<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1997
Registration No. 33-79906
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
----------------------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 4 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 5 [X]
(Check appropriate box or boxes)
----------------------------------------
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 2
(Exact Name of Registrant)
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(Name of Depositor)
400 Broadway
Cincinnati, Ohio 45202
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number (513) 629-1800
----------------------------------------
Copy to:
DONALD J. WUEBBLING, ESQ. J. LELAND BREWSTER II, ESQ.
400 Broadway Frost & Jacobs
Cincinnati, Ohio 45202 2500 PNC Center
(Name and Address of Agent 201 East Fifth Street
for Service) Cincinnati, Ohio 45202
----------------------------------------
It is proposed that this filing will become effective (check the appropriate
box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1997 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[ ] on ___________ pursuant to paragraph (a) of Rule 485
----------------------------------------
Variable Annuity Contracts -- Pursuant to Rule 24f-2(a)(1) under the Investment
Company Act of 1940, the Registrant has registered an indefinite amount of
securities. The Registrant will file a Rule 24f-2 Notice on or before
June 30, 1997 for fiscal year ended December 31, 1996.
Select Advisors Portfolios has also executed this Registration Statement.
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
CROSS-REFERENCE SHEET
REQUIRED BY RULE 495(a)
PART I - DISCUSSION OF THE VARIABLE ANNUITY CONTRACT
PART A - PROSPECTUS
FORM HEADING
N-4 IN
ITEM NO. PROSPECTUS
1. Cover Page Cover Page
2. Definitions Glossary
3. Synopsis Summary of the Contract;
Fee and Expense Tables
4. Condensed Financial Information
(a) Accumulation Unit Value Accumulation Unit Value
(b) Performance Information Performance Information
5. General Description of Registrant,
Depositor and Portfolio Companies
(a) Depositor The Company
(b) Registrant The Variable Account
(c) Portfolio Company The VI Trust and the
SA Trust
(d) Prospectus The VI Trust and the
SA Trust
(e) Voting Voting Rights
(f) Administrator Charges
6. Deductions and Expenses
(a) Deductions Charges; Mortality and Expense Risk
Charge
(i)
<PAGE>
FORM HEADING
N-4 IN
ITEM NO. PROSPECTUS
(b) Sales load Not Applicable
(c) Special purchase plans Dollar Cost Averaging;
Purchase of a Contract
(d) Commissions Distribution of the Contracts
(e) Portfolio company deductions Expenses of the VIT Portfolios and
and expenses SAT Portfolios; Expense Caps
(f) Registrant's expenses Charges
(g) Organizational expenses Administrative Charges
7. General description of variable annuity contracts
(a) Rights Summary of the Contract;
Allocation of Purchase Payments;
Surrenders and Partial
Withdrawals; Death Benefit;
Selection of Annuity Income
Options; Reports to Contract
Owners; Voting Rights;
Other Contract Provisions
(b) Provisions and limitations Allocation of Purchase
Payments; Transfers
(c) Changes in contracts The Variable Account
or operations
(d) Contract owner inquiries Cover Page; Summary of the
Contract
8. Annuity Period
(a) Level of benefits Selection of Annuity
Income Options
(b) Annuity commencement date Income Date Selection
(ii)
<PAGE>
FORM HEADING
N-4 IN
ITEM NO. PROSPECTUS
(c) Annuity payments Annuity Payout Plans
(d) Assumed investment return Selection of Annuity Income Options
(e) Minimums Annuity Payout Plans
(f) Rights to change options Selection of Annuity Income Options
or transfer contract value
9. Death Benefit
(a) Death benefit calculation Death Benefit
(b) Forms of benefits Annuity Payout Plans; Death Benefit
10. Purchases and Contract Values
(a) Procedures for purchases Purchase of a Contract
(b) Accumulation unit values Accumulation Unit Value;
Accumulation Unit Value - VIT
Sub-Accounts; Accumulation Unit
Value - Growth & Income and
Bond Sub-Accounts
(c) Calculation of Allocation of Purchase
accumulation unit values Payments; Accumulation Unit Value;
Accumulation Unit Value - VIT
Sub-Accounts; Accumulation Unit
Values - Growth & Income and Bond
Sub-Accounts
(d) Principal underwriter Distribution of the Contracts
11. Redemptions
(a) Redemption procedures Surrenders and Partial Withdrawals
(b) Texas Optional Retirement Not Applicable
Program
(c) Delay Surrenders and Partial Withdrawals
(d) Lapse Surrenders and Partial Withdrawals
(e) Revocation rights Free Look Privilege
(iii)
<PAGE>
FORM HEADING
N-4 IN
ITEM NO. PROSPECTUS
12. Taxes
(a) Tax consequences Federal Income Taxation
(b) Qualified plans Federal Income Taxation
(c) Impact of taxes Federal Income Taxation
13. Legal Proceedings Legal Proceedings
14. Table of Contents for Statement Table of Contents of Statement
of Additional Information of Additional Information
PART B - SAI
FORM HEADING
N-1A IN
ITEM NO. SAI
15. Cover Page Cover Page
16. Table of Contents Table of Contents of Statement
of Additional Information
17. General Information and History
(a) Name change Not Applicable
(b) Attribution of assets Not Applicable
(c) Control of depositor The Company (Prospectus)
18. Services
(a) Fees, expenses and costs Administrative Services;
Charges (Prospectus);
Expenses of VIT Portfolios
and SAT Portfolios;
Expense Caps (Prospectus)
(b) Management-related services Administrative Services
(c) Custodian and independent Independent Accountants
public accountant
(iv)
<PAGE>
FORM HEADING
N-4 IN
ITEM NO. SAI
(d) Other custodianship Safekeeping of Assets
(e) Administrative servicing Administrative Services
agent Agreement; The Company
(Prospectus); The Variable
Account (Prospectus)
(f) Depositor as principal Not Applicable
underwriter
19. Purchase of securities offered
(a) Manner of offering Distribution of the
Contracts (Prospectus)
(b) Sales Load Not Applicable
20. Underwriters
(a) Depositor or affiliate Distribution of Contracts
as principal underwriter (Prospectus)
(b) Continuous offering Distribution of Contracts
(Prospectus)
(c) Underwriting commissions Distribution of Contracts
(d) Payments to underwriter Distribution of Contracts
21. Calculation of performance data Sub-Account Performance
22. Annuity payments Fixed Annuity Income Payments
23. Financial Statements
(a) Registrant Financial Statements
(b) Depositor Financial Statements
(v)
<PAGE>
PART II - DISCUSSION OF SELECT ADVISORS PORTFOLIOS
PART A
FORM HEADING
N-1A IN
ITEM NO. PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Summary; Fee and Expense Tables
(Prospectus Part I)
3. Condensed Financial Information
(a) Financial Highlights Financial Highlights
(b) Debt Not Applicable
(c) Per Share Operating Performance Information
Performance (Prospectus Part I)
4. General Description of the Registrant
(a)(i) Organization The Variable Account (Prospectus
Part I)
(a)(ii) Investment Objectives Investment Objectives, Policies and
and Policies Restrictions; Risk Factors,
Restrictions and Investment
Techniques
5. Management of the Portfolios Management of the Portfolios
5A. Management's Discussion of Not Applicable
Fund Performance
6. Capital Stock and Other Description of Interests, Voting
Securities Rights and Liabilities; Taxation
(SAI)
7. Purchase of Securities Purchase and Valuation; Special
Being Offered Information Concerning Hub and
Spoke-Registered Trademark-
Structure; Management of
the Portfolios
8. Redemption or Purchase Special Information Concerning Hub
and Spoke-Registered Trademark-
Structure; Description
of Interests, Voting Rights and
Liabilities
9. Pending Legal Proceedings Not Applicable
(vi)
<PAGE>
PART B
FORM HEADING
N-1A IN
ITEM NO. SAI
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Facts about the Company;
and History The Variable Account (Prospectus
Part I)
13. Investment Objectives and Investment Objectives, Techniques,
Policies Policies and Restrictions
14. Management of the Fund Management of the SA Trust
15. Control Persons and Management of the SA Trust; The
Principal Holders of Securities Variable Account (Prospectus Part
I)
16. Investment Advisory and Management of the Portfolios
Other Persons (Prospectus Part II); Advisors,
Portfolio Advisors, Administrator
and Distributor
17. Brokerage Allocation Portfolio Transactions and
and Other Practices and Brokerage Commissions
18. Capital Stock and Other Securities Organization of the SA Trust
19. Purchase, Redemption and Pricing Valuation of Securities;
of Securities Being Offered Redemption in Kind
20. Tax Status Taxation
21. Underwriters Distribution of the Contracts
(Prospectus Part I)
22. Calculations of Performance Data Performance Information (Prospectus
Part I)
23. Financial Statements Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of the Registration Statement.
(vii)
<PAGE>
T O U C H S T O N E
---------------------------------------------
[LOGO]
TOUCHSTONE II VARIABLE ANNUITY
( EMERGING GROWTH
( INTERNATIONAL EQUITY
( GROWTH & INCOME
( BALANCED
( INCOME OPPORTUNITY
( BOND
( STANDBY INCOME
- --------------------------------------------------------------------------------
PROSPECTUS
MAY 1, 1997
<PAGE>
THIS BOOKLET CONTAINS THE PROSPECTUS FOR TOUCHSTONE II VARIABLE ANNUITY, A
FLEXIBLE PURCHASE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACT, ISSUED BY
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY. THIS BOOKLET ALSO INCLUDES THE
PROSPECTUS FOR INVESTMENT PORTFOLIOS UNDERLYING THE TOUCHSTONE II VARIABLE
ANNUITY. THESE PROSPECTUSES ARE BOUND TOGETHER FOR YOUR CONVENIENCE.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
MAY 1, 1997
<TABLE>
<S> <C>
UNITS OF INTEREST UNDER WESTERN-SOUTHERN LIFE
FLEXIBLE PURCHASE ASSURANCE COMPANY
PAYMENT DEFERRED SEPARATE ACCOUNT 2
VARIABLE ANNUITY 400 BROADWAY
CONTRACTS CINCINNATI, OHIO 45202
</TABLE>
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This Prospectus describes individual variable annuity contracts (each a
"CONTRACT" and collectively the "CONTRACTS") offered by Western-Southern Life
Assurance Company (the "COMPANY"), a life insurance company which is a wholly
owned subsidiary of The Western and Southern Life Insurance Company ("WESTERN &
SOUTHERN"). The Contracts are designed for individual investors and group plans
that desire to accumulate capital on a tax-deferred basis for retirement or
other long term objectives. Contracts may be purchased on either a non-qualified
basis or on a qualified basis in connection with qualified retirement and
pension plans. Contracts may be purchased by making an initial payment of at
least $5,000. Subsequent payments to a Contract must be at least $1,000.
Payments will be invested as the Contract Owner directs in one or more sub-
accounts (each a "SUB-ACCOUNT") of Western-Southern Life Assurance Company
Separate Account 2 (the "VARIABLE ACCOUNT"), each of which invests in a
corresponding portfolio (a "PORTFOLIO") of Select Advisors Variable Insurance
Trust or of Select Advisors Portfolios, each of which is an open-end diversified
management investment company.
The Sub-Accounts in which Contract Owners may invest are: Emerging Growth,
International Equity, Growth & Income, Balanced, Income Opportunity, Bond and
Standby Income. Information regarding these investment options is set forth
under the caption "The Variable Account" herein. Of the seven Sub-Accounts,
five, Emerging Growth, International Equity, Balanced, Income Opportunity and
Standby Income, invest in corresponding Portfolios of Select Advisors Variable
Insurance Trust (the "VI TRUST"). THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED
BY THE CURRENT PROSPECTUS FOR THE VI TRUST (THE "VI TRUST PROSPECTUS"). The
remaining two Sub-Accounts, Growth & Income and Bond, invest in the Growth &
Income Portfolio II (the "Growth & Income Portfolio") and Bond Portfolio II (the
"Bond Portfolio") of Select Advisors Portfolios (the "SA TRUST") under a Hub and
Spoke-Registered Trademark- arrangement. Unlike the Portfolios of the VI Trust,
the SA Trust may also receive investments for its Growth & Income Portfolio and
Bond Portfolio from other insurance company separate accounts registered as
investment companies under the Investment Company Act of 1940. See "Special
Information Concerning Hub And Spoke-Registered Trademark- Structure" in this
Prospectus. Hub and Spoke-Registered Trademark- is a registered service mark of
Signature Financial Group, Inc.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE CONTRACTS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, THE NATIONAL CREDIT UNION
SHARE INSURANCE FUND OR ANY OTHER AGENCY. MUTUAL FUNDS AND VARIABLE ANNUITIES
INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THE INCOME OPPORTUNITY PORTFOLIO OF THE VI TRUST MAY INVEST UP TO 100% OF
ITS TOTAL ASSETS IN NON-INVESTMENT GRADE BONDS, (COMMONLY KNOWN AS "JUNK BONDS")
ISSUED BY BOTH U.S. AND FOREIGN ISSUERS, WHICH ENTAIL GREATER RISK OF UNTIMELY
INTEREST AND PRINCIPAL PAYMENTS, DEFAULT AND PRICE VOLATILITY THAN HIGHER RATED
SECURITIES, AND MAY PRESENT PROBLEMS OF LIQUIDITY AND VALUATION. SEE "INCOME
OPPORTUNITY PORTFOLIO" IN THE VI TRUST PROSPECTUS.
This Prospectus tells investors briefly the information they should know
before investing in the Contracts. Investors should read and retain this
Prospectus for future reference. Additional information about the Contract and
the Variable Account has been filed with the Securities and Exchange Commission
in a Statement of Additional Information dated May 1, 1997. The Statement of
Additional Information is incorporated by reference in this Prospectus and is
available without charge by calling the Touchstone Variable Annuity Service
Center at 1-800-669-2796. The table of contents of the Statement of Additional
Information appears on page 46 of this Prospectus.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY INTEREST OR PARTICIPATION IN
THE CONTRACTS OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM SUCH
OFFER WOULD BE UNLAWFUL THEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
PROSPECTUS CONTENTS
<TABLE>
<S> <C>
GLOSSARY............................................................................... 1
PART I -- DISCUSSION OF THE VARIABLE ANNUITY CONTRACT.................................. 3
FEE AND EXPENSE TABLES................................................................. 3
SUMMARY OF THE CONTRACT................................................................ 5
PERFORMANCE INFORMATION................................................................ 8
FACTS ABOUT THE COMPANY AND THE VARIABLE ACCOUNT....................................... 8
The Company.......................................................................... 8
The Variable Account................................................................. 8
The VI Trust and the SA Trust........................................................ 9
THE CONTRACT........................................................................... 10
Purchase of a Contract............................................................... 10
Free Look Privilege.................................................................. 11
Allocation of Purchase Payments...................................................... 11
Accumulation Unit Value.............................................................. 11
Accumulation Unit Value -- VIT Sub-Accounts........................................ 11
Accumulation Unit Value -- Growth & Income and Bond Sub-Accounts................... 12
Dollar Cost Averaging................................................................ 12
Transfers............................................................................ 13
Surrenders and Partial Withdrawals................................................... 13
Selection of Annuity Income Options.................................................. 14
Income Date Selection.............................................................. 14
Annuity Payout Plans............................................................... 14
Death Benefit........................................................................ 15
CHARGES................................................................................ 15
Premium Taxes........................................................................ 15
Other Taxes.......................................................................... 15
Administrative Charges............................................................... 15
Contract Maintenance Charge........................................................ 15
Contract Administration Charge..................................................... 15
Mortality and Expense Risk Charge.................................................... 16
Expenses of VIT Portfolios and SAT Portfolios; Expense Caps.......................... 16
OTHER INFORMATION...................................................................... 16
Distribution of the Contracts........................................................ 16
Statements to Contract Owners........................................................ 17
Adjustment of Units and Values....................................................... 17
Voting Rights........................................................................ 17
Substituted Securities............................................................... 17
OTHER CONTRACT PROVISIONS.............................................................. 18
Misstatement of Age or Sex........................................................... 18
Assignment........................................................................... 18
Loans................................................................................ 18
No Dividends......................................................................... 18
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
FEDERAL INCOME TAX INFORMATION......................................................... 18
Qualification as an "Annuity Contract"............................................... 18
Diversification.................................................................... 18
Excessive Control.................................................................. 19
Required Distributions............................................................. 19
Multiple Contracts................................................................. 20
Federal Income Taxation.............................................................. 20
General............................................................................ 20
Tax Treatment of Assignments....................................................... 21
Tax Treatment of Withdrawals -- Non-Qualified Contracts............................ 21
Qualified Contracts and Qualified Plans............................................ 21
Section 401 Qualified Pension or Profit-Sharing Plans............................ 22
Section 403(b) Plans............................................................. 22
Loans............................................................................ 22
Individual Retirement Annuities.................................................. 23
Simplified Employee Pension Plans................................................ 23
Savings Incentive Match Plans for Employees (SIMPLE)............................. 24
Section 457 -- Deferred Compensation Plans....................................... 24
Tax Treatment of Withdrawals -- Qualified Contracts................................ 24
Tax-Sheltered Annuities -- Withdrawal Limitations.................................. 26
LEGAL PROCEEDINGS...................................................................... 26
FINANCIAL STATEMENTS................................................................... 26
PART II -- DISCUSSION OF SELECT ADVISORS PORTFOLIOS.................................... 27
SUMMARY................................................................................ 27
General.............................................................................. 27
Risks................................................................................ 27
Advisors............................................................................. 27
Sub-Accounts......................................................................... 27
Other Investors...................................................................... 28
FINANCIAL HIGHLIGHTS................................................................... 28
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS....................................... 29
Growth & Income Portfolio............................................................ 29
Bond Portfolio....................................................................... 29
SPECIAL INFORMATION CONCERNING HUB AND SPOKE-Registered Trademark-..................... 29
MANAGEMENT OF THE PORTFOLIOS........................................................... 30
General.............................................................................. 30
Consultant to the Advisor............................................................ 31
Portfolio Advisors................................................................... 31
Expenses............................................................................. 32
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
RISK FACTORS, RESTRICTIONS AND INVESTMENT TECHNIQUES................................... 32
Techniques and Risk Factors.......................................................... 32
Derivatives........................................................................ 32
Foreign Securities................................................................. 32
Risks Associated with "Emerging Markets" Securities................................ 33
Currency Exchange Rates............................................................ 33
Medium and Lower Rated ("Junk Bonds") and Unrated Securities....................... 33
ADRs, EDRs and CDRs................................................................ 34
Fixed-Income and Other Debt Instrument Securities.................................. 34
U.S. Government Securities......................................................... 35
Mortgage Related Securities........................................................ 35
Stripped Mortgage Related Securities............................................... 36
Zero Coupon Securities............................................................. 36
Custodial Receipts................................................................. 36
When-Issued and Delayed Delivery Securities........................................ 37
Repurchase Agreements.............................................................. 37
Reverse Repurchase Agreements and Forward Roll Transactions........................ 37
Lending Portfolio Securities....................................................... 38
Illiquid Securities................................................................ 38
Non-Publicly Traded ("Restricted") Securities and Rule 144A Securities............. 38
Temporary Investments.............................................................. 38
Futures Contracts and Related Options.............................................. 39
Options on Stock................................................................... 39
Options on Securities Indexes...................................................... 39
Forward Currency Contracts......................................................... 40
Asset Coverage....................................................................... 40
Certain Investment Restrictions...................................................... 41
Portfolio Turnover................................................................... 41
MANAGEMENT OF THE SA TRUST............................................................. 41
Board of Trustees.................................................................... 41
Administrator, Fund Accounting Agent, Custodian and Transfer Agent................... 41
Sponsor.............................................................................. 42
Allocation of Expenses of the Portfolios............................................. 42
PURCHASE AND VALUATION................................................................. 42
Purchase............................................................................. 42
Valuation............................................................................ 42
ADDITIONAL INFORMATION................................................................. 43
Description of Beneficial Interests, Voting Rights and Liabilities................... 43
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION............................... 45
</TABLE>
iii
<PAGE>
GLOSSARY
ACCUMULATION UNIT -- An accounting unit of measure used to calculate the
Contract Value prior to the Income Date.
ACCUMULATION UNIT VALUE -- The dollar value of an Accumulation Unit in a
Sub-Account of the Variable Account.
ANNUITANT -- The natural person whose life is used to determine the duration
and amount of any annuity payments.
BENEFICIARY -- The person(s) to whom the Death Benefit will be paid if the
Annuitant dies before the Income Date.
CODE -- The Internal Revenue Code of 1986, as amended.
COMPANY -- Western-Southern Life Assurance Company.
CONTRACT -- An individual variable annuity contract, including the
Application Form and any amendments, riders or endorsements, offered by the
Company as set forth in this Prospectus.
CONTRACT ANNIVERSARY -- The same day and month as the Contract Date in each
subsequent year.
CONTRACT DATE -- The date, as set forth on page 3 of the Contract, on which
the Contract becomes effective, which generally will be within one business day
after receipt of the initial Purchase Payment and Application Form in good order
at the Touchstone Variable Annuity Service Center.
CONTRACT VALUE -- At any given time, the value of all Accumulation Units
credited to the Sub-Accounts pursuant to the Contract.
CONTRACT YEAR -- A year which starts with the Contract Date or with a
Contract Anniversary.
INCOME DATE -- The date on which annuity payments are scheduled to begin,
changeable by written notice to the Company.
OWNER OR JOINT OWNER -- The person(s) owning all rights under the Contract.
PORTFOLIO -- An investment portfolio of the VI Trust or of the SA Trust,
each of which is a registered open-end management investment company. Each
Portfolio corresponds to a Sub-Account of the Variable Account.
PURCHASE PAYMENT -- An amount paid to the Company under the Contract prior
to deduction of any applicable premium tax.
QUALIFIED AND NON-QUALIFIED CONTRACTS -- A QUALIFIED CONTRACT is a Contract
purchased in connection with a plan which qualifies under Sections 401, 403(b),
408 or 457 of the Code. A NON-QUALIFIED CONTRACT is any other Contract.
SAT PORTFOLIO -- Either the Growth & Income Portfolio II ("GROWTH & INCOME
PORTFOLIO") or the Bond Portfolio II ("BOND PORTFOLIO") of the SA Trust.
SA TRUST -- Select Advisors Portfolios, a trust formed under New York law
that includes portfolios in which certain of the Sub-Accounts invest. Part II of
this Prospectus, beginning at page 28, contains information regarding the SA
Trust and such Protfolios.
SUB-ACCOUNT -- A division of the Variable Account which invests in a
Portfolio of the VI Trust or the SA Trust. Purchase Payments allocated to the
Variable Account are further allocated among Sub-Accounts as designated by the
Owner.
SURRENDER VALUE -- The Contract Value after deduction of all applicable
charges. This is the amount payable to an Owner upon surrender of the Contract
prior to the Income Date during the Annuitant's lifetime.
VALUATION DATE -- Each day on which valuation of the Sub-Accounts is
required by applicable law, including every day that the New York Stock Exchange
is open.
1
<PAGE>
VALUATION PERIOD -- The period of time beginning at the close of trading on
the New York Stock Exchange on one Valuation Date and ending at the close of
trading on the New York Stock Exchange on the next succeeding Valuation Date.
VARIABLE ACCOUNT -- Western-Southern Life Assurance Company Separate Account
2, a separate investment account of the Company.
VI TRUST -- Select Advisors Variable Insurance Trust, a business trust
formed under Massachusetts law that includes portfolios in which certain of the
Sub-Accounts invest. A separate Prospectus describing the VI Trust and such
Portfolios accompanies and is bound with this Prospectus.
VIT PORTFOLIO -- A Portfolio of the VI Trust.
