUITY BALANCED OPPORTUNITY
TOTAL SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Income:
Dividends and capital
gains $ 632,218 $ 78,087 $ 19,427 $ 106,100 $ 359,226
Miscellaneous income
(loss) 11,618 1,457 (196) 1,531 840
Expenses:
Mortality and expense
risk, and administrative
charge 139,808 15,425 16,207 19,935 22,201
------------ ------------ ------------ ------------ ------------
Net investment income
(loss) 504,028 64,119 3,024 87,696 337,865
------------ ------------ ------------ ------------ ------------
Net change in unrealized
appreciation (depreciation)
on investments 736,735 51,240 103,391 182,124 34,430
Realized gain (loss) on
investments 55,105 14,060 25,572 3,877 12,639
------------ ------------ ------------ ------------ ------------
Net realized and unrealized
gain (loss) on investments 791,840 65,300 128,963 186,001 47,069
------------ ------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations 1,295,868 129,419 131,987 273,697 384,934
------------ ------------ ------------ ------------ ------------
Contract owners activity:
Payments received from
contract owners 24,271,995 2,915,558 2,950,701 3,035,487 3,973,450
Net transfers between
sub-accounts and/or
fixed account (51,686) (166,332) (120,369) 47,771 672,000
Withdrawals and surrenders (147,317) (20,170) (21,168) (17,803) (26,742)
Contract maintenance charge (1,706) (249) (163) (256) (188)
------------ ------------ ------------ ------------ ------------
Net increase from contract
activity 24,071,286 2,728,807 2,809,001 3,065,199 4,618,520
------------ ------------ ------------ ------------ ------------
Net increase in net assets 25,367,154 2,858,226 2,940,988 3,338,896 5,003,454
Net assets, at beginning
of period 2,068,211 174,982 175,704 339,933 250,493
------------ ------------ ------------ ------------ ------------
Net assets, at end of period $ 27,435,365 $ 3,033,208 $ 3,116,692 $ 3,678,829 $ 5,253,947
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
STANDBY GROWTH &
INCOME INCOME II BOND II
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Dividends and capital
gains $ 69,378
Miscellaneous income
(loss) 334 $ 6,979 $ 673
Expenses:
Mortality and expense
risk, and administrative
charge 18,034 31,803 16,203
------------ ------------ ------------
Net investment income
(loss) 51,678 (24,824) (15,530)
------------ ------------ ------------
Net change in unrealized
appreciation (depreciation)
on investments 304 288,509 76,737
Realized gain (loss) on
investments (1,043)
------------ ------------ ------------
Net realized and unrealized
gain (loss) on investments (739) 288,509 76,737
------------ ------------ ------------
Net increase in net assets
resulting from operations 50,939 263,685 61,207
------------ ------------ ------------
Contract owners activity:
Payments received from
contract owners 3,946,882 5,241,129 2,208,788
Net transfers between
sub-accounts and/or
fixed account (1,138,789) 555,914 98,119
Withdrawals and surrenders (16,705) (29,858) (14,871)
Contract maintenance charge (134) (538) (178)
------------ ------------ ------------
Net increase from contract
activity 2,791,254 5,766,647 2,291,858
------------ ------------ ------------
Net increase in net assets 2,842,193 6,030,332 2,353,065
Net assets, at beginning
of period 443,543 358,485 325,071
------------ ------------ ------------
Net assets, at end of period $ 3,285,736 $ 6,388,817 $ 2,678,136
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
<PAGE> 130
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE PERIOD FROM FEBRUARY 23, 1995 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
INTER-
EMERGING NATIONAL INCOME STANDBY
GROWTH EQUITY BALANCED OPPORTUNITY INCOME
TOTAL SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income
Dividends and capital gains $ 52,003 $ 11,286 $ 491 $ 24,992 $ 9,264 $ 5,970
Miscellaneous income (loss) 77 193 141 (227) 61 (129)
Expenses:
Mortality and expense
risk, and administrative
charge 6,841 509 581 1,133 846 1,417
----------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss) 45,239 10,970 51 23,632 8,479 4,424
----------- ----------- ----------- ----------- ----------- -----------
Net change in unrealized
appreciation (depreciation)
on investments 24,058 (6,269) 2,576 (17,568) 6,174 109
Realized gain (loss) on
investments 556 427 30 91 50 (42)
----------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized
gain (loss) on investments 24,614 (5,842) 2,606 (17,477) 6,224 67
----------- ----------- ----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations 69,853 5,128 2,657 6,155 14,703 4,491
----------- ----------- ----------- ----------- ----------- -----------
Contract owners activity:
Payments received from
contract owners 2,006,075 166,635 166,202 331,426 232,585 470,827
Net transfers between
sub-accounts and/or fixed
account -- 7,875 6,845 2,352 3,205 (31,775)
Withdrawals and surrenders (7,717) (4,656) -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net increase from contract
activity 1,998,358 169,854 173,047 333,778 235,790 439,052
----------- ----------- ----------- ----------- ----------- -----------
Net increase in net assets 2,068,211 174,982 175,704 339,933 250,493 443,543
Net assets, at beginning of
period -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net assets, at end of period $ 2,068,211 $ 174,982 $ 175,704 $ 339,933 $ 250,493 $ 443,543
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
GROWTH &
INCOME II BOND II
SUB-ACCOUNT SUB-ACCOUNT
----------- -----------
<S> <C> <C>
Income
Dividends and capital gains $ -- $ --
Miscellaneous income (loss) 35 3
Expenses:
Mortality and expense
risk, and administrative
charge 1,136 1,219
----------- -----------
Net investment income (loss) (1,101) (1,216)
----------- -----------
Net change in unrealized
appreciation (depreciation)
on investments 24,742 14,294
Realized gain (loss) on
investments -- --
----------- -----------
Net realized and unrealized
gain (loss) on investments 24,742 14,294
----------- -----------
Net increase in net assets
resulting from operations 23,641 13,078
----------- -----------
Contract owners activity:
Payments received from
contract owners 324,719 313,681
Net transfers between
sub-accounts and/or fixed
account 10,125 1,373
Withdrawals and surrenders -- (3,061)
----------- -----------
Net increase from contract
activity 334,844 311,993
----------- -----------
Net increase in net assets 358,485 325,071
Net assets, at beginning of
period -- --
----------- -----------
Net assets, at end of period $ 358,485 $ 325,071
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
<PAGE> 131
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 1
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
Western-Southern Life Assurance Company Separate Account 1 (the "Account") is a
unit investment trust registered under the Investment Company Act of 1940 (the
"1940 Act"), established by the 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 Account
is a funding vehicle for individual variable annuity contracts and commenced
operations on February 23, 1995.
The variable annuity 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. The variable annuity contracts are distributed
across the United States through a network of broker-dealers and wholesalers.
2. SIGNIFICANT ACCOUNTING POLICIES:
The Account has seven investment sub-accounts each of which invests in the
corresponding portfolio ( a "Portfolio") of Select Advisors Variable Insurance
Trust or of Select Advisers Portfolios, each of which is an open-ended
diversified management investment company. The sub-accounts' values fluctuate on
a day to day basis depending on the investment performance of the Portfolio in
which each sub-account is invested. A contractholder may also allocate funds to
the Fixed Account, which is part of the general account of the Company. 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 investment company under
the 1940 Act. Sub-account transactions are recorded on the trade date and income
from dividends is recorded on the ex-dividend date. Realized gains and losses on
the sales of investments are computed on the basis of specific identification.
Upon annuitization, the contract assets are transferred to the general account
of the Company. Accordingly, contract reserves are recorded by the Company. See
the related prospectus for a more detailed understanding of the annuity
contracts.
3. CONTRACT CHARGES:
Certain deductions for administrative and risk charges are deducted from the
contract value, in order to compensate the Company for administrative expenses
and for the assumption of mortality and expense risks. These charges are made
daily at an annual effective rate of 1.35%.
5
<PAGE> 132
NOTE TO FINANCIAL STATEMENTS, CONTINUED:
3. CONTRACT CHARGES, CONTINUED:
The Company also deducts an annual contract maintenance charge from the contract
value on each contract anniversary and upon any full surrender. The contract
maintenance charge is $35 for the first ten Contract Years and the lesser of (a)
$35 or (b) 0.17% of the Contract Value after the tenth Contract Anniversary.
Since no deduction for a sales charge is made from the payments received from
contract owners, a surrender charge is imposed on certain surrenders and partial
withdrawals to cover expenses relating to promotion, sale and distribution of
the contracts. The surrender charge is assessed on each redemption, except for
certain amounts excluded from charges under the contract. This charge ranges
from 7% to 0% depending on the number of years since the payment was received.
4. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
5. TAXES:
The Account is not taxed separately because the operations of the Account are
part of the total operations of the Company. The Company is taxed as a life
insurance company under the Internal Revenue Code. Under existing federal income
tax law, no taxes are payable on the investment income or on the capital gains
of the Account.
6
<PAGE> 133
NOTE TO FINANCIAL STATEMENTS, CONTINUED:
6. PURCHASES AND SALES OF INVESTMENTS:
The following table shows aggregate cost of shares and beneficial interests of
the portfolios purchased and proceeds from shares and beneficial interests of
the portfolios sold by the corresponding sub-accounts for the period January 1,
1996 to December 31, 1996.
<TABLE>
<CAPTION>
PURCHASES SALES
----------- ----------
<S> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $3,126,516 $ 333,462
International Equity Portfolio 3,157,914 345,835
Balanced Portfolio 3,220,156 67,201
Income Opportunity Portfolio 5,061,409 104,820
Standby Income Portfolio 4,008,357 1,165,948
Select Advisors Portfolios
Growth & Income Portfolio II 5,990,806 249,000
Bond Portfolio II 2,320,416 44,100
</TABLE>
7. UNIT VALUES:
The following table shows a summary of units outstanding for variable annuity
contracts for the period January 1, 1996 to December 31, 1996.
<TABLE>
<CAPTION>
TRANSFERS
BEGINNING UNITS UNITS BETWEEN ENDING UNIT ENDING
UNIT PURCHASED REDEEMED SUB-ACCOUNTS UNITS VALUE VALUE
---------- --------- -------- ------------ ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Sub-account 14,972 236,576 (1,640) (13,269) 236,639 12.817847 $3,033,208
International Equity Sub-account 15,645 248,050 (1,782) (9,567) 252,346 12.350885 3,116,692
Balanced Sub-account 28,416 236,023 (1,365) 3,842 266,916 13.782738 3,678,829
Income Opportunity Sub-account 20,015 272,044 (1,850) 43,853 334,062 15.727477 5,253,947
Standby Income Sub-account 42,991 372,954 (1,590) (107,604) 306,751 10.711418 3,285,736
Growth & Income Sub-account 28,701 384,931 (2,223) 39,732 451,141 14.161478 6,388,817
Bond Sub-account 28,863 198,731 (1,330) 8,761 235,025 11.395131 2,678,136
-----------
$27,435,365
-----------
-----------
</TABLE>
7
<PAGE> 134
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
SUPPLEMENTARY INFORMATION--SELECTED PER UNIT DATA AND RATIOS
(SELECTED DATA FOR A SHARE OF ACCUMULATION UNIT OUTSTANDING THOUGHOUT EACH YEAR)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME GROWTH &
GROWTH EQUITY BALANCED OPPORTUNITY STANDBY INCOME INCOME II BOND II
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ------------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data
Investment income $ 0.334587 $ 0.083236 $ 0.564184 $ 1.961352 $ 0.546191 $ - $
Expenses 0.165347 0.159808 0.170051 0.189796 0.141698 0.181541 0.149925
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income-net 0.169240 (0.076572) 0.394133 1.771556 0.404493 (0.181541) (0.149925)
Net realized and unrealizable
gain (loss) 0.961438 1.196627 1.425763 1.440778 (0.010269) 1.852780 0.282532
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
asset value 1.130678 1.120055 1.819896 3.212334 0.394244 1.671239 0.132607
Beginning of year 11.687169 11.230830 11.962842 12.515143 10.317194 12.490239 11.262524
---------- ---------- ---------- ---------- ----------- ---------- ----------
End of year $12.817847 $12.350885 $13.782738 $15.727477 $10.711418 $14.161478 $11.395131
---------- ---------- ---------- ---------- ----------- ---------- ----------
---------- ---------- ---------- ---------- ----------- ---------- ----------
Ratios
Ratio of operating expense
to average net assets (%) 0.96% 0.98% 0.99% 0.81% 0.97% 0.94% 1.08%
Ratio of investment income-net
to average net assets (%) 4.00% 0.18% 4.36% 12.28% 2.77% (0.74)% (1.03)%
</TABLE>
8
<PAGE> 135
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
SUPPLEMENTARY INFORMATION--SELECTED PER UNIT DATA AND RATIOS
(SELECTED DATA FOR A SHARE OF ACCUMULATION UNIT OUTSTANDING THOUGHOUT EACH YEAR)
FOR THE PERIOD FROM FEBRUARY 23, 1995 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1995
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME GROWTH &
GROWTH EQUITY BALANCED OPPORTUNITY STANDBY INCOME INCOME II BOND II
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ------------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data
Investment income $ 0.786333 $ 0.033593 $ 1.121644 $ 1.546728 $ 0.482206 $ - $ -
Expenses 0.123840 0.123076 0.127804 0.127882 0.115186 0.126716 0.120569
---------- ---------- ---------- ---------- ---------- ---------- ---------
Investment income-net 0.662493 (0.089483) 0.993840 1.418846 0.367020 (0.126716) (0.120569)
Net realized and unrealizable
gain (loss) on investments 1.024676 1.320313 0.969002 1.096297 (0.049826) 2.616955 1.383093
---------- ---------- ---------- ---------- ---------- ---------- ---------
Net increase (decrease) in
net asset value 1.687169 1.230830 1.962842 2.515143 0.317194 2.490239 1.262524
Beginning of year 10.000000 10.000000 10.000000 10.000000 10.000000 10.000000 10.000000
---------- ---------- ---------- ---------- ---------- ---------- ----------
End of year $11.687169 $11.230830 $11.962842 $12.515143 $10.317194 $12.490239 $11.262524
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Ratios
Ratio of operating expense
to average net assets (%) 0.58% 0.66% 0.67% 0.68% 0.64% 0.63% 0.75%
Ratio of investment
income-net to average net
assets (%) 12.54% 0.06% 13.90% 6.77% 2.00% (0.61)% (0.75)%
</TABLE>
9
<PAGE> 136
WESTERN - SOUTHERN LIFE ASSURANCE
COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF
THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<PAGE> 137
CONTENTS
Pages
Report of Independent Accountants 1
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 2-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 6-7
Notes to Financial Statements 8-23
<PAGE> 138
TOUCHSTONE
[LOGO]---------------------------------
Western-Southern Life
Assurance Company
------------------
Separate Account 1
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1997
- --------------------------------------------------------------------------------
<PAGE> 139
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Statement of Net Assets
As of June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at current market value:
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio (649,275 shares, cost $8,125,575) $ 9,135,303
International Equity Portfolio (678,201 shares, cost $7,546,806) 8,484,294
Balanced Portfolio (680,891 shares, cost $8,739,738) 9,471,192
Income Opportunity Portfolio (1,096,540 shares, cost $12,529,670) 12,796,617
Standby Income Portfolio (741,045 shares, cost $7,413,890) 7,410,452
Select Advisors Portfolios
Growth & Income Portfolio II (46.276771% beneficial interest, cost
$13,189,063) 14,406,675
Bond Portfolio II(31.160100% beneficial interest, cost $5,502,279) 5,736,786
-----------
Total assets 67,441,319
-----------
LIABILITIES
Accounts payable 105
-----------
Total liabilities 105
Total net assets $67,441,214
===========
NET ASSETS
Variable annuity contracts $67,440,231
Retained in the variable account by Western-Southern Life Assurance Company 983
-----------
Total net assets $67,441,214
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 140
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Statement of Operations and Changes in Net Assets
For the period from January 1, 1997 to June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY GROWTH &
GROWTH EQUITY BALANCED OPPORTUNITY INCOME INCOME BOND
TOTAL SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME:
Dividends $ 689,418 $ -- $ -- $ 75,197 $ 470,063 $ 144,158 $ -- $ --
Miscellaneous income
(loss) 581 139 573 (666) (775) 564 1,011 (265)
EXPENSES:
Mortality and expense
risk and
administrative
charge 305,817 37,180 36,384 42,344 59,834 36,681 66,072 27,322
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net Investment Income
(loss) 384,182 (37,041) (35,811) 32,187 409,454 108,041 (65,061) (27,587)
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net change in
unrealized
appreciation
(depreciation) on
investments 3,633,505 964,757 831,521 566,898 226,344 (3,851) 904,360 143,476
Realized gain (loss) on
investments 145,765 (6,238) 10,341 11,701 132,042 (2,081) -- --
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net realized and
unrealized gain (loss)
on investments 3,779,270 958,519 841,862 578,599 358,386 (5,932) 904,360 143,476
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net increase (decrease)
in net assets resulting
from operations 4,163,452 921,478 806,051 610,786 767,840 102,109 839,299 115,889
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Contract owners activity:
Payments received from
contract owners 36,752,167 4,202,675 3,478,311 4,907,903 7,313,880 6,554,245 7,591,160 2,703,993
Net transfers between
sub-accounts and/or
fixed account (123,028) 1,048,551 1,156,965 373,854 (367,450) (2,414,567) (225,612) 305,231
Withdrawals and
surrenders (779,186) (69,634) (72,719) (99,147) (170,172) (116,882) (184,855) (65,777)
Contract maintenance
change (7,556) (974) (1,007) (1,032) (1,429) (293) (2,134) (687)
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net increase from
contract activity 35,842,397 5,180,618 4,561,550 5,181,578 6,774,829 4,022,503 7,178,559 2,942,760
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net increase in net
assets 40,005,849 6,102,096 5,367,601 5,792,364 7,542,669 4,124,612 8,017,858 3,058,649
Net assets, at beginning
of period 27,435,365 3,033,208 3,116,692 3,678,829 5,253,947 3,285,736 6,388,817 2,678,136
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net assets, at end of
period $67,441,214 $9,135,304 $8,484,293 $9,471,193 $12,796,616 $ 7,410,348 $14,406,675 $5,736,785
=========== ========== ========== ========== =========== =========== =========== ==========
</TABLE>
Statement of Operations and Changes in Net Assets
For the year ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY GROWTH &
GROWTH EQUITY BALANCED OPPORTUNITY INCOME INCOME BOND
TOTAL SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME:
Dividends and capital
gains $ 632,218 $ 78,087 $ 19,427 $ 106,100 $ 359,226 $ 69,378 $ -- $ --
Miscellaneous income
(loss) 11,618 1,457 (196) 1,531 840 334 6,979 673
EXPENSES:
Mortality and
expenses and
administrative
charge 139,808 15,425 16,207 19,935 22,201 18,034 31,803 16,203
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net Investment income
(loss) 504,028 64,119 3,024 87,696 337,865 51,678 (24,824) (15,530)
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net change in
unrealized
appreciation
(depreciation) on
investments 736,735 51,240 103,391 182,124 34,430 304 288,509 76,737
Realized gain (loss) on
investments 55,105 14,060 25,572 3,877 12,639 (1,043) -- --
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net realized and
unrealized gain (loss)
on investments 791,840 65,300 128,963 186,001 47,069 (739) 288,509 76,737
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net increase in net
assets resulting from
operations 1,295,868 129,419 131,987 273,697 384,934 50,939 263,685 61,207
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Contract owners activity:
Payments received from
contract owners 24,271,995 2,915,558 2,950,701 3,035,487 3,973,450 3,946,882 5,241,129 2,208,788
Net transfers between
sub-accounts and/or
fixed account (51,686) (166,332) (120,369) 47,771 672,000 (1,138,789) 555,914 98,119
Withdrawals and
surrenders (147,317) (20,170) (21,168) (17,803) (26,742) (16,705) (29,858) (14,871)
Contract maintenance
change (1,706) (249) (163) (256) (188) (134) (538) (178)
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net increase from
contract activity 24,071,286 2,728,807 2,809,001 3,065,199 4,618,520 2,791,254 5,766,647 2,291,858
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net increase in net
assets 25,367,154 2,858,226 2,940,988 3,338,896 5,003,454 2,842,193 6,030,332 2,353,065
Net assets, at beginning
of period 2,068,211 174,982 175,704 339,933 250,493 443,543 358,485 325,071
----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------
Net assets, at end of
period $27,435,365 $3,033,208 $3,116,692 $3,678,829 $ 5,253,947 $ 3,285,736 $ 6,388,817 $2,678,136
=========== ========== ========== ========== =========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 141
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. ORGANIZATION
Western-Southern Life Assurance Company Separate Account 1 (the "Account")
is a unit investment trust registered under the Investment Company Act of 1940
(the "1940 Act"), established by the 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
Account is a funding vehicle for individual variable annuity contracts, and
commenced operations on February 23, 1995.
