WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
FLEXIBLE PURCHASE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACTS
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but
contains information in addition to that set forth in the current prospectus
dated May 1, 1995, as amended November 14, 1995 (the "Prospectus") for the
variable annuity contracts ("Contracts") offered by Western-Southern Life
Assurance Company (the "Company") through its Separate Account 2 (the "Variable
Account"), 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 or by written request to the Company at
400 Broadway, Cincinnati, Ohio 45202.
The date of this
Statement of Additional Information
is
May 1, 1995
as amended November 14, 1995
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TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PART I - DISCUSSION REGARDING THE VARIABLE ANNUITY CONTRACTS . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Administrative Services . . . . . . . . . . . . . . . . . . . . . . 1
Safekeeping of Assets . . . . . . . . . . . . . . . . . . . . . . . 1
Distribution of the Contracts . . . . . . . . . . . . . . . . . . . 1
Sub-Account Performance . . . . . . . . . . . . . . . . . . . . . . 2
Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Total Return . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fixed Annuity Income Payments . . . . . . . . . . . . . . . . . . . 4
Independent Accountants . . . . . . . . . . . . . . . . . . . . . . 5
PART II - DISCUSSION REGARDING THE SELECT ADVISORS PORTFOLIOS. . . . . . 5
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
INVESTMENT OBJECTIVES, TECHNIQUES, POLICIES AND RESTRICTIONS . . . . . . 6
INVESTMENT OBJECTIVES. . . . . . . . . . . . . . . . . . . . . . . . . . 6
INVESTMENT TECHNIQUES. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Certificates of Deposit and Bankers' Acceptances. . . . . . . . . . 6
Commercial Paper. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Lower-Rated Debt Securities . . . . . . . . . . . . . . . . . . . . 7
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . 7
Foreign Securities: Special Considerations Concerning
Eastern Europe . . . . . . . . . . . . . . . . . . . . . . . . . 8
Lending Portfolio Securities. . . . . . . . . . . . . . . . . . . . 9
Futures Contracts and Options on Futures Contracts. . . . . . . . . 9
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Futures Contracts. . . . . . . . . . . . . . . . . . . . . . . 10
Options on Futures Contracts . . . . . . . . . . . . . . . . . 12
Options on Foreign Currencies. . . . . . . . . . . . . . . . . 13
Additional Risks of Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies . . . . . . . . 14
Options on Securities . . . . . . . . . . . . . . . . . . . . . . . 15
Options on Securities Indexes . . . . . . . . . . . . . . . . . . . 18
Forward Currency Contracts. . . . . . . . . . . . . . . . . . . . . 18
Rating Services . . . . . . . . . . . . . . . . . . . . . . . . . . 20
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 20
Fundamental Policies. . . . . . . . . . . . . . . . . . . . . . . . 20
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State and Federal Restrictions. . . . . . . . . . . . . . . . . . . 21
Portfolio Transactions and Brokerage Commissions. . . . . . . . . . 24
VALUATION OF SECURITIES; REDEMPTION IN KIND. . . . . . . . . . . . . . . 26
MANAGEMENT OF THE SA TRUST . . . . . . . . . . . . . . . . . . . . . . . 28
Trustees of the SA Trust. . . . . . . . . . . . . . . . . . . . . . 28
Officers of the SA Trust. . . . . . . . . . . . . . . . . . . . . . 28
Trustee Compensation Table. . . . . . . . . . . . . . . . . . . . . 30
Advisor, Portfolio Advisors, Administrator and Sponsor. . . . . . . 30
Advisor. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Portfolio Advisors . . . . . . . . . . . . . . . . . . . . . . 31
Administrator. . . . . . . . . . . . . . . . . . . . . . . . . 32
Sponsor. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Custodian. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Counsel and Independent Accountants. . . . . . . . . . . . . . 33
ORGANIZATION OF THE SA TRUST . . . . . . . . . . . . . . . . . . . . . . 33
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Taxation of the Portfolios. . . . . . . . . . . . . . . . . . . . . 34
Sub-Account Diversification . . . . . . . . . . . . . . . . . . . . 34
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 35
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
BOND, COMMERCIAL PAPER AND MUNICIPAL . . . . . . . . . . . . . . . . . .A-1
Moody's Bond Ratings. . . . . . . . . . . . . . . . . . . . . . . .A-1
S&P's Bond Rating . . . . . . . . . . . . . . . . . . . . . . . . .A-2
Description of S&P Municipal Bond Ratings:. . . . . . . . . . . . .A-3
Description of Moody's Municipal Bond Ratings . . . . . . . . . . .A-4
Description of S&P Municipal Note Ratings . . . . . . . . . . . . .A-4
Description of Moody's Municipal Note Ratings . . . . . . . . . . .A-5
S&P's Commercial Paper Ratings. . . . . . . . . . . . . . . . . . .A-5
Moody's Commercial Paper Ratings. . . . . . . . . . . . . . . . . .A-5
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PART I - DISCUSSION REGARDING THE VARIABLE ANNUITY CONTRACTS
General
Except as otherwise indicated herein, all capitalized terms shall have the
meanings assigned to them in the Prospectus.
The Company is subject to regulation by the Ohio Department of Insurance,
which periodically examines its financial condition and operations. The Company
also is subject to the insurance laws and regulations of all jurisdictions in
which it offers Contracts. Copies of the Contract have been filed with, and,
where required, approved by, insurance regulators in those jurisdictions. The
Company must submit annual statements of its operations, including financial
statements, to such state insurance regulators so that they may determine
solvency and compliance with applicable state insurance laws and regulations.
The Company and the Separate Account 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.
Administrative Services
The Company has entered into an agreement with Vantage Computer Systems,
Inc., 301 West 11th Street, Kansas City, Missouri 64105 ("Vantage"). Pursuant to
this agreement, Vantage acts as recordkeeping agent for the Company with respect
to the Contracts and the Separate Account. Under the agreement, Vantage
maintains certain records regarding the Contracts and assists the Company in
administering the daily operations of the Variable Account.
Safekeeping of Assets
The assets of the Variable Account are held by the Company, separate from
the Company's general account assets and any other separate accounts which the
Company has or will establish. The Company maintains records of all purchases
and redemptions of the interests in the Portfolios held by the Sub-Accounts. The
Company maintains fidelity bond coverage for the acts of its officers and
employees.
Distribution of the Contracts
As disclosed in the Prospectus, the Contracts are distributed through
Touchstone Securities, Inc. (the "Distributor"), which is a wholly-owned
subsidiary of IFS Financial Services, Inc. ("IFS"). IFS is a wholly-owned
subsidiary of the Company. The Distributor is a member of the National
Association of Securities Dealers. 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.
Sub-Account Performance
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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, yields, and other performance information may be quoted
numerically or in a table, graph or similar illustration. The value of an
Accumulation Unit, yields and total returns fluctuate in response to market
conditions, interest rates and other factors.
Yields
From time to time, the Company may advertise the yields of the Sub-Accounts.
The "yield" of a non-money market Sub-Account refers to the income generated by
that Sub-Account over a thirty-day period.
"Yield" for a Sub-Account is computed by dividing the net investment income
per Accumulation Unit earned during the thirty-day period by the maximum
offering price per Accumulation Unit on the last day of the period, according to
the following formula:
a-b
Yield = 2 [ ( cd + 1) 6 - 1]
where. . .
a = net investment income attributable to Portfolio investments earned by
the applicable Sub-Account during the thirty-day period
b = expenses accrued for the period (net of expense reimbursement and
including the pro-rata Contract Maintenance Charge).
c = average daily number of Accumulation Units outstanding during the
period.
d = the maximum offering price per Accumulation Unit on the last day of
the period.
Total Return
"Total return" or "average annual total return" quoted in advertising
reflects all aspects of a Sub-Account's return, including the effect of
reinvestment by the Variable Account of Portfolio income and capital gain
distributions and any change in the Sub-Account's value over the applicable
period. Such quotations reflect Contract Maintenance, Contract Administration
and Mortality and Expense Risk Charges. Since the Contract is intended as a
long-term investment, total return calculations will assume that no partial
withdrawals from the hypothetical Contract occurred during the applicable
period.