TERMS DEFINED ELSEWHERE IN THE PROSPECTUS
The following terms have the meanings given such terms at the pages
indicated in this table:
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------- -----------
<S> <C>
ADMINISTRATOR................................. 10
ADVISOR....................................... 10
ADVISORS ACT.................................. 32
ADVISORY AGREEMENT............................ 31
BENEFIT DETERMINATION DATE.................... 15
BOARD OF TRUSTEES/TRUSTEES.................... 31
DEATH BENEFIT................................. 15
DESIGNATED BENEFICIARY........................ 19
DISTRIBUTOR................................... 16
DOLLAR COST AVERAGING......................... 12
EXPENSE CAP................................... 3
EXPENSE RISK.................................. 16
FORT WASHINGTON............................... 32
FREE LOOK..................................... 5
FREE LOOK PERIOD.............................. 11
INVESTORS BANK................................ 10
IFS........................................... 16
INDIVIDUAL RETIREMENT ARRANGEMENT............. 25
IRA........................................... 23
MORTALITY RISK................................ 15
<CAPTION>
TERM PAGE
- ---------------------------------------------- -----------
<S> <C>
PIN........................................... 13
PORTFOLIO ADVISORS............................ 10
QUALIFIED PLANS............................... 21
ROGERSCASEY................................... 10
SAT NET INVESTMENT FACTOR..................... 12
SEC........................................... 8
SEP........................................... 23
SIMPLE........................................ 24
SPONSOR....................................... 3
SPONSOR AGREEMENTS............................ 3
SURRENDER..................................... 6
TOUCHSTONE VARIABLE ANNUITY SERVICE CENTER.... 5
TREASURY DEPARTMENT........................... 19
TRUSTEES/BOARD OF TRUSTEES.................... 31
VIT NET INVESTMENT FACTOR..................... 11
VIT SUB-ACCOUNT............................... 11
VI TRUST PROSPECTUS........................... COVER
WESTERN & SOUTHERN............................ COVER
1933 ACT...................................... 43
1940 ACT...................................... 8
</TABLE>
2
<PAGE>
PART I -- DISCUSSION OF THE VARIABLE ANNUITY CONTRACT
FEE AND EXPENSE TABLES
The following tables provide information concerning Contract Owner
transaction expenses and annual operating expenses of the Variable Account and
each Sub-Account. For these purposes, expenses of the Portfolio in which each
Sub-Account invests are treated as if they were expenses of that Sub-Account,
since that is their practical effect. It is expected that the combined expenses
per Accumulation Unit of each Sub-Account and its corresponding Portfolio will,
at a minimum, be approximately equal to and may be less than the expenses that
would be incurred by each Sub-Account alone if, instead of investing in such
Portfolio, the Sub-Account retained an investment advisor and portfolio advisors
and invested directly in the types of securities held by the Portfolio. For
additional information regarding these expenses, see "Charges."
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Contingent Deferred Sales Charge.................................... 0%
Annual Contract Maintenance Charge**........................................ $35
Variable Account Annual Expenses (as a percentage of average account value)
Mortality and Expense Risk Charges*..................................... 0.70%
Contract Administration Charge.......................................... 0.10%
---
Total Variable Account Annual Expenses*................................. 0.80%
</TABLE>
*The Company reserves the right to increase the Mortality and Expense Risk
Charge to 0.90% at any time.
**In certain states the Company may waive, reduce or eliminate the annual
Contract Maintenance Charge.
PORTFOLIO EXPENSES
The expenses of each of the VIT Portfolios and each of the SAT Portfolios
shown below are assessed at the underlying Portfolio level and are not direct
charges against the assets of the Sub-Accounts or reductions from Contract
Value, although such charges are borne indirectly by Contract Owners. Portfolio
expenses are taken into consideration in computing the net asset value of each
Portfolio, which is the price used to calculate the Contract Value. However,
under agreements (the "SPONSOR AGREEMENTS") with the VI Trust and SA Trust,
Touchstone Advisors, Inc., as sponsor to the two trusts (the "SPONSOR") has
agreed to reimburse each Portfolio for those annual operating expenses of the
Portfolio exceeding a specified percentage (the "EXPENSE CAP") of the
Portfolio's average daily net assets. For additional information regarding the
Sponsor Agreements, see "Sponsor" at page 43. Operating expenses for this
purpose include fees of the Advisor, fees of the Administrator, amortization of
organizational expenses, legal and accounting fees and Sponsor fees, but do not
include interest, taxes, brokerage commissions and other portfolio transaction
expenses, capital expenditures and extraordinary expenses. Fees and expenses in
the table are expressed as a percentage of average daily net assets.
<TABLE>
<CAPTION>
ADVISOR FEES OTHER EXPENSES TOTAL EXPENSES (AFTER
(AFTER EXPENSE (AFTER EXPENSE EXPENSE
VIT PORTFOLIOS REIMBURSEMENT) REIMBURSEMENT) REIMBURSEMENT) (1)
- ---------------------------------------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
Emerging Growth..................................... 0.80% 0.35% 1.15%
International Equity................................ 0.95% 0.30% 1.25%
Balanced............................................ 0.80% 0.10% 0.90%
Income Opportunity.................................. 0.65% 0.20% 0.85%
Standby Income...................................... 0.25% 0.25% 0.50%
<CAPTION>
SAT PORTFOLIOS
- ----------------------------------------------------
<S> <C> <C> <C>
Growth & Income..................................... 0.75% 0.10% 0.85%
Bond................................................ 0.55% 0.20% 0.75%
</TABLE>
3
<PAGE>
- ------------------------
(1) Total Portfolio expenses absent reimbursement by the Sponsor would have been
as follows: Emerging Growth -- 3.14%; International Equity -- 2.84%;
Balanced -- 2.65%; Income Opportunity -- 2.79%; Standby Income -- 1.52%;
Growth & Income -- 1.71; and Bond -- 1.72%. A Sponsor Agreement may be
terminated by the Sponsor as to any Portfolio, as of the end of any calendar
quarter after December 31, 1996, by giving at least 30 days prior written
notice, and will be terminated if the Sponsor ceases to be the investment
advisor for the Portfolio. If a Sponsor Agreement is terminated, actual
Portfolio expenses may exceed those shown in the table. For more information
regarding each Portfolio's expenses, see "Expenses of the VIT Portfolios and
SAT Portfolios; Expense Caps" herein, the VI Trust Prospectus, and the
Statement of Additional Information (available on request from the
Touchstone Variable Annuity Service Center).
EXAMPLE
The following charts depict the expenses that would be incurred under the
Contract assuming a $1,000 investment in each Sub-Account and a 5% annual return
on that investment. Portfolio expenses have been estimated at the Expense Cap
for each Portfolio. THE DOLLAR FIGURES IN EACH CHART ARE ILLUSTRATIVE ONLY AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The effect of the Contract
Maintenance Charge is calculated by expressing it as a percentage of the average
Contract Value, which is assumed, for this purpose only, to be $25,000. Premium
taxes currently are imposed by certain states and municipalities on Purchase
Payments made under the Contracts. Premium taxes are not reflected in the
samples below; where applicable, such taxes may decrease the amount of each
Purchase Payment available for allocation.
An Owner surrendering a Contract at the end of the applicable time period
would pay the following aggregate Contract and Portfolio expenses on a $1,000
investment in each Sub-Account, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Emerging Growth.................................................... $ 23 $ 72 $ 124 $ 264
International Equity............................................... $ 24 $ 75 $ 129 $ 275
Balanced........................................................... $ 21 $ 64 $ 110 $ 238
Income Opportunity................................................. $ 20 $ 63 $ 108 $ 232
Standby Income..................................................... $ 17 $ 52 $ 89 $ 194
Growth & Income.................................................... $ 20 $ 63 $ 108 $ 232
Bond............................................................... $ 19 $ 60 $ 102 $ 222
</TABLE>
An Owner annuitizing a Contract at the end of the applicable time period
would pay the following aggregate Contract and Portfolio expenses on the same
investment:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Emerging Growth.................................................... $ 23 $ 72 $ 124 $ 264
International Equity............................................... $ 24 $ 75 $ 129 $ 275
Balanced........................................................... $ 21 $ 64 $ 110 $ 238
Income Opportunity................................................. $ 20 $ 63 $ 108 $ 232
Standby Income..................................................... $ 17 $ 52 $ 89 $ 194
Growth & Income.................................................... $ 20 $ 63 $ 108 $ 232
Bond............................................................... $ 19 $ 60 $ 102 $ 222
</TABLE>
4
<PAGE>
An Owner who does not surrender a Contract at the end of the applicable time
period would pay the following aggregate Contract and Portfolio expenses on the
same investment:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Emerging Growth.................................................... $ 23 $ 72 $ 124 $ 264
International Equity............................................... $ 24 $ 75 $ 129 $ 275
Balanced........................................................... $ 21 $ 64 $ 110 $ 238
Income Opportunity................................................. $ 20 $ 63 $ 108 $ 232
Standby Income..................................................... $ 17 $ 52 $ 89 $ 194
Growth & Income.................................................... $ 20 $ 63 $ 108 $ 232
Bond............................................................... $ 19 $ 60 $ 102 $ 222
</TABLE>
The foregoing tables assume a Mortality and Expense Risk Charge of .90% (the
maximum such charge that the Company may charge), notwithstanding that the
current such charge is 0.70%.
The purpose of the above tables is to assist an Owner in understanding the
various costs and expenses that an Owner will bear directly or indirectly.
OTHER PORTFOLIO FINANCIAL INFORMATION
Additional financial information regarding the Growth & Income and Bond
Portfolios may be found at page 28 of this Prospectus, and similar information
regarding the Emerging Growth, International Equity, Balanced, Income
Opportunity and Standby Income Portfolios may be found in the VI Trust
Prospectus, which follows and is bound with this Prospectus.
SUMMARY OF THE CONTRACT
GENERAL
The purpose of the Contract is to permit an Owner to accumulate funds on a
tax-deferred basis by investing in one or more alternatives, and to permit the
Owner or the Owner's designee to receive annuity income payments starting on the
Income Date. An Owner may invest in one or more of seven Sub-Accounts of the
Variable Account. Each Sub-Account will, in turn, invest solely in one of seven
Portfolios, five of which are Portfolios of the VI Trust and two of which are
Portfolios of the SA Trust. Each Trust is an open-end diversified management
investment company. The VI Trust is organized as a Massachusetts business trust
and the SA Trust is organized as a New York trust. For further information
regarding these two trusts, see "The VI Trust and the SA Trust."
The Variable Account is a separate account of the Company. Its assets are
segregated from other assets of the Company. Owners bear the investment risk
with respect to the Sub-Accounts which they select, and there is no guarantee
that amounts invested by the Owner in the Sub-Accounts will increase or retain
their value. See "The Variable Account."
MINIMUM AND MAXIMUM INVESTMENTS
A Contract may be purchased on a Non-Qualified basis or on a Qualified basis
as part of a plan which qualifies under Sections 401, 403(b), 408 or 457 of the
Code. The initial Purchase Payment must be at least $5,000, and subsequent
Purchase Payments must be at least $1,000. The cumulative total of all Purchase
Payments under a Contract may not exceed $500,000 without the prior consent of
the Company. See "Purchase Of A Contract."
VARIABLE ANNUITY SERVICE CENTER
Investments in or withdrawals from a Contract, transfers of amounts among
the Sub-Accounts and other directions with respect to the investment of Purchase
Payments should be directed to the Company at the Touchstone Variable Annuity
Service Center, P.O. Box 419707, Kansas City, Missouri 64179-0849 (the
"TOUCHSTONE VARIABLE ANNUITY SERVICE CENTER").
TEN-DAY FREE LOOK
To be sure that the Owner is satisfied with the Contract, the Owner has a
ten-day "FREE LOOK." Within ten days of the date the Contract is received by the
Owner, it may be returned to the Company at the Touchstone Variable Annuity
Service Center. If the Contract is received by the Company within such time, the
Company will void the
5
<PAGE>
Contract, and the Contract Value, plus any amount deducted from the initial
Purchase Payment prior to allocation to the Sub-Accounts, will then be refunded
in full unless otherwise required by state or federal law. See "Free Look
Privilege."
INVESTMENT OPTIONS
Purchase Payments will be invested by the Company, in the proportions that
the Owner directs, in the Sub-Accounts. See "Allocation of Purchase Payments."
The Variable Account currently has seven Sub-Accounts, each of which invests
exclusively in one of the VIT Portfolios or one of the SAT Portfolios. The VIT
Portfolios are Emerging Growth, International Equity, Balanced, Income
Opportunity and Standby Income. The SAT Portfolios are Growth & Income and Bond.
Information regarding the investment options presented by the VIT Portfolios and
the SAT Portfolios is set forth under the caption "The VI Trust and the SA
Trust" herein. More detailed information regarding the SAT Portfolios will be
found under the caption "Investment Objectives, Policies and Restrictions" in
this Prospectus. Detailed information regarding the VIT Portfolios will be found
in the VI Trust Prospectus. Owners may transfer funds between Sub-Accounts once
every thirty days. See "Transfers."
PURCHASE PAYMENTS
The Owner may elect to allocate Purchase Payments to one or more
Sub-Accounts. Purchase Payments will be processed by the Company on the day
received at the Touchstone Variable Annuity Service Center, if received in good
order no later than 3:00 p.m. Central Time on any Valuation Date. Payments
received in good order later in the day, or on any day not a Valuation Date,
will be processed on the next Valuation Date. Purchases by the Sub-Accounts of
shares of the corresponding VIT Portfolios or of interests in the corresponding
SAT Portfolio will be made on the next Valuation Date following processing, at
the value of the corresponding Portfolio on the date of processing. As the value
of the investments in the Sub-Accounts increases or decreases, the Contract
Value increases or decreases. See "Allocation of Purchase Payments."
WITHDRAWAL; SURRENDER
Prior to the Income Date, the Owner may withdraw all or part of the Contract
Value. A withdrawal of all of the Contract Value is a "SURRENDER." The minimum
partial withdrawal is $250, and the Contract Value following any partial
withdrawal must be at least $5,000. See "Surrenders and Partial Withdrawals."
Certain withdrawals may be subject to an additional tax on premature
distributions as well as to federal income tax. See "Federal Income Taxation."
INCOME OPTIONS
The Contract offers four fixed annuity income options, unless otherwise
limited by applicable state insurance laws. Income may be paid in installments,
either for a fixed period of one to 30 years or in a fixed amount. Income also
may be paid under one of two life income alternatives. Other payout plans may be
selected with prior approval of the Company. If no income option is selected by
the Owner, the Contract provides for a monthly annuity payment, beginning on the
Income Date if the Annuitant is then living, payable for life with ten years
certain. See "Selection of Annuity Income Options." If the Annuitant dies after
the Income Date, the amount and manner of any continuing payments will depend
upon the income option selected.
BENEFIT UPON DEATH
If the Annuitant dies before the Income Date, the Company will pay a Death
Benefit to the Beneficiary selected by the Owner. See "Death Benefit."
CHARGES
The Company does not deduct a sales charge from Purchase Payments made for
Contracts and does not impose a surrender charge on withdrawals or surrenders.
On each Contract Anniversary (and upon surrender) the Company will deduct an
annual Contract Maintenance Charge of $35 from the Contract Value. In certain
states, the Company may waive, reduce or eliminate such charge. The Company also
will deduct on a daily basis a Contract Administration Charge equal to an annual
rate of 0.10% of the Contract Value. These charges are to reimburse the Company
for administrative expenses related to the issue and maintenance of the
Contract. The Company does not expect to recover from these charges an amount in
excess of accumulated administrative expenses. See "Administrative Charges."
6
<PAGE>
The Company deducts on a daily basis a Mortality Risk Charge equal to an
annual rate of 0.50% of the Contract Value for mortality risk assumed by the
Company. The Company also deducts on a daily basis an Expense Risk Charge equal
to an annual rate of 0.20% of the Contract Value as compensation for the
Company's risk in agreeing not to increase administrative charges on the
Contracts regardless of actual administrative costs. See "Mortality and Expense
Risk Charge." The Company reserves the right to increase the Mortality Risk
Charge to 0.60% and the Expense Risk Charge to 0.30%.
Premium taxes payable to any governmental entity will be charged against the
Contracts. See "Premium Taxes" and "Other Taxes."
The Company may include as a component of the Net Investment Factor (see
"Accumulation Unit Value") a charge or credit for any taxes reserved, which are
determined by the Company to have resulted from the investment operations of any
Sub-Account. See "Allocation of Purchase Payments" and "Other Taxes."
The Portfolios of the VI Trust and of the SA Trust accrue management fees
and other expenses daily and pay them monthly. See "Expenses of VIT Portfolios
and SAT Portfolios; Expense Caps."
THE FOREGOING SUMMARY IS INTENDED TO PROVIDE ONLY AN OVERVIEW OF THE MORE
SIGNIFICANT ASPECTS OF THE CONTRACT. DETAILED INFORMATION IS PROVIDED IN
SUBSEQUENT SECTIONS OF THIS PROSPECTUS AND IN THE CONTRACT. THE CONTRACT
(INCLUDING ANY AMENDMENTS, RIDERS AND ENDORSEMENTS) TOGETHER WITH THE
APPLICATION FORM CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE OWNER AND THE
COMPANY AND SHOULD BE RETAINED BY THE OWNER.
ACCUMULATION UNIT VALUES
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIODS)
<TABLE>
<CAPTION>
UNIT VALUE AT UNIT VALUE NUMBER OF
BEGINNING OF AT UNITS AT
YEAR ENDED DECEMBER 31, YEAR END OF YEAR END OF YEAR
- ---------------------------------------------------------------------- ---------------- ----------- -----------
<S> <C> <C> <C>
Emerging Growth Sub-Account
1995* 10.000000 11.741102 2,008
1996 11.741102 12.947664 4,066
International Equity Sub-Account
1995* 10.000000 11.282669 2,158
1996 11.282669 12.475967 4,538
Balanced Sub-Account
1995* 10.000000 12.018023 1,771
1996 12.018023 13.922266 3,958
Income Opportunity Sub-Account
1995* 10.000000 12.572866 2,048
1996 12.572866 15.886632 3,590
Standby Income Sub-Account
1995* 10.000000 10.364840 1,059
1996 10.364840 10.819908 19,762
Growth & Income Sub-Account
1995* 10.000000 12.533949 2,623
1996 12.533949 14.291347 4,690
Bond Sub-Account
1995* 10.000000 11.309517 1,615
1996 11.309517 11.505592 2,904
</TABLE>
- ------------------------
* Operations commenced on February 23, 1995.
For information explaining how Accumulation Unit Value is calculated for the
various Sub-Accounts, see "Accumulation Unit Value."
7
<PAGE>
PERFORMANCE INFORMATION
GENERAL
The Variable Account may advertise certain performance information regarding
the Sub-Accounts from time to time. Such performance information will be based
upon historical performance and is not intended to predict future performance
under an actual Contract.
Average annual total return quotations represent the average compounded rate
of return on a hypothetical initial investment of $1,000. Average annual total
return reflects all historical investment results, less all charges and
deductions applied against a Sub-Account (excluding any deductions for premium
taxes). The rate for each Sub-Account is computed by comparing a hypothetical
initial investment of $1,000 in the Sub-Account to the hypothetical Surrender
Value of that investment at the end of specifically defined 1, 5 and 10 year
periods or for the life of the Contract.
It is important to note that total return figures are based on historical
earnings and are not intended to indicate future performance. The Statement of
Additional Information describes in more detail the methods used to determine
total return.
RATINGS; INDEXES
In reports or other communications to shareholders or in advertising
material, a Sub-Account may also quote non-standardized total return figures,
such as non-annualized figures (provided that these figures are accompanied by
standardized total return figures calculated as described above), as well as
compare its performance with that of other separate accounts as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of separate accounts. The performance
information also may include evaluations of the separate accounts published by
nationally recognized ranking services and by financial publications that are
nationally recognized.
Additional information regarding the calculation of performance information
appears in the Statement of Additional Information.
FACTS ABOUT THE COMPANY AND THE VARIABLE ACCOUNT
THE COMPANY
The Company is a stock life insurance company organized under the laws of
the State of Ohio on December 1, 1980. The Company is a wholly-owned subsidiary
of The Western and Southern Life Insurance Company, a mutual life insurance
company originally organized under the laws of the State of Ohio on February 23,
1888 ("WESTERN & SOUTHERN"). Both companies are in the business of issuing
insurance and annuity contracts. The executive offices of both companies are
located at 400 Broadway, Cincinnati, Ohio 45202 and their telephone number is
(513)629-1800.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of the Company
established pursuant to Ohio law on June 1, 1994. It is used to support the
Contracts described in this Prospectus and for other purposes permitted by law.
The Variable Account is registered with the Securities and Exchange Commission
(the "SEC") as a unit investment trust under the Investment Company Act of 1940
(the "1940 ACT").
The Company owns the assets of the Variable Account. As required by law,
however, the assets of the Variable Account are kept separate from the Company's
general account assets and any other separate account assets and are held
exclusively for the benefit of Owners and Beneficiaries of the Contracts. These
assets may not be charged with liabilities from any other business which the
Company may conduct. The Company is obligated to pay all benefits provided under
the Contracts.
Each Sub-Account of the Variable Account is administered and accounted for
as part of the general business of the Company; however, the income, capital
gains or capital losses of each Sub-Account are credited to or charged against
the assets held in that Sub-Account in accordance with the terms of each
Contract without regard to the income, capital gains or capital losses of any
other Sub-Account or arising out of any other business of the Company.
8
<PAGE>
Each Sub-Account invests either in a Portfolio of the VI Trust or in a
Portfolio of the SA Trust. The VI Trust is a Massachusetts business trust and
the SA Trust is a New York trust. Each Trust is registered as an open-end
management investment company under the 1940 Act. The Portfolios are described
generally below. Owners periodically may transfer funds between Sub-Accounts or
change allocations among Sub-Accounts. See "Transfers."
THE VI TRUST AND THE SA TRUST
The Variable Account consists of seven Sub-Accounts, each of which invests
exclusively in one of the VIT Portfolios or in one of the SAT Portfolios. The
investment objective of each Sub-Account is the same as the corresponding
Portfolio, each of which is described briefly below. There is no assurance that
any Contract or Portfolio will meet its investment objective.
VIT PORTFOLIOS
EMERGING GROWTH PORTFOLIO has a primary investment objective of capital
appreciation with income as a secondary investment objective. The Portfolio
attempts to achieve its investment objective through investment primarily in the
common stock of smaller, rapidly growing companies.
INTERNATIONAL EQUITY PORTFOLIO has an investment objective of long term
capital appreciation through investment primarily in equity securities of
companies based outside the United States.
BALANCED PORTFOLIO has an investment objective of growth of capital and
income through investment in common stocks and fixed-income securities.
INCOME OPPORTUNITY PORTFOLIO has an investment objective of high current
income through investment in high yield, non-investment grade debt securities
(commonly known as "junk bonds") of both U.S. and non U.S. issuers and in
mortgage related securities. To the extent consistent with its primary
objective, the Portfolio will also seek capital appreciation.
STANDBY INCOME PORTFOLIO has an investment objective of high current income
to the extent consistent with relative stability of principal which it attempts
to achieve through investment in short term, investment grade debt securities.
SAT PORTFOLIOS
GROWTH & INCOME PORTFOLIO has an investment objective of long term capital
appreciation and dividend income through investment primarily in common stocks
of high quality companies.
BOND PORTFOLIO has an investment objective of providing a high level of
current income primarily through investment in investment grade bonds.
Several of the Portfolios invest in non-investment grade (or "junk") bonds
which entail greater risk of untimely interest and principal payments, default
and price volatility than higher rated securities and may present problems of
liquidity and valuation. The Income Opportunity Portfolio and the International
Equity Portfolio of the VI Trust, which are described in more detail in the VI
Trust Prospectus, may invest up to 100% and 35%, respectively, of their total
assets in non-investment grade bonds. See "Income Opportunity Portfolio,"
"International Equity Portfolio," and "Medium and Lower Rated ("Junk Bonds") and
Unrated Securities" in the VI Trust Prospectus. The Growth & Income Portfolio
and Bond Portfolio of the SA Trust, which are described in Part II of this
Prospectus, may invest up to 5% and 35%, respectively, of their total assets in
non-investment grade bonds. See "Growth & Income Portfolio," "Bond Portfolio,"
and "Medium and Lower Rated ("Junk Bonds") and Unrated Securities." Such
investments may not be appropriate for all investors.
MORE COMPLETE INFORMATION ABOUT THE FIVE PORTFOLIOS OF THE VI TRUST,
INCLUDING THE ASSOCIATED RISKS, IS SET FORTH IN THE VI TRUST PROSPECTUS. SIMILAR
INFORMATION WITH RESPECT TO THE GROWTH & INCOME AND THE BOND
9
<PAGE>
PORTFOLIOS OF THE SA TRUST IS CONTAINED IN PART II OF THIS PROSPECTUS.
PROSPECTIVE PURCHASERS OF CONTRACTS SHOULD READ THE VI TRUST PROSPECTUS AND PART
II OF THIS PROSPECTUS IN CONJUNCTION WITH THE INFORMATION REGARDING THE VARIABLE
ACCOUNT CONTAINED HEREIN.