The variable annuity 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. The variable annuity contracts are
distributed across the United States through a network of broker-dealers and
wholesalers.
2. SIGNIFICANT ACCOUNTING POLICIES
The Account has seven investment sub-accounts each of which invests in the
corresponding portfolio (a "Portfolio") of Select Advisors Variable Insurance
Trust or of Select Advisors Portfolios, each of which is an open-ended
diversified management investment company. The sub-account's value fluctuates on
a day to day basis depending on the investment performance of the Portfolio in
which the sub-account is invested. A contractholder may also allocate funds to
the Fixed Account, which is part of the general account of the Company. 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 investment company under
the 1940 Act. Sub-account transactions are recorded on the trade date and income
from dividends is recorded on the ex-dividend date. Realized gains and losses on
the sales of investments are computed on the basis of specific identification.
Upon annuitization, the contract assets are transferred to the general
account of the Company. Accordingly, contract reserves are recorded by the
Company. See the related prospectus for a more detailed understanding of the
annuity contracts.
3. CONTRACT CHARGES
Certain deduction for administrative and risk charges are deducted from the
contract value, in order to compensate the Company for administrative expenses
and for the assumption of mortality and expense risks. These charges are made
daily at an annual effective rate of 1.35%.
The Company also deducts an annual contract maintenance charge from the
contract value on each contract anniversary and upon any full surrender. The
contract maintenance charge is $35 for the first ten Contract Years and the
lesser of (a) $35 and (b) 0.17% of the Contract Value after the tenth Contract
Anniversary.
Since no deduction for a sales charge is made from the payments received
from contract owners, a surrender charge is imposed on certain surrenders and
partial withdrawals to cover expenses relating to promotion, sale and
distribution of the contracts. The surrender charge is assessed on each
redemption, except for certain amounts excluded from charges under the contract.
This charge ranges from 7% to 0% depending on the number of years since the
payment was received.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5. TAXES
The Account is not taxed separately because the operations of the Account
are part of the total operations of the Company. The Company is taxed as a life
insurance company under the Internal Revenue Code. Under existing federal income
tax law, no taxes are payable on the investment income or on the capital gains
of the Account.
5
<PAGE> 142
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. PURCHASES AND SALES OF INVESTMENTS
The following table shows aggregate cost of shares and beneficial interests
of the Portfolios purchased and proceeds from shares and beneficial interests of
the Portfolios sold by the corresponding sub-accounts for the period January 1,
1997 to June 30, 1997.
<TABLE>
<CAPTION>
PURCHASES SALES
---------- ----------
<S> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $6,031,012 $ 887,514
International Equity Portfolio 4,620,611 94,897
Balanced Portfolio 5,344,053 130,364
Income Opportunity Portfolio 8,786,053 1,601,997
Standby Income Portfolio 7,625,423 3,494,426
Select Advisors Portfolios
Growth & Income Portfolio II 7,993,388 879,888
Bond Portfolio II 3,082,780 167,605
</TABLE>
7. UNIT VALUES
The following table shows a summary of units outstanding for variable
annuity contracts for the period January 1, 1997 to June 30, 1997.
<TABLE>
<CAPTION>
TRANSFERS
BEGINNING UNITS UNITS BETWEEN SUB- ENDING UNIT ENDING
UNITS PURCHASED REDEEMED ACCOUNTS UNITS VALUE VALUE
--------- --------- -------- ------------ ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Sub-account 236,639 322,393 (5,390) 68,456 622,098 14.684666 $ 9,135,304
International Equity Sub-account 252,346 272,766 (5,687) 92,494 611,919 13.865066 8,484,293
Balanced Sub-account 266,916 346,479 (6,995) 25,963 632,363 14.977466 9,471,193
Income Opportunity Sub-account 334,062 447,384 (10,430) (22,185) 748,831 17.088785 12,796,616
Standby Income Sub-account 306,751 605,875 (10,841) (222,512) 679,273 10.909239 7,410,348
Growth & Income Sub-account 451,141 533,891 (13,040) (14,859) 957,133 15.051902 14,406,675
Bond Sub-account 235,025 236,580 (5,794) 26,661 492,472 11.648950 5,736,785
-----------
$67,441,214
===========
</TABLE>
6
<PAGE> 143
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Supplementary Information-selected Per Unit Data and Ratios
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY GROWTH &
GROWTH EQUITY BALANCED OPPORTUNITY INCOME INCOME BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JUNE
30, 1997 (UNAUDITED)
Per unit data
Investment income $ -- $ -- $ 0.139205 $ 0.813369 $ 0.280417 $ -- $ --
Expenses 0.087288 0.084877 0.094681 0.108948 0.071868 0.095396 0.076088
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income-net (0.087288) (0.084877) 0.044524 0.704421 0.208548 (0.095396) (0.076088)
Net realized and unrealized
gain (loss) on investments 1.954107 1.599058 1.150204 0.656887 (0.010727) 0.985820 0.329907
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in
net asset value 1.866819 1.514181 1.194728 1.361308 0.197821 0.890424 0.253819
Beginning of period 12.817847 12.350885 13.782738 15.727477 10.711418 14.161478 11.395131
---------- ---------- ---------- ---------- ---------- ---------- ----------
End of period $14.684666 $13.865066 $14.977466 $17.088785 $10.909239 $15.051902 $11.648950
========== ========== ========== ========== ========== ========== ==========
Ratios
Ratio of operating expense
to average net assets (%) 0.61% 0.63% 0.64% 0.66% 0.69% 0.64% 0.65%
Ratio of investment
income-net to average net
assets (%) (0.61)% (0.62)% 0.49% 4.54% 2.02% (0.63)% (0.66)%
FOR THE YEAR ENDED
DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------------------------------
Per unit data
Investment income $ 0.334587 $ 0.083236 $ 0.564184 $ 1.961352 $ 0.546191 $ -- $ --
Expenses 0.165347 0.159808 0.170051 0.189796 0.141698 0.181541 0.149925
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income-net 0.169240 (0.076572) 0.394133 1.771556 0.404493 (0.181541) (0.149925)
Net realized and unrealized
gain (loss) on investments 0.961438 1.196627 1.425763 1.440778 (0.010269) 1.852780 0.282532
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in
net asset value 1.130678 1.120055 1.819896 3.212334 0.394224 1.671239 0.132607
Beginning of year 11.687169 11.230830 11.962842 12.515143 10.317194 12.490239 11.262524
---------- ---------- ---------- ---------- ---------- ---------- ----------
End of year $12.817847 $12.350885 $13.782738 $15.727477 $10.711418 $14.161478 $11.395131
========== ========== ========== ========== ========== ========== ==========
Ratios
Ratio of operating expense
to average net assets (%) 0.96% 0.98% 0.99% 0.81% 0.97% 0.94% 1.08%
Ratio of investment
income-net to average net
assets (%) 4.00% 0.18% 4.36% 12.28% 2.77% (0.74)% (1.03)%
FOR THE PERIOD FROM FEBRUARY
23, 1995 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31,
1995
- --------------------------------------------------------------------------------------------------------------------------------
Per unit data
Investment income $ 0.786333 $ 0.033593 $ 1.121644 $ 1.546728 $ 0.482206 $ -- $ --
Expenses 0.123840 0.123076 0.127804 0.127882 0.115186 0.126716 0.120569
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income-net 0.662493 (0.089483) 0.993840 1.418846 0.367020 (0.126716) (0.120569)
Net realized and unrealized
gain (loss) on investments 1.024676 1.320313 0.969002 1.096297 (0.049826) 2.616955 1.383093
---------- ---------- ---------- ----------- ---------- ---------- ----------
Net increase (decrease) in
net asset value 1.687169 1.230830 1.962842 2.515143 0.317194 2.490239 1.262524
Beginning of year 10.000000 10.000000 10.000000 10.000000 10.000000 10.000000 10.000000
---------- ---------- ---------- ----------- ----------- ---------- ----------
End of year $11.687169 $11.230830 $11.962842 $12.515143 $10.317194 $12.490239 $11.262524
========== ========== ========== ========== ========== ========== ==========
Ratios
Ratio of operating expense
to average net assets (%) 0.58% 0.66% 0.67% 0.68% 0.64% 0.63% 0.75%
Ratio of investment
income-net to average net
assets (%) 12.54% 0.06% 13.90% 6.77% 2.00% (0.61)% (0.75)%
</TABLE>
The above information was prepared using daily weighted-average units
outstanding.
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 144
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Western-Southern Life Assurance Company
We have audited the accompanying consolidated balance sheets of Western-Southern
Life Assurance Company (a wholly-owned subsidiary of The Western and Southern
Life Insurance Company) and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations and statements of changes in
shareholder's equity and cash flows for the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Western-Southern
Life Assurance Company and Subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 1, the Company adopted Statement of Financial Accounting
Standards No. 120 (SFAS 120), Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration Participating
Contracts, and Financial Accounting Standards Board Interpretation No. 40 (FIN
40), Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises effective January 1, 1993, which required
implementation of several accounting pronouncements not previously adopted. The
effects of adopting SFAS 120 and FIN 40 were retroactively applied to the
Company's previously issued financial statements consistent with the
implementation guidance of those standards.