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
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following formula:
P (1 + T)n = ERV
where:
P = a hypothetical initial Purchase Payment of $1,000
T = average annual total return
n = number of years and/or portion of a year
ERV = ending redeemable value of a hypothetical initial Purchase
Payment of $1,000 at the end of the applicable period
If a Sub-Account has been in existence for less than one, five or ten years, the
time period since the date of the initial public offering will be substituted
for the periods stated.
As a hypothetical example, a cumulative return of 100% over ten years would
produce an average annual total return of 7.18%, which is the annual rate that
would equal 100% growth on a compounded basis in ten years. 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.
Any total return quotation provided for a Sub-Account should not be
considered as representative of the performance of the Sub-Account in the
future, since the net asset value will vary based not only on the type, quality
and maturities of the securities held in the corresponding Portfolio, but also
on changes in the current value of such securities and on changes in the
expenses of the Sub-Account and the corresponding Portfolio. These factors and
possible differences in the methods used to calculate total return should be
considered when comparing the total return of a Sub-Account to total returns
published for other investment companies or other investment vehicles. Total
return reflects the performance of both principal and income.
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.
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.
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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 income options. The amount of
such payments is calculated by applying the Surrender Value, less any applicable
premium tax, at annuitization to the income payment rates for the annuity payout
plan selected. Annuity income payments will be the larger of:
(a) the income based on the rates shown in the Contract's Annuity Tables
for the annuity payout plan chosen; and
(b) the income calculated by applying the proceeds as a single premium at
the Company's current rates in effect on the date of the first income
payment for the same plan.
Annuity income payments under any of the annuity payout plans will not vary
in dollar amount and will not be affected by the future investment performance
of the Variable Account.
If the Owner of the Contract dies before the entire interest in the Contract
is distributed, the Contract Value must be distributed as described below so
that the Contract qualifies as an annuity under the Internal Revenue Code.
If death occurs on or after the Income Date, any remaining portion of the
interest in the Contract must be distributed at least as rapidly as under the
method of distribution being used as of the date of death. If death occurs
before the Income Date, the entire interest in the Contract must be distributed
within five years after the date of death, unless the following conditions are
met.
If an annuity payout option is selected by the Beneficiary and if annuity
income payments begin within one year of the Owner's death, the value of the
Contract may be distributed over the Beneficiary's life or a period not
exceeding the Beneficiary's life expectancy. However, for Qualified Contracts
where the Owner's spouse is the Beneficiary, annuity income payments need not
begin within one year after the Owner's death; rather, they need only begin on
or before April 1 of the calendar year in which the Owner would have attained
age 70-1/2.
Independent Accountants
The Balance Sheets of the Company as of December 31, 1993 and 1994, and the
Summaries of Operations, Statements of Changes in Shareholder's Equity and
Statements of Cash Flows of the Company for each of the three years in the
period ended December 31, 1994,
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included in this registration statement, 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.
As described in the Prospectus, the Variable Account seeks to achieve the
investment objectives of each Sub-Account by investing all the investable assets
of the Sub-Account in a diversified open-end management investment company
having the same investment objectives as such Sub-Account. These investment
companies are, respectively, Emerging Growth Portfolio, International Equity
Portfolio, Balanced Portfolio, Growth & Income Portfolio, Income Opportunity
Portfolio, Bond Portfolio and Standby Income Portfolio (each a "Portfolio" or,
collectively, the "Portfolios"). Detailed information regarding the Emerging
Growth, International Equity, Balanced, Income Opportunity and Standby Income
Portfolios (the "VIT Portfolios") is contained in the separate prospectus of the
Select Advisors Variable Insurance Trust (the "VI Trust") that accompanies the
Prospectus. Detailed information regarding the Bond Portfolio and the Growth &
Income Portfolio (the "SAT Portfolios") is contained in Part II of the
Prospectus and this Statement of Additional Information.
Since the investment characteristics of each Sub-Account will correspond
directly to those of the respective Portfolio in which the Sub-Account invests
all of its Assets, the following is a discussion of the various investments of
and techniques employed by the SAT Portfolios.
As disclosed in the Prospectus, Touchstone Advisors, Inc. (the "Advisor") is
the investment advisor of each Portfolio, and the specific investments of each
Portfolio are managed on a day-to-day basis by their respective investment
advisors (collectively, the "Portfolio Advisors"). Signature Financial Services,
Inc. ("Signature" 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, of course, be no assurance that any Sub-Account will
achieve its investment objective(s).
See The VI Trust and the SA Trust in the Prospectus.
The following provides additional information about certain of the investment
techniques employed by one or more of the SAT Portfolios. For further
information, please refer to the
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discussion of investment techniques 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 timedraft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Commercial Paper
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see the Appendix.
Lower-Rated Debt Securities
While the market for high yield corporate debt securities (commonly known as
"junk bonds") has been in existence for many years and has weathered previous
economic downturns, the 1980's brought a dramatic increase in the use of such
securities to fund highly leveraged corporate acquisitions and restructuring.
Past experience may not provide an accurate indication of future performance of
the high yield, high risk bond market, especially during periods of economic
recession. In fact, from 1989 to 1991, the percentage of lower-rated debt
securities that defaulted rose significantly above prior levels.
The market for junk bonds may be thinner and less active than that for higher
rated debt
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securities, which can adversely affect the prices at which the former are sold.
If market quotations are not available, such lower-rated debt securities will be
valued in accordance with procedures establish by the Board of Trustees of the
SA Trust, including the use of outside pricing services. Judgment plays a
greater role in valuing high yield, high risk corporate debt securities than is
the case for securities for which more external sources for quotations and last
sale information is available. Adverse publicity and changing investor
perception may affect the ability of outside pricing services to value
lower-rated debt securities and the ability to dispose of these securities.
In considering investments for the Portfolio, the Portfolio Advisor will
attempt to identify those issuers of high yielding debt securities ("junk
bonds") whose financial condition is adequate to meet future obligations, has
improved or is expected to improve in the future. The Portfolio Advisor's
analysis focuses on relative values based on such factors as interest on
dividend coverage, asset coverage, earnings prospects and the experience and
managerial strength of the issuer.
A Portfolio may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interest of security holders if it determines this to be in the
best interest of the Portfolio.
For a description of bond ratings, see the Appendix to the Prospectus.
Illiquid Securities
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "1933 Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the 1933 Act are referred to as "private placements" or
"restricted securities" and are purchased directly from the issuer or in the
secondary market. Investment companies do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a
Portfolio might not be able to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A Portfolio might also have
to register such restricted securities in order to dispose of them, resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
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The Securities and Exchange Commission (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities otherwise
subject to restriction on their resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the 1933 Act
of resales of certain securities to qualified institutional buyers. The Advisor
and each Portfolio Advisor anticipate that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc.
Each Portfolio Advisor will monitor the liquidity of Rule 144A securities in
the respective Portfolio's portfolio under the supervision of the 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 (formerly the Union of Soviet Socialist
Republics).
In certain of these markets, the Communist Party, despite the fall of
communist dominated governments, continues to exercise a significant or, in some
countries, a dominant role. So long as this situation continues or currently
controlling parties remain vulnerable to sudden removal from power, investments
in such countries will involve risks of nationalization, expropriation and
confiscatory taxation. The former communist governments of a number of Eastern
European countries expropriated large amounts of private property in the past,
in many cases without adequate compensation, and there may be no assurance that
such expropriation will not occur in the future at the hands of either an
existing non-communist regime or upon the return to power of the Communist
Party. In the event of such expropriation, a Portfolio could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern
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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
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 in crease 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 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
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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, 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 purchase 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.
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Since the fluctuations in the value of futures contracts should be similar to
those of debt securities, an SAT Portfolio could take advantage of the
anticipated rise in the value of debt securities without actually buying them
until the market had stabilized. At that time, the futures contracts could be
liquidated and the Portfolio could then buy debt securities on the cash market.
When a Portfolio enters into a futures contract for any purpose, the
Portfolio will establish a segregated account with the Portfolio's custodian to
collateralize or "cover" the Portfolio's obligation consisting of cash, cash
equivalents or high grade liquid debt 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
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underlying debt securities, it may or may not be less risky than ownership of
the futures contract or underlying debt securities. As with the purchase of
futures contracts, when an SAT Portfolio is not fully invested it may purchase a
call option on a futures contract to hedge against a market advance due to
declining interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, an SAT Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Portfolio's holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
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
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in dollars and will thereby offset, in whole or in part, the adverse effect on
its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, an SAT Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
Options on foreign currencies may be written for the same types of hedging
purposes. For example, where an SAT Portfolio anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the SAT
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the 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,
U.S. Government securities and other high quality liquid debt 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
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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
averse change in the exchange rate. In such circumstances, the Portfolio
collateralizes the option by maintaining in a segregated account with its
custodian, cash or U.S. Government securities or other high quality liquid debt
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.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanged. 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
<PAGE>
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 on a security then held in its portfolio ("covered options") in
an attempt to increase income. However, the Portfolio may forgo the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the Portfolio.
