<PAGE> 1
As filed with the Securities and Exchange Commission on April 30, 1998
Registration No. 033-76582
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. [ ]
Post-Effective Amendment No. 6 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 11 [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. MARK H. LONGENECKER, JR., 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: Continuous Offering
It is proposed that this filing will become effective (check appropriate box)
___ immediately upon filing pursuant to paragraph (b) of rule 485
XX on May 1, 1998 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
___ on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
___ this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Title of Securities Being Registered: Variable Annuity Contracts
----------------------------
Select Advisors Portfolios has also executed this Registration Statement.
<PAGE> 2
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
VARIABLE ANNUITY
CROSS-REFERENCE SHEET REQUIRED BY RULE 495(A)
PART I - DISCUSSION OF THE VARIABLE ANNUITY CONTRACT
<TABLE>
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FORM N-4 PART A ITEM NO. HEADING IN PROSPECTUS
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<S> <C> <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 Accumulation Unit Values
(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 Separate 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
(f) Registrant's expenses Charges
(g) Organizational expenses Administrative Charges
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<TABLE>
<CAPTION>
FORM N-4 PART A ITEM NO. HEADING IN PROSPECTUS
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<S> <C> <C>
7. General Description of Variable
Annuity Contracts
(a) Rights Summary of the Contract; Allocation of
Purchase Payments; Surrenders and Partial
Withdrawals; Selection of Income Payment
Option; Statements to Owners; Voting Rights;
Other Contract Provisions
(b) Provisions and limitations Allocation of Purchase Payments; Transfers
(c) Changes in contracts or The Separate Account
operations
(d) Contract owner inquiries Cover Page; Summary of the Contract
8. Annuity Period
(a) Level of benefits Selection of Annuity Income Option
(b) Annuity commencement date Income Date Selection
(c) Annuity payments Annuity Payout Plans
(d) Assumed investment return Selection of Annuity Income Option
(e) Minimums Annuity Payout Plans
(f) Rights to change options or Selection of Annuity Payout Plans
transfer contract value
9. Death Benefit
(a) Death benefit calculation Death Benefit
(b) Forms of benefits Selection of Annuity Payout Plans
10. Purchases and Contract Value
(a) Procedures for purchases Purchase of a Contract
(b) Accumulation unit values Accumulation Unit Value
(c) Calculation of accumulation Allocation of Purchase Payments;
unit values Accumulation Unit Value
(d) Principal underwriter Distribution of the Contracts
11. Redemptions
(a) Redemption procedures Surrenders and Partial Withdrawals
(b) Texas Optional Retirement Not Applicable
Program
(c) Delay Surrenders and Partial Withdrawals
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<TABLE>
<CAPTION>
FORM N-4 PART A ITEM NO. HEADING IN PROSPECTUS
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<S> <C> <C>
(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 Table of Contents of Statement of Additional
Additional Information Information
FORM N-4 PART B 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 Charges (Prospectus); Expenses of the VIT
Portfolios and the SAT Portfolios (Prospectus)
(b) Management-related services Not applicable
(c) Custodian and independent Independent Accountants
public accountant
(d) Other custodianship Safekeeping of Assets
(e) Administrative servicing The Company (Prospectus); The Separate
Account (Prospectus)
(f) Depositor as principal Not Applicable
underwriter
19. Purchase of Securities Being Offered
(a) Manner of offering Distribution of the Contracts (Prospectus)
(b) Sales Load Surrender Charge (Prospectus)
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<TABLE>
<CAPTION>
FORM N-4 PART B ITEM NO. HEADING IN SAI
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<S> <C> <C>
20. Underwriters
(a) Depositor or affiliate as Distribution of Contracts (Prospectus)
principal 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)
21. 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
FORM N-1A PART A 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 Separate Account (Prospectus Part I)
(a)(ii) Investment Objectives Investment Objectives, Policies and
Restrictions; Investment Techniques, Risk
Factors and Investment Restrictions
5. Management of the Portfolios Management of the Portfolios
5A. Management's Discussion of Financial Highlights
Portfolios' Performance
6. Capital Stock and Other Securities Additional Information; Taxation (SAI)
</TABLE>
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<TABLE>
<CAPTION>
FORM N-1A PART A ITEM NO. HEADING IN PROSPECTUS
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<S> <C> <C>
7. Purchase of Securities Being Offered Purchase and Valuation; Special Information
Concerning Hub and Spoke(R) Structure;
Management of the Portfolios
8. Redemption or Purchase Special Information Concerning Hub and
Spoke(R) Structure; Additional Information
9. Legal Proceedings Not Applicable
FORM N-4 PART B ITEM NO. HEADING IN SAI
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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 Management of the SA Trust; The Separate
of Securities Account (Prospectus Part I)
16. Investment Advisory and Other Management of the Portfolios (Prospectus
Persons Part II); Advisor, Portfolio Advisors,
Administrator, and Sponsor
17. Brokerage Allocation and Other Portfolio Transactions and Brokerage
Practices Commissions
18. Capital Stock and Other Securities Organization of the SA Trust
19. Purchase, Redemption and Pricing of Valuation of Securities and Redemption in
Securities Being Offered Kind
20. Tax Status Taxation
21. Underwriters Distribution of the Contracts (Prospectus
Part I)
22. Calculation of Performance Data Performance Information (Prospectus Part I);
Sub-Account Performance
23. Financial Statements Financial Statements
</TABLE>
v
<PAGE> 7
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.
vi
<PAGE> 8
TOUCHSTONE
Touchstone Variable Annuity
S Emerging Growth
S International Equity
S Income Opportunity
S Value Plus
S Growth & Income
S Balanced
S Bond
S Standby Income
S Fixed Account
- --------------------------------------------------------------------------------
PROSPECTUS
MAY 1, 1998
<PAGE> 9
THIS BOOKLET CONTAINS THE PROSPECTUS FOR TOUCHSTONE VARIABLE ANNUITY, A FLEXIBLE
PURCHASE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACT, ISSUED BY WESTERN-SOUTHERN
LIFE ASSURANCE COMPANY. THIS BOOKLET ALSO INCLUDES THE PROSPECTUS FOR INVESTMENT
PORTFOLIOS UNDERLYING THE TOUCHSTONE VARIABLE ANNUITY. THESE PROSPECTUSES ARE
BOUND TOGETHER FOR YOUR CONVENIENCE.
<PAGE> 10
- --------------------------------------------------------------------------------
PROSPECTUS
MAY 1, 1998
UNITS OF INTEREST
UNDER FLEXIBLE PURCHASE
PAYMENT DEFERRED
VARIABLE ANNUITY
CONTRACT
WESTERN-SOUTHERN LIFE
ASSURANCE COMPANY
SEPARATE ACCOUNT 1
400 BROADWAY
CINCINNATI, OHIO 45202
- --------------------------------------------------------------------------------
This Prospectus describes individual variable annuity contracts (each a
"CONTRACT" and collectively the "CONTRACTS") offered by Western-Southern Life
Assurance Company (the "COMPANY"). The Contracts are designed for individual
investors and group plans that desire to accumulate capital on a tax-deferred
basis for retirement or other long term objectives. Contracts may be purchased
on either a non-qualified basis or on a qualified basis in connection with
qualified retirement and pension plans. Generally, non-qualified Contracts may
be purchased by making an initial payment of at least $2,000, and qualified
Contracts may be purchased by making an initial payment of at least $1,000.
Subsequent payments to a Contract must be at least $100. Payments will be
invested as the Owner directs in one or more sub-accounts (each a "SUB-ACCOUNT")
of Western-Southern Life Assurance Company Separate Account 1 ("SEPARATE ACCOUNT
1") or in a fixed-rate option funded through the Company's general account. Each
Sub-Account invests in a corresponding portfolio (a "PORTFOLIO") of Select
Advisors Variable Insurance Trust or of Select Advisors Portfolios.
The Sub-Accounts in which Owners may invest are: Emerging Growth,
International Equity, Income Opportunity, Value Plus, Growth & Income, Balanced,
Bond and Standby Income. Information regarding these investment options is set
forth under the caption "The Variable Account" herein. The Emerging Growth,
International Equity, Income Opportunity, Value Plus, Balanced and Standby
Income invest in corresponding Portfolios of Select Advisors Variable Insurance
Trust (the "VI TRUST"). The Growth & Income and Bond Sub-Accounts invest in
corresponding Portfolios of Select Advisors Portfolios (the "SA TRUST"). 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 Portfolios from separate accounts of other insurance
companies registered as investment companies.
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. THESE BONDS 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. THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED
BY THE CURRENT PROSPECTUS FOR THE VI TRUST, A COPY OF WHICH IS BOUND WITH THIS
PROSPECTUS. Additional information about the Contracts and Separate Account 1
has been filed with the Securities and Exchange Commission in a Statement of
Additional Information dated May 1, 1998. The Statement of Additional
Information is incorporated by reference in this Prospectus and is available
without charge by calling the Touchstone Variable Annuity Service Center at
1-800-669-2796. The table of contents of the Statement of Additional Information
appears on page 58 of this Prospectus. The Securities and Exchange Commission
maintains a web site (http://www.sec.gov) that contains the Statement of
Additional Information, certain 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.
<PAGE> 11
PROSPECTUS CONTENTS
<TABLE>
<S> <C>
GLOSSARY.................................................... 1
PART I -- DISCUSSION OF THE VARIABLE ANNUITY CONTRACT....... 4
FEE AND EXPENSE TABLES...................................... 4
SUMMARY OF THE CONTRACT..................................... 6
ACCUMULATION UNIT VALUES.................................... 10
PERFORMANCE INFORMATION..................................... 10
FACTS ABOUT THE COMPANY, THE VARIABLE ACCOUNT AND THE FIXED
ACCOUNT................................................... 11
The Company............................................ 11
The Separate Account................................... 11
The VI Trust and the SA Trust..................... 11
Additions, Deletions and Substitutions of
Investments........................................... 13
The Fixed Account...................................... 13
THE CONTRACT................................................ 14
Purchase of a Contract................................. 14
Free Look Privilege.................................... 14
Allocation of Purchase Payments........................ 15
Accumulation Unit Value................................ 15
Accumulation Unit Value -- VIT Sub-Accounts....... 15
Accumulation Unit Value -- Growth & Income and
Bond Sub-Accounts.................................. 16
Fixed Account Value.................................... 16
Dollar Cost Averaging.................................. 16
Transfers.............................................. 17
Surrenders and Partial Withdrawals..................... 18
Systematic Withdrawals............................ 18
Selection of Annuity Income Option..................... 19
Income Date Selection............................. 19
Annuity Payout Plans.............................. 19
Death Benefit.......................................... 20
CHARGES..................................................... 20
Premium Taxes.......................................... 20
Other Taxes............................................ 20
Administrative Charges................................. 20
Contract Maintenance Charge....................... 21
Contract Administration Charge.................... 21
Mortality and Expense Risk Charges..................... 21
Surrender Charge....................................... 21
Expenses of VIT Portfolios and SAT Portfolios.......... 22
OTHER INFORMATION........................................... 23
Distribution of the Contracts.......................... 23
Statements to Owners................................... 23
Adjustment of Units and Values......................... 24
Voting Rights.......................................... 24
Substituted Securities................................. 24
OTHER CONTRACT PROVISIONS................................... 25
Misstatement of Age or Sex............................. 25
Assignment............................................. 25
Loans.................................................. 25
No Dividends........................................... 25
</TABLE>
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<TABLE>
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FEDERAL INCOME TAX INFORMATION.............................. 25
Qualification as an "Annuity Contract"................. 25
Diversification................................... 26
Excessive Control................................. 26
Required Distributions............................ 26
Multiple Contracts................................ 27
Qualified Contracts and Qualified Plans................ 27
General........................................... 27
Section 401 Qualified Pension or Profit-Sharing
Plans.............................................. 28
Section 403(b) Plans.............................. 28
Traditional IRAs.................................. 29
Roth IRAs......................................... 30
Simplified Employee Pension Plans................. 31
Savings Incentive Match Plans for Employees
(SIMPLE)........................................... 32
Section 457 Deferred Compensation Plans........... 32
Federal Income Taxation................................ 32
General........................................... 32
Tax Treatment of Assignments...................... 33
Tax Treatment of Withdrawals from Non-Qualified
Contracts.......................................... 33
Tax Treatment of Withdrawals from Qualified
Contracts.......................................... 34
Tax Treatment of Distributions from Roth IRAs..... 35
Penalty Tax on Withdrawals from Qualified
Contracts and IRAs................................. 35
Required Distributions from Qualified Contracts,
IRAs and Section 457 Plans......................... 36
Withdrawal Limitations for SIMPLE IRAs............ 37
Withdrawal Limitations for Tax-Sheltered
Annuities.......................................... 37
LEGAL PROCEEDINGS........................................... 37
FINANCIAL STATEMENTS........................................ 37
PART II -- DISCUSSION OF SELECT ADVISORS PORTFOLIOS......... 38
SUMMARY..................................................... 38
General................................................ 38
Risks.................................................. 38
Advisors............................................... 38
Sub-Accounts........................................... 38
Other Investors........................................ 39
FINANCIAL HIGHLIGHTS........................................ 39
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS............ 40
Growth & Income Portfolio.............................. 40
Bond Portfolio......................................... 41
General................................................ 41
SPECIAL INFORMATION CONCERNING HUB AND SPOKE(R)STRUCTURE.... 41
MANAGEMENT OF THE PORTFOLIOS................................ 42
General................................................ 42
Portfolio Advisors..................................... 43
</TABLE>
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<PAGE> 13
<TABLE>
<S> <C>
INVESTMENT TECHNIQUES, RISK FACTORS AND INVESTMENT
RESTRICTIONS.............................................. 44
Techniques and Risk Factors............................ 44
Foreign Securities................................ 44
Risks Associated with Emerging Markets
Securities......................................... 44
Currency Exchange Rates........................... 45
ADRS, EDRS and CDRS............................... 45
Convertible Securities............................ 45
Fixed-Income and Other Debt Instrument
Securities......................................... 45
Medium and Lower Rated and Unrated Securities..... 46
U.S. Government Securities........................ 47
Mortgage Related Securities....................... 47
Stripped Mortgage Related Securities.............. 48
Zero Coupon Securities............................ 48
Custodial Receipts................................ 49
When-Issued and Delayed-Delivery Securities....... 49
Real Estate Investment Trusts..................... 49
Standard & Poor's Depositary Receipts............. 50
Repurchase Agreements............................. 50
Reverse Repurchase Agreements and Forward Roll
Transactions....................................... 50
Lending Portfolio Securities...................... 50
Illiquid Securities............................... 51
Non-Publicly Traded ("Restricted") Securities and
Rule 144A Securities............................... 51
Temporary Investments............................. 51
Derivatives....................................... 51
Futures Contracts and Related Options............. 52
Options on Stock.................................. 52
Options on Securities Indexes..................... 53
Forward Currency Contracts........................ 53
Asset Coverage.................................... 54
Certain Investment Restrictions........................ 54
Portfolio Turnover..................................... 54
MANAGEMENT OF THE SA TRUST.................................. 55
Board of Trustees...................................... 55
Sponsor................................................ 55
Administrator, Fund Accounting Agent, Custodian and
Transfer Agent........................................ 55
Allocation of Expenses of the Portfolios............... 55
PURCHASE AND VALUATION...................................... 56
Purchase............................................... 56
Valuation.............................................. 56
ADDITIONAL INFORMATION...................................... 57
Description of Beneficial Interests, Liabilities,
Voting Rights and Reports............................. 57
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION... 58
</TABLE>
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<PAGE> 14
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
Annuitant dies before the Income Date.
CODE -- The Internal Revenue Code of 1986, as amended.
COMPANY -- Western-Southern Life Assurance Company.
CONTRACT -- An individual flexible variable annuity contract, including the
Application Form and any amendments, riders or endorsements, offered by the
Company as set forth in this Prospectus.
CONTRACT ANNIVERSARY -- The same day and month as the Contract Date in each
subsequent year.
CONTRACT DATE -- The date, as set forth on page 3 of the Contract, on which
the Contract becomes effective, which generally will be within one business day
after receipt of the initial Purchase Payment and Application Form in good order
at the Touchstone Variable Annuity Service Center.
CONTRACT VALUE -- The total value of the Contract at any time prior to or
on the Income Date, representing the sum of the Variable Account Value and the
Fixed Account Value.
CONTRACT YEAR -- A year which starts with the Contract Date or with a
Contract Anniversary.
FIXED ACCOUNT -- A Contract option under which some or all of the Purchase
Payments are allocated to the Company's general account. The Company credits
interest to the amounts allocated to the Fixed Account at rates declared by the
Company from time to time and guaranteed for one year periods.
FIXED ACCOUNT VALUE -- At any given time, (1) the sum of all Purchase
Payments allocated to the Fixed Account, plus (2) any Variable Account Value
transferred to the Fixed Account, plus (3) interest credited by the Company to
the Fixed Account, less (4) any amounts transferred from the Fixed Account to
the Variable Account, less (5) any amounts withdrawn for charges, deductions or
surrenders (which includes Surrender Charges, if any).
INCOME DATE -- The date on which annuity payments are scheduled to begin,
changeable by written notice to the Company.
IRA -- An individual retirement account or an individual retirement
annuity.
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, 408A or 457 of the Code. A NON-QUALIFIED CONTRACT is any other Contract.
ROTH IRA -- An IRA established under Section 408A of the Code in which
contributions are not deductible and qualified withdrawals are not subject to
federal income tax.
1
<PAGE> 15
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 the Growth & Income and Bond Sub-Accounts
invest. Part II of this Prospectus, beginning at page 38, contains information
regarding the SA Trust and such Portfolios.
SEPARATE ACCOUNT 1 -- A separate investment account of the Company in which
Purchase Payments allocated to the Variable Account are held.
SUB-ACCOUNT -- A division of the Variable Account which invests in a
Portfolio of the VI Trust or the SA Trust. Purchase Payments allocated to the
Variable Account are further allocated among Sub-Accounts as designated by the
Owner.
SURRENDER CHARGE -- A declining contingent deferred sales charge, ranging
from 7% during the first two years after a Purchase Payment is received to 0%
after seven years from receipt of 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.
TRADITIONAL IRA -- An IRA established under Section 408 of the Code in
which contributions may be deductible and federal income tax is deferred until
amounts are withdrawn from the IRA.
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 Separate Account 1.
VARIABLE ACCOUNT VALUE -- At any given time, the value of all Accumulation
Units credited to the Sub-Accounts pursuant to the Contract.
VI TRUST -- Select Advisors Variable Insurance Trust, a business trust
formed under Massachusetts law that includes portfolios in which the Emerging
Growth, International Equity, Income Opportunity, Value Plus, Balanced and
Standby Income Sub-Accounts invest.
VI TRUST PROSPECTUS -- A separate Prospectus describing the VI Trust and
the Emerging Growth, International Equity, Income Opportunity, Value Plus,
Balanced and Standby Income Portfolios accompanies and is bound with this
Prospectus.
VIT PORTFOLIO -- A Portfolio of the VI Trust.
2
<PAGE> 16
TERMS DEFINED ELSEWHERE IN THE PROSPECTUS
The following terms have the meanings given such terms at the pages
indicated.
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<CAPTION>
TERM PAGE
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Administrator........................... 13
Advisor................................. 13
Advisers Act............................ 43
Advisory Agreement...................... 42
Benefit Determination Date.............. 20
Board of Trustees/Trustees.............. 42
Contract Administration Charge.......... 9
Contract Maintenance Charge............. 9
Death Benefit........................... 20
Designated beneficiary.................. 26
Distributor............................. 23
Dollar Cost Averaging................... 16
Expense Cap............................. 5
Expense risk............................ 21
Expense Risk Charge..................... 9
Fort Washington......................... 43
Free amounts............................ 22
Free look............................... 7
Free look period........................ 14
IFS..................................... 23
Investors Bank.......................... 13
Mortality risk.......................... 21
</TABLE>
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<CAPTION>
TERM PAGE
---- ----
<S> <C>
Mortality Risk Charge................... 9
NYSE.................................... 8
PIN..................................... 17
Portfolio Advisors...................... 13
Qualified Plans......................... 27
SAT Net Investment Factor............... 16
Scudder Kemper.......................... 43
SEC..................................... 11
Section 457 Plans....................... 27
SEP..................................... 31
SIMPLE IRA.............................. 32
Sponsor................................. 5
Sponsor Agreements...................... 5
Surrender............................... 8
Touchstone Variable Annuity Service
Center................................ 7
Treasury Department..................... 26
Trustees/Board of Trustees.............. 42
VIT Net Investment Factor............... 15
VIT Sub-Account......................... 15
1933 Act................................ 13
1940 Act................................ 11
</TABLE>
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<PAGE> 17
PART I -- DISCUSSION OF THE VARIABLE ANNUITY CONTRACT
FEE AND EXPENSE TABLES
The following tables provide information concerning Owner transaction
expenses and annual operating expenses of the Variable Account, each Sub-Account
and the corresponding Portfolio.
OWNER TRANSACTION EXPENSES
Maximum Contingent Deferred Sales Charge(1)....................7%
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> <C>
less than 1............................. 7%
1....................................... 7%
2....................................... 6%
3....................................... 5%
4....................................... 4%
5....................................... 2%
6....................................... 1%
7 and later............................. 0%
</TABLE>
ANNUAL CONTRACT MAINTENANCE CHARGE(2)...................................$35
VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average account value)
<TABLE>
<S> <C>
Mortality and Expense Risk Charges.......................... 1.20%
Contract Administration Charge.............................. 0.15%
----
Total Variable Account Annual Expenses...................... 1.35%
</TABLE>
PORTFOLIO EXPENSES (as a percentage of average daily net assets)
<TABLE>
<CAPTION>
ADVISOR FEE OTHER EXPENSES TOTAL EXPENSES
(AFTER EXPENSE (AFTER EXPENSE (AFTER EXPENSE
REIMBURSEMENT) REIMBURSEMENT) REIMBURSEMENT)(3)
-------------- -------------- -----------------
<S> <C> <C> <C>
VIT PORTFOLIOS
- ---------------------------------------------
Emerging Growth.............................. 0.80% 0.35% 1.15%
International Equity......................... 0.95% 0.30% 1.25%
Income Opportunity........................... 0.65% 0.20% 0.85%
Value Plus(4)................................ 0.75% 0.10% 0.85%
Balanced..................................... 0.80% 0.10% 0.90%
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) Also referred to as a "Surrender Charge."
(2) In certain states in which the Company has received the necessary regulatory
approvals, it may waive, reduce or eliminate the annual Contract Maintenance
Charge.
(3) Total Portfolio expenses absent reimbursement by the Sponsor would have been
as follows: Emerging Growth -- 2.19%; International Equity -- 3.19%; Income
Opportunity -- 1.72%; Growth & Income -- 1.64%; Balanced -- 2.04%;
Bond -- 1.69% and Standby Income -- 1.48%.
4
<PAGE> 18
(4) Expenses for the Value Plus Portfolio are expressed as a percentage of its
projected average daily net assets and are based on estimates of expenses to
be incurred during the fiscal year ending December 31, 1998, after any
applicable fee waivers and expense reimbursements. For the Value Plus
Portfolio it is estimated that, for the year ending December 31, 1998,
absent reimbursement, "Other Expenses" and "Total Operating Expenses" will
be 1.85% and 2.85% of the Portfolio's projected average daily net assets.
The purpose of the above table is to assist an Owner in understanding the
various costs and expenses that an Owner will bear directly or indirectly.
Premium taxes charged by certain states or other governmental entities may be
applicable, but are not included in the table. For purposes of the table,
expenses of the Portfolio in which each Sub-Account invests are treated as if
they were expenses of that Sub-Account. The expenses of each Portfolio 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 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. It is expected that the
combined expenses per Accumulation Unit of a 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 the 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.
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. 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. A Sponsor Agreement
may be terminated by the Sponsor as to any Portfolio as of the end of any
calendar quarter, 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 additional information regarding expenses related to a Contract, see
"Charges" at page 20. For more information regarding each Portfolio's expenses,
see "Expenses of the VIT Portfolios and SAT Portfolios" herein at page 22, the
VI Trust Prospectus, and the Statement of Additional Information (available on
request from the Touchstone Variable Annuity Service Center). For additional
information regarding the Sponsor Agreements, see "Sponsor" at page 55.
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.
5
<PAGE> 19
An Owner surrendering a Contract at the end of the applicable time period
would pay the following aggregate Contract and Portfolio expenses on a $1,000
investment in each Sub-Account, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Emerging Growth........................................ $97 $137 $178 $301
International Equity................................... $98 $140 $183 $311
Income Opportunity..................................... $94 $128 $162 $270
Value Plus............................................. $94 $128 NA NA
Growth & Income........................................ $94 $128 $162 $270
Balanced............................................... $94 $129 $165 $275
Bond................................................... $93 $125 $157 $259
Standby Income......................................... $90 $117 $144 $232
</TABLE>
An Owner annuitizing a Contract (with a minimum 5 year payout) at the end
of the applicable time period would pay the following aggregate Contract and
Portfolio expenses on the same investment:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Emerging Growth........................................ $97 $ 83 $142 $301
International Equity................................... $98 $ 86 $147 $311
Income Opportunity..................................... $94 $ 74 $126 $270
Value Plus............................................. $94 $ 74 NA NA
Growth & Income........................................ $94 $ 74 $126 $270
Balanced............................................... $94 $ 75 $129 $275
Bond................................................... $93 $ 71 $121 $259
Standby Income......................................... $90 $ 63 $108 $232
</TABLE>
An Owner who does not surrender a Contract at the end of the applicable
time period would pay the following aggregate Contract and Portfolio expenses on
the same investment:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Emerging Growth........................................ $27 $ 83 $142 $301
International Equity................................... $28 $ 86 $147 $311
Income Opportunity..................................... $24 $ 74 $126 $270
Value Plus............................................. $24 $ 74 NA NA
Growth & Income........................................ $24 $ 74 $126 $270
Balanced............................................... $24 $ 75 $129 $275
Bond................................................... $23 $ 71 $121 $259
Standby Income......................................... $20 $ 63 $108 $232
</TABLE>
OTHER PORTFOLIO FINANCIAL INFORMATION
Additional financial information regarding the Emerging Growth,
International Equity, Income Opportunity, Balanced and Standby Income Portfolios
may be found in the VI Trust Prospectus, which follows and is bound with this
Prospectus. Similar information regarding the Growth & Income and Bond
Portfolios may be found at page 39 of this Prospectus.
SUMMARY OF THE CONTRACT
GENERAL
The purpose of the Contract is (1) to permit an Owner to accumulate funds
on a tax-deferred basis by investing in one or more alternatives, and (2) 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 the eight
Sub-Accounts
6
<PAGE> 20
of the Variable Account and in the Company's Fixed Account. Each Sub-Account
will, in turn, invest solely in one of the following Portfolios:
<TABLE>
<CAPTION>
VI TRUST PORTFOLIOS SA TRUST PORTFOLIOS
- ---------------------------- -------------------------
<S> <C>
Emerging Growth Portfolio Growth & Income Portfolio
International Equity
Portfolio Bond Portfolio
Income Opportunity Portfolio
Value Plus Portfolio
Balanced Portfolio
Standby Income Portfolio
</TABLE>
An investment in the Fixed Account will be held and managed by the Company
through its general account. See "The VI Trust and the SA Trust" and "The Fixed
Account."
Assets allocated by 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 $2,000 for
Non-Qualified Contracts and $1,000 for Qualified Contracts. Each subsequent
payment must be at least $100. If payments are made under an automatic or
scheduled installment plan, the minimums may be satisfied by purchase payments
made on an annualized basis of not less than $600. 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."
VARIABLE ANNUITY SERVICE CENTER
Investments in or withdrawals from a Contract, transfers of amounts to or
from the Variable Account and other directions with respect to the investment of
Purchase Payments should be directed to the Company at the Touchstone Variable
Annuity Service Center, P.O. Box 2850, Cincinnati, Ohio 45201-2850 (the
"TOUCHSTONE VARIABLE ANNUITY SERVICE CENTER").
TEN-DAY FREE LOOK
To be sure that the Owner is satisfied with the Contract, the Owner has a
ten-day "FREE LOOK." Within ten days of the date the Contract is received by the
Owner, it may be returned to the Company at the Touchstone Variable Annuity
Service Center. If the Contract is received by the Company within such time, the
Company will void the Contract, and the Contract Value, plus any amount deducted
from the initial Purchase Payment prior to allocation to the Sub-Accounts or the
Fixed Account, will then be refunded in full unless otherwise required by state
or federal law. See "Free Look Privilege."
INVESTMENT OPTIONS
Purchase Payments will be invested by the Company, in the proportions that
the Owner directs, in the Fixed Account and the Sub-Accounts. See "Allocation of
Purchase Payments." The Variable Account currently has eight Sub-Accounts, each
of which invests exclusively in one of the VIT Portfolios or one of the SAT
7
<PAGE> 21
Portfolios. The VIT Portfolios are the Emerging Growth, International Equity,
Income Opportunity, Value Plus, Balanced and Standby Income Portfolios. The SAT
Portfolios are the Growth & Income and Bond Portfolios.
Information regarding the investment objectives of 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
Part II of 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 30 days. One
transfer from the Variable Account to the Fixed Account may be made during any
Contract Year. One transfer from the Fixed Account to the Variable Account also
may be made during any Contract Year. The maximum amount of a transfer from the
Fixed Account to the Variable Account is 25% of the Fixed Account Value. See
"Transfers."
PURCHASE PAYMENTS
The Owner may elect to allocate Purchase Payments to the Sub-Accounts or
the Fixed Account or any combination of these alternatives. Purchase Payments
will be processed by the Company on the day received at the Touchstone Variable
Annuity Service Center, if received in good order no later than the close of
regular trading on the New York Stock Exchange (the "NYSE") on any Valuation
Date. Payments received in good order later in the day, or on any day that is
not a Valuation Date, will be processed on the next Valuation Date. Regular
trading on the NYSE usually closes at 4:00 p.m. Eastern Time. Purchases by the
Sub-Accounts of shares of the corresponding VIT Portfolios or of interests in
the corresponding SAT Portfolios 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 of the Sub-Accounts in the
corresponding Portfolios increases or decreases, the Variable Account Value
increases or decreases. See "Allocation of Purchase Payments."
WITHDRAWALS AND 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 available "free" amounts, as described
under the caption "Surrender Charge -- 'Free' Amounts") generally will be
subject to a Surrender Charge. See "Surrender Charge." This charge is 7% of the
amount of any Purchase Payment withdrawn less than two years following receipt
of such payment and decreases over time. The charge is reduced 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. The Company 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 a penalty on premature distributions as well as to federal
income tax. See "Federal Income Taxation."