Cincinnati, Ohio
April 25, 1997
1
<PAGE> 145
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
--------- ------------
(in thousands)
------------------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Debt securities $2,548,307 $2,170,703
Equity securities 64,462 52,836
Mortgage loans, net 93,499 122,465
Real estate 10,374 15,512
Policy Loans 51,331 51,952
Short term investments 88,012 103,924
Other invested assets 10,881 22,258
Cash and cash equivalents 593 6,514
---------- ----------
Total investments 2,867,459 2,546,164
---------- ----------
Accrued investment income 35,140 31,209
Deferred acquisition costs, net 284,135 242,998
Other assets 6,417 6,695
Assets held in separate accounts 27,971 2,225
---------- ----------
Total assets $3,221,122 $2,829,291
---------- ----------
---------- ----------
</TABLE>
CONTINUED
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
2
<PAGE> 146
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED BALANCE SHEETS, CONTINUED
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY 1996 1995
--------- ------------
(in thousands)
------------------------
<S> <C> <C>
Policy reserves $2,614,250 $2,261,627
Other policyholder funds 20,434 14,773
Pending policyholder claims 6,961 6,956
---------- ----------
Total policy liabilities 2,641,645 2,283,356
---------- ----------
Payable to parent company 139,885 136,853
Other accrued expenses 57,953 46,870
Federal income tax liability
Current 11,735 11,107
Deferred 55,385 62,286
Liabilities related to separate accounts 27,971 2,225
---------- ----------
Total liabilities 2,934,574 2,542,697
---------- ----------
Commitments and contingencies (see Note 8)
Common stock, $1 par value, authorized
10,000,000 shares issued and outstanding
1,500,000 shares 1,500 1,500
Paid-in capital 221,285 221,285
Net unrealized appreciation (depreciation)
on securities available-for-sale 12,348 32,770
Retained earnings 51,415 31,039
---------- ----------
Total shareholder's equity 286,548 286,594
---------- ----------
Total liabilities and shareholder's equity $3,221,122 $2,829,291
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
<PAGE> 147
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---- ------------- ----
(in thousands)
---------------------------------
<S> <C> <C> <C>
Revenue:
Insurance premiums and other
considerations $ 91,740 $ 89,706 $ 85,433
Policy and contract charges 32,895 32,886 31,626
Net investment income 195,147 231,231 144,110
Net realized investment gains (losses) 14,256 5,095 (8,736)
Other income 1,093 785 1,181
-------- -------- --------
Total revenues 335,131 359,703 253,614
-------- -------- --------
Benefits and expenses:
Policy benefits 54,575 52,620 43,498
Interest expense on annuities and
financial products 143,989 127,082 104,016
Amortization and write-off of
deferred policy acquisition costs 49,013 43,631 41,860
Other operating expenses 53,744 51,647 49,898
-------- -------- --------
Total benefits and expenses 301,321 274,980 239,272
-------- -------- --------
Income before income taxes 33,810 84,723 14,342
Income tax expense (benefit)
Current 8,858 488 4,301
Deferred 2,818 1,133 668
-------- -------- --------
11,676 1,621 4,969
-------- -------- --------
Net income $22,134 $83,102 $9,373
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
<PAGE> 148
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Unrealized
Appreciation
(Depreciation)
on
Securities
Common Paid-in available- Retained Total
Stock Capital for-sale Earnings Equity
------ ------- ----------- -------- ------
<S> <C> <C> <C> <C> <C>
Shareholders' equity, January 1, 1994 $1,500 $150,000 $21,489 $1,989 $174,978
Net income 9,373 9,373
Unrealized appreciation (depreciation)
on securities, net of deferred income
tax and adjustments to deferred
policy acquisition costs (50,551) (50,551)
Capital contribution from Parent 11,285 11,285
------ -------- -------- ------- --------
Shareholder's equity, December 31, 1994 1,500 161,285 (29,062) 11,362 145,085
------ -------- -------- ------- --------
Net income 83,102 83,102
Unrealized appreciation (depreciation)
on securities, net of deferred income
tax and adjustments to deferred
policy acquisition costs 61,832 61,832
Capital contribution from Parent 60,000 60,000
Dividend to Parent (63,425) (63,425)
------ -------- -------- ------- --------
Shareholder's equity, December 31, 1995 1,500 221,285 32,770 31,039 286,594
------ -------- -------- ------- --------
Net income 22,134
Unrealized appreciation (depreciation)
on securities, net of deferred income
tax and adjustments to deferred
policy acquisition costs (20,422) (20,422)
Dividend to Parent (1,758) (1,758)
------ -------- -------- ------- --------
Shareholder's equity,
December 31, 1996 $1,500 $221,285 $12,348 $51,415 $286,548
------ -------- -------- ------- --------
------ -------- -------- ------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
<PAGE> 149
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(in thousands)
------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 22,134 $ 83,102 $ 9,373
Adjustments to reconcile net
income to net cash provided
by operating activities:
Capitalization of deferred policy
acquisition costs (51,036) (42,837) (50,401)
Amortization and write-off of deferred policy
acquisition costs 49,013 43,631 41,860
Realized (gains) losses on invested assets, net (14,256) (5,095) 8,736
Deferred Federal income tax 2,818 1,133 (668)
Increase in policy liabilities 26,078 10,372 29,601
(Increase) decrease in other assets (29,399) (6,883) (6,855)
Increase (decrease) in other liabilities 40,491 33,853 (6,535)
---------- ---------- ---------
Net cash provided by operating activities 45,843 11,276 26,447
---------- ---------- ---------
Cash flows from investing activities:
Purchases:
Debt securities, available-for-sale (1,447,588) (960,371) (717,240)
Equity securities, available-for-sale (35,851) (27,527) (32,144)
Mortgage loans (10,295) (1,628)
Real Estate (583) (8,918) (2,438)
Short-term and other invested assets (2,788,146) (2,740,652) (3,295,518)
Proceeds from sales, calls or maturities
Debt securities, available-for-sale 1,003,920 652,316 343,321
Equity securities, available-for-sale 31,317 17,503 10,180
Mortgage loans 30,109 21,758 9,253
Real Estate 7,000 2,950
Short-term and other invested assets 2,817,605 2,696,859 3,300,496
---------- --------- ---------
Net cash used by investing activities (382,217) (359,327) (383,312)
---------- ---------- ----------
</TABLE>
CONTINUED
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
<PAGE> 150
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(in thousands)
----------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Deposits to universal life and
investment product account balances 513,635 385,562 416,342
Withdrawals from universal life and
investment product account balances (181,424) (134,740) (73,341)
Capital contributions from parent 60,000 11,285
Dividends to parent (1,758) (63,425)
-------- -------- -------
Net cash provided by financing
activities 330,453 247,397 354,286
-------- -------- -------
Net decrease in cash and cash
equivalents (5,921) 5,346 (2,579)
Cash and cash equivalents at
beginning of year 6,514 1,168 3,747
-------- -------- -------
Cash and cash equivalents at end of year $593 $6,514 $1,168
-------- -------- -------
-------- -------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
<PAGE> 151
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING
POLICIES:
A. NATURE OF OPERATIONS: Western-Southern Life Assurance Company is a
wholly-owned subsidiary of The Western and Southern Life Insurance
Company (the "Parent"), a mutual life insurance Company.
The Company offers individual annuities and interest-sensitive life
insurance products through its parent company's agents and various
financial institutions. The Company is licensed in forty-three states and
the District of Columbia, actively selling in twenty-one states, and has
94% of its field force located in twelve midwest and south-central states.
B. BASIS OF PRESENTATION: The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles
(GAAP). The Company adopted Financial Accounting Standards Board (FASB)
Statement No. 120 (SFAS 120), "Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts," and Financial Accounting Standards
Board Interpretation No. 40 (FIN 40), "Applicability of Generally Accepted
Accounting Principles for Mutual Life Insurance and Other Enterprises"
effective January 1, 1993. SFAS 120 and FIN 40 require financial
statements of mutual life insurance companies and their subsidiaries
referred to as prepared in accordance with generally accepted accounting
principles to apply all applicable authoritative GAAP pronouncements.
Previously, the financial statements prepared in conformity with
accounting practices prescribed or permitted by the Department of
Insurance of the State of Ohio ("statutory accounting") were considered to
be GAAP for mutual life insurers and their subsidiaries.
The cumulative effect of applying SFAS 120 and FIN 40 primarily consists
of the initial deferral of acquisition costs, the establishment of
deferred taxes, a change in methodology for insurance reserves, the
elimination of the statutory asset valuation reserve and the effect of
classifying certain investments as available-for-sale. The effect of the
changes has been reported retroactively through restatement of previously
issued financial information.
8
<PAGE> 152
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. PRINCIPAL ACCOUNTING POLICIES, CONTINUED:
B. BASIS OF PRESENTATION, CONTINUED:
As a result of the change in accounting principles, net income as
previously reported has been restated as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net income, as previously reported $ 18,272 $ 7,068
Add adjustments for effect of
retroactively applying a new basis
of accounting on prior years
Deferred policy acquisition costs (794) 8,541
Policy reserves 14,133 13,063
Deferred income taxes (1,133) (668)
Interest maintenance reserve 2,141 (6,006)
Current income taxes 543 (2,026)
Federal income tax refund 53,000 --
Other, net (3,060) (10,599)
-------- ---------
Total 64,830 2,305
-------- ---------
Net income, as adjusted $ 83,102 $ 9,373
-------- ---------
-------- ---------
</TABLE>
As a result of the change in accounting principles, shareholder's equity,
as previously reported has been restated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year,
as previously reported $166,942 $ 97,835 $ 90,452
Add adjustments for the cumulative
effect on prior years of applying
retroactively the new basis of
accounting
Deferred policy acquisition costs 243,179 367,591 303,984
Asset valuation reserve and interest
maintenance reserve 36,263 28,645 32,154
Policy reserves (76,916) (91,049) (104,101)
Reinsurance (141,714) (137,340) (131,419)
Deferred income taxes (62,280) (27,433) (53,489)
Excess of fair value over amortized
cost of debt and equity securities
available-for-sale, net of tax and deferred
policy acquisition costs 120,925 (94,470) 36,963
Other, net 195 1,306 434
--------- --------- ---------
Total 119,652 47,250 84,526
--------- --------- ---------
Balance at beginning of year, as adjusted $286,594 $145,085 $174,978
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company also files financial statements with insurance regulatory
authorities which are prepared on the basis of statutory accounting
practices which are significantly different from financial statements
prepared in accordance with GAAP. These differences are described in
detail in Note 7.
The following is a description of the principle accounting policies and
practices used in the preparation of these financial statements.
C. CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Courtyard
Nursing Care, Inc. and IFS Financial Services, Inc. Significant
intercompany transactions have been eliminated.
D. PREMIUM REVENUE AND BENEFITS TO POLICYHOLDERS: The premiums and benefits
for whole life and term insurance products and certain
<PAGE> 153
annuities with life contingencies (immediate annuities) are fixed and
guaranteed. Such premiums are recognized as premium revenue when due.
Benefits and expenses are associated with earned premiums so as to result
in recognition of profits over the life of the contracts. This association
is accomplished by means of the provision for liabilities for future
policy benefits and the amortization of deferred policy acquisition costs.
9
<PAGE> 154
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. PRINCIPAL ACCOUNTING POLICIES, CONTINUED:
D. PREMIUM REVENUE AND BENEFITS TO POLICYHOLDERS, CONTINUED: Universal life
policies and investment contracts are policies with terms that are not
fixed and guaranteed. The terms that may be changed could include one or
more of the amounts assessed the policyholder, premiums paid by the
policyholder or interest accrued to policyholder balances. The amounts
collected from policyholders for these policies are considered deposits,
and only the deductions during the period for cost of insurance, policy
administration and surrenders are included in revenue. Policy benefits and
claims that are charged to expense include interest credited to contracts
and benefit claims incurred in the period in excess of related policy
account balances.
E. DEFERRED POLICY ACQUISITION COSTS: Those costs of acquiring new business,
which vary with and are primarily related to the production of new
business, have been deferred to the extent that such costs are deemed
recoverable. Such costs include commissions, certain costs of policy
underwriting and issue and certain variable agency expenses. These costs
are amortized with interest as follows:
For universal life-type policies and investment contracts, over the lesser
of the lifetime of the policy or 15-30 years in relation to the present
value of estimated gross profits from surrender charges and investment,
mortality and expense margins, discounted using the interest rate credited
to the policy.
Recoverability of the unamortized balance of deferred policy acquisition
costs is evaluated regularly. For universal life-type contracts, and
investment contracts, the accumulated amortization is adjusted (increased
or decreased) whenever there is a material change in the estimated gross
profits expected over the life of a block of business in order to maintain
a constant relationship between cumulative amortization and the present
value of gross profits. For most other contracts, the unamortized asset
balance is reduced by a charge to income only when the present value of
future cash flows, net of the policy liabilities, is not sufficient to
cover such asset balance.
The Company states actively managed fixed maturities at fair value. The
Company also adjusts the cost of policies produced to reflect the change
in cumulative amortization that would have been recorded if they had sold
the securities at their fair value and reinvested the proceeds at current
yields. If future yields on such securities decline, it may be necessary
to increase certain insurance liabilities. The Company will adjust such
liabilities when their balances and future net cash flows (including
investment income) are insufficient to cover future benefits and expenses.
10
<PAGE> 155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. PRINCIPAL ACCOUNTING POLICIES, CONTINUED:
E. DEFERRED POLICY ACQUISITION COSTS, CONTINUED: A summary of deferred
acquisition costs follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Deferred acquisition costs, January 1 $242,998 $367,409 $252,365
Capitalization of costs 51,036 42,837 50,401
Amortization and write-off (49,013) (43,631) (41,860)
Additional amount related to
unrealized gains (losses)
on securities 39,114 (123,617) 106,503
-------- -------- --------
$284,135 $242,998 $367,409
-------- -------- --------
-------- -------- --------
</TABLE>
F. VALUATION OF INVESTMENTS:
- Debt securities which may be sold to meet liquidity and
other needs of the Company are categorized as
available-for-sale and are stated at fair value. Equity
securities are classified as available-for-sale and are stated
at fair value. Realized gains and losses on sale or maturity
of investments are based upon specific identification of the
investments sold and do not include amounts allocable to
separate accounts. At the time a decline in value of an
investment is determined to be other than temporary, a
provision for loss is recorded which is included in realized
investment gains and losses. Unrealized gains and losses,
resulting from carrying available-for-sale securities at fair
value, are reported in shareholder's equity, net of deferred
taxes of $6,649 and $17,645, respectively, and deferred
acquisition costs of $29,619 and $68,733, respectively, at
December 31, 1996 and 1995.
- Mortgage loans on real estate are carried at amortized cost less an
impairment allowance for estimated uncollectible amounts. The Company
records interest income from impaired loans on the cash-basis method.
- Policy loan values are carried at outstanding indebtedness not in
excess of policy cash surrender value.
11
<PAGE> 156
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. PRINCIPAL ACCOUNTING POLICIES, CONTINUED:
F. VALUATION OF INVESTMENTS, CONTINUED:
- Real estate joint ventures and partnerships where the Company can
exercise significant influence are accounted for on the equity method.
- Short-term investments are those investments with a maturity of less
than one year at the time of purchase and consist primarily of debt
securities and money market funds.
G. RESERVES FOR FUTURE POLICY AND CONTRACT BENEFITS: Liabilities for future
policy benefits on universal life and investment contracts consist
principally of policy account values plus certain deferred policy fees
which are amortized using the same assumptions and factors used to
amortize the cost of policies produced. If the future benefits on
investment contracts are guaranteed (immediate annuities with benefits
paid for a period certain) the liability for future benefits is the
present value of such guaranteed benefits. Claim liabilities include
provisions for reported claims and estimates based on historical
experience, for claims incurred but not reported.
H. ASSETS HELD IN SEPARATE ACCOUNTS: The Company maintains separate account
funds on which investment income and gains or losses accrue directly to
certain policyholders of variable annuity contracts. The assets of these
accounts are legally segregated and are valued at fair value. The related
liabilities are recorded at amounts equal to the underlying assets; the
fair value of these liabilities is equal to their carrying amount.
I. CASH AND CASH EQUIVALENTS: The Company considers short-term
investments with an original maturity of three months or less to be
cash and cash equivalents.
J. FEDERAL INCOME TAXES: The provision for income taxes is computed on
the separate return method and includes amounts currently payable
and deferred income taxes resulting from the temporary differences in
the assets and liabilities determined on a tax and financial reporting
basis.
The Company's Parent files a consolidated tax return with its eligible
subsidiaries, including the Company. The Company pays tax to its Parent
based on the provisions of a written agreement. Under the agreement, the
benefits from losses of subsidiaries is not retained by the subsidiary
companies but are allocated among those companies in the consolidated
group having taxable income. Differences between the Company's current
provision recorded for financial reporting purposes and the amount of tax
allocated to the Company under its legal tax sharing agreement are
considered to be dividends or capital contributions to/from its Parent. In
1996, 1995 and 1994, the Company (paid) received capital to/from its
Parent of $1,285, ($975) and ($1,758), respectively, under this agreement.