When an SAT Portfolio writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time during
the option period. If the option expires unexercised, the Portfolio will realize
income in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which the SAT Portfolio has no control, the
Portfolio must sell the underlying security to the option holder at the exercise
price. By writing a covered call option, the Portfolio forgoes, in exchange for
the premium less the commission ("net premium"), the opportunity to profit
during the option period from an increase in the market value of the underlying
security above the exercise price.
When an SAT Portfolio writes a covered put option, it gives the purchaser of
the option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in
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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. The SAT Portfolio will only write
put options involving securities for which a determination is made at the time
the option is written that the Portfolio owns or which the Portfolio wishes to
acquire the securities at 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.
Securities against which options are written will be segregated on the books
of the custodian for the Portfolio. If the Portfolio does not own the security
on which the option is written, the Portfolio will "cover" its obligation by
placing high grade liquid debt securities in a segregated account at the
Portfolio's custodian.
An SAT Portfolio may purchase call and put options on any securities in which
it may invest. The Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The purchase
of a call option would entitle the Portfolio, in exchange for the premium paid,
to purchase a security at a specified price during the option period. The
Portfolio would ordinarily have a gain if the value of the securities increased
above the exercise price sufficiently to cover the premium and would have a loss
if the value of the securities remained at or below the exercise price during
the option period.
An SAT Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange
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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. 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.
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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 high grade liquid debt instruments 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 high grade liquid assets 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
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transactions with respect to security transactions. However, the Portfolio
Advisors believe that it is important to have the flexibility to enter into
foreign currency hedging transactions when it determines that the transactions
would be in a Portfolio's best interest. Although these transactions tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain that might be realized
should the value of the hedged currency increase. The precise matching of the
forward currency contract amounts and the value of the securities involved will
not generally be possible because the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of such
securities between the date the forward currency contract is entered into and
the date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward currency contracts. In such
event the SAT Portfolio's ability to utilize forward currency contracts in the
manner set forth in the Prospectus may be restricted. Forward currency contracts
may reduce the potential gain from a positive change in the relationship between
the U.S. dollar and foreign currencies. Unanticipated changes in currency prices
may result in poorer overall performance for the Portfolio than if it had not
entered into such contracts. The use of foreign currency forward 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 foreign currency
forward 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 rating services 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
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the ratings used herein and in the Funds' Prospectuses is set forth in the
Appendix to this Statement of Additional Information.
INVESTMENT RESTRICTIONS
The investment restrictions described below as "fundamental policies" of each
SAT Portfolio may not be changed with respect to any Portfolio without the
approval of a "majority of the outstanding voting securities" of the SAT
Portfolio. "Majority of the outstanding voting securities" under the Investment
Company Act of 1940, as amended (the "1940 Act"), and as used in this Statement
of Additional Information and the Prospectus, means, with respect to the
Portfolio, the lesser of (i) 67% or more of the outstanding voting securities of
the Portfolio present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Portfolio are present or represented by
proxy or (ii) more than 50% of the outstanding voting securities of the
Portfolio.
Fundamental Policies
As a matter of fundamental policy, no SAT Portfolio may:
(1) 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 "State and Federal Restrictions" below;
(2) 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) 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) 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 (the Portfolio may hold
and sell, for its portfolio, real estate acquired as a result of the Portfolio's
ownership of securities);
<PAGE>
(5) 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) 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; and
(7) with respect to 75% of its assets, invest more than 5% of its total
assets in the securities (excluding U.S. Government securities) of any one
issuer.
State and Federal Restrictions
In order to comply with certain state and federal statutes and policies,
neither SAT Portfolio will, as a matter of operating policy (changeable by the
respective Board of Trustees without a shareholder vote) (except that no
operating policy shall prevent a Portfolio from investing all of its assets in
an open-end investment company with substantially the same investment
objectives), do any of the following:
(i) borrow money (including through reverse repurchase agreements or
dollar 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 net assets; provided, however,
that no Portfolio may purchase any security while outstanding
borrowings exceed 5%;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Portfolio's net assets (taken at market value), provided that
collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, and
reverse repurchase agreements are not considered a pledge of assets
for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and
except that deposits of initial deposit and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures;
(iv) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to
obtain securities, without payment of further consideration,
equivalent in kind and amount to the securities sold and provided
that if such right is conditional the sale is made upon the same
conditions;
(v) invest for the purpose of exercising control or management;
<PAGE>
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though
not made in the open market, is part of a plan of merger or
consolidation; provided, however, that securities of any investment
company will not be purchased for the Portfolio if such purchase at
the time thereof would cause: (a) more than 10% of the Portfolio's
total assets (taken at the greater of cost or market value) to be
invested in the securities of such issuers; (b) more than 5% of the
Portfolio's total assets (taken at the greater of cost or market
value) to be invested in any one investment company; or (c) more
than 3% of the outstanding voting securities of any such issuer to
be held for the Portfolio; provided further that, except in the
case of a merger or consolidation, the Portfolio shall not purchase
any securities of any open-end investment company;
(vii) invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid or
not readily marketable (excluding Rule 144A securities deemed by
the Board of Trustees of the SA Trust to be liquid);
(viii) invest more than 15% of the Portfolio's total assets in securities
(taken at the greater of cost or market value) in (a) securities
(including Rule 144A securities) that are restricted as to resale
under the 1933 Act, and (b) securities that are issued by issuers
that (including predecessors) have been in operation less than
three years (other than U.S. Government securities), provided,
however, that no more than 5% of the Portfolio's total assets are
invested in securities issued by issuers that (including
predecessors) have been in operation less than three years;
(ix) invest more than 10% of the Portfolio's total assets (taken at the
greater of cost or market value) in securities (excluding Rule 144A
securities) that are restricted as to resale under the 1933 Act;
(x) purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio to hold more than 10% of any
class of securities of such issuer, for which purposes all
indebtedness of an issuer shall be deemed a single class and all
preferred stock of an issuer shall be deemed a single class, except
that futures or option contracts shall not be subject to this
restriction;
(xi) purchase or retain in the Portfolio's portfolio any securities
issued by an issuer any of whose officers, directors, trustees or
security holders is an officer or Trustee of the Portfolio, or is
an officer or partner of the Advisor, if after the purchase of the
securities of such issuer for the Portfolio one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and
such persons owning more than 1/2 of 1% of such
<PAGE>
shares or securities together own beneficially more than 5% of such
shares or securities, or both, all taken at market value;
(xii) invest more than 5% of the Portfolio's net assets in warrants
(valued at the lower of cost or market), but not more than 2% of
the Portfolio's net assets may be invested in warrants not listed
on the New York Stock Exchange Inc. ("NYSE") or the American Stock
Exchange;
(xiii) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount
of such securities or securities convertible into or exchangeable,
without payment of any further consideration, for securities of the
same issue and equal in amount to, the securities sold short, and
unless not more than 10% of the Portfolio's net assets (taken at
market value) is represented by such securities, or securities
convertible into or exchangeable for such securities, at any one
time (the Portfolios have no current intention to engage in short
selling);
(xiv) purchase puts, calls, straddles, spreads and any combination
thereof if by reason thereof the value of the Portfolio's aggregate
investment in such classes of securities will exceed 5% of its
total assets;
(xv) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio and the option is
issued by the Options Clearing Corporation, 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 short-term U.S. Government
securities equal in value to the amount the Portfolio will be
obligated to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the
Portfolio has purchased a closing put, which is a put of the same
series as the one previously written; and
(xvi) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on
financial futures unless such options are written by other persons
and: (a) the options or futures are offered through the
<PAGE>
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 state securities law and regulations of all states in which the
corresponding Sub-Account, or any registered investment company 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 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 the
brokerage commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for a Portfolio taking into account such factors
as price, commission (negotiable in case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions paid by others. 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,
<PAGE>
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.
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 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.