INCOME OPTIONS
The Contract offers four fixed annuity 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 one of two life income alternatives. Other annuity income
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 Annuity Income Option." If the
Annuitant dies after the Income Date, the amount and manner of any continuing
payments will depend upon the income option selected.
8
<PAGE> 22
DEATH BENEFIT
If the Annuitant dies before the Income Date, the Company will pay a Death
Benefit to the Beneficiary selected by the Owner. See "Death Benefit."
CHARGES
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 7% of the lesser of the
following amounts: (1) the total amount of all purchase payments made within 84
months prior to the date of the request to surrender, and (2) 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 $35 from the Contract
Value. In certain states, the Company may waive, reduce or eliminate such
charge. The Company also will deduct on a daily basis an administration charge
(the "CONTRACT ADMINISTRATION CHARGE") at an annual rate equal to 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 Charges. The Company deducts on a daily basis a
charge to compensate for the mortality risk assumed by the Company (the
"MORTALITY RISK CHARGE") at an annual rate equal to 0.80% of the Variable
Account Value. The Company also deducts on a daily basis a charge at an annual
rate equal to 0.40% of the Variable Account Value as compensation for the
Company's risk in agreeing not to increase administrative charges on the
Contracts regardless of actual administrative costs (the "EXPENSE RISK CHARGE").
See "Mortality and Expense Risk Charges."
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."
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.
9
<PAGE> 23
ACCUMULATION UNIT VALUES
(for an accumulation unit outstanding throughout the periods)
<TABLE>
<CAPTION>
UNIT VALUE UNIT VALUE NUMBER OF
AT BEGINNING AT END UNITS AT
YEAR ENDED DECEMBER 31, OF YEAR OF YEAR END OF YEAR
----------------------- ------------ ---------- -----------
<S> <C> <C> <C>
Emerging Growth Sub-Account
1995**............................................ 10.000000 11.687169 14,972
1996.............................................. 11.687169 12.817847 236,639
1997.............................................. 12.817847 16.905544 921,086
International Equity Sub-Account
1995**............................................ 10.000000 11.230830 15,645
1996.............................................. 11.230830 12.350885 252,346
1997.............................................. 12.350885 13.984724 939,980
Income Opportunity Sub-Account
1995**............................................ 10.000000 12.515143 20,015
1996.............................................. 12.515143 15.727477 334,062
1997.............................................. 15.727477 17.401250 1,296,326
Growth & Income Sub-Account
1995**............................................ 10.000000 12.490239 28,701
1996.............................................. 12.490239 14.161478 451,141
1997.............................................. 14.161478 16.749955 1,858,720
Balanced Sub-Account
1995**............................................ 10.000000 11.962842 28,416
1996.............................................. 11.962842 13.782738 266,916
1997.............................................. 13.782738 16.130170 1,153,567
Bond Sub-Account
1995**............................................ 10.000000 11.262524 28,863
1996.............................................. 11.262524 11.395131 235,025
1997.............................................. 11.395131 12.137441 936,431
Standby Income Sub-Account
1995**............................................ 10.000000 10.317194 42,991
1996.............................................. 10.317194 10.711418 306,751
1997.............................................. 10.711418 11.140654 1,033,781
</TABLE>
- ---------
**Operations commenced on February 23, 1995.
For information explaining how Accumulation Unit Value is calculated for
the various Sub-Accounts, see "Accumulation Unit Value."
PERFORMANCE INFORMATION
Separate Account 1 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).
10
<PAGE> 24
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.
In reports or other communications to shareholders or in advertising
material, non-standardized total return figures, such as aggregate total return
figures and non-annualized figures, may also be quoted. These figures will be
accompanied by standardized total return figures calculated as described above.
The performance of a Sub-Account may be compared 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.
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.
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. 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 SEPARATE ACCOUNT
The Variable Account is held by 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 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.
THE VI TRUST AND THE SA TRUST
The Variable Account consists of eight Sub-Accounts, each of which invests
exclusively in one of the Portfolios of the VI Trust or in one of the 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 master trust.
11
<PAGE> 25
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.
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.
VALUE PLUS PORTFOLIO has an investment objective of long-term growth
of capital through investment primarily in common stocks which are
considered by its Portfolio Advisor to be fundamentally undervalued in
relation to earnings, cash flow and financial strength.
BALANCED PORTFOLIO has an investment objective of growth of capital
and income through investment in common stocks and fixed-income securities.
STANDBY INCOME PORTFOLIO has an investment objective of high current
income to the extent consistent with relative stability of principal which
it attempts to achieve through investment in short-term, investment grade
debt securities.
SAT PORTFOLIOS
GROWTH & INCOME PORTFOLIO has an investment objective of long term
capital appreciation and dividend income through investment primarily in
common stocks of high quality companies.
BOND PORTFOLIO has an investment objective of providing a high level
of current income primarily through investment in investment grade bonds.
Each Portfolio listed below may invest a portion of its total assets in
non-investment grade (or "junk") bonds. These bonds 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.
Investments in these Portfolios may not be appropriate for all investors.
<TABLE>
<CAPTION>
PERCENTAGE OF PORTFOLIO'S TOTAL ASSETS THAT MAY BE
PORTFOLIO INVESTED IN NON-INVESTMENT GRADE BONDS
--------- --------------------------------------------------
<S> <C>
International Equity Up to 35% of the Portfolio's total assets
Portfolio of VI Trust
Income Opportunity Up to 100% of the Portfolio's total assets
Portfolio of VI Trust
Growth & Income Up to 5% of the Portfolio's total assets
Portfolio of SA Trust
Bond Portfolio of SA Trust Up to 35% of the Portfolio's total assets
</TABLE>
For more information about non-investment grade bonds, see "Medium and Lower
Rated and Unrated Securities" in the VI Trust Prospectus and in Part II of this
Prospectus.
MORE COMPLETE INFORMATION ABOUT THE SIX 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
12
<PAGE> 26
SHOULD READ THE VI TRUST PROSPECTUS AND PART II OF THIS PROSPECTUS IN
CONJUNCTION WITH THE INFORMATION REGARDING THE VARIABLE ACCOUNT CONTAINED
HEREIN.
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 portfolio 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.
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 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. In addition, the
Company reserves the right to operate Separate Account 1 as a management
investment company under the 1940 Act or any other form permitted by law or to
deregister Separate Account 1 under the 1940 Act in the event such registration
no longer is required.
THE FIXED ACCOUNT
Due to exemptive and exclusionary provisions, interests in the Fixed
Account have not been registered under the Securities Act of 1933 (the "1933
ACT") and the Company's general account has not been registered as an 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, an 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.
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<PAGE> 27
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 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."
MINIMUM/MAXIMUM INVESTMENTS
The purchase of a Non-Qualified Contract requires a minimum initial
Purchase Payment of $2,000. The minimum initial Purchase Payment for a Qualified
Contract is $1,000. Initial payments of $50 (or $600 annualized) are permitted
if such payments are made under an automatic or scheduled installment plan, such
as pre-authorized checking account deduction, salary deduction or electronic
funds transfer. 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
Touchstone Variable Annuity Service Center. The proposed Annuitant must be no
older than 85 years old. The Contract becomes effective on the Contract Date,
which is stated on page 3 of the Contract. The Contract Date will be the
Valuation Date on which the initial Purchase Payment and the Application Form
are received in good order at the Touchstone Variable Annuity Service Center, if
they are received by the close of regular trading on the NYSE. If they are
received after the close of regular trading on the NYSE, the effective date of
the Contract will be the following Valuation Date. Regular trading on the NYSE
usually closes at 4:00 p.m. Eastern Time.
If an incomplete Application Form is received, the Company will request
additional information to complete the application. If the Application Form
remains incomplete for five business days after its receipt, the Company will
return the initial Purchase Payment unless the purchaser consents to a delay.
FREE LOOK PRIVILEGE
A Contract may be returned for a refund within 10 days after the Owner
receives it (the "FREE LOOK PERIOD"). If the Owner chooses not to retain the
Contract, it must be returned to the Company at the Touchstone Variable Annuity
Service Center within the free look period. In such circumstances, the Company
will cancel the Contract and refund promptly an amount that in most cases will
be equal to the Owner's Contract Value, plus any amount deducted from the
initial Purchase Payment prior to allocation to the
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<PAGE> 28
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. Each Owner should
periodically review his or her allocations under the Contract in light of market
conditions and his or her own financial objectives.
The initial Purchase Payment is allocated as of the Contract Date. For all
subsequent Purchase Payments allocated to Sub-Accounts, 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
at the Touchstone Variable Annuity Service Center if received before the close
of regular trading on the NYSE on such Valuation Date. For payments received
after the close of regular trading on the NYSE, Accumulation Units will be
credited at the Accumulation Unit Value calculated as of the next Valuation
Date. Regular trading on the NYSE usually closes at 4:00 p.m. Eastern Time.
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 applicable Valuation Date. 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 procedure used to calculate Accumulation Unit Value for the
Sub-Accounts that invest in Portfolios of the VI Trust and the procedure used to
calculate Accumulation Unit Value for the Sub-Accounts that invest in Portfolios
of the SA Trust are described below. The procedures do not produce different
results. Rather, they reflect different accounting treatment at the Portfolio
level, with interests in the VI Trust being calculated on a per share basis and
interests in the SA Trust being calculated on a percentage basis.
ACCUMULATION UNIT VALUE -- VIT SUB-ACCOUNTS
The value of an Accumulation Unit at the close of any Valuation Period is
determined for each Sub-Account that invests in 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 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) equals:
(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
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<PAGE> 29
(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%) and the annual Contract Administration Charge
(0.15%).
ACCUMULATION UNIT VALUE -- GROWTH & INCOME AND BOND SUB-ACCOUNTS
The value of an Accumulation Unit at the close of any Valuation Period is
determined for the Growth & Income and Bond Sub-Accounts by multiplying the
Accumulation Unit Value at the close of the immediately preceding Valuation
Period by the "SAT NET INVESTMENT FACTOR" (described below). Depending upon
investment performance of the SAT Portfolio in which the Sub-Account is
invested, the Accumulation Unit Value may increase or decrease.
The SAT Net Investment Factor for each of the Growth & Income and Bond
Sub-Accounts for any Valuation Period is equal to one plus the net result of (a)
divided by (b) where:
(a) is the accrued gain or loss in the Sub-Account for the Valuation
Period, including investment income, capital gains and losses, adjusted
by:
(1) charging the Sub-Account a dollar amount representing the portion of
the annual Mortality and Expense Risk Charge (1.20%) and the annual
Contract Administration Charge (0.15%) that is allocable to the
Sub-Account for the Valuation Period, and
(2) charging or crediting the Sub-Account for any tax charge or tax
credit determined by the Company to have resulted from the investment
operations of the Sub-Account during the Valuation Period;
and
(b) is the value of the Sub-Account as of the close of the immediately
preceding Valuation Period.
FIXED ACCOUNT VALUE
Fixed Account Value is calculated on a daily basis, and consists of (1) the
sum of all Purchase Payments allocated to the Fixed Account, plus (2) any
Variable Account Value transferred to the Fixed Account, plus (3) interest
credited by the Company to the Fixed Account, less (4) any amounts transferred
from the Fixed Account to the Variable Account, less (5) any amounts withdrawn
for charges 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
An Owner may direct the Company, at any time prior to the Income Date, to
transfer automatically 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 an Owner subject to the following
requirements:
(1) The Contract Value must be at least $10,000.
(2) Each Dollar Cost Averaging transfer must be at least $200.
(3) Each allocation to a Sub-Account must be at least 5% of the amount
transferred.
(4) Dollar Cost Averaging must be effective for a period of at least 12
months.
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<PAGE> 30
All Dollar Cost Averaging transfers for all Contracts will be made
effective on the monthly or quarterly anniversary of the Contract Date as
requested by the Owner.
Owners may elect to participate in Dollar Cost Averaging by notifying the
Company in writing. Forms for this purpose are available from the Touchstone
Variable Annuity Service Center.
Dollar Cost Averaging will terminate when any of the following occurs: (1)
the number of designated transfers has been completed, (2) the portion of the
Contract Value in the Fixed Account or in the Standby Income Sub-Account is
insufficient to complete the next scheduled transfer, (3) the Owner requests
termination in writing, or (4) the Contract is terminated. The Company also
reserves the right to terminate Dollar Cost Averaging, on a prospective basis,
upon 30 days' written notice to Owners. There is no charge at this time for
Dollar Cost Averaging, but the Company reserves the right to charge a fee for
this service.
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.
(1) The minimum transfer amount is $250.
(2) Transfers among Sub-Accounts other than by Dollar Cost Averaging may be
made once every 30 days.
(3) Each allocation to a Sub-Account must be at least 5% of the amount
transferred.
(4) 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).
(5) 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 will effect transfers pursuant to proper written or telephone
instructions received at the Touchstone Variable Annuity Service Center which
clearly specify the requested changes. Requests received in good order at the
Touchstone Variable Annuity Service Center by the close of regular trading on
the NYSE on any Valuation Date will be effected that day. Requests received
after the close of regular trading on the NYSE will be effected on the next
Valuation Date. Regular trading on the NYSE usually closes at 4:00 p.m. Eastern
Time.
The Company will not honor telephone transfer instructions unless proper
authorization has been provided either (1) in the completed Application Form, or
(2) in a properly completed telephone transfer authorization form. If the proper
authorization is on file at the Touchstone Variable Annuity Service Center,
requests for transfers may be made by calling 1-800-669-2796 (press 2) between
8:00 a.m. and 4:00 p.m. Eastern Time on any Valuation Date. Telephone transfer
instructions 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.
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.
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."
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<PAGE> 31
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 reserves the
right to modify, suspend or discontinue the telephone transfer privilege at any
time and without prior notice.
SURRENDERS AND PARTIAL WITHDRAWALS
While the Contract is in force and prior to the Income Date or the death of
the Annuitant, the Company will, upon proper written notification by the Owner,
allow the Owner to surrender all, or withdraw part, of the Contract Value, less
any Surrender Charge 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 about 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; or
(4) The SEC, by order, permits postponement of payments for the protection
of security holders.
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 total Purchase
Payments made.
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 Owner or the Annuitant (as
applicable) reaching age 59 1/2. See "Tax Treatment of Withdrawals from
Non-Qualified Contracts" and "Tax Treatment of Withdrawals from Qualified
Contracts."
SYSTEMATIC WITHDRAWALS
An 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. Such systematic withdrawals will be accomplished by liquidating, on a pro
rata basis, Accumulation Units from all Sub-Accounts to which Contract Value is
allocated and value from the Fixed Account. Surrender Charges may apply to such
withdrawals. However, Accumulation Units representing only income earned on the
Contract will be liquidated first to satisfy systematic withdrawals, and no
Surrender Charges will apply to liquidations of such Accumulation Units.
Surrender Charges will apply, however, to systematic withdrawals that require
liquidation of Accumulation Units representing Purchase Payments. See "Surrender
Charge -- Free Amounts."
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<PAGE> 32
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
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 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 Owner or the Annuitant (as
applicable) reaching age 59 1/2. See "Tax Treatment of Withdrawals from
Non-Qualified Contracts" and "Tax Treatment of Withdrawals from Qualified
Contracts."
SELECTION OF ANNUITY INCOME OPTION
INCOME DATE SELECTION
The Income Date is the later of the Contract Anniversary on or following
the Annuitant's 80th birthday and the 10th Contract Anniversary, unless
otherwise indicated on page 3 of the Contract. The Income Date can be changed to
any date by written request to the Company, if such written request is received
on or prior to the scheduled Income Date. Special rules apply to the selection
of Income Dates for Qualified Contracts. See "Tax Treatment of Withdrawals from
Qualified Contracts."
ANNUITY PAYOUT PLANS
Annuity payments will be made to the payee(s) designated by the Owner. If
no payee is designated, the Annuitant 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 annuity payout plans specified in the Contract and
described below. A change of annuity payout plan is permitted prior to the
Income Date upon 31 days' prior written notice to the Company. In the absence of
an election, annuity payments will be made in accordance with Life income Plan
2A described below, with monthly payments guaranteed for ten years. Annuity
payments will be made monthly (or, if requested, quarterly, semiannually or
annually) except that: (1) proceeds of less than $1,000 shall be paid in a
single sum and (2) the Company may change the frequency of payment to avoid
periodic payments of less than $50.
The annuity payout plans currently available under the Contract are
described below.
<TABLE>
<S> <C>
Installment Income Plan 1A Fixed period -- Paid in equal monthly payments for the
number of years selected, but not more than 30 years.
Installment Income Plan 1B Fixed Amount -- Paid in equal monthly installments of $5 or
more for each $1,000 applied until the full amount, with
compound interest at not less than 3% a year, is used up.
Life Income Plan 2A One Life -- Paid in equal monthly payments during the
lifetime of the Annuitant. The Company guarantees payments
for either 10 years or 20 years, and for as long as the
Annuitant lives. The amount of the monthly payment is based
on the Annuitant's sex and age on the date of the first
payment and on the number of years for which payments are
guaranteed. Payments may not be commuted (i.e., paid in a
lump sum).
Life Income Plan 2B Joint and Survivor -- Paid in equal monthly payments during
the lifetimes of the Annuitant and another designated
person. Payments will continue as long as either person is
living. The amount of each payment is based on both persons'
sex and age on the date of the first payment. If either one
dies before the due date of the first payment, the Company
will make payments during the survivor's lifetime under Life
Income Plan 2A, with payments guaranteed for 10 years.
Payments may not be commuted.
</TABLE>
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<PAGE> 33
Unless limited in any jurisdiction by applicable state insurance laws, each
of the plans is available under Non-Qualified Contracts. Under a Qualified
Contract, Installment Income Plans 1A and 1B are available provided that any
period certain does not extend beyond the life expectancy of the Annuitant.
Under a Qualified Contract, Life Income Plans 2A and 2B are available, provided
that any period certain may not extend beyond the life expectancy of the
Annuitant or joint life expectancies of the Annuitants.
DEATH BENEFIT
If the Annuitant dies before the Income Date, the Company will pay a death
benefit to the Beneficiary designated by the Owner (the "DEATH BENEFIT"). The
Death Benefit will be calculated as of the Valuation Date on which satisfactory
proof of death and Death Benefit payment instructions are received in good order
by the Company (the "BENEFIT DETERMINATION DATE"). If the Company does not
receive Death Benefit payment instructions within 60 days of receipt of
satisfactory proof of death, it reserves the right to make payment of the Death
Benefit in a lump sum. No Surrender Charge is made in connection with the
payment of a Death Benefit.
If the Annuitant dies prior to the first day of the calendar month after
the Annuitant's 80th birthday, the Death Benefit will equal the greatest of (1)
the Contract Value on the Benefit Determination Date, (2) the sum of all
Purchase Payments less any amounts withdrawn (which include any Surrender Charge
thereon) and (3) if the Annuitant dies after the seventh Contract Anniversary,
the Contract Value on the most recent septennial Contract Anniversary (i.e.,
years 7, 14, 21, etc.), plus any Purchase Payments made since such Contract
Anniversary and less any amounts withdrawn (which include any Surrender Charge
thereon) since that Contract Anniversary.
If the Annuitant dies on or after the first day of the calendar month after
the Annuitant's 80th birthday (but before the Income Date), the Death Benefit
will equal the Contract Value on the Benefit Determination Date.
If the Annuitant dies after the Income Date, the benefits, if any,
remaining to be paid will depend upon the annuity payout plan in effect. See
"Annuity Payout Plans."
CHARGES
All charges under the Contract are described below.
PREMIUM TAXES
Certain states or other governmental entities impose premium taxes, with
rates that range up to 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> 34
CONTRACT MAINTENANCE CHARGE
On each Contract Anniversary before the Income Date, an annual Contract
Maintenance Charge is deducted from the Contract Value to cover such costs. 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 $35.
After the tenth Contract Anniversary the charge is the lesser of (a) $35 and (b)
0.17% of the Contract Value. This charge will be deducted by liquidating on a
pro-rata basis Accumulation Units from all Sub-Accounts to which Contract Value
is allocated and value from the Fixed Account. In states in which it has
received regulatory approval, the Company may waive, reduce or eliminate the
Contract Maintenance Charge.
CONTRACT ADMINISTRATION CHARGE
On each Valuation Date, the Company deducts from the Accumulation Unit
Value a Contract Administration Charge 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 CHARGES
As compensation for its assumption of mortality and expense risks, the
Company deducts from the Accumulation Unit Value Mortality and Expense Risk
Charges that are the daily equivalent of an effective annual rate of 1.20%.
These charges are not imposed against any portion of the Contract Value
allocated to the Fixed Account.
The Company bears a "MORTALITY RISK" because the Company is taking the risk
that its actuarial estimate of mortality rates may prove inaccurate. This would
result if the Annuitant lives longer than expected, or if the Annuitant dies
prior to the Income Date at a time when the Death Benefit guaranteed by the
Company is higher than the Contract Value. The Company bears an "EXPENSE RISK"
because the costs of issuing and administering Contracts may be greater than
expected when setting the administrative charges. Of the 1.20% total charge,
0.80% is for assuming the mortality risk and 0.40% is for assuming the expense
risk. The Company may realize a gain from the charge for these risks to the
extent that the charge is not needed to provide for benefits and expenses under
the Contracts.
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 in
connection with a systematic withdrawal of earnings), 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 (1) at the death of the Annuitant, or (2) 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.
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<PAGE> 35
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> <C>
less than 1.................................. 7%
1............................................ 7%
2............................................ 6%
3............................................ 5%
4............................................ 4%
5............................................ 2%
6............................................ 1%
7 and later.................................. 0%
</TABLE>
The Company reserves the right to reduce or eliminate the Surrender Charge
when Contracts are sold to a trustee, employer or similar entity pursuant to a
retirement plan or when Contracts are otherwise sold to a group such that the
Company saves sales expenses, 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.
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.
Annuitization (Commencement of Annuity Payments). A Surrender Charge is
also imposed if annuity payments begin during the first seven Contract Years.
However, if the Owner elects an Income Date that is at least two years after the
Contract Date and selects a payout plan with at least five years of level
payments, the Surrender Charge will be waived. If the Owner later (but within
seven years after the Contract Date) elects, where permitted, to take the
commuted value of the remaining payments, a Surrender Charge will be imposed at
the rates shown in the above table, calculated as of the date of commutation.
"Free" Amounts. Any Purchase 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 more than one year and for less than seven 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 for
amounts of eligible Purchase Payments not already withdrawn. Free withdrawal
amounts are deemed withdrawn on a first-in, first-out basis; that is,
withdrawals are deemed to come from the oldest Purchase Payments first. To the
extent that withdrawal amounts exceed the available "free" amounts, they also
will be taken from the oldest Purchase Payments first, with the Surrender Charge
being based on the number of years such Purchase Payments have been invested in
the Contract. With respect to Contracts owned by charitable remainder trusts,
the 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
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
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<PAGE> 36
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>
EXPENSE CAP
-----------
<S> <C>
VI TRUST
- ---------------------------------------------------------
Emerging Growth Portfolio................................ 1.15%
International Equity Portfolio........................... 1.25%
Income Opportunity Portfolio............................. 0.85%
Value Plus Portfolio..................................... 1.25%
Balanced Portfolio....................................... 0.90%
Standby Income Portfolio................................. 0.50%
SA TRUST
- ---------------------------------------------------------
Growth & Income Portfolio................................ 0.85%
Bond Portfolio........................................... 0.75%
</TABLE>
Operating expenses, for purposes of expense reimbursement, include fees of
the Advisor, fees of the Administrator, amortization of organizational expenses,
legal and accounting fees and Sponsor fees, but do not include interest, taxes,
brokerage commissions and other portfolio transaction expenses, capital
expenditures and extraordinary expenses. The Sponsor Agreements may be
terminated by the Sponsor as of the end of any calendar quarter 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 December 31, 1998.
OTHER INFORMATION
DISTRIBUTION OF THE CONTRACTS
Contracts are distributed through Touchstone Securities, Inc. (the
"DISTRIBUTOR"). The Distributor is a wholly-owned subsidiary of IFS Financial
Services, Inc. ("IFS") which is 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 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
23
<PAGE> 37
Accumulation Units in the Variable Account also will receive semiannual reports
containing financial statements for 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 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 Owner can instruct the
Company to vote. At least 14 days before such meeting, the Company will mail to
each Owner 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 Owners. The Company also will vote shares or interest it
holds in the Sub-Accounts that are not attributable to Owners in the same
manner. Under certain circumstances, the Company may be required by state
regulatory authorities to disregard voting instructions. This could happen if
such instructions would change the sub-classification or investment objectives
of the Portfolios, or result in approval or disapproval of an investment
advisory contract.
Under federal regulations, the Company also may disregard instructions to
vote for Owner-initiated changes in investment policies or the investment
advisor if the Company disapproves of the proposed changes. The Company would
disapprove of a proposed change only if it were contrary to state law,
prohibited by state regulatory authorities, or if the Company concluded that the
change would result in overspeculative or unsound investment practices. If the
Company disregards voting instructions, it will include a summary of its actions
in the next report to 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
24
<PAGE> 38
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
Touchstone Variable Annuity Service Center. The rights of the Owner and any
Beneficiary will be affected by an assignment, and the Company disclaims any
responsibility for the validity or tax consequences of any assignment.
LOANS
Loans may be permitted under Qualified Contracts purchased in connection
with a plan established under Section 403(b), if the plan documents 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.
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.
25
<PAGE> 39
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, (1) the
underlying assets meet the diversification standards prescribed elsewhere in the
Code for an entity to be classified as a regulated investment company and (2) no
more than 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 that established
diversification requirements for the investment portfolios such as the
Portfolios underlying variable contracts such as the Contracts. The regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described in
Section 817(h) of the Code. Under the Regulations, an investment portfolio will
be deemed adequately diversified if: (1) no more than 55% of the value of the
total assets of the investment portfolio is represented by any one investment;
(2) no more than 70% of the value of the total assets of the investment
portfolio is represented by any two investments; (3) no more than 80% of the
value of the total assets of the investment portfolio is represented by any
three investments; and (4) no more than 90% of the value of the total assets of
the investment portfolio is represented by any four investments.
The 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., the owner is 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, (1) the amounts accumulated
under a Contract must be distributed within five years, or (2) 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
26
<PAGE> 40
Contract and take distributions under the above rules as if the surviving spouse
were the original 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
traditional 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 traditional and Roth
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. 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 traditional individual retirement annuities (but not Roth
IRAs) 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% may be 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 a
traditional 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 Owner or Annuitant, as applicable, 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 traditional individual retirement annuities of the
Owner. The Owner has sole responsibility for requesting distributions under the
Qualified Contract or other traditional individual retirement annuities (to the
extent permitted by the Code) that will satisfy the minimum distribution rules.
In the case of a distribution from a Qualified Contract issued under a plan
which qualifies under Section 401 of the Code, the Company will not send a
notice when the Owner or Annuitant, as applicable, 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.
QUALIFIED CONTRACTS AND QUALIFIED PLANS
GENERAL
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), 408 or 408A of the Code ("QUALIFIED PLANS") and under plans which
qualify under Section 457 of the Code ("SECTION 457 PLANS"). Because of the
minimum purchase payment requirements, such Contracts may not be appropriate for
some retirement plans. Taxation of participants in each Qualified Plan varies
with the type of plan and terms and conditions of each specific plan.
Owners, Annuitants and Beneficiaries are cautioned that benefits under a
Qualified Plan usually are subject to the terms and conditions of such plan
regardless of the terms and conditions of Qualified Contracts issued pursuant to
such plan. Although the Company provides administration for Qualified Contracts,
it does not provide administrative support for Qualified Plans. Qualified
Contracts may include special provisions restricting Contract provisions that
may otherwise be available and described in this Prospectus. Generally,
Qualified Contracts issued pursuant to Qualified Plans are not transferable
except upon surrender or annuitization. Various
27
<PAGE> 41
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 from 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
from Qualified Contracts."
SECTION 403(b) PLANS
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includable in the gross income of
employees 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
"Withdrawal Limitations for Tax-Sheltered Annuities."
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. 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 the date of issue.
28
<PAGE> 42
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.
TRADITIONAL IRAS
The Code permits eligible individuals to contribute to an individual
retirement program known as an "Individual Retirement Annuity" ("IRA"). Subject
to applicable limitations, certain amounts contributed to a traditional IRA may
be deductible from the individual's gross income for federal income tax
purposes. A Qualified Contract can be used in connection with a traditional IRA
that is governed under Section 408 of the Code.
The maximum amount that may be contributed to all traditional IRAs for the
benefit of an individual for any tax year beginning on or after January 1, 1998
will generally be equal to the lesser of (a) $2,000 or (b) the compensation
includible in the individual's income (for federal income tax purposes) with
respect to such tax year.
A special rule applies if the individual for whom the contributions are
being made files a joint federal income tax return with his or her spouse for
the applicable tax year but has compensation includible in income (for federal
income tax purposes) with respect to such tax year that is less than the taxable
compensation of his or her spouse for such tax year (such as will occur when the
individual is a "nonworking spouse"). In such case, the maximum amount that may
be contributed to all traditional IRAs for such individual with respect to such
tax year can generally be up to the lesser of (a) $2,000 or (b) the sum of the
taxable compensation of such individual for such tax year plus the taxable
compensation of his or her spouse for such tax year (minus any deduction allowed
his or her spouse with respect to such tax year for contributions to traditional
IRAs and any contributions made by his or her spouse to Roth IRAs with respect
to such tax year).
Annual contributions cannot be made to a traditional IRA for an individual
after he or she has attained age 70 1/2.
Contributions to traditional IRAs in excess of the contribution limits
summarized above may be subject to certain tax penalties or other restrictions.
In determining the deduction limit on contributions made to all traditional
IRAs held for the benefit of an individual with respect to any tax year
beginning on or after January 1, 1998, the $2,000 limit noted above begins to be
phased out if (1) such individual (or, if applicable, his or her spouse) is an
active participant in an employer-provided tax-qualified retirement plan for a
plan year ending within such tax year and (2) his or her adjusted gross income
(for federal income tax purposes) with respect to such tax year exceeds a
certain amount (the "initial traditional IRA limit"). In addition, if the
individual is an active participant in an employer-provided tax-qualified
retirement plan for a plan year ending within such tax year, such $2,000 limit
is reduced to zero if such adjusted gross income is equal to or in excess of a
higher amount (the "totally phased out traditional IRA limit").