12
<PAGE> 157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. PRINCIPAL ACCOUNTING POLICIES, CONTINUED:
K. USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
2. INVESTMENTS:
The amortized cost and estimated fair values of securities available-for-sale
at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale
- -----------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 53,740 $ 429 $ 413 $ 53,756
Debt securities issued by states
of the U.S. and political
subdivisions of the states 85,735 3,545 180 89,100
Corporate securities 1,430,217 54,142 6,201 1,478,158
Mortgage-backed securities 928,954 14,645 16,306 927,293
---------- ------- ------- ----------
Total debt securities $2,498,646 $72,761 $23,100 $2,548,307
---------- ------- ------- ----------
---------- ------- ------- ----------
Equity securities $ 59,253 $ 7,940 $ 2,731 $ 64,462
---------- ------- ------- ----------
---------- ------- ------- ----------
</TABLE>
13
<PAGE> 158
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
<TABLE>
1995
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale:
- -------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 11,980 $ 396 $ - $ 12,376
Debt securities issued by states
of the U.S. and political
subdivisions of the states 111,554 8,070 - 119,624
Corporate securities 1,125,228 86,730 1,287 1,210,671
Mortgage-backed securities 801,772 30,322 4,062 828,032
---------- -------- ------ ----------
Total debt securities $2,050,534 $125,518 $5,349 $2,170,703
---------- -------- ------ ----------
---------- -------- ------ ----------
Equity securities $ 51,221 $ 3,085 $1,470 $ 52,836
---------- -------- ------ ----------
---------- -------- ------ ----------
</TABLE>
<TABLE>
<CAPTION>
1994
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale:
- - ------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 16,641 $ 66 $ 613 $ 16,094
Debt securities issued by states
of the U.S. and political
subdivisions of the states 74,407 104 3,813 70,698
Debt securities issued by Foreign
governments 4,854 34 4,820
Corporate securities 961,633 12,013 53,761 919,885
Mortgage-backed securities 676,562 1,590 51,040 627,112
---------- ------- -------- ----------
Total debt securities $1,734,097 $13,773 $109,261 $1,638,609
---------- ------- -------- ----------
---------- ------- -------- ----------
Equity securities $ 39,593 $ 77 $ 996 $ 38,674
---------- ------- -------- ----------
---------- ------- -------- ----------
</TABLE>
14
<PAGE> 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
The amortized cost and estimated fair value of debt securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Total
------------------------
Amortized Estimated
Cost Fair Value
---------- -----------
<S> <C> <C>
Due in one year or less $ 18,416 $ 18,637
Due after one year through five years 386,240 400,504
Due after five years through ten years 902,491 928,997
Due after ten years 262,545 272,876
---------- ----------
1,569,692 1,621,014
Mortgage-backed securities 928,954 927,293
---------- ----------
Total $2,498,646 $2,548,307
---------- ----------
---------- ----------
</TABLE>
Net investment income consisted of the following for the years ended December
31:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Debt securities $172,331 $152,328 $119,623
Equity securities 3,391 3,392 2,671
Mortgage loans 10,195 12,967 14,270
Rental income from real estate 2,604 2,246 1,247
Policy loans 3,743 3,739 3,728
Other invested assets 1,694 2,466 2,335
Short-term investments 5,121 4,643 2,707
Interest on Federal tax refund 53,000
-------- -------- --------
Gross investment income 199,079 234,781 146,581
Investment expense 3,932 3,550 2,471
-------- -------- --------
Net investment income $195,147 $231,231 $144,110
-------- -------- --------
-------- -------- --------
</TABLE>
15
<PAGE> 160
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
Proceeds from sales of investments in debt securities during 1996, 1995 and
1994 were $1,003,920, $652,316 and $343,321, respectively. Gross gains of
$14,494, $14,839 and $7,688 and gross losses of $8,135, $9,739 and $13,698
were realized on those sales in 1996, 1995 and 1994, respectively.
Proceeds from sales of investments in equity securities during 1996, 1995 and
1994 were $31,317, $17,503 and $10,180, respectively. Gross gains of $4,936,
$3,303 and $166 and gross losses of $1,407, $598 and $411 were realized on
those sales in 1996, 1995 and 1994, respectively.
3. MORTGAGE LOANS:
The Company maintains a diversified mortgage loan portfolio, consisting
principally of commercial real estate loans, and exercises internal limits on
concentrations of loans by geographic area, industry, use and individual
mortgagor. Mortgage loans on various properties in Ohio account for
approximately 38% of the total amortized cost of the Company's mortgage
loans. The remaining mortgage loans relate to properties located throughout
the United States.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $5,684 $4,043 $3,282
Provisions charged to operations - 2,513 761
Charge-offs, net of recoveries 1,152 872 -
------ ------ ------
Balance, end of year $4,532 $5,684 $4,043
------ ------ -------
------ ------ -------
</TABLE>
16
<PAGE> 161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following sets forth the fair values of the Company's financial
instruments:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------
Book Value Fair Value Book Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets
Debt securities $2,548,307 $2,548,307 $2,170,703 $2,170,703
Equity securities 64,462 64,462 52,836 52,836
Mortgage loans, net 93,499 96,800 122,465 130,884
Short-term investments 88,012 88,012 103,924 103,924
Cash and cash
equivalents 593 593 6,514 6,514
---------- ---------- ---------- ----------
Total assets $2,794,873 $2,798,174 $2,456,442 $2,464,861
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Liabilities
Investment-type
contract reserves $2,614,250 $2,478,682 $2,261,627 $2,120,043
---------- ---------- ---------- ----------
Total liabilities $2,614,250 $2,478,682 $2,261,627 $2,120,043
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Fair values for debt, equity and short-term investment securities are based
on quoted market prices.
The fair values for mortgage loans, consisting principally of commercial real
estate loans, are estimated using discounted cash flow analyses, using
interest rates currently being offered for similar loans collateralized by
properties with similar investment risk. The fair values for mortgage loans
in default are established at the lower of the fair market value of the
related underlying collateral or carrying value of the loan.
Fair value for the Company's liability under investment type contracts is
disclosed using two methods. For investment contracts without defined
maturities, fair value is the amount payable on demand. For investment
contracts with known or determined maturities, fair value is estimated using
discounted cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining for the
contracts being valued.
Interest changes may have temporary effects on the sale and profitability of
annuity products offered by the Company. Although the rates offered by the
companies are adjustable in the long-term, in the short-term they may be
subject to contractual and competitive restrictions which may prevent timely
adjustment. The Company's management monitors interest rates with respect to
a spectrum of duration and sells annuities that permit flexible responses to
interest rate changes as part of the Company's management of interest
spreads. However, adverse changes in investment yields on invested assets
will affect the earnings on those products with a guaranteed return.
17
<PAGE> 162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED:
The Company believes it is not practicable to estimate the fair value of
policy loans. These assets are carried at their aggregate unpaid principal
balances. Estimation of the fair value is not practicable as the loans have
no stated maturity and are an integral part of the related insurance
contracts.
5. RELATED PARTY TRANSACTIONS:
The Company has three modified coinsurance agreements under which it cedes
all of its universal life insurance business to its parent. The Company also
has a coinsurance agreement under which it assumes all of its parent's
flexible premium annuity business. These contracts are accounted for as
financing arrangements as the contracts do not provide for adequate transfer
of risk. Under the agreements, the Company holds as a deposit liability
$139,885 and $136,853 at December 31, 1996 and 1995, respectively, and has
recorded interest expense of $9,426, $8,351 and $7,861 for the years ended
December 31, 1996, 1995 and 1994, respectively, in its Statement of
Operations as charges relating to this arrangement.
The Company has no employees of its own and reimburses its parent for
management services and rent. Management services provided by the parent
amounted to $37,798 and $33,750 in 1996 and 1995, respectively. Rent expense
was $4,253 and $4,391 in 1996 and 1995, respectively.
During 1995 and 1994, the Company's parent made capital contributions of
$60,000 and $10,000, respectively, to the Company.
At December 31, 1996 and 1995, the Company had $35,915 and $31,118,
respectively, invested in the Touchstone Funds, mutual funds administered by
a subsidiary of the Company.
6. FEDERAL INCOME TAXES:
A reconciliation of the income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to the income tax expense
included in the consolidated statement of operations follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Income tax computed at statutory tax rate $ 11,834 $29,653 $5,020
Federal income tax refund related to
IRS assessment (28,000)
Dividends received deduction (178) (32) (54)
Other, net 20 - 3
-------- ------- ------
Federal income tax $ 11,676 $ 1,621 $4,969
-------- ------- ------
-------- ------- ------
</TABLE>
18
<PAGE> 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. FEDERAL INCOME TAXES, CONTINUED:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred income tax (asset) liability:
Deferred policy acquisition costs $93,475 $79,208
Investments 18,267 42,485
Future policy and contract benefits (59,833) (63,091)
Other 3,476 3,684
------- -------
Deferred income tax (asset) liability $55,385 $62,286
------- -------
------- -------
</TABLE>
Federal income taxes paid under the Company's tax-sharing agreement with its
parent were $11,735, $11,107 and $3,852 for 1996, 1995 and 1994,
respectively.
In 1987, the Company's parent recorded an assessment from the Internal
Revenue Service relating to an audit of the 1982 and 1983 consolidated tax
returns in which the Company was included. The assessment related to the
Company amounted to $71,725 and included interest in the amount of $26,380.
The assessment related to the disallowance of certain universal life reserve
deductions taken in excess of amounts computed for statutory purposes. The
assessment was paid with the intent of litigating the issue as the Company
maintained that the original deductions were proper and in accordance with
the Internal Revenue Code. In 1995, the U.S. District Court issued a summary
judgment which stated the original deductions were proper, entitling the
Company's parent to a refund of all related assessments paid including
interest, which approximated $115,000. This judgment was appealed by the IRS,
and in 1995, the IRS settled this issue through a refund totaling $81,000,
including interest of $53,000. The effect of the resolution of this matter
was recorded by the Company and the refund was remitted to the Company's
parent. Thus, the Company has recorded a dividend to its Parent in 1995 of
$62,450, reflecting the refund, net of taxes on the interest received.
7. REGULATORY MATTERS:
The Company, which is domiciled in Ohio, prepares statutory financial
statements in accordance with accounting principles and practices prescribed
or permitted by the State of Ohio Department of Insurance (SAP). Prescribed
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices differ from state-to-state, may differ from company-to-company
within a state, and may change in the future.
19
<PAGE> 164
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. REGULATORY MATTERS:
A reconciliation of SAP shareholder's equity to GAAP shareholder's equity at
December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
SAP shareholder's equity $ 170,603 $ 166,942 $ 97,835
Deferred policy acquisition costs 284,308 243,179 367,591
Policy reserves (63,340) (76,916) (91,049)
Asset valuation and interest
maintenance reserves 47,463 36,263 28,645
Deferred income taxes (55,375) (62,280) (27,433)
Unrealized gain (loss) on
available-for-sale securities 49,688 120,925 (94,470)
Reinsurance (144,372) (141,714) (137,340)
Other, net (2,427) 195 1,306
-------- -------- --------
Total GAAP shareholder's equity $286,548 $286,594 $145,085
-------- -------- --------
-------- -------- --------
</TABLE>
A reconciliation of SAP net income to GAAP income at December 31, follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
SAP net income $ 13,673 $18,272 $ 7,068
Deferred policy acquisition costs 2,023 (794) 8,541
Policy reserves 13,576 14,133 13,063
Deferred income taxes (2,818) (1,133) (668)
Federal income tax refund 53,000
Interest maintenance reserve 1,362 2,141 (6,006)
Current income taxes (2,146) 543 (2,026)
Other, net (3,536) (3,060) (10,599)
-------- -------- ---------
Total GAAP net income $22,134 $83,102 $ 9,373
-------- -------- ---------
-------- -------- ---------
</TABLE>
The Company is required by statutory regulations to meet minimum risked-based
capital standards. Risk-based capital is a method of measuring the minimum
amount of capital appropriate for an insurance company to support its overall
business operations in consideration of its size and risk profile. At
December 31, 1996 and 1995, the Company substantially exceeded all levels of
risk-based capital required.
State regulatory authorities have powers relating to granting and revoking
licenses to transact business, the licensing of agents, the regulation of
premium rates and trade practices, the form and content of insurance
policies, the content of advertising material.
20
<PAGE> 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. REGULATORY MATTERS, CONTINUED:
Under Ohio law, the Company is subject to certain statutory restrictions on
dividends it may pay to its Parent. Dividends paid from other than "earned
surplus" also require regulatory approval. During 1996, the Company paid
dividends of $1.758 to its Parent. This distribution represents amounts remitted
to the Parent under the tax sharing agreement between the Company and its
Parent.
The Company received written approval from the State of Ohio Department of
Insurance to record guaranty fund assessments as incurred and defer the amount
on the balance sheet to the extent that they are recoverable through premium tax
credits. When the tax credits are realized, the deferred tax assessment is
removed from the balance sheet as a charge to premium tax expense. There is no
prescribed statutory accounting treatment for these transactions.
The Company also received approval to record all taxes, including interest,
assessments, settlements and corrections through the Summary of Operations,
rather than as a direct charge to shareholder's equity. There is no prescribed
accounting treatment for these transactions.
8. CONTINGENCIES:
The Company is currently a defendant in various lawsuits, which allege improper
sales practices by the Company. In certain of these, the plaintiffs seek to
certify the case as class action. At this point in time, management is unable to
estimate the potential outcome of the lawsuits.
9. BUSINESS SEGMENT INFORMATION:
The Company operates primarily in the interest-sensitive life insurance and
annuity lines of business in the life insurance industry. The following table
summarizes the revenue and net income before income taxes for the year ended
December 31, by business segment.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues
Interest-sensitive life insurance and other $ 194,829 $ 245,945 $172,233
Annuities 140,302 113,758 81,381
---------- ---------- --------
$ 335,131 $ 359,703 $253,614
---------- ---------- --------
---------- ---------- --------
Net income before income taxes
Interest-sensitive life insurance and other $ 6,026 $ 61,560 $ 1,417
Annuities 27,784 23,163 12,925
---------- ---------- --------
$ 33,810 $ 84,723 $ 14,342
---------- ---------- --------
---------- ---------- --------
Assets
Interest-sensitive life insurance and other $1,483,240 $1,443,040
Annuities 1,737,882 1,386,251
---------- ----------
$3,221,122 $2,829,291
---------- ----------
---------- ----------
</TABLE>
10. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." This Standard is
effective for transactions occurring after December 31, 1996 and provides
guidelines for accounting for transfers and servicing of financial assets and
extinguishment of liabilities. The Company does not believe the adoption of this
Standard will have a material impact on its financial statements.
21
<PAGE> 166
PART C
ITEM 24 -- FINANCIAL STATEMENTS AND EXHIBITS
(a) No financial statements are included in Part A.
The following financial statements are included in Part B:
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
(1) Report of Coopers & Lybrand L.L.P.
(2) Statement of Net Assets as of December 31, 1996.
(3) Statement of Operations and Changes in Net Assets for
the year ended December 31, 1996 and for the period
from February 23, 1995 to December 31, 1995.
(4) Supplementary Information -- Selected Per Unit Data
and Ratios for the year ended December 31, 1996 and
for the period from February 23, 1995 to December 31,
1995.
(5) Statement of Net Assets June 30, 1997 (unaudited).
(6) Statement of Operations and Changes in Net Assets for
the period from January 1, 1997 to June 30, l997
(unaudited) and for the year ended December 31, 1996.
(7) Supplementary Information - Selected Per Unit Data
and Ratios for the six months ended June 30, 1997
(unaudited), for the year ended December 31, 1996,
and for the period from February 23, 1995 to December
31, 1995.
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(1) Report of Coopers & Lybrand L.L.P.
(2) Balance Sheets as of December 31, 1996 and 1995.
(3) Summaries of Operations for the Years Ended December
31, 1996, 1995 and 1994.
(4) Statements of Changes in Shareholder's Equity for the
Years Ended December 31, 1996, 1995 and 1994.
(5) Statements of Cash Flows for the Years Ended December
31, 1996, 1995 and 1994.
-1-
<PAGE> 167
The following financial statements are incorporated by reference into
Part B:
SELECT ADVISORS PORTFOLIOS (GROWTH & INCOME PORTFOLIO II AND BOND
PORTFOLIO II)
(1) Report of Coopers & Lybrand L.L.P.
(2) Schedule of Investments December 31, 1996.
(3) Statement of Assets and Liabilities December 31,
1996.
(4) Statement of Operations for the year ended December
31, 1996.
(5) Statement of Changes in Net Assets for the years
ended December 31, 1996.
(6) Supplementary Data for the years ended December 31,
1996.
(7) Schedule of Investments June 30, 1997 (unaudited).
(8) Statement of Assets and Liabilities June 30, 1997
(unaudited).
(9) Statement of Operations for the six months ended June
30, 1997 (unaudited)
(10) Statement of Changes in Net Assets for the six month
period ended June 30, 1997 (unaudited) and for the
year ended December 31, 1996.
(11) Supplementary Data for the six months ended June 30,
1997 (unaudited) and for the year ended December 31,
1996.
(b) Exhibits:
(1) Resolutions of Board of Directors of Western-Southern
Life Assurance Company (the "Company") establishing
Western-Southern Life Assurance Company Separate
Account 1 incorporated herein by reference to the
Registration Statement filed with the Securities and
Exchange Commission ("SEC") on March 17, 1994 (File
Nos. 33-76582 and 811-8420).
(2) Not Applicable.