Higher commissions may be paid to firms that provide research services to
the extent permitted by law. A Portfolio Advisor may use this research
information in managing an SAT Portfolio's assets, as well as the assets of
other clients.
For the period November 21, 1994 (commencement of operations) to December
31, 1994, the aggregate commissions paid by each Portfolio is as follows:
Bond Growth & Income
Portfolio Portfolio
Aggregate Commissions None $4,982
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
<PAGE>
information is used by the Portfolio Advisor in connection with such Portfolios.
Conversely, such information provided to the Portfolio Advisor by brokers and
dealers through whom other clients of the Portfolio Advisor effect securities
transactions may be useful to the Portfolio Advisor in providing services to the
Portfolios.
In certain instances there may be securities which are suitable for an SAT
Portfolio as well as for one or more of the Advisor's other clients, including
Portfolios of the SAT 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.
VALUATION OF SECURITIES; REDEMPTION IN KIND
The value of each security for which readily available market quotations
exists is based on a decision as to the broadest and most representative market
for such security. The value of such security is based either on the last sale
price on a national securities exchange, or, in the absence of recorded sales,
at the readily available closing bid price on such exchanges, or at the quoted
bid price in the over-the-counter market. Securities listed on a foreign
exchange are valued at the last quoted sale price available before the time net
assets are valued. Unlisted securities are valued at the average of the quoted
bid and asked prices in the over-the-counter market. Debt securities are valued
by a pricing service which determines valuations based upon market transactions
for normal, institutional-size trading units of similar securities. Securities
or other assets for which market quotations are not readily available are valued
at fair value in accordance with procedures established by the SA Trust. Such
procedures include the use of independent pricing services, which use prices
based upon yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. All portfolio securities with a remaining maturity of less than 60
days are valued at amortized cost, which approximates market.
The accounting records of the Portfolios are maintained in U.S. dollars.
The market value of investment securities, other assets and liabilities and
forward contracts denominated in foreign currencies are translated into U.S.
dollars at the prevailing exchange rates at the end of the period. Purchases and
sales of securities, income receipts, and expense payments are translated at the
exchange rate prevailing on the respective dates of such transactions. Reported
net realized gains and losses on foreign currency transactions represent net
gains and losses from
<PAGE>
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 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 NYSE
is open for business. As of 4:00 p.m., New York time, on each such day, the
value of each investor's interest in a Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage representing
that investor's share of the aggregate beneficial interests in the Portfolio.
Any additions or reductions which are to be effected on that day will then be
effected. The investor's percentage of the aggregate beneficial interests in a
Portfolio will then be recomputed as the percentage equal to the fraction (i)
the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m. on such day plus or minus, as the case may be, the
<PAGE>
amount of net additions to or reductions in the investor's investment in the
Portfolio effected on such day and (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of 4:00 p.m. on such day plus or
minus, as the case may be, the amount of net additions to or reductions in the
aggregate investments in the Portfolio by all investors in the Portfolio. The
percentage so determined will then be applied to determine the value of the
investor's interest in the Portfolio as of 4:00 p.m. on the following day the
NYSE is open for trading.
MANAGEMENT OF THE SA TRUST
The Trustees and officers of the SA Trust and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those Trustees who are "interested
persons" (as defined in the 1940 Act) of the SA Trust. Unless otherwise
indicated, the address of each Trustee and officer is 318 Broadway, Cincinnati,
Ohio.
Trustees of the SA Trust
*EDWARD G. HARNESS, JR. -- Trustee and President; Director, President and
Chief Executive Officer, Touchstone Advisors, Inc. (since December, 1993);
Director, Chief Executive Officer, Touchstone Securities (since October, 1991);
President, IFS Financial Services, Inc. (since November, 1990); President,
Landmark Financial Corporation (prior to July, 1990).
*WILLIAM J. WILLIAMS -- 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., 3 Grandin Place, Cincinnati, OH 45208 -- Trustee;
Retired Professor Emeritus, College of Business, University of Cincinnati.
PHILLIP R. COX, 4199 Crossgate Lane, Cincinnati, OH 45236 -- Trustee;
President and Chief Executive Officer, Cox Financial Corp. (since 1972);
Director, Federal Reserve Bank of Cleveland (since January, 1994); Director,
Cincinnati Bell Inc. (since March, 1993); Director, PNC Bank (since October,
1992); Director, Cincinnati Gas & Electric Co. (since May, 1994).
ROBERT E. STAUTBERG, 4815 Drake Road, Cincinnati, OH 45243 -- Trustee;
Director, Scripps Howard Broadcasting Company (since May, 1989); Trustee, Good
Samaritan Hospital (since January, 1988); Retired Partner and Director, KPMG
Peat Marwick (since December, 1987); Trustee and Director of other not for
profit organizations.
DAVID POLLAK, 1313 Kemper, Suite 111, Cincinnati, Ohio 45246 -- Trustee;
Retired President, The Ultimate Distributing Company (1986-1993); Vice-Chairman,
Continental Steel Corporation (1982-1985); Vice-Chairman, XTEK (1972-1982);
Director Emeritus, Fifth-Third Bank.
<PAGE>
Officers of the SA Trust
JILL T. MCGRUDER -- Vice President; Vice President and Chief Operations
Officer, Touchstone Advisors, Inc. (since December, 1993); President and Chief
Operations Officer, Touchstone Securities (since October, 1991); Executive Vice
President, IFS Financial Services, Inc. (since May, 1991); Officer, Nationwide
Life Insurance Company (May, 1981 to May, 1991).
EDWARD S. HEENAN -- Treasurer; Vice President and Controller, Touchstone
Advisors (since December, 1993); Director, Controller, Touchstone Securities
(since October, 1991); Vice President and Comptroller, The Western and Southern
Life Insurance Company (since 1987).
THOMAS M. LENZ, 6 St. James Avenue, Boston, Massachusetts 02116 --
Secretary; Vice President and Associate General Counsel, Signature Financial
Group, Inc. ("SFG") (since November, 1989); Assistant Secretary, Signature
(since February, 1991); Attorney, Ropes & Gray (prior to November, 1989).
DAVID G. DANIELSON, 6 St. James Avenue, Boston, Massachusetts 02116 --
Assistant Treasurer; Assistant Manager, SFG (since May, 1991); Graduate Student,
Northeastern University (April, 1990 to March, 1991); Tax Accountant and Systems
Analyst, Putnam Companies (prior to March, 1990).
JOHN R. EDLER -- Assistant Treasurer; Vice President, SFG (since January
1993); Senior Tax Compliance Accountant, Putnam Investments (prior to December
1992). His address is 6 St. James Avenue, Boston, Massachusetts 02116.
JAMES S. LELKO, JR., 6 St. James Avenue, Boston, Massachusetts 02116 --
Assistant Treasurer; Assistant Manager, SFG (since January, 1992); Senior Tax
Compliance Accountant, Putnam Investments (prior to December, 1992).
BRIAN J. MANLEY -- Assistant Treasurer; Vice President and Chief Financial
Officer, Touchstone (since December, 1993); Vice President and Chief Financial
Officer, Touchstone Securities (since November, 1991); Assistant Controller, The
Union Central Life Insurance Company (prior to 1991).
DANIEL E. SHEA, 6 St. James Avenue, Boston Massachusetts 02116 -- Assistant
Treasurer; Assistant Manager, SFG (since November, 1993); Supervisor and Senior
Technical Advisor, Putnam Investments (prior to November, 1993).
MOLLY S. MUGLER, 6 St. James Avenue, Boston, Massachusetts 02116 --
Assistant Secretary; Legal Counsel and Assistant Secretary, SFG (since December,
1988); Assistant Secretary, Signature (since April, 1989).
LINDA T. GIBSON, 6 St. James Avenue, Boston, Massachusetts 02116 --
Assistant Secretary; Legal Counsel and Assistant Secretary, SFG (since May,
1992); Assistant Secretary, Signature (since October, 1992); student, Boston
University School of Law (September, 1989 to May, 1992); Product Manager, SFG
(January, 1989 to September, 1989).
ANDRES E. SALDANA, 6 St. James Avenue, Boston, Massachusetts 02116 --
Assistant Secretary; Legal Counsel, SFG (since November, 1992); Attorney, Ropes
& Gray (September, 1990 to November, 1992); law student, Yale Law School
(September, 1987 to May, 1990).