For this purpose, the initial traditional IRA limit for any tax year is
generally:
(1) $150,000 if the applicable individual is not an active participant in
an employer-provided tax-qualified retirement plan at any time in a
plan year ending within such tax year but whose spouse has been such an
active participant;
(2) $50,000 (increasing in stages in tax years beginning after 1998 until
it is $80,000 for tax years beginning in 2007 and thereafter) if the
applicable individual files a joint federal income tax return for such
tax year and has been an active participant in an employer-provided
tax-qualified retirement plan at any time in a plan year ending within
such tax year;
(3) $30,000 (increasing in stages in tax years beginning after 1998 until
it is $50,000 for tax years beginning in 2005 and thereafter) if the
applicable individual files a separate federal income tax return for
such tax year, is not married and has been an active participant in an
employer-provided tax-qualified retirement plan at any time in a plan
year ending within such tax year; or
29
<PAGE> 43
(4) $0 if the applicable individual files a separate federal income tax
return for such tax year, is married and has been an active participant
in an employer-provided tax-qualified retirement plan at any time in a
plan year ending within such tax year.
Further, for this purpose, the totally phased out traditional IRA limit for
any individual and with respect to any tax year prior to 2007 is an amount that
is $10,000 above the initial traditional IRA limit applicable to such individual
and tax year. The $10,000 amount will be increased to $20,000 with respect to a
tax year beginning in 2007 or later if the applicable individual files a joint
federal income tax return for such tax year.
Under certain conditions, distributions from other traditional IRAs or
Qualified Plans may be rolled over or transferred to a traditional IRA on a
tax-deferred basis. Traditional IRAs are subject to limitations on eligibility,
contributions, transferability and distributions. See "Tax Treatment of
Withdrawals from Qualified Contracts."
Sales of Contracts for use with traditional IRAs are subject to special
requirements imposed by the Code, including the requirement that certain
informational disclosure be given to persons desiring to establish a traditional
IRA. Purchasers of Contracts to be qualified as traditional IRAs should obtain
tax advice as to the tax treatment and suitability of such an investment.
ROTH IRAS
A Qualified Contract can also be used in connection with a Roth IRA that is
governed under Section 408A of the Code. Unlike a traditional IRA, no
contributions to a Roth IRA can, under any circumstances, be deducted by an
individual. Instead, all contributions made to a Roth IRA are nondeductible.
Subject to the following discussion, the maximum amount that may be
contributed to all Roth IRAs for the benefit of an individual with respect to
any tax year will generally be equal to the amount (if any) by which (1) the
lesser of $2,000 or the compensation includible in the individual's income (for
federal income tax purposes) with respect to such tax year exceeds (2) the
aggregate amount of contributions made for the benefit of such individual with
respect to such tax year to all traditional IRAs.
A special rule applies if the individual for whom the contributions are
being made files a joint federal income tax return with his or her spouse for
the applicable tax year but has an amount of compensation includible in income
(for federal income tax purposes) with respect to such tax year that is less
than the taxable compensation of his or her spouse for such tax year (such as
will occur when the individual is a "nonworking spouse"). In such case, subject
to the following discussion, the maximum amount that may be contributed to all
Roth IRAs for such individual with respect to such tax year can generally be up
to the amount (if any) by which (1) the lesser of $2,000 or the sum of the
taxable compensation of such individual for such tax year plus the taxable
compensation of his or her spouse for such tax year (minus any deduction allowed
his or her spouse with respect to such tax year for contributions to traditional
IRAs and any contributions made for his or her spouse to Roth IRAs with respect
to such tax year) exceeds (2) the aggregate amount of contributions made for the
benefit of such individual with respect to such tax year to all traditional
IRAs.
The maximum contribution amount that can be made to Roth IRAs for any
individual with respect to any tax year under the rules described above
generally begins to be phased out for such individual if his or her adjusted
gross income (for federal income tax purposes) with respect to such tax year
exceeds a certain amount (the "initial Roth IRA limit") and is reduced to zero
(so that no contributions can be made to Roth IRAs for his or her benefit for
such tax year) if his or her adjusted gross income for such tax year is equal to
or in excess of a higher amount (the "totally phased out Roth IRA limit").
For this purpose, the initial Roth IRA limit and the totally phased out
Roth IRA limit are generally:
(1) $150,000 and $160,000, respectively, if the applicable individual files
a joint federal income tax return for such tax year;
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(2) $95,000 and $110,000, respectively, if such individual files a separate
federal income tax return for such tax year and is not married; and
(3) $0 and $15,000, respectively, if such individual files a separate
return for such tax year and is married.
Unlike traditional IRAs, if otherwise permitted, annual contributions can
be made to Roth IRAs for an individual even after he or she has attained age
70 1/2.
Similar to traditional IRAs, contributions made to Roth IRAs in excess of
the contribution limits summarized above may be subject to certain tax penalties
or other restrictions.
Rollover Contributions to a Roth IRA. Under certain conditions described
in Sections 408(d)(3) and 408A(e) of the Code, an individual may be able to roll
over a distribution from a Roth IRA or a traditional IRA to a Roth IRA on a
tax-deferred basis during any tax year; except that such a rollover from a
traditional IRA to a Roth IRA can be made in a tax year only if (1) the
applicable individual's adjusted gross income (for federal income tax purposes)
with respect to such tax year is $100,000 or less and (2) such individual is not
a married individual filing a separate federal income tax return for such tax
year. Any proper rollover is not taken into account in determining the amount of
annual contributions made to Roth IRAs for purposes of the contribution limits
described above.
However, if any distribution from an individual's traditional IRA is rolled
over to a Roth IRA held for the benefit of such individual, the individual must
generally include in income (for federal income tax purposes) the amount of such
distribution. Under a special rule applicable to any such distribution made
before January 1, 1999, such distribution is included in income only ratably
over the four-tax year period beginning with the tax year in which the
distribution is made. No early distribution penalty tax under Section 72(t) of
the Code, which generally provides a 10% penalty in cases of distributions from
IRAs unless the applicable individual is age 59 1/2 or in certain other
situations, will apply to such a distribution.
Any individual considering a rollover to a Roth IRA should review the
conditions applicable to making such a rollover that are set forth in Sections
408(d)(3) and 408A(e) of the Code.
If an individual's traditional IRA is converted into a Roth IRA, it is
generally subject to the same tax rules and limits that would apply to a
distribution from a traditional IRA that is rolled over to a Roth IRA.
Like traditional IRAs, Roth IRAs are subject to limitations on eligibility,
contributions, transferability and distributions. See "Tax Treatment of
Withdrawals from Qualified Contracts." Sales of Contracts for use with Roth IRAs
are subject to special requirements imposed by the Code, including the
requirement that certain informational disclosure must be given to persons
desiring to establish a Roth IRA. Purchasers of Contracts to be qualified as
Roth IRAs 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 1998, indexed to reflect certain cost-of-living changes
for 1999 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 $10,000 for 1998, 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 as: amounts of allowable contributions; form,
manner and timing of distributions; vesting and nonforfeitability of interests;
nondiscrimi-
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nation in eligibility and participation, and the tax treatment of distributions,
withdrawals and surrenders. See "Tax Treatment of Withdrawals from Qualified
Contracts."
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE)
Employers that establish a Savings Incentive Match Plan for Employees (a
"SIMPLE IRA") 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 (not to exceed $6,000
annually) based on one of two schedules. The schedules are either (1) a dollar
for dollar matching contribution for all employees who make salary deferral
contributions based on the employee's salary deferral up to a maximum of 3% of
the employee's compensation, or (2) a 2% nonelective contribution for all
eligible employees based on compensation (which may not exceed $160,000 for
1998). 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 from 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 an employee will not be
includable in the employee's 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, subject to the reductions described below, the lesser of
$8,000 or 33 1/3% of gross income from the employer. Amounts so deferred may be
used by the employer to purchase Contracts pursuant to this Prospectus.
Contributions to a Section 457 Plan must be reduced by amounts (1) excluded
from income under Section 403(b) (tax sheltered annuities), Section 402(e)(3)
(elective salary deferrals under Section 401(k) or 403(b) plans), Section
402(h)(1)(B) (elective salary deferrals under Simplified Employee Pensions) or
Section 402(k) (SIMPLE IRAs) of the Code or (2) 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.
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. 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)).
FEDERAL INCOME TAXATION
GENERAL
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
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occur. Instead, an Owner is taxed only when a distribution occurs, either in the
form of a lump sum payment or as annuity payments under the payout plan
selected.
For a lump sum payment received as a total surrender (total redemption),
the recipient is taxed on the portion of the payment that exceeds the cost basis
of the Contract. For Non-Qualified Contracts, this cost basis is generally the
sum of the Purchase Payments. For a Qualified Contract, there may be no cost
basis in the Contract within the meaning of Section 72 of the Code. The taxable
portion of the lump sum payment is taxed at ordinary income tax rates.
For annuity payments under 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 (1) 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 (2) 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 is eligible to
elect not to have taxes withheld and so elects. 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.
Also, amounts that are "eligible rollover distributions" are subject to
mandatory withholding unless distributed as "direct rollovers." See "Tax
Treatment of Withdrawals from Qualified Contracts." Amounts so withheld will
vary among recipients depending upon the tax status of the recipient and the
type of payment.
Owners, Annuitants and Beneficiaries under the Contracts should seek
financial advice about the tax consequences of any withdrawals or other
distributions.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. An Owner
should therefore consult his or her tax advisors prior to assigning any
Contract.
TAX TREATMENT OF WITHDRAWALS FROM 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 10% penalty will apply to the income
portion of amounts received other than under the following circumstances:
(1) on or after the date the taxpayer reaches age 59 1/2;
(2) on or after the death of the Owner;
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(3) if the taxpayer is totally disabled (as defined in Section 72(m)(7) of
the Code);
(4) 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;
(5) amounts attributable to investment in the Contract prior to August 14,
1982; or
(6) under an immediate annuity within the meaning of Code Section 72(u)(4).
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 from Qualified
Contracts."
TAX TREATMENT OF WITHDRAWALS FROM QUALIFIED CONTRACTS
The discussion in this section applies to Qualified Plans other than
traditional and Roth IRAs. It does not apply to Section 457 Plans.
Distributions from Qualified Contracts purchased under Qualified Plans
generally are taxable as ordinary income, except to the extent allocable to an
employee's after-tax contributions. Special rules described below apply to
distributions from Qualified Contracts that are rolled over to a traditional
individual retirement account, a traditional individual retirement annuity or
another Qualified Plan.
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.
Rollover Distributions. 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.
A distribution is not an "eligible rollover distribution" and cannot be
paid as a direct rollover if (1) it represents the return of "after-tax"
employee contributions, (2) it is part of a series of payments made for a period
of ten years or more, (3) to the extent it is a "required minimum distribution"
that is made after age 70 1/2 and is required by law, or (4) it is made for
certain other reasons. The administrator of the Qualified Plan will provide
additional information about these tax rules when a distribution is made.
The Qualified Plan is required to give the Owner, Annuitant or Beneficiary
(as applicable) the choice of having payments that are eligible rollover
distributions paid in one of the following ways:
(1) a "direct rollover" to a traditional IRA or to certain other types of
Qualified Plans, or
(2) a "direct payment" to the Owner, Annuitant or Beneficiary.
Direct Rollovers. If a direct rollover is chosen, the payment will be made
directly to the traditional IRA or other Qualified Plan. Such payment 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 traditional IRA or other
Qualified Plan. Nonspouse Beneficiaries cannot elect direct rollovers.
Direct Payments. If a payment to the 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
Owner, Annuitant or Beneficiary will be taxed on the payment for the year it is
made unless he or she rolls the payment
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over to a traditional IRA or certain other types of Qualified Plans within 60
days of receiving the payment. Nonspouse Beneficiaries cannot make such
rollovers. If the 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.
TAX TREATMENT OF DISTRIBUTIONS FROM ROTH IRAS
Any distribution from a Roth IRA that is considered a qualified
distribution is not includible in income for federal income tax purposes and
hence also is not subject to the early distribution penalty tax under Section
72(t) of the Code.
A distribution from a Roth IRA is treated as a "qualified distribution" for
this purpose if (1) it is made after the end of the five-tax year period
beginning with the first tax year for which a contribution was made to a Roth
IRA for the benefit of the applicable individual (or, to the extent any portion
of such distribution is allocable to a rollover contribution, if it is made
after the end of the five-tax year period beginning with the tax year in which
the rollover contribution was made) and (2) it meets one of the following
conditions:
(a) It is made on or after the date the individual attains age 59 1/2;
(b) It is made to a beneficiary or the individual's estate on or after the
death of the individual;
(c) It is attributable to the individual's being disabled (within the
meaning of Section 72(m)(7) of the Code); or
(d) It meets the conditions of a "qualified first-time homeowner
distribution," which are summarized below. See "Penalty Tax on
Withdrawals from Qualified Contracts and IRAs."
Any distribution from a Roth IRA that is not considered a qualified
distribution under the above rules is generally excluded from income (for
federal income tax purposes) to the extent it does not, when added to all
previous distributions from such Roth IRA, exceed the aggregate amount of
contributions made to such Roth IRA and is included in income (and may be
subject to the early distribution penalty tax under Section 72(t) of the Code)
to the extent it does exceed such amount.
PENALTY TAX ON WITHDRAWALS FROM QUALIFIED CONTRACTS AND IRAS
Section 72(t) of the Code imposes a 10% penalty tax on the taxable portion
of any distribution from a Qualified Plan or an IRA, including Contracts issued
in connection with plans that are qualified under Code Sections 401, 403(b), 408
and 408A. 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 IRA or to another eligible Qualified Plan, no tax penalty will
be imposed.
In addition, the tax penalty will not apply to the following distributions:
(1) distributions made on or after the date on which the Owner or Annuitant
(as applicable) reaches age 59 1/2;
(2) distributions following the death or disability of the Owner or
Annuitant (as applicable) (disability is defined in Section 72(m)(7) of
the Code);
(3) distributions that are part of substantially equal periodic payments
made not less frequently than annually for the life (or life
expectancy) of the Owner or Annuitant (as applicable) or the joint
lives (or joint life expectancies) of such 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 Owner or Annuitant separates from service);
(4) for Qualified Plans other than IRAs, distributions to an Owner or
Annuitant (as applicable) who has separated from service after
attaining age 55;
(5) distributions made to the 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 Owner or Annuitant (as
applicable) for amounts paid during the taxable year for medical care;
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(6) for Qualified Plans other than IRAs, distributions made to an alternate
payee pursuant to a qualified domestic relations order;
(7) distributions to unemployed individuals for health insurance premiums
under certain conditions;
(8) for traditional IRAs and Roth IRAs, "qualified educational
distributions"; and
(9) for traditional IRAs and Roth IRAs, "qualified first-time homeowner
distributions."
A "qualified educational distribution" refers to any distribution received
by an individual to the extent it does not exceed the expenses for tuition,
fees, books, supplies, and equipment required for the enrollment or attendance
of the individual, his or her spouse or any child or grandchild of the
individual or his or her spouse at a qualified post-secondary institution of
education (less certain scholarships or other assistance received for the same
expenses).
A "qualified first-time homeowner distribution" refers to any distribution
received by an individual to the extent it is used by him or her, before the
close of the 120th day after the day on which it is received, to pay the costs
of acquiring, constructing or reconstructing a principal residence of a
first-time homebuyer who is such individual, his or her spouse or any child,
grandchild or ancestor of such individual or his or her spouse. No more than
$10,000 can be excluded in the aggregate from the early distribution penalty tax
by an individual under this exception over all tax years.
REQUIRED DISTRIBUTIONS FROM QUALIFIED CONTRACTS, IRAS AND SECTION 457 PLANS
Distributions from a Qualified Contract issued in connection with a
Qualified Plan or a traditional IRA generally must commence by April 1 of the
calendar year after the calendar year in which the Owner or Annuitant, as
applicable, 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 a traditional IRA). Distributions from a
Qualified Contract issued in connection with a traditional 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
Owner or Annuitant, as applicable, reaches age 70 1/2 even if he or she has not
terminated employment.
Required distributions must be made in minimum annual amounts determined
under rules issued pursuant to the Code. See "Required Distributions."
Other rules apply to a Qualified Contract issued in connection with a
Qualified Plan or a traditional IRA to determine when and how required minimum
distributions must be made in the event of the death of the Owner or Annuitant.
The plan or IRA documents will contain such rules. In addition, if the Owner's
or Annuitant's surviving spouse is the beneficiary of the interest in the
Qualified Plan or the traditional 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
IRA or to treat a traditional IRA as his or her own.
Under certain conditions, distributions from other traditional IRAs and
other Qualified Plans may be rolled over or transferred on a tax-deferred basis
into a traditional 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.
Roth IRAs. A Roth IRA is not subject to the requirements governing
distributions and they will not apply unless the applicable Roth IRA document
itself imposes such requirements. However, minimum distributions may be required
from a Roth IRA after the death of the individual for whose benefit the Roth IRA
was established, in accordance with the rules of the Code and the IRS. In
general, such rules appear to require that the funds held under the individual's
Roth IRA be completely distributed by the end of the calendar year in which the
fifth annual anniversary of the date of the death of the individual occurs. As
an alternative, if distributions to the individual's beneficiary as designated
under the Roth IRA begin by the end of the calendar year immediately following
the calendar year in which the individual's death occurs (or, if the designated
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beneficiary is the individual's surviving spouse, by the later of the end of the
calendar year immediately following the calendar year in which the individual
dies or the end of the calendar year in which the individual would have attained
age 70 1/2), distributions from the individual's Roth IRA may be able to be made
over a period not extending beyond the life (or life expectancy) of the
designated beneficiary.
Section 457 Plans. 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
Owner or Annuitant, distributions must be made over a period not exceeding 15
years (or, if greater, the life expectancy of the surviving spouse if that
spouse is the beneficiary).
WITHDRAWAL LIMITATIONS FOR SIMPLE IRAS
Because contributions to a SIMPLE IRA are placed in traditional IRAs, many
of the traditional 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.
WITHDRAWAL LIMITATIONS FOR TAX-SHELTERED ANNUITIES
Effective January 1, 1989, the Code limits the withdrawal of amounts
attributable to contributions made pursuant to a salary reduction agreement (as
defined in Section 403(b) (11) of the Code) to circumstances only: (1) when the
Owner attains age 59 1/2; (2) separates from service; (3) dies; (4) becomes
disabled (within the meaning of Section 72(m)(7) of the Code); or (5) in the
case of hardship. However, withdrawals for hardship are restricted to the
portion of the Owner's Contract Value which represents contributions by the
Owner and does not include any investment results. The limitations on
withdrawals apply only to salary reduction contributions made after December 31,
1988 and to income attributable to such contributions and to income attributable
to amounts held as of December 31, 1988. The limitations on withdrawals do not
affect rollovers between certain Qualified Plans. Owners should consult their
own tax counsel or other tax advisor regarding any distributions.
LEGAL PROCEEDINGS
There are no material legal proceedings, other than ordinary routine
litigation incidental to the businesses of the Company, Separate Account 1, 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 and of Separate Account 1 may be found
in the Statement of Additional Information, which may be obtained without charge
by calling the Touchstone Variable Annuity Service Center at 1-800-669-2796
(press 2).
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PART II -- DISCUSSION OF SELECT ADVISORS PORTFOLIOS
SUMMARY
GENERAL
Select Advisors Portfolios (the "SA TRUST") is a diversified, open-end
management investment company which was organized as a trust under the laws of
the State of New York on February 7, 1994. The SA Trust includes nine separate
portfolios, two of which, the Growth & Income Portfolio and the Bond Portfolio
(each as "SAT PORTFOLIO" and collectively 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.
For further information regarding the investment objectives, policies and
restrictions of each of the SAT Portfolios, see "Investment Objectives, Policies
and Restrictions." 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.
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 foreign
issuers and governments, the Portfolio may face risks that are different from
those associated with investment in domestic securities. The Growth & Income
Portfolio and Bond Portfolio may invest up to 5% and 35%, respectively, of its
total assets in non-investment grade bonds, commonly known as junk bonds. These
bonds 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. For additional information, see "Investment Objectives,
Policies and Restrictions" and "Investment Techniques, Risk Factors and
Investment Restrictions."
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."
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 Owners only in an interest in the corresponding SAT
Portfolio.
Owners electing to allocate a portion of their Purchase Payments to the
Variable Account acquire interests in the Sub-Account(s) that they select. Each
Sub-Account, in turn, holds an interest in the corresponding SAT Portfolio.
Owners do not invest directly in the corresponding SAT Portfolio. See "Purchase
Payments."
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<PAGE> 52
Similarly, Owners that surrender or make withdrawals from their Contracts do not
directly redeem interests in the Portfolios. See "Surrenders and Partial
Withdrawals."
Although Owners who allocate all or any portion of their Purchase Payments
to the Growth & Income and Bond 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 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
securities held by the Portfolio. 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 periods 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 in the SA Trust's Statement of
Additional Information. The Annual Report, which includes further information
about each Portfolio's performance, is available without charge and upon request
by calling (800) 669-2796.
<TABLE>
<CAPTION>
GROWTH & INCOME PORTFOLIO BOND PORTFOLIO
------------------------------------- -------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1997 1996 1995 1994(A) 1997 1996 1995 1994(A)
- --------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratios and supplemental data (b):
Net assets at end of period
(000's)....................... $46,563 $21,971 $13,894 $9,923 $24,684 $14,979 $12,304 $10,104
Ratios to average net assets:
Expenses........................ 0.85% 0.85% 0.85% 0.85% 0.75% 0.75% 0.75% 0.75%
Net investment income........... 1.28% 1.07% 1.27% 2.06% 6.28% 6.16% 6.91% 6.76%
Expenses, without waiver and
reimbursement................. 1.47% 1.71% 1.77% 2.94% 1.49% 1.72% 1.58% 2.67%
Portfolio turnover................ 153% 69% 96% 0% 79% 79% 80% 0%
Average commission rate (c)....... $0.0551 $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
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<PAGE> 53
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, 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 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 "Investment Techniques, Risk Factors
and Investment Restrictions -- 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:
<TABLE>
<CAPTION>
TYPE OF FIXED INCOME INSTRUMENTS RATINGS LIMITATION
-------------------------------- ------- ----------
<S> <C> <C>
Convertible Fixed Income Instruments.... Rated as least Ba by Up to 20% of the
Moody's or BB by S&P Portfolio's total assets
Non-convertible Fixed Income
Instruments........................... Rated at least Baa by Up to 20% of the
Moody's or BBB by S&P Portfolio's total assets
Non-convertible Fixed Income
Investments........................... Rated below Baa by Up to 5% of the
Moody's or BBB by S&P Portfolio's total assets
</TABLE>
See "Investment Techniques, Risk Factors and Investment
Restrictions -- Convertible Securities" and "-- Medium and Lower Rated 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 "Investment Techniques, Risk Factors and Investment
Restrictions -- 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 "Investment Techniques,
Risk Factors and Investment Restrictions -- Standard & Poor's Depositary
Receipts."
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<PAGE> 54
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 the following types of securities: 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. The Portfolio 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. The market value of
debt securities held by the Portfolio and the net asset value of the Portfolio
will be affected by general changes in interest rates. The market value of debt
securities held by the Portfolio can be expected to vary inversely to changes in
prevailing interest rates. See "Medium and Lower-Rated and Unrated Securities"
and "-- Fixed-Income and Other Debt 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."
The average maturity of the Portfolio will be between five and fifteen
years. The average maturity of the Portfolio's holdings may be shortened in
order to preserve capital if the Portfolio Advisor anticipates a rise in
interest rates. Conversely, the maturity may be lengthened to maximize returns
if interest rates are expected to decline.
GENERAL
The investment objective of an SAT Portfolio may be changed without the
approval of the investors in the Portfolio, but not without 30 days prior
written notice to the investors in the Portfolio (and notice by the
corresponding Sub-Account to its Owners). If a Sub-Account's investment
objective is changed, an Owner should consider whether the Sub-Account remains
an appropriate investment in light of his or her then-current financial position
and needs. There can, of course, be no assurance that the investment objective
of any SAT Portfolio will be achieved.
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 Growth & Income or Bond Sub-Account
should be aware that these differences may result in differences in returns
41
<PAGE> 55
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).
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 solicit voting instructions of each Owner who has allocated Contract Value
to the Sub-Account and will cast all of the votes of the Sub-Account in the same
proportion as the voting instructions received from Owners. Owners who do not
provide voting instructions will not affect the Sub-Account's vote at the
Portfolio meeting. The percentage of a Sub-Account's votes representing Owners
not providing voting instructions will be voted by the Company in the same
proportion as the Sub-Account Owners who do, in fact, provide voting
instructions.
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.
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), to serve as the investment advisor to
each of the SAT Portfolios.
Under the terms of the investment advisory agreement between the SA Trust
and the Advisor (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. Each Portfolio Advisor makes all the
day-to day decisions to purchase and sell particular portfolio securities.
For its services, the Advisor receives an advisory fee from each SAT
Portfolio. The Advisor in turn pays each Portfolio Advisor a fee for its
services. The Advisor or any Portfolio Advisor may waive any or all of its
advisory fees.
The allocation of the fees paid by the SAT Portfolios 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
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<PAGE> 56
daily and paid monthly at an annual rate equal to the percentage specified below
of the value of the average daily net assets of the SAT Portfolio:
<TABLE>
<CAPTION>
GROWTH & INCOME PORTFOLIO
-------------------------
<S> <C>
Advisor................................................ 0.80% on the first $150 million
0.75% thereafter
Portfolio Advisor
Scudder Kemper Investments, Inc...................... 0.50% on the first $150 million
0.45% thereafter
</TABLE>
<TABLE>
<CAPTION>
BOND PORTFOLIO
--------------
<S> <C>
Advisor................................................ 0.55%
Portfolio Advisor
Fort Washington Investment Advisors, Inc............. 0.30%
</TABLE>
Fort Washington Investment Advisors, Inc. ("FORT WASHINGTON") is an
affiliate of the Advisor, and the Advisor may be 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.
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.
SCUDDER KEMPER INVESTMENTS, INC. ("SCUDDER KEMPER") serves as the
Portfolio Advisor to the Growth & Income Portfolio. Scudder, Stevens & Clark,
Inc, ("Scudder"), which registered in 1943 as an investment advisor under the
Investment Advisers Act of 1940, as amended (the "ADVISERS ACT"), served as the
Portfolio Advisor to the Portfolio until December 31, 1997. As of December 31,
1997, a strategic alliance between Scudder and Zurich Group ("Zurich") was
completed, the operations of Scudder and Zurich Kemper Investments, Inc, a
subsidiary of Zurich, were combined, and the combined operations were named
Scudder Kemper Investments, Inc. Scudder Kemper is owned 69.5% by Zurich and
30.5% by senior employees of Scudder Kemper. Scudder Kemper provides investment
advisory services to mutual fund investors, retirement and pension plans,
institutional and corporation clients, insurance companies, and private family
and individual accounts. As of December 31, 1997, Scudder Kemper had assets
under management of more than $200 billion. Zurich is a leading, internationally
recognized provider of insurance and financial services in non-life and life
insurance, and reinsurance as well as asset management.
Robert T. Hoffman, Lori Ensinger, 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.
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 Kemper's principal
executive officers are located at 345 Park Avenue, New York, New York.
Scudder Kemper 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
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<PAGE> 57
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.
FORT WASHINGTON serves as the Portfolio Advisor to the Bond Portfolio.
Fort Washington is a wholly-owned subsidiary of The Western and Southern Life
Insurance Company. Fort Washington has been registered as an investment advisor
under the Advisers Act since 1990. Fort Washington provides investment advisory
services to individual and institutional clients. As of December 31, 1997, Fort
Washington had assets under management of $9 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. Fort Washington's
principal executive offices are located at 420 East Fourth Street, Cincinnati,
Ohio 45202.
INVESTMENT TECHNIQUES, RISK FACTORS
AND INVESTMENT RESTRICTIONS
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.
Foreign Securities
Investing in securities issued by foreign companies and governments
involves considerations and potential risks not typically associated with
investing in obligations issued by the U.S. government and domestic
corporations. Less information may be available about foreign companies than
about domestic companies and foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.
Risks Associated with Emerging Markets Securities
"Emerging markets" securities include the securities of issuers based in
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.
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<PAGE> 58
So long as the Communist Party continues to exercise a significant or, in
some cases, 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, 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.
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.
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.
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. As a result, investors in the Portfolio should anticipate that
the market value of the obligations held by the Portfolio generally will
increase when prevailing interest rates are declining and generally will
decrease when prevailing interest rates are rising. Investors in the Portfolio
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
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<PAGE> 59
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."
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.
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
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credit quality of the securities held by the Portfolio and increasing the
exposure of the Portfolio to the risks of lower rated securities. Investments in
zero coupon bonds may be more speculative and subject to greater fluctuations in
value due to changes in interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Portfolio, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event will require sale of these securities by the
Portfolio, but the Portfolio Advisor will consider this event in its
determination of whether the Portfolio should continue to hold the securities.
U.S. Government Securities
Each Portfolio may invest in U.S. Government securities, which are
obligations issued or guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities. Some U.S. government securities, such as U.S.
Treasury bills, Treasury notes and Treasury bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States. Others are supported by: (i) the right of
the issuer to borrow from the U.S. Treasury, such as securities of the Federal
Home Loan Banks; (ii) the discretionary authority of the U.S. government to
purchase the agency's obligations, such as securities of the FNMA; or (iii) only
the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. Government will provide
financial support in the future to U.S. government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States.
Securities guaranteed as to principal and interest by the U.S. government,
its agencies, authorities or instrumentalities include: (i) securities for which
the payment of principal and interest is backed by an irrevocable letter of
credit issued by the U.S. Government or any of its agencies, authorities or
instrumentalities; and (ii) participation interests in loans made to foreign
governments or other entities that are so guaranteed. The secondary market for
certain of these participation interests is limited and, therefore, may be
regarded as illiquid.
Mortgage Related Securities
Each Portfolio may invest in mortgage related securities. There are several
risks associated with mortgage related securities generally. One is that the
monthly cash inflow from the underlying loans may not be sufficient to meet the
monthly payment requirements of the mortgage related security.
Prepayment of principal by mortgagors or mortgage foreclosures will shorten
the term of the underlying mortgage pool for a mortgage related security. Early
returns of principal will affect the average life of the mortgage related
securities remaining in a Portfolio. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. In periods of rising interest rates, the rate of
prepayment tends to decrease, thereby lengthening the average life of a pool of
mortgage related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life of
a pool. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of a Portfolio. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that a Portfolio will have to reinvest the proceeds of prepayments at
lower interest rates than those at which the assets were previously invested. If
this occurs, a Portfolio's yield will correspondingly decline. Thus, mortgage
related securities may have less potential for capital appreciation in periods
of falling interest rates than other fixed-income securities of comparable
maturity, although these securities may have a comparable risk of decline in
market value in periods of rising interest rates. To the extent that a Portfolio
purchases mortgage related securities at a premium, unscheduled prepayments,
which are made at par, will result in a loss equal to any unamortized premium.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage related securities. Payments of principal and interest on the mortgages
are passed through to the holders of the CMOs on the same schedule as 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
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invests, the investment may be subject to a greater or lesser risk of prepayment
than other types of mortgage related securities.