(3) (a) Distributor Agreement between the Company
(on behalf of Separate Account 1) and
Touchstone Securities, Inc. incorporated
herein by reference to Pre-Effective
Amendment No. 2 to the Registration
Statement filed with the SEC on November 14,
1994 (File Nos. 33-76582 and 811-8420).
(b) Commission Schedule incorporated herein by
reference to Pre-Effective Amendment No. 2
to the Registration Statement filed with
-2-
<PAGE> 168
the SEC on November 14, 1994 (File Nos.
33-76582 and 811-8420).
(c) Specimens of agreements between Touchstone
Securities, Inc. and its dealers
incorporated herein by reference to
Pre-Effective Amendment No. 2 to the
Registration Statement filed with the SEC on
November 14, 1994 (File Nos. 33-76582 and
811-8420).
(4) (a) Specimen Variable Annuity Contract
incorporated herein by reference to the
Registration Statement filed with the SEC on
June 20, 1997 (File Nos. 333-29705 and
811-8420).
(b) Specimen Endorsements and Riders
incorporated herein by reference to the
Registration Statement filed with the SEC on
June 20, 1997 (File Nos. 333-29705 and
811-8420).
(5) Specimen Application Form for Variable Annuity
Contract incorporated herein by reference to the
Registration Statement filed with the SEC on June 20,
1997 (File Nos. 333-29705 and 811-8420).
(6) (a) Amended Articles of Incorporation of the
Company incorporated herein by reference to
Post-Effective Amendment No. 2 to the
Registration Statement filed with the SEC on
April 29, 1996 (File Nos. 33-76582 and
811-8420).
(b) Amended Code of Regulations of the Company
incorporated herein by reference to
Post-Effective Amendment No. 2 to the
Registration Statement filed with the SEC on
April 29, 1996 (File No. 33-76582 and
811-8420).
(7) Not Applicable.
(8) (a) Administrative Services and Fund Accounting
Agreement between Investors Bank and Trust
Company and Select Advisors Portfolios
incorporated herein by reference to
Post-Effective Amendment No. 4 to the
Registration Statement filed with the SEC on
April 30, 1997 (File No. 33-76582 and
811-8420).
(b) Investment Advisory Agreement between
Touchstone Advisors, Inc. and Select
Advisors Portfolios including Amendment No.
1 and Amendment No. 2.
(c) Portfolio Advisory Agreement between
Touchstone Advisors, Inc. and:
(i) Scudder, Stevens & Clark, Inc.
(Growth & Income).
-3-
<PAGE> 169
(ii) Fort Washington Investment
Advisors, Inc. (Bond) incorporated
herein by reference to
Post-Effective Amendment No. 2 to
the Registration Statement filed
with the SEC on April 29, 1996
(File Nos. 33-76582 and 811-8420).
(d) Custodian Agreement between Select Advisors
Portfolios and Investors Bank & Trust
Company incorporated herein by reference to
Pre-Effective Amendment No. 2 to the
Registration Statement filed with the SEC on
November 14, 1994 (File Nos. 33-76582 and
811-8420).
(e) (i) Sponsor Agreement between Select
Advisors Variable Insurance Trust
and Touchstone Advisors, Inc.
incorporated herein by reference to
Pre-Effective Amendment No. 2 to
the Registration Statement filed
with the SEC on November 14, 1994
(File Nos. 33-76582 and 811-8420).
(ii) Sponsor Agreement between Select
Advisors Portfolios and Touchstone
Advisors, Inc. incorporated herein
by reference to Pre-Effective
Amendment No. 2 to the Registration
Statement filed with the SEC on
November 14, 1994 (File Nos.
33-76582 and 811-8420).
(f) Fund Participation Agreement between Select
Advisors Portfolios and Touchstone Advisors,
Inc. incorporated herein by reference to
Pre-Effective Amendment No. 2 to the
Registration Statement filed with the SEC on
November 14, 1994 (File Nos. 33-76582 and
811-8420).
(9) Opinion and consent of Donald B. Wuebbling, Esq.
incorporated herein by reference to the Registration
Statement filed with the SEC on June 20, 1997 (File
Nos. 333-29705 and 811-8420).
(10) Consent of Coopers & Lybrand L.L.P.
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable
(14) Not applicable.
-4-
<PAGE> 170
(15) (a) Powers of Attorney -- Directors of the
Company incorporated herein by reference to
the Registration Statement filed with the
SEC on June 20, 1997 (File Nos. 333-29705
and 811-8420).
(b) Powers of Attorney -- Trustees of Select
Advisors Portfolios incorporated herein by
reference to the Registration Statement
filed with the SEC on June 20, 1997 (File
Nos. 333-29705 and 811-8420).
(99) Written Requests of Western-Southern Life
Assurance Company, Touchstone Securities,
Inc. and Select Advisors Portfolios for
Acceleration of Effective Date.
ITEM 25. -- DIRECTORS AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
The directors and officers of the Company are:
<S> <C>
William J. Williams Chairman of the Board and Director
John F. Barrett Director, Chief Executive Officer and President
James N. Clark Director, Executive Vice President,
Secretary and Treasurer
Dr. J. Harold Kotte Director
Dr. Lawrence C. Hawkins Director
Omni-Man, Inc.
3909 Reading Road
Cincinnati, Ohio 45229
Carl A. Kroch Director
Kroch's & Brentano's
29 South Wabash Avenue
Chicago, Illinois 60603
Eugene P. Ruehlmann Director
Vorys, Sater, Seymour and Pease
Suite 2100 Atrium Two
221 East Fourth Street
Cincinnati, Ohio 45202
Charles M. Williams Director
Thomas L. Williams Director
North American Properties
212 East Third Street
Suite 300
Cincinnati, Ohio 45202
</TABLE>
-5-
<PAGE> 171
<TABLE>
<S> <C>
Chalmers Wylie Director
754 Stonewood Court
Columbus, Ohio 43235
Herbert R. Brown Vice President
James W. Carpenter Vice President and Senior Counsel
Keith T. Clark Vice President and Medical Director
Bryan C. Dunn Senior Vice President and Chief
Marketing Officer
David G. Ennis Vice President and Auditor
Noreen J. Hayes Vice President
Edward S. Heenan Vice President and Comptroller
Dale P. Hennie Senior Vice President
Carroll R. Hutchinson Senior Vice President and Chief Actuary
Donald W. Kaplan Vice President and Actuary
William F. Ledwin Senior Vice President and Chief Investment Officer
Harold V. Lyons Vice President and Actuary
Jill T. McGruder Senior Vice President
J. J. Miller Senior Vice President
Kenneth A. Palmer Senior Vice President
Mario J. San Marco Vice President
Thomas M. Stapleton Vice President
Robert H. Starnes Vice President
</TABLE>
-6-
<PAGE> 172
<TABLE>
<S> <C>
Richard K. Taulbee Vice President
Donald J. Wuebbling Vice President and General Counsel
G. H. Schellpeper Vice President
8901 Indian Hills Drive
Omaha, Nebraska 68144
James J. Vance Treasurer
</TABLE>
Unless otherwise noted, the principal business address of all persons
listed in Item 25 is 400 Broadway, Cincinnati, Ohio 45202.
ITEM 26. -- PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The Western and Southern Life Insurance Company ("WSLIC")
Western-Southern Life Assurance Company ("WSLAC"); 100% owned
by WSLIC
Courtyard Nursing Care, Inc.; Ohio corporation; 100%
owned by WSLAC; ownership and operation of real
estate.
IFS Financial Services, Inc. ("IFS"); Ohio
corporation; 100% owned by WSLAC; development and
marketing of financial products for distribution
through financial institutions.
IFS Systems, Inc.; Delaware corporation;
100% owned by IFS; development, marketing
and support of software systems. IFS
Insurance Agency, Inc.; Ohio corporation;
99% owned by IFS, 1% owned by William F.
Ledwin; general insurance agency.
Touchstone Securities, Inc.; Nebraska
corporation; 100% owned by IFS; securities
broker-dealer.
Touchstone Advisors, Inc.; Ohio corporation;
100% owned by IFS; registered investment
adviser.
IFS Agency Services, Inc.; Pennsylvania
corporation; 100% owned by IFS; general
insurance agency.
IFS Agency, Inc.; Texas corporation; 100%
owned by an individual; general insurance
agency.
-7-
<PAGE> 173
IFS General Agency, Inc.; Pennsylvania
corporation; 100% owned by William F.
Ledwin; general insurance agency.
Seasons Congregate Living, Inc.; Ohio corporation; 100% owned
by WSLIC; ownership and operation of real estate.
Latitudes at the Moors, Inc.; Florida corporation; 100% owned
by WSLIC; ownership and operation of real estate.
WestAd Inc.; Ohio corporation; 100% owned by WSLIC, general
advertising, book-selling and publishing.
Fort Washington Investment Advisors, Inc.; Ohio corporation;
100% owned by WSLIC; registered investment adviser.
Columbus Life Insurance Company; Ohio corporation; 100% owned
by WSLIC; insurance.
Colmain Properties, Inc.; Ohio corporation; 100%
owned by Columbus Life Insurance Company; acquiring,
owning, managing, leasing, selling real estate.
Colpick, Inc.; Ohio corporation; 100% owned
by Colmain Properties, Inc.; acquiring,
owning, managing, leasing and selling real
estate.
CAI Holding Company, Inc.; Ohio corporation; 100%
owned by Columbus Life Insurance Company; holding
company.
Capital Analysts Incorporated; Delaware
corporation; 100% owned by CAI Holding
Company; securities broker-dealer. Capital
Analysts Agency, Inc.; Ohio corporation; 99%
owned by Capital Analysts Incorporated, 1%
owned by William F. Ledwin; general
insurance agency.
Capital Analysts Agency, Inc.; Texas
corporation; 100% owned by an individual who
is a resident of Texas, but under
contractual association with Capital
Analysts Incorporated; general insurance
agency.
Capital Analysts Insurance Agency, Inc.;
Massachusetts corporation; 100% owned by
Capital Analysts Incorporated; general
insurance agency.
CLIC Company I; Delaware corporation; 100% owned by
Columbus Life Insurance Company; holding company.
-8-
<PAGE> 174
CLIC Company II; Delaware corporation; 100% owned by
Columbus Life Insurance Company; holding company.
Eagle Properties, Inc.; Ohio corporation; 100% owned by WSLIC;
ownership, development and management of real estate.
Seasons Management Company; Ohio corporation; 100%
owned by Eagle Properties, Inc.; management of real
estate.
Continental General Corporation; Nebraska corporation; 100%
owned by WSLIC; holding company.
Continental Agency Services, Inc.; Nebraska
corporation; 100% owned by Continental General
Corporation.
Continental General Insurance Company; Nebraska
corporation; 100% owned by Continental General
Corporation; insurance.
Continental Print & Photo Co.; Nebraska corporation;
100% owned by Continental General Corporation;
printing.
Waslic Company II; Delaware corporation; 100% owned by WSLIC;
holding company.
WestTax, Inc.; Ohio corporation, 100% owned by WSLIC;
preparation and electronic filing of tax returns.
Florida Outlet Marts, Inc.; Florida corporation; 100% owned by
WSLIC; ownership and operation of real estate.
AM Concepts Inc.; Delaware corporation, 100% owned by WSLIC;
venture capital investment in companies engaged in alternative
marketing of financial products.
Western-Southern Agency, Inc.; Ohio corporation; 99% owned by
WSLIC; 1% owned by William F. Ledwin; general insurance
agency.
Western-Southern Agency Services, Inc.; Pennsylvania
corporation; 100% owned by WSLIC; general insurance agency.
W-S Agency of Texas, Inc.; Texas corporation; 100% owned by an
individual; general insurance agency.
ITEM 27. -- NUMBER OF CONTRACT OWNERS
Not Applicable.
-9-
<PAGE> 175
ITEM 28. -- INDEMNIFICATION
The Amended Code of Regulations of the Company provides that, to the
fullest extent not prohibited by applicable law, the Company shall
indemnify each director, officer and employee against any and all costs
and expenses (including attorney fees, judgments, fines, penalties,
amounts paid in settlement, and other disbursements) actually and
reasonably incurred by or imposed upon such director, officer or
employee in connection with any action, suit, investigation or
proceedings (or any claim or other matter therein), whether civil,
criminal, administrative or otherwise in nature, including any
settlements thereof of any appeals therein, with respect to which such
director, officer or employee is named or otherwise becomes or is
threatened to be made a party by reason of being or at any time having
been a director, officer or employee of the Company, or, at the
direction or request of the Company, a director, trustee, officer,
administrator, manager, employee, adviser or other agent of or fiduciary
for any other corporation, partnership, trust, venture or other entity
or enterprise including any employee benefit plan; provided, however,
that no person shall be indemnified to the extent, if any, that the
directors of the Company, acting at a meeting at which a quorum of
directors who are not parties to or threatened with any such action,
suit, investigation or proceeding, determine that such indemnification
is contrary to applicable law.
Any director of the Company who is a party to or threatened with any
such action, suit, investigation or proceeding shall not be qualified to
vote; and if for this reason a quorum of directors, who are not
disqualified from voting by reason of being parties to or threatened
with such action, suit, investigation or proceeding, cannot be obtained,
such determination shall be made by three attorneys at law, who have not
theretofore represented the Company in any matter and who shall be
selected by all of the officers and directors of the Company who are not
parties to or threatened with any such action, suit, investigation or
proceeding. If there are no officers or directors who are qualified to
make such selection, the selection shall be made by a Judge of the Court
of Common Pleas of Hamilton County, Ohio. Such indemnification shall not
be deemed exclusive of any other right to which such director, officer
or employee may be entitled under the Company's articles of
incorporation, code of regulations, any agreement, any insurance
purchased by the Company, vote of shareholders or otherwise.
The Board of Directors of the Company also may, in its discretion,
secure and maintain insurance policies against any liability asserted
against and incurred by any of the Company's directors, officers or
employees.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a trustee, director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted
by such trustee, director, officer or controlling person in connection
with the securities being
-10-
<PAGE> 176
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issues.
ITEM 29. -- PRINCIPAL UNDERWRITERS
(a) Touchstone Securities, Inc. ("Touchstone") acts as distributor
for Contracts issued under Western-Southern Life Assurance
Company Separate Account 1 and as distributor for the shares of
several series (Funds) of Select Advisors Trust A and Select
Advisors Trust C, each of which is affiliated with the
Depositor.
(b) Set forth below are the names, principal business addresses and
positions of each director and officer of Touchstone. Unless
otherwise noted, the principal business address of these
individuals is Touchstone Securities, Inc., 311 Pike Street,
Cincinnati, Ohio 45202. Unless otherwise specified, none of the
officers and directors of Touchstone serves as an officer or
Trustee of the SA Trust.
<TABLE>
<CAPTION>
Name Position/Office with Distributor
---- --------------------------------
<S> <C>
James N. Clark(1) Director
Edward G. Harness, Jr. Director, Chief Executive Officer and President;
Trustee and President, SA Trust
Edward S. Heenan(1) Director and Controller; Controller, SA Trust
William F. Ledwin(1) Director
Donald J. Wuebbling(1) Director
Brian Manley Vice President and Chief Financial Officer;
Assistant Treasurer, SA Trust
Richard K. Taulbee(1) Vice President
Carl A. Ramsey(2) Vice President
E. Duane Clay(2) Vice President
Robert F. Morand(1) Secretary
Patricia Wilson Chief Compliance Officer
</TABLE>
(1) 400 Broadway, Cincinnati, Ohio 45202
(2) 8901 Indian Hills Drive, Omaha, Nebraska 68114
-11-
<PAGE> 177
(c) The following table sets forth information about all commissions
and compensation received by Touchstone Securities, Inc.
<TABLE>
<CAPTION>
Name of Principal Net Underwriting Compensation on Brokerage Commissions Compensation
Underwriter Discounts and Redemptions
Commissions
---------------------- ----------------------- ---------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
Touchstone $0 $0 $0 $0
Securities, Inc.
</TABLE>
ITEM 30. -- LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules
promulgated thereunder are maintained by the Company at 400 Broadway,
Cincinnati, Ohio 45202.
ITEM 31. -- MANAGEMENT SERVICES
Not Applicable.