Messrs. Lenz, Danielson, Elder, Lelko, Saldana and Shea and Mss. Gibson and
Mugler also hold similar positions for other investment companies for which
Signature or an affiliate serves
<PAGE>
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 Trust or the Portfolio Trust for serving as an officer or
Trustee of the SA Trust. The SA Trust, the VI Trust and two affiliated trusts of
the SA Trust together pay 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 period November 21, 1994 (commencement of
operations) to December 31, 1994, the SA Trust incurred $2094.90 in Trustee fees
and expenses.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM SA TRUST AND
NAME OF PERSON, COMPENSATION AS PART OF SA TRUST BENEFITS UPON FUND COMPLEX
POSITIONS FROM SA TRUST EXPENSES RETIREMENT PAID TO TRUSTEES
<S> <C> <C> <C> <C>
Edward G. Harness, Jr., none none none none
Trustee of Trust
William J. Williams, none none none none
Trustee of Trust
Joseph S. Stern, Jr., $698.30 none none $2,250
Trustee of Trust
Phillip R. Cox, $698.30 none none $2,250
Trustee of Trust
Robert E. Stautberg, $698.30 none none $2,250
Trustee of Trust
David Pollak,* none none none none
Trustee of Trust
- -------------------
<FN>
* Mr. Pollak was elected to the Board of Trustees on March 30, 1995 and,
therefore, was not compensated as a Trustee during the period ended December
31, 1994.
</FN>
</TABLE>
<PAGE>
As of April 30, 1995, 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 Portfolio 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 wilful misfeasance, bad faith or gross negligence or reckless
disregard of its or their obligations and duties under the Advisory Agreement.
The Trust's Prospectus contains a description of fees payable to the
Advisor for services under the Advisory Agreement.
For the period November 21, 1994 (commencement of operations) to December
31, 1994, each 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.
<PAGE>
Bond Portfolio Growth & Income
Portfolio
Rate 0.55% 0.75%
Amount $6,064 $8,015
For the period November 21, 1994 (commencement of operations) to December
31, 1994, the Advisor has waived its Investment Advisory fee.
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
Pursuant to an administrative services and fund accounting agreement (the
"Administrative Services Agreement"), Signature provides the SA Trust with
general office facilities and supervises the overall administration of the SA
Trust, including, among other responsibilities, the negotiation of contracts and
fees with, and the monitoring of performance and billings of, the independent
contractors and agents of the SA Trust; the preparation and filing of all
documents required for compliance by the Trust with applicable laws and
regulations; and arranging for the maintenance of books and records of the SA
Trust. The Administrator provides persons satisfactory to the Board of Trustees
of the SA Trust to serve as officers of the Trust. Such officers, as well as
certain other employees and Trustees of the SA Trust, may be directors, officers
or employees of the Administrator or its affiliates.
For the services to be rendered and the facilities to be provided by
Signature under the Administrative Services Agreement, the SA Trust shall pay to
Signature an administrative services and accounting fee from the assets of each
SAT Portfolio that is determined, on an
<PAGE>
annual basis (but calculated and paid monthly), by (a) multiplying the average
daily net assets of all Portfolios of the SA Trust by a percentage derived as
follows:
on the combined average daily net assets of all Portfolios of the SA
Trust up to $100 million -- 0.20%;
on the combined average daily net assets of all Portfolios of the SA
Trust from $100 million to $200 million -- 0.18%;
on the combined average daily net assets of all Portfolios of the SA
Trust from $200 million to $500 million -- 0.12%;
on the combined average daily net assets of all Portfolios of the SA
Trust from $500 million to $1 billion -- 0.08%;
on the combined average daily net assets of all Portfolios of the SA
Trust greater than $1 billion -- 0.05%; and
(b) allocating the resulting fee among the Portfolios in proportion to
their respect average daily net assets.
In addition, each SAT Portfolio is subject to a minimum annual
administrative services and fund accounting fee of $60,000 ($40,000 in the first
year of operations). In the case of the SAT Portfolios, this minimum fee is
subject to increases depending on how many investors each Portfolio has.
For the period November 21, 1994 (commencement of operations) to December
31, 1994, each SAT Portfolio incurred $4,384 in administrative and fund
accounting fees.
The Administrative Services Agreement provides that Signature may render
administrative services to others. The Administrative Services Agreement also
provides that neither the Administrator 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 gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their obligations and
duties under the Administrative Services Agreement.
The Administrative Services Agreement terminates automatically if it is
assigned and may be terminated, with respect to a Portfolio, without penalty by
majority vote of the Sub-Account and the other investors in the Portfolio (with
the vote of each being in proportion to the amount of their investment) or by
either party on not more than 60 days' nor less than 30 days' written notice.
Signature is a wholly-owned subsidiary of Signature Financial Group, Inc.,
a Delaware corporation.
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
<PAGE>
provides oversight of the various service providers to each of the SA Trust and
the SAT Portfolios, including the Administrator and the Custodian. For its
services in this regard, the Sponsor is paid a fee, on an annual basis, equal to
0.20% of the average daily net assets of each Portfolio. The Sponsor Agreement
may be terminated by the Sponsor on not less than 30 days prior written notice
and by the SA Trust, as to any Portfolio. The Sponsor has advised the SA Trust
that it will waive all fees under the Sponsor Agreement through April 30, 1996.
Custodian
Investors Bank & Trust Company ("IBT"), 89 South Street, Boston,
Massachusetts 02111, serves as custodian for the SA Trust and for each SAT
Portfolio pursuant to the custody agreement (the "Custodian"). As Custodian, it
holds each Portfolio's assets.
Counsel and Independent Accountants
Frost & Jacobs, 2500 PNC Center, 201 East 5th Street, Cincinnati, Ohio
45202, serves as counsel to the SA Trust and each SAT Portfolio. Coopers &
Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109, acts as
independent accountants of the SA Trust and each SAT Portfolio.
ORGANIZATION OF THE SA TRUST
Interests in the SA Trust do not have cumulative voting rights, which means
that holders of more than 50% of such interests (which includes the interests
held by other investors in the SAT Portfolios (Growth & Income and Bond) and the
interests of other investors in Portfolios of the SA Trust that are not
available for investment by the Sub-Accounts) voting for the election of
Trustees can elect all Trustees. Accordingly, it is unlikely that Owners having
Contract Value in the Sub-Accounts that invest in the SAT Portfolios will be
able to control the election of any of the Trustees. Matters affecting the SAT
Portfolios are generally decided by separate vote of each SAT Portfolio, except
with respect to the election of Trustees and the ratification of the selection
of independent accountants.
The SA Trust, in the Portfolios of which all of the assets of the
corresponding Sub-Accounts will be invested, is organized as a trust under the
laws of the State of New York. Each Sub-Account and other entity investing in an
SAT Portfolio (e.g., other investment companies, insurance company separate
accounts and common and commingled trust funds) will each be liable for all
obligations of the Portfolio. However, the risk of a Sub-Account incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself was unable to meet
its obligations. Accordingly, the 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
<PAGE>
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.
<PAGE>
FINANCIAL STATEMENTS
The following financial statements for Western-Southern Life Assurance
Company the fiscal periods indicated are attached hereto:
(1) Report of Coopers & Lybrand L.L.P. on the Financial Statements of
Western-Southern Life Assurance Company.
(2) Balance Sheets of Western-Southern Life Assurance Company as of
December 31, 1994 and 1993.
(3) Summaries of Operations for Western-Southern Life Assurance Company
for the Years Ended December 31, 1994, 1993 and 1992.
(4) Statements of Changes in Shareholder's Equity for Western-Southern
Life Assurance Company for the Years Ended December 31, 1994, 1993 and
1992.
(5) Statements of Cash Flows for Western-Southern Life Assurance Company
for the Years Ended December 31, 1994, 1993 and 1992.
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(A Wholly-Owned Subsidiary of The Western and
Southern Life Assurance Comapny)
-----
REPORTS ON AUDITS OF FINANICAL STATEMENTS
for the years ended December 31, 1994, 1993 and 1992
<PAGE>
REPORT OF INDEPFNDFNT ACCOUNTANTS
To the Board of Directors
Western-Southern Life Assurance Company
We have audited the accompanying balance sheets (statutory basis) of
Western-Southern Life Assurance Company (a wholly-owned subsidiary of The
Western and Southern Life Insurance Company) as of December 31, 1994 and 1993,
and the related summaries of operations (statutory basis) and statements of
changes in shareholder's equity (statutory basis) and cash flows (statutory
basis) for the three years in the period ended December 31. 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an-opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, these finanical statements were prepared in conformity
with accounting practices prescribed or permitted by insurance regulatory
authorities.