Mortgage related securities may not be readily marketable. To the extent
any of these securities are not readily marketable in the judgment of the
Portfolio Advisor, the investment restriction limiting a Portfolio's investment
in illiquid instruments to not more than 15% of the value of its net assets will
apply.
Stripped Mortgage Related Securities
These securities are either issued and guaranteed, or privately-issued but
collateralized by securities issued, by GNMA, FNMA or FHLMC. These securities
represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only") on
mortgage related certificates issued by GNMA, FNMA or FHLMC, as the case may be.
The certificates underlying the stripped mortgage related securities represent
all or part of the beneficial interest in pools of mortgage loans. The Portfolio
will invest in stripped mortgage related securities in order to enhance yield or
to benefit from anticipated appreciation in value of the securities at times
when its Portfolio Advisor believes that interest rates will remain stable or
increase. In periods of rising interest rates, the expected increase in the
value of stripped mortgage related securities may offset all or a portion of any
decline in value of the securities held by the Portfolio.
Investing in stripped mortgage related securities involves the risks
normally associated with investing in mortgage related securities. See "Mortgage
Related Securities" above. In addition, the yields on stripped mortgage related
securities are extremely sensitive to the prepayment experience on the mortgage
loans underlying the certificates collateralizing the securities. If a decline
in the level of prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal will be
accelerated, thereby reducing the yield to maturity on interest-only stripped
mortgage related securities and increasing the yield to maturity on
principal-only stripped mortgage related securities. Sufficiently high
prepayment rates could result in a Portfolio not fully recovering its initial
investment in an interest-only stripped mortgage related security. Under current
market conditions, the Portfolio expects that investments in stripped mortgage
related securities will consist primarily of interest-only securities. Stripped
mortgage related securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that the Portfolio will be able to effect a trade of a stripped mortgage related
security at a time when it wishes to do so. The Portfolio will acquire stripped
mortgage related securities only if a secondary market for the securities exists
at the time of acquisition. Except for stripped mortgage related securities
based on fixed rate FNMA and FHLMC mortgage certificates that meet certain
liquidity criteria established by the Board of Trustees, the Portfolios will
treat stripped mortgage related securities as illiquid and will limit its
investments in these securities, together with other illiquid investments, to
not more than 15% of net assets.
Zero Coupon Securities
Zero coupon U.S. Government securities are debt obligations that are issued
or purchased at a significant discount from face value. The discount
approximates the total amount of interest the security will accrue and compound
over the period until maturity or the particular interest payment date at a rate
of interest reflecting the market rate of the security at the time of issuance.
Zero coupon securities do not require the periodic payment of interest. These
investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a 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"),
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which are issued by the U.S. Treasury as component parts of U.S. Treasury bonds
and represent scheduled interest and principal payments on the bonds.
Custodial Receipts
Custodial receipts or certificates, such as Certificates of Accrual on
Treasury Securities ("CATS"), Treasury Investors Growth Receipts ("TIGRs") and
Financial Corporation certificates ("FICO Strips"), are securities underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, authorities or instrumentalities. The
underwriters of these certificates or receipts purchase a U.S. Government
security and deposit the security in an irrevocable trust or custodial account
with a custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the U.S. Government Security. Custodial receipts evidencing specific
coupon or principal payments have the same general attributes as zero coupon
U.S. Government securities, described above. Although typically under the terms
of a custodial receipt a Portfolio is authorized to assert its rights directly
against the issuer of the underlying obligation, the Portfolio may be required
to assert through the custodian bank such rights as may exist against the
underlying issuer. Thus, if the underlying issuer fails to pay principal and/or
interest when due, a Portfolio may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Portfolio had
purchased a direct obligation of the issuer. In addition, if the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
respect of any taxes paid.
When-Issued and Delayed-Delivery Securities
To secure prices deemed advantageous at a particular time, each Portfolio
may purchase securities on a when-issued or delayed-delivery basis, in which
case delivery of the securities occurs beyond the normal settlement period;
payment for or delivery of the securities would be made prior to the reciprocal
delivery or payment by the other party to the transaction. A Portfolio will
enter into when-issued or delayed-delivery transactions for the purpose of
acquiring securities and not for the purpose of leverage. When-issued securities
purchased by the Portfolio may include securities purchased on a "when, as and
if issued" basis under which the issuance of the securities depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring.
Securities purchased on a when-issued or delayed-delivery basis may expose
a Portfolio to risk because the securities may experience fluctuations in value
prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.
Real Estate Investment Trusts
The Growth & Income Portfolio may invest in REITs, 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.
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Standard & Poor's Depositary Receipts
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.
Repurchase Agreements
Each of the Portfolios may engage in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, a Portfolio would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Portfolio's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Portfolio's holding period. A Portfolio may enter into repurchase
agreements with respect to U.S. government securities with member banks of the
Federal Reserve System and certain non-bank dealers approved by the respective
Board of Trustees. Under each repurchase agreement, the selling institution is
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. The Portfolio Advisor, acting
under the supervision of the Advisor and the Board of Trustees, reviews on an
ongoing basis the value of the collateral and the creditworthiness of those
non-bank dealers with whom the Portfolio enters into repurchase agreements. In
entering into a repurchase agreement, a Portfolio bears a risk of loss in the
event that the other party to the transaction defaults on its obligations and
the Portfolio is delayed or prevented from exercising its rights to dispose of
the underlying securities, including the risk of a possible decline in the value
of the underlying securities during the period in which the Portfolio seeks to
assert its rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or a part of the income from
the agreement. Repurchase agreements are considered to be collateralized loans
under the 1940 Act.
Reverse Repurchase Agreements and Forward Roll Transactions
The Portfolios may enter into reverse repurchase agreements and forward
roll transactions. In a reverse repurchase agreement the Portfolio agrees to
sell portfolio securities to financial institutions such as banks and
broker-dealers and to repurchase them at a mutually agreed date and price.
Forward roll transactions are equivalent to reverse repurchase agreements but
involve mortgage-backed securities and involve a repurchase of a substantially
similar security. At the time the Portfolio enters into a reverse repurchase
agreement or forward roll transaction it will place in a segregated custodial
account cash 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
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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 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: securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities (including those
purchased in the form of custodial receipts), repurchase agreements,
certificates of deposit, master notes, time deposits 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.
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
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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.
Futures Contracts and Related Options
Each Portfolio may enter into futures contracts and purchase and write
(sell) options on these contracts, including but not limited to interest rate,
securities index and foreign currency futures contracts and put and call options
on these futures contracts. These contracts will be entered into only upon the
concurrence of the Portfolio Advisor that such contracts are necessary or
appropriate in the management of the Portfolio's assets. These contracts will be
entered into on exchanges designated by the Commodity Futures Trading Commission
("CFTC") or, consistent with CFTC regulations, on foreign exchanges. These
transactions may be entered into for bona fide hedging and other permissible
risk management purposes including protecting against anticipated changes in the
value of securities a Portfolio intends to purchase.
No Portfolio will hedge more than 25% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. In addition, no
Portfolio will buy futures or write puts whose underlying value exceeds 25% of
its total assets, and no Portfolio will buy calls with a value exceeding 5% of
its total assets.
A Portfolio will not enter into futures contracts and related options for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's assets after taking into account unrealized profits and
unrealized losses on any contracts it has entered into.
A Portfolio may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the
Portfolio's futures and options positions may not prove to be perfectly or even
highly correlated with changes in the value of its portfolio securities.
Successful use of futures and related options is subject to a Portfolio
Advisor's ability to predict correctly movements in the direction of the
securities markets generally, which ability may require different skills and
techniques than predicting changes in the prices of individual securities.
Moreover, futures and options contracts may only be closed out by entering into
offsetting transactions on the exchange where the position was entered into (or
a linked exchange), and as a result of daily price fluctuation limits there can
be no assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a 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
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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.
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, 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
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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.
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 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. The following are summaries of some of these
restrictions. The full text of all of the restrictions is set forth in the
Statement of Additional Information.
1. Neither Portfolio may, 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 or acquire more than 10% of the outstanding voting
securities of any one issuer, except U.S. Government securities.
2. Neither Portfolio may invest more than 25% of its total assets in
securities of issuers in any one industry.
3. 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.
Neither Portfolio may purchase securities while borrowings exceed 5% of
the value of the Portfolio's total assets.
4. Neither 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).
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 1997 and 1996 were 153% and 82% and 79% and 79%, respectively.
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<PAGE> 68
MANAGEMENT OF THE SA TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the SA Trust rests
with its Board of Trustees. The Trustees approve all significant agreements
between the SA Trust and the persons and companies that furnish services to the
SA Trust and the Portfolios, including agreements between the SA Trust and each
of the Custodian, the Advisor and the Administrator. Due to the services
provided by the Advisor and the Administrator, the Trust 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.
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 (1) by the Sponsor as of the end of any calendar quarter on not less
than 30 days prior written notice or (2) by the SA Trust 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 December 31, 1998.
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 pays 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.
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
55
<PAGE> 69
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 CAP"). The Sponsor's
obligation to reimburse the SA Trust for such amounts may be terminated by the
Sponsor as of the end of any calendar quarter by giving at least 30 days prior
written notice.
PURCHASE AND VALUATION
PURCHASE
Interests in the Growth & Income and Bond Portfolios are not offered to the
public and are issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of the 1933
Act. Investments in the Growth & Income and Bond Portfolios may be made only by
a limited number of insurance company separate accounts. This Prospectus and its
accompanying Statement of Additional Information do not constitute an offer to
sell, or the solicitation of an offer to buy, any "security" (within the meaning
of the 1933 Act) of the Portfolios.
VALUATION
The net asset value of each SAT Portfolio is determined as of the close of
regular trading on the NYSE on each day on which the NYSE is open for trading,
by deducting the amount of the Portfolio's liabilities from the value of its
assets. At the close of each such business day, the value of each Sub-Account's
interest in the Portfolio will be determined by multiplying the net asset value
of the corresponding Portfolio by the percentage, effective for that day, that
represents the Sub-Account's share of the aggregate interests in that Portfolio.
Generally, a Portfolio's investments are valued at market value or, in the
absence of a market value, at fair value as determined by or under the direction
of the SA Trust's Board of Trustees.
Securities that are primarily traded on foreign exchanges are generally
valued at the preceding closing values of the securities on their respective
exchanges, except that, when an occurrence subsequent to the time a value was so
established is likely to have changed that value, the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Board of Trustees of the SA Trust. A security that is primarily
traded on a domestic 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.
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<PAGE> 70
ADDITIONAL INFORMATION
DESCRIPTION OF BENEFICIAL INTERESTS, LIABILITIES, VOTING RIGHTS AND REPORTS
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 (1)
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 (2) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of business on such day plus or minus, as the case may be, the amount of
the net additions to or withdrawals from the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as of the close of business on the following business day.
The SA Trust was organized as a trust under the laws of the State of New
York pursuant to a Declaration of Trust dated February 7, 1994. The interests of
the SA Trust are divided into separate series. No series of the SA Trust has any
preference over any other series.
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 a Sub-Account and the Owners having
Contract Value therein will not be adversely affected by reason of the
Sub-Account investing in the corresponding SAT Portfolio.
Each Sub-Account will be involved only in votes that affect the
corresponding SAT Portfolio. Sub-Accounts investing in the SAT Portfolios will,
however, vote with all other interestholders of the SA Trust's Portfolios 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. Each Portfolio will
vote separately on matters affecting only that Portfolio. Under certain
circumstances, other investors in a Portfolio could control the outcome of these
votes.
The SA Trust 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 Owners."
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<PAGE> 71
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I -- Discussion Regarding the Variable Annuity
Contracts................................................. 1
Part II -- Discussion Regarding the Select Advisors
Portfolios................................................ 5
Summary................................................ 5
Investment Objectives, Techniques, Policies and
Restrictions.......................................... 5
Portfolio Transactions and Brokerage Commissions....... 21
Valuation of Securities and Redemption in Kind......... 23
Management of the SA Trust............................. 25
Organization of the SA Trust........................... 30
Taxation............................................... 30
Financial Statements................................... 31
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the related
Statement of Additional Information and related official sales literature in
connection with the offering of the Contracts, and if given or made, such other
information or representations must not be relied upon as having been authorized
by Separate Account 1, the Company, the Advisor or the Distributor. 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.
58
<PAGE> 72
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 1
FLEXIBLE PURCHASE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACTS
----------------------------
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
----------------------------
This Statement of Additional Information is not a prospectus, but
contains information in addition to that set forth in the current prospectus
dated May 1, 1998 (the "PROSPECTUS") for certain variable annuity contracts
("CONTRACTS") offered by Western-Southern Life Assurance Company (the "COMPANY")
through its Separate Account 1 ("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 Touchstone
Variable Annuity Service Center at 1-800-669-2796 (press 2) or by written
request to the Company at P.O. Box 2850, Cincinnati, Ohio 45201-2850.
<PAGE> 73
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
PART I - DISCUSSION REGARDING THE VARIABLE ANNUITY CONTRACTS..............................................1
General..........................................................................................1
Safekeeping of Assets............................................................................1
Distribution of the Contracts....................................................................1
Sub-Account Performance..........................................................................2
Fixed Annuity Income Payments....................................................................4
Independent Accountants..........................................................................4
PART II - DISCUSSION REGARDING THE SELECT ADVISORS PORTFOLIOS.............................................4
SUMMARY...................................................................................................4
INVESTMENT OBJECTIVES, TECHNIQUES, POLICIES AND RESTRICTIONS..............................................5
INVESTMENT OBJECTIVES.....................................................................................5
INVESTMENT TECHNIQUES.....................................................................................5
Certificates of Deposit and Bankers' Acceptances.................................................5
Commercial Paper.................................................................................6
Lower-Rated Debt Securities......................................................................6
Illiquid Securities..............................................................................6
Foreign Securities: Special Considerations Concerning Eastern Europe............................7
Lending Portfolio Securities.....................................................................8
Futures Contracts and Options on Futures Contracts...............................................8
General.................................................................................8
Futures Contracts.......................................................................8
Options on Futures Contracts............................................................10
Options on Foreign Currencies...........................................................11
Additional Risks of Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies....................................12
Options on Securities............................................................................13
Options on Securities Indexes....................................................................15
Forward Currency Contracts.......................................................................16
Rating Services..................................................................................17
INVESTMENT RESTRICTIONS...................................................................................17
Fundamental Policies.............................................................................18
Additional Restrictions..........................................................................19
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS..........................................................21
VALUATION OF SECURITIES AND REDEMPTION IN KIND............................................................23
MANAGEMENT OF THE SA TRUST................................................................................25
Trustees of the SA Trust.........................................................................25
</TABLE>
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<PAGE> 74
<TABLE>
<S> <C>
Officers of the SA Trust.........................................................................25
Trustee Compensation Table.......................................................................27
Advisor, Portfolio Advisors, Administrator and Sponsor...........................................27
Advisor.................................................................................27
Portfolio Advisors......................................................................28
Administrator, Custodian and Fund Accounting Agent......................................28
Sponsor.................................................................................29
Counsel and Independent Accountants..............................................................30
ORGANIZATION OF THE SA TRUST..............................................................................30
TAXATION..................................................................................................30
Taxation of the Portfolios.......................................................................30
Sub-Account Diversification......................................................................30
FINANCIAL STATEMENTS......................................................................................31
</TABLE>
iii
<PAGE> 75
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 that 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.
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<PAGE> 76
("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 the Contracts and paid by the Company
to the Distributor and amounts retained by the Distributor are shown below for
the periods indicated.
<TABLE>
<CAPTION>
Amounts Retained by
Period Sales Commissions Paid Distributor
------------------------------------------------------------------------------------------
<S> <C> <C>
For the period from February 23, 1995 to $ 159,807 $ 26,967
December 31, 1995
For the year ended December 31, 1996 $1,902,186 $ 305,688
For the year ended December 31, 1997 $7,686,342 $ 790,452
</TABLE>
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 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)[to the power of N] = ERV where:
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
The following table sets forth the type of total return data for each of the
Sub-Accounts that will be used in advertising, in each case for the period ended
December 31, 1997.
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<PAGE> 77
<TABLE>
<CAPTION>
TYPE OF EMERGING INTERNATIONAL INCOME GROWTH & STANDBY
PERFORMANCE GROWTH EQUITY OPPORTUNITY INCOME BALANCED BOND INCOME
Data Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C> <C> <C> <C> <C>
Total Return 21.39% 2.73% 0.14% 7.78% 6.53% -3.99% -6.49%
For Year
Total Return 31.89% 13.23% 10.64% 18.28% 17.03% 6.51% 4.01%
For Year
Measured by
Change In
Accumulation
Unit Value **
Average 15.12% 7.24% 16.35% 14.73% 13.13% 1.60% -1.73%
Annual Total
Return Since
Inception*
Total Return 69.06% 39.85% 74.01% 67.50% 61.30% 21.37% 11.41%
Since
Inception
Measured By
Change In
Accumulation
Unit Value**
<FN>
* Based on a period beginning February 28, 1995.
** Calculated by determining the change in the Accumulation Unit Value from the beginning of the period to the end
of the period and dividing such amount by the Accumulation Unit Value at the end of the period.
</FN>
</TABLE>
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 Sub-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
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<PAGE> 78
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.
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 INCOME PAYMENTS
The Contracts provide only for fixed annuity payment options. The
amount of such payments is calculated by applying the Surrender Value at
annuitization, less any applicable premium tax, to the income payment rates for
the income payment option selected. Annuity payments will be the larger of:
1. the income based on the rates shown in the Contract's Annuity
Tables for the income payment option chosen; and
2. 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
pages 31-32, 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.
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.
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<PAGE> 79
As described in the Prospectus, each Sub-Account seeks to achieve its
investment objectives 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, Income
Opportunity Portfolio, Value Plus Portfolio, Growth & Income Portfolio, Balanced
Portfolio, Bond Portfolio and Standby Income Portfolio (each a "PORTFOLIO" or,
collectively, the "PORTFOLIOS"). Detailed information regarding the Emerging
Growth, International Equity, Income Opportunity Value Plus, Balanced 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 Growth & Income
Portfolio and the Bond 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 portfolio 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
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft 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.
5
<PAGE> 80
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 established 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.
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
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significant amount of these restricted securities 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 on 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 (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, dominant role in Eastern European countries investments in such
countries will involve risks of nationalization,
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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 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
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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.
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
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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 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
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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.
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
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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 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.
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
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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.
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
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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-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.
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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
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
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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.
RATING SERVICES
The ratings of nationally recognized statistical rating 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
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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
The fundamental policies of each SAT Portfolio are described below. No
investment restriction of an SAT 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.
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.
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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.
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:
1. 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%;
2. 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;
3. 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;
4. 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;
5. invest for the purpose of exercising control or management;
6. 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
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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;
7. 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);
8. 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);
9. 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;
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10. 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 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);
11. 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;
12. 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
13. 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 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
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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 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.
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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 fiscal years ended December 31, 1997, 1996 and 1995, the
aggregate brokerage commissions paid by each Portfolio is as follows:
<TABLE>
<CAPTION>
Growth & Income Bond
Year Ended December 31, Portfolio Portfolio
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $125,091 None
1996 $ 40,690 None
1995 $ 30,788 None
</TABLE>
VALUATION OF SECURITIES AND 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 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
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currencies is 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 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 New York Stock Exchange ("NYSE") is open for business. As of the close
of regular trading on the NYSE, 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 the close of
regular trading on the NYSE 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 the close of regular trading on
the NYSE on such day plus or minus, as the case may be, the amount of net
additions to or
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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 the close of regular
trading on the NYSE 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. 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 49), 311 Pike Street, Cincinnati, OH
45202 - - 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 82), 400 Broadway, Cincinnati, OH 45202
- --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).
JOSEPH S. STERN, JR., (Age 80), 3 Grandin Place, Cincinnati, OH 45208 -
- - Trustee; Retired Professor Emeritus, College of Business, University of
Cincinnati.
PHILLIP R. COX, (Age 50), 105 East Fourth Street, Cincinnati, OH 45202
- - - 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.
ROBERT E. STAUTBERG, (Age 63), 4815 Drake Road, Cincinnati, OH 45243 -
- - Trustee; Chairman of the Board of Trustees, Good Samaritan Hospital; Retired
Partner and Director, KPMG Peat Marwick.
DAVID POLLAK, (Age 80), 1313 Kemper Road, Suite 111, Cincinnati, OH
45246 - - Trustee; President, The Ultimate Distributing Company (1986-1993);
Director Emeritus, Fifth Third Bank.
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,
25
<PAGE> 100
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 36) - Treasurer; Treasurer, The Western and
Southern Life Insurance Company (since January, 1994); Corporate Finance
Manager, Eastman Kodak Company (June, 1988 to December, 1994). His address is
400 Broadway, Cincinnati, OH 45202
ANDREW S. JOSEF, (Age 33) -- Secretary; Director, Legal Administration,
Investors Bank (since May, 1997); Senior 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, 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
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, 1997, the Growth and Income Portfolio incurred $4,975 in Trustee fees and
the Bond Portfolio incurred $2,949 in Trustee fees.
26
<PAGE> 101
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation from the Fund
Name of Person from SA Trust Complex Paid to Trustees
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Phillip R. Cox $3,079.44 $10,000
David Pollak $3,079.44 $10,000
Robert E. Stautberg $3,079.44 $10,000
Joseph S. Stern, Jr. $1,976.63 $ 6,750
Edward G. Harness, Jr. None none
William J. Williams None none
</TABLE>
As of February 1, 1998, 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 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 fiscal years ended December 31, 1997, 1996 and 1995 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.
27
<PAGE> 102
<TABLE>
<CAPTION>
Portfolio Year Rate Amount
-------------------------------------------------------------
<S> <C> <C> <C>
Growth & Income 1997 0.80% $183,644
1996 0.75% $127,974
1995 0.75% $ 88,934
Bond 1997 0.55% $ 66,023
1996 0.55% $ 72,116
1995 0.55% $ 61,568
</TABLE>
For the fiscal years ended December 31, 1997, 1996 and 1995, the
Advisor, under the terms of the Sponsor Agreement, reimbursed each SAT Portfolio
the amount set forth below.
<TABLE>
<CAPTION>
Portfolio Year Amount
-------------------------------------------------------------
<S> <C> <C>
Growth & Income 1997 $134,442
1996 $118,296
1995 $85,300
Bond 1997 $102,119
1996 $106,315
1995 $69,754
</TABLE>
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.
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.
28
<PAGE> 103
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 fiscal years ended December 31, 1997, 1996 and 1995, each SAT
Portfolio incurred the following administrative and fund accounting fees,
including out-of-pocket expenses.
<TABLE>
<CAPTION>
Portfolio Year Amount
-------------------------------------------------------------
<S> <C> <C>
Growth & Income 1997 $79,501
1996 $56,786
1995 $46,743
Bond 1997 $79,501
1996 $56,396
1995 $47,124
</TABLE>
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 December 31, 1998.
29
<PAGE> 104
COUNSEL AND INDEPENDENT ACCOUNTANTS
Frost & Jacobs LLP, 2500 PNC Center, 201 East Fifth 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 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.
30
<PAGE> 105
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. Statement of Net Assets as of December 31, 1997.
2. Statement of Operations and Changes in Net Assets for the years ended
December 31, 1997 and 1996.
3. Notes to Financial Statements.
4. Supplementary Information-Selected Per Unit Data and Ratios for the
years ended December 31, 1997 and 1996.
5. Report of Coopers & Lybrand L.L.P.
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. Consolidated Balance Sheets as of December 31, 1997 and 1996.
3. Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995.
4. Consolidated Statements of Changes in Shareholder's Equity for the
years ended December 31, 1997, 1996 and 1995.
5. Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
6. Notes to Financial Statements.
The following financial statements for Select Advisor Portfolios (Growth &
Income Portfolio and Bond Porfolio) 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. Schedule of Investments December 31, 1997.
2. Statement of Assets and Liabilities December 31, 1997.
3. Statement of Operations for the year ended December 31, 1997.
4. Statement of Changes in Net Assets for the years ended December 31,
1997 and 1996.
5. Supplementary Data for the years ended December 31, 1997, 1996, 1995
and 1994.
6. Notes to Financial Statements.
31
<PAGE> 106
7. Report of Coopers & Lybrand L.L.P.
32
<PAGE> 107
<TABLE>
<S> <C>
DISTRIBUTOR
Touchstone Securities, Inc. Sub-Accounts
311 Pike Street ------------
Cincinnati, Ohio 45202
(800) 669-2796 (press 3) oEmerging Growth
oInternational Equity
INVESTMENT ADVISOR AND SPONSOR oIncome Opportunity
oValue Plus
Touchstone Advisors, Inc. oGrowth & Income
311 Pike Street oBalanced
Cincinnati, Ohio 45202 oBond
oStandby Income
TOUCHSTONE VARIABLE ANNUITY 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 May 1, 1998
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
</TABLE>
33
<PAGE> 108
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Statement of Net Assets
As of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at current market value:
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio (1,011,132 shares, cost
$14,102,125) $ 15,571,429
International Equity Portfolio (1,094,533 shares,
cost $12,968,031) 13,145,336
Balanced Portfolio (1,330,036 shares, cost
$18,150,256) 18,607,210
Income Opportunity Portfolio (2,045,113 shares, cost
$23,590,436) 22,557,601
Standby Income Portfolio (1,151,627 shares, cost
$11,526,134) 11,516,273
Select Advisors Portfolios
Growth & Income Portfolio II (59.548236% beneficial
interest, cost $24,411,541) 27,783,480
Bond Portfolio II(46.030520% beneficial interest,
cost $10,776,380) 11,365,878
------------
Total investments 120,547,207
Accounts receivable from Western-Southern Life
Assurance Company 894
------------
Total net assets $120,548,101
============
NET ASSETS
Variable Annuity Contracts $120,547,058
Retained in the variable account by Western-Southern Life
Assurance Company 1,043
------------
Total net assets $120,548,101
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE> 109
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Statement of Operations and Changes in Net Assets
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL 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 $ 5,409,296 $ 834,976 $ 709,520 $ 1,376,386 $ 2,070,121 $ 418,293
Miscellaneous income (loss) 3,218 3,731 2,880 (2,658) (3,840) 328
EXPENSES:
Mortality and expense risk, and
administrative charge 939,202 122,709 108,285 135,364 179,897 103,640
------------ ----------- ----------- ----------- ----------- -----------
Net Investment Income (loss) 4,473,312 715,998 604,115 1,238,364 1,886,384 314,981
------------ ----------- ----------- ----------- ----------- -----------
Net change in unrealized
appreciation (depreciation) on
investments 4,261,510 1,424,333 71,338 292,397 (1,073,439) (10,274)
Realized gain (loss) on
investments 735,060 360,604 196,132 25,029 154,273 (978)
------------ ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss) on investments 4,996,570 1,784,937 267,470 317,426 (919,166) (11,252)
------------ ----------- ----------- ----------- ----------- -----------
Net increase in net assets resulting
from operations 9,469,882 2,500,935 871,585 1,555,790 967,218 303,729
------------ ----------- ----------- ----------- ----------- -----------
Contract owners activity:
Payments received from contract
owners 85,891,128 9,661,438 8,570,847 12,652,990 17,117,095 14,114,244
Net transfers between sub-accounts
and/or fixed account 414,133 764,178 877,161 1,086,970 (243,339) (5,891,834)
Withdrawals and surrenders (2,638,983) (384,782) (287,848) (364,055) (532,734) (293,869)
Contract maintenance change (23,424) (3,521) (3,073) (3,299) (4,491) (1,006)
------------ ----------- ----------- ----------- ----------- -----------
Net increase from contract
activity 83,642,854 10,037,313 9,157,087 13,372,606 16,336,531 7,927,535
------------ ----------- ----------- ----------- ----------- -----------
Net increase in net assets 93,112,736 12,538,248 10,028,672 14,928,396 17,303,749 8,231,264
Net assets, at beginning of period 27,435,365 3,033,208 3,116,692 3,678,829 5,253,947 3,285,736
------------ ----------- ----------- ----------- ----------- -----------
Net assets, at end of period $120,548,101 $15,571,456 $13,145,364 $18,607,225 $22,557,696 $11,517,000
============ =========== =========== =========== =========== ===========
<CAPTION>
GROWTH &
INCOME II BOND II
SUB-ACCOUNT SUB-ACCOUNT
----------- -----------
<S> <C> <C>
INCOME:
Dividends and capital gains $ -- $ --
Miscellaneous income (loss) 3,168 (391)
EXPENSES:
Mortality and expense risk, and
administrative charge 207,267 82,040
----------- -----------
Net Investment Income (loss) (204,099) (82,431)
----------- -----------
Net change in unrealized
appreciation (depreciation) on
investments 3,058,688 498,467
Realized gain (loss) on
investments -- --
----------- -----------
Net realized and unrealized gain
(loss) on investments 3,058,688 498,467
----------- -----------
Net increase in net assets resulting
from operations 2,854,589 416,036
----------- -----------
Contract owners activity:
Payments received from contract
owners 17,225,945 6,548,569
Net transfers between sub-accounts
and/or fixed account 1,881,077 1,939,920
Withdrawals and surrenders (560,767) (214,928)
Contract maintenance change (6,180) (1,854)
----------- -----------
Net increase from contract
activity 18,540,075 8,271,707
----------- -----------
Net increase in net assets 21,394,664 8,687,743
Net assets, at beginning of period 6,388,817 2,678,136
----------- -----------
Net assets, at end of period $27,783,481 $11,365,879
=========== ===========
</TABLE>
Statement of Operations and Changes in Net Assets
For the year ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL 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 $ 632,218 $ 78,087 $ 19,427 $ 106,100 $ 359,226 $ 69,378
Miscellaneous income (loss) 11,618 1,457 (196) 1,531 840 334
EXPENSES:
Mortality and expense risk, and
administrative charge 139,808 15,425 16,207 19,935 22,201 18,034
----------- ---------- ---------- ---------- ---------- -----------
Net Investment Income (loss) 504,028 64,119 3,024 87,696 337,865 51,678
----------- ---------- ---------- ---------- ---------- -----------
Net change in unrealized appreciation
(depreciation) on investments 736,735 51,240 103,391 182,124 34,430 304
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)
----------- ---------- ---------- ---------- ---------- -----------
Net increase in net assets resulting
from operations 1,295,868 129,419 131,987 273,697 384,934 50,939
----------- ---------- ---------- ---------- ---------- -----------
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
Net transfers between sub-accounts
and/or fixed account (51,686) (166,332) (120,369) 47,771 672,000 (1,138,789)
Withdrawals and surrenders (147,317) (20,170) (21,168) (17,803) (26,742) (16,705)
Contract maintenance change (1,706) (249) (163) (256) (188) (134)
----------- ---------- ---------- ---------- ---------- -----------
Net increase from contract activity 24,071,286 2,728,807 2,809,001 3,065,199 4,618,520 2,791,254
----------- ---------- ---------- ---------- ---------- -----------
Net increase in net assets 25,367,154 2,858,226 2,940,988 3,338,896 5,003,454 2,842,193
Net assets, at beginning of period 2,068,211 174,982 175,704 339,933 250,493 443,543
----------- ---------- ---------- ---------- ---------- -----------
Net assets, at end of period $27,435,365 $3,033,208 $3,116,692 $3,678,829 $5,253,947 $ 3,285,736
=========== ========== ========== ========== ========== ===========
<CAPTION>
GROWTH &
INCOME II BOND II
SUB-ACCOUNT SUB-ACCOUNT
----------- -----------
<S> <C> <C>
INCOME:
Dividends and capital gains $ -- $ --
Miscellaneous income (loss) 6,979 673
EXPENSES:
Mortality and expense risk, and
administrative charge 31,803 16,203
---------- ----------
Net Investment Income (loss) (24,824) (15,530)
---------- ----------
Net change in unrealized appreciation
(depreciation) on investments 288,509 76,737
Realized gain (loss) on investments
---------- ----------
Net realized and unrealized gain (loss)
on investments 288,509 76,737
---------- ----------
Net increase in net assets resulting
from operations 263,685 61,207
---------- ----------
Contract owners activity:
Payments received from contract
owners 5,241,129 2,208,788
Net transfers between sub-accounts
and/or fixed account 555,914 98,119
Withdrawals and surrenders (29,858) (14,871)
Contract maintenance change (538) (178)
---------- ----------
Net increase from contract activity 5,766,647 2,291,858
---------- ----------
Net increase in net assets 6,030,332 2,353,065
Net assets, at beginning of period 358,485 325,071
---------- ----------
Net assets, at end of period $6,388,817 $2,678,136
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE> 110
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, interest 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%.