Both the VI Trust and the SA Trust have entered into investment advisory
agreements with Touchstone Advisors, Inc. (the "ADVISOR"). The Advisor, in turn,
has entered into investment advisory agreements with separate investment
advisors selected for each Portfolio (the "PORTFOLIO ADVISORS"). It is the
responsibility of the Advisor to select the Portfolio Advisors, subject to the
review and approval of the trustees of the VI Trust or the SA Trust, as the case
may be, and to review the ongoing investment strategy of each Portfolio Advisor
and the performance of the Portfolios. Each Trust has entered into agreements
with Investors Bank and Trust Company ("INVESTORS BANK" or the "ADMINISTRATOR")
pursuant to which Investors Bank provides administrative and fund accounting
services for each Trust. The Advisor employs, at its expense, the services of
RogersCasey Sponsor Services, Inc. ("ROGERSCASEY"), a research firm specializing
in appraisal and comparison of investment managers, as a consultant to assist in
evaluating portfolio advisors. See "Consultant to the Advisor."
ADDITIONS, DELETIONS AND SUBSTITUTIONS OF INVESTMENTS
The Company may from time to time make additional Sub-Accounts available.
These Sub-Accounts will invest in investment portfolios that the Company deems
suitable for the Contracts. The Company also has the right, upon approval of
affected Contract Owners or approval of the SEC, to substitute a new investment
portfolio or similar investment option for the Portfolio in which a Sub-Account
invests. A substitution may become necessary if, in the Company's judgment, the
Portfolio or other investment option no longer suits the purposes of the
Contracts. This may happen due to unsatisfactory investment performance, a
change in laws or regulations, a change in a Portfolio's investment objectives
or restrictions, because the Portfolio is no longer available for investment, or
for some other reason. The Company would obtain prior approval from the SEC to
the extent required and any other required approvals before making such a
substitution. The Company also reserves the right to eliminate Sub-Accounts from
the Variable Account or to combine two or more Sub-Accounts, and the right to
operate the Variable Account as a management investment company under the 1940
Act or any other form permitted by law or to deregister the Variable Account
under the 1940 Act in the event such registration no longer is required.
THE CONTRACT
PURCHASE OF A CONTRACT
The Company offers Contracts only in states in which it has received the
necessary regulatory approvals to do so. Contracts may be Qualified or
Non-Qualified. Qualified Contracts are accorded special federal income tax
treatment under the Code. Generally, Qualified Contracts may be purchased only
in connection with plans which qualify under Sections 401, 403(b), 408 or 457
under the Code. Qualified Contracts contain provisions restricting the timing
and amount of payments to and distributions from such Contracts. See "Federal
Income Taxation."
The purchase of either a Qualified or a Non-Qualified Contract requires a
minimum initial Purchase Payment of $5,000. Subsequent Purchase Payments under
both types of Contracts must be at least $1,000 and may be made at any time. The
maximum cumulative total of all Purchase Payments under any Contract may not
exceed $500,000 without prior approval by the Company.
To purchase a Contract, the purchaser must submit the initial Purchase
Payment and the completed Application Form in good order to the Company at the
Touchstone Variable Annuity Service Center. The proposed Annuitant must be no
older than 85 years old. The Contract becomes effective on the Contract Date,
which is stated on page 3 of the Contract, and generally is the Valuation Date
on which the initial Purchase Payment and the Application Form are received in
good order at the Touchstone Variable Annuity Service Center. Any such receipt
must be effected by 3:00 p.m. Central Time on a Valuation Date; if later, the
effective date of the Contract will be the following Valuation Date. Purchase
Payments will be allocated among the Sub-Accounts according to the instructions
of the Owner. See "Allocation of Purchase Payments." If an incomplete
Application Form is received, the Company will request additional information to
complete the application. If the Application Form remains incomplete for five
business days after its receipt, the Company will return the initial Purchase
Payment unless the purchaser consents to a delay.
10
<PAGE>
FREE LOOK PRIVILEGE
A Contract may be returned for a refund within 10 days after the Owner
receives it (the "FREE LOOK PERIOD"). If the Owner chooses not to retain the
Contract, it must be returned to the Company at the Touchstone Variable Annuity
Service Center within the free look period. In such circumstances, the Company
will cancel the Contract and refund promptly an amount that in most cases will
be equal to the Owner's Contract Value, plus any amount deducted from the
initial Purchase Payment prior to allocation to the Sub-Accounts. The laws of
certain states require the Company to return other amounts to Owners pursuant to
the free look privilege; in such states, such amounts will be returned.
Similarly, the laws of certain states require a free look period longer than 10
days; Owners living in such states will have a free look period conforming to
applicable state law.
ALLOCATION OF PURCHASE PAYMENTS
Allocation of the initial Purchase Payment to the Sub-Accounts will be made
according to the instructions given by the Owner on the Application Form. Each
allocation must be in whole percentages of at least 5%, and the sum of the
allocation percentages must equal 100%. Absent written instructions from the
Owner, subsequent Purchase Payments will be allocated in the same manner as the
most recent written allocation, or the initial allocation, if unchanged.
Contract Owners should periodically review their allocations under the Contract
in light of market conditions and their own financial objectives.
For all Purchase Payments allocated to Sub-Accounts (other than the initial
such payment, which is allocated as of the Contract Date), Accumulation Units
will be credited at the Accumulation Unit Value calculated as of the close of
business on the Valuation Date such Purchase Payment is received in good order
by the Company at the Touchstone Variable Annuity Service Center if received
before 3:00 p.m. Central Time on such Valuation Date. For payments received
after such time, Accumulation Units will be credited at the Accumulation Unit
Value calculated as of the next following Valuation Date. The number of
Accumulation Units for each Sub-Account of the Variable Account is determined by
dividing the amount of the Purchase Payment allocated to the Sub-Account by the
Accumulation Unit Value for the Sub-Account as of the close of business on the
Valuation Date on which the Company is deemed to have received the Purchase
Payment. The Accumulation Unit Value for each Sub-Account was set arbitrarily at
$10 when the first Portfolio interest was purchased by the Sub-Account.
Thereafter, Accumulation Unit Value fluctuates from day to day depending upon
the investment performance of the Portfolio in which the Sub-Account is
invested.
ACCUMULATION UNIT VALUE
The following material describes the procedures used to calculate
Accumulation Unit Value for, respectively, the five Sub-Accounts (Emerging
Growth, International Equity, Balanced, Income Opportunity and Standby Income)
that invest in Portfolios of the VI Trust and the two Sub-Accounts (Growth &
Income and Bond) that invest in Portfolios of the SA Trust. The procedures do
not produce different results. Rather, they reflect different accounting
treatment at the Portfolio level, with interests in the VI Trust being
calculated on a per share basis and interests in the SA Trust being calculated
on a percentage basis.
ACCUMULATION UNIT VALUE -- VIT SUB-ACCOUNTS
The value of an Accumulation Unit at the close of any Valuation Period is
determined for each Sub-Account that invests in an VIT Portfolio (a "VIT
SUB-ACCOUNT") by multiplying the Accumulation Unit Value of the Sub-Account at
the close of the immediately preceding Valuation Period by the "VIT NET
INVESTMENT FACTOR" (as described below). Depending upon investment performance
of the Portfolio in which the Sub-Account is invested, the VIT Net Investment
Factor may be greater or less than one. Accordingly, the Accumulation Unit Value
may increase or decrease.
The VIT Net Investment Factor for each VIT Sub-Account, for any Valuation
Period, is determined by dividing (a) by (b) and subtracting (c) from the
result, where:
(a) is:
(1) the net asset value per share of the corresponding VIT Portfolio at
the end of the current Valuation Period, plus
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<PAGE>
(2) the per share amount of any dividend or capital gain distribution
made by the VIT Portfolio on shares held in the Sub-Account if the
"ex-dividend" date occurs during the current Valuation Period, plus
or minus
(3) a per share charge or credit for any taxes reserved, which are
determined by the Company to have resulted from the investment
operations of the Sub-Account during the current Valuation Period;
and
(b) is:
(1) the net asset value per share of the corresponding VIT Portfolio
determined at the end of the immediately preceding Valuation Period;
and
(c) is a factor representing the charges deducted from the Sub-Account on a
daily basis for the daily portion of the annual Mortality and Expense
Risk Charge (0.70%)* and the annual Contract Administration Charge
(0.10%).
* The Company reserves the right to increase the Mortality and Expense
Risk Charge to 0.90%.
ACCUMULATION UNIT VALUE -- GROWTH & INCOME AND BOND SUB-ACCOUNTS
The value of an Accumulation Unit at the close of any Valuation Period is
determined for the Growth & Income and Bond Sub-Accounts by multiplying the
Accumulation Unit Value at the close of the immediately preceding Valuation
Period by the "SAT NET INVESTMENT FACTOR" (described below). Depending upon
investment performance of the SAT Portfolio in which the Sub-Account is
invested, the SAT Net Investment Factor may be greater or less than one.
Accordingly, the Accumulaton Unit Value may increase or decrease.
The SAT Net Investment Factor for each of the Growth & Income and Bond
Sub-Accounts for any Valuation Period is equal to one plus the net result of (a)
divided by (b) where:
(a) is the accrued gain or loss in the Sub-Account for the Valuation Period,
including investment income, capital gains and losses, adjusted by:
(1) charging the Sub-Account a dollar amount representing the portion of
the annual Mortality and Expense Risk Charge (0.70%)* and the annual
Contract Administration Charge (0.10%) that is allocable to the
Sub-Account for the Valuation Period, and
(2) charging or crediting the Sub-Account for any tax charge or tax
credit determined by the Company to have resulted from the investment
operations of the Sub-Account during the Valuation Period; and
(b) is the value of the Sub-Account as of the close of the immediately
preceding Valuation Period.
* The Company reserves the right to increase the Mortality and Expense
Risk Charge to 0.90%.
DOLLAR COST AVERAGING
A Contract Owner may direct the Company, at any time prior to the Income
Date, to transfer automatically specified dollar amounts from the Standby Income
Sub-Account to other Sub-Accounts on a monthly or quarterly basis. This
automatic transfer, known as Dollar Cost Averaging, may be selected by a
Contract Owner for a period of at least 12 months. The minimum Dollar Cost
Averaging transfer is $1,000, with a minimum allocation per Sub-Account of 5% of
the total amount transferred. Dollar Cost Averaging is available only if the
Contract Value is at least $10,000. All Dollar Cost Averaging transfers for all
Contracts will be made effective on the monthly or quarterly anniversary of the
Contract Date, at the election of the Owner. Contract Owners may elect to
participate in Dollar Cost Averaging by notifying the Company in writing. Forms
for this purpose are available from the Touchstone Variable Annuity Service
Center. Dollar Cost Averaging will terminate when any of the following occurs:
(1) the number of designated transfers has been completed; (2) the portion of
the Contract Value in the Standby Income Sub-Account is insufficient to complete
the next scheduled transfer; (3) the Contract Owner requests termination in
writing; or (4) the Contract is terminated. There is no charge at this time for
Dollar Cost Averaging, but the Company reserves the right to charge a fee for
this service. The Company also reserves the right to terminate Dollar Cost
Averaging, on a prospective basis, upon 30 days' written notice to Contract
Owners.
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<PAGE>
TRANSFERS
Subject to the conditions described below, an Owner may transfer all or part
of the Contract Value among the Sub-Accounts. The minimum transfer amount is
$250. Transfers among Sub-Accounts other than by Dollar Cost Averaging may be
made once every 30 days, and not less than 5% of the total amount transferred
can be directed to any other Sub-Account. The Company currently imposes no
charges for any such transfer, but reserves the right to modify availability of
and conditions for transfers at any time, including the right to charge transfer
fees.
The Company will effect transfers pursuant to proper written or telephone
instructions received at the Touchstone Variable Annuity Service Center which
clearly specify the requested changes. Requests received in good order by the
Company at the Touchstone Variable Annuity Service Center by 3:00 p.m. Central
Time on any Valuation Date will be effected that day; requests received after
that time will be effected on the next Valuation Date.
The Company will not honor telephone transfer instructions unless proper
authorization has been provided either (i) in the completed Application Form, or
(ii) in a properly completed telephone transfer authorization form. If the
proper authorization is on file at the Touchstone Variable Annuity Service
Center, requests for transfers may be made by calling 1-800-669-2796 (press 2)
between 8:00 a.m. and 3:00 p.m. Central Time on any Valuation Date. Such
telephone transfer request must include a precise identification of the Owner's
Contract and Social Security number. A personal identification number ("PIN")
also may be required. The Company will accept telephone requests for transfers
from any person presenting the required information and claiming to be the
Owner. All or part of any telephone conversation relating to transfer
instructions may be recorded by the Company.
Telephone transfer instructions apply only to previously invested Purchase
Payments and may not be employed to change the investment allocation of future
Purchase Payments under the Contract. Allocation of future Purchase Payments can
be changed only by proper written request. See "Allocation of Purchase
Payments."
The Company will not be liable for following instructions received by
telephone that it reasonably believes to be genuine. The Company has established
certain procedures, some of which are described above, to confirm that telephone
instructions are genuine. If it does not follow reasonable procedures, it may be
liable for any losses due to unauthorized or fraudulent instructions.
The Company reserves the right to modify, suspend or discontinue the
telephone transfer privilege at any time and without prior notice.
SURRENDERS AND PARTIAL WITHDRAWALS
While the Contract is in force and prior to the Income Date or the death of
the Annuitant, the Company will, upon proper written notification by the Owner,
allow the Owner to surrender all, or withdraw part, of the Contract Value. A
withdrawal may not be less than $250, and it may not reduce the Contract Value
to less than $5,000.
Any amount withdrawn will result in the liquidation of Accumulation Units
from each applicable Sub-Account in the ratio that the value of each Sub-Account
in which the Owner is invested bears to the total Contract Value. The Owner must
specify in writing in advance which Accumulation Units are to be liquidated if
some other ratio is desired.
All surrenders and partial withdrawals will be paid within seven days of
receipt of written notification, subject to postponement of either calculation
or payment, or both, for any of the following reasons:
(1) The New York Stock Exchange is closed other than for customary weekend
and holiday closings;
(2) Trading on the New York Stock Exchange is restricted;
(3) An emergency exists as a result of which disposal of securities is not
reasonably practicable or it is not reasonably practicable to fairly
determine the value of the net assets of the Variable Account; or
(4) The SEC, by order, permits postponement of payments for the protection
of security holders.
Applicable regulations of the SEC shall determine whether the conditions
prescribed in (2) and (3) exist.
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<PAGE>
Since the Owner assumes the investment risk with respect to amounts held in
the Sub-Accounts, the total amount paid upon surrenders and partial withdrawals
under the Contracts may be more or less than the Purchase Payments made.
Certain tax penalties and restrictions may apply to surrenders and partial
withdrawals. For example, the Internal Revenue Service imposes a penalty tax
equal to 10% of the amount of taxable income on most surrenders and partial
withdrawals made from Contracts prior to the Contract Owner or the Annuitant (as
applicable) reaching age 59 1/2. See "Tax Treatment of Withdrawals --
Non-Qualified Contracts" and "-- Qualified Contracts."
SELECTION OF ANNUITY INCOME OPTIONS
INCOME DATE SELECTION
The Income Date is the later of the Contract Anniversary on or following the
Annuitant's 80th birthday and the 10th Contract Anniversary, unless otherwise
indicated on Page 3 of the Contract. The Income Date can be changed to any date
by written request to the Company, if such written request is received at least
31 days prior to the scheduled Income Date.
The Income Date for some Qualified Contracts with issue ages less than 70 is
the Contract Anniversary on or before April 1 of the year following the year in
which the Annuitant reaches age 70 1/2, unless otherwise indicated by the Owner
or determined by the plan documents. The Income Date for any Qualified Contract
with issue age greater than age 69 is the 10th Contract Anniversary, unless
otherwise indicated by the Owner. Special rules apply to the selection of Income
Dates for Qualified Contracts. See "Tax Treatment of Withdrawals -- Qualified
Contracts."
ANNUITY PAYOUT PLANS
Annuity payments will be made to the payee(s) designated by the Owner. If no
payee is designated, the Annuitant will be the payee. The Owner may change
payee(s) at any time.
The Owner may apply the Surrender Value less any applicable premium tax
under any one of the annuity payout plans specified in the Contract and
described below. A change of annuity payout plan is permitted prior to the
Income Date upon 31 days' prior written notice to the Company. In the absence of
an election, annuity payments will be made in accordance with Life Income Plan
2A, described below, with monthly payments guaranteed for ten years. Annuity
payments will be made monthly (or, if requested, quarterly, semiannually or
annually) except that: (i) proceeds of less than $1,000 shall be paid in a
single sum and (ii) the Company may change the frequency of payment to avoid
periodic payments of less than $50.
The annuity payout plans currently available under the Contract are
described below. Unless limited in any jurisdiction by applicable state
insurance laws, each of the plans is available under Non-Qualified Contracts:
1. Installment Income Plans
A. Fixed period -- Paid in equal monthly payments for the number of
years selected, but not more than 30 years.
B. Fixed Amount -- Paid in equal monthly installments of $5 or more for
each $1,000 applied until the full amount, with compound interest at
not less than 3% a year, is used up.
2. Life Income Plans
A. One Life -- Paid in equal monthly payments during the lifetime of
the Annuitant. The Company guarantees payments for either 10 years or
20 years, and for as long as the Annuitant lives. The amount of the
monthly payment is based on the Annuitant's sex and age on the date
of the first payment and on the number of years for which payments
are guaranteed. Payments may not be commuted.
B. Joint and Survivor -- Paid in equal monthly payments during the
lifetimes of the Annuitant and another designated person. Payments
will continue as long as either person is living. The amount of each
payment is based on both persons' sex and age on the date of the
first payment. If either one
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<PAGE>
dies before the due date of the first payment, the Company will make
payments during the survivor's lifetime under Life Income Plan A,
with payments guaranteed for 10 years. Payments may not be commuted.
Under a Qualified Contract. Plans 1A and 1B are available provided that any
period certain does not extend beyond the life expectancy of the Annuitant.
Plans 2A and 2B are available, provided that any period certain may not extend
beyond the life expectancy of the Annuitant or joint life expectancies of the
Annuitants.
DEATH BENEFIT
If the Annuitant dies before the Income Date, the Company will pay a death
benefit to the Beneficiary designated by the Owner (the "DEATH BENEFIT"). The
Death Benefit will be calculated as of the Valuation Date on which satisfactory
proof of death and Death Benefit payout instructions are received in good order
by the Company (the "BENEFIT DETERMINATION DATE"). If the Annuitant dies prior
to the first day of the calendar month after the Annuitant's 80th birthday, the
Death Benefit will equal the greater of (1) the Contract Value on the Benefit
Determination Date and (2) the sum of all Purchase Payments less any amounts
withdrawn.
If the Annuitant dies on or after the first day of the calendar month after
the Annuitant's 80th birthday (but before the Income Date), the Death Benefit
will equal the Contract Value on the Benefit Determination Date. If the Company
does not receive Death Benefit payment instructions within 60 days of receipt of
satisfactory proof of death, it reserves the right to make payment of the Death
Benefit in a lump sum.
If the Annuitant dies after the Income Date, the benefits, if any, remaining
to be paid will depend upon the annuity payout plan in effect. See "Annuity
Payout Plans."
CHARGES
All charges under the Contract are described below.
PREMIUM TAXES
Certain states or other governmental entities impose premium taxes, with
rates that range up to as much as 3.5% of the Purchase Payment. Some states
assess the tax at the time Purchase Payments are made, and others assess at the
time annuity payments begin. The Company will pay the premium tax at the time
imposed by applicable law. The Company reserves the right to deduct for the tax,
however, at the time the tax is paid, at the time the Contract is surrendered or
amounts are withdrawn, when the Death Benefit is paid or when the annuity
payments begin.
OTHER TAXES
The Company reserves the right to deduct the amount of certain taxes (other
than premium taxes) that it may have to pay. See "Federal Income Tax
Information."
ADMINISTRATIVE CHARGES
The Company incurs costs in establishing and maintaining the Contracts, and
in maintaining records and systems and issuing reports to Owners. The
administrative charges discussed below have been established at the levels
indicated to reimburse the Company for its expected actual costs of
administering the Contracts over time.
CONTRACT MAINTENANCE CHARGE
On each Contract Anniversary before the Income Date, an annual maintenance
charge is deducted from the Contract Value to cover such costs. The maintenance
charge is also deducted on any date not a Contract Anniversary on which the
Owner fully surrenders the Contract, or on the Income Date. This charge will be
deducted by liquidating on a pro-rata basis Accumulation Units from all
Sub-Accounts to which Contract Value is allocated. In certain states, the
Company may waive, reduce or eliminate such charge.
CONTRACT ADMINISTRATION CHARGE
On each Valuation Date, the Company deducts from the Accumulation Unit Value
a charge equal to a percentage of such value that is the daily equivalent of an
effective annual rate of 0.10%.
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<PAGE>
MORTALITY AND EXPENSE RISK CHARGE
As compensation for its assumption of mortality and expense risks, the
Company deducts from the Accumulation Unit Value a charge equal to a percentage
of such value that is the daily equivalent of an effective annual rate of 0.70%.
The Company reserves the right, however, to increase the mortality and expense
risk charge to 0.90% but only after notice to all Owners then invested in the
Sub-Accounts. The Company bears a "MORTALITY RISK" because the Company is taking
the risk that its actuarial estimate of mortality rates may prove inaccurate.
This would result if the Annuitant lives longer than expected, or if the
Annuitant dies prior to the Income Date at a time when the Death Benefit
guaranteed by the Company is higher than the Contract Value. The Company bears
an "EXPENSE RISK" because the costs of issuing and administering Contracts may
be greater than expected when setting the administrative charges. Of the 0.70%
total charge, 0.50% is for assuming the mortality risk and 0.20% is for assuming
the expense risk. The Company may realize a gain from the charge for these risks
to the extent that the charge is not needed to provide for benefits and expenses
under the Contracts.
EXPENSES OF VIT PORTFOLIOS AND SAT PORTFOLIOS; EXPENSE CAPS
Each VIT Portfolio and each SAT Portfolio incurs various operating expenses.
For the VIT Portfolios these expenses are more fully described in the prospectus
for the VIT Portfolios. For the Growth & Income and Bond Portfolios, they are
described in Part II of this Prospectus. All such expenses are borne indirectly
by Owners in that they reduce the net asset value of the Portfolios.
Under Sponsor Agreements with the VI Trust and the SA Trust, the Sponsor has
agreed to reimburse each Portfolio for the amounts by which total operating
expenses, on an annual basis, exceed the following percentages of the average
daily net assets of the various Portfolios:
<TABLE>
<CAPTION>
VI TRUST
- ---------------------------------------------------------------------------------------
<S> <C>
Emerging Growth Portfolio.............................................................. 1.15%
International Equity Portfolio......................................................... 1.25%
Balanced Portfolio..................................................................... 0.90%
Income Opportunity Portfolio........................................................... 0.85%
Standby Income Portfolio............................................................... 0.50%
<CAPTION>
SA TRUST
- ---------------------------------------------------------------------------------------
<S> <C>
Growth & Income Portfolio.............................................................. 0.85%
Bond Portfolio......................................................................... 0.75%
</TABLE>
Operating expenses, for purposes of expense reimbursement, include fees of
the Advisor, fees of the Administrator, amortization of organizational expenses,
legal and accounting fees and Sponsor fees, but do not include interest, taxes,
brokerage commissions and other portfolio transaction expenses, capital
expenditures and extraordinary expenses. The Sponsor Agreements may be
terminated by the Sponsor as of the end of any calendar quarter after December
31, 1997 upon not less than 30 days prior written notice. The Sponsor's
agreement to reimburse a Portfolio also terminates as to a Portfolio if the
Sponsor ceases to be the investment advisor to that Portfolio. See "Sponsor."
Under the Sponsor Agreements, the Sponsor is entitled to an annual fee of 0.20%
of average daily net assets, but the Sponsor has waived such fees through April
30, 1998.
OTHER INFORMATION
DISTRIBUTION OF THE CONTRACTS
Contracts are distributed through Touchstone Securities, Inc. (the
"DISTRIBUTOR"), which is a wholly-owned subsidiary of IFS Financial Services,
Inc. ("IFS"), a wholly-owned subsidiary of the Company. The principal business
address of the Distributor is 311 Pike Street, Cincinnati, Ohio 45202. In
connection with the sale of Contracts, the Distributor receives a trail
commission equal on an annual basis to 0.30% of Contract Value and a marketing
expense allowance equal to 0.30% of each Purchase Payment. These charges are
paid by the Company and are not passed on to the Owner of the Contract except to
the extent absorbed by any Mortality and Expense Risk Charges. See "Mortality
and Expense Risk Charge."
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<PAGE>
STATEMENTS TO CONTRACT OWNERS
Prior to the Income Date, a confirmation of each Purchase Payment and
certain other transactions, such as transfers and partial withdrawals, will be
sent to the Owner.