In our opinion. the financial statements referred to above present fairly, in
all material respects, the financial position of Western-Southern Life Assurance
Company as of December 31, 1994 and 1993, and the results of its operations and
its cash flows for the three years in the period ended December 31, 1994 in
conformity with accounting practiccs prescribed or permitted by insurance
regulatory authorities, which practices are considered to be generaliv accepted
accounting principles for wholly-owned stock life subsidiaries of mutal life
insurance companies.
/s/COOPERS & LYBRAND L.L.P.
Cincinnati, Ohio
April 12, 1995
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(A Wholly-Owned Subsidiary of The Western and
Southern Life Insurance Company)
BALANCE SHEETS
as of December 31, 1994 and 1993
-------------------------------
ASSETS
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(in thousands)
<S> <C> <C>
Debt securities $1,710,601 $1,348,150
Preferred and common stocks 58,325 31,699
Mortgage loans 141,278 149,189
Policy loans 51,941 50,815
Cash and temporary investments 53,516 66,849
Other invested assets 35,937 37,229
--------- ---------
Cash and invested assets 2,051,598 1,683,931
Investment income due and accrued 26,965 22,861
Reinsurance due, held by parent 32,249 35,177
Other assets 2,142 1,514
-------- ---------
Total assets $2,112,954 $1,743483
========= =========
LIABILITIES
Policy reserves $1,925,319 $1,538,880
Policy claims in process of settlement 5,961 6,555
Federal income taxes payable 4,692 13,309
Amounts due to parent:
Reinsurance premiums 27,072 28,123
General expenses 5,261 14,134
Liability for temporary investments held for affil 4,942 8,308
Other liabilities 13,228 11,568
Interest maintenance reserve 11,612 17,618
Asset valuation reserve 17,033 14,536
-------- ---------
Total liabilities 2,015,120 1,653,031
---------- ---------
SHAREHOLDER'S EQUITY
Common stock, $1 par value, authorized 10,000,000
shares, issued and outstanding 1,500,000 shares 1,500 1,500
Paid-in capital 160,000 150,000
Retained earnings (deficit) (63,666) (61,048)
--------- --------
Total shareholder's equity 97,834 90,452
--------- ---------
Total liabilities and stockholder's equity $2,112,954 $1,743,483
========== =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(A Wholly-Owned Subsidiary of The Western and
Southern Life Insurance Company)
SUMMARIES OF OPERATIONS
for the years ended December 31, 1994, 1993 and 1992
(in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Premiums $496,525 $416,689 416,359
Net investment income 146,958 122,565 98,597
-------- ------- ---------
643,483 539,254 514,956
-------- ------- ---------
Policy benefits and expenses:
Death benefits 58,418 51,302 45,195
Annuity benefits 58,044 33,160 16,324
Surrender benefits 27,064 24,372 24,142
Other benefits 2,453 2,179 1,616
Increase in policy reserves 387,507 327,458 344,460
Commissions on premiums 44,817 42,501 40,696
General expenses 52,474 43,890 43,745
-------- -------- ---------
630,777 524,862 516,178
-------- -------- ---------
Gain (loss) from operations before federal income
taxes and net realized capital loss 12,706 14,392 (1,222)
Federal income taxes 5,324 6,579 2,177
-------- -------- ----------
Net gain from operations before net
realized capital loss 7,382 7,813 (3,339)
Net realized capital loss, less federal
income benefit of $36 in 1994,
$374 in 1993 and $1,470 in 1992 (314) (654) (3,780)
--------- -------- ----------
Net income $7,068 $7,159 (7,119)
========= ======== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(A Wholly-Owned Subsidiary of The Western and
Southern Life Insurance Company)
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
for the years ended December 31, 1994, 1993 and 1992
--------------------
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Shareholder's equity, beginning of year $90,452 $60,425 $69,577
Net income 7,068 7,159 (7,119)
Change in asset valuation reserve (2,497) (1,220) (2,185)
Change in net unrealized gains (losses):
Unaffiliated common stock (918) 0 0
Subsidiaries (3,332) (3,435) (2,097)
Other invested assets (1,235) (504) 2,541
Change in reserves on real estate and
mortgage loans 46 (1,899) 0
Capital contribution from parent 10,000 30,000 0
Other changes, net (1,750) (74) (292)
----------- ---------- ----------
Shareholder's equity, end of year $97,834 $90,452 $60,425
=========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(A Wholly-Owned Subsidiary of The Western and
Southern Life Insurance Company)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1994, 1993 and 1992
----------------------
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Net cash from operations:
Premium and annuity considerations $493,630 $418,117 $417,228
Net investment income received 140,579 116,565 94,593
Other income received 256 25 3,605
-------- -------- --------
634,465 534,707 515,426
Surrender and annuity benefits paid (84,851) (58,101) (40,456)
Death and other benefits to policyholders (58,535) (52,678) (49,277)
Commissions, other expenses and taxes paid (93,899) (84,221) (79,804)
Net increase in policy and other loans (14,516) (4,920) (5,617)
Federal income taxes paid to parent (11,716) (4,726) (7,518)
--------- --------- ----------
Net cash from operations 370,948 330,061 332,754
Proceeds from investments sold, matured or repaid:
Debt securities 343,311 354,232 509,326
Stocks 10,149 87,647 1,000
Mortgage loans 7,047 27,949 8,338
Other invested assets 4,290 3,010 1,378
--------- --------- ----------
Total investment proceeds 364,797 472,838 520,042
Capital Contributions 10,000 30,000
Other sources 47,851 573
--------- --------- -----------
Total cash provided 745,745 880,750 853,369
--------- --------- -----------
Cost of investments acquired:
Debt securities 711,387 709,765 812,436
Stocks 41,271 89,099 32,617
Mortgage loans 1,628 13,468 241
Other invested assets 2,414 39 937
--------- --------- ---------
Total investments acquired 756,700 812,371 846,231
Other cash applied, net 2,378 2,898 6,313
--------- ---------- ---------
Total cash applied 759,078 815,269 852,544
--------- ---------- ----------
Net change in cash and temporary investments (13,333) 65,481 825
Cash and temporary investments:
Beginning of year 66,849 1,368 543
---------- ---------- ----------
End of year $53,516 $66,849 $1,368
========== ========== ==========
</TABLE>
The accompanying notes are an intergral
part of the financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. PRINCIPAL ACCOUNTING POLICIES:
-----------------------------
Western-Southern Life Assurance Company is a wholly-owned subsidiary of
The Western and Southern Life Insurance Company, a mutual life
insurance company.
The accompanying financial statements have been prepared on the basis
of accounting practices prescribed or permitted by insurance regulatory
authorities, which practices are considered to be generally accepted
accounting principles (GAAP) for wholly-owned stock life subsidiaries
of mutual life insurance companies. Certain amounts for 1993 and 1992
have been reclassified to conform to the 1994 presentation.
In January 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 120, Accounting
and Reporting by Mutual Life Insurance Enterprises and by Insurance
Enterprises for Certain Long-Duration Participating Contracts. This
Statement, effective for fiscal years beginning after December 15,
1995, extends the requirements of SFAS Nos. 60, 97, and 113 to mutual
life insurance companies. It also defers the effective date of
Interpretation 40, previously issued by the FASB in 1993, to fiscal
years beginning after December 15, 1995. Interpretation 40 indicated
that financial statements of mutual life insurance companies prepared
on a statutory basis will no longer be considered in conformity With
GAAP. In addition, the American Institute of Certified Public
Accountants has issued Statement of Position (SOP) 95-1, Accounting for
Certain Insurance Activities of Mutual Life Insurance Enterprises,
which is also effective for fiscal years beginning after December 15,
1995. This SOP establishes accounting for certain participating life
insurance contracts. These statements apply to the Company since it is
a subsidiary of a mutual company.
The effect of initially applying SFAS No. 120, Interpretation 40, and
SOP 95-1 is to be reported retroactively through restatement of all
previously issued annual financial statements presented for comparative
purposes for fiscal years beginning after December 15, 1992. The effect
of implementation of this standard has not yet been determined,
although management expects the implementation to have a positive
impact on the Company's shareholder's equity. Management may initiate
the accounting changes in 1996.