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.
36
<PAGE> 111
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 December 31, 1997.
<TABLE>
<CAPTION>
PURCHASES SALES
----------- ----------
<S> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $13,170,887 $2,417,682
International Equity Portfolio 10,972,885 1,211,737
Balanced Portfolio 14,823,266 212,387
Income Opportunity Portfolio 20,215,886 1,993,295
Standby Income Portfolio 17,107,511 8,865,373
Select Advisors Portfolio
Growth & Income Portfolio II 20,562,741 2,226,763
Bond Portfolio II 8,565,550 376,274
</TABLE>
7. UNIT VALUES
The following table shows a summary of units outstanding for variable
annuity contracts for the period January 1, 1997 to December 31, 1997.
<TABLE>
<CAPTION>
TRANSFERS
BEGINNING UNITS UNITS BETWEEN SUB- ENDING UNIT ENDING
UNIT PURCHASED REDEEMED ACCOUNTS UNITS VALUE VALUE
--------- --------- -------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Sub-account 236,639 658,639 (24,977) 50,785 921,086 16.905544 $ 15,571,456
International Equity
Sub-account 252,346 636,140 (21,290) 72,784 939,980 13.984724 13,145,364
Balanced Sub-account 266,916 839,471 (24,039) 71,219 1,153,567 16.130170 18,607,225
Income Opportunity Sub-account 334,062 1,008,989 (31,392) (15,333) 1,296,326 17.401250 22,557,696
Standby Income Sub-account 306,751 1,291,272 (26,966) (537,276) 1,033,781 11.140654 11,517,000
Growth & Income Sub-account 451,141 1,129,801 (36,756) 114,534 1,658,720 16.749955 27,783,481
Bond Sub-account 235,025 557,735 (18,397) 162,068 936,431 12.137441 11,365,879
------------
$120,548,101
============
</TABLE>
37
<PAGE> 112
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 throughout each
year)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY GROWTH &
GROWTH EQUITY BALANCED OPPORTUNITY 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>
FOR THE YEAR ENDED
DECEMBER 31, 1997
Per share data
Investment income $ 0.914814 $ 0.759815 $ 1.297872 $ 2.211330 $ 0.586459 $ -- $ --
Expenses 0.197048 0.179407 0.200630 0.227065 0.146437 0.204446 0.156956
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income-net 0.717766 0.580408 1.097242 1.984265 0.440022 (0.204446) (0.156956)
Net realized and unrealizable
gain (loss) on investments 3.369931 1.053431 1.250190 (0.310492) (0.010786) 2.792923 0.899266
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
asset value 4.087697 1.633839 2.347432 1.673773 0.429236 2.588477 0.742310
Beginning of year 12.817847 12.350885 13.782738 15.727477 10.711418 14.161478 11.395131
---------- ---------- ---------- ---------- ---------- ---------- ----------
End of year $16.905544 $13.984724 $16.130170 $17.401250 $11.140654 $16.749955 $12.137441
========== ========== ========== ========== ========== ========== ==========
Ratios
Ratio of operating expense
to average net assets(%) 1.32% 1.33% 1.21% 1.29% 1.40% 1.21% 1.17%
Ratio of investment
income-net to average net
assets(%) 7.70% 7.43% 11.11% 13.57% 4.26% -1.19% -1.17%
FOR THE YEAR ENDED
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
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 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)%
</TABLE>
The above information has been prepared using daily weighted-average units
outstanding.
The accompanying notes are an integral part of the financial statements.
38
<PAGE> 113
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, 1997, and the
related statements of operations, changes in net assets and selected per unit
data and ratios for the years ended December 31, 1997 and 1996. 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, 1997 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, 1997, the results of operations, the changes in its net assets and
the selected per unit data and ratios for the years ended December 31, 1997 and
1996 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 16, 1998
<PAGE> 114
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 1
FLEXIBLE PURCHASE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACTS
----------------------------
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
----------------------------
This Statement of Additional Information is not a prospectus, but
contains information in addition to that set forth in the current prospectus
dated May 1, 1998 (the "PROSPECTUS") for certain variable annuity contracts
("CONTRACTS") offered by Western-Southern Life Assurance Company (the "COMPANY")
through its Separate Account 1 ("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 Touchstone
Variable Annuity Service Center at 1-800-669-2796 (press 2) or by written
request to the Company at P.O. Box 2850, Cincinnati, Ohio 45201-2850.
<PAGE> 115
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
PART I - DISCUSSION REGARDING THE VARIABLE ANNUITY CONTRACTS..............................................1
General..........................................................................................1
Safekeeping of Assets............................................................................1
Distribution of the Contracts....................................................................1
Sub-Account Performance..........................................................................2
Fixed Annuity Income Payments....................................................................4
Independent Accountants..........................................................................4
PART II - DISCUSSION REGARDING THE SELECT ADVISORS PORTFOLIOS.............................................4
SUMMARY...................................................................................................4
INVESTMENT OBJECTIVES, TECHNIQUES, POLICIES AND RESTRICTIONS..............................................5
INVESTMENT OBJECTIVES.....................................................................................5
INVESTMENT TECHNIQUES.....................................................................................5
Certificates of Deposit and Bankers' Acceptances.................................................5
Commercial Paper.................................................................................6
Lower-Rated Debt Securities......................................................................6
Illiquid Securities..............................................................................6
Foreign Securities: Special Considerations Concerning Eastern Europe............................7
Lending Portfolio Securities.....................................................................8
Futures Contracts and Options on Futures Contracts...............................................8
General.................................................................................8
Futures Contracts.......................................................................8
Options on Futures Contracts............................................................10
Options on Foreign Currencies...........................................................11
Additional Risks of Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies....................................12
Options on Securities............................................................................13
Options on Securities Indexes....................................................................15
Forward Currency Contracts.......................................................................16
Rating Services..................................................................................17
INVESTMENT RESTRICTIONS...................................................................................17
Fundamental Policies.............................................................................18
Additional Restrictions..........................................................................19
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS..........................................................21
VALUATION OF SECURITIES AND REDEMPTION IN KIND............................................................23
MANAGEMENT OF THE SA TRUST................................................................................25
Trustees of the SA Trust.........................................................................25
</TABLE>
ii
<PAGE> 116
<TABLE>
<S> <C>
Officers of the SA Trust.........................................................................25
Trustee Compensation Table.......................................................................27
Advisor, Portfolio Advisors, Administrator and Sponsor...........................................27
Advisor.................................................................................27
Portfolio Advisors......................................................................28
Administrator, Custodian and Fund Accounting Agent......................................28
Sponsor.................................................................................29
Counsel and Independent Accountants..............................................................30
ORGANIZATION OF THE SA TRUST..............................................................................30
TAXATION..................................................................................................30
Taxation of the Portfolios.......................................................................30
Sub-Account Diversification......................................................................30
FINANCIAL STATEMENTS......................................................................................31
</TABLE>
iii
<PAGE> 117
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 that 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.
1
<PAGE> 118
("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 the Contracts and paid by the Company
to the Distributor and amounts retained by the Distributor are shown below for
the periods indicated.
<TABLE>
<CAPTION>
Amounts Retained by
Period Sales Commissions Paid Distributor
------------------------------------------------------------------------------------------
<S> <C> <C>
For the period from February 23, 1995 to $ 159,807 $ 26,967
December 31, 1995
For the year ended December 31, 1996 $1,902,186 $ 305,688
For the year ended December 31, 1997 $7,686,342 $ 790,452
</TABLE>
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 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)[to the power of N] = ERV where:
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
The following table sets forth the type of total return data for each of the
Sub-Accounts that will be used in advertising, in each case for the period ended
December 31, 1997.
2
<PAGE> 119
<TABLE>
<CAPTION>
TYPE OF EMERGING INTERNATIONAL INCOME GROWTH & STANDBY
PERFORMANCE GROWTH EQUITY OPPORTUNITY INCOME BALANCED BOND INCOME
Data Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
<S> <C> <C> <C> <C> <C> <C> <C>
Total Return 21.39% 2.73% 0.14% 7.78% 6.53% -3.99% -6.49%
For Year
Total Return 31.89% 13.23% 10.64% 18.28% 17.03% 6.51% 4.01%
For Year
Measured by
Change In
Accumulation
Unit Value **
Average 15.12% 7.24% 16.35% 14.73% 13.13% 1.60% -1.73%
Annual Total
Return Since
Inception*
Total Return 69.06% 39.85% 74.01% 67.50% 61.30% 21.37% 11.41%
Since
Inception
Measured By
Change In
Accumulation
Unit Value**
<FN>
* Based on a period beginning February 28, 1995.
** Calculated by determining the change in the Accumulation Unit Value from the beginning of the period to the end
of the period and dividing such amount by the Accumulation Unit Value at the end of the period.
</FN>
</TABLE>
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 Sub-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
3
<PAGE> 120
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.
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 INCOME PAYMENTS
The Contracts provide only for fixed annuity payment options. The
amount of such payments is calculated by applying the Surrender Value at
annuitization, less any applicable premium tax, to the income payment rates for
the income payment option selected. Annuity payments will be the larger of:
1. the income based on the rates shown in the Contract's Annuity
Tables for the income payment option chosen; and
2. 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
pages 31-32, 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.
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.
4
<PAGE> 121
As described in the Prospectus, each Sub-Account seeks to achieve its
investment objectives 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, Income
Opportunity Portfolio, Value Plus Portfolio, Growth & Income Portfolio, Balanced
Portfolio, Bond Portfolio and Standby Income Portfolio (each a "PORTFOLIO" or,
collectively, the "PORTFOLIOS"). Detailed information regarding the Emerging
Growth, International Equity, Income Opportunity Value Plus, Balanced 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 Growth & Income
Portfolio and the Bond 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 portfolio 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
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft 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.
5
<PAGE> 122
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 established 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.
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
6
<PAGE> 123
significant amount of these restricted securities 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 on 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 (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, dominant role in Eastern European countries investments in such
countries will involve risks of nationalization,
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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 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
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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.
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
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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 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
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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.
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
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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 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.
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
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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.
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
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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-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.
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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
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
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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.
RATING SERVICES
The ratings of nationally recognized statistical rating 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
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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
The fundamental policies of each SAT Portfolio are described below. No
investment restriction of an SAT 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.
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.
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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.
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:
1. 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%;
2. 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;
3. 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;
4. 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;
5. invest for the purpose of exercising control or management;
6. 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
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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;
7. 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);
8. 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);
9. 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;
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10. 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 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);
11. 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;
12. 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
13. 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 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
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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 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.
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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 fiscal years ended December 31, 1997, 1996 and 1995, the
aggregate brokerage commissions paid by each Portfolio is as follows:
<TABLE>
<CAPTION>
Growth & Income Bond
Year Ended December 31, Portfolio Portfolio
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $125,091 None
1996 $ 40,690 None
1995 $ 30,788 None
</TABLE>
VALUATION OF SECURITIES AND 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 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
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currencies is 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 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 New York Stock Exchange ("NYSE") is open for business. As of the close
of regular trading on the NYSE, 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 the close of
regular trading on the NYSE 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 the close of regular trading on
the NYSE on such day plus or minus, as the case may be, the amount of net
additions to or
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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 the close of regular
trading on the NYSE 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. 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 49), 311 Pike Street, Cincinnati, OH
45202 - - 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 82), 400 Broadway, Cincinnati, OH 45202
- --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).
JOSEPH S. STERN, JR., (Age 80), 3 Grandin Place, Cincinnati, OH 45208 -
- - Trustee; Retired Professor Emeritus, College of Business, University of
Cincinnati.
PHILLIP R. COX, (Age 50), 105 East Fourth Street, Cincinnati, OH 45202
- - - 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.
ROBERT E. STAUTBERG, (Age 63), 4815 Drake Road, Cincinnati, OH 45243 -
- - Trustee; Chairman of the Board of Trustees, Good Samaritan Hospital; Retired
Partner and Director, KPMG Peat Marwick.
DAVID POLLAK, (Age 80), 1313 Kemper Road, Suite 111, Cincinnati, OH
45246 - - Trustee; President, The Ultimate Distributing Company (1986-1993);
Director Emeritus, Fifth Third Bank.
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,
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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 36) - Treasurer; Treasurer, The Western and
Southern Life Insurance Company (since January, 1994); Corporate Finance
Manager, Eastman Kodak Company (June, 1988 to December, 1994). His address is
400 Broadway, Cincinnati, OH 45202
ANDREW S. JOSEF, (Age 33) -- Secretary; Director, Legal Administration,
Investors Bank (since May, 1997); Senior 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, 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
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, 1997, the Growth and Income Portfolio incurred $4,975 in Trustee fees and
the Bond Portfolio incurred $2,949 in Trustee fees.
26
<PAGE> 143
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation from the Fund
Name of Person from SA Trust Complex Paid to Trustees
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Phillip R. Cox $3,079.44 $10,000
David Pollak $3,079.44 $10,000
Robert E. Stautberg $3,079.44 $10,000
Joseph S. Stern, Jr. $1,976.63 $ 6,750
Edward G. Harness, Jr. None none
William J. Williams None none
</TABLE>
As of February 1, 1998, 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 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 fiscal years ended December 31, 1997, 1996 and 1995 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.
27
<PAGE> 144
<TABLE>
<CAPTION>
Portfolio Year Rate Amount
-------------------------------------------------------------
<S> <C> <C> <C>
Growth & Income 1997 0.80% $183,644
1996 0.75% $127,974
1995 0.75% $ 88,934
Bond 1997 0.55% $ 66,023
1996 0.55% $ 72,116
1995 0.55% $ 61,568
</TABLE>
For the fiscal years ended December 31, 1997, 1996 and 1995, the
Advisor, under the terms of the Sponsor Agreement, reimbursed each SAT Portfolio
the amount set forth below.
<TABLE>
<CAPTION>
Portfolio Year Amount
-------------------------------------------------------------
<S> <C> <C>
Growth & Income 1997 $134,442
1996 $118,296
1995 $85,300
Bond 1997 $102,119
1996 $106,315
1995 $69,754
</TABLE>
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.
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.
28
<PAGE> 145
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 fiscal years ended December 31, 1997, 1996 and 1995, each SAT
Portfolio incurred the following administrative and fund accounting fees,
including out-of-pocket expenses.
<TABLE>
<CAPTION>
Portfolio Year Amount
-------------------------------------------------------------
<S> <C> <C>
Growth & Income 1997 $79,501
1996 $56,786
1995 $46,743
Bond 1997 $79,501
1996 $56,396
1995 $47,124
</TABLE>
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 December 31, 1998.
29
<PAGE> 146
COUNSEL AND INDEPENDENT ACCOUNTANTS
Frost & Jacobs LLP, 2500 PNC Center, 201 East Fifth 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 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.
30
<PAGE> 147
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. Statement of Net Assets as of December 31, 1997.
2. Statement of Operations and Changes in Net Assets for the years ended
December 31, 1997 and 1996.
3. Notes to Financial Statements.
4. Supplementary Information-Selected Per Unit Data and Ratios for the
years ended December 31, 1997 and 1996.
5. Report of Coopers & Lybrand L.L.P.
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. Consolidated Balance Sheets as of December 31, 1997 and 1996.
3. Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995.
4. Consolidated Statements of Changes in Shareholder's Equity for the
years ended December 31, 1997, 1996 and 1995.
5. Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
6. Notes to Financial Statements.
The following financial statements for Select Advisor Portfolios (Growth &
Income Portfolio and Bond Porfolio) 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. Schedule of Investments December 31, 1997.
2. Statement of Assets and Liabilities December 31, 1997.
3. Statement of Operations for the year ended December 31, 1997.
4. Statement of Changes in Net Assets for the years ended December 31,
1997 and 1996.
5. Supplementary Data for the years ended December 31, 1997, 1996, 1995
and 1994.
6. Notes to Financial Statements.
31
<PAGE> 148
7. Report of Coopers & Lybrand L.L.P.
32
<PAGE> 149
<TABLE>
<S> <C>
DISTRIBUTOR
Touchstone Securities, Inc. Sub-Accounts
311 Pike Street ------------
Cincinnati, Ohio 45202
(800) 669-2796 (press 3) oEmerging Growth
oInternational Equity
INVESTMENT ADVISOR AND SPONSOR oIncome Opportunity
oValue Plus
Touchstone Advisors, Inc. oGrowth & Income
311 Pike Street oBalanced
Cincinnati, Ohio 45202 oBond
oStandby Income
TOUCHSTONE VARIABLE ANNUITY 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 May 1, 1998
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
</TABLE>
33
<PAGE> 150
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Statement of Net Assets
As of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at current market value:
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio (1,011,132 shares, cost
$14,102,125) $ 15,571,429
International Equity Portfolio (1,094,533 shares,
cost $12,968,031) 13,145,336
Balanced Portfolio (1,330,036 shares, cost
$18,150,256) 18,607,210
Income Opportunity Portfolio (2,045,113 shares, cost
$23,590,436) 22,557,601
Standby Income Portfolio (1,151,627 shares, cost
$11,526,134) 11,516,273
Select Advisors Portfolios
Growth & Income Portfolio II (59.548236% beneficial
interest, cost $24,411,541) 27,783,480
Bond Portfolio II(46.030520% beneficial interest,
cost $10,776,380) 11,365,878
------------
Total investments 120,547,207
Accounts receivable from Western-Southern Life
Assurance Company 894
------------
Total net assets $120,548,101
============
NET ASSETS
Variable Annuity Contracts $120,547,058
Retained in the variable account by Western-Southern Life
Assurance Company 1,043
------------
Total net assets $120,548,101
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE> 151
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
Statement of Operations and Changes in Net Assets
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL 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 $ 5,409,296 $ 834,976 $ 709,520 $ 1,376,386 $ 2,070,121 $ 418,293
Miscellaneous income (loss) 3,218 3,731 2,880 (2,658) (3,840) 328
EXPENSES:
Mortality and expense risk, and
administrative charge 939,202 122,709 108,285 135,364 179,897 103,640
------------ ----------- ----------- ----------- ----------- -----------
Net Investment Income (loss) 4,473,312 715,998 604,115 1,238,364 1,886,384 314,981
------------ ----------- ----------- ----------- ----------- -----------
Net change in unrealized
appreciation (depreciation) on
investments 4,261,510 1,424,333 71,338 292,397 (1,073,439) (10,274)
Realized gain (loss) on
investments 735,060 360,604 196,132 25,029 154,273 (978)
------------ ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss) on investments 4,996,570 1,784,937 267,470 317,426 (919,166) (11,252)
------------ ----------- ----------- ----------- ----------- -----------
Net increase in net assets resulting
from operations 9,469,882 2,500,935 871,585 1,555,790 967,218 303,729
------------ ----------- ----------- ----------- ----------- -----------
Contract owners activity:
Payments received from contract
owners 85,891,128 9,661,438 8,570,847 12,652,990 17,117,095 14,114,244
Net transfers between sub-accounts
and/or fixed account 414,133 764,178 877,161 1,086,970 (243,339) (5,891,834)
Withdrawals and surrenders (2,638,983) (384,782) (287,848) (364,055) (532,734) (293,869)
Contract maintenance change (23,424) (3,521) (3,073) (3,299) (4,491) (1,006)
------------ ----------- ----------- ----------- ----------- -----------
Net increase from contract
activity 83,642,854 10,037,313 9,157,087 13,372,606 16,336,531 7,927,535
------------ ----------- ----------- ----------- ----------- -----------
Net increase in net assets 93,112,736 12,538,248 10,028,672 14,928,396 17,303,749 8,231,264
Net assets, at beginning of period 27,435,365 3,033,208 3,116,692 3,678,829 5,253,947 3,285,736
------------ ----------- ----------- ----------- ----------- -----------
Net assets, at end of period $120,548,101 $15,571,456 $13,145,364 $18,607,225 $22,557,696 $11,517,000
============ =========== =========== =========== =========== ===========
<CAPTION>
GROWTH &
INCOME II BOND II
SUB-ACCOUNT SUB-ACCOUNT
----------- -----------
<S> <C> <C>
INCOME:
Dividends and capital gains $ -- $ --
Miscellaneous income (loss) 3,168 (391)
EXPENSES:
Mortality and expense risk, and
administrative charge 207,267 82,040
----------- -----------
Net Investment Income (loss) (204,099) (82,431)
----------- -----------
Net change in unrealized
appreciation (depreciation) on
investments 3,058,688 498,467
Realized gain (loss) on
investments -- --
----------- -----------
Net realized and unrealized gain
(loss) on investments 3,058,688 498,467
----------- -----------
Net increase in net assets resulting
from operations 2,854,589 416,036
----------- -----------
Contract owners activity:
Payments received from contract
owners 17,225,945 6,548,569
Net transfers between sub-accounts
and/or fixed account 1,881,077 1,939,920
Withdrawals and surrenders (560,767) (214,928)
Contract maintenance change (6,180) (1,854)
----------- -----------
Net increase from contract
activity 18,540,075 8,271,707
----------- -----------
Net increase in net assets 21,394,664 8,687,743
Net assets, at beginning of period 6,388,817 2,678,136
----------- -----------
Net assets, at end of period $27,783,481 $11,365,879
=========== ===========
</TABLE>
Statement of Operations and Changes in Net Assets
For the year ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL 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 $ 632,218 $ 78,087 $ 19,427 $ 106,100 $ 359,226 $ 69,378
Miscellaneous income (loss) 11,618 1,457 (196) 1,531 840 334
EXPENSES:
Mortality and expense risk, and
administrative charge 139,808 15,425 16,207 19,935 22,201 18,034
----------- ---------- ---------- ---------- ---------- -----------
Net Investment Income (loss) 504,028 64,119 3,024 87,696 337,865 51,678
----------- ---------- ---------- ---------- ---------- -----------
Net change in unrealized appreciation
(depreciation) on investments 736,735 51,240 103,391 182,124 34,430 304
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)
----------- ---------- ---------- ---------- ---------- -----------
Net increase in net assets resulting
from operations 1,295,868 129,419 131,987 273,697 384,934 50,939
----------- ---------- ---------- ---------- ---------- -----------
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
Net transfers between sub-accounts
and/or fixed account (51,686) (166,332) (120,369) 47,771 672,000 (1,138,789)
Withdrawals and surrenders (147,317) (20,170) (21,168) (17,803) (26,742) (16,705)
Contract maintenance change (1,706) (249) (163) (256) (188) (134)
----------- ---------- ---------- ---------- ---------- -----------
Net increase from contract activity 24,071,286 2,728,807 2,809,001 3,065,199 4,618,520 2,791,254
----------- ---------- ---------- ---------- ---------- -----------
Net increase in net assets 25,367,154 2,858,226 2,940,988 3,338,896 5,003,454 2,842,193
Net assets, at beginning of period 2,068,211 174,982 175,704 339,933 250,493 443,543
----------- ---------- ---------- ---------- ---------- -----------
Net assets, at end of period $27,435,365 $3,033,208 $3,116,692 $3,678,829 $5,253,947 $ 3,285,736
=========== ========== ========== ========== ========== ===========
<CAPTION>
GROWTH &
INCOME II BOND II
SUB-ACCOUNT SUB-ACCOUNT
----------- -----------
<S> <C> <C>
INCOME:
Dividends and capital gains $ -- $ --
Miscellaneous income (loss) 6,979 673
EXPENSES:
Mortality and expense risk, and
administrative charge 31,803 16,203
---------- ----------
Net Investment Income (loss) (24,824) (15,530)
---------- ----------
Net change in unrealized appreciation
(depreciation) on investments 288,509 76,737
Realized gain (loss) on investments
---------- ----------
Net realized and unrealized gain (loss)
on investments 288,509 76,737
---------- ----------
Net increase in net assets resulting
from operations 263,685 61,207
---------- ----------
Contract owners activity:
Payments received from contract
owners 5,241,129 2,208,788
Net transfers between sub-accounts
and/or fixed account 555,914 98,119
Withdrawals and surrenders (29,858) (14,871)
Contract maintenance change (538) (178)
---------- ----------
Net increase from contract activity 5,766,647 2,291,858
---------- ----------
Net increase in net assets 6,030,332 2,353,065
Net assets, at beginning of period 358,485 325,071
---------- ----------
Net assets, at end of period $6,388,817 $2,678,136
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE> 152
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, interest 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%.
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.
36
<PAGE> 153
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 December 31, 1997.
<TABLE>
<CAPTION>
PURCHASES SALES
----------- ----------
<S> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $13,170,887 $2,417,682
International Equity Portfolio 10,972,885 1,211,737
Balanced Portfolio 14,823,266 212,387
Income Opportunity Portfolio 20,215,886 1,993,295
Standby Income Portfolio 17,107,511 8,865,373
Select Advisors Portfolio
Growth & Income Portfolio II 20,562,741 2,226,763
Bond Portfolio II 8,565,550 376,274
</TABLE>
7. UNIT VALUES
The following table shows a summary of units outstanding for variable
annuity contracts for the period January 1, 1997 to December 31, 1997.
<TABLE>
<CAPTION>
TRANSFERS
BEGINNING UNITS UNITS BETWEEN SUB- ENDING UNIT ENDING
UNIT PURCHASED REDEEMED ACCOUNTS UNITS VALUE VALUE
--------- --------- -------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Sub-account 236,639 658,639 (24,977) 50,785 921,086 16.905544 $ 15,571,456
International Equity
Sub-account 252,346 636,140 (21,290) 72,784 939,980 13.984724 13,145,364
Balanced Sub-account 266,916 839,471 (24,039) 71,219 1,153,567 16.130170 18,607,225
Income Opportunity Sub-account 334,062 1,008,989 (31,392) (15,333) 1,296,326 17.401250 22,557,696
Standby Income Sub-account 306,751 1,291,272 (26,966) (537,276) 1,033,781 11.140654 11,517,000
Growth & Income Sub-account 451,141 1,129,801 (36,756) 114,534 1,658,720 16.749955 27,783,481
Bond Sub-account 235,025 557,735 (18,397) 162,068 936,431 12.137441 11,365,879
------------
$120,548,101
============
</TABLE>
37
<PAGE> 154
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 throughout each
year)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY GROWTH &
GROWTH EQUITY BALANCED OPPORTUNITY 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>
FOR THE YEAR ENDED
DECEMBER 31, 1997
Per share data
Investment income $ 0.914814 $ 0.759815 $ 1.297872 $ 2.211330 $ 0.586459 $ -- $ --
Expenses 0.197048 0.179407 0.200630 0.227065 0.146437 0.204446 0.156956
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income-net 0.717766 0.580408 1.097242 1.984265 0.440022 (0.204446) (0.156956)
Net realized and unrealizable
gain (loss) on investments 3.369931 1.053431 1.250190 (0.310492) (0.010786) 2.792923 0.899266
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
asset value 4.087697 1.633839 2.347432 1.673773 0.429236 2.588477 0.742310
Beginning of year 12.817847 12.350885 13.782738 15.727477 10.711418 14.161478 11.395131
---------- ---------- ---------- ---------- ---------- ---------- ----------
End of year $16.905544 $13.984724 $16.130170 $17.401250 $11.140654 $16.749955 $12.137441
========== ========== ========== ========== ========== ========== ==========
Ratios
Ratio of operating expense
to average net assets(%) 1.32% 1.33% 1.21% 1.29% 1.40% 1.21% 1.17%
Ratio of investment
income-net to average net
assets(%) 7.70% 7.43% 11.11% 13.57% 4.26% -1.19% -1.17%
FOR THE YEAR ENDED
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
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 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)%
</TABLE>
The above information has been prepared using daily weighted-average units
outstanding.
The accompanying notes are an integral part of the financial statements.
38
<PAGE> 155
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, 1997, and the
related statements of operations, changes in net assets and selected per unit
data and ratios for the years ended December 31, 1997 and 1996. 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, 1997 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, 1997, the results of operations, the changes in its net assets and
the selected per unit data and ratios for the years ended December 31, 1997 and
1996 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 16, 1998
<PAGE> 156
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, 1997 and 1996, and
the related consolidated statements of operations and statements of changes in
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 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.
/s/ Coopers & Lybrand L.L.P.