At least once in each Contract Year prior to the Income Date, each Owner
will be sent a statement that includes the Contract Value, as of a date not more
than four months prior to the mailing date of such statement. Each Owner also
will receive semiannual reports containing financial statements for the Variable
Account. At least one such report in each year will be accompanied by a list of
portfolio securities of each of the Portfolios underlying the Sub-Accounts and
any other information required by applicable law or regulation.
ADJUSTMENT OF UNITS AND VALUES
The Company reserves the right to change the number and value of the
Accumulation Units credited to any Contract, without the consent of the Owner or
any other person, provided strict equity is preserved and the change does not
otherwise affect the benefits, provisions or investment return of the Contract.
VOTING RIGHTS
Prior to the Income Date the Company will vote shares of each VIT Portfolio
and the interest in each SAT Portfolio owned by the Variable Account according
to instructions received from Owners. However, if the 1940 Act or any related
regulations or interpretations should change and the Company decides it may be
permitted to vote shares (or interests) of the Portfolios in its own right, it
may do so.
Persons entitled to give voting instructions will be determined as of the
record date for meetings of shareholders of any or all of the Portfolios. Prior
to the Income Date, the Owner has the right to direct the vote by the Company at
such meetings of that portion of the share of any VIT Portfolio (or interest in
any SAT Portfolio) held in the Sub-Account that are attributable to the Owner's
Contract.
The Company calculates that portion of the shares (interest, in the case of
the SA Trust) in the Portfolio that the Owner may direct the Company to vote by
applying the Owner's percentage interest, if any, in a particular Sub-Account to
the total number of shares (interest, in the case of the SA Trust) attributable
to such Sub-Account as of the record date. Fractional votes will be counted. The
Company reserves the right to modify the manner in which it calculates the
weight given to voting instructions where such change is necessary to comply
with then-current federal regulations or interpretations of those regulations.
The Company will determine 90 days or less before the applicable meeting the
number of shares in each VIT Portfolio (or, in the case of the SA Trust, the
portion of the interest in each SAT Portfolio) that each Contract Owner can
instruct the Company to vote. At least 14 days before such meeting, the Company
will mail such person materials enabling him or her to instruct the Company how
to vote.
If voting instructions are not received from an Owner, the Company will vote
the shares of the VI Trust (or interest in the SAT Portfolio) attributable to
such Owner in the same proportion as the voting instructions which are received
from other Contract Owners. The Company also will vote shares or interest it
holds in the Sub-Accounts that are not attributable to Contract Owners in the
same manner. Under certain circumstances, the Company may be required by state
regulatory authorities to disregard voting instructions. This could happen if
such instructions would change the sub-classification or investment objectives
of the Portfolios, or result in approval or disapproval of an investment
advisory contract.
Under federal regulations, the Company also may disregard instructions to
vote for Owner-initiated changes in investment policies or the investment
advisor if the Company disapproves of the proposed changes. The Company would
disapprove of a proposed change only if it were contrary to state law,
prohibited by state regulatory authorities or if the Company concluded that the
change would result in overspeculative or unsound investment practices. If the
Company disregards voting instructions, it will include a summary of its actions
in the next report to Contract Owners.
SUBSTITUTED SECURITIES
Shares of the VIT Portfolios or interests in the SAT Portfolios may not
always be available for purchase by the Sub-Accounts of the Variable Account, or
the Company may decide that further investment in any such shares or
17
<PAGE>
interest or in any such Portfolios is no longer appropriate in view of the
purposes of the Variable Account. In either event, shares of or an interest in
another open-end investment company or unit investment trust may be substituted
both for the Portfolio shares or interest already purchased by the corresponding
Sub-Accounts and/or as the security to be purchased in the future, provided that
these substitutions have been approved by the Securities and Exchange
Commission. In the event of any substitution pursuant to this provision, the
Company may make an appropriate endorsement to the Contract to reflect the
substitution.
OTHER CONTRACT PROVISIONS
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Annuitant is misstated to the Company, the Company
will change any benefits under the Contract to those which the proceeds would
have purchased had the correct age and sex been stated. If the misstatement is
not discovered until after annuity payments have started, any overpayments will
be charged, with compound interest, against subsequent payments. Any amount the
Company owes as the result of underpayments will be paid, with compound
interest, in a lump sum.
ASSIGNMENT
An Owner may assign a Non-Qualified Contract in writing, but may not assign
a Qualified Contract except as may be allowed under applicable law and the
documents governing the plan. The Company will not be bound by any assignment
until written notice of the assignment is received and recorded at the Variable
Annuity Service Center. The rights of the Owner and any Beneficiary will be
affected by an assignment, and the Company disclaims any responsibility for the
validity or tax consequences of any assignment.
LOANS
Loans may be permitted under Qualified Contracts purchased in connection
with a plan established under Section 403(b). However, plan documents also must
permit such loans. Loans are not permitted under any other type of Contract.
NO DIVIDENDS
The Contracts are "non-participating." That means that they do not provide
for dividends. Investment results under the Contracts are reflected in benefits.
FEDERAL INCOME TAX INFORMATION
THE FOLLOWING DISCUSSION IS NOT INTENDED AND SHOULD NOT BE RELIED UPON AS
TAX ADVICE, BUT MERELY AS A SYNOPSIS OF CERTAIN FEDERAL INCOME TAX LAWS.
ALTHOUGH THE FOLLOWING DISCUSSION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
FEDERAL INCOME TAX LAWS AS CURRENTLY INTERPRETED, THERE IS NO GUARANTEE THAT
THOSE LAWS AND INTERPRETATIONS WILL NOT CHANGE. THE DISCUSSION DOES NOT TAKE
INTO ACCOUNT STATE OR LOCAL TAX LAWS WHICH MAY AFFECT THE PURCHASE OF A CONTRACT
OR THE BENEFITS PAID OUT UNDER A CONTRACT, AND DOES NOT CONSIDER FEDERAL ESTATE
AND GIFT TAXES AND STATE AND LOCAL ESTATE, INHERITANCE AND OTHER SIMILAR TAXES
WHICH WILL DEPEND UPON THE INDIVIDUAL SITUATION OF EACH OWNER OR BENEFICIARY.
PROSPECTIVE OWNERS SHOULD CONSULT THEIR OWN TAX ADVISORS PRIOR TO PURCHASING
A CONTRACT.
QUALIFICATION AS AN "ANNUITY CONTRACT"
The following discussion is based upon the Company's assumption that the
Contract will be treated as an "annuity contract" under the Code. The Company
does not guarantee the tax status of any Contract. A purchaser bears the
complete risk that the Contract may not be treated as an "annuity contract"
under federal income tax laws. Disqualification of the Contract as an annuity
contract generally would result in imposition of federal income tax to the Owner
with respect to yearly earnings allocable to the Contract prior to the receipt
of payments under the Contract.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of all variable annuity contracts. The Code generally provides
that a variable contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations
18
<PAGE>
prescribed by the United States Treasury Department ("TREASURY DEPARTMENT"),
adequately diversified. The Code contains a safe harbor provision which provides
that variable contracts such as the Contracts meet the diversification
requirements if, as of the end of each quarter, the underlying assets meet the
diversification standards prescribed elsewhere in the Code for an entity to be
classified as a regulated investment company and no more than fifty-five percent
(55%) of the total assets consist of cash, cash items, U.S. government
securities and securities of other regulated investment companies.
In March 1989, the Treasury Department issued regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
investment portfolios such as the Portfolios underlying variable contracts such
as the Contracts. The regulations amplify the diversification requirements for
variable contracts set forth in the Code and provide an alternative to the safe
harbor provision described in Section 817(h) of the Code. Under the Regulations,
an investment portfolio will be deemed adequately diversified if: (1) no more
than 55% of the value of the total assets of the investment portfolio is
represented by any one investment; (2) no more than 70% of the value of the
total assets of the investment portfolio is represented by any two investments;
(3) no more than 80% of the value of the total assets of the investment
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the investment portfolio is represented by any
four investments.
The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States Government
agency or instrumentality shall be treated as a separate issuer."
The Variable Account, through each of the VIT Portfolios and each of the SAT
Portfolios, intends to comply with the diversification requirements of the Code
and the regulations. The Advisor has agreed to manage the Portfolios so as to
comply with such requirements.
EXCESSIVE CONTROL
The Treasury Department has from time to time suggested that guidelines may
be forthcoming under which a variable annuity contract will not be treated as an
annuity contract for tax purposes if the owner of the contract has excessive
control over the investments underlying the contract (I.E., by being able to
transfer values among Sub-Accounts with only limited restrictions). If a
variable contract is not treated as an annuity contract, the owner of such
contract would be considered the owner of the assets of a separate account, and
income and gains from that account would be included each year in the owner's
gross income. No such guidelines have been issued to date.
The issuance of such guidelines, or regulations or rulings dealing with
excessive control issues, might require the Company to impose limitations on an
Owner's right to transfer all or part of the Contract Value among the Sub-
Accounts or to make other changes in the Contract as necessary to attempt to
prevent an Owner from being considered the owner of any assets of the Variable
Account. The Company therefore reserves the right to make such changes. It is
not known whether any such guidelines, regulations or rulings, if adopted, would
have retroactive effect.
REQUIRED DISTRIBUTIONS
Additionally, in order to qualify as an annuity contract under the Code, a
Non-Qualified Contract must meet certain requirements regarding distributions in
the event of the death of the Owner. In general, if the Owner dies before the
entire value of the Contract is distributed, the remaining value of the Contract
must be distributed according to provisions of the Code. Upon the death of an
Owner prior to commencement of annuity payments, the amounts accumulated under a
Contract must be distributed within five years, or, if distributions to a
designated beneficiary within the meaning of Section 72 of the Code (a
"DESIGNATED BENEFICIARY") begin within one year of the Owner's death,
distributions are permitted over a period not extending beyond the life (or life
expectancy) of the designated beneficiary. The above rules are modified if the
designated beneficiary is the surviving spouse. The surviving spouse is not
required to take distributions from the Contract under the above rules as a
beneficiary and may continue the Contract and take distributions under the above
rules as if the surviving spouse was the original Owner. If distributions have
begun prior to the death of the Owner, such distributions must continue at least
as rapidly as under the method in effect at the date of the Owner's death
(unless the method in effect provides that payments cease at the death of the
Owner).
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For Qualified Contracts issued in connection with tax-qualified plans and
individual retirement annuities, the plan documents and rules will determine
mandatory distribution rules. However, under the Code, distributions from
Contracts issued under Qualified Plans (other than individual retirement
annuities and certain governmental or church-sponsored Qualified Plans) for
employees who are not 5% owners of the sponsoring employer generally must
commence no later than April 1 of the calendar year following the calendar year
in which the employee terminates employment or reaches age 70 1/2, whichever is
later, and such distributions must be made over a period that does not exceed
the life expectancy of the employee or the joint and last survivor life
expectancy of the employee and a designated beneficiary. Distributions from
Contracts issued under individual retirement annuities or to 5% owners of the
sponsoring employer from Contracts issued under Qualified Plans (other than
certain governmental or church-sponsored Qualified Plans) must commence by April
1 of the calendar year after the calendar year in which the individuals reach
age 70 1/2 even if they have not terminated employment. A penalty tax of 50% is
imposed on any amount by which the required minimum distribution in any year
exceeds the amount actually distributed.
If the Contract is a Qualified Contract issued in connection with an
individual retirement annuity, the Company will send a notice to the Owner when
the Owner reaches age 70 1/2. The notice will summarize the required minimum
distribution rules and advise the Owner of the date that such distributions must
begin from the Qualified Contract or other individual retirement annuities of
the Owner. The Owner has sole responsibility for requesting distributions under
the Qualified Contract or other individual retirement annuities that will
satisfy the minimum distribution rules. In the case of a distribution from a
Contract issued under a Qualified Plan (other than an individual retirement
annuity) to a 5% owner of the sponsoring employer, the Company will not send a
notice when the 5% owner reaches age 70 1/2, and such owner has sole
responsibility for requesting distributions under the Qualified Contract that
will satisfy the minimum distribution rules.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year period to the same contract owner by one company
or its affiliates are treated as one annuity contract for purposes of
determining the tax consequences of any distribution. Such treatment may result
in adverse tax consequences, including accelerated taxation of the gain deemed
distributed from such combination of contracts. Owners should consult a tax
advisor prior to purchasing more than one non-qualified annuity contract in any
calendar year period.
FEDERAL INCOME TAXATION
GENERAL
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Variable Account is not a separate entity from the
Company and its operations form a part of the Company.
Section 72 of the Code governs taxation of annuities in general. Except as
described below for Owners who are not natural persons, an Owner is not taxed on
increases in the value of the Contract when those increases occur. Instead, an
Owner is taxed only when distribution occurs, either in the form of a lump sum
payment or as annuity payments under the payout plan selected. For a lump sum
payment received as a total surrender (total redemption), the recipient is taxed
on the portion of the payment that exceeds the cost basis of the Contract. For
Non-Qualified Contracts, this cost basis is generally the sum of the Purchase
Payments, while for a Qualified Contract there may be no cost basis in the
Contract within the meaning of Section 72 of the Code. The taxable portion of
the lump sum payment is taxed at ordinary income tax rates.
For annuity payments under the Non-Qualified Contracts, a fixed portion of
each payment is excludable from gross income as a tax-free recovery of the
Owner's Purchase Payments (if any), and the balance is taxed at ordinary income
tax rates. The excludable portion can be determined by dividing (i) the Owner's
Purchase Payments (in the case of Non-Qualified Contracts only, as adjusted for
any period-certain or refund guarantee), less any withdrawals from those
Purchase Payments, by (ii) the number of years over which it is anticipated that
the annuity will be paid. The method of determining the number of years over
which payments are anticipated is different for Qualified and Non-Qualified
Contracts. If annuity payments continue beyond the anticipated number of years,
such payments will be fully taxable.
Owners who are not natural persons generally must include in income any
increase in the excess of the Contract's Value over the "investment in the
contract" during the taxable year. As a result, Contracts used in
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connection with unfunded deferred compensation plans of private employers
(sometimes called "top hat" plans) generally are currently subject to income tax
on such increase in value. There are some exceptions to this rule, including an
exception for Contracts owned by certain tax-qualified plans. A prospective
Owner that is not a natural person may wish to discuss availability of these
exceptions with its own tax advisor.
Annuity payments or other amounts received under all Contracts are subject
to income tax withholding under the Code unless the recipient elects not to have
taxes withheld. However, annuity payments to former employees under deferred
compensation plans pursuant to Section 457 of the Code are subject to income tax
withholding as if such payments are wages. Amounts so withheld will vary among
recipients depending upon the tax status of the recipient and the type of
payment.
Owners, Annuitants and Beneficiaries under the Contracts should seek
financial advice about the tax consequences of any withdrawals or other
distributions.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult their tax advisors should they wish to assign their Contracts.
TAX TREATMENT OF WITHDRAWALS--NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of all payments (including
withdrawals of Contract Value) from annuity contracts. Applied to a Contract, it
provides that if the Contract Value exceeds the aggregate Purchase Payments
made, any payment that is not received as an annuity payment will be treated as
coming first from earnings and then, only after the earnings portion is
exhausted, as coming from the principal. If the Contract contains investments in
the Contract made prior to August 14, 1982, special taxation rules apply to such
withdrawals and related earnings. These special rules provide that any amount
withdrawn that is not received as an annuity payment will be treated as coming
first from principal and then, only after the principal portion is exhausted, as
coming from earnings. Withdrawn earnings are includable in gross income.
Section 72 further provides that a ten percent (10%) penalty will apply to
the income portion of amounts received other than: (a) on or after the date the
taxpayer reaches age 59 1/2; (b) on or after the death of the Contract Owner;
(c) if the taxpayer is totally disabled (as defined in Section 72(m)(7) of the
Code); (d) in a series of substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy) of the taxpayer or
for the joint lives (or joint life expectancies) of the taxpayer and the joint
annuitant; (e) from a Contract issued under a plan that qualifies for favorable
federal income tax treatment under Sections 401(a), 403(a), or 403(b) of the
Code or that is an individual retirement account or individual retirement
annuity; (f) amounts attributable to investment in the Contract prior to August
14, 1982; (g) from a Contract that is issued under a Qualified Plan; (h) under
an immediate annuity within the meaning of Code Section 72(u)(4); or (i) which
is purchased by an employer upon termination of a plan described in Section
401(a) or 403(a) of the Code and is held by the employer until the employee
separates from service (some of the above exceptions may not apply to Contracts
issued as Non-Qualified Contracts).
The above paragraph does not apply to Qualified Contracts. However, separate
withdrawal restrictions and tax penalties and restrictions may apply to such
Qualified Contracts. See "Tax Treatment of Withdrawals--Qualified Contracts."
QUALIFIED CONTRACTS AND QUALIFIED PLANS
The Qualified Contracts offered by this Prospectus are designed to be
suitable for use under various types of plans which qualify under Sections 401,
403(b) or 408 of the Code ("QUALIFIED PLANS") and under plans which qualify
under Section 457 of the Code. Because of the minimum purchase payment
requirements, such Contracts may not be appropriate for some retirement plans.
Taxation of participants in each Qualified Plan varies with the type of plan and
terms and conditions of each specific plan.
Owners, Annuitants and Beneficiaries are cautioned that benefits under a
Qualified Plan usually are subject to the terms and conditions of such plan
regardless of the terms and conditions of Qualified Contracts issued pursuant to
such plan. Although the Company provides administration for Qualified Contracts,
it does not provide administrative support for Qualified Plans. Qualified
Contracts may include special provisions restricting Contract
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provisions that may otherwise be available and described in this Prospectus.
Generally, Qualified Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. See "Tax
Treatment of Withdrawals--Qualified Contracts."
On July 8, 1983, the Supreme Court decided in ARIZONA GOVERNING COMMITTEE V.
NORRIS that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. Accordingly, Contracts sold by the Company in
connection with Qualified Plans (excluding individual retirement annuities) will
utilize annuity tables which do not differentiate on the basis of sex.
The following are general descriptions of the types of Qualified Plans with
which the Qualified Contracts may be used. Such descriptions are not exhaustive
and are for general informational purposes only. The tax rules regarding
Qualified Plans are complex, change frequently and will have differing
applications depending on individual facts and circumstances. Each purchaser
should obtain tax advice prior to purchasing a Contract issued under a Qualified
Plan.
SECTION 401 QUALIFIED PENSION OR PROFIT-SHARING PLANS
Section 401 of the Code permits self-employed individuals (which includes
persons conducting a trade or business through a partnership) to establish
various types of Qualified Plans for themselves and their employees, commonly
referred to as "H.R. 10" or "Keogh" plans. Section 401 of the Code also permits
corporate employers and certain non-profit organizations to establish various
types of Qualified Plans for employees. These retirement plans may permit the
purchase of the Contracts to provide benefits under the plans. Permissible
contributions to such plans for the benefit of such persons will not be
includable in the gross income of such persons for federal income tax purposes
until distributed from the plans.
The tax consequences to participants may vary depending upon the particular
plan design. However, the Code places limitations and restrictions on all such
plans including on such items as: amounts of allowable contributions; form,
manner and timing of distributions; vesting and nonforfeitability of interests;
nondiscrimination in eligibility and participation; and the tax treatment of
distributions, withdrawals and surrenders. See "Tax Treatment of
Withdrawals--Qualified Contracts" and "Tax Sheltered Annuities--Withdrawal
Limitations."
SECTION 403(B) PLANS
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includable in the gross income of
employees for federal income tax purposes until the employees receive
distributions from the Contracts. The amount of contributions to a tax-sheltered
annuity is limited to certain maximums imposed by the Code. Contributions also
may need to comply with nondiscrimination rules, which may further limit
contributions for highly compensated employees. Furthermore, the Code sets forth
additional restrictions governing such items as transferability, distributions
and withdrawals. See "Tax Treatment of Withdrawals--Qualified Contracts."
Section 403(b) Plans are qualified employer plans covered under Section
72(p) of the Code concerning loans from plans. Under the Contract, an Owner may,
subject to certain requirements, receive loans from a Contract that is issued as
a 403(b) tax sheltered annuity beginning 30 days after date of issue.
LOANS
With respect to Section 403(b) Plans, the Contract provides for loans that
conform to the specific terms set forth in the Contract and Code Section 72(p).
In general, the maximum amount and other terms and conditions of loans from a
Contract are determined as though the Contract was a qualified plan covered
under Title I of ERISA. Among other things, the Contract specifically requires
that each such loan must be a minimum of $1,000 and that the maximum term for
repayment of loans (other than residential purchase loans) is 5 years, at an
interest rate comparable to that charged by commercial lenders for similar
loans. Residential purchase loans may be repaid over a 15-year period.
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A Contract cannot be surrendered or annuitized while a Contract loan is
outstanding, unless the Contract Value can be reduced by the outstanding loan
balance plus interest and such reduction satisfies Section 403(b)(11) of the
Code if applicable.
INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which may be deductible from the individual's gross income for federal
income tax purposes. Tax-deductible contributions to individual retirement
annuities under Section 408(b) of the Code are limited to the lesser of $2,000
or 100% of compensation includable in federal taxable gross income for
individuals who (i) are not (and whose spouses are not) active participants in
another tax-qualified retirement plan, (ii) are active participants in another
such plan but are unmarried and have adjusted gross incomes of $25,000 or less,
(iii) are active participants (or have spouses who are active participants) in
another tax-qualified retirement plan but are married, file a joint federal
income tax return and have adjusted gross incomes of $40,000 or less, (iv) are
not active participants (even if they have spouses who are active participants)
in another tax-qualified retirement plan but are married and file a separate
federal income tax return. Individuals who are active participants in other
retirement plans and whose adjusted gross income exceeds the above $25,000 or
$40,000 limits, as applicable, by less than $10,000 are entitled to make
deductible contributions in proportionately reduced amounts. Persons who are
active participants in another qualified retirement plan, are married, file a
separate federal income tax return, and have adjusted gross incomes of $10,000
or less are entitled to make deductible contributions in reduced amounts.
Subject to the rules in the prior paragraph about persons who are active
participants in other tax-qualified retirement plans, a deductible contribution
also may be made to an IRA for a spouse who receives little or no compensation
during the tax year such as a spouse who does not work outside the home (a
"nonworking spouse"). The nonworking spouse must file a joint federal income tax
return with his or her working spouse for the year to be eligible to contribute
to an IRA. The maximum deductible contribution for the nonworking spouse is the
lesser of $2,000 or the total of the compensation includable in the nonworking
spouse's own federal taxable gross income (if any) plus the compensation
includable in the federal taxable gross income of his or her working spouse
minus the working spouse's IRA contribution for the year.
An individual may make nondeductible contributions to an IRA equal to $2,000
minus the limit on deductible contributions to an IRA with respect to that
individual for the year.
Under certain conditions, distributions from other individual retirement
accounts, individual retirement annuities or Qualified Plans may be rolled over
or transferred to an IRA on a tax-deferred basis. IRAs are subject to
limitations on eligibility, contributions, transferability and distributions.
See "Tax Treatment of Withdrawals-- Qualified Contracts." Sales of Contracts for
use with IRAs are subject to special requirements imposed by the Code, including
the requirement that certain informational disclosure be given to persons
desiring to establish an IRA. Purchasers of Contracts to be qualified as
Individual Retirement Annuities should obtain tax advice as to the tax treatment
and suitability of such an investment.
SIMPLIFIED EMPLOYEE PENSION PLANS
Employers may establish what is known as a simplified employee pension plan
("SEP") under Section 408(k) of the Code. Employer contributions to a SEP can be
invested in an individual retirement annuity selected by a participant in the
SEP. Contributions generally must be made as a uniform percentage of employee
compensation and are excluded from gross income of the employee for federal
income tax purposes. Employer contributions to a SEP cannot exceed the lesser of
$30,000 or 15% of an employee's eligible compensation (which may not exceed
$160,000 for the year 1997, indexed to reflect certain cost-of-living changes
for 1998 and later years). The Code also permits employees of certain small
employers to have SEP contributions made on the basis of salary reduction if the
SEP was established as a salary reduction SEP no later than December 31, 1996.
Such salary reduction contributions may not exceed $9,500, indexed annually for
inflation.
The tax consequences to participants may vary depending upon the particular
plan design. However, the Code places limitations and restrictions on all such
plans including on such items as: amounts of allowable contributions;
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form, manner and timing of distributions; vesting and nonforfeitability of
interests; nondiscrimination in eligibility and participation, and the tax
treatment of distributions, withdrawals and surrenders. See "Tax Treatment of
Withdrawals--Qualified Contracts."