The following is a description of the principal accounting policies and
practices used in the preparation of these financial statements.
<PAGE>
Revenues and Expenses
---------------------
Premium revenues on fixed premium policies are recognized when due over
the premium paying period of the policies. Premium revenues on flexible
premium policies are recognized when received. Commissions and other
costs of acquiring the policies are charged to expense when incurred.
Valuation of Investments
------------------------
o Debt securities and stock values are as prescribed by the
National Association of Insurance Commissioners (NAIC); debt
securities principally at amortized cost, preferred stocks in
good standing at cost and al other stocks at market.
o Investments in subsidiaries are recorded on the equity method.
The net income or loss of such subsidiaries is recorded
directly to retained earnings.
o Mortgage loans not in default are carried at outstanding
indebtedness adjusted for unamortized premium or discount.
Mortgage loans in default and property acquired in
satisfaction of debt are recorded at the lower of the related
indebtedness or fair market value.
o Policy loan values are at outstanding indebtedness not in
excess of policy cash surrender value.
o Real estate joint ventures and partnerships are accounted for
on the equity method, with the equity in earnings recorded
through net investment income and retained earnings for
general and limited partnership interests, respectively.
The asset valuation reserve serves to provide a reserve, recorded
through retained earnings, against fluctuations in the market values of
debt securities, stocks, mortgage loans, real estate and other invested
assets. The interest maintenance reserve defers the recognition of
realized capital gains and losses resulting from changes in interest
rates on fixed income investments sold and amortizes the gains and
losses into investment income over the approximate remaining life of
the investments sold. The net gain (loss) deferred as a result of
recording the interest maintenance reserve was $(4,065,000) and
$11,241,000 net of federal income taxes (benefit) of $(2,189,000) and
$6,357,000, in 1994 and 1993, respectively.
Realized gains and losses from sales of securities are determined on
the basis of specific identification and recognized on the trade date.
Realized gains and losses, adjusted for the interest maintenance
reserve, are included in the determination of net income. Adjustments
to fair market value for permanent declines in value of mortgage loans
property acquired in satisfaction of debt and real estate are treated
as realized losses and are included in net income. Adjustments for
declines which are not permanent and for valuation reserves are treated
as unrealized losses. Unrealized gains and losses on all investments
are reported as adjustments to retained earnings.
<PAGE>
Policy Reserves
---------------
Policy reserves for life insurance, annuity contracts and supplemental
benefits are developed by using accepted actuarial methods and are
computed principally on the Commissioner's Reserve Valuation Method.
The following mortality tables and interest rates are used:
Percentage of Reserves
----------------------
1994 1993
----------------------
Life insurance:
58 CSO and 80 CSO, 3 1/2% - 5 1/2% 40.2% 47.6%
Annuities: 59.1 51.6
Various, 2-1/2% - 8-1/4%
Supplemental benefits: 0.7 0.8
Various, 2-1/2% - 8-1/4% ----------------------
100.0% 100.0%
======================
Cash and Temporary Investments
------------------------------
The Company considers short-term investments with an original maturity
of three months or less to be temporary investments.
Federal Income Taxes
--------------------
The Company's parent files a consolidated tax return with its eligible
subsidiaries, including the Company. The provision for federal income
taxes is allocated to the Company using a separate return method based
upon a written agreement.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS:
-------------------------------------
Statements of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of fair
value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to
estimate that value.
The following methods and assumptions were used to estimate the fair
value of the Company's financial instruments:
Cash and Temporary Investments
------------------------------
<PAGE>
The carrying amounts reported in the balance sheet for these
instruments approximate their fair values.
Debt securities
---------------
Fair values for debt securities are based on quoted market prices.
The amortized cost and estimated fair values of investments in debt
securities at December 31, 1994 and 1993, are as follows:
1994
-------------------------------------------------
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
-------------------------------------------------
(in thousands)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $16,641 $66 $613 $16,094
Debt securities issued by
states of the U.S. and
political subdivisions
of the states 74,407 104 $3,813 70,698
Corporate securities 938,137 12,013 53,479 896,671
Foreign governments 4,854 34 4,820
Mortgage-backed securities 676,563 1,590 51,040 627,113
----------------------------------------------------
Total $1,710,602 $13,773 $108,979 $1,615,396
====================================================
<PAGE>
1993
---------------------------------------------------
Amortized Unrealized Unrealize Estimated Fair
Cost Gains Losses Value
---------------------------------------------------
(in thousands)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $6,740 $369 $7,109
Debt securities issued
by states of the U.S.
and political subdivisions
of the states 46,387 3,228 $269 49,347
Corporate securities 611,144 60,096 2,676 868,364
Mortgage-backed securities 486,866 27,291 2,648 513,508
-----------------------------------------------------
Total $1,353,137 $90,984 $5,793 $1,438,328
The amortized cost and estimated fair value of debt securities at December 31,
1994, by contractual maturity, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Estimated market
Cost value
------------ ------------
(in thousands)
Due in one year or less $11,857 $11,751
Due after one year through five years 155,078 155,803
Due after five years through ten years 648,029 617,210
Due after ten years 219,075 203,519
------------ ------------
1,034,039 988,283
Mortgage-backed securities 676,563 627,113
------------ ------------
Total $1,710,602 $1,615,396
============ ============
<PAGE>
Proceeds from sales of investments in debt securities during 1994, 1993
and 1992 were $343,311,000, $354,232,000 and $509,326,000,
respectively. Gross gains of $7,688,000, $18,674,000 and $12,851,000
and gross losses of $13,698,000, $430,000 and $2,544,000 were realized
on those sales in 1994, 1993 and 1992, respectively.
Preferred and Common Stocks
---------------------------
Common stocks are carried in the balance sheet at their fair value.
Preferred stock, with a carrying amount of $28,717,000 and $30,716,000,
has an estimated fair value of $29,064,000 and $34,011,000 at December
31, 1994 and 1993, respectively.
Mortgage Loans
--------------
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 estimated at the lower of
the fair market value of the related underlying collateral or carrying
value of the loan . At December 31, 1994 and 1993, the mortgage loan
reserve, recorded as a liability in the balance sheet, was $973,000 and
$1,199,000, respectively. The carrying amounts and fair values of the
Company's investments in mortgage loans were as follows at December 31,
1994 and 1993:
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(in thousands)
Mortgage Loans $141,278 $140,675 $149,189 $158,580
Policy Loans
------------
The Company believes it is not practicable to estimate the fair value
of policy loans. These assets, Totalling $51,941,000 and $50,815,000 at
December 31, 1994 and 1993, respectively, are carried at their
aggregate unpaid principal balances. Estimation of the fair market
value is not practicable as the loans have no stated maturity and are
an integral part of the related insurance contracts.
<PAGE>
Reserves for Investment-Type Insurance Contracts
-------------------------------------------------
Certain reserves for investment-type insurance contracts do not include
mortality or morbitity risk. Fair values for insurance reserves are not
required to be disclosed. However, the estimated fair values for all
insurance reserves and investment contracts are taken into
consideration in the Company's overall management of interest rate
risk.
The Company believes that all individual annuity contracts which are in
the cash value fund accumulation phase prior to annuitization represent
investment-type insurance contracts. The fair values for these
contracts have been estimated as the carrying values in the balance
sheet less any applicable surrender charges. It also believes the
single premium immediate annuities without life contingencies represent
investment contracts. The fair value of these annuities is estimated by
recalculating the reserve at a reinvestment interest rate determined
from Asset/Liability matching. At December 31, 1994 and 1993 the
amounts are as follows:
1994 1993
------ ------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands) (in thousands)
Individual annuities $1,095,889 $1,076,109 $754,448 $731,366
========== =========== ========= =========
3. RELATED PARTY TRANSACTIONS
---------------------------
The Company has three modified coinsurance agreements under which it cedes
all of its universal life insurance business to its parent. Under the
terms of the agreement, the Company retains the reserves and related
assets. The Company also records in its summaries of operations premiums
less experience refunds, commissions, adjustments to reserves as specified
in the agreement, benefits incurred and other related expenses of this
business. The net effect of the agreements on operations of the Company
has been recorded as a reduction in general expenses of $793,000,
$6,765,000 and $8,667,000 in 1994, 1993, and 1992, respectively.