Cincinnati, Ohio
April 27, 1998
1
<PAGE> 157
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, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
-------------- --------------
(IN THOUSANDS)
------------------------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Debt securities $2,975,472 $2,548,307
Equity securities 98,615 64,462
Mortgage loans, net 114,553 93,499
Real estate 7,007 10,374
Policy loans 51,231 51,331
Short term investments 60,357 88,012
Other invested assets 13,152 10,881
Cash and cash equivalents 281 593
---------- ----------
Total investments 3,320,668 2,867,459
---------- ----------
Accrued investment income 39,356 35,140
Deferred acquisition costs, net 248,586 284,135
Other assets 6,619 6,417
Assets held in separate accounts 122,631 27,971
---------- ----------
Total assets $3,737,860 $3,221,122
========== ==========
</TABLE>
Continued
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 158
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, 1997 and 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY 1997 1996
-------------- --------------
(IN THOUSANDS)
------------------------------
<S> <C> <C>
Policy reserves $2,957,121 $2,614,250
Other policyholder funds 26,050 20,434
Pending policyholder claims 5,815 6,961
---------- ----------
Total policy liabilities 2,988,986 2,641,645
---------- ----------
Payable to parent company 197,358 177,760
Other accrued expenses 21,395 20,078
Federal income tax liability
Current 17,058 11,735
Deferred 62,158 55,385
Liabilities related to separate accounts 122,631 27,971
---------- ----------
Total liabilities 3,409,586 2,934,574
---------- ----------
Commitments and contingencies (see Note 8)
Common stock, $1 par value, authorized 10,000,0000 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 34,330 12,348
Retained earnings 71,159 51,415
---------- ----------
Total shareholder's equity 328,274 286,548
---------- ----------
Total liabilities and shareholder's equity $3,737,860 $3,221,122
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 159
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, 1997
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
(IN THOUSANDS)
-----------------------------------------
<S> <C> <C> <C>
Revenue:
Insurance premiums and other considerations $ 59,458 $ 55,806 $ 54,731
Policy and contract charges 74,889 68,829 67,861
Net investment income 227,047 195,147 231,231
Net realized investment gains (losses) 19,439 14,256 5,095
Other income 3,902 1,093 785
-------- -------- --------
Total revenues 384,735 335,131 359,703
-------- -------- --------
Benefits and expenses:
Policy benefits 59,835 54,575 52,620
Interest expense on annuities and financial products 165,652 143,989 127,082
Amortization of deferred policy acquisition costs 60,992 49,013 43,631
Other operating expenses 61,264 53,744 51,647
-------- -------- --------
Total benefits and expenses 347,743 301,321 274,980
-------- -------- --------
Income before income taxes 36,992 33,810 84,723
Income tax expense (benefit)
Current 15,568 8,858 488
Deferred (2,866) 2,818 1,133
-------- -------- --------
12,702 11,676 1,621
-------- -------- --------
Net income $ 24,290 $ 22,134 $ 83,102
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 160
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of The Western and Southern Life Insurance Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
for the three years ended December 31, 1997
<TABLE>
<CAPTION>
NET
UNREALIZED
APPRECIA-
TION
(DEPRECIA-
TION) ON
SECURITIES
COMMON PAID-IN AVAILABLE- RETAINED TOTAL
STOCK CAPITAL FOR-SALE EARNINGS EQUITY
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Shareholder's equity, January 1, 1995 $ 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 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
--------- --------- ---------- ---------- ----------
Net income 24,290 24,290
Unrealized appreciation (depreciation) on securities,
net of deferred income tax and adjustments to
deferred policy acquisition costs 21,982 21,982
Dividend to parent (4,546) (4,546)
--------- --------- ---------- ---------- ----------
Shareholder's equity, December 31, 1997 $ 1,500 $221,285 $ 34,330 $ 71,159 $ 328,274
========= ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 161
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of The Western and Southern Life Insurance Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three years ended December 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- --------------
(IN THOUSANDS)
-------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 24,290 $ 22,134 $ 83,102
Adjustments to reconcile net income to net cash provided
by operating activities:
Capitalization of deferred policy acquisition costs (56,245) (51,036) (42,837)
Amortization and write-off of deferred policy
acquisition costs 60,992 49,013 43,631
Realized (gains) losses on invested assets, net (19,439) (14,256) (5,095)
Deferred Federal income tax (2,866) 2,818 1,133
Increase in policy liabilities 37,190 26,078 10,372
(Increase) decrease in other assets (99,078) (29,399) (6,883)
Increase (decrease) in other liabilities 120,878 40,491 33,853
---------- ---------- ----------
Net cash provided by operating activities 65,722 45,843 117,276
---------- ---------- ----------
Cash flows from investing activities:
Purchases:
Debt securities, available-for-sale (1,431,999) (1,447,588) (960,371)
Equity securities, available-for-sale (71,179) (35,851) (27,527)
Mortgage loans (37,415) - (10,295)
Real estate (437) (583) (8,918)
Short-term and other invested assets (2,706,179) (2,788,146) (2,740,652)
Proceeds from sales, calls or maturities
Debt securities, available-for-sale 1,075,974 1,003,920 652,316
Equity securities, available-for-sale 44,121 31,317 17,503
Mortgage loans 18,514 30,109 21,758
Real estate 3,878 7,000
Short-term and other invested assets 2,733,083 2,817,605 2,696,859
---------- ---------- ----------
Net cash used by investing activities (371,639) (382,217) (359,327)
---------- ---------- ----------
</TABLE>
Continued
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 162
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(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, 1997
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -----------
(IN THOUSANDS)
------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Deposits to universal life and investment product
account balances 595,479 513,635 385,562
Withdrawals from universal life and investment product
account balances (285,328) (181,424) (134,740)
Capital contributions from parent 60,000
Dividends to parent (4,546) (1,758) (63,425)
--------- --------- ---------
Net cash provided by financing activities 305,605 330,453 247,397
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (312) (5,921) 5,346
Cash and cash equivalents at beginning of year 593 6,514 1,168
--------- --------- ---------
Cash and cash equivalents at end of year $ 281 $ 593 $ 6,514
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 163
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(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. Prior to 1996, 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> 164
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND 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
<S> <C>
Net income, as previously reported $ 18,272
Add adjustments for effect of retroactively applying a new basis
of accounting
Deferred policy acquisition costs (794)
Policy reserves 14,133
Deferred income taxes (1,133)
Current income taxes 2,141
Interest maintenance reserve 543
Federal income tax refund 53,000
Other, net (3,060)
--------
Total 64,830
--------
Net income, as adjusted $ 83,102
========
</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
<S> <C> <C>
Balance at beginning of year, as previously reported $ 166,942 $ 97,835
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
Asset valuation reserve and interest maintenance reserve 36,263 28,645
Policy reserves (76,916) (91,049)
Reinsurance (141,714) (137,340)
Deferred Federal income tax (62,280) (27,433)
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)
Other, net 195 1,306
---------- ---------
Total 119,652 47,250
---------- ---------
Balance at beginning of year, as adjusted $ 286,594 145,085
========== =========
</TABLE>
9
<PAGE> 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING
POLICIES, CONTINUED:
b. BASIS OF PRESENTATION, CONTINUED:
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
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.
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.
10
<PAGE> 166
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING
POLICIES, CONTINUED:
e. DEFERRED POLICY ACQUISITION COSTS, CONTINUED:
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 available-for-sale securities 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.
A summary of deferred acquisition costs follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------- -----------
<S> <C> <C> <C>
Deferred acquisition costs, January 1 $284,135 $242,998 $367,409
Capitalization of costs 56,245 51,036 42,837
Amortization (48,749) (49,013) (43,631)
Additional amount related to unrealized gains
(losses) on securities (43,045) 39,114 (123,617)
-------- -------- --------
$248,586 $284,135 $242,998
======== ======== ========
</TABLE>
11
<PAGE> 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING
POLICIES, CONTINUED:
f. VALUATION OF INVESTMENTS:
o 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 $18,485 and $6,649, respectively, and deferred
acquisition costs of $60,421 and $29,619, respectively, at
December 31, 1997 and 1996.
o 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.
o Policy loan values are carried at outstanding indebtedness not in
excess of policy cash surrender value.
o Real estate joint ventures and partnerships where the Company can
exercise significant influence are accounted for on the equity
method.
o 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.
12
<PAGE> 168
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING
POLICIES, CONTINUED:
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.
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.
l. RECLASSIFICATIONS: Certain 1996 and 1995 amounts have been
reclassified to conform to the 1997 presentation.
13
<PAGE> 169
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS:
The amortized cost and estimated fair values of securities
available-for-sale at December 31, 1997, 1996, and 1995, are as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
UN- UN-
AMORTIZED REALIZED REALIZED 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 $ 21,454 $ 474 $ 17 $ 21,911
Debt securities issued by states of the U.S.
and political subdivisions of the states 83,387 5,890 21 89,256
Corporate securities 1,769,188 85,277 8,969 1,845,496
Mortgage-backed securities 997,094 27,687 5,972 1,018,809
---------- -------- ------- ----------
Total debt securities $2,871,123 $119,328 $14,979 $2,975,472
========== ======== ======= ==========
Equity securities $ 89,728 $ 10,217 $ 1,330 $ 98,615
========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
UN- UN-
AMORTIZED REALIZED REALIZED 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>
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
UN- UN-
AMORTIZED REALIZED REALIZED 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>
14
<PAGE> 170
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
The amortized cost and estimated fair value of debt securities at
December 31, 1997, 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 $ 32,667 $ 33,019
Due after one year through five years 638,739 669,040
Due after five years through ten years 879,907 912,067
Due after ten years 322,716 342,537
-------------- --------------
Mortgage-backed securities 997,094 1,018,809
-------------- --------------
Total $ 2,871,123 $ 2,975,472
============== ==============
</TABLE>
Net investment income consisted of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Debt securities $ 202,957 $ 172,331 $ 152,328
Equity securities 8,895 3,391 3,392
Mortgage loans 7,388 10,195 12,967
Rental income from real estate 2,280 2,604 2,246
Policy loans 3,668 3,743 3,739
Other invested assets 647 1,694 2,466
Short-term investments 4,590 5,121 4,643
Interest on Federal tax return - - 53,000
------------ ------------ ------------
Gross investment income 230,425 199,079 234,781
Investment expense 3,378 3,932 3,550
------------ ------------ ------------
Net investment income $ 227,047 $ 195,147 $231,231
============ ============ ============
</TABLE>
15
<PAGE> 171
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
Proceeds from sales of investments in debt securities during 1997, 1996
and 1995 were $1,075,974, $1,003,920 and $652,316, respectively. Gross
gains of $16,837, $14,494 and $14,839 and gross losses of $3,361, $8,135
and $9,739 were realized on those sales in 1997, 1996 and 1995,
respectively.
Proceeds from sales of investments in equity securities during 1997, 1996
and 1995 were $44,121, $31,317 and $17,503, respectively. Gross gains of
$7,575, $4,936 and $3,303 and gross losses of $4,139, $1,407 and $598
were realized on those sales in 1997, 1996 and 1995, 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 50% 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,
----------------------------------
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 4,532 $ 5,684 $ 4,043
Provisions charged to operations 2,178 - 2,513
Charge-offs, net of recoveries (3,733) (1,152) (872)
----------- ---------- ---------
Balance, end of year $ 2,977 $ 4,532 $ 5,684
=========== ========== =========
</TABLE>
16
<PAGE> 172
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>
1997 1996
------------------------------ ------------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Assets
Debt securities $ 2,975,472 $ 2,975,472 $ 2,548,307 $ 2,548,307
Equity securities 98,615 98,615 64,462 64,462
Mortgage loans, net 114,553 117,838 93,499 96,800
Short-term investments 60,357 60,357 88,012 88,012
Cash and cash equivalents 281 281 593 593
-------------- ------------- -------------- --------------
Total assets $ 3,249,278 $ 3,252,563 $ 2,794,873 $ 2,798,174
============== ============= ============== ==============
Liabilities
Investment-type contract reserves $ 2,957,121 $ 2,854,827 $ 2,614,250 $ 2,515,854
-------------- ------------- -------------- --------------
Total liabilities $ 2,957,121 $ 2,854,827 $ 2,614,250 $ 2,515,854
============== ============= ============== ==============
</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> 173
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 $146,104 and $139,885 at December 31, 1997 and 1996,
respectively, and has recorded interest expense of $9,190, $9,426 and
$8,351 for the years ended December 31, 1997, 1996 and 1995,
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 $38,935, $37,798 and $33,750 in 1997, 1996 and 1995,
respectively. Rent expense was $4,579, $4,253 and $4,391 in 1997, 1996
and 1995, respectively.
During 1995, the Company's parent made capital contributions of $60,000
to the Company.
At December 31, 1997 and 1996, the Company had $42,298 and $35,915,
respectively, invested in the Touchstone Funds, mutual funds administered
by a subsidiary of the Company.
18
<PAGE> 174
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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>
1997 1996 1995
<S> <C> <C> <C>
Income tax computed at statutory tax rate $ 12,947 $ 11,834 $ 29,653
Federal income tax refund related to IRS assessment -- (28,000)
Dividends received deduction (231) (178) (32)
Other, net (14) 20 --
----------- ----------- -----------
Federal income tax $ 12,702 $ 11,676 $ 1,621
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred income tax (asset) liability:
Deferred policy acquisition costs $ 78,015 $ 93,475
Investments 38,859 18,267
Future policy and contract benefits (56,099) (59,833)
Other 1,383 3,476
----------- -----------
Deferred income tax (asset) liability $ 62,158 $ 55,385
=========== ===========
</TABLE>
Federal income taxes paid under the Company's tax-sharing agreement with
its parent were $17,058, $11,735 and $11,107 for 1997, 1996 and 1995,
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.
19
<PAGE> 175
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
A reconciliation of SAP shareholder's equity to GAAP shareholder's equity
at December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
SAP shareholder's equity $ 178,079 $ 170,603 $ 166,942
Deferred policy acquisition costs 248,586 284,308 243,179
Policy reserves (48,372) (63,340) (76,916)
Asset valuation and interest maintenance reserves 61,448 47,463 36,263
Deferred income taxes (62,907) (55,375) (62,280)
Unrealized gain (loss) on available-for-sale securities 103,177 49,688 120,925
Reinsurance (149,692) (144,372) (141,714)
Other, net (2,045) (2,427) 195
------------- ------------- ------------
Total GAAP shareholder's equity $ 328,274 $ 286,548 $ 286,594
============= ============= ============
</TABLE>
A reconciliation of SAP net income to GAAP income at December 31,
follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
SAP net income $ 17,755 $ 13,673 $ 18,272
Deferred policy acquisition costs (4,747) 2,023 (794)
Policy reserves 14,968 13,576 14,133
Deferred income taxes 2,866 (2,818) (1,133)
Federal income tax refund - - 53,000
Interest maintenance reserve 4,632 1,362 2,141
Current income taxes (73) (2,146) 543
Other, net (11,111) (3,536) (3,060)
------------ ------------ -----------
Total GAAP net income $ 24,290 $ 22,134 $ 83,102
============ ============ ===========
</TABLE>
20
<PAGE> 176
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. REGULATORY MATTERS, CONTINUED:
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, 1997 and 1996, 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, and the content of advertising material.
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 prior regulatory approval. During 1997, the
Company paid dividends of $4,546 to its Parent. This distribution
represents amounts remitted to the Parent under the tax sharing agreement
between the Company and its Parent.
For statutory accounting purposes, the Company received written approval
from the State of Ohio Department of Insurance to record guaranty fund
assessments as billed 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 written 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.
21
<PAGE> 177
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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>
1997 1996 1995
<S> <C> <C> <C>
Revenues
Interest-sensitive life insurance and other $ 214,818 $ 199,513 $ 250,718
Annuities 169,917 135,618 108,985
-------------- -------------- -----------
$ 384,735 $ 335,131 $ 359,703
============== ============== ===========
Net income before income taxes
Interest-sensitive life insurance and other $ 8,792 $ 10,711 $ 66,323
Annuities 28,200 23,099 18,400
-------------- -------------- -----------
$ 36,992 $ 33,810 $ 84,723
============== ============== ===========
Assets
Interest-sensitive life insurance and other $ 1,543,891 $ 1,483,240
Annuities 2,193,969 1,737,882
-------------- --------------
$ 3,737,860 $ 3,221,122
============== ==============
</TABLE>
10. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 130 "Reporting Comprehensive Income."
This statement requires display of comprehensive income in a set of
general-purpose financial statements. Comprehensive income is defined as
changes in equity of a business enterprise during a period from
transactions and other events from non-owner sources. The Company will
display comprehensive income for fiscal periods beginning after December
15, 1997.
22
<PAGE> 178
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard 131 "Disclosures about
Segments of an Enterprise and Related Information." This statement
requires selected information to be reported on the Company's operating
segments. Operating segments are determined by the way management
structures the segments in making operating decisions and assessing
performance. The Company is currently reviewing what changes, if any,
this will require on the presentation of the financial statements for
fiscal periods beginning after December 15, 1997.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3 "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." This statement provides
guidance on accounting for insurance related assessments and required
disclosure information. This statement is effective for fiscal years
beginning after December 15, 1998. The Company does not believe that this
statement will materially affect the Company's financial statements or
disclosures.
In March, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. The Company does not believe that this
statement will materially affect the Company's financial statements or
disclosures.
23
<PAGE> 1
Exhibit 3(a)
DISTRIBUTOR AGREEMENT
(Variable Annuity)
This Agreement is made this 10th day of November, 1994 by and between
Western-Southern Life Assurance Company, an insurance company organized and
existing under the laws of the State of Ohio (the "Company") and Touchstone
Securities, Inc., a Nebraska corporation (the "Distributor") and its undersigned
affiliated insurance agencies (the "Agencies").
WHEREAS, the Company and its Separate Account 1 and Separate Account 2
(individually a "Separate Account" and together the "Separate Accounts"), each
of which is a separate investment account registered as a unit investment trust
under the Investment Company Act of 1940 (the "1940 Act"), propose to offer for
sale certain variable annuity contracts, together with certificates under group
contracts and any riders (hereafter, the "Contracts"), interests under which may
be deemed to be securities under the Securities Act of 1933 (the "1933 Act") and
the laws of some states; and
WHEREAS, the Separate Accounts and various divisions thereof (the
"Sub-Accounts") will invest solely in various portfolios of the Select Advisors
Variable Insurance Trust, an open-end diversified management investment company
organized as a Massachusetts business trust (the "VI Trust") and various
portfolios of Select Advisors Portfolios, an open-end diversified management
investment company organized as a Massachusetts business trust (the "SA
Trust")(the portfolios of the VI Trust and the SA Trust being herein sometimes
referred to as the "Portfolios" or, individually, as a "Portfolio"); and
WHEREAS, the Distributor is registered as a broker-dealer with the
Securities and Exchange Commission (the "SEC") under the Securities Exchange Act
of 1934 (the "1934 Act") and is a member of the National Association of
Securities Dealers, Inc. (the "NASD"); and
WHEREAS, the Agencies are affiliated with the Distributor by common
ownership or contract and are duly licensed insurance agencies under the
applicable insurance laws of one or more of those states in which the Contracts
will be distributed pursuant to this Agreement; and
WHEREAS, certain personnel of the Company or its affiliates may engage,
or may be deemed to be engaged, directly or indirectly, in offering, selling,
advertising or marketing Contracts and confirming transactions as required by
1934 Act Rule 10b-10; in the maintenance of records required by 1934 Act Rules
17a-3 and 17a-4 or other SEC or NASD rules applicable to registered
broker-dealers; and in the payment of commissions with respect to Contracts; and
WHEREAS, all Company personnel engaged in the activities described in
the foregoing paragraph (and those registered representatives of the Distributor
who shall supervise securities activities related to the Contracts that are
conducted on the premises of financial institutions), as well as all other
persons who Section 3(a)(18) of the 1934 Act defines as associated persons of
the Distributor, will be referred to herein as "Associated Persons," (it being
understood that such term, as used in this Agreement, does not include persons
associated with other broker-dealer firms that are engaged by the Distributor to
offer and sell Contracts);
<PAGE> 2
NOW, THEREFORE, in consideration of the covenants and mutual promises
herein contained, the Distributor and the Company agree as follows:
1. APPOINTMENT OF DISTRIBUTOR. The Distributor will act as the
exclusive general distributor of the Contracts during the term of this Agreement
in each state or other jurisdiction where the Contracts may legally be sold. The
Distributor shall at all times function as, and be deemed to be, an independent
contractor and will be under no obligation to effectuate any particular amount
of sales of Contracts or to promote or make sales, except to the extent the
Distributor deems advisable. Anything in this Agreement to the contrary
notwithstanding, the Company retains the ultimate right to control the sale of
the Contracts, including the right to suspend sales in any jurisdiction or
jurisdictions, to appoint and discharge agents of the Company, or to refuse to
sell a Contract to any applicant for any reason whatsoever.
2. APPOINTMENT OF DEALERS. The Distributor will use its best efforts to
find purchasers for the Contracts and to promote the distribution of the
Contracts. The Distributor may enter into agreements, in form and substance
satisfactory to the Company, with dealers and other persons selected by the
Distributor ("Selected Dealers"), providing for the sale of Contracts by and
through such Selected Dealers. The Selected Dealers shall not have any authority
to act as agent for the Company, but shall act only as dealers for their own
accounts or as agents for their customers.
3. DISTRIBUTION RESPONSIBILITIES OF THE DISTRIBUTOR. The Distributor
will assume full responsibility for securities law compliance by the Associated
Persons with respect to the offering of the Contracts, including, as applicable,
compliance with the NASD Rules of Fair Practice and Federal and state securities
laws and regulations. The Distributor, directly or through the Company as its
agent, will (a) make timely filings as required by law with the SEC, NASD, and
any other securities regulatory authorities of any sales literature or materials
relating to the Separate Account or the Sub-Accounts, (b) make available to the
Company copies of any agreements or plans intended for use in connection with
the sale of the Contracts in sufficient numbers and in adequate time for
clearance by the appropriate regulatory authorities before they are used, and
(c) train the Associated Persons, use its best efforts to prepare them to
complete satisfactorily any and all applicable NASD and state securities
examinations, register the Associated Persons as its registered representatives
or principals to the extent legally required before they engage in securities
activities, and diligently supervise and control them in the performance of such
activities. The parties will use their best efforts to obtain any required
clearances by regulatory agencies as expeditiously as reasonably possible and
will not use any materials, plan or agreement in any jurisdiction unless all
filings have been made and approvals obtained that are necessary to make said
use proper and legal therein. The Company will be responsible for filing the
Contracts with and obtaining all necessary approvals thereof from state
insurance regulatory authorities.
2
<PAGE> 3
4. ADMINISTRATIVE FUNCTIONS AND SERVICES. Completed applications for
the Contracts shall be transmitted directly to the Company or its designated
agent for acceptance or rejection in accordance with rules and procedures
established by the Company. Initial and subsequent premium payments under the
Contracts shall be made payable to the Company and shall be delivered to the
Company or its designated agent; any such payments that are received in error by
the Distributor shall be forwarded by the Distributor to the Company or its
designated agent promptly after such receipt. All other administrative functions
and services in connection with the Contracts shall be performed by the Company.
5. APPOINTMENT OF AGENTS; COMPLIANCE WITH STATE INSURANCE LAWS. The
Company shall undertake to appoint as life insurance agents of the Company the
Distributor's qualified principals and representatives (including Associated
Persons where applicable) and, as appropriate upon the request of the
Distributor, those of the Selected Dealers. The Distributor, either itself or
through an affiliated insurance agency, shall comply with all state insurance
licensing requirements applicable to the Distributor in performing this
Agreement, and shall be responsible for ensuring that Associated Persons will
engage in the offer and sale of Contracts only if properly qualified under the
insurance laws of all relevant jurisdictions. Although the Distributor may
assist the Selected Dealers or their representatives or principals in qualifying
under relevant insurance laws to sell Contracts, and will assist the Company in
monitoring such qualification on a periodic basis, the responsibility for
ensuring that all such requirements have been met is that of such Selected
Dealers and not the Distributor. Each of the Agencies joins in the execution
this Agreement for the purpose of acknowledging its obligations to comply with
all state insurance licensing requirements of those states in which such Agency
is licensed that are applicable to the Contracts and the performance of this
Agreement on Distributor's behalf.
6. SUITABILITY. The Distributor will take reasonable steps to ensure
that the Associated Persons shall not make recommendations to an applicant to
purchase a Contract in the absence of reasonable grounds to believe that the
purchase of the Contract is suitable for the applicant.
7. SALES PRACTICES. The Distributor will use its best efforts to assure
that no person uses any sales aids, promotional material, or sales literature
with respect to Contracts that have not been specifically approved in advance by
the Distributor and the Company. The Company will be responsible for filing such
items, as necessary, with any insurance regulatory authorities and, where
necessary, obtaining approvals of said authorities. Distributor will use its
best efforts to assure that no person, in connection with the offer or sale of
the Contracts, makes any representations regarding the Contracts, the
Sub-Accounts, interests in the Portfolios, the Company, or the Distributor,
which are not either then authorized by the Company and the Distributor or
contained in a then-effective Registration Statement relating to any of the
Separate Accounts and the offering of the Contracts (the "Registration
Statement").
8. COSTS AND EXPENSES. Except as set forth below or otherwise
specifically set forth herein, or except as may otherwise be agreed between the
parties from time to time, each party to
3
<PAGE> 4
this Agreement shall bear all costs and expenses of providing the services and
performing the functions that it undertakes to provide or perform hereunder.
(a) As between the Company and the Distributor, the Company
will bear and/or reimburse the Distributor for the cost of all direct
services and expenses (but not any part of the Distributor's general
overhead) and all fees, including registration and filing fees,
required or incurred in connection with (i) registering and qualifying
the Separate Accounts and the Contracts with Federal and state
regulatory authorities, (ii) preparing, typesetting, printing, filing
and distributing registration statements, prospectuses and statements
of additional information (including amendments to any of the
foregoing) pertaining to the Separate Accounts and the Contracts
(except the cost thereof relating to those prospectuses and statements
of additional information distributed to prospective investors, which
will be borne by the Distributor), (iii) preparing, typesetting,
printing, filing and distributing Contract forms, (iv) preparing,
typesetting, printing, filing and distributing to Contract owners
confirmations, periodic statements of account, and periodic reports of
the Separate Accounts and the various Sub-Accounts to Contract owners,
(v) audit and accounting expenses pertaining to the Company and audit
and financial statement preparation expenses pertaining to the Separate
Accounts and the Sub-Accounts, (vi) preparation of and filing Forms
N-SAR for the Separate Accounts, (vii) preparation of and filing
required insurance regulatory reports for the Separate Accounts and the
Company, (viii) general advice, including the fees and expenses of
legal counsel, concerning the Separate Accounts and the Contracts, and
(ix) registering and qualifying those Associated Persons who are
employees of the Company or its affiliates with state insurance
regulatory authorities (including the training of Associated Persons
for this purpose).
(b) As between the Company and the Distributor, the
Distributor will bear and/or reimburse the Company for the cost of all
direct services and expenses (but not any part of the Company's general
overhead) and all fees, including registration and filing fees,
required or incurred in connection with (i) registering and qualifying
the Associated Persons with Federal and state securities regulatory
authorities, including the NASD (including the training of Associated
Persons for this purpose), (ii) preparing, typesetting, filing with
insurance and securities regulatory authorities, printing and
disseminating sales literature (including prospectuses and statements
of additional information distributed to prospective investors) and
advertising in connection with the Contracts or in connection with the
interests in the Portfolios purchased by the Separate Accounts through
its Sub-Accounts, and (iii) costs of computer processing that may be
necessary for the Distributor to perform its responsibilities
hereunder.
(c) In connection with the sale of the Contracts, Distributor
will pay all amounts (including sales commissions and overrides at
rates established by Distributor) becoming payable to the Selected
Dealers or their sales representatives, to the Associated Persons or to
any other broker-dealers who have entered into sales agreements with
the
4
<PAGE> 5
Distributor, provided that appropriate records of all commission
payments shall be maintained by the Company or its agent. The
agreements with the Selected Dealers and any such agreement with
another broker-dealer shall be subject to the Company's approval as to
form and substance.
9. RECORDS AND CONFIRMATIONS. The Distributor, directly or through the
Company as its agent, will (i) maintain and preserve in accordance with Rules
17a-3 and 17a-4 under the 1934 Act all books and records required to be
maintained in connection with the offer and sale of the Contracts being
distributed pursuant to this Agreement, which books and records shall remain the
property of the Distributor and shall be subject to inspection by the SEC in
accordance with Section 17(a) of the 1934 Act and (ii) upon or prior to the
completion of each Contract transaction for which a confirmation is legally
required, send a written confirmation for each such transaction reflecting the
facts of the transaction. All records maintained hereunder by the Company as the
Distributor's agent will be promptly surrendered by the Company at the request
of the Distributor and will be available at any time during business hours to
properly-constituted governmental authorities and furnished to them in true,
correct and current hard copy form, should the same be required by said
authorities.
The Company or the Distributor (but at the Company's expense), will
maintain and preserve all records in connection with the Contracts and the
Separate Accounts in accordance with Rules 31a-1 and 31a-2 under the 1940 Act.
To the extent maintained and preserved by the Distributor, such records shall be
the property of the Company and shall be returned to the Company upon request.
10. SECURITIES LAW REGISTRATION. The Distributor will execute such
papers and do such acts and things as shall from time to time be reasonably
requested by the Company for the purpose of (i) maintaining the registration of
the Contracts under the 1933 Act and the registration of each Separate Account
under the 1940 Act and (ii) qualifying and maintaining qualification of the
Contracts for sale under the applicable laws of any state.
Each party hereto shall advise the other promptly of (i) any action of
the SEC or any authorities of any state or territory, of which it has knowledge,
affecting the registration or qualification of any Separate Accounts or of the
Contracts or the right to offer the Contracts for sale or (ii) the happening of
any event which makes untrue any statement, or which requires the making of any
change in, any Registration Statement or any current prospectus or statement of
additional information, in order to make the statements therein not materially
misleading.
11. COMPENSATION. As compensation to the Distributor for assuming the
expenses and performing the distribution services to be assumed and performed by
it pursuant to this Agreement, the Distributor will receive from the Company
such amounts and at such times as are set forth in Schedule A to this Agreement
(as the same may from time to time be amended by agreement between the parties
hereto). To the extent that applicable state insurance laws require that
compensation due on account of the sale of Contracts be paid only to duly
licensed insurance
5
<PAGE> 6
agents, the Distributor agrees that any such compensation received from the
Company by the Distributor will be processed by the Distributor on behalf of its
affiliated insurance agency. In this event, such compensation will be reported
by the Distributor for purposes of satisfying securities regulatory requirements
and by its affiliated insurance agency for purposes of satisfying state
insurance regulatory requirements.
The Company will receive all amounts charged as "surrender charges" in
connection with the Contracts, and all other amounts assessed as Contract
charges.
12. COOPERATION. The Distributor and the Company agree to cooperate
with each other fully in any insurance regulatory examination, investigation, or
proceeding or any judicial proceeding arising in connection with the Contracts.
The Distributor and the Company further agree to cooperate fully with each other
in any securities regulatory examination, investigation or proceeding or any
judicial proceeding with respect to the Company, the Distributor, their
respective affiliates, agents or representatives (including all Associated
Persons), and the Selected Dealers, to the extent that such examination,
investigation or proceeding is in connection with Contracts distributed under
this Agreement. The Distributor shall furnish applicable Federal and state
regulatory authorities with any information or reports in connection with its
services under this Agreement which such authorities may request in order to
ascertain whether the Company's operations are being conducted in a manner
consistent with any applicable law or regulations.