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE)
Employers which establish Savings Incentive Match Plans for Employees
("SIMPLE" IRAs) under Section 408(p) of the Code may make employee salary
deferral contributions and employer contribution to individual retirement
annuities established for the eligible employees. Employees who have earned or
expect to earn $5,000 or more annually may defer the lesser of $6,000 or 100% of
earned income through a salary deferral arrangement. Employee salary deferrals
are not includable in the employee's federal taxable gross income. The employer
must make a company contribution based on one of two schedules. The schedules
are either a dollar for dollar matching contribution for all employees who make
salary deferral contributions based on the employee's salary deferral up to a
maximum of 3% of the employee's compensation, or a 2% nonelective contribution
for all eligible employees based on compensation (which may not exceed $160,000
for 1997). Employers sponsoring SIMPLE IRAs may not maintain other qualified
retirement plans.
The Code places certain limitations and restrictions on these plans
including: manner and timing of contributions; vesting and nonforfeitability of
interests; nondiscrimination in eligibility and participation; tax treatment of
distributions, withdrawals and surrenders; frequency of notification and
eligibility to participate; and annual employee reporting. See "Tax Treatment of
Withdrawals--Qualified Contracts."
SECTION 457--DEFERRED COMPENSATION PLANS
Under Section 457 of the Code, governmental and certain other tax exempt
employers may establish deferred compensation plans for the benefit of their
employees and may purchase annuity contracts in connection with those plans.
Under such plans, contributions made for the benefit of the employees will not
be includable in the employees' gross income for federal income tax purposes
until distributed from the Plan. If the program is considered an "eligible
deferred compensation plan" under the Code, an individual generally may
contribute, on a tax-deferred basis, the lesser of $7,500 or 33 1/3% of gross
income from the employer, reduced by amounts excluded from income under Sections
403(b) (tax sheltered annuities), 402(e)(3) (elective salary deferrals under
Section 401(k) or 403(b) plans), 402(h)(1)(B) (elective salary deferrals under
Simplified Employee Pensions) or 402(k) (SIMPLE IRAs) of the Code or for which a
deduction is allowed under Section 501(c)(18) (for certain "employee pay-all"
plans created before June 25, 1959) for the taxable year. Amounts so deferred
may be used by the employer to purchase Contracts pursuant to this Prospectus.
Under a Section 457 plan that is not a governmental plan, all the plan
assets, including any Contract, must remain solely the property of the employer
subject only to the claims of the employer's general creditors until such time
as made available to the participant or beneficiary. The employee has no present
rights or vested interest in the Contract and is entitled to payment only under
the terms of the plan.
Under a governmental Section 457 plan that is maintained by a state, a
political subdivision of a state, or any agency or instrumentality of a state or
political subdivision, all assets of a Section 457 plan must be held in a trust,
a custodial account or an annuity contract for the exclusive benefit of
participants and their beneficiaries.
Distributions from such plans generally are not permitted prior to
termination of employment except in cases of unforeseeable emergencies (as
defined in Treas. Reg. Section 1.457-2(b)(4)).
TAX TREATMENT OF WITHDRAWALS--QUALIFIED CONTRACTS
The discussion in the following paragraph applies to Qualified Plans other
than IRAs. It does not apply to Section 457 plans.
Distributions from Qualified Contracts purchased under Qualified Plans (but
not from IRAs) that are "eligible rollover distributions" are subject to certain
direct rollover and federal income tax withholding rules. The Qualified Plan is
required to give the Contract Owner, Annuitant or Beneficiary (as applicable)
the choice of having payments that are eligible rollover distributions paid
either as (a) a "direct rollover" to an individual retirement account or an
individual retirement annuity (an "INDIVIDUAL RETIREMENT ARRANGEMENT") or to
certain other types of Qualified Plans, or (b) a payment to the Contract Owner,
Annuitant or Beneficiary. Nonspouse Beneficiaries
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cannot elect direct rollovers. If a direct rollover is chosen, the payment will
be made directly to the individual retirement arrangement or other Qualified
Plan, and will not be subject to federal income tax in the year the direct
rollover is made, but will be taxed later when it is taken out of the individual
retirement arrangement or other Qualified Plan. If a payment to the Contract
Owner, Annuitant or Beneficiary is chosen, he or she will receive only 80% of
the payment because the Qualified Plan administrator is required to withhold 20%
of the payment and send it to the Internal Revenue Service to be credited
against federal income taxes. Also, the Contract Owner, Annuitant or Beneficiary
will be taxed on the payment for the year it is made unless he or she rolls it
over to an individual retirement arrangement or certain other types of Qualified
Plans within 60 days of receiving the payment. Nonspouse Beneficiaries cannot
make such rollovers. If the Contract Owner, Annuitant or Beneficiary wants to
roll over 100% of a payment, he or she must find other funds to replace the 20%
that was withheld. Distributions are not "eligible rollover distributions" and
cannot be paid as a direct rollover if they represent the return of "after-tax"
employee contributions, are part of a series of payments made for a period of
ten years or more, to the extent the distributions are "required minimum
distributions" that are made after age 70 1/2 and are required by law, or are
made for certain other reasons. The administrator of the Qualified Plan will
provide additional information about these tax rules when a distribution is
made.
Distributions from Qualified Contracts purchased under Qualified Plans that
are not rolled over to an individual retirement arrangement or another Qualified
Plan (or are not eligible to be rolled over) are taxable as ordinary income,
except to the extent allocable to an employee's after-tax contributions. If an
employee or the Beneficiary receives from a Qualified Plan (not including
distributions from an individual retirement account, individual retirement
annuity or tax-sheltered annuity) a "lump sum distribution" as defined in
Section 402(d)(4) of the Code, the taxable portion of the distribution may be
subject to special tax treatment. For most individuals receiving lump sum
distributions after age 59 1/2 and on or before December 31, 1999, the tax rate
may be determined under five-year income averaging provisions of the Code. Those
who reached age 50 on or before January 1, 1986 instead may elect to use a
ten-year income averaging. In addition, such individuals may elect capital gains
treatment for the taxable portion of a lump sum distribution attributable to
years of service before 1974.
Section 72(t) of the Code imposes a 10% penalty tax on the taxable portion
of any distribution from Qualified Plans and IRAs, including Contracts issued in
connection with plans that are qualified under Code Sections 401, 403(b) and
408(a) and 408. To the extent amounts are not includable in gross income because
they have been properly rolled over (as direct rollovers or as rollovers of
other payments) to an individual retirement arrangement or to another eligible
Qualified Plan, no tax penalty will be imposed. The tax penalty will not apply
to the following distributions: (a) distributions made on or after the date on
which the Contract Owner or Annuitant (as applicable) reaches age 59 1/2; (b)
distributions following the death or disability of the Contract Owner or
Annuitant (as applicable) (disability is defined in Section 72(m)(7) of the
Code); (c) distributions that are part of substantially equal periodic payments
made not less frequently than annually for the life (or life expectancy) of the
Contract Owner or Annuitant (as applicable) or the joint lives (or joint life
expectancies) of such Contract Owner or Annuitant (as applicable) and the
designated beneficiary (provided that if the Qualified Plan is other than an
IRA, distributions do not begin before the Contract Owner or Annuitant separates
from service); (d) for Qualified Plans other than IRAs, distributions to a
Contract Owner or Annuitant (as applicable) who has separated from service after
attaining age 55; (e) distributions made to the Contract Owner or Annuitant (as
applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Contract Owner or Annuitant (as
applicable) for amounts paid during the taxable year for medical care; (f) for
Qualified Plans other than IRAs, distributions made to an alternate payee
pursuant to a qualified domestic relations order; and (g) distributions to
unemployed individuals for health insurance premiums under certain conditions.
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Distributions from a Qualified Contract issued in connection with a
Qualified Plan or an IRA generally must commence by April 1 of the calendar year
after the calendar year in which the Contract Owner or Annuitant reaches age
70 1/2 (or, if later, by April 1 of the calendar year after the calendar year in
which he or she terminates employment in the case of certain Qualified Plans but
not in the case of an IRA), and must be made in minimum annual amounts
determined under rules issued by the Internal Revenue Service. See "Required
Distributions." Distributions from a Qualified Contract issued in connection
with an IRA and distributions to 5% owners of the sponsoring employer from
Contracts issued under Qualified Plans (other than certain governmental or
church-sponsored Qualified Plans) must commence by April 1 of the calendar year
after the calendar year in which the Contract Owner or Annuitant reaches age
70 1/2 even if he or she has not terminated employment.
Other rules apply to a Qualified Contract issued in connection with a
Qualified Plan or an IRA to determine when and how required minimum
distributions must be made in the event of the death of the Contract Owner or
Annuitant. The plan or IRA documents will contain such rules. In addition, if
the Contract Owner's or Annuitant's surviving spouse is the beneficiary of the
interest in the Qualified Plan or the IRA, the surviving spouse may be able to
elect to defer the commencement of distributions past the commencement date that
otherwise would apply, to roll over a distribution to the surviving spouse's own
individual retirement arrangement or to treat an IRA as his or her own.
Distributions from a Contract issued in connection with a Section 457 Plan
generally must meet the same rules as distributions from Qualified Plan. See
"Required Distributions." However, in the case of a distribution from such a
Contract which does not begin before the death of the Contract Owner or
Annuitant, distributions must be made over a period not exceeding fifteen years
(or the life expectancy of the surviving spouse if that spouse is the
beneficiary).
Under certain conditions, distributions from other IRAs and other Qualified
Plans may be rolled over or transferred on a tax-deferred basis into an IRA or
another Qualified Plan. Persons seeking to roll over distributions in such a
manner should obtain tax advice as to the limitations imposed by the Code on
such rollovers.
Because contributions to a SIMPLE IRA are placed in individual retirement
annuities, many of the IRA rules apply to SIMPLE IRAs. In addition, during the
first two years after the individual first participates in any salary reduction
arrangement that is part of a SIMPLE IRA, any amounts distributed from the
SIMPLE IRA are subject to a 25% early withdrawal penalty imposed by the IRS
unless the distributions are rolled over to another SIMPLE IRA or unless one of
the exceptions to the Section 72(t) tax, as discussed above, applies. During
this first two year period, employees may transfer SIMPLE IRAs to other SIMPLE
IRAs without a 25% early withdrawal penalty. Employees who have not reached age
59 1/2 and do not qualify for one of the exceptions to the Section 72(t) tax
must wait two years after first participating in the SIMPLE IRA before
transferring employee and/or employer contributions to other IRAs or IRA
rollover annuities under Section 408(d)(3). After the two year period, the
normal IRA rules regarding withdrawals apply to SIMPLE IRAs.
TAX-SHELTERED ANNUITIES--WITHDRAWAL LIMITATIONS
Effective January 1, 1989, the Code limits the withdrawal of amounts
attributable to contributions made pursuant to a salary reduction agreement (as
defined in Section 403(b)(11) of the Code) to circumstances only: (1) when the
Owner attains age 59 1/2; (2) separates from service; (3) dies; (4) becomes
disabled (within the meaning of Section 72(m)(7) of the Code); or (5) in the
case of hardship. However, withdrawals for hardship are restricted to the
portion of the Owner's Contract Value which represents contributions by the
Owner and does not include any investment results. The limitations on
withdrawals apply only to salary reduction contributions made after December 31,
1988 and to income attributable to such contributions and to income attributable
to amounts held as of December 31, 1988. The limitations on withdrawals do not
affect rollovers between certain Qualified Plans. Owners should consult their
own tax counsel or other tax advisor regarding any distributions.
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LEGAL PROCEEDINGS
There are no material legal proceedings, other than ordinary routine
litigation incidental to the businesses of the Company, the Variable Account,
the Distributor, the Advisor or IFS, to which any of these entities is a party
or to which any of their respective property is subject.
FINANCIAL STATEMENTS
Financial Statements of the Company and of the Company's Separate Account 2
may be found in the Statement of Additional Information, which may be obtained
without charge by calling the Touchstone Variable Annuity Service Center at
1-800-669-2796 (press 2).
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PART II -- DISCUSSION OF SELECT ADVISORS PORTFOLIOS
SUMMARY
GENERAL
Select Advisors Portfolios (the "SA TRUST") is a diversified, open-end
management investment company which was organized as a trust under the laws of
the State of New York on February 7, 1994. The SA Trust includes eight separate
portfolios, two of which, the Growth & Income Portfolio and the Bond Portfolio
(sometimes herein called the "SAT PORTFOLIOS"), are discussed in this Part II.
Each of the SAT Portfolios has a different investment objective and different
policies and practices:
GROWTH & INCOME PORTFOLIO has an investment objective of long term capital
appreciation and dividend income through investment primarily in common
stocks of high quality companies.
BOND PORTFOLIO has an investment objective of providing a high level of
current income primarily through investment in investment grade bonds.
The Growth & Income Portfolio and Bond Portfolio may invest up to 5% and
35%, respectively, of their total assets in non-investment grade (or "junk")
bonds. See "Growth & Income Portfolio," "Bond Portfolio" and "Medium and Lower
Rated ("Junk Bonds") and Unrated Securities." For further information regarding
the investment objectives, policies and restrictions of each of the SAT
Portfolios, see "Investment Objectives, Policies and Restrictions."
RISKS
There are certain risks associated with the investment policies of each SAT
Portfolio. The value of a Sub-Account will fluctuate with the value of the
underlying securities in the corresponding SAT Portfolio in which all of the
Sub-Account's assets are invested. To the extent that a Portfolio invests in
income securities, the market value of those securities will be affected by
general changes in interest rates, which may result in either increases or
decreases in the value of those securities. To the extent that a Portfolio
invests in securities of non-U.S. issuers and foreign currencies, the Portfolio
may face risks that are different from those associated with investment in
domestic securities, including the effect of different economies, change in
relative currency exchange rates, future political and economic developments,
the possible imposition of exchange controls or other governmental confiscation
or restrictions, and less availability of data on companies and the securities
industry as well as less regulation of stock exchanges, brokers and issuers. For
additional information, see "Investment Objectives, Policies and Restrictions"
and "Risk Factors, Restrictions and Investment Techniques."
ADVISORS
Each SAT Portfolio is managed by one or more Portfolio Advisors selected by
the Board of Trustees of the SA Trust based on the recommendations of the
Advisor. The Advisor is paid advisory fees for the general management of the SAT
Portfolios. The Portfolio Advisors are paid fees by the Advisor to manage the
assets of each of the SAT Portfolios. See "Management of the Portfolios."
There can, of course, be no assurance that the investment objectives of the
SAT Portfolios can be achieved. Except for certain investment restrictions
designated as fundamental in this Prospectus or the Statement of Additional
Information, the investment objectives and policies of any SAT Portfolio may be
changed by the Trustees of the SA Trust without the approval of the investors in
the respective Portfolio.
SUB-ACCOUNTS
Each Portfolio corresponds to a Sub-Account of the Variable Account. The
investment objectives of each Sub-Account are the same as the investment
objectives of its corresponding SAT Portfolio, and each Sub-Account invests the
funds it receives from Contract Owners only in an interest in the corresponding
SAT Portfolio.
Contract Owners electing to allocate a portion of their Purchase Payments to
the Variable Account acquire interests in the Sub-Account(s) which they select,
and do not invest directly in the corresponding SAT Portfolios. Instead,
Purchase Payments of Owners are allocated to the Sub-Accounts. Each Sub-Account,
in turn, holds an
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interest in the corresponding SAT Portfolio. See "Purchase Payments." Similarly,
Owners that surrender or make withdrawals from their Contracts do not directly
redeem interests in the Portfolios. See "Surrenders and Partial Withdrawals."
Although Owners who allocate all or any portion of their Purchase Payments
to the various Sub-Accounts do not directly own interests in the SAT Portfolios
or the SA Trust, they do have voting rights in certain circumstances. If at any
time any Sub-Account is requested to vote on a matter regarding the
corresponding SAT Portfolio, the Company will solicit the directions of each
Owner who has allocated Contract Value to such Sub-Account and will cast the
votes of the Sub-Account in accordance with the directions received from such
Owners. See "Voting Rights."
OTHER INVESTORS
Owners should be aware that each SAT Portfolio may receive investments from
other insurance company separate accounts. Owners should be aware that other
investors in an SAT Portfolio could control the results of voting on any matter
submitted to investors in that Portfolio. In certain instances, such as a change
in an SAT Portfolio's fundamental policies, it might be advisable for the
affected Sub-Account (subject to receipt of required approvals) to redeem its
investment in the Portfolio. Substantial redemptions could result in that
Portfolio effecting any such redemption by means of a distribution in kind of
Portfolio securities. Any such distribution in kind could adversely affect the
diversification and liquidity of the Sub-Accounts' investments. In addition, the
Sub-Account could incur brokerage and other transaction costs in order to
convert the resulting securities to cash.
As is true with many investments generally, investors in the Portfolios
(including the Sub-Accounts) may be affected by the actions of other large or
controlling investors. For example, the decision of a large investor to redeem
its shares could result in higher operating expenses and a corresponding
reduction in return. Large redemptions could, as well, cause a Sub-Account's
holdings to become less diverse, resulting in increased risk.
FINANCIAL HIGHLIGHTS
The following table shows ratios to average net assets and other financial
data for each SAT Portfolio for the period indicated and was derived from
financial statements audited by Coopers & Lybrand L.L.P., the SA Trust's
independent accountants, whose report thereon appears in the SA Trust's Annual
Report which is included in the SA Trust's Statement of Additional Information.
<TABLE>
<CAPTION>
GROWTH & INCOME PORTFOLIO BOND PORTFOLIO
------------------------------------ -------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1996 1995 1994(A) 1996 1995 1994(A)
- -------------------------------------- ----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ratios and supplemental data (b):
Net assets at end of period
(000's)............................ $ 21,971 $ 13,894 $ 9,923 $ 14,979 $ 12,304 $ 10,104
Ratios to average net assets:
Expenses............................ 0.85% 0.85% 0.85% 0.75% 0.75% 0.75%
Net investment income............... 1.07% 1.27% 2.06% 6.16% 6.91% 6.76%
Expenses, without waiver and
reimbursement...................... 1.71% 1.77% 2.94% 1.72% 1.58% 2.67%
Portfolio Turnover.................... 69% 96% 0% 79% 80% 0%
Average commission rate(c)............ $ 0.0571 --
</TABLE>
- ------------------------
(a) The Portfolios commenced operations on November 21, 1994.
(b) Ratios are annualized. Portfolio turnover is not annualized.
(c) For fiscal year beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on
which commissions are charged. This amount may vary between periods and
funds depending on the volume and character of trades executed in various
markets whose trading practices and commission rate structures may differ.
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<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
GROWTH & INCOME PORTFOLIO
The investment objective of the Portfolio is long term capital appreciation
and dividend income through investment primarily in a diversified portfolio of
common stocks of high quality companies that, in the Portfolio Advisor's
opinion, have above average growth potential at the time of purchase. In
general, these securities are characterized as having above average dividend
yields and below average price earnings ratios relative to the stock market in
general, as measured by the S&P 500. Other factors, such as earnings and
dividend growth prospects as well as industry outlook and market share, also are
considered. Under normal conditions, at least 80% of the Portfolio's assets will
be invested in common stocks and at least 65% of the Portfolio's assets will be
invested in common stocks that, at the time of investment, will be expected to
pay regular dividends.
The Portfolio will generally invest a majority of its assets in common
stocks of issuers with total market capitalization of $1 billion or greater at
the time of purchase, but may invest in securities of companies having various
levels of market capitalization, including smaller companies whose securities
may be more volatile and less liquid than securities issued by larger companies
with higher levels of net worth. Investments will be in companies in various
industries.
The Portfolio may also invest up to 20% of its total assets in foreign
securities, including securities of foreign issuers in the form of ADRs. The
Portfolio may not invest more than 5% of its total assets in the securities of
companies based in an emerging market. See "Foreign Securities."
The Portfolio may invest under normal circumstances up to 20% of its total
assets in preferred stock, convertible bonds and other fixed income instruments
rated at least Baa by Moody's or BBB by S&P. The Portfolio may invest up to 5%
of its total assets in bonds rated below Baa by Moody's or BBB by S&P (commonly
known as "junk bonds"). See "Medium and Lower-Rated ("Junk Bonds") and Unrated
Securities."
BOND PORTFOLIO
The investment objective of the Portfolio is to provide high current income
primarily through investments in investment grade bonds. Investment grade bonds
are those rated at least Baa by Moody's or BBB by S&P or unrated bonds
considered by the Portfolio Advisor to be of comparable quality. Under normal
circumstances, at least 65% of the value of the Portfolio's total assets will be
invested in bonds or debentures (as described in the first sentence of the next
paragraph). The average maturity of the Portfolio will be between five and
fifteen years. The average maturity of the Portfolio's holdings may be shortened
in order to preserve capital if the Portfolio Advisor anticipates a rise in
interest rates. Conversely, the maturity may be lengthened to maximize returns
if interest rates are expected to decline.
This Portfolio invests in U.S. Treasury obligations, corporate bonds,
debentures, mortgage related securities issued by various governmental agencies,
such as GNMA and government related organizations, such as FNMA and FHLMC,
including collateralized mortgage obligations ("CMOs"), privately issued
mortgage related securities (including CMOs), stripped U.S. Government and
mortgage related securities, non-publicly registered securities, asset backed
securities, and Eurodollar certificates of deposit and Eurodollar bonds. It will
also invest in preferred stock. No more than 60% of the Portfolio's total assets
will be invested in mortgage related securities. The Portfolio will not invest
in any bond or preferred stock rated lower than B by S&P or by Moody's. The
Portfolio will invest less than 35% of its assets in U.S. or foreign
non-investment grade (or "junk") bonds and preferred stock. High risk, lower
quality debt securities are regarded as predominantly speculative with respect
to the issuer's ability to pay interest and repay principal in accordance with
the terms of the obligation. See "Medium and Lower-Rated ("Junk Bonds") and
Unrated Securities." Up to 20% of the Portfolio's assets may be invested in
fixed income securities denominated in foreign currencies. These foreign
securities must meet the same rating and quality standards as the Portfolio's
U.S. dollar-denominated investments. See "Foreign Securities."
SPECIAL INFORMATION CONCERNING HUB AND SPOKE-REGISTERED TRADEMARK- STRUCTURE
The SA Trust is utilizing certain proprietary rights, know-how and financial
services referred to as Hub and Spoke-Registered Trademark- from Signature
Financial Group, Inc.
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<PAGE>
The Growth & Income and Bond Sub-Accounts seek to achieve their investment
objectives by investing all of their respective assets in the corresponding SAT
Portfolio, each of which is a series of a separate registered investment company
with the same investment objectives as the Sub-Account. In addition to selling
an interest to the corresponding Sub-Account, each SAT Portfolio may sell
interests to other insurance company separate accounts. Such investors will
invest in an SAT Portfolio on the same terms and conditions and will pay a
proportionate share of that Portfolio's expenses. However, the other investors
investing in the SAT Portfolio are not required to sell their shares at the same
public offering price as the Sub-Account due to variations in sales commissions
and other operating expenses. Therefore, Owners investing in either the Bond or
Growth & Income Sub-Account should be aware that these differences may result in
differences in returns experienced by investors in the different investment
vehicles that invest in a Portfolio. Such differences in returns are also
present in other mutual fund structures. Information concerning other holders of
interests in an SAT Portfolio is available from the Distributor at (800)
669-2796 (press 3).
The investment objective of an SAT Portfolio may also be changed without the
approval of the investors in the Portfolio, but not without written notice
thereof to the investors in the Portfolio (and notice by the corresponding
Sub-Account to its Owners) thirty days prior to implementing the change. If
there were a change in a Sub-Account's investment objective, Owners should
consider whether the Sub-Account remains an appropriate investment in light of
their then-current financial positions and needs. There can, of course, be no
assurance that the investment objective of any SAT Portfolio will be achieved.
Smaller investors in an SAT Portfolio may be materially affected by the
actions of larger investors in the Portfolio. For example, if a larger investor
withdraws from a Portfolio, the remaining investors may experience higher pro
rata operating expenses, thereby producing lower returns. Additionally, a
Portfolio may become less diverse, resulting in increased portfolio risk.
(However, this possibility exists as well for traditionally structured
investment vehicles which have large or institutional investors.) Also,
investors with a greater pro rata ownership in an SAT Portfolio could have
effective voting control of the operations of the Portfolio. Whenever a
Sub-Account is requested to vote on matters pertaining to the corresponding
Portfolio (other than a vote by the Sub-Account to continue the operation of the
Portfolio upon the withdrawal of another investor in the Portfolio), the Company
will hold a meeting of Owners investing in the Sub-Account and will cast all of
its votes in the same proportion as the votes of these Owners. Owners who do not
vote will not affect the Sub-Account's vote at the Portfolio meeting. The
percentage of a Sub-Account's votes representing Owners not voting will be voted
by the Company in the same proportion as the Sub-Account Owners who do, in fact,
vote. Certain changes in a Portfolio's investment objective, policies or
restrictions might cause a Sub-Account to withdraw its interest in an SAT
Portfolio. Any such withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the Portfolio). If
securities are distributed, a Sub-Account could incur brokerage, tax or other
charges in converting the securities to cash. In addition, the distribution in
kind may result in a less diversified portfolio of investments or adversely
affect the liquidity of a Sub-Account. Notwithstanding the above, there are
other means for meeting shareholder redemption requests, such as borrowing.