ITEM 32. -- UNDERTAKINGS
Registrant undertakes to:
(a) file a post-effective amendment to this Registration Statement
as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never
more than 16 months old for so long as payments under the
Contracts may be accepted;
(b) include either (1) as part of any application to purchase a
Contract offered by the Prospectus, a space that an applicant
can check to request a Statement of Additional Information, or
(2) a postcard or similar written communication affixed to or
included in the Prospectus that the applicant can remove to
send for a Statement of Additional Information; and
(c) deliver any Statement of Additional Information and any
financial statements required to be made available under this
Form promptly upon written or oral request directed to the
address or telephone number contained in the Prospectus.
Registrant represents that it is relying upon a "no-action" letter
issued to the American Council of Life Insurance concerning that
conflict between the redeemability requirements of sections 22(e),
27(c)(1) and 27(d) of the Investment Company Act of 1940 and the limits
on the redeemability of variable annuities imposed by Section
403(b)(11) of the Internal Revenue Code. The Registrant has included
disclosure concerning the 403(b)(11) restrictions in its prospectus and
sales literature, and established a procedure whereby each plan
participant will sign a statement
-12-
<PAGE> 178
acknowledging these restrictions before a Contract is issued. Sales
representatives have been instructed to bring the restrictions to the
attention of potential plan participants.
Pursuant to Section 26(e) of the Investment Company Act of 1940, as
amended, Western-Southern Life Assurance Company represents that, with
respect to the Contracts registered with the Commission by this
Registration Statement, as it may be amended, and offered by the
Prospectus included in this Registration Statement, all fees and
charges imposed for any purpose and in any manner and deducted under
the Contracts, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the risks
assumed by the Western-Southern Life Assurance Company.
-13-
<PAGE> 179
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Depositor, on behalf of itself and the
Registrant has duly caused this Pre-Effective Amendment No. 1 to its
Registration Statement under the Securities Act of 1933 and Amendment No. 8 to
its Registration Statement under the Investment Company Act of 1940 to be signed
on its behalf, in the City of Cincinnati and State of Ohio on the 8th day of
October, 1997.
WESTERN-SOUTHERN LIFE ASSURANCE
COMPANY SEPARATE ACCOUNT 1
By WESTERN-SOUTHERN LIFE
ASSURANCE COMPANY
By /s/ EDWARD S. HEENAN
----------------------------------
Edward S. Heenan,
Vice President and Controller
As required by the Securities Act of 1933, this Registration Statement
has been signed below by the following persons in the capacities and on the
date(s) indicated below.
PRINCIPAL EXECUTIVE OFFICER:
/s/ JOHN F. BARRETT October 8, 1997
- -------------------
John F. Barrett,
President, Director and
Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER:
/s/ JAMES J. VANCE October 8, 1997
- ------------------
James J. Vance,
Treasurer
DIRECTORS:
JAMES N. CLARK
LAWRENCE C. HAWKINS
J. HAROLD KOTTE By /s/EDWARD S. HEENAN
CARL A. KROCH Edward S. Heenan,
EUGENE P. RUEHLMANN as attorney-in fact for each Director
CHARLES M. WILLIAMS
THOMAS L. WILLIAMS October 8, 1997
WILLIAM J. WILLIAMS
CHALMERS P. WYLIE
-14-
<PAGE> 180
SIGNATURES
Select Advisors Portfolios has duly caused Pre-Effective Amendment No.
1 to the Registration Statement under the Securities Act of 1933 and Amendment
No. 8 to the Registration Statement under the Investment Company Act of 1940 of
Western-Southern Life Assurance Company Separate Account 1 to be signed on its
behalf, in the City of Cincinnati and State of Ohio on the 8th day of
October, 1997.
SELECT ADVISORS PORTFOLIOS
By /s/EDWARD G. HARNESS, JR.
-----------------------------------
Edward G. Harness, Jr.,
President
This Registration Statement under the Securities Act of 1933 has also
been signed below by the following persons in the capacities indicated and on
the date(s) indicated below.
PRINCIPAL EXECUTIVE OFFICER:
/s/EDWARD G. HARNESS, JR. October 8, 1997
- -------------------------
Edward G. Harness, Jr.
Trustee and President
PRINCIPAL FINANCIAL OFFICER:
/s/ JAMES J. VANCE October 8, 1997
- ------------------
James J. Vance,
Treasurer
TRUSTEES:
PHILIP R. COX By /s/EDWARD S. HEENAN
DAVID POLLAK ------------------------------------
ROBERT E. STAUTBERG Edward S. Heenan,
JOSEPH S. STERN, JR. as attorney-in fact for each Trustee
October 8, 1997
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<PAGE> 181
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
8(a) Investment Advisory Agreement including Amendment No. 1
and Amendment No. 2
8(c)(i) Portfolio Advisory Agreement with Scudder, Stevens &
Clark, Inc.
10 Consent of Coopers & Lybrand L.L.P.
99 Written Requests of Western-Southern Life Assurance Company,
Touchstone Securities, Inc. and Select Advisors Portfolios for
Acceleration of Effective Date
-16-
<PAGE> 1
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT, dated as of September 9, 1994, by and between
TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and SELECT
ADVISORS PORTFOLIOS, a New York master trust created pursuant to a Declaration
of Trust dated February 7, 1994, as amended from time to time (the "Trust").
WHEREAS, the Trust is an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended, (the
"1940 Act"); and
WHEREAS, interests in the Trust are divided into separate subtrusts
(each, along with any subtrust which may in the future be established, a
"Portfolio"); and
WHEREAS, the Trust desires to avail itself of the services,
information, advice, assistance and facilities of an investment advisor and to
have an investment advisor perform for it various investment advisory and
research services and other management services; and
WHEREAS, the Advisor is an investment Advisor registered under the
Investment Advisers Act of 1940, as amended, and desires to provide investment
advisory services to the Trust;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE ADVISOR. he Trust hereby employs the Advisor
to manage the investment and reinvestment of the assets of each Portfolio
subject to the control and direction of the Trust's Board of Trustees, for the
period on the terms hereinafter set forth. The Advisor hereby accepts such
employment and agrees during such period to render the services and to assume
the obligations herein set forth for the compensation herein provided. The
Advisor shall for all purposes herein be deemed to be independent contractor and
shall, except as expressly provided or authorized (whether herein or otherwise),
have no authority to act for or represent the Trust in any way or otherwise be
deemed an agent of the Trust.
2. OBLIGATIONS AND SERVICES TO BE PROVIDED BY THE ADVISOR. In
providing the services and assuming the obligations set forth herein, the
Advisor may, at its expense, employ one or more subadvisors for any Portfolio.
Any agreement between the Advisor and a subadvisor shall be subject to the
renewal, termination and amendment provisions of paragraph 10 hereof. The
Advisor undertakes to provide the following services and to assume the following
obligations:
<PAGE> 2
a) The Advisor will manage the investment and
reinvestment of the assets of each Portfolio, subject
to and in accordance with the respective investment
objectives and policies of each Portfolio and any
directions which the Trust's Board of Trustees may
issue from time to time. In pursuance of the
foregoing, the Advisor may engage separate investment
advisors ("Portfolio Advisor(s)") to make all
determinations with respect to the investment of the
assets of each Portfolio, to effect the purchase and
sale of portfolio securities and to take such steps
as may be necessary to implement the same. Such
determination and services by each Portfolio Advisor
shall also include determining the manner in which
voting rights, rights to consent to corporate action
and any other rights pertaining to the portfolio
securities shall be exercised. The Advisor shall, and
shall cause each Portfolio Advisor to, render regular
reports to the Trust's Board of Trustees concerning
the Trust's and each Portfolio's investment
activities.
b) The Advisor shall, or shall cause the respective
Portfolio Advisor(s) to place orders for the
execution of all portfolio transactions, in the name
of the respective Portfolio and in accordance with
the policies with respect thereto set forth in the
Trust's registration statements under the 1940 Act
and the Securities Act of 1933, as such registration
statements may be amended from time to time. In
connection with the placement of orders for the
execution of portfolio transactions, the Advisor
shall create and maintain (or cause the Portfolio
Advisors to create and maintain) all necessary
brokerage records for each Portfolio, which records
shall comply with all applicable laws, rules and
regulations, including but not limited to records
required by Section 31(a) of the 1940 Act. All
records shall be the property of the Trust and shall
be available for inspection and use by the Securities
and Exchange Commission (the "SEC"), the Trust or any
person retained by the Trust. Where applicable, such
records shall be maintained by the Advisor (or
Portfolio Advisor) for the periods and in the places
required by Rule 31a-02 under the 1940 Act.
c) In the event of any reorganization or other change in
the Advisor, its investment principals, supervisors
or members of its investment (or comparable)
committee, the Advisor shall give the Trust's Board
of Trustees written notice of such reorganization or
change within a reasonable time (but not later than
30 days) after such reorganization or change.
d) The Advisor shall bear its expenses of providing
services to the Trust pursuant to this Agreement
except such expenses as are undertaken by the Trust.
In addition, the Advisor shall pay the
2
<PAGE> 3
salaries and fees, if any, of all Trustees, officers
and employees of the Trust who are affiliated
persons, as defined in Section 2(a)(3) of the 1940
Act, of the Advisor.
e) The Advisor will manage, or will cause the Portfolio
Advisors to manage, the Portfolio Assets and the
investment and reinvestment of such assets so as to
comply with the provisions of the 1940 Act and with
Subchapter M of the Internal Revenue Code of 1986, as
amended.
3. EXPENSES. The Trust shall pay the expenses of its operation,
including but not limited to (i) charges and expenses for Trust accounting,
pricing and appraisal services and related overhead, (ii) the charges and
expenses of the Portfolio's auditor's; (iii) the charges and expenses of any
custodian, transfer agent, plan agent, dividend disbursing agent and registrar
appointed by the Trust with respect to the Portfolios; (iv) brokers'
commissions, and issue and transfer taxes, chargeable to the Trust in connection
with securities transactions to which the Trust is a party; (v) insurance
premiums, interest charges, dues and fees for Trust membership in trade
associations and all taxes and fees payable by the Trust to federal, state or
other governmental agencies; (vi) fees and expenses involved in registering and
maintaining registrations of the Trust and/or interests in the Trust with the
SEC, state or blue sky securities agencies and foreign countries, including the
preparation of Prospectuses and Statements of Additional Information for filing
with the SEC; (vii) all expenses of meetings of Trustees and of interest holders
of the Trust and of preparing, printing and distributing prospectuses, notices,
proxy statements and all reports to shareholders and to governmental agencies;
(viii) charges and expenses of legal counsel to the Trust; (ix) compensation of
Trustees of the Trust; (x) the cost of preparing and printing share
certificates; and (xi) interest on borrowed money, if any.
4. COMPENSATION OF THE ADVISOR.
a) As compensation for the services rendered and
obligations assumed hereunder by the Advisor, the
Trust shall pay to the Advisor monthly a fee that is
equal on an annual basis to that percentage of the
average daily net assets of each Portfolio set forth
on Schedule 1 attached hereto (and with respect to
any future Portfolio, such percentage as the Trust
and the Advisor may agree to from time to time). Such
fee shall be computed and accrued daily. If the
Advisor serves as investment advisor for less than
the whole of any period specified in this Section 4a,
the compensation to the Advisor shall be prorated.
For purposes of calculating the Advisor's fee, the
daily value of each Portfolio's net assets shall be
computed by the same method as the Trust uses to
compute the net asset value of that Portfolio.
3
<PAGE> 4
b) The Advisor will pay all fees owing to each Portfolio
Advisor, and the Trust shall not be obligated to the
Portfolio Advisors in any manner with respect to the
compensation of such Portfolio Advisors.
c) The Advisor reserves the right to waive all or a part
of its fee.
5. ACTIVITIES OF THE ADVISOR. The services of the Advisor to the
Trust hereunder are not to be deemed exclusive, and the Advisor shall be free to
render similar services to others. It is understood that the Trustees and
officers of the Trust are or may become interested in the Advisor as
stockholders, officers or otherwise, and that stockholders and officers of the
Advisor are or may become similarly interested in the Trust, and that the
Advisor may become interested in the Trust as a shareholder or otherwise.
6. USE OF NAMES. The Trust will not use the name of the Advisor
in any prospectus, sales literature or other material relating to the Trust in
any manner not approved prior thereto by the Advisor; except that the Trust may
use such name in any document which merely refers in accurate terms to its
appointment hereunder or in any situation which is required by the SEC or a
state securities commission; and provided further, that in no event shall such
approval be unreasonably withheld. The Advisor will not use the name of the
Trust in any material relating to the Advisor in any manner not approved prior
thereto by the Trust; except that the Advisor may use such name in any document
which merely refers in accurate terms to the appointment of the Advisor
hereunder or in any situation which is required by the SEC or a state securities
commission. In all other cases, the parties may use such names to the extent
that the use is approved by the party named, it being agreed that in no event
shall such approval be unreasonably withheld.
The Trustees of the Trust acknowledge that, in consideration
of the Advisor's assumption of certain organization expenses of the Trust and of
the various Portfolios, the Advisor has reserved for itself the rights to the
name "Select Advisors Portfolios" (or any similar names) and that use by the
Trust of such name shall continue only with the continuing consent of the
Advisor, which consent may be withdrawn at any time, effective immediately, upon
written notice thereof to the Trust.
7. LIMITATION OF LIABILITY OF THE ADVISOR.
a) Absent willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or
duties hereunder on the part of the Advisor, the
Advisor shall not be subject to liability to the
Trust or to any holder of an interest in any
Portfolio for any act or omission in the course of,
or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase,
holding or sale of any security. As used in this
Section 7, the term "Advisor" shall include
Touchstone Advisors, Inc. and/or any of its
affiliates and the
4
<PAGE> 5
directors, officers and employees of Touchstone
Advisors, Inc. and/or of its affiliates.
b) The Trust will indemnify the Advisor against, and
hold it harmless from, any and all losses, claims,
damages, liabilities or expenses (including
reasonable counsel fees and expenses) resulting from
acts or omissions of the Trust. Indemnification shall
be made only after: (i) a final decision on the
merits by a court or other body before whom the
proceeding was brought that the Trust was liable for
the damages claimed or (ii) in the absence of such a
decision, a reasonable determination based upon a
review of the facts, that the Trust was liable for
the damages claimed, which determination shall be
made by either (a) the vote of a majority of a quorum
of Trustees of the Trust who are neither "interested
persons" of the Trust nor parties to the proceeding
("disinterested non-party Trustees") or (b) an
independent legal counsel satisfactory to the parties
hereto, whose determination shall be set forth in a
written opinion. The Advisor shall be entitled to
advances from the Trust for payment of the reasonable
expenses incurred by it in connection with the matter
as to which it is seeking indemnification in the
manner and to the fullest extent that would be
permissible under the applicable provisions of the
General Corporation Law of Ohio. The Advisor shall
provide to the Trust a written affirmation of its
good faith belief that the standard of conduct
necessary for indemnification under such law has been
met and a written undertaking to repay any such
advance if it should ultimately be determined that
the standard of conduct has not been met. In
addition, at least one of the following additional
conditions shall be met: (a) the Advisor shall
provide security in form and amount acceptable to the
Trust for its undertaking; (b) the Trust is insured
against losses arising by reason of the advance; or
(c) a majority of a quorum of the Trustees of the
Trust, the members of which majority are
disinterested non-party Trustees, or independent
legal counsel in a written opinion, shall have
determined, based on a review of facts readily
available to the Trust at the time the advance is
proposed to be made, that there is reason to believe
that the Advisor will ultimately be found to be
entitled to indemnification.
8. LIMITATION OF TRUST'S LIABILITY. The Advisor acknowledges that
it has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Advisor agrees that the Trust's
obligations hereunder in any case shall be limited to the Trust and to its
assets and that the Advisor shall not seek satisfaction of any such obligation
from the holders of the interests in any Portfolio nor from any Trustee,
officer, employee or agent of the Trust.
5
<PAGE> 6
9. FORCE MAJEURE. The Advisor shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Advisor shall take reasonable steps to minimize service
interruptions but shall have no liability with respect thereto.