13. INDEMNIFICATION.
(a) The Distributor shall indemnify and hold harmless each
Separate Account, the Company and each of its directors and officers,
and each person who controls the Company against any loss, liability,
claim, damage, or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, claim, damage
or expense and reasonable counsel fees incurred in connection
therewith) (i) arising by reason of any person's acquiring any Contract
or interest thereunder, which may be based upon the ground that any
Registration Statement of the Company or of any Separate Account or the
prospectus or statement of additional information contained therein, as
from time to time amended or supplemented, or any annual or interim
reports of the Company or any Separate Account to Contract owners,
include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to
make the statements therein not misleading, but only to the extent that
such statement or omission was made in reliance upon, and in conformity
with, information furnished to the Company in writing in connection
therewith by or on behalf of the Distributor or (ii) otherwise arising
out of the Distributor's negligence, bad faith, willful misfeasance or
reckless disregard of its responsibilities hereunder.
(b) The Company shall indemnify and hold harmless the
Distributor, its agents and employees, and each person, if any, who
controls the Distributor against any loss, liability, claim, damage, or
expense described in subparagraph (a), above, except as to
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<PAGE> 7
statements (or omissions) made (or not made) in reliance upon, and
conformity with, information furnished to the Company in writing by or
on behalf of the Distributor for use in connection with (i) the
Registration Statement of the Company or any Separate Account or the
prospectus or statement of additional information contained therein, as
the same may be from time to time amended and supplemented, or (ii) any
annual or interim reports to Contract owners; provided, however, that
in no case is the indemnity of the Company in favor of the Distributor
and any such controlling persons to be deemed to protect the
Distributor or any such controlling persons against any liability to
the Company or its Contract owners to which the Distributor or any such
controlling person would otherwise be subject by reason or willful
misfeasance, bad faith or negligence in the performance of their duties
or by reason of reckless disregard of their obligations and duties
under this agreement.
(c) No person from whom indemnity may be sought under this
Section 13 ("Indemnitor") shall be liable to indemnify or hold harmless
any person ("Indemnitee") pursuant to this Section 13, unless the
Indemnitee shall have notified the Indemnitor in writing of the nature
of the claim as to which indemnity is being sought hereunder within a
reasonable time after the Indemnitee shall have been served with a
summons or other first legal process giving notice thereof (or shall
have received notice of such service on any designated agent), which
notice to the Indemnitor shall give information as to the nature of the
claim for which indemnity is sought hereunder. The failure of the
Indemnitee to notify the Indemnitor of any such claim shall not relieve
it from any liability which it may have to the Indemnitee otherwise
than on account of its indemnity agreement contained in this Section
13. The Indemnitor will be entitled to participate at its own expense
in the defense, or, if it so elects, to assume the defense of any suit
brought to enforce any such claim, but if the Indemnitor elects to
assume the defense, such defense shall be conducted by counsel chosen
by it that is reasonably satisfactory to the Indemnitee. If the
Indemnitor elects to assume the defense of any such suit and retain
such counsel in accordance herewith, the Indemnitee shall bear the fees
and expenses of any additional counsel retained by it. If the
Indemnitor does not elect to assume the defense of any such suit, it
will reimburse the Indemnitee for the reasonable fees and expenses of
any counsel retained by the Indemnitee that is reasonably satisfactory
to the Indemnitor.
14. MISCELLANEOUS.
(a) This Agreement shall become effective as of the date of
its execution and shall continue in full force and effect until
terminated. It may be terminated at any time without penalty on six
months' prior written notice by either party to the other.
(b) This Agreement may be amended only by the written
agreement of the parties hereto.
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<PAGE> 8
(c) The Distributor will not assign or delegate its
responsibilities under this Agreement, except with the consent of the
Company.
(d) This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
(e) The Distributor shall keep confidential any information
obtained pursuant to this Agreement and shall disclose such information
only if the Company has authorized such disclosure, or if such
disclosure is expressly required by Federal or state authorities having
jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
WESTERN-SOUTHERN LIFE
ASSURANCE COMPANY TOUCHSTONE SECURITIES, INC.
By: /s/ DONALD J. WUEBBLING By:/s/ EDWARD G. HARNESS, JR.
------------------------ ----------------------------
Donald J. Wuebbling Edward G. Harness, Jr.
Vice President Chief Executive Officer
By: /s/ WILLIAM F. LEDWIN By:/s/ JILL T. MCGRUDER
------------------------ ----------------------------
William F. Ledwin Jill T. McGruder
Senior Vice President President
AND, its affiliated insurance agencies:
IFS INSURANCE AGENCY, INC.
By: /s/ EDWARD G. HARNESS, JR.
--------------------------------
Edward G. Harness, Jr.
President
By: /s/ JILL T. MCGRUDER
--------------------------------
Jill T. McGruder
Vice President
8
<PAGE> 9
IFS AGENCY SERVICES, INC.
By: /s/ EDWARD G. HARNESS, JR.
-----------------------------
Edward G. Harness, Jr.
President
By: /s/ JILL T. MCGRUDER
-----------------------------
Jill T. McGruder
Vice President
IFS AGENCY, INC.
By: /s/ AUSTIN MACKEY
-----------------------------
Austin Mackey
Vice President
9
<PAGE> 1
Exhibit 3(b)
SCHEDULE A
COMMISSION SCHEDULE
SEPARATE ACCOUNT 1 VARIABLE ANNUITY -- 7.00% of all purchase payments,
regardless of whether such premiums are allocated to the fixed account or a
separate account option, plus an annual service fee of 0.25% of the Contract
Value starting at the beginning of the second Contract year.
SEPARATE ACCOUNT 2 VARIABLE ANNUITY -- An annual service fee of 0.30% of the
Contract Value starting in the first Contract year.
<PAGE> 1
Exhibit 8(b)
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
salaries and fees, if any, of all Trustees, officers and
employees of the Trust who are
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<PAGE> 3
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.
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.
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<PAGE> 4
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 directors, officers and
employees of Touchstone Advisors, Inc. and/or of its
affiliates.
4
<PAGE> 5
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.
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
5
<PAGE> 6
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. 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.
6
<PAGE> 7
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%
8
<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.
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<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, JR.
---------------------------------
Edward G. Harness, Jr., President
TOUCHSTONE ADVISORS INC.
By: /s/ BRIAN J. MANLEY
10
<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%
11
<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.
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<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, JR.
------------------------------
Edward G. Harness, Jr., President
TOUCHSTONE ADVISORS INC.
By: /s/ BRIAN J. MANLEY
------------------------
13
<PAGE> 14
Exhibit A to Amendment No. 2 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
i$150 million
International Equity Portfolio 0.95%
Balanced Portfolio 0.80%
Income Opportunity 0.65%
Bond Portfolio 0.55%
Bond Portfolio II 0.55%
14
<PAGE> 15
AMENDMENT NO. 3
TO
INVESTMENT ADVISORY AGREEMENT
BETWEEN
TOUCHSTONE ADVISORS, INC. AND SELECT ADVISORS PORTFOLIOS
This Amendment No. 3 to Investment Advisory Agreement is dated as of
May 1, 1998 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
WHEREAS, a Sub-Trust or series of the Trust to be named Touchstone
Value Plus Portfolio has been established and designated by the Trust's Board of
Trustees;
NOW, THEREFORE, Schedule 1 to the Advisory Agreement is hereby amended,
effective as of May 1, 1998, to read as set forth in Exhibit A to this
Amendment, the sole change in such Schedule being the addition of the Value Plus
Portfolio.
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, JR.
--------------------------------
Edward G. Harness, Jr., President
TOUCHSTONE ADVISORS INC.
By: /s/ PATRICIA J. WILSON
15
<PAGE> 16
Exhibit A to Amendment No. 3 to
Investment 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 Portfolio 0.65%
Bond Portfolio 0.55%
Bond Portfolio II 0.55%
Value Plus Portfolio 0.75%
16
<PAGE> 1
Exhibit 8(c)(i)
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 January,
1998, by and between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the
"Advisor"), and Scudder Kemper Investments, 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, and (ii) this
Agreement is valid and binding upon the Advisor. 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 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.
<PAGE> 2
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 restrictions imposed by these
clients on the use of such names or by the Advisers Act and the rules
adopted thereunder.
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<PAGE> 3
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 containing such information as the Board of Trustees
reasonably shall request.
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<PAGE> 4
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.
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
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<PAGE> 5
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 0.50%
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 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
5
<PAGE> 6
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 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.
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<PAGE> 7
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.
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
7
<PAGE> 8
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.
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.
8
<PAGE> 9
c. 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.
d. 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.
e. 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.
11. 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.
12. 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.
13. MISCELLANEOUS. Each party agrees to perform such further
actions and execute such further documents as are necessary to effectuate the
purposes 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.
9
<PAGE> 10
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:
/s/ BRIAN MANLEY BY /s/ EDWARD G. HARNESS, JR.
- -------------------------------- ---------------------------------
Edward G. Harness, Jr.
Name: Brian Manley President
----------------------------
Title: VP/CFO
----------------------------
SCUDDER KEMPER INVESTMENTS, INC.
Attest:
/s/ JOHN D. LAMB BY /s/ CORNELIA M. SMALL
- -------------------------------- ---------------------------------
Name: John D. Lamb Name: Cornelia M. Small
---------------------------- ---------------------------------
Title: Vice President Title: Managing Director
-------------------------- ---------------------------------
10
<PAGE> 1
Exhibit 8(e)(i)
SPONSOR AGREEMENT
SPONSOR AGREEMENT, dated as of September 9, 1994, by and between Select
Advisors Variable Insurance Trust, a Massachusetts business trust (the "Trust"),
and Touchstone Advisors, Inc., an Ohio corporation ("Touchstone");
W I T N E S S E T H:
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended
(collectively with the rules and regulations promulgated thereunder as amended
from time to time, the "1940 Act");
WHEREAS, the Trust wishes to engage Touchstone to sponsor, and provide
certain management and supervisory services with respect to, all currently
existing or future series (each a "Portfolio") of the Trust, and Touchstone is
willing to provide such services to the Trust, on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of Touchstone. Subject to the direction and control of the
Board of Trustees of the Trust (the "Board"), Touchstone shall perform such
sponsorship and management and supervisory services as may from time to time be
reasonably requested by the Trust, which shall include without limitation: (a)
providing office space, equipment and clerical personnel necessary for
performing the management functions herein set forth; (b) arranging, if desired
by the Trust, for directors, officers or employees of Touchstone to serve as
Trustees, officers or agents of the Trust if duly elected or appointed to such
positions and subject to their individual consent and to any limitations imposed
by law; (c) supervising the overall administration of the Trust, including the
provision of services to the Trust by the Trust's administrator and fund
accounting agent, transfer agent and custodian, which services include without
limitation: (i) updating of corporate organizational documents, and the
negotiation of contracts and fees with and the monitoring and coordinating of
performance and billings of the Trust's transfer agent, custodian, shareholder
servicing agents and other independent contractors or agents, (ii) the
preparation of and filing of documents required for compliance by the Trust with
applicable laws and regulations (including state "blue sky" laws and
regulations), including registration statements on Form N-1A (or other
applicable form), prospectuses and statements of additional information and
semi-annual and annual reports to the Trust's shareholders, (iii) reviewing
(including coordinating the preparing of, but not preparing) tax returns, (iv)
preparation of agendas and supporting documents for and minutes of meetings of
Trustees, committees of Trustees and preparation of notices, proxy statements
and minutes of meetings of shareholders of the Trust or of one or more of the
Portfolios, (v) the maintenance of books and records of the Trust, (vi)
telephone coverage to respond to shareholder inquiries, (vii) the provision of
monitoring reports and assistance regarding the
<PAGE> 2
Portfolios' compliance with federal securities and tax laws including compliance
with the 1940 Act and Subchapter M of the Internal Revenue Code of 1986, as
amended, (viii) the dissemination of yield and other performance information to
newspapers and tracking services, (ix) the preparation of annual renewals for
fidelity bond and errors and omissions insurance coverage, (x) the development
of a budget for the Trust, the establishment of the rate of expense accruals and
the arrangement of the payment of all fixed and management expenses, and (xi)
the determination of each Portfolio's net asset value and the provision of all
other fund accounting services to the Portfolios.
2. Organization Expenses. Touchstone shall pay all of the organization
expenses of the Trust required to be paid prior to the Trust's or any
Portfolio's commencement of investment operations. The Portfolios shall
reimburse Touchstone, without any interest or carrying charges, for such
organization expenses.
3. Allocation of Charges and Expenses. Touchstone shall pay the entire
salaries and wages of all of the Trust's Trustees, officers and agents who
devote part or all of their time to the affairs of Touchstone or its affiliates,
and the wages and salaries of such persons shall not be deemed to be expenses
incurred by the Trust.
4. Operating Expense Waivers or Reimbursement. Touchstone shall waive
all or a portion of its fee pursuant to this Sponsor Agreement and/or reimburse
a portion of the operating expenses (including amortization of organization
expenses but excluding interest, taxes, brokerage commissions and other
portfolio transaction expenses, capital expenditures and extraordinary expenses)
("Expenses") of each Portfolio of the Trust such that after such reimbursement
the aggregate Expenses of the Portfolio shall be equal on an annual basis to the
following percentages of the average daily net assets of the Portfolio for the
Portfolio's then-current fiscal year: Emerging Growth Portfolio, 1.15%;
International Equity Portfolio, 1.25%; Balanced Portfolio, 0.90%; Income
Opportunity Portfolio, 0.85%; and Standby Income Portfolio, 0.50%.
Touchstone's obligations in this Section 4 may be terminated, with
respect to any Portfolio, by Touchstone as of the end of any calendar quarter
after December 31, 1995, upon at least 30 days prior written notice to the Trust
(an "Expense Cap Termination").
5. Compensation of Touchstone. For the services to be rendered, the
facilities to be provided and the expenses to be assumed by Touchstone
hereunder, the Trust shall pay to Touchstone a sponsor fee from the assets of
each Portfolio equal on an annual basis to 0.20% of the Portfolio's average
daily net assets for that Portfolio's then-current fiscal year.
If Touchstone serves under this Agreement for less than the whole
of any month, the compensation to Touchstone hereunder shall be prorated. For
purposes of computing the fees payable to Touchstone hereunder, the net asset
value of each Portfolio shall be computed in the manner specified in that
Portfolio's then-current registration statement.
2
<PAGE> 3
Touchstone hereby waives all of its fees under this Agreement with
respect to each Portfolio until April 30, 1996.
6. Limitation of Liability of Touchstone. Touchstone shall not be
liable for any error of judgment or mistake of law or for any act or omission in
the sponsorship or management of the Trust or the performance of its duties
hereunder, except for willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of the reckless disregard of its
obligations and duties hereunder. As used in this Section 6, the term
"Touchstone" shall include Touchstone and/or any of its affiliates and the
directors, officers and employees of Touchstone and/or any of its affiliates.
7. Activities of Touchstone. The services of Touchstone to the Trust
are not to be deemed exclusive, Touchstone being free to render similar
sponsorship and management services and/or other services to other parties. It
is understood that Trustees and officers of the Trust, and shareholders of a
Portfolio are or may become interested in Touchstone and/or any of its
affiliates, as directors, officers, employees, or otherwise, and that directors,
officers and employees of Touchstone and/or any of its affiliates are or may
become similarly interested in the Trust and that Touchstone and/or any of its
affiliates may be or become interested in the Trust as a shareholder of a
Portfolio or otherwise.
8. Duration, Termination and Amendment. This Agreement shall become
effective as of the day and year first above written and shall govern the
relations between the parties hereto until terminated in accordance with this
Section 8. Except for an Expense Cap Termination, this Agreement may not be
amended except by an instrument in writing signed by both parties.
This agreement may be terminated, with respect to any Portfolio or
Portfolios:
(a) by Touchstone, either (i) at the end of the calendar
quarter after December 31, 1995 during which Touchstone has given at
least 30 days advance witten notice to the Trust, on behalf of each
such Portfolio, that it is terminating this agreement as to such
Portfolio or (ii) at such time as Touchstone ceases to be the
investment advisor to such Portfolio. In the event of a termination
pursuant to clause
(i) of the preceding sentence, each party's obligations
hereunder shall terminate as to each such Portfolio as of the end of
the calendar quarter in which the notice of termination is given; in
the event of a termination pursuant to clause (ii) of the preceding
sentence Touchstone's obligations hereunder shall terminate as to each
such Portfolio as of the effective date of its termination as
investment advisor.
(b) by the Board, or by the vote of a "majority of the
outstanding voting securities" (as such phrase is defined in the 1940
Act) of each such Portfolio, as of the end of the calendar quarter
during which the Trust, on behalf of each such Portfolio, has given at
least 30 days advance written notice to Touchstone that it is
terminating
3
<PAGE> 4
this agreement as to each such Portfolio.
9. Subcontracting by Touchstone. Touchstone may subcontract for the
performance of Touchstone's obligations hereunder with any one or more persons;
provided, however, that Touchstone shall be as fully responsible to the Trust
for the acts and omissions of any subcontractor as it would be for its own acts
or omissions.
10. Severability. 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.
11. 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 Touchstone shall be
318 Broadway, Cincinnati, Ohio 45202.
12. Miscellaneous. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. 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. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, but such counterparts shall, together, constitute only
one instrument.
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. The
person signing on behalf of the Trust has executed this Agreement not
individually, but as an officer under the Trust's Declaration of Trust, and the
obligations of this Agreement are not binding upon such person or upon any of
the Trust's Trustees, officers or shareholders individually, but bind only the
Trust estate.
SELECT ADVISORS VARIABLE
INSURANCE TRUST
By: /s/ EDWARD G. HARNESS, JR.
----------------------------------
Edward G. Harness, Jr.
President
4
<PAGE> 5
TOUCHSTONE ADVISORS, INC.
By: /s/ JILL T. MCGRUDER
----------------------------------
Jill T. McGruder
Vice President
Attest:
By: /s/ DONALD J. WUEBBLING
- ----------------------------------
Donald J. Wuebbling
Secretary
5
<PAGE> 1
Exhibit 8(e)(ii)
AMENDMENT NO. 1
TO
SPONSOR AGREEMENT
BETWEEN
TOUCHSTONE ADVISORS, INC. AND SELECT ADVISORS VARIABLE INSURANCE TRUST
This Amendment No. 1 to Sponsor Agreement is dated as of May 1, 1998
and amends the Sponsor Agreement (the "Sponsor Agreement") dated September 9,
1994 made by and between Select Advisors Variable Insurance Trust, a
Massachusetts business trust (the "Trust"), and Touchstone Advisors, Inc., an
Ohio corporation ("Touchstone"), and.
WHEREAS, the Touchstone acts as sponsor to the Trust pursuant to the
Sponsor Agreement; and
WHEREAS, the Trust's Board of Trustees has amended and restated the
Establishment and Designation of Series appended to the Trust's Declaration of
Trust (the "Declaration") to add an additional series of Shares (as defined in
the Declaration) of the Trust, to be designated the Touchstone Value Plus
Portfolio;
NOW, THEREFORE, Section 4 of the Sponsor Agreement is hereby amended,
effective as of May 1, 1998, to read as set forth below, the sole change in such
paragraph being the addition of information with respect to the Value Plus
Portfolio.
4. Operating Expense Waivers or Reimbursement. Touchstone
shall waive all or a portion of its fees pursuant to this Sponsor
Agreement and/or reimburse a portion of the operating expenses
(including amortization of organization expenses but excluding
interest, taxes, brokerage commissions and other portfolio transaction
expenses, capital expenditures and extraordinary expenses) ("Expenses")
of each Portfolio of the Trust such that after such reimbursement the
aggregate Expenses of the Portfolio shall be equal on an annual basis
to the following percentages of the average daily net assets of the
Portfolio for the Portfolio's then-current fiscal year: Emerging Growth
Portfolio, 1.15%; International Equity Portfolio, 1.25%; Balanced
Portfolio, 0.90%; Income Opportunity Portfolio, 0.85%; Standby Income
Portfolio, 0.50%; and Value Plus Portfolio, 0.85%.
Touchstone's obligations in this Section 4 may be
terminated, with respect to any Portfolio, by Touchstone as of the end
of any calendar quarter after December 31, 1995, upon at least 30 days
prior written notice to the Trust (an "Expense Cap Termination").
<PAGE> 2
IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to the
Sponsor Agreement to be executed and delivered in their names and on their
behalf as of the day and year first above written. The person signing on behalf
of the Trust has executed this Agreement not individually, but as an officer
under the Trust's Declaration of Trust, and the obligations of this Agreement
are not binding upon such person or upon any of the Trust's Trustees, officer or
shareholder individually, but bind only the Trust estate.
SELECT ADVISORS VARIABLE
INSURANCE TRUST
By: ____________________________________
Edward G. Harness, Jr., President
TOUCHSTONE ADVISORS INC.
By: ____________________________________
2
<PAGE> 1
Exhibit 8(e)(iii)
SPONSOR AGREEMENT
SPONSOR AGREEMENT, dated as of September 9, 1994, by and between Select
Advisors Portfolios, a New York trust (the "Trust"), and Touchstone Advisors,
Inc., an Ohio corporation ("Touchstone");
W I T N E S S E T H:
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended
(collectively with the rules and regulations promulgated thereunder as amended
from time to time, the "1940 Act");
WHEREAS, the Trust wishes to engage Touchstone to sponsor, and provide
certain management and supervisory services with respect to, the Growth & Income
II and Bond II portfolios (each a "Portfolio") of the Trust, and Touchstone is
willing to provide such services to the Trust, on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of Touchstone. Subject to the direction and control of the
Board of Trustees of the Trust (the "Board"), Touchstone shall perform such
sponsorship and management and supervisory services with respect to the
Portfolios as may from time to time be reasonably requested by the Trust, which
shall include without limitation: (a) providing office space, equipment and
clerical personnel necessary for performing the management functions herein set
forth; (b) arranging, if desired by the Trust, for directors, officers or
employees of Touchstone to serve as Trustees, officers or agents of the Trust if
duly elected or appointed to such positions and subject to their individual
consent and to any limitations imposed by law; (c) supervising the overall
administration of the Trust, including the provision of services to the
Portfolios by the Trust's administrator and fund accounting agent, transfer
agent and custodian, which services include without limitation: (i) updating of
corporate organizational documents, and the negotiation of contracts and fees
with and the monitoring and coordinating of performance and billings of the
transfer agent, custodian, shareholder servicing agents and other independent
contractors or agents of the Trust, with respect to the Portfolios, (ii) the
preparation of and filing of documents required for compliance by the Portfolios
with applicable laws and regulations (including state "blue sky" laws and
regulations), including registration statements on Form N-1A (or other
applicable form), prospectuses and statements of additional information and
semi-annual and annual reports to the Trust's shareholders, (iii) reviewing
(including coordinating the preparing of,
<PAGE> 2
but not preparing) tax returns, (iv) preparation of agendas and supporting
documents for and minutes of meetings of Trustees and of committees of Trustees,
in each case on behalf of the Portfolios, or either of them, and preparation of
notices, proxy statements and minutes of meetings of shareholders of the Trust
or of one or both of the Portfolios, (v) the maintenance of books and records of
the Trust in respect of the Portfolios, (vi) telephone coverage to respond to
shareholder inquiries regarding the Portfolios, (vii) the provision of
monitoring reports and assistance regarding the Portfolios' compliance with
federal securities and tax laws including compliance with the 1940 Act and
Subchapter M of the Internal Revenue Code of 1986, as amended, (viii) the
dissemination of yield and other performance information regarding the
Portfolios to newspapers and tracking services, (ix) the preparation of annual
renewals for fidelity bond and errors and omissions insurance coverage, (x) the
development of a budget for the Trust on behalf of the Portfolios, the
establishment of the rate of expense accruals and the arrangement of the payment
of all fixed and management expenses of the Portfolios, and (xi) the
determination of each Portfolio's net asset value and the provision of all other
fund accounting services to the Portfolios.
2. Organization Expenses. Touchstone shall pay all of the organization
expenses of the Trust required to be paid on behalf or the Portfolios prior to
the Trust's or either Portfolio's commencement of investment operations. The
Portfolios shall reimburse Touchstone, without any interest or carrying charges,
for such organization expenses.
3. Allocation of Charges and Expenses. Touchstone shall pay the entire
salaries and wages of all of the Trust's Trustees, officers and agents who
devote part or all of their time to the affairs of Touchstone or its affiliates,
and the wages and salaries of such persons shall not be deemed to be expenses
incurred by the Trust.
4. Operating Expense Waivers or Reimbursement. Touchstone shall waive
all or a portion of its fee pursuant to this Sponsor Agreement and/or reimburse
a portion of the operating expenses (including amortization of organization
expenses but excluding interest, taxes, brokerage commissions and other
portfolio transaction expenses, capital expenditures and extraordinary expenses)
("Expenses") of the Growth & Income II and Bond II Portfolios such that after
such reimbursement the aggregate Expenses of each such Portfolio shall be equal
on an annual basis to the following percentages of the average daily net assets
of that Portfolio for the Portfolio's then-current fiscal year: Growth & Income
II Portfolio, 0.85% and Bond Portfolio II, 0.75%.
Touchstone's obligations in this Section 4 may be terminated,
with respect to either Portfolio, by Touchstone as of the end of any calendar
quarter after December 31, 1995, upon at least 30 days prior written notice to
the Trust (an "Expense Cap Termination").
5. Compensation of Touchstone. For the services to be rendered, the
facilities to be provided and the expenses to be assumed by Touchstone
hereunder, each Portfolio shall pay to Touchstone a sponsor fee from the assets
of that Portfolio equal on an annual basis to 0.20%
2
<PAGE> 3
of the Portfolio's average daily net assets for that Portfolio's then-current
fiscal year.
If Touchstone serves under this Agreement for less than the whole of
any month, the compensation to Touchstone hereunder shall be prorated. For
purposes of computing the fees payable to Touchstone hereunder, the net asset
value of each Portfolio shall be computed in the manner specified in that
Portfolio's then-current registration statement.
Touchstone hereby waives all of its fees under this Agreement
with respect to each Portfolio until April 30, 1996.
6. Limitation of Liability of Touchstone. Touchstone shall not be
liable for any error of judgment or mistake of law or for any act or omission in
the sponsorship or management of the Trust or the performance of its duties
hereunder, except for willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of the reckless disregard of its
obligations and duties hereunder. As used in this Section 6, the term
"Touchstone" shall include Touchstone and/or any of its affiliates and the
directors, officers and employees of Touchstone and/or any of its affiliates.
7. Activities of Touchstone. The services of Touchstone to the Trust
are not to be deemed exclusive, Touchstone being free to render similar
sponsorship and management services and/or other services to other parties. It
is understood that Trustees and officers of the Trust, and shareholders of a
Portfolio are or may become interested in Touchstone and/or any of its
affiliates, as directors, officers, employees, or otherwise, and that directors,
officers and employees of Touchstone and/or any of its affiliates are or may
become similarly interested in the Trust and that Touchstone and/or any of its
affiliates may be or become interested in the Trust as a shareholder of a
Portfolio or otherwise.
8. Duration, Termination and Amendment. This Agreement shall become
effective as of the day and year first above written and shall govern the
relations between the parties hereto until terminated in accordance with this
Section 8. Except for an Expense Cap Termination, this Agreement may not be
amended except by an instrument in writing signed by both parties.
This agreement may be terminated, with respect to either or both of
the Portfolios:
(a) by Touchstone, either (i) at the end of the calendar
quarter after December 31, 1995 during which Touchstone has given at
least 30 days advance written notice to the Trust, on behalf of each
such Portfolio, that it is terminating this agreement as to such
Portfolio or (ii) at such time as Touchstone ceases to be the
investment advisor to such Portfolio. In the event of a termination
pursuant to clause (i) of the preceding sentence, each party's
obligations hereunder shall terminate as to each such Portfolio as of
the end of the calendar quarter in which the notice of termination is
given; in the event of a termination pursuant to clause (ii) of the
3
<PAGE> 4
preceding sentence Touchstone's obligations hereunder shall terminate
as to each such Portfolio as of the effective date of its termination
as investment advisor.
(b) by the Board, or by the vote of a "majority of the
outstanding voting securities" (as such phrase is defined in the 1940
Act) of each such Portfolio, as of the end of the calendar quarter
during which the Trust, on behalf of each such Portfolio, has given at
least 30 days advance written notice to Touchstone that it is
terminating this agreement as to each such Portfolio.
9. Subcontracting by Touchstone. Touchstone may subcontract
for the performance of Touchstone's obligations hereunder with any one or more
persons; provided, however, that Touchstone shall be as fully responsible to the
Trust for the acts and omissions of any subcontractor as it would be for its own
acts or omissions.
10. Severability. 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.
11. 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 Touchstone shall be
318 Broadway, Cincinnati, Ohio 45202.
12. Miscellaneous. Each party agrees to perform such further
actions and execute such further documents as are necessary to effectuate the
purposes hereof. 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. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, but such counterparts shall, together, constitute only
one instrument.
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. The
person signing on behalf of the Trust has executed this Agreement not
individually, but as an officer under the Trust's Declaration of Trust, and the
obligations of this Agreement are not binding upon such person or upon any of
the Trust's Trustees, officers or shareholders individually, but bind only the
Trust estate.
4
<PAGE> 5
SELECT ADVISORS PORTFOLIOS
By: /s/ EDWARD G. HARNESS, JR.
---------------------------------
Edward G. Harness, Jr.
President
TOUCHSTONE ADVISORS, INC.
By: /s/ JILL T. MCGRUDER
---------------------------------
Jill T. McGruder
Vice President
Attest:
By:/s/ DONALD J. WUEBBLING
----------------------------
Donald J. Wuebbling
Secretary
5
<PAGE> 1
Exhibit 8(f)(i)
FUND PARTICIPATION AGREEMENT
This Fund Participation Agreement (the "Agreement"), dated as of the
10th day of November , 1994, is made by and among Western-Southern Life
Assurance Company ("Western-Southern"), on its own behalf and on behalf of
Western-Southern Separate Account No. 1 and Western-Southern Life Assurance
Company Separate Account No. 2 (each called a "Separate Account") and the
various sub-accounts of each thereof as set forth in Exhibit A attached hereto
and as may be amended from time to time (each a "Sub-Account"), the Select
Advisors Portfolios, a New York trust (the "SA Trust"), but only as to those
Portfolios thereof shown on Exhibit B-1 hereof, the Select Advisors Variable
Insurance Trust, a Massachusetts business trust (the "VI Trust"), and each
separate series thereof, as set forth on Exhibit B-2 hereof (each such portfolio
of the SA Trust and of the VI Trust being herein called a "Portfolio" or,
together, the "Portfolios"), all of which Portfolios shall be made available to
serve as underlying investment media for the Sub-Accounts. The parties hereby
agree as follows:
1. Representations and Agreements of the Parties.
1.1 Each of the SA Trust and the VI Trust (sometimes herein
together called the "Trusts") make the following respective representations and
covenants:
(a) The VI Trust has been established and is validly existing and in
good standing as a business trust under the laws of the
Commonwealth of Massachusetts and consists of separate series for
each of the Portfolios described in the registration statement on
Form N-1A for such trust heretofore filed with the SEC (the "VI
Trust Registration Statement"). The SA Trust has been established
and is validly existing and in good standing as a business trust
under the laws of the State of New York and consists of separate
series for each of the Portfolios described in the registration
statement on Form N-1A for such trust heretofore filed with the
SEC (the "SA Trust Registration Statement"). The VI Trust
Registration Statement and the SA Trust Registration Statement
are sometimes together referred to as the "Trust Registration
Statements".