For more information about each Portfolio's policies, management and
expenses, see "Investment Objectives, Policies and Restrictions," "Management of
the Portfolios" and "Risk Factors, Restrictions and Investment Techniques." For
more information about each Portfolio's investment restrictions, see the
Statement of Additional Information.
MANAGEMENT OF THE PORTFOLIOS
GENERAL
The business of the SA Trust is governed by a board of trustees (the
"TRUSTEES" or "BOARD OF TRUSTEES") who are elected by a vote of the investors in
the Portfolios. The Trustees exercise broad supervision over the affairs of the
SA Trust. They have retained the services of the Advisor, a subsidiary of IFS
(in turn a subsidiary of the Company), under terms of an investment advisory
agreement (the "ADVISORY AGREEMENT"), pursuant to which the Advisor has been
engaged as investment advisor to each of the SAT Portfolios. Under terms of the
Advisory Agreement it is the Advisor's responsibility to select, subject to
review and approval by the Trustees, one or more Portfolio Advisors. The Advisor
is responsible for the continuing evaluation, selection and monitoring of the
Portfolio Advisors. In this
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<PAGE>
regard, the Advisor employs the services of RogersCasey a research firm
specializing in appraisal and comparison of investment advisers, to assist it in
evaluating the Portfolio Advisors and candidates for those positions. See
"Consultant to the Advisor."
Each Portfolio Advisor has discretion, subject to oversight by the Trustees,
to purchase and sell portfolio assets, except as limited by each Portfolio's
investment objectives, policies and restrictions and by specific investment
strategies developed by the Advisor. See "Investment Objectives, Policies and
Restrictions" and "Risk Factors, Restrictions and Investment Techniques."
For its services, the Advisor receives an advisory fee from each SAT
Portfolio. See "Expenses." A part of the fee paid to the Advisor is used by the
Advisor to pay the advisory fees of the Portfolio Advisors. Such fees are paid
by the Advisor and not by the SAT Portfolio. Any Portfolio Advisor may waive any
or all of such fees. The allocation of the fees paid to the Advisor, showing the
amount received by the Advisor and the amounts paid by it to the two Portfolio
Advisors is set forth below. Such fees are computed daily and paid monthly at
the annual rate specified below of the value of the average daily net assets of
the SAT Portfolio:
<TABLE>
<CAPTION>
GROWTH & INCOME
PORTFOLIO BOND PORTFOLIO
---------------- --------------
<S> <C> <C>
Advisor............................................................... 0.75% 0.55%
Portfolio Advisor..................................................... 0.45% 0.30%
</TABLE>
The Portfolio Advisor for the Growth & Income and Bond Portfolios is Fort
Washington Investment Advisors, Inc. ("FORT WASHINGTON"). See "Portfolio
Advisors," below. Because Fort Washington is a subsidiary of Western & Southern
and, hence, an affiliate of the Advisor, the Advisor is subject to a conflict of
interest when making decisions regarding the retention and compensation of that
particular Portfolio Advisor. However, the Advisor's decisions, including the
identity of a Portfolio Advisor and the specific amount of the Advisor's
compensation to be paid to the Portfolio Advisor, are subject to review and
approval by a majority of the Board of Trustees and separately by a majority of
such Trustees who are not affiliated with the Advisor or any of its affiliates.
CONSULTANT TO THE ADVISOR
RogersCasey, located at One Parklands Drive, Darien, Connecticut 06820, has
been engaged in the business of rendering portfolio advisor evaluations since
1976. The staff at RogersCasey is experienced in acting as investment
consultants and in developing, implementing and managing multiple portfolio
advisor programs. RogersCasey provides asset management consulting services to
various institutional and individual clients and provides the Advisor with
investment consulting services with respect to development, implementation and
management of the SA Trust's multiple portfolio manager program. RogersCasey is
employed by, and its fees and expenses are paid by the Advisor (not the SA
Trust). As consultant, RogersCasey provides research concerning registered
investment advisors to be retained by the Advisor as Portfolio Advisors,
monitors and assists the Advisor with the periodic reevaluation of existing
Portfolio Advisors and makes periodic reports to the Advisor and the Board of
Trustees of the SA Trust.
PORTFOLIO ADVISORS
The following sets forth certain information about each of the Portfolio
Advisors. The individuals employed by the Portfolio Advisor who are primarily
responsible for the day-to-day investment management of the Portfolio are named
below. The annual total return information shown below includes the effect of
deducting each Portfolio's expenses, but does not include charges attributable
to the Contract. See "Fee and Expense Tables."
FORT WASHINGTON serves as the Portfolio Advisor to the Growth & Income
Portfolio. Fort Washington is a wholly-owned subsidiary of Western & Southern.
Fort Washington has been registered as an investment advisor under the
Investment Advisers Act of 1940, as amended, (the "ADVISORS ACT") since
September 14, 1990. Fort Washington provides investment advisory services to
individual and institutional clients. As of December 31, 1996, Fort Washington
had assets under management of $9.5 billion. John J. O'Connor is primarily
responsible for the day-to-day investment management of the Growth & Income
Portfolio. Mr. O'Connor (CFA and CPA) joined Western & Southern/Fort Washington
in 1988 and is the Senior Portfolio Manager and Director of Investment Research.
Fort Washington's principal executive offices are located at 420 East Fourth
Street, Cincinnati, Ohio 45202.
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<PAGE>
Fort Washington also serves as Portfolio Advisor to the Bond Portfolio.
Roger M. Lanham and Brendan White are the individuals primarily responsible for
the day-to-day investment management of the Bond Portfolio. Mr. Lanham is a CFA
and has been with Western & Southern/Fort Washington since 1981. Mr. White is a
CFA and has been with Western & Southern/Fort Washington since 1993. Prior to
1993, Mr. White was with Ohio Casualty Insurance Co. for six years, managing
high yield and mortgage backed assets.
EXPENSES
The SA Trust pays all of its expenses of operations, other than those borne
by the Advisor. In particular, the SA Trust pays: the compensation of its
Trustees who are not affiliated with the Advisor and its affiliates;
governmental fees; interest charges; taxes; membership dues in trade
associations; fees and expenses of independent auditors and legal counsel of the
SA Trust; insurance premiums; amortization of organizational expenses; and
expenses of calculating the net asset value and net income of each of the
Portfolios; expenses related to the execution, recording and settlement of
security transactions; fees and expenses of the custodian; expenses of preparing
and mailing reports to investors and to governmental officers and commissions;
expenses of meetings of investors; and the advisory fees payable to the Advisor
under the Advisory Agreement.
RISK FACTORS, RESTRICTIONS AND INVESTMENT TECHNIQUES
TECHNIQUES AND RISK FACTORS
The following are descriptions of certain types of securities invested in by
the SAT Portfolios, certain investment techniques employed by those Portfolios
and risks associated with utilizing either the securities or the investment
techniques.
DERIVATIVES
The Portfolios may invest in various instruments that are commonly known as
derivatives. Generally, a derivative is a financial arrangement, the value of
which is based on, or "derived" from, a traditional security asset, or market
index. Some "derivatives" such as certain mortgage-related and other
asset-backed securities are in many respects like any other investment, although
they may be more volatile or less liquid than more traditional debt securities.
There are, in fact, many different types of derivatives and many different ways
to use them. There is a range of risks associated with those uses. Futures and
options are commonly used for traditional hedging purposes to attempt to protect
a fund from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. However, some
derivatives are used for leverage, which tends to magnify the effects of an
instrument's price changes as market conditions change. Leverage involves the
use of a small amount of money to control a large amount of financial assets,
and can in some circumstances, lead to significant losses. A Portfolio Advisor
will use derivatives only in circumstances where the Portfolio Advisor believes
they offer the most economic means of improving the risk/reward profile of the
Portfolio. Derivatives will not be used to increase portfolio risk above the
level that could be achieved using only traditional investment securities or to
acquire exposure to changes in the value of assets or indexes that by themselves
would not be purchased for the Portfolio. The use of derivatives for non-hedging
purposes may be considered speculative. A description of the derivatives that
the Portfolios may use and some of their risks is found below.
FOREIGN SECURITIES
Investing in securities issued by foreign companies and governments involves
considerations and potential risks not typically associated with investing in
obligations issued by the U.S. government and domestic corporations. Less
information may be available about foreign companies than about domestic
companies and foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic companies. The values of
foreign investments are affected by changes in currency rates or exchange
control regulations, restrictions or prohibitions on the repatriation of foreign
currencies, application of foreign tax laws, including withholding taxes,
changes in governmental administration or economic or monetary policy (in the
United States or abroad) or changed circumstances in dealings between nations.
Costs are also incurred in connection with conversions between various
currencies. In addition, foreign brokerage commissions and custody fees are
generally higher than those charged in the United States, and foreign securities
markets may be less liquid, more volatile and less subject to governmental
supervision
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<PAGE>
than in the United States. Investments in foreign countries could be affected by
other factors not present in the United States, including expropriation,
confiscatory taxation, lack of uniform accounting and auditing standards and
potential difficulties in enforcing contractual obligations and could be subject
to extended clearance and settlement periods.
RISKS ASSOCIATED WITH "EMERGING MARKETS" SECURITIES
"Emerging Markets" securities include the securities of issuers based in
some of the world's underdeveloped markets, including Eastern Europe. These
typically include countries where per capita GNP is less than $8,355.
Investments in securities of issuers based in such countries entail all of the
risks of investing in foreign issuers outlined in this section but to a
heightened degree. These heightened risks include: (i) expropriation,
confiscatory taxation, nationalization, and less social, political and economic
stability; (ii) the smaller size of the market for such securities and a low or
nonexistent volume of trading, resulting in a lack of liquidity and in price
volatility; (iii) certain national policies that may restrict a Portfolio's
investment opportunities including restrictions on investing in issuers in
industries deemed sensitive to relevant national interests; and (iv) in the case
of Eastern Europe, the absence of developed capital markets and legal structures
governing private or foreign investment and private property and the possibility
that recent favorable economic and political developments could be slowed or
reversed by unanticipated events.
So long as the Communist Party continues to exercise a significant or, in
some cases, dominant role in Eastern European countries, investments in such
countries will involve risk of nationalization, expropriation and confiscatory
taxation. The former communist governments of a number of Eastern European
countries expropriated large amounts of private property in the past, and in
many cases without adequate compensation. There is no assurance that such
expropriation will not occur in the future at the hands of either an existing
non-communist regime or upon the return to power of the Communist Party. In the
event of any such expropriation, a Portfolio could lose a substantial portion of
any investments it has made in the affected countries. Finally, even though the
currencies of less developed countries may be convertible into U.S. dollars, the
conversion rates may be artificial in relation to the actual market values and
may be adverse to Portfolio shareholders.
CURRENCY EXCHANGE RATES
A Portfolio's share value may change significantly when the currencies,
other than the U.S. dollar, in which the Portfolio's investments are denominated
strengthen or weaken against the U.S. dollar. Currency exchange rates generally
are determined by the forces of supply and demand in the foreign exchange
markets and the relative merits of investments in different countries as seen
from an international perspective. Currency exchange rates can also be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
by currency controls or political developments in the United States or abroad.
MEDIUM AND LOWER RATED AND UNRATED SECURITIES
Securities rated in the fourth highest category by S&P or Moody's, BBB and
Baa, respectively, although considered investment grade, possess speculative
characteristics, and changes in economic or other conditions are more likely to
impair the ability of issuers of these securities to make interest and principal
payments than is the case with respect to issuers of higher grade bonds.
Generally, medium or lower rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds," offer a higher
current yield than is offered by higher rated securities, but also (i) will
likely have some quality and protective characteristics that, in the judgment of
the rating organizations, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (ii) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The yield of junk bonds will
fluctuate over time.
The market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher quality bonds. In addition, medium and lower rated
securities and comparable unrated securities generally present a higher degree
of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium and lower rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. Since the risk of
default is higher for lower-rated securities, the Portfolio Advisor's research
and credit
34
<PAGE>
analysis are an especially important part of managing securities of the type
held by a Portfolio. In light of these risks, the Board of Trustees has
instructed the Portfolio Advisor, in evaluating the creditworthiness of an
issue, whether rated or unrated, to take various factors into consideration,
which may include, as applicable, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
In addition, the market value of securities in lower rated categories is
more volatile than that of higher quality securities, and the markets in which
medium and lower rated or unrated securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Portfolios to obtain accurate market
quotations for purposes of valuing their respective portfolios and calculating
their respective net asset values. Moreover, the lack of a liquid trading market
may restrict the availability of securities for the Portfolios to purchase and
may also have the effect of limiting the ability of a Portfolio to sell
securities at their fair value either to meet redemption requests or to respond
to changes in the economy or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Portfolio may
have to replace the security with a lower yielding security, resulting in a
decreased return for shareholders. Also, as the principal value of bonds moves
conversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by a Portfolio may decline relatively
proportionately more than a portfolio consisting of higher rated securities. If
a Portfolio experiences unexpected net redemptions, it may be forced to sell its
higher rated bonds, resulting in a decline in the overall credit quality of the
securities held by the Portfolio and increasing the exposure of the Portfolio to
the risks of lower rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Portfolio, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event will require sale of these securities by the
Portfolio, but the Portfolio Advisor will consider this event in its
determination of whether the Portfolio should continue to hold the securities.
ADRS, EDRS AND CDRS
ADRs are U.S. dollar-denominated receipts typically issued by domestic banks
or trust companies that represent the deposit with those entities of securities
of a foreign issuer. ADRs are publicly traded on exchanges or over-the-counter
in the United States. European Depositary Receipts ("EDRs"), which are sometimes
referred to as Continental Depositary Receipts ("CDRs"), may also be purchased
by the Portfolios. EDRs and CDRs are generally issued by foreign banks and
evidence ownership of either foreign or domestic securities. Certain
institutions issuing ADRs or EDRs may not be sponsored by the issuer of the
underlying foreign securities. A non-sponsored depository may not provide the
same shareholder information that a sponsored depository is required to provide
under its contractual arrangements with the issuer of the underlying foreign
securities.
FIXED-INCOME AND OTHER DEBT INSTRUMENT SECURITIES
Fixed income and other debt instrument securities include all bonds, high
yield or "junk" bonds, municipal bonds, debentures, U.S. Government securities,
mortgage related securities including government stripped mortgage related
securities, zero coupon securities and custodial receipts. The market value of
fixed income obligations of the Portfolios will be affected by general changes
in interest rates which will result in increases or decreases in the value of
the obligations held by the Portfolios. The market value of the obligations held
by a Portfolio can be expected to vary inversely to changes in prevailing
interest rates. Shareholders also should recognize that, in periods of declining
interest rates, a Portfolio's yield will tend to be somewhat higher than
prevailing market rates and, in periods of rising interest rates, a Portfolio's
yield will tend to be somewhat lower. Also, when interest rates are falling, the
inflow of net new money to a Portfolio from the continuous sale of its shares
will tend to be invested in instruments producing lower yields than the balance
of its portfolio, thereby reducing the Portfolio's current yield. In periods of
rising interest rates, the opposite can be expected to occur. In addition,
securities in which a Portfolio may invest may not yield as high a level of
current income as might be achieved by investing in securities with less
liquidity, less creditworthiness or longer maturities.
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Ratings made available by S&P and Moody's are relative and subjective and
are not absolute standards of quality. Although these ratings are initial
criteria for selection of portfolio investments, a Portfolio Advisor also will
make its own evaluation of these securities. Among the factors that will be
considered are the long-term ability of the issuers to pay principal and
interest and general economic trends.
Fixed-income securities may be purchased on a when-issued or
delayed-delivery basis. See "When-Issued and Delayed-Delivery Securities."
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in U.S. Government securities, which are
obligations issued or guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities. Some U.S. government securities, such as U.S.
Treasury bills, Treasury notes and Treasury bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States. Others are supported by: (i) the right of
the issuer to borrow from the U.S. Treasury, such as securities of the Federal
Home Loan Banks; (ii) the discretionary authority of the U.S. government to
purchase the agency's obligations, such as securities of the FNMA; of (iii) only
the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. Government will provide
financial support in the future to U.S. government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States.
Securities guaranteed as to principal and interest by the U.S. government,
its agencies, authorities or instrumentalities include: (i) securities for which
the payment of principal and interest is backed by an irrevocable letter of
credit issued by the U.S. Government or any of its agencies, authorities or
instrumentalities; and (ii) participation interests in loans made to foreign
governments or other entities that are so guaranteed. The secondary market for
certain of these participation interests is limited and, therefore, may be
regarded as illiquid.
MORTGAGE RELATED SECURITIES
Each Portfolio may invest in mortgage related securities. There are several
risks associated with mortgage related securities generally. One is that the
monthly cash inflow from the underlying loans may not be sufficient to meet the
monthly payment requirements of the mortgage related security.
Prepayment of principal by mortgagors or mortgage foreclosures will shorten
the term of the underlying mortgage pool for a mortgage related security. Early
returns of principal will affect the average life of the mortgage related
securities remaining in a Portfolio. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. In periods of rising interest rates, the rate of
prepayment tends to decrease, thereby lengthening the average life of a pool of
mortgage related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life of
a pool. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of a Portfolio. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that a Portfolio will have to reinvest the proceeds of prepayments at
lower interest rates than those at which the assets were previously invested. If
this occurs, a Portfolio's yield will correspondingly decline. Thus, mortgage
related securities may have less potential for capital appreciation in periods
of falling interest rates than other fixed-income securities of comparable
maturity, although these securities may have a comparable risk of decline in
market value in periods of rising interest rates. To the extent that a Portfolio
purchases mortgage related securities at a premium, unscheduled prepayments,
which are made at par, will result in a loss equal to any unamortized premium.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage related securities. Payments of principal and interest on the mortgages
are passed through to the holders of the CMOs on the same schedule as they are
received, although certain classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages. Therefore, depending on
the type of CMOs in which a Portfolio invests, the investment may be subject to
a greater or lesser risk of prepayment than other types of mortgage related
securities.
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Mortgage related securities may not be readily marketable. To the extent any
of these securities are not readily marketable in the judgment of the Portfolio
Advisor, the investment restriction limiting a Portfolio's investment in
illiquid instruments to not more than 10% of the value of its net assets will
apply.
STRIPPED MORTGAGE RELATED SECURITIES
These securities are either issued and guaranteed, or privately-issued but
collateralized by securities issued, by GNMA, FNMA or FHLMC. These securities
represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only") on
mortgage related certificates issued by GNMA, FNMA or FHLMC, as the case may be.
The certificates underlying the stripped mortgage related securities represent
all or part of the beneficial interest in pools of mortgage loans. The Portfolio
will invest in stripped mortgage related securities in order to enhance yield or
to benefit from anticipated appreciation in value of the securities at times
when its Portfolio Advisor believes that interest rates will remain stable or
increase. In periods of rising interest rates, the expected increase in the
value of stripped mortgage related securities may offset all or a portion of any
decline in value of the securities held by the Portfolio.
Investing in stripped mortgage related securities involves the risks
normally associated with investing in mortgage related securities. See "Mortgage
Related Securities" above. In addition, the yields on stripped mortgage related
securities are extremely sensitive to the prepayment experience on the mortgage
loans underlying the certificates collateralizing the securities. If a decline
in the level of prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal will be
accelerated, thereby reducing the yield to maturity on interest-only stripped
mortgage related securities and increasing the yield to maturity on
principal-only stripped mortgage related securities. Sufficiently high
prepayment rates could result in a Portfolio not fully recovering its initial
investment in an interest-only stripped mortgage related security. Under current
market conditions, the Portfolio expects that investments in stripped mortgage
related securities will consist primarily of interest-only securities. Stripped
mortgage related securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that the Portfolio will be able to effect a trade of a stripped mortgage related
security at a time when it wishes to do so. The Portfolio will acquire stripped
mortgage related securities only if a secondary market for the securities exists
at the time of acquisition. Except for stripped mortgage related securities
based on fixed rate FNMA and FHLMC mortgage certificates that meet certain
liquidity criteria established by the Board of Trustees, the Portfolios will
treat stripped mortgage related securities as illiquid and will limit its
investments in these securities, together with other illiquid investments, to
not more than 15% of net assets.
ZERO COUPON SECURITIES
Zero coupon U.S. Government securities are debt obligations that are issued
or purchased at a significant discount from face value. The discount
approximates the total amount of interest the security will accrue and compound
over the period until maturity or the particular interest payment date at a rate
of interest reflecting the market rate of the security at the time of issuance.
Zero coupon securities do not require the periodic payment of interest. These
investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a higher rate of return to attract investors who are
willing to defer receipt of cash. These investments may experience greater
volatility in market value than U.S. Government securities that make regular
payments of interest. A Portfolio accrues income on these investments for tax
and accounting purposes, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the liquidation
of other portfolio securities to satisfy the Portfolio's distribution
obligations, in which case the Portfolio will forego the purchase of additional
income producing assets with these funds. Zero coupon securities include STRIPS,
that is, securities underwritten by securities dealers or banks that evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. Government, its agencies, authorities or
instrumentalities. They also include Coupons Under Book Entry System ("CUBES"),
which are issued by the U.S. Treasury as component parts of U.S. Treasury bonds
and represent scheduled interest and principal payments on the bonds.
CUSTODIAL RECEIPTS
Custodial receipts or certificates, such as Certificates of Accrual on
Treasury Securities ("CATS"), Treasury Investors Growth Receipts ("TIGRs") and
Financial Corporation certificates ("FICO Strips"), are securities underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments
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or both on certain notes or bonds issued by the U.S. Government, its agencies,
authorities or instrumentalities. The underwriters of these certificates or
receipts purchase a U.S. Government security and deposit the security in an
irrevocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the U.S. Government Security.
Custodial receipts evidencing specific coupon or principal payments have the
same general attributes as zero coupon U.S. Government securities, described
above. Although typically under the terms of a custodial receipt a Portfolio is
authorized to assert its rights directly against the issuer of the underlying
obligation, the Portfolio may be required to assert through the custodian bank
such rights as may exist against the underlying issuer. Thus, if the underlying
issuer fails to pay principal and/or interest when due, a Portfolio may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Portfolio had purchased a direct obligation of the
issuer. In addition, if the trust or custodial account in which the underlying
security has been deposited is determined to be an association taxable as a
corporation, instead of a non-taxable entity, the yield on the underlying
security would be reduced in respect of any taxes paid.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
To secure prices deemed advantageous at a particular time, each Portfolio
may purchase securities on a when-issued or delayed-delivery basis, in which
case delivery of the securities occurs beyond the normal settlement period;
payment for or delivery of the securities would be made prior to the reciprocal
delivery or payment by the other party to the transaction. A Portfolio will
enter into when-issued or delayed-delivery transactions for the purpose of
acquiring securities and not for the purpose of leverage. When-issued securities
purchased by the Portfolio may include securities purchased on a "when, as and
if issued" basis under which the issuance of the securities depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring.
Securities purchased on a when-issued or delayed-delivery basis may expose a
Portfolio to risk because the securities may experience fluctuations in value
prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.
REPURCHASE AGREEMENTS
Each of the Portfolios may engage in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, a Portfolio would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Portfolio's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Portfolio's holding period. A Portfolio may enter into repurchase
agreements with respect to U.S. government securities with member banks of the
Federal Reserve System and certain non-bank dealers approved by the respective
Board of Trustees. Under each repurchase agreement, the selling institution is
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. The Portfolio Advisor, acting
under the supervision of the Advisor and the Board of Trustees, reviews on an
ongoing basis the value of the collateral and the creditworthiness of those
non-bank dealers with whom the Portfolio enters into repurchase agreements. In
entering into a repurchase agreement, a Portfolio bears a risk of loss in the
event that the other party to the transaction defaults on its obligations and
the Portfolio is delayed or prevented from exercising its rights to dispose of
the underlying securities, including the risk of a possible decline in the value
of the underlying securities during the period in which the Portfolio seeks to
assert its rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or a part of the income from
the agreement. Repurchase agreements are considered to be collateralized loans
under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS AND FORWARD ROLL TRANSACTIONS
The Portfolios may enter into reverse repurchase agreements and forward roll
transactions. In a reverse repurchase agreement the Portfolio agrees to sell
portfolio securities to financial institutions such as banks and broker-dealers
and to repurchase them at a mutually agreed date and price. Forward roll
transactions are equivalent
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to reverse repurchase agreements but involve mortgage-backed securities and
involve a repurchase of a substantially similar security. At the time the
Portfolio enters into a reverse repurchase agreement or forward roll transaction
it will place in a segregated custodial account cash or liquid securities having
a value equal to the repurchase price, including accrued interest. Reverse
repurchase agreements and forward roll transactions involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of the securities. Reverse repurchase agreements and forward
roll transactions are considered to be borrowings by a Portfolio for purposes of
the limitations described in "Certain Investment Restrictions" below and in the
Statement of Additional Information.