10. RENEWAL, TERMINATION AND AMENDMENT.
a) This Agreement shall continue in effect, unless
sooner terminated as hereinafter provided, for a
period of twelve months from the date hereof and it
shall continue indefinitely thereafter as to each
Portfolio, provided that such continuance is
specifically approved by the parties hereto and, in
addition, at least annually by (i) the vote of
holders of a majority of the outstanding voting
securities of the affected Portfolio or by vote of a
majority of the Trust's Board of Trustees and (ii) by
the vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of
the Advisor, cast in person at a meeting called for
the purpose of voting on such approval.
b) This Agreement may be terminated at any time, with
respect to any Portfolio(s), without payment of any
penalty, by the Trust's Board of Trustees or by a
vote of the majority of the outstanding voting
securities of the affected Portfolio(s) upon 60 days'
prior written notice to the Advisor and by the
Advisor upon 60 days' prior written notice to the
Trust.
c) This Agreement may be amended at any time by the
parties hereto, subject to approval by the Trust's
Board of Trustees and, if required by applicable SEC
rules and regulations, a vote of the majority of the
outstanding voting securities of any Portfolio
affected by such change. This Agreement shall
terminate automatically in the event of its
assignment.
d) The terms "assignment," "interested persons" and
"majority of the outstanding voting securities" shall
have the meaning set forth for such terms in the 1940
Act.
11. SEVERABILITY. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby.
12. MISCELLANEOUS. Each party agrees to perform such further
actions and execute such further documents as are necessary to effectuate the
purposes hereof.
6
<PAGE> 7
This Agreement shall be construed and enforced in accordance with and governed
by the laws of the State of Ohio. The captions, in this Agreement are included
for convenience only and in no way define or delimit any of the provisions
hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered inn their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
Pursuant to the Trust's Declaration of Trust, dated as of February 7, 1994, the
obligations of this Agreement are not binding upon any of the Trustees or
interestholders of the Trust individually, but bind only the Trust estate.
SELECT ADVISORS PORTFOLIOS
By /s/ Edward G. Harness, Jr.
---------------------------------
Edward G. Harness, Jr., President
Attest:
/s/ Teresa Massong
- ---------------------------------
TOUCHSTONE ADVISORS, INC.
By /s/ Jill T. McGruder
---------------------------------
Jill T. McGruder, Vice President
Attest:
/s/ Teresa Massong
- ---------------------------------
7
<PAGE> 8
Exhibit A to Amendment No 1 to
Advisory Agreement
SCHEDULE 1
Emerging Growth Portfolio 0.80%
International Equity Portfolio 0.95%
Growth & Income Portfolio 0.75%
Growth & Income Portfolio II 0.75%
Balanced Portfolio 0.80%
Income Opportunity 0.65%
Bond Portfolio 0.55%
Bond Portfolio II 0.55%
<PAGE> 9
AMENDMENT NO. 1
INVESTMENT ADVISORY AGREEMENT
This Amendment No. 1 to Investment Advisory Agreement is dated as of May
1, 1997 and amends the Investment Advisory Agreement (the "Advisory Agreement")
dated September 9, 1994 made by and between Touchstone Advisors, Inc., an Ohio
corporation (the "Advisor"), and Select Advisors Portfolios, a New York master
trust created pursuant to a Declaration of Trust dated February 7, 1994 (the
"Trust").
WHEREAS, the Advisor acts as investment advisor to the Trust pursuant to
the Advisory Agreement; and in such capacity the Advisor has engaged separate
portfolio advisors for each of the Trust's portfolios; and
WHEREAS, the Trust, by its Board of Trustees, has taken action to
terminate the Trust's Municipal Bond Portfolio and the Portfolio Advisory
Agreement, dated September 9, 1994, presently in effect between the Advisor and
Neuberger & Berman, Portfolio Advisor to such portfolio, each as of the close of
business on April 30, 1997; and
WHEREAS, such Board of Trustees also has taken action to terminate
Portfolio Advisory Agreements presently in effect between the Advisor and Harbor
Capital Management Company, Inc. ("Harbor Capital") and Morgan Grenfell Capital
Management, Inc. ("Morgan Grenfell"), each such Portfolio Advisory Agreement
being dated as of September 9, 1994; and
WHEREAS, such Board of Trustees also has taken action to enter into a
Portfolio Advisory Agreement with Op Cap Advisors, a subsidiary of Oppenheimer
Capital, a registered investment advisor, under which Op Cap Advisors will act
as Portfolio Advisor to the Trust's Balanced Portfolio, replacing Harbor Capital
and Morgan Grenfell; and
WHEREAS, the advisory fees to be paid to Op Cap Advisors under such
Portfolio Advisory Agreement will be higher than the fees currently being paid
to Harbor Capital and Morgan Grenfell under their Portfolio Advisor Agreements
and the Advisor has requested that its fees accordingly, also be increased;
and
WHEREAS, shareholders of the Trust, at a meeting of such shareholders
held on April 23, 1997 approved the proposed increase in such fees to be paid
under the Advisory Agreement.
NOW, THEREFORE, Schedule 1 to the Advisory Agreement is hereby amended,
effective as of the close of business on April 30, 1997, to read as set forth in
Exhibit A to this Amendment, the only changes in such Schedule being an increase
in the advisory fees to be paid by the Balanced Portfolio, from 0.70% to 0.80%
of average daily net assets, and the deletion of the Municipal Bond Portfolio.
<PAGE> 10
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
and delivered in their names and on their behalf as of the day and year first
above written.
SELECT ADVISORS PORTFOLIO
By: /s/ Edward G. Harness
-----------------------------------
Edward G. Harness, Jr., President
TOUCHSTONE ADVISORS INC.
By: /s/ Brian J. Manley
---------------------------------
Brian J. Manley, Vice President
<PAGE> 11
Exhibit A to Amendment No 1 to
Advisory Agreement
SCHEDULE 1
Emerging Growth Portfolio 0.80%
International Equity Portfolio 0.95%
Growth & Income Portfolio 0.75%
Growth & Income Portfolio II 0.75%
Balanced Portfolio 0.80%
Income Opportunity 0.65%
Bond Portfolio 0.55%
Bond Portfolio II 0.55%
<PAGE> 12
AMENDMENT NO. 2
TO
INVESTMENT ADVISORY AGREEMENT
This Amendment No. 2 to Investment Advisory Agreement is dated as of
September 18, 1997 and amends the Investment Advisory Agreement (the "Advisory
Agreement") dated September 9, 1994 made by and between Touchstone Advisors,
Inc., an Ohio corporation (the "Advisor"), and Select Advisors Portfolios, a New
York master trust created pursuant to a Declaration of Trust dated February 7,
1994 (the "Trust").
WHEREAS, the Advisor acts as investment advisor to the Trust pursuant
to the Advisory Agreement and in such capacity has engaged separate portfolio
advisors for each of the Trust's portfolios; and
WHEREAS, Fort Washington Investment Advisors, Inc. ("Fort Washington")
resigned as portfolio advisor to the Trust's Growth & Income Portfolios (the
"Portfolios"), effective at the close of business on August 31, 1997; and
WHEREAS, pursuant to approval given by the Trust's Board of Trustees,
the Advisor, on behalf of the Portfolios, entered into a Portfolio Advisory
Agreement, effective September 1, 1997, with Scudder Stevens & Clark, a
registered investment advisor ("Scudder"), under which Scudder is now acting as
Portfolio Advisor to the Portfolio (the "Portfolio Agreement"); and
WHEREAS, the holders of interests in the Portfolios approved the
Portfolio Agreement in meetings and actions held and taken on September 18,1997;
and
WHEREAS, the advisory fees to be paid by the Advisor to Scudder under
the Portfolio Agreement for all periods after September 18, 1997 will be higher
than the fees formerly paid to Fort Washington under their portfolio advisor
agreement for the Portfolio, and the Advisor has requested that its fees,
accordingly, also be increased; and
WHEREAS, the holders of interests in the Portfolios approved such
increase in fees under the Advisory Agreement in meetings and actions held and
taken on September 18, 1997; and
NOW, THEREFORE, Schedule 1 to the Advisory Agreement is hereby amended,
effective as of September 18, 1997, to read as set forth in Exhibit A to this
Amendment, the sole change in such Schedule being an increase in the advisory
fees to be paid by the Portfolio, from 0.75% to 0.80%, on the first $150 million
of average daily net assets of the Portfolios.
<PAGE> 13
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and delivered in their names and on their behalf as of the day and year
first above written.
SELECT ADVISORS PORTFOLIOS
By: /s/ Edward G. Harness
---------------------------------
Edward G. Harness, Jr., President
TOUCHSTONE ADVISORS INC.
By: /s/ Brian J. Manley
---------------------------------
<PAGE> 14
Exhibit A to Amendment No. 1 to
Advisory Agreement
SCHEDULE 1
Emerging Growth Portfolio 0.80%
Growth & Income Portfolio
0.80% on the first $150 million of average
daily net assets and 0.75% on such assets in
excess of $150 million
Growth & Income II Portfolio 0.80% on the first $150 million of average
daily net assets and 0.75% on such assets in
excess of $150 million
International Equity Portfolio 0.95%
Balanced Portfolio 0.80%
Income Opportunity 0.65%
Bond Portfolio 0.55%
Bond Portfolio II 0.55%
<PAGE> 1
PORTFOLIO ADVISORY AGREEMENT
SELECT ADVISORS PORTFOLIOS
GROWTH & INCOME PORTFOLIO
GROWTH & INCOME II PORTFOLIO
This PORTFOLIO ADVISORY AGREEMENT is made as of the 1st day of
September, 1997, by and between TOUCHSTONE ADVISORS, INC., an Ohio corporation
(the "Advisor"), and Scudder Stevens & Clark Inc. (the "Portfolio Advisor"), a
Delaware corporation.
WHEREAS, the Advisor has been organized to operate as an investment
advisor registered under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), and has been retained by Select Advisors Portfolios (the
"Trust"), a New York trust organized pursuant to a Declaration of Trust dated
February 7, 1994 and registered as an open-end management investment company
under the Investment Company Act of 1940 (the "1940 Act") to provide investment
advisory services to the Growth & Income Portfolio and the Growth and Income II
Portfolio (herein together the "Portfolio"); and
WHEREAS, the Portfolio Advisor also is an investment advisor registered
under the Advisers Act; and
WHEREAS, the Advisor desires to retain the Portfolio Advisor to furnish
it with portfolio management services in connection with the Advisor's
investment advisory activities on behalf of the Portfolio, and the Portfolio
Advisor is willing to furnish such services to the Advisor and the Portfolio;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE PORTFOLIO ADVISOR. In accordance with and
subject to the Investment Advisory Agreement between the Trust and the Advisor,
attached hereto as Exhibit A (the "Advisory Agreement"), the Advisor hereby
appoints the Portfolio Advisor to manage the investment and reinvestment of
those assets of the Portfolio allocated to it by the Advisor (the "Portfolio
Assets"), subject to the control and direction of the Advisor and the Trust's
Board of Trustees, for the period and on the terms hereinafter set forth. The
Advisor hereby represents that (i) it has authority under the Advisory Agreement
to appoint the Portfolio Advisor to act as an investment adviser to the Trust,
(ii) this Agreement is valid and binding upon the Advisor, and (iii) with
respect to this Agreement, the conditions of Rule 15a-4 under the 1940 Act have
been fulfilled. The Portfolio Advisor hereby accepts such employment and agrees
during such period to render the services and to perform the duties called for
by this Agreement for the
<PAGE> 2
compensation herein provided. The Portfolio Advisor shall at all times maintain
its registration as an investment advisor under the Advisers Act and shall
otherwise comply in all material respects with all applicable laws and
regulations, both state and federal. The Portfolio Advisor shall for all
purposes herein be deemed an independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Trust in any way or otherwise be deemed an
agent of the Trust or the Portfolio.
2. DUTIES OF THE PORTFOLIO ADVISOR. The Portfolio Advisor will
provide the following services and undertake the following duties:
a. The Portfolio Advisor will manage the investment and
reinvestment of the Portfolio Assets, subject to and in accordance with
the investment objectives, policies and restrictions of the Portfolio
and any directions which the Advisor or the Trust's Board of Trustees
may give from time to time with respect to the Portfolio. In
furtherance of the foregoing, the Portfolio Advisor will make all
determinations with respect to the investment of the Portfolio Assets
and the purchase and sale of portfolio securities and shall take such
steps as may be necessary or advisable to implement the same. The
Portfolio Advisor also will determine the manner in which voting
rights, rights to consent to corporate action and any other rights
pertaining to the portfolio securities will be exercised. The Portfolio
Advisor will render regular reports to the Trust's Board of Trustees,
to the Advisor and to RogersCasey Consulting, Inc. (or such other
advisor or advisors as the Advisor shall engage to assist it in the
evaluation of the performance and activities of the Portfolio Advisor).
Such reports shall be made in such form and manner and with respect to
such matters regarding the Portfolio and the Portfolio Advisor as the
Trust, the Advisor or RogersCasey Consulting, Inc. shall from time to
time reasonably request.
b. The Portfolio Advisor shall provide support to the
Advisor with respect to the marketing of the Portfolio in a manner
comparable to the support provided to comparable clients of the
Portfolio Advisor, including but not limited to: (i) permission to use
the Portfolio Advisor's name as provided in Section 6, (ii) permission
to use the past performance and investment history of the Portfolio
Advisor as the same is applicable to the Portfolio provided counsel to
the Trust determine that the use of such information and the manner of
presentation of such information is legally permissible, (iii) access
to the individual(s) responsible for day-to-day management of the
Portfolio for marketing conferences, teleconferences and other
activities involving the promotion of the Portfolio, subject to the
reasonable request of the Advisor, (iv) permission to use biographical
and historical data of the Portfolio Advisor and individual manager(s),
and (v) with respect to clients whose names are provided to the Advisor
by the Portfolio Advisor in writing prior to use, permission to use the
names of these clients, subject to any
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<PAGE> 3
restrictions imposed by these clients on the use of such names or by
the Advisers Act and the rules adopted thereunder.
c. The Portfolio Advisor will, in the name of the
Portfolio, place orders for the execution of all portfolio transactions
in accordance with the policies with respect thereto set forth in the
Trust's registration statements under the 1940 Act and the Securities
Act of 1933, as such registration statements may be in effect from time
to time. In connection with the placement of orders for the execution
of portfolio transactions, the Portfolio Advisor will create and
maintain all necessary brokerage records of the Portfolio in accordance
with all applicable laws, rules and regulations, including but not
limited to records required by Section 31(a) of the 1940 Act. All
records shall be the property of the Trust and shall be available for
inspection and use by the Securities and Exchange Commission (the
"SEC"), the Trust or any person retained by the Trust. Where
applicable, such records shall be maintained by the Advisor for the
periods and in the places required by Rule 31a-2 under the 1940 Act.