(b) Each of the Trusts is a no-load diversified, open-end,
management investment company and is duly registered under the
Investment Company Act of 1940 (the "1940 Act"). The offering
of the securities of the VI Trust (but not those of the SA
Trust) has been duly registered under the Securities Act of
1933, as amended.
(c) The information regarding the VI Trust and the SA Trust and
each of the Portfolios thereof that each Trust has supplied to
Western-Southern for inclusion in the registration statements
filed by Western-Southern with the SEC (the "Western-Southern
Registration Statements") in respect of the Contracts (as
defined in Section 1.2) to be issued by each of the Separate
Accounts does not contain any untrue statement of a material
fact or omit to state a material fact
<PAGE> 2
required to be stated therein or necessary to make the
statements therein not misleading.
(d) Neither the VI Trust Registration Statement nor the SA Trust
Registration Statement contains any untrue statement of a
material fact or omits to state a material fact required to be
stated therein or a material fact that is necessary in order
to make the statements therein not misleading; provided,
however, that this representation does not extend to
statements or omissions made in reliance upon and in
conformity with written information furnished by
Western-Southern for inclusion in the Trust Registration
Statements.
(e) Each Trust and each Portfolio thereof will comply with and
qualify under the requirements applicable to regulated
investment companies under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and the
affected Trust will notify Western-Southern immediately upon
having a reasonable basis for believing that such Trust or any
Portfolio thereof has ceased to so comply.
(f) Each Portfolio will comply with the diversification
requirements set forth in Section 5(b)(1) of the 1940 Act and
Section 817(h) of the Code and Section 1.817-5(b) of the
regulations under the Code, and each Trust will cause each of
its Portfolios to maintain such Portfolio's compliance with
such diversification requirements. Each Trust will notify
Western-Southern immediately upon having a reasonable basis
for believing that any Portfolio thereof has ceased to meet
such requirements or might not meet such requirements in the
future.
(g) Except for shares or interests sold for organizational
purposes prior to the effective date of each Trust
Registration Statement, neither Trust will sell shares of or
interests in the Portfolios of such Trust to purchasers other
than the Separate Accounts or one or more other separate
accounts established by Western-Southern or other life
insurance companies.
1.2 Western-Southern represents and covenants as follows:
(a) It is an insurance company duly organized and in good standing
under applicable law and has legally and validly established
the Separate Accounts as separate accounts under Ohio law, and
has registered each as a unit investment trust under the 1940
Act to serve as an investment vehicle for the Flexible
Purchase Payment Deferred Variable Annuity Contracts to be
offered by the Separate Accounts (the "Contracts").
(b) The Contracts provide for the allocation of net amounts
received by Western-Southern to the Separate Accounts and to
various Sub-Accounts
2
<PAGE> 3
thereof. Selection of a particular Sub-Account is made by the
Contract owner, who may change such selection from time to time
in accordance with the terms of the applicable Contract.
(c) The offering of the Contracts has been registered under the
Securities Act of 1933, as amended, (the "1933 Act").
(d) Each Sub-Account is a "segregated asset account" for purposes
of diversification testing. Interests in each such Sub-Account
are offered exclusively through the purchase of a "variable
contract," within the meaning of such term under Section
817(d) of the Code. Western-Southern will exercise its best
efforts to continue to meet such definitional requirements,
and will notify each Trust immediately upon having a
reasonable basis for believing that such requirements have
ceased to be met or that they might not be met in the future.
(e) The information regarding Western-Southern and the Separate
Account that Western-Southern and the Separate Account have
supplied to (i) the VI Trust for inclusion in the VI Trust
Registration Statement or (ii) the SA Trust for inclusion in
the SA Trust Registration Statement does not contain any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading.
1.3 The representations and covenants contained in Sections 1.1 and
1.2 are continuing representations and covenants of each party making the same
that must be satisfied throughout the term of this Agreement. The Trusts will
provide Western-Southern, within ten (10) business days (i) after the end of
each year, a letter from the appropriate officer of each Trust certifying to the
continued accuracy of the representations contained in Section 1.1, above, and
(ii) after the end of each calendar quarter, a detailed listing of the
individual securities and other assets, if any, held by each Portfolio as of the
end of such calendar quarter. Western-Southern will provide each Trust, within
ten (10) business days after the end of each year, a letter from the appropriate
officer of Western-Southern certifying to the continued accuracy of the
representations contained in Section 1.2, above.
2. Marketing. Western-Southern through its Distributor, Touchstone
Securities, Inc. (the "Distributor") will make all reasonable efforts to market
the Contracts. In so doing, Western-Southern and the Distributor will comply
with all applicable state or federal securities and insurance laws.
3. Valuation; Order.
3.1 The VI Trust will cause Signature Financial Services, Inc., the
administrative services and fund accounting agent for the Trusts ("Signature
Financial") to provide to Western-Southern, promptly following the close of
trading (the "Close") on each Business Day
3
<PAGE> 4
(as defined in 3.4, below), (i) the net asset value per share for each Portfolio
as of the Close on such Business Day, (ii) the per share amount of any dividend
or capital gain distribution made by a Portfolio in respect of the shares held
by the related Sub-Account, if the "ex-dividend" date for such dividend or
distribution has occurred since the Close of the preceding Business Day, and
(iii) based on such net asset values and such dividends and distributions, the
Accumulation Unit Value (as such term is defined in the Western-Southern
Registration Statement) to be used in determining values in each Sub-Account.
3.2 The SA Trust will cause Signature Financial to provide to
Western-Southern, promptly after the Close on each Business Day, (i) the
percentage ownership of each Portfolio by the corresponding Sub-Account of each
Separate Account, and the value thereof, as of the Close on the preceding
Business Day, (ii) the net amount of all contributions and withdrawals which,
though duly received or credited during the preceding Business Day, are made by
Western-Southern to or from each Portfolio after the Close on the preceding
Business Day, (iii) the percentage ownership of each Portfolio and the value
thereof (after the adjustment of (i), above, by (ii), above) as of the Close of
the preceding Business Day, (iv) net investment results and other charges for
the period from the Close of the preceding Business Day to the Close of the
current Business Day, (v) the resulting percentage ownership of Western-Southern
in each Portfolio, and the value thereof, as of the Close on the current
Business Day, and (vi) the resulting Accumulation Unit Value.
3.3 Western-Southern shall be the designee of each Trust for receipt of
orders from the Separate Accounts. Accordingly, receipt of an order for shares
of the VI Trust or interests of the SA Trust by Western-Southern shall, for
purposes of the calculations described in Sections 3.1 and 3.2, above,
constitute receipt thereof by the affected Trust, provided that such Trust
receives notice of such order by 11:00 A.M. on the following Business Day.
Orders received by Western-Southern will be sent directly to the affected Trust
or its specified agent, and payment for purchases, net of redemptions, will be
wired to a custodial account designated by such Trust so as to coincide with the
order for Portfolio shares or interests, as the case may be. If redemptions for
either of the Trusts for any period exceed purchases, the affected Trust will
wire transfer the amount of such excess to an account designated by
Western-Southern. Each Trust will execute all directions from Western-Southern
(whether net purchases or net redemptions) at the net asset value of such shares
(or the value of the interests, in the case of the SA Trust), as determined as
of the Close on the preceding Business Day, i.e., the Business Day on which such
directions (whether purchases or redemptions) were duly received by
Western-Southern from owners of the Contracts in accordance with the relevant
Western-Southern Registration Statement. Promptly after executing such orders,
each Trust will provide to Western-Southern a written confirmation which shall
include (x) the number of shares of the VI Trust (or the percentage of interest
ownership, in the case of the SA Trust) in each Portfolio of such Trust at the
Close of the preceding Business Day, (y) a detailed account, by dollars and
(where appropriate) by shares, of the purchases and redemptions for that Trust
(and the net result thereof) by each Sub-Account since the Close of the
preceding Business Day, and (z) the number of shares of each Portfolio of the VI
Trust (and the percentage of
4
<PAGE> 5
interest ownership of each Portfolio of the SA Trust held by each such
Portfolio's corresponding Sub-Account after all such orders have been executed.
Notwithstanding the above, the Trusts shall not be held responsible for
providing Western-Southern with values, or with investment results, on any day
that is not a Business Day, when an emergency exists making the valuation of
such Trust's Portfolios not reasonably practicable, or during any period when
the Securities and Exchange Commission ("SEC") has by order permitted the
suspension of pricing of shares for the protection of shareholders.
3.4 "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and each other day, if any, on which the affected
Trust is required to calculate the net asset value (or its equivalent) of each
Portfolio, as set forth in such Trust's prospectus and Statement of Additional
Information.
4. Expenses; Documents and Information. All expenses incident to (i)
the establishment and operation of each Trust, including all costs of
registration and other compliance under state and federal laws and (ii) the
performance by such Trust of its obligations under this Agreement, shall be paid
by each such Trust. The VI Trust will provide to Western-Southern, for use by
the Separate Accounts and the Sub-Accounts in respect of the Contracts, a
reasonable quantity of (w) all prospectuses required for delivery to existing
Contract owners after each post-effective amendment to the VI Trust Registration
Statement, and all related statements of additional information ("SAIs"), (x)
all proxy material required for meetings of shareholders of either Trust or any
Portfolio thereof, (y) all periodic reports to shareholders of either Trust
required to be delivered to the Contract owners and (z) any other material
reasonably required to be distributed to the owners of the Contracts. The SA
Trust will provide to Western-Southern copies of all post-effective amendments
to the SA Trust Registration Statement and of all exhibits and other documents
filed with respect thereto.
5. Sales Representations. Western-Southern and its agents shall make
no representations concerning the Portfolios other than those contained in (i)
the then current prospectuses and SAIs of the Separate Accounts in respect of
the Contracts issued by such Separate Accounts and (ii) any current printed
sales literature of either Separate Account in respect of the Contracts that is
delivered to either Trust and as to which such Trust has not objected by notice
to Western-Southern given in accordance with paragraph 12.
6. Administrative Services to Contract Owners. Administrative services
to Contract owners shall be the responsibility of Western-Southern and shall not
be the responsibility of either Trust. Each Trust recognizes that
Western-Southern, through the Separate Account and the Sub-Accounts, will be the
sole holder of interests in the Trusts and the Portfolios thereof for the
benefit of owners of the Contracts.
5
<PAGE> 6
7. Disclosures.
(a) Each Trust will provide Western-Southern, after the end of
each fiscal year, with such investment advisory data and other
expense data of each Portfolio for such fiscal year, and with
such other information as may be necessary, to enable
Western-Southern to fulfill, on a timely basis, its prospectus
disclosure obligations under state and/or federal securities
laws and its obligations under variable annuity insurance
requirements.
(b) Each Trust will provide Western-Southern, no later than August
15 of each year, with all information regarding the Portfolios
required by Western-Southern to meet the requirements imposed
on it and/or the Separate Account and the Sub-Accounts
pursuant to Rule 30d-2 promulgated by the SEC under the 1940
Act.
(c) Each Trust will promptly disclose in writing to
Western-Southern any information regarding such Trust, or any
Portfolio thereof, that is reasonably required by
Western-Southern in order to cause the information regarding
the Trust and the Portfolios included in the Prospectus,
Statement of Additional Information and other disclosure
documents then being used by Western-Southern in connection
with its offering of the Contracts to conform to the
representations and covenants made in Section 1.1.
8. Voting. So long as, and to the extent that, the SEC continues
to interpret the 1940 Act to require (and so long as any state insurance
department or agency having jurisdiction requires) pass-through voting
privileges for variable contract owners, the Trusts will provide
Western-Southern, on a timely basis and at no cost to Western-Southern, with
sufficient copies of all proxy material that is required for such purpose to be
passed through to the Contract owners. Western-Southern will distribute all such
proxy material and will vote shares in the Portfolios in accordance with
instructions received from the Contract owners. Western-Southern shall vote
those shares for which no instructions have been received in the same proportion
as the portion for which such instructions have been received from Contract
owners. Western-Southern will not recommend or oppose action in connection with
any such vote or interfere with any such solicitation of proxies.
9. Insurance. Each Trust shall maintain, without cost or expense
to Western-Southern, (i) fidelity bond coverage in an amount not less than the
minimum coverage required by Rule 17g-1 under the 1940 Act, and (ii) errors and
omissions coverage in an amount and with companies reasonably acceptable to
Western-Southern. Each Trust and each Portfolio thereof shall be named insureds
under each such coverage. At the request of Western-Southern, which may be made
not more frequently than twice in any calendar year, each Trust will supply, or
cause the company issuing such policies to supply, evidence in writing,
satisfactory to Western-Southern, that the bonds and other insurance policies
called for
6
<PAGE> 7
by this paragraph are then in force with such companies and in such amounts as
either comply with Rule 17g-1 or have been approved by Western-Southern.
10. Termination. This Agreement shall terminate as to the sale and
issuance of new Contracts:
(a) at the option of any party, upon not less than 60 days advance
written notice to the other parties;
(b) at the option of either Trust, with respect to any one or more
of that Trust's Portfolios, if such Trust determines to the
reasonable satisfaction of Western-Southern and thereafter
demonstrates that liquidation of such Portfolio or Portfolios
is in the best interests of each Portfolio and its beneficial
owners; provided that any such Portfolio shall be continued in
operation for at least six months after the determination to
permit the substitution for such Portfolio's interests the
shares or interests of another investment company, pursuant to
SEC regulation;
(c) at the option of Western-Southern, immediately upon delivery
of written notice thereof to the affected Trust, if (i)
interests in any Portfolio of that Trust are not available for
any reason to meet the requirements of the Contracts, as
determined by Western-Southern, provided that such
termination shall be effective only as to those Portfolios
that are not reasonably available, or (ii) any one or more of
the representations set forth in Section 1.1 are, individually
or in the aggregate, materially untrue, or if the affected
Trust breaches any one or more of the terms of this Agreement
and such breaches are individually or in the aggregate,
material, or (iii) any combination of untrue representations
and breaches of agreement terms are individually or in the
aggregate, material;
(d) at the option of the affected Trust, immediately upon delivery
of written notice thereof to Western-Southern, upon
institution of formal proceedings against the Separate Account
or Western-Southern by the National Association of Securities
Dealers ("NASD"), the SEC or any other regulatory body;
(e) at the option of Western-Southern, immediately upon delivery
of written notice thereof to the affected Trust, upon
institution of formal proceedings against the affected Trust
by the NASD, the SEC or any other regulatory body;
(f) with respect to any Portfolio, if either the requisite vote of
the Contract owners having an interest in such Portfolio is
obtained for, or the SEC gives requisite approval to, the
substitution for the interests of any Portfolio the shares or
interests of another investment company as investments for any
one or more of the Sub-Accounts; provided that
Western-Southern gives the affected Trust
7
<PAGE> 8
not less than 60 days prior written notice of either (x) any
such proposed vote of Contract owners or (y) any termination
based upon clause (ii), above; or
(g) if interests in the Portfolios are not issued or sold in
conformance with federal law or such law precludes the use of
interests in the Portfolios as an underlying investment medium
for the Sub-Accounts or, indirectly, for the Contracts issued
or to be issued by Western-Southern. Prompt notice shall be
given by any party to the other such parties in the event the
conditions of this subparagraph (g) occur.
11. Termination Does Not Relieve Certain Obligations. Termination
as the result of any cause listed in the preceding paragraph, except as and in
respect of any Portfolio or Portfolios in respect of which this Agreement is
terminated in accordance with subparagraph 10(b), shall not affect the
obligation of the affected Trust to provide interests in the Portfolios for
investment by the Sub-Accounts (and all related information required by
Western-Southern, the Separate Account and the Sub-Accounts to meet the
requirements of the 1940 Act and the Code as to such investment) in respect of
Contracts then in force for which such interests are serving as an underlying
investment medium, unless the further sale of such interests is proscribed by
law, by the SEC or by any other regulatory body.
12. Notices. Any notice, claim, request or demand required by this
Agreement shall be in writing and shall be deemed to have been duly given on the
day delivered or transmitted by fax or on the third business day after mailing
(first class, postage prepaid) to the addresses or fax numbers set forth below:
(a) If to Western-Southern (for itself or on behalf of the
Separate Account or any Sub-Account):
Western-Southern Life Assurance Company
400 Broadway
Cincinnati, Ohio 45202
Fax: (513) 629-1081
Attn: William F. Ledwin
with a copy to:
Donald J. Wuebbling
Vice President & General Counsel
Western-Southern Life
400 Broadway
Cincinnati, Ohio 45202
Fax: (513) 629-1044
8
<PAGE> 9
(b) If to either Trust (for itself or on behalf of any of its
Portfolios):
As to the VI Trust,
Select Advisors Variable Insurance Trust
318 Broadway
Cincinnati, Ohio 45202
Fax: (513) 241-3596
Attn: Edward G. Harness, Jr.
As to the SA Trust,
Select Advisors Portfolios
318 Broadway
Cincinnati, Ohio 45202
Fax: (513) 241-3596
Attn: Edward G. Harness, Jr.
with a copy in either case to:
J. Leland Brewster
2500 PNC Center
Cincinnati, Ohio 45202
Fax: (513) 651-6981
13. No Waiver. The forbearance or neglect of any party to insist
upon strict compliance by any other party, with any of the provisions of this
Agreement, whether continuing or not, or to declare a forfeiture of termination
against the other parties, shall not be construed as a waiver or any of the
rights or privileges of any party hereunder. No waiver of any right or privilege
of any party arising from any default or failure of performance by any party
shall affect the rights or privileges of the other parties in the event of a
further default or failure of performance.
14. Assignment. No party hereto may assign this contract or any
interest therein, by operation of law or otherwise, without the prior written
consent of all other parties hereto.
15. Governing Law. This Agreement shall be construed and the
provisions hereof interpreted under and in accordance with the laws of Ohio.
This Agreement shall be subject to the provisions of the federal securities
statutes, rules and regulations, including such exemptions from those statutes,
rules and regulations as the SEC may grant and the terms hereof shall be
interpreted and construed in accordance therewith.
9
<PAGE> 10
16. Trust Liability. All persons dealing with either Trust must
look solely to the property of that Trust for the enforcement of any claims
against such Trust. None of the Trustees, officers, agents or shareholders of
either Trust shall be personally liable for obligations entered into on behalf
of that Trust.
In witness whereof, the parties have executed this agreement as of the
day and year first above written.
WESTERN-SOUTHERN LIFE ASSURANCE
COMPANY
By:/s/ WILLIAM F. LEDWIN
- ------------------------ ------------------------------------
Date William F. Ledwin
Senior Vice President
By:/s/ DONALD J. WUEBBLING
------------------------------------
Donald J. Wuebbling
Vice President
SELECT ADVISORS VARIABLE INSURANCE
TRUST
By:/s/ EDWARD G. HARNESS
- ------------------------ ------------------------------------
Date Edward G. Harness
President
SELECT ADVISORS PORTFOLIOS
By:/s/ EDWARD G. HARNESS
- ------------------------ ------------------------------------
Date Edward G. Harness
President
10
<PAGE> 11
EXHIBIT A
Emerging Growth Sub-Account
International Equity Sub-Account
Balanced Sub-Account
Income Opportunity Sub-Account
Standby Income Sub-Account
Growth & Income Sub-Account
Bond Sub-Account
11
<PAGE> 12
EXHIBIT B
EXHIBIT B-1
Growth & Income II Portfolio
Bond II Portfolio
EXHIBIT B-2
Emerging Growth Portfolio
International Equity Portfolio
Balanced Portfolio
Income Opportunity Portfolio
Standby Income Portfolio
<PAGE> 1
Exhibit 8(f)(ii)
Amendment No. 1
To
Fund Participation Agreement
Between
Western-Southern Life Assurance Company
And
Select Advisors Portfolios
And
Select Advisors Variable Insurance Trust
This Amendment No. 1 to the Fund Participation Agreement is dated as of May 1,
1998 and amends Exhibit A to the Fund Participation Agreement (the "Agreement")
dated November 10, 1994 made by and among Western-Southern Life Assurance
Company (Western-Southern"), on its own behalf and on behalf of Western-Southern
Life Assurance Separate Account No.1 and Western-Southern Life Assurance Company
Separate Account No. 2 (each called a "Separate Account") and the various
sub-accounts of each thereof as set forth in Exhibit A attached hereto and as
may be amended from time to time (each a "Sub-Account"), the Select Advisors
Portfolios, a New York Trust (the "SA Trust"), but only as to those Portfolios
thereof shown on Exhibit B-1 hereof, the Select Advisors Variable Insurance
Trust, a Massachusetts business trust ("VI Trust"), and each separate series
thereof, as set forth on Exhibit B-2 hereof (each such portfolio of the SA Trust
and of the VI Trust being herein called a "Portfolio" or, together, the
"Portfolios"), all of which Portfolios shall be made available to serve as
underlying investment media for the Sub-Accounts.
WHEREAS, Western-Southern's Board of Directors has determined to establish an
additional sub-account to be designated the Value Plus Sub-Account; and
WHEREAS, The Board of Trustees of the SA Trust and the VI Trust (together, the
"Trusts") has amended and restated the Establishment and Designation of Series
appended to each Trust's Declaration of Trust (the "Declaration") to add an
additional series of Shares (as defined in the Declaration) of the Trusts, to be
designated the Value Plus Portfolio;
NOW THERFORE, Exhibits A and B-2 to the Agreement are hereby amended, effective
as of May 1, 1998, to read as set forth in Exhibits A and B to this Agreement,
the sole change in Exhibit A being the addition of the Value Plus Sub-Account
and the sole change in Exhibit B-2 being the addition of the Value Plus
Portfolio.
<PAGE> 2
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.
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
By: _____________________________________________
William F. Ledwin
Senior Vice President
By: _____________________________________________
Donald J. Wuebbling
Vice President
SELECT ADVISORS VARIABLE INSURANCE TRUST
By: ____________________________________________
Edward G. Harness
President
SELECT ADVISORS PORTFOLIOS
By: _____________________________________________
Edward G. Harness
President
<PAGE> 3
Exhibit A to Amendment No. 1 to Fund Participation Agreement
EXHIBIT A
Emerging Growth Sub-Account
International Equity Sub-Account
Balanced Sub-Account
Income Opportunity Sub-Account
Standby Income Sub-Account
Growth & Income Sub-Account
Bond Sub-Account
Value Plus Sub-Account
<PAGE> 4
Exhibit B to Amendment No. 1 to Fund Participation Agreement
EXHIBIT B
EXHIBIT B-1
Growth & Income II Portfolio
Bond II Portfolio
EXHIBIT B-2
Emerging Growth Portfolio
International Equity Portfolio
Balanced Portfolio
Income Opportunity Portfolio
Standby Income Portfolio
Value Plus Portfolio
<PAGE> 1
Exhibit 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form N-4 (File
No. 33-76582) of our report, dated January 16, 1998, on our audits of the
financial statements of Western-Southern Life Assurance Company Separate
Account I. We also consent to the reference to our firm under the caption
"Experts."
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
April 29, 1998
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form N-4 (File
No. 33-76582) of our report, dated April 27, 1998, on our audits of the
financial statements Western-Southern Life Assurance Company. We also consent
to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
April 29, 1998
<PAGE> 1
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
AVERAGE ANNUAL TOTAL RETURN FOR ONE YEAR*
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Ending Contract
Initial Beginning Units Ending Unit Value before Maintenance
Purchase Unit Value Purchased Value Charges Charge
------------------------------------------------------------------------------
P BUV UP EUV PEV CMC
=P/BUV =UP*EUV
<S> <C> <C> <C> <C> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $1,000.00 12.817847 78.016222 16.905544 $1,318.91 $ 35.00
International Equity Portfolio $1,000.00 12.350885 80.965858 13.984724 $1,132.29 $ 35.00
Balanced Portfolio $1,000.00 13.782738 72.554524 16.130170 $1,170.32 $ 35.00
Income Opportunity Portfolio $1,000.00 15.727477 63.582989 17.401250 $1,106.42 $ 35.00
Standby Income Portfolio $1,000.00 10.711418 93.358321 11.140654 $1,040.07 $ 35.00
Select Advisors Portfolios
Growth & Income Portfolio II $1,000.00 14.161478 70.614098 16.749955 $1,182.78 $ 35.00
Bond Portfolio II $1,000.00 11.395131 87.75678 12.137441 $1,065.14 $ 35.00
<CAPTION>
Ending
Surrender Redeemable Number of Average Annual
Charge Value Years Total Return
----------------------------------------------------------------------------
SC ERV n T
=PEV-CMC-SC =(ERV/P)to the 1/nth power-1
<S> <C> <C> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $ 70.00 $1,213.91 1 21.39%
International Equity Portfolio $ 70.00 $1,027.29 1 2.73%
Balanced Portfolio $ 70.00 $1,065.32 1 6.53%
Income Opportunity Portfolio $ 70.00 $1,001.42 1 0.14%
Standby Income Portfolio $ 70.00 $ 935.07 1 -6.49%
Select Advisors Portfolios
Growth & Income Portfolio II $ 70.00 $1,077.78 1 7.78%
Bond Portfolio II $ 70.00 $ 960.14 1 -3.99%
</TABLE>
================================================================================
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
TOTAL RETURN FOR ONE YEAR MEASURED BY CHANGE IN ACCUMULATION UNIT VALUE
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Initial Beginning Ending Unit
Purchase Unit Value Value
---------------------------------------------------------------------------------------
P BUV EUV
<S> <C> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $ 1,000.00 12.817847 16.905544
International Equity Portfolio $ 1,000.00 12.350885 13.984724
Balanced Portfolio $ 1,000.00 13.782738 16.130170
Income Opportunity Portfolio $ 1,000.00 15.727477 17.401250
Standby Income Portfolio $ 1,000.00 10.711418 11.140654
Select Advisors Portfolios
Growth & Income Portfolio II $ 1,000.00 14.161478 16.749955
Bond Portfolio II $ 1,000.00 11.395131 12.137441
<CAPTION>
Changes in Unit Average Annual
Value Total Return
---------------------------------------------------------
CUV T
=EUV-BUV =CUV/BUV
<S> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio 4.087697 31.89%
International Equity Portfolio 1.633839 13.23%
Balanced Portfolio 2.347432 17.03%
Income Opportunity Portfolio 1.673773 10.64%
Standby Income Portfolio 0.429236 4.01%
Select Advisors Portfolios
Growth & Income Portfolio II 2.588477 18.28%
Bond Portfolio II 0.74231 6.51%
</TABLE>
<PAGE> 2
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION*
FOR THE PERIOD FROM FEBRUARY 28, 1995 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Ending Contract
Initial Beginning Units Ending Unit Value before Maintenance
Purchase Unit Value Purchased Value Charges Charge
------------------------------------------------------------------------------
P BUV UP EUV PEV CMC
=P/BUV =UP*EUV
<S> <C> <C> <C> <C> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $1,000.00 10.000000 100 16.905544 $1,690.55 $ 105.00
International Equity Portfolio $1,000.00 10.000000 100 13.984724 $1,398.47 $ 105.00
Balanced Portfolio $1,000.00 10.000000 100 16.130170 $1,613.02 $ 105.00
Income Opportunity Portfolio $1,000.00 10.000000 100 17.401250 $1,740.13 $ 105.00
Standby Income Portfolio $1,000.00 10.000000 100 11.140654 $1,114.07 $ 105.00
Select Advisors Portfolios
Growth & Income Portfolio II $1,000.00 10.000000 100 16.749955 $1,675.00 $ 105.00
Bond Portfolio II $1,000.00 10.000000 100 12.137441 $1,213.74 $ 105.00
<CAPTION>
Ending
Surrender Redeemable Number of Average Annual
Charge Value Years Total Return
----------------------------------------------------------------------------
SC ERV n T
=PEV-CMC-SC =(ERV/P)to the 1/nth power-1
<S> <C> <C> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $ 60.00 $1,525.55 3 15.12%
International Equity Portfolio $ 60.00 $1,233.47 3 7.24%
Balanced Portfolio $ 60.00 $1,448.02 3 13.13%
Income Opportunity Portfolio $ 60.00 $1,575.13 3 16.35%
Standby Income Portfolio $ 60.00 $ 949.07 3 -1.73%
Select Advisors Portfolios
Growth & Income Portfolio II $ 60.00 $1,510.00 3 14.73%
Bond Portfolio II $ 60.00 $1,048.74 3 1.60%
</TABLE>
================================================================================
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 1
TOTAL RETURN SINCE INCEPTION MEASURED BY CHANGE IN ACCUMULATION UNIT VALUE
FOR THE PERIOD FROM FEBRUARY 28, 1995 TO DECEMBER 31, 1997 **
<TABLE>
<CAPTION>
Initial Beginning Ending Unit
Purchase Unit Value Value
---------------------------------------------------------------------------------------
P BUV EUV
<S> <C> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $ 1,000.00 10.000000 16.905544
International Equity Portfolio $ 1,000.00 10.000000 13.984724
Balanced Portfolio $ 1,000.00 10.000000 16.130170
Income Opportunity Portfolio $ 1,000.00 10.000000 17.401250
Standby Income Portfolio $ 1,000.00 10.000000 11.140654
Select Advisors Portfolios
Growth & Income Portfolio II $ 1,000.00 10.000000 16.749955
Bond Portfolio II $ 1,000.00 10.000000 12.137441
<CAPTION>
Changes in Unit Average Annual
Value Total Return
---------------------------------------------------------
CUV T
=EUV-BUV =CUV/BUV
<S> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio 6.905544 69.06%
International Equity Portfolio 3.984724 39.85%
Balanced Portfolio 6.13017 61.30%
Income Opportunity Portfolio 7.40125 74.01%
Standby Income Portfolio 1.140654 11.41%
Select Advisors Portfolios
Growth & Income Portfolio II 6.749955 67.50%
Bond Portfolio II 2.137441 21.37%
</TABLE>