The Company also has a coinsurance agreement under which it assumes all of
its
<PAGE>
parent's flexible premium annuity business. Under the terms of this
agreement, the Company assumed reserves of $31,Z43,000 and S32,384,000 as
of December 31, 1994 and 1993, respectively. Amounts included in the
summaries of operations resulting from this agreement are as follows:
1994 1993 1992
-----------------------------------------
(in thousands)
Premiums $1,177 $493 $708
Net investment income 11,916 2,171 2,438
Benefits and expenses 3,715 2,851 3,034
Increase/(Decrease)
in policy reserves (1,141) (187) 112
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 $32,291,000, $30,971,000, and $31,669,000 in 1994, 1993 and
1992, respectively. Rent expense was $4,126,000, $3,858,000 and $2,775,000
in 1994, 1993 and 1992, respectively.
During 1994 and 1993, the Company made capital contributions of $3,225,000
and $1,000,000, respectively, r-o its wholly-owned subsidiary IFS
Financial Services (IFS). Additionally, .he Company pays commissions to
IFS for sales made on behalf of the Company. These commissions r-otalled
$1,858,000, $1,099,000 and $745,000 in 1994, 1993 an 1992, respectively.
During 1994 and 1993, the Company's parent made capital contributions o@@
$10,000,000 and $30,000,000, respectively, to rhe Company.
At December 31, 1994, the company had 28,732,000 invested in the
Touchstone Funds, a mutual funds administered by Touchstone Advisors,
Inc., a wholly-owned subsidiary of IFS.
4. FEDERAL INCOME TAXES:
--------------------
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 S71,725,000 and included interest in the amount of
$26,380,000. The issue involved in the assessment was the disallowance of
certain deductions relating to life reserves of the Company's universal
life products taken in excess of such reserves computed for statutory
purposes. The assessment was paid in order to litigate the issue as the
Company maintains that the original deductions were proper and in
accordance with the Internal Revenue Code. In 1994, the U.S. District
Court issued a summary judgement which stated the original deductions were
proper, entitling the Company's parent to a refund of all related
assessments paid including interest, which approximates $105 million. This
judgement is being appealed by the IRS. The effect of the final resolution
of this matter will be recorded by the Company's parent in accordance with
the tax sharing agreement.
Following is a reconciliation between the amount of tax computed at the
federal statutory rate of 35% and the federal income tax provision
(exclusive of taxes related to capital gains or losses) reflected in the
summary of operations;
<TABLE>
<CAPTION>
1994 1993 1992
------------------------------------
(in thousands)
<S> <C> <C> <C>
Income tax (benefit) computed at statutory rate $4,447 $5,037 ($415)
Increase (decrease) in taxes resulting from:
Adjustments to statutory reserves for tax
purposes 2,999 680 3,584
Deferred acquisition costs recorded or tax
purposes 1,401 1,475 1,382
Reclassification of capital gains to ordinary
income 231 213 155
Mortgage loan writedowns recorded in prior
years through shareholder's equity (30) (649) (1,747)
Bond discount accrual (899) (398) (387)
Difference between book and tax income from
investments in partnerships 439 770 (186)
Change in deferred and uncollected (368) (558) (279)
Guaranty fund assessment accrued at year end (216) 525
Amortization of interest maintenance reserve (679) (520)
Changes in prior period estimates (1,594)
Other (406) 4 10
------------------------------------
Federal income taxes $5,324 $6,579 $2,117
====================================
</TABLE>
<PAGE>
In 1992, the Company recorded the deferred tax benefit of $700,000
related to the writedown of certain real estate properties which will
be recorded for tax purposes in later years.
5. SUBSIDIARIES:
------------
The following represents combined capsule information for the company's
whollyowned subsidiaries, IFS Financial Services, Inc. and Courtyard
Nursing Care, Inc., for the years ended December 31, 1994 and 1993:
1994 1993
---------------------
(in thousands)
Assets $3,694 $3,922
Liabilities 983 1,979
Net revenues 2,696 2,452
Net loss (2,457) (2,104)
6. PERMITTED STATUTORY ACCOUNTING PRACTICES
----------------------------------------
The Company, which is domiciled in ChIo, prepares its statutory
financial statements in accordance with accounting principles and
practices prescribed or permitted by the State of Ohio Department of
Insurance. Prescribed statutory accounting practices include state
laws, regulations, and general administrative rules, as well as a
variety of publications of the 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. Furthermore, the
NAIC has a project to codify statutory accounting practices, the result
of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project, which is
expected to be completed in 1995 will likely change the definitions of
what comprises prescribed versus permitted statutory accounting
practices, and may result in changes to the accounting policies that
insurance enterprises use to prepare their statutory financial
statements.
The Company received written approval from the State of Ohio Department
of Insurance to record Guaranty Fund Assessments when 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 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.
<PAGE>
APPENDIX
BOND, COMMERCIAL PAPER AND MUNICIPAL OBLIGATIONS RATINGS
Set forth below are descriptions of the ratings of Moody's and S&P, which
represent their opinions as to the quality of the Municipal Obligations and
securities which they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Moody's Bond Ratings
Aaa. Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal interest are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest principal payments or of maintenance of other
terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default
<PAGE>
or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Unrated. Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effect of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa-1,
A-1, Baa-1 and B-1.
S&P's Bond Rating
AAA. Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from higher rated issues only in a small degree.
A. Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in the highest rated
categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
<PAGE>
to pay interest and repay principal for bonds in this category than in higher
rated categories.
BB, B, CCC, CC and C. Bonds rated BB, B, CCC, CC, and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of this obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties of major risk
exposures to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no interest is
being paid.
D. Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-). The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR. Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Description of S&P Municipal Bond Ratings:
AAA - Prime - These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds - In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds - Debt service coverage has been, and is expected to remain,
substantial, stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant, earnings test for
issuance of additional bonds and debt service reserve requirements) are
rigorous. There is evidence of superior management.
AA - High Grade - The investment characteristics of bonds in this group are
only slightly less marked than those of the prime quality issues. Bonds rated AA
have the second strongest capacity for payment of debt service.
A - Good Grade - Principal and interest payments on bonds in this category
are regarded as safe although the bonds are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than bonds
in higher rated categories. This rating describes the third strongest capacity
for payment of debt service. Regarding municipal bonds, the rating differs from
the two higher ratings because:
<PAGE>
General Obligations Bonds - There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and expenditures,
or in quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date.
Revenue Bonds - Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provision, while satisfactory, are less stringent.
Management performance appearance appears adequate.
S&P's letter ratings may be modified by the addition of a plus or a minus
sigh, which is used to show relative standing within the major rating
categories, except in the AAA rating category.
Description of Moody's Municipal Bond Ratings:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gild edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally know as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Moody's may apply the numerical modifier in each generic rating
classification from Aa through B. The modified 1 indicates that the security
within its generic rating classification possesses the strongest investment
attributes.
Description of S&P Municipal Note Ratings:
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, or -2) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given the designation of SP-1+.
Notes rated SP-2 have a satisfactory capacity to pay principal and interest.
<PAGE>
Description of Moody's Municipal Note Ratings:
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG1/VMIG 1 are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both.
Loans bearing the designation MIG2/VMIG2 are of high quality, with ample margins
of protection, although not as large as the preceding group.
S&P's Commercial Paper Ratings
A is the highest commercial paper rating category utilized by S&P, which
uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
Moody's Commercial Paper Ratings
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-terms promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by eternal conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
<PAGE>
DISTRIBUTOR
Touchstone Securities, Inc. SUB-ACCOUNTS
318 Broadway
Cincinnati, Ohio 45202 oEmerging Growth
(800) 669-2796 oInternational Equity
oGrowth & Income
INVESTMENT ADVISOR oBalanced
oIncome Opportunity
Touchstone Advisors, Inc. oBond
318 Broadway oStandby Income
Cincinnati, Ohio 45202
VARIABLE ANNUITY SERVICE CENTER
Touchstone Variable Annuity Service Center
P.O. Box 419707
Kansas City, Missouri 64179-0819
(800) 669-2796
CUSTODIAN
Investors Bank & Trust Company STATEMENT OF
89 South Street ADDITIONAL INFORMATION
Boston, Massachuse May 1, 1995, as amended
November 14, 1995
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
201 East Fourth Street
Cincinnati, Ohio 45202
LEGAL COUNSEL
Frost & Jacobs
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