LENDING PORTFOLIO SECURITIES
To generate income for the purpose of helping to meet its operating
expenses, each Portfolio may lend securities to brokers, dealers and other
financial organizations. These loans, if and when made, may not exceed 30% of a
Portfolio's assets taken at value. A Portfolio's loans of securities will be
collateralized by cash, letters of credit or U.S. Government securities. The
cash or instruments collateralizing a Portfolio's loans of securities will be
maintained at all times in a segregated account with the Portfolio's custodian,
or with a designated subcustodian, in an amount at least equal to the current
market value of the loaned securities. In lending securities to brokers, dealers
and other financial organizations, a Portfolio is subject to risks, which, like
those associated with other extensions of credit, include delays in recovery and
possible loss of rights in the collateral should the borrower fail financially.
For further information regarding measures taken to protect a Lending Portfolio,
see the Statement of Additional Information.
ILLIQUID SECURITIES
No Portfolio may invest more than 15% of its net assets in securities which
are illiquid or otherwise not readily marketable. If a security becomes illiquid
after purchase by the Portfolio, the Portfolio will normally sell the security
unless to do so would not be in the best interests of shareholders.
NON-PUBLICLY TRADED ("RESTRICTED") SECURITIES AND RULE 144A SECURITIES
Each Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under SEC Rule 144A or under an exemption from such laws. If a
dealer or institutional trading market in such securities exists, these
restricted securities or Rule 144A securities are treated as exempt from the
Portfolio's 15% limit on illiquid securities. The Board of Trustees of the SA
Trust, with advice and information from the respective Portfolio Advisor, will
determine the liquidity of restricted securities or Rule 144A securities by
looking at factors such as trading activity and the availability of reliable
price information and, through reports from such Portfolio Advisor, the Board of
Trustees of the Portfolio Trust will monitor trading activity in restricted
securities. If institutional trading in restricted securities or Rule 144A
securities were to decline, a Portfolio's illiquidity could be increased and the
Portfolio could be adversely affected.
No Portfolio will invest more than 10% of its total assets in restricted
securities (excluding Rule 144A securities).
TEMPORARY INVESTMENTS
For temporary defensive purposes during periods when the Portfolio Advisor
of a Portfolio believes, in consultation with the Advisor, that pursuing the
Portfolio's basic investment strategy may be inconsistent with the best
interests of its shareholders, the Portfolio may invest its assets without limit
in the following money market instruments: U.S. Government securities (including
those purchased in the form of custodial receipts), repurchase agreements,
certificates of deposit and bankers' acceptances issued by banks or savings and
loan associations having assets of at least $500 million as of the end of their
most recent fiscal year and high quality commercial paper.
In addition, for the same purposes the Portfolio Advisor may invest without
limit in obligations issued or guaranteed by foreign governments or by any of
their political subdivisions, authorities, agencies or instrumentalities that
are rated at least AA by S&P or Aa by Moody's or, if unrated, are determined by
the Portfolio Advisor to be of equivalent quality. Each Portfolio also may hold
a portion of its assets in money market instruments or cash in amounts designed
to pay expenses, to meet anticipated redemptions or pending investments in
accordance with its objectives and policies. Any temporary investments may be
purchased on a when-issued basis.
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FUTURES CONTRACTS AND RELATED OPTIONS
Each Portfolio may enter into futures contracts and purchase and write
(sell) options on these contracts, including but not limited to interest rate,
securities index and foreign currency futures contracts and put and call options
on these futures contracts. These contracts will be entered into only upon the
concurrence of the Portfolio Advisor that such contracts are necessary or
appropriate in the management of the Portfolio's assets. These contracts will be
entered into on exchanges designated by the Commodity Futures Trading Commission
("CFTC") or, consistent with CFTC regulations, on foreign exchanges. These
transactions may be entered into for bona fide hedging and other permissible
risk management purposes including protecting against anticipated changes in the
value of securities a Portfolio intends to purchase.
No Portfolio will hedge more than 25% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. In addition, no
Portfolio will buy futures or write puts whose underlying value exceeds 25% of
its total assets, and no Portfolio will buy calls with a value exceeding 5% of
its total assets.
A Portfolio will not enter into futures contracts and related options for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's assets after taking into account unrealized profits and
unrealized losses on any contracts it has entered into.
A Portfolio may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the
Portfolio's futures and options positions may not prove to be perfectly or even
highly correlated with changes in the value of its portfolio securities.
Successful use of futures and related options is subject to a Portfolio
Advisor's ability to predict correctly movements in the direction of the
securities markets generally, which ability may require different skills and
techniques than predicting changes in the prices of individual securities.
Moreover, futures and options contracts may only be closed out by entering into
offsetting transactions on the exchange where the position was entered into (or
a linked exchange), and as a result of daily price fluctuation limits there can
be no assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a Portfolio may realize
a loss on a futures contract or option that is not offset by an increase in the
value of its portfolio securities that are being hedged or a Portfolio may not
be able to close a futures or options position without incurring a loss in the
event of adverse price movements. For additional information, see "Futures
Contracts and Options on Futures Contracts" in the Statement of Additional
Information.
OPTIONS ON STOCK
Each Portfolio may write and purchase options on stocks. A call option gives
the purchaser of the option the right to buy, and obligates the writer to sell,
the underlying stock at the exercise price at any time during the option period.
Similarly, a put option gives the purchaser of the option the right to sell, and
obligates the writer to buy the underlying stock at the exercise price at any
time during the option period. A covered call option with respect to which a
Portfolio owns the underlying stock sold by the Portfolio exposes the Portfolio
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying stock or to possible
continued holding of a stock which might otherwise have been sold to protect
against depreciation in the market price of the stock. A covered put option sold
by a Portfolio exposes the Portfolio during the term of the option to a decline
in price of the underlying stock.
To close out a position when writing covered options, a Portfolio may make a
"closing purchase transaction" which involves purchasing an option on the same
stock with the same exercise price and expiration date as the option which it
has previously written on the stock. The Portfolio will realize a profit or loss
for a closing purchase transaction if the amount paid to purchase an option is
less or more, as the case may be, than the amount received from the sale
thereof. To close out a position as a purchaser of an option, a Portfolio may
make a "closing sale transaction" which involves liquidating the Portfolio's
position by selling the option previously purchased. See also "Options on
Securities" in the Statement of Additional Information.
OPTIONS ON SECURITIES INDEXES
Each Portfolio may purchase and write put and call options on securities
indexes listed on domestic and, in the case of those Portfolios which may invest
in foreign securities, on foreign exchanges. A securities index fluctuates with
changes in the market values of the securities included in the index.
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Options on securities indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a security
index gives the holders the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
(b) a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the index upon which the option is based being greater than, in
the case of a call, or less than, in the case of a put, the exercise price of
the option. The amount of cash received will be equal to such difference between
the closing price of the index and the exercise price of the option expressed in
dollars or a foreign currency, as the case may be, times a specified multiple.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. The writer may offset its position in securities
index options prior to expiration by entering into a closing transaction on an
exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular security, whether the Portfolio
will realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of securities prices in the market generally
or, in the case of certain indexes, in an industry or market segment, rather
than movements in price of a particular security. Accordingly, successful use by
a Portfolio of options on security indexes will be subject to the Portfolio
Advisor's ability to predict correctly movement in the direction of that
securities market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities. For further information regarding index options, see "Options on
Securities Indexes" in the Statement of Additional Information.
FORWARD CURRENCY CONTRACTS
Each Portfolio may hold currencies to meet settlement requirements for
foreign securities and may engage in currency exchange transactions in order to
protect against uncertainty in the level of future exchange rates between a
particular foreign currency and the U.S. dollar or between foreign currencies in
which the Portfolio's securities are or may be denominated. Forward currency
contracts are agreements to exchange one currency for another, for example, to
exchange a certain amount of U.S. dollars for a certain amount of French francs
at a future date. The date (which may be any agreed-upon fixed number of days in
the future), the amount of currency to be exchanged and the price at which the
exchange will take place will be negotiated with a currency trader and fixed for
the term of the contract at the time that the Portfolio enters into the
contract.
In hedging specific portfolio positions, a Portfolio may enter into a
forward contract with respect to either the currency in which the positions are
denominated or another currency deemed appropriate by the Portfolio Advisor. The
amount the Portfolio may invest in forward currency contracts is limited to the
amount of the Portfolio's aggregate investments in foreign currencies. Risks
associated with entering into forward currency contracts include the possibility
that the market for forward currency contracts may be limited with respect to
certain currencies and, upon a contract's maturity, the inability of a Portfolio
to negotiate with the dealer to enter into an offsetting transaction. Forward
currency contracts may be closed out only by the parties entering into an
offsetting contract. In addition, the correlation between movements in the
prices of those contracts and movements in the price of the currency hedged or
used for cover will not be perfect. There is no assurance that an active forward
currency contract market will always exist. These factors will restrict a
Portfolio's ability to hedge against the risk of devaluation of currencies in
which a Portfolio holds a substantial quantity of securities and are unrelated
to the qualitative rating that may be assigned to any particular security. See
also "Forward Currency Contracts" in the Statement of Additional Information for
further information concerning forward currency contracts.
ASSET COVERAGE
To assure that a Portfolio's use of futures and related options, as well as
when-issued and delayed-delivery transactions, forward currency contracts and
swap transactions, are not used to achieve investment leverage, the Portfolio
will cover such transactions, as required under applicable SEC interpretations,
either by owning the underlying securities or by establishing a segregated
account with the SA Trust's custodian containing liquid securities in an amount
at all times equal to or exceeding the Portfolio's commitment with respect to
these instruments or contracts.
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CERTAIN INVESTMENT RESTRICTIONS
The SA Trust, on behalf of each SAT Portfolio, has adopted certain
investment restrictions that are enumerated in detail in the Statement of
Additional Information. Among other restrictions, each SAT Portfolio may not,
with respect to 75% of its total assets taken at market value, invest more than
5% of its total assets in the securities of any one issuer, except U.S.
Government securities, or acquire more than 10% of any class of the outstanding
voting securities of any one issuer. In addition, no Portfolio may invest more
than 25% of its total assets in securities of issuers in any one industry. Each
Portfolio may borrow money as a temporary measure from banks in an aggregate
amount not exceeding one-third of the value of the Portfolio's total assets to
meet redemptions and for other temporary or emergency purposes not involving
leveraging. Reverse repurchase agreements and forward roll transactions
involving mortgage-related securities will be aggregated with bank borrowings
for purposes of this calculation. No Portfolio may purchase securities while
borrowings exceed 5% of the value of the Portfolio's total assets. No Portfolio
will invest more than 15% of the value of its net assets in securities that are
illiquid, including certain government stripped mortgage related securities,
repurchase agreements maturing in more than seven days and that cannot be
liquidated prior to maturity and securities that are illiquid by virtue of the
absence of a readily available market. Securities that have legal or contractual
restrictions on resale but have a readily available market, such as certain Rule
144A securities, are deemed not illiquid for this purpose. No Portfolio may
invest more than 10% of its assets in restricted securities (excluding Rule 144A
securities). See "Illiquid Securities" and "Non-Publicly Traded ("Restricted")
Securities and Rule 144A Securities."
PORTFOLIO TURNOVER
Generally, the SAT Portfolios will not trade in securities for short-term
profits but, when circumstances warrant, securities may be sold without regard
to the length of time held. The SAT Portfolios may engage in active short-term
trading to benefit from yield disparities among different issues of securities,
to seek short-term profits during periods of fluctuating interest rates or for
other reasons. Active trading will increase a Portfolio's rate of turnover,
certain transaction expenses and the incidence of short-term capital gain
taxable as ordinary income. An annual turnover rate of 100% would occur when all
the securities held by the Portfolio are replaced one time during a period of
one year. The turnover rates of the Growth & Income Portfolio and the Bond
Portfolio for 1996 and 1995 were 82% and 96% and 79% and 80%, respectively.
MANAGEMENT OF THE SA TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the SA Trust rests
with its Board of Trustees. The Trustees approve all significant agreements
between the SA Trust and the persons and companies that furnish services to the
SA Trust and the Portfolios, including agreements between the SA Trust and each
of the Custodian, the Advisor and the Administrator. Due to the services
provided by the Advisor and the Administrator, the Trust currently has no
employees and its officers are not required to devote their full time to the
affairs of the SA Trust. The Statement of Additional Information contains
background information regarding each Trustee and executive officer of the SA
Trust.
ADMINISTRATOR, FUND ACCOUNTING AGENT, CUSTODIAN AND TRANSFER AGENT
Investors Bank, 89 South Street, Boston, Massachusetts 02111, serves as
administrator, fund accounting agent, custodian and transfer agent for the SA
Trust. Investors Bank was organized in 1969 as a Massachusetts-chartered trust
company and is a wholly-owned subsidiary of Investors Financial Services Corp.,
a publicly-held corporation and holding company registered under the Bank
Holding Company Act of 1956.
As administrator and fund accounting agent, Investors Bank provides, on
behalf of the SA Trust, accounting, clerical and bookkeeping services; the daily
calculation of net asset values; state securities registration services;
corporate secretarial services; assistance in the preparation of management
reports; preparation and filing of tax returns, registration statements, and
reports to shareholders and to the SEC. Investors Bank also provides personnel
to serve as certain officers of the SA Trust.
42
<PAGE>
As custodian, Investors Bank holds cash, securities and other assets of the
SA Trust as required by the 1940 Act. As transfer agent, Investors Bank is
responsible for maintaining records of shareholder interests for the SA Trust.
For its services as fund accounting agent and administrator, each SAT
Portfolio shall pay fees to Investors Bank that are computed and paid monthly.
Such fees equal, in the aggregate, 0.12% on an annual basis of the average daily
net assets of all the portfolios and funds for which Investors Bank acts as fund
accounting agent and administrator up to $1 billion in assets and 0.08% on an
annual basis of average daily net assets which exceed $1 billion, subject to
certain annual minimum fees. As compensation for its services as custodian to
the SA Trust, Investors Bank receives fees, computed and paid monthly, in the
aggregate, of 0.03% on an annual basis of the average daily net assets of all
the portfolios and funds for which Investors Bank acts as custodian up to $500
million and 0.02% on an annual basis of such average daily net assets for the
next $500 million and 0.01% on an annual basis of such average daily net assets
which exceed $1 billion.
SPONSOR
Touchstone Advisors, Inc., as Sponsor to the SA Trust pursuant to a Sponsor
Agreement, provides oversight of the various service providers to the SA Trust,
including the Administrator, Custodian and Transfer Agent. As Sponsor to the SA
Trust, Touchstone Advisors reserves the right to receive a sponsor fee from each
Portfolio equal on an annual basis to 0.20% of the average daily net assets of
that Portfolio for its then current fiscal year. The Sponsor Agreement may be
terminated by the Sponsor as of the end of any calendar quarter after December
31, 1997 on not less than 30 days prior written notice. The SA Trust may
terminate the Sponsor Agreement at any time on not less than 30 days prior
written notice. The Sponsor has advised the SA Trust that it will waive all fees
under the Sponsor Agreement through April 30, 1998.
ALLOCATION OF EXPENSES OF THE PORTFOLIOS
Each SAT Portfolio bears its own expenses, which generally include all costs
not specifically borne by the Advisor, the SAT Portfolio Advisors and the
Administrator. Included among a Portfolio's expenses are: costs incurred in
connection with its organization; investment management and administration fees;
sponsor fees; fees for necessary professional and brokerage services; fees for
any pricing service; the costs of regulatory compliance; and costs associated
with maintaining the SA Trust's legal existence and shareholder relations. Under
separate agreements with the SA Trust, the Sponsor has agreed to reimburse each
SAT Portfolio to the extent that the aggregate operating expenses of the
Portfolio exceed agreed upon expense limitations (the "Expense Caps"). The
Sponsor's obligation to reimburse the SA Trust of such amounts may be terminated
by the Sponsor at the end of any calendar quarter after December 31, 1997. For
more detailed information regarding the Expense Caps, see "Fee and Expense
Tables" and "Expenses of VIT Portfolios and SAT Portfolios; Expense Caps."
PURCHASE AND VALUATION
PURCHASE
Interests in the Growth & Income and Bond Portfolios are not offered to the
public and are issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of the
Securities Act of 1933 (the "1933 ACT"). Investments in the Growth & Income and
Bond Portfolios may be made only by a limited number of insurance company
separate accounts. This Prospectus and its accompanying Statement of Additional
Information do not constitute an offer to sell, or the solicitation of an offer
to buy, any "security" (within the meaning of the 1933 Act) of the Portfolios.
VALUATION
The net asset value of each SAT Portfolio is determined as of the close of
regular trading on the NYSE on each day on which the NYSE is open for trading,
by deducting the amount of the Portfolio's liabilities from the value of its
assets. At the close of each such business day, the value of each Sub-Account's
interest in the Portfolio will be determined by multiplying the net asset value
of the corresponding Portfolio by the percentage, effective for that day, that
represents the Sub-Account's share of the aggregate interests in that Portfolio.
Generally, a Portfolio's investments are valued at market value or, in the
absence of a market value, at fair value as determined by or under the direction
of the SA Trust's Board of Trustees.
43
<PAGE>
Securities that are primarily traded on foreign exchanges are generally
valued at the preceding closing values of the securities on their respective
exchanges, except that, when an occurrence subsequent to the time a value was so
established is likely to have changed that value, the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Board of Trustees of the SA Trust. A security that is primarily
traded on a domestic or foreign stock exchange is valued at the last sales price
on that exchange or, if no sales occurred during the day, at the current quoted
bid price. All short-term dollar-denominated investments that mature in 60 days
or less are valued on the basis of amortized cost (which involves valuing an
investment at its cost and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of fluctuating
interest rates on the market value of the investment) when the Board of Trustees
of the SA Trust has determined that amortized cost represents fair value. An
option that is written by a Portfolio is generally valued at the last sale price
or, in the absence of the last sale price, the last offer price. An option that
is purchased by a Portfolio is generally valued at the last sale price or, in
the absence of the last sale price, the last bid price. The value of a futures
contract is equal to the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract. A settlement price may
not be used if the market makes the maximum price change in a single trading
session permitted by an exchange (a "limit move") with respect to a particular
futures contract or if the securities underlying the futures contract experience
significant price fluctuations after the determination of the settlement price.
When a settlement price cannot be used, futures contracts will be valued at
their fair market value as determined by or under the direction of the Board of
Trustees of the SA Trust.
All assets and liabilities initially expressed in foreign currency values
will be converted into U.S. dollar values at the mean between the bid and
offered quotations of the currencies against U.S. dollars as last quoted by any
recognized dealer. If the bid and offered quotations are not available, the rate
of exchange will be determined in good faith by the Board of Trustees of the SA
Trust. In carrying out the valuation policies of the Board of Trustees of the SA
Trust, independent pricing services may be consulted. Further information
regarding the SA Trust's valuation policies is contained in the Statement of
Additional Information.
ADDITIONAL INFORMATION
DESCRIPTION OF BENEFICIAL INTERESTS, VOTING RIGHTS AND LIABILITIES
Each investor in an SAT Portfolio, including the corresponding Sub-Account,
may add to or reduce its investment in the Portfolio on each day the Portfolio
determines its net asset value. At the close of each such business day, the
value of each investor's beneficial interest in the Portfolio will be determined
by multiplying the net asset value of the Portfolio by the percentage, effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals, which are to be
effected as of the close of business on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be re-computed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of business on such day plus or minus, as the case may be, the amount of
the net additions to or withdrawals from the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as of the close of business on the following business day.
The SA Trust was organized as a trust under the laws of the State of New
York pursuant to a Declaration of Trust dated February 7, 1994, at which time
the SAT Portfolios were established and designated as a separate series of this
SA Trust. The Declaration of Trust provides that the Sub- Account and other
entities investing in the Portfolios (E.G., other insurance company separate
accounts) will each be liable for all obligations of the corresponding
Portfolio. However, the risk of a Sub-Account incurring financial loss on
account of such liability is limited to circumstances in which both inadequate
insurance existed and the corresponding Portfolio itself was unable to meet its
obligations. Accordingly, the Trustees of the SA Trust believe that neither the
Sub-Account nor its Owners
44
<PAGE>
having Contract Value therein will for this reason be adversely affected as a
result of the Sub- Account investing in the Portfolios. The interests in SA
Trust are divided into separate series. No series of SA Trust has any preference
over any other series.
Each Sub-Account will be involved only in votes that affect the
corresponding SAT Portfolio. Owners investing in Sub-Accounts that are, in turn,
investing in the SAT Portfolios will, however, vote with other investors in all
of the SA Trust's Portfolios (of which there are seven) to elect Trustees of the
SA Trust and for certain other matters. Under certain circumstances the
investors of one or more series of the SA Trust (including the SAT Portfolios)
could control the outcome of these votes. Holders of interests in each Portfolio
will vote separately on matters affecting only that Portfolio. Under certain
circumstances, other investors in a Portfolio could control the outcome of these
votes.
The Variable Account sends to each shareholder a semi-annual report and an
audited annual report. At least one such report will include a list of the
investment securities held by the SAT Portfolios. See "Statements to Contract
Owners."
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the Variable
Account's Statement of Additional Information and in the Variable Account's
official sales literature in connection with the offering of interests in the
Contracts, and if given or made, such other information or representations must
not be relied upon as having been authorized by the Variable Account. This
Prospectus does not constitute an offer in any state in which, or to any person
to whom, such offer may not lawfully be made.
45
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I - Discussion Regarding the Variable Annuity Contracts.............................................. 1
Part II - Discussion Regarding the Select Advisors Portfolios............................................. 5
Summary................................................................................................. 5
Investment Objectives, Techniques, Policies and Restrictions............................................ 5
Investment Objectives................................................................................. 5
Investment Techniques................................................................................. 6
Investment Restrictions............................................................................... 19
Valuation of Securities; Redemption in Kind............................................................. 25
Management of the SA Trust.............................................................................. 27
Organization of the SA Trust............................................................................ 32
Taxation................................................................................................ 32
Financial Statements.................................................................................... 33
</TABLE>
46
<PAGE>
- --------------------------------------------------------------------------------
T O U C H S T O N E
-----------------------------------------
FORM 7127-9711 THE MARK OF EXCELLENCE IN INVESTMENT MANAGEMENT-SM-
DISTRIBUTOR
Touchstone Securities, Inc.
318 Broadway
Cincinnati, Ohio 45202
(800) 669-2796
INVESTMENT ADVISOR & SPONSOR
Touchstone Advisors, Inc.
318 Broadway
Cincinnati, Ohio 45202
VARIABLE ANNUITY SERVICE CENTER
Touchstone Variable Annuity Service Center
P.O. Box 419707
Kansas City, Missouri 64179-0819
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
312 Walnut Street
Cincinnati, Ohio 45202
LEGAL COUNSEL
Frost & Jacobs
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
<PAGE>
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,
1997 (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 (press 2) or by written request to the
Company at 400 Broadway, Cincinnati, Ohio 45202.
The date of this
Statement of Additional Information
is
May 1, 1997
FORM 7136-9705
<PAGE>
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
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................. 5
INVESTMENT OBJECTIVES........................................................ 5
INVESTMENT TECHNIQUES........................................................ 6
Certificates of Deposit and Bankers' Acceptances........................ 6
Commercial Paper........................................................ 6
Lower-Rated Debt Securities............................................. 6
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.................................................. 9
Options on Futures Contracts....................................... 11
Options on Foreign Currencies...................................... 12
Additional Risks of Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies................... 13
Options on Securities................................................... 15
Options on Securities Indexes........................................... 17
Forward Currency Contracts.............................................. 17
Rating Services......................................................... 19
INVESTMENT RESTRICTIONS......................................................19
Fundamental Policies.................................................... 19
Additional Restrictions................................................. 20
Portfolio Transactions and Brokerage Commissions........................ 23
VALUATION OF SECURITIES; REDEMPTION IN KIND..................................25
i
<PAGE>
MANAGEMENT OF THE SA TRUST...................................................27
Trustees of the SA Trust................................................ 27
Officers of the SA Trust................................................ 28
Trustee Compensation Table.............................................. 29
Advisor, Portfolio Advisors, Administrator and Sponsor.................. 29
Advisor............................................................ 29
Portfolio Advisors................................................. 30
Administrator, Fund Accounting Agent,
Custodian and Transfer Agent................................... 30
Sponsor............................................................ 31
Counsel and Independent Accountants................................ 32
ORGANIZATION OF THE SA TRUST.................................................32
TAXATION.....................................................................32
Taxation of the Portfolios.............................................. 32
Sub-Account Diversification............................................. 32
FINANCIAL STATEMENTS.........................................................33
ii
<PAGE>
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 CSC Continuum, 301 West
11th Street, Kansas City, Missouri 64105 ("CSC"). Pursuant to this agreement,
CSC acts as recordkeeping agent for the Company with respect to the Contracts
and the Separate Account. Under the agreement, CSC maintains certain records
regarding the Contracts and assists the Company in administering the daily
operations of the Variable Account and other separate accounts of the Company.