When placing orders with brokers and dealers, the Portfolio Advisor
shall seek to obtain the most favorable price and execution available
for the Portfolio, and in placing such orders the Portfolio Advisor may
consider a number of factors, including, without limitation, the
overall direct net economic result to the Portfolio (including
commissions, which may not be the lowest available but ordinarily
should not be higher than the generally prevailing competitive range),
the financial strength and stability of the broker, the efficiency with
which the transaction will be effected, the ability to effect the
transaction at all where a large block is involved and the availability
of the broker or dealer to stand ready to execute possibly difficult
transactions in the future. The Portfolio Advisor is specifically
authorized, to the extent authorized by law (including, without
limitation, Section 28(e) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), to pay a broker or dealer who provides
research services to the Portfolio Advisor an amount of commission for
effecting a portfolio transaction in excess of the amount of commission
another broker or dealer would have charged for effecting such
transaction, in recognition of such additional research services
rendered by the broker or dealer, but only if the Portfolio Advisor
determines in good faith that the excess commission is reasonable in
relation to the value of the brokerage and research services provided
by such broker or dealer viewed in terms of the particular transaction
or the Portfolio Advisor's overall responsibilities with respect to
discretionary accounts that it manages, and that the Portfolio derives
or will derive a reasonably significant benefit from such research
services. The Portfolio Advisor will present a written report to the
Board of Trustees of the Trust, at least quarterly and at such other
times as reasonably requested by the Board of Trustees, indicating
total brokerage expenses, actual or imputed, as well as the services
obtained in consideration for such expenses, broken down by
broker-dealer and
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<PAGE> 4
containing such information as the Board of Trustees reasonably shall
request.
d. The Portfolio Advisor may execute standard account
documentation, agreements, contracts and other documents (collectively
"Account Documents") as the Portfolio Advisor may be requested by
brokers, dealers, counterparties and other persons in connection with
the Portfolio Advisor's management of the Portfolio Assets, provided
that the Advisor and the Trust's Board of Trustees first authorize the
Portfolio Advisor to execute Account Documents. In such respect, and
only for this limited purpose, the Portfolio Adviser shall act as the
agent and/or attorney-in-fact of the Trust and/or the Advisor.
e. The Advisor recognizes that, subject to the
provisions of Section 2c, Scudder Investor Services, Inc. or its
successor ("SIS"), an affiliate of the Portfolio Advisor, may act as
the regular broker for the portfolio so long as it is lawful for it so
to act and that SIS may be a major recipient of brokerage commissions
paid by the portfolio. SIS may effect securities transactions for the
portfolio only if (i) the commissions, fees or other remuneration
received or to be received by it are reasonable and fair compared to
the commissions, fees or other remuneration received by other brokers
in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable
period of time and (ii) the Trustees, including a majority of those
Trustees who are not interested persons, have adopted procedures
pursuant to Rule 17e-1 under the 1940 Act for determining the
permissible level of such commissions.
f. The Advisor understands that (i) when orders to
purchase or sell the same security on identical terms are placed by
more than one of the funds and/or other advisory accounts managed by
the Portfolio Advisor or its affiliates, the transactions generally
will be executed as received, although a fund or advisory account that
does not direct trades to a specific broker ("free trades") usually
will have its order executed first, (ii) although all orders placed on
behalf of the Portfolio will be considered free trades, having an order
placed first in the market does not necessarily guarantee the most
favorable price, and (iii) purchases will be combined where possible
for the purpose of negotiating brokerage commissions, which in some
cases might have a detrimental effect on the price or volume of the
security in a particular transaction as far as the Portfolio is
concerned.
g. The Portfolio Advisor may enter into arrangements
with other persons affiliated with the Portfolio Advisor for the
provision of certain personnel and facilities to the Portfolio Advisor
to better enable it to fulfill its duties and obligations under this
Agreement.
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<PAGE> 5
h. In the event of any reorganization or other change in
the Portfolio Advisor, its investment principals, supervisors or
members of its investment (or comparable) committee, the Portfolio
Advisor shall give the Advisor and the Trust's Board of Trustees
written notice of such reorganization or change within a reasonable
time (but not later than 30 days) after such reorganization or change.
i. The Portfolio Advisor will bear its expenses of
providing services to the Portfolio pursuant to this Agreement except
such expenses as are undertaken by the Advisor or the Trust.
j. The Portfolio Advisor will manage the Portfolio
Assets and the investment and reinvestment of such assets so as to seek
to comply with the provisions of the 1940 Act and with Subchapter M of
the Internal Revenue Code of 1986, as amended.
3. COMPENSATION OF THE PORTFOLIO ADVISOR.
a. As compensation for the services to be rendered and
duties undertaken hereunder by the Portfolio Advisor, the Advisor will
pay to the Portfolio Advisor a monthly fee equal on an annual basis to
0.45% of the average daily net assets of the Portfolio. Commencing as
of the date next following the date upon which the owners of interests
in the Portfolio shall have approved such change, the Advisor will pay
to the Portfolio Advisor a monthly fee equal to 0.50% of the first $150
million of the average daily net assets of the Portfolio, and 0.45% of
such average daily net assets in excess of $150 million.
b. The fee of the Portfolio Advisor hereunder shall be
computed and accrued daily and paid monthly. If the Portfolio Advisor
serves in such capacity for less than the whole of any period specified
in Section 3a, the fee to the Portfolio Advisor shall be prorated. For
purposes of calculating the Portfolio Advisor's fee, the daily value of
the Portfolio's net assets shall be computed by the same method as the
Trust uses to compute the net asset value of the Portfolio for purposes
of purchases and redemptions of interests thereof.
c. The Portfolio Advisor reserves the right to waive all
or a part of its fees hereunder.
4. ACTIVITIES OF THE PORTFOLIO ADVISOR. It is understood that the
Portfolio Advisor may perform investment advisory services for various other
clients, including other investment companies. Furthermore, it is understood
that the Portfolio Advisor may give advice, and take action, with respect to its
other clients that may differ from the advice given, or the time and nature of
action taken, with respect to the Portfolio. The Portfolio Advisor will report
to the Board of Trustees
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<PAGE> 6
of the Trust (at regular quarterly meetings and at such other times as such
Board of Trustees reasonably shall request) (i) the financial condition and
prospects of the Portfolio Advisor, (ii) the nature and amount of transactions
affecting the Portfolio that involve the Portfolio Advisor and affiliates of the
Portfolio Advisor, (iii) information regarding any potential conflicts of
interest arising by reason of its continuing provision of advisory services to
the Portfolio and to its other accounts, and (iv) such other information as the
Board of Trustees shall reasonably request regarding the Portfolio, the
Portfolio's performance, the performance of other comparable accounts to whom
the Portfolio Advisor provides services, and the plans of, and the capability
of, the Portfolio Advisor with respect to providing future services to the
Portfolio and its other accounts. The Portfolio Advisor agrees, on an ongoing
basis, to notify the Advisor of any change in the individual(s) responsible for
day-to-day management of the Portfolio and any material change in the investment
strategies employed by the Portfolio Advisor in managing the Portfolio. At least
annually, the Portfolio Advisor shall report to the Trustees the total number
and type of such other accounts and the approximate total asset value thereof
(but not the identities of the beneficial owners of such accounts). The
Portfolio Advisor agrees to submit to the Trust a statement defining its
policies with respect to the allocation of investment opportunities among the
Portfolio and its other clients.
It is understood that the Portfolio Advisor may become interested in
the Trust as an interest holder or otherwise.
The Portfolio Advisor has supplied to the Advisor and the Trust copies
of its Form ADV with all exhibits and attachments thereto (including the
Portfolio Advisor's statement of financial condition) and will hereafter supply
to the Advisor, promptly upon the preparation thereof, copies of all amendments
or restatements of such document.
Nothing in this Agreement shall prevent the Portfolio Advisor, any
parent, subsidiary or affiliate, or any director or officer thereof, from acting
as investment advisor for any other person, firm, or corporation, and shall not
in any way limit or restrict the Portfolio Advisor or any of its directors,
officers, stockholders or employees from buying, selling or trading any
securities or commodities for its or their own account or for the account of
others for whom it or they may be acting, if such activities will not adversely
affect or otherwise impair the performance by the Portfolio Advisor of its
duties and obligations under this Agreement. The Portfolio Advisor will (i)
supply to the Advisor, upon the execution of this Agreement, with a true copy of
its currently effective Code of Ethics and policies regarding insider trading
and (ii) thereafter supply to Advisor copies of any amendments to or
restatements of such Code of Ethics or insider trading policies. The Portfolio
Advisor agrees to provide the Advisor, on a quarterly basis, a report with
respect to material violations of the Portfolio Advisor's Code of Ethics or
insider trading policies by portfolio managers who have responsibility for
managing the Portfolio or a written statement indicating that no such violations
have occurred during the quarter. In addition, the Portfolio Advisor agrees to
provide to the
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<PAGE> 7
Advisor other information concerning violations of its Code of Ethics or insider
trading policies to the same extent as it provides such information to the
Boards of Directors of its proprietary mutual funds. The parties agree to be
bound by the provisions of Rule 17j-1 under the 1940 Act as it may be amended to
the extent that the provisions of the Rule are stricter than the provisions of
this paragraph.
5. PROVISION OF INFORMATION BY THE ADVISOR. To facilitate the
Portfolio Advisor's fulfillment of its obligations under this Agreement, the
Advisor agrees (i) promptly to provide the Portfolio Advisor with all amendments
or supplements to the Trust's registration statements, its Agreement and
Declaration of Trust, and its By-Laws, (ii) on an ongoing basis, to notify the
Portfolio Advisor expressly in writing of each change in the fundamental and
nonfundamental investment policies of the Portfolio, (iii) to provide or cause
to be provided to the Portfolio Advisor on an ongoing basis such assistance as
may be reasonably requested by the Portfolio Advisor in connection with its
activities under this Agreement, including, without limitation, information
concerning the Portfolio, its available funds, or funds that may reasonably
become available for investment, and information as to the general condition of
the Portfolio's affairs, (iv) to provide or cause to be provided to the
Portfolio Advisor on an ongoing basis such information as is reasonably
requested by the Portfolio Advisor for performance by the Portfolio Advisor of
its obligations under this Agreement and the Portfolio Advisor shall not be in
breach of any term of this Agreement or be deemed to have acted negligently if
such alleged breach or negligent act is the result of the Advisor's failure to
provide or cause to be provided such requested information and the Portfolio
Advisor's reliance on the information most recently furnished to the Portfolio
Advisor, and (v) promptly to provide the Portfolio Advisor with any guidelines
and procedures applicable to the Portfolio Advisor or the Portfolio adopted from
time to time by the Board of Trustees of the Trust and all amendments thereto
6. USE OF NAMES. Neither the Advisor nor the Trust shall use the
name of the Portfolio Advisor in any prospectus, sales literature or other
material relating to the Advisor or the Trust in any manner not approved in
advance by the Portfolio Advisor; provided, however, that the Portfolio Advisor
will approve all uses of its name which merely refer in accurate terms to its
appointment hereunder or which are required by the SEC or a state securities
commission; and provided further, that in no event shall such approval be
unreasonably withheld. The Portfolio Advisor shall not use the name of the
Advisor or the Trust in any material relating to the Portfolio Advisor in any
manner not approved in advance by the Advisor or the Trust, as the case may be;
provided, however, that the Advisor and the Trust shall each approve all uses of
their respective names which merely refer in accurate terms to the appointment
of the Portfolio Advisor hereunder or which are required by the SEC or a state
securities commission; and, provided further, that in no event shall such
approval be unreasonably withheld. Upon termination of this Agreement, the
Advisor and the Trust shall immediately cease to use the name of the Portfolio
Advisor.
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<PAGE> 8
7. LIMITATION OF LIABILITY OF THE PORTFOLIO ADVISOR. Absent
willful misfeasance, bad faith, gross negligence, or reckless disregard of
obligations or duties hereunder on the part of the Portfolio Advisor, the
Portfolio Advisor shall not be subject to liability to the Advisor, the Trust or
to any holder of an interest in the Portfolio for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security. The
Portfolio Advisor shall not be liable to the Advisor or the Trust for any loss
suffered as a consequence of any action or inaction of other service providers
to the Trust, provided such action or inaction of such other service providers
to the Portfolio is not a result of the willful misconduct, bad faith or gross
negligence in the performance of, or from reckless disregard of, the duties of
the Portfolio Advisor under this Agreement. As used in this Section 7, the term
"Portfolio Advisor" shall include the Portfolio Advisor and/or any of its
affiliates and the directors, officers and employees of the Portfolio Advisor
and/or any of its affiliates.
8. LIMITATION OF TRUST'S LIABILITY. The Portfolio Advisor
acknowledges that it has received notice of and accepts the limitations upon the
Trust's liability set forth in its Declaration of Trust. The Portfolio Advisor
agrees that (i) the Trust's obligations to the Portfolio Advisor under this
Agreement (or indirectly under the Advisory Agreement) shall be limited, in any
event to the assets of the Portfolio and (ii) the Portfolio Advisor shall not
seek satisfaction of any such obligation from the holders of interests in the
Portfolio nor from any Trustee, officer, employee or agent of the Trust.
9. FORCE MAJEURE. The Portfolio Advisor shall not be liable for
delays or errors occurring by reason of circumstances beyond its control,
including but not limited to acts of civil or military authority, national
emergencies, work stoppages, fire, flood, catastrophe, acts of God,
insurrection, war, riot, or failure of communication or power supply. In the
event of equipment breakdowns beyond its control, the Portfolio Advisor shall
take reasonable steps to minimize service interruptions but shall have no
liability with respect thereto.
10. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless
sooner terminated as hereinafter provided, until December 31, 1998; and
it shall continue thereafter provided that such continuance is
specifically approved by the parties and, in addition, at least
annually by (i) the vote of the holders of a majority of the
outstanding voting securities (as herein defined) of the Portfolio or
by vote of a majority of the Trust's Board of Trustees and (ii) by the
vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of either the Advisor or the Portfolio
Advisor, cast in person at a meeting called for the purpose of voting
on such approval.
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<PAGE> 9
b. This Agreement may be terminated at any time, without
payment of any penalty, (i) by the Advisor, by the Trust's Board of
Trustees or by a vote of the majority of the outstanding voting
securities of the Portfolio, in any such case upon not less than 60
days' prior written notice to the Portfolio Advisor and (ii) by the
Portfolio Advisor upon not less than 60 days' prior written notice to
the Advisor and the Trust. This Agreement shall terminate automatically
in the event of its assignment.
c. If this Agreement is not approved by the favorable
vote of a majority of the outstanding voting securities of the
Portfolio during the 120 day period after the effective date of the
Agreement, it will terminate as of the close of business on the last
day of such period.
d. This Agreement will also terminate upon written
notice to the other party that the other party is in material breach of
the Agreement, unless the other party in material breach of this
Agreement cures such breach to the reasonable satisfaction of the party
alleging the breach within 30 days after the written notice.
e. This Agreement may be amended at any time by the
parties hereto, subject to approval by the Trust's Board of Trustees
and, if required by applicable SEC rules and regulations, a vote of the
majority of the outstanding voting securities of the Portfolio affected
by such change.
f. The terms "affiliated persons," "assignment,"
"interested persons" and "majority of the outstanding voting
securities" shall have the meaning set forth for such terms in Section
2(a) of the 1940 Act.
12. SEVERABILITY AND INCORPORATED EFFECT. If any provision of this
Agreement shall become or shall be found to be invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. In addition, where the effect of a requirement of the 1940 Act
reflected in any provision of this Agreement is relaxed by a rule, regulation or
order of the SEC, whether of specific or general application, such provision
shall be deemed to incorporate the effect of such rule, regulation or order.
13. NOTICE. Any notices under this Agreement shall be in writing
addressed and delivered personally (or by telecopy) or mailed postage-paid, to
the other party at such address as such other party may designate in accordance
with this paragraph for the receipt of such notice. Until further notice to the
other party, it is agreed that the address of the Trust and that of the Advisor
for this purpose shall be 311 Pike Street, Cincinnati, Ohio 45202 and that the
address of the Portfolio Advisor shall be 345 Park Avenue, New York, New York
10154.
14. MISCELLANEOUS. Each party agrees to perform such further
actions and execute such further documents as are necessary to effectuate the
purposes
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<PAGE> 10
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio, or any applicable provisions of the
1940 Act. To the extent that the laws of the State of Ohio, or any of the
provisions in the Agreement, conflict with applicable provisions of the 1940
Act, the latter shall control. The captions in this Agreement are included for
convenience only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
Attest:
R.F. Morand BY /s/ Edward G. Harness, Jr.
- --------------------------- -----------------------------
Asst Secretary Edward G. Harness, Jr.
President
SCUDDER STEVENS & CLARK INC.
Attest:
Kathryn L. Quirk BY /s/ Cornelia Small
- --------------------------- -----------------------------
Secretary
Name: Cornelia Small
-----------------------
Title: Managing Director
-----------------------
-10-
<PAGE> 1
COOPERS & LYBRAND COOPERS & LYBRAND L.L.P. a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration on Form N-4 (File No.
333-29705) of our report, dated April 25, 1997, on our audits of the financial
statements of Western-Southern Life Assurance Company. We also consent to the
reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P
Cincinnati, Ohio
October 7, 1997
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
Limited liability association incorporated in Switzerland.
<PAGE> 2
COOPERS & LYBRAND COOPERS & LYBRAND L.L.P. a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration on Form N-4 (File No.
333-29705) of our report, dated January 9, 1997, on our audits of the financial
statements of Western-Southern Life Assurance Company Separate Account 1. We
also consent to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P
Cincinnati, Ohio
October 7, 1997
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
Limited liability association incorporated in Switzerland.