The Company paid CSC $266,794, $444,324 and $356,801 for services rendered
during the years ended December 31, 1994, 1995 and 1996, respectively, pursuant
to the terms of the agreement.
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, Inc. The offering of the Contracts
<PAGE>
is continuous, and the Company does not anticipate discontinuing offering the
Contracts, although it reserves the right to do so.
SUB-ACCOUNT PERFORMANCE
The performance of the Sub-Accounts may be quoted or advertised by the
Company in various ways. All performance information supplied by the Company in
advertising is based upon historical results of the Sub-Accounts and the
Portfolios and is not intended to indicate future performance of either one.
Total returns and other performance information may be quoted numerically or in
a table, graph or similar illustration. The value of an Accumulation Unit and
total returns fluctuate in response to market conditions, interest rates and
other factors.
Average annual total returns are calculated by determining the average
annual compounded rates of return over one, five and ten year periods (or since
commencement of operations) that would equate an initial hypothetical investment
to the ending redeemable value according to the following formula:
P (1 + T)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
2
<PAGE>
The following table sets forth the total return data for each of the
Sub-Accounts of the type that will be used in advertising, in each case for the
period ended December 31, 1996.
<TABLE>
<CAPTION>
Type of Emerging International Income Standby Growth &
Performance Growth Equity Balanced Opportunity Income Income Bond
Data Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
- ---- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Return 6.78% 7.08% 12.34% 22.86% 0.89% 10.52% -1.77%
For Year
Total Return 10.28% 10.58% 15.90% 26.36% 4.39% 14.02% 1.73%
For Year
Measured By
Change In
Accumulation
Unit Value**
Average 10.67% 8.52% 14.99% 23.23% 0.60% 16.58% 3.95%
Annual Total
Return Since
Inception*
Total Return 29.48% 24.76% 39.30% 58.87% 8.20% 42.91% 15.06%
Since Inception
Measured by
Change in
Accumulation
Unit Value**
</TABLE>
* Based on a period beginning February 28, 1995.
** Calculated by determining the change in the Accumulation Unit Value from
the beginning of the period to the end of the period and dividing such
amount by the Accumulation Unit Value at the end of the period.
While average annual total returns are convenient means of comparing
investment alternatives, investors should realize that any Sub-Account's
performance is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of any Sub-Account.
Average annual total return is calculated as required by applicable
regulations. In addition to average annual total returns, a Sub-Account may
quote cumulative total returns reflecting the simple change in value of any
investment over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount.
"Total return" or "average annual total return" quoted in advertising
reflects all aspects of a Sub Account's return, including the effect of
reinvestment by the Variable Account of Portfolio income and capital gain
distributions and any change in the Sub-Account's value over the applicable
period. Such quotations reflect Contract Maintenance, Contract Administration
and Mortality and Expense Risk Charges. Since the Contract is intended as a
long-term investment, total return calculations will assume that no partial
withdrawals from the hypothetical Contract occurred during the applicable
period.
3
<PAGE>
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.
The Company may advertise examples of the effects of dollar cost averaging,
whereby an Owner periodically invests a fixed dollar amount in a Sub-Account,
thereby purchasing fewer Accumulation Units when prices are high and more
Accumulation Units when prices are low. While such a strategy does not assure a
profit nor guard against a loss in a declining market, the Owner's average cost
per Accumulation Unit can be lower than if fixed numbers of Accumulation Units
had been purchased at the same intervals. In evaluating dollar cost averaging,
Owners should consider their ability to continue purchasing Accumulation Units
during periods of low price levels.
Performance information for any Sub-Account may be compared, in reports to
Owners and in advertising, to stock indices, other variable annuity separate
accounts or other products tracked by Lipper Analytical Services, or other
widely used independent research firms which rank variable annuities and
investment companies by overall performance, investment objectives and assets.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges and investment management costs.
FIXED ANNUITY INCOME PAYMENTS
The Contracts provide only for fixed annuity 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.
4
<PAGE>
INDEPENDENT ACCOUNTANTS
The Statement of Net Assets of Western-Southern Life Assurance Company
Separate Account 2 as of December 31, 1996, the Statement of Operations and
Changes in Net Assets, for the year Ended December 31, 1996 and the period
from February 23, 1995 to December 31, 1995, 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.
As disclosed in the Prospectus, Touchstone Advisors, Inc. (the "ADVISOR")
is the investment advisor of each Portfolio, and the specific investments of
each Portfolio are managed on a day-to-day basis by their respective investment
advisors (collectively, the "PORTFOLIO ADVISORS"). Investors Bank & Trust
Company ("INVESTORS BANK" or the "ADMINISTRATOR") serves as administrator and
fund accounting agent to each Portfolio.
INVESTMENT OBJECTIVES, TECHNIQUES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objective(s) of each Sub-Account is described in the
Prospectus. There can be no assurance that any Sub-Account will achieve its
investment objective(s). See THE VI TRUST AND THE SA TRUST in the Prospectus.
5
<PAGE>
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 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
6
<PAGE>
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.
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.
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The Advisor and each Portfolio Advisor anticipate that the market for certain
restricted securities such as institutional commercial paper will expand further
as a result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc.
Each Portfolio Advisor will monitor the liquidity of Rule 144A securities
in the respective Portfolio's portfolio under the supervision of the SA Trust's
Board of Trustees. In reaching liquidity decisions, each Portfolio Advisor will
consider, among other things, the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers and other
potential purchasers wishing to purchase or sell the security; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and of the marketplace trades (e.g., the time needed to dispose of the security,
the method of soliciting offers and the mechanics of the transfer).
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING EASTERN EUROPE
Investments in companies domiciled in Eastern European countries may be
subject to potentially greater risks than those of other foreign issuers. These
risks include: (i) potentially less social, political and economic stability;
(ii) the small current size of the markets for such securities and the low
volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Portfolios'
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the Commonwealth of Independent States.
So long as the Communist Party continues to exercise a significant or,
in some cases, dominant role in Eastern European countries, investments
in such countries will involve risks of nationalization, expropriation and
confiscatory taxation. The former communist governments of a number of Eastern
European countries expropriated large amounts of private property in the past,
in many cases without adequate compensation, and there may be no assurance that
such expropriation will not occur in the future at the hands of either an
existing non-communist regime or upon the return to power of the Communist
Party. In the event of such expropriation, a Portfolio could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to the Portfolio's shareholders.
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LENDING PORTFOLIO SECURITIES
By lending its securities, a Portfolio can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or obtaining yield in the
form of interest paid by the borrower when U.S. Government obligations are used
as collateral. There may be risks of delay in receiving additional collateral
or risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. Each
Portfolio will adhere to the following conditions whenever its securities are
loaned: (i) the Portfolio must receive at least 100 percent cash collateral or
equivalent securities from the borrower; (ii) the borrower must increase this
collateral whenever the market value of the securities loaned, including accrued
interest, rises above the value of the collateral; (iii) the Portfolio must be
able to terminate the loan at any time; (iv) the Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities, and any increase in market value; (v)
the Portfolio may pay only reasonable custodian fees in connection with the
loan; and (vi) voting rights on the loaned securities may pass to the borrower;
provided, however, that if a material event adversely affecting the investment
occurs, the Board of Trustees must terminate the loan and regain the right to
vote the securities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL
The successful use of futures contracts and options on futures contracts
draws upon the Portfolio Advisor's skill and experience with respect to such
instruments and usually depends on the Portfolio Advisor's ability to forecast
interest rate and currency exchange rate movements correctly. Should interest
or exchange rates move in an unexpected manner, an SAT Portfolio may not achieve
the anticipated benefits of futures contracts or options on futures contracts or
may realize losses and thus will be in a worse position than if such strategies
had not been used. In addition, the correlation between movements in the price
of futures contracts or options on futures contracts and movements in the price
of the securities and currencies hedged or used for cover will not be perfect
and could produce unanticipated losses.
FUTURES CONTRACTS
An SAT Portfolio may enter into contracts for the purchase or sale for
future delivery of fixed-income securities or foreign currencies, or contracts
based on financial indices including any index of U.S. Government securities,
foreign government securities or corporate debt securities. U.S. futures
contracts have been designed by exchanges which have been designated "contracts
markets" by the Commodity Futures Trading Commission ("CFTC"), and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on a number of
exchange markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange. An SAT Portfolio may enter into futures contracts which are based on
debt securities that are backed by the full faith and credit of the U.S.
Government, such as long-term U.S. Treasury bonds, Treasury Notes, Government
National Mortgage Association ("GNMA") modified pass-through mortgage-backed
securities and three-month U.S. Treasury bills. An SAT Portfolio may also enter
into futures contracts which are based on bonds issued by entities other than
the U.S. Government.
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At the same time a futures contract is purchased or sold, the SAT Portfolio
must allocate cash or securities as a deposit payment ("INITIAL DEPOSIT"). It
is expected that the initial deposit would be approximately 1-1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by
buying (or selling, as the case may be) on a commodities exchange an identical
futures contract calling for delivery in the same month. Such a transaction,
which is effected through a member of an exchange, cancels the obligation to
make or take delivery of the securities. Since all transactions in the futures
market are made, offset or fulfilled through a clearinghouse associated with the
exchange on which the contracts are traded, the SAT Portfolio will incur
brokerage fees when it purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the case
of an SAT Portfolio which holds or intends to acquire fixed-income securities,
is to attempt to protect the Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income securities or
foreign currencies. For example, if interest rates were expected to increase,
the Portfolio might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling an
equivalent value of the debt securities owned by the Portfolio. If interest
rates did increase, the value of the debt security in the Portfolio would
decline, but the value of the futures contracts to the Portfolio would increase
at approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. The Portfolio
could accomplish similar results by selling debt securities and investing in
bonds with short maturities when interest rates are expected to increase.
However, since the futures market is more liquid than the cash market, the use
of futures contracts as an investment technique allows the Portfolio to maintain
a defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of
futures contracts should be similar to those of debt securities, an SAT
Portfolio could take advantage of the anticipated rise in the value of debt
securities without actually buying them until the market had stabilized. At
that time, the futures contracts could be liquidated and the Portfolio could
then buy debt securities on the cash market. When a Portfolio enters into a
futures contract for any purpose, the Portfolio will establish a segregated
account with the Portfolio's custodian to collateralize or "cover" the
Portfolio's obligation consisting of cash or liquid securities from its
portfolio in an amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value
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of the initial and variation margin payments made by the Portfolio with respect
to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Portfolio Advisor may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although each applicable
Portfolio Advisor believes that use of such contracts will benefit the
respective Portfolio, if the Portfolio Advisor's investment judgment about the
general direction of interest rates is incorrect, a Portfolio's overall
performance would be poorer than if it had not entered into any such contract.
For example, if an SAT Portfolio has hedged against the possibility of an
increase in interest rates which would adversely affect the price of debt
securities held in its portfolio and interest rates decrease instead, the
Portfolio will lose part or all of the benefit of the increased value of its
debt securities which it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if a Portfolio has
insufficient cash, it may have to sell debt securities from its portfolio to
meet daily variation margin requirements. Such sales of bonds may be, but will
not necessarily be, at increased prices which reflect the rising market. An SAT
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
OPTIONS ON FUTURES CONTRACTS
Each SAT Portfolio may purchase and write options on futures contracts for
hedging purposes. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the price
of the futures contract upon which it is based or the price of the underlying
debt securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of futures
contracts, when an SAT Portfolio is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, an SAT Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Portfolio's holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security
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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 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.
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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 and
liquid securities in a segregated account with its custodian.
Each SAT Portfolio also may write call options on foreign currencies that
are not covered for cross-hedging purposes. A call option on a foreign currency
is for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. dollar value of a security which the
Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange rate.
In such circumstances, the Portfolio collateralizes the option by maintaining in
a segregated account with its custodian, cash or liquid securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES
Unlike transactions entered into by a Portfolio in futures contracts,
options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
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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
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transaction. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting an SAT Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery or
currency, the fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which may not
be present in the case of exchange-traded currency options. An SAT Portfolio's
ability to terminate over-the-counter options will be more limited than with
exchange-traded options. It is also possible that broker-dealers participating
in over-the-counter options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, each Portfolio
will treat purchased over-the-counter options and assets used to cover written
over-the-counter options as illiquid securities. With respect to options
written with primary dealers in U.S. Government securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the
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risk of governmental actions affecting trading in or the prices of foreign
currencies or securities. The value of such positions also could be adversely
affected by: (i) other complex foreign political and economic factors; (ii)
lesser availability than in the United States of data on which to make trading
decisions; (iii) delays in the Portfolio's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States; (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States; and (v) lesser trading volume.
OPTIONS ON SECURITIES
The SAT Portfolios may write (sell), to a limited extent, only covered call
and put options ("COVERED OPTIONS") in an attempt to increase income. However,
the Portfolio may forgo the benefits of appreciation on securities sold or may
pay more than the market price on securities acquired pursuant to call and put
options written by the Portfolio.
When an SAT Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the price specified in
the option (the "EXERCISE PRICE") by exercising the option at any time during
the option period. If the option expires unexercised, the Portfolio will
realize income in an amount equal to the premium received for writing the
option. If the option is exercised, a decision over which the SAT Portfolio has
no control, the Portfolio must sell the underlying security to the option holder
at the exercise price. By writing a covered call option, the Portfolio forgoes,
in exchange for the premium less the commission ("NET PREMIUM"), the opportunity
to profit during the option period from an increase in the market value of the
underlying security above the exercise price.
When an SAT Portfolio writes a covered put option, it gives the purchaser
of the option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which the SAT Portfolio has no control, the Portfolio must
purchase the underlying security from the option holder at the exercise price.
By writing a covered put option, the Portfolio, in exchange for the net premium
received, accepts the risk of a decline in the market value of the underlying
security below the exercise price.
An SAT Portfolio may terminate its obligation as the writer of a call or
put option by purchasing an option with the same exercise price and expiration
date as the option previously written. This transaction is called a "closing
purchase transaction." Where the Portfolio cannot effect a closing purchase
transaction, it may be forced to incur brokerage commissions or dealer spreads
in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.
When an SAT Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to reflect
the current market value of the option written. The current market value of a
traded option is the last sale price or, in the absence of a sale, the mean
between the closing bid and asked price. If an option expires on its stipulated
expiration date or if the Portfolio
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enters into a closing purchase transaction, the Portfolio will realize a gain
(or loss if the cost of a closing purchase transaction exceeds the premium
received when the option was sold), and the deferred credit related to such
option will be eliminated. If a call option is exercised, the SAT Portfolio
will realize a gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the premium originally received. The
writing of covered call options may be deemed to involve the pledge of the
securities against which the option is being written.
When an SAT Portfolio writes a call option, it will "cover" its obligation
by segregating the underlying security on the books of the Portfolio's custodian
or by placing liquid securities in a segregated account at the Portfolio's
custodian. When an SAT Portfolio writes a put option, it will "cover" its
obligation by placing liquid securities in a segregated account at the
Portfolio's custodian.
An SAT Portfolio may purchase call and put options on any securities in
which it may invest. The Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The
purchase of a call option would entitle the Portfolio, in exchange for the
premium paid, to purchase a security at a specified price during the option
period. The Portfolio would ordinarily have a gain if the value of the
securities increased above the exercise price sufficiently to cover the premium
and would have a loss if the value of the securities remained at or below the
exercise price during the option period.
An SAT Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("PROTECTIVE PUTS")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell a security, which may or may not be held in the Portfolio's portfolio, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
SAT Portfolio's portfolio securities. Put options also may be purchased by the
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. The Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
Each SAT Portfolio has adopted certain other nonfundamental policies
concerning option transactions which are discussed below. The Portfolio's
activities in options may also be restricted by the requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. It is impossible to
predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
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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. The absence of a liquid secondary market to close out
options positions on securities indexes is more likely to occur, although the
SAT Portfolio generally will only purchase or write such an option if the
Portfolio Advisor believes the option can be closed out.
Use of options on securities indexes also entails the risk that trading in
such options may be interrupted if trading in certain securities included in the
index is interrupted. An SAT Portfolio will not purchase such options unless
the Advisor and the respective Portfolio Advisor each believes the market is
sufficiently developed such that the risk of trading in such options is no
greater than the risk of trading in options on securities.
Price movements in an SAT Portfolio's portfolio may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indexes cannot serve as a complete hedge. Because options on securities indexes
require settlement in cash, the Portfolio Advisor may be forced to liquidate
portfolio securities to meet settlement obligations.
When a Portfolio writes a put or call option on a securities index it will
cover the position by placing liquid securities in a segregated asset account
with the Portfolio's custodian.
FORWARD CURRENCY CONTRACTS
Because, when investing in foreign securities, a Portfolio buys and sells
securities denominated in currencies other than the U.S. dollar and receives
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
such Portfolios from time to time may enter into forward currency transactions
to convert to and from different foreign currencies and to
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convert foreign currencies to and from the U.S. dollar. A Portfolio either
enters into these transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market or uses forward currency
contracts to purchase or sell foreign currencies.
A forward currency contract is an obligation by a Portfolio to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract. Forward currency contracts establish an exchange
rate at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward currency contract generally has no deposit
requirement and is traded at a net price without commission. Each SAT Portfolio
maintains with its custodian a segregated account of liquid securities in an
amount at least equal to its obligations under each forward currency contract.
Neither spot transactions nor forward currency contracts eliminate fluctuations
in the prices of the Portfolio's securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
An SAT Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into a Portfolio Advisor's long-term
investment decisions, an SAT Portfolio will not routinely enter into foreign
currency hedging transactions with respect to security transactions. However,
the Portfolio Advisors believe that it is important to have the flexibility to
enter into foreign currency hedging transactions when it determines that the
transactions would be in a Portfolio's best interest. Although these
transactions tend to minimize the risk of loss due to a decline in the value of
the hedged currency, at the same time they tend to limit any potential gain that
might be realized should the value of the hedged currency increase. The precise
matching of the forward currency contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward currency
contract is entered into and the date it matures. The projection of currency
market movements is extremely difficult, and the successful execution of a
hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward currency contracts. In such
event the SAT Portfolio's ability to utilize forward currency contracts in the
manner set forth in the Prospectus may be restricted. Forward currency
contracts may reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the
Portfolio than if it had not entered into such contracts. The use of forward
currency contracts may not eliminate fluctuations in the underlying U.S. dollar
equivalent value of the prices of or rates of return on a Portfolio's foreign
currency denominated portfolio securities and the use of such techniques will
subject a Portfolio to certain risks.
The matching of the increase in value of a forward currency contract and
the decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedge generally will not be
precise. In addition, a Portfolio may not always be able to enter
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into forward currency contracts at attractive prices and this will limit the SAT
Portfolio's ability to use such contract to hedge or cross-hedge its assets.
Also, with regard to a Portfolio's use of cross-hedges, there can be no
assurance that historical correlations between the movement of certain foreign
currencies relative to the U.S. dollar will continue. Thus, at any time poor
correlation may exist between movements in the exchange rates of the foreign
currencies underlying a Portfolio's cross-hedges and the movements in the
exchange rates of the foreign currencies in which the Portfolio's assets that
are the subject of such cross-hedges are denominated.
RATING SERVICES
The ratings of 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 the ratings used herein and in the Funds' Prospectuses is set
forth in the Appendix to this Statement of Additional Information.
INVESTMENT RESTRICTIONS
The investment restrictions described below as "fundamental policies" of
each SAT Portfolio may not be changed with respect to any Portfolio without the
approval of a "majority of the outstanding voting securities" of the SAT
Portfolio. "MAJORITY OF THE OUTSTANDING VOTING SECURITIES" under the Investment
Company Act of 1940, as amended (the "1940 ACT"), and as used in this Statement
of Additional Information and the Prospectus, means, with respect to the
Portfolio, the lesser of (i) 67% or more of the outstanding voting securities of
the Portfolio present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Portfolio are present or represented by
proxy or (ii) more than 50% of the outstanding voting securities of the
Portfolio.
FUNDAMENTAL POLICIES
As a matter of fundamental policy, no SAT Portfolio may (except that no
investment restriction of a Portfolio shall prevent a Portfolio from investing
all of its assets in an open-end investment company with substantially the same
investment objectives):
(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
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assets to secure such borrowings, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes of this
restriction and except that assets may be pledged to secure letters of credit
solely for the purpose of participating in a captive insurance company sponsored
by the Investment Company Institute; for additional related restrictions, see
clause (i) under the caption "Additional Restrictions" below;
(2) 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 (except that
the Portfolio may hold and sell, for its portfolio, real estate acquired as a
result of the Portfolio's ownership of securities);
(5) 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 total assets taken at market value, invest
in assets other than cash and cash items (including receivables), U.S.
Government securities, securities of other investment companies, and other
securities for purposes of this calculation limited in respect of any one issuer
to an amount not greater in value than 5% of the value of the total assets of
the Portfolio and to not more than 10% of the outstanding voting securities of
such issuer.
ADDITIONAL RESTRICTIONS
Neither SAT Portfolio will, as a matter of operating policy (changeable by
the respective Board of Trustees without a shareholder vote) (except that no
operating policy shall prevent a Portfolio from investing all of its assets in
an open-end investment company with substantially the same investment
objectives), do any of the following:
(i) borrow money (including through reverse repurchase agreements or
forward roll transactions involving mortgage-backed securities or
similar investment techniques
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entered into for leveraging purposes), except that the Portfolio may
borrow for temporary or emergency purposes up to 10% of its total
assets; provided, however, that no Portfolio may purchase any security
while outstanding borrowings exceed 5%;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of the
Portfolio's total assets (taken at market value), provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, and reverse
repurchase agreements are not considered a pledge of assets for
purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin, except
that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that
deposits of initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of futures;
(iv) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to
obtain securities, without payment of further consideration, equivalent
in kind and amount to the securities sold and provided that if such
right is conditional the sale is made upon the same conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by purchase
in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Portfolio if such purchase at the time thereof would
cause: (a) more than 10% of the Portfolio's total assets (taken at the
greater of cost or market value) to be invested in the securities of
such issuers; (b) more than 5% of the Portfolio's total assets (taken
at the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio; provided
further that, except in the case of a merger or consolidation, the
Portfolio shall not purchase any securities of any open-end investment
company unless the Portfolio (1) waives the investment advisory fee,
with respect to assets invested in other open-end investment companies
and (2) incurs no sales charge in connection with the investment;
(vii) invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid or not
readily marketable (defined as a security that cannot be sold in the
ordinary course of business within seven days at approximately the
value at which the Portfolio has valued the security) excluding (a)
Rule 144A securities determined to be liquid by the Board of Trustees
of the SA Trust; and (b) commercial paper that is sold under Section
4(2) of the Securities Act of 1933 which is not traded flat or in
default as to interest or principal, and either (i) is rated in one of
the two highest categories by at least two nationally recognized
statistical rating organizations and the Board of Trustees of the SA
Trust have determined the
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commercial paper to be liquid; or (ii) is rated in one of the two
highest categories by one nationally recognized statistical rating
agency and the Board of Trustees of the SA Trust have determined that
the commercial paper is equivalent quality and is liquid);
(viii) invest more than 5% of the Portfolio's total assets in securities
issued by issuers that (including the period of operation of any
predecessor or unconditional guarantor of such issuer) have been in
operation less than three years;
(ix) invest more than 10% of the Portfolio's total assets in securities that
are restricted from being sold to the public without registration under
the Securities Act of 1933 (other than Rule 144A securities deemed to
be liquid by the Trustees of the SA Trust);
(x) purchase securities of any issuer if such purchase at the time thereof
would cause the Portfolio to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an
issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(xi) purchase or retain in the Portfolio's portfolio any securities issued
by an issuer any of whose officers, directors, trustees or security
holders is an officer or Trustee of the SA Trust, or is an officer or
partner of the Advisor, if after the purchase of the securities of such
issuer for the Portfolio one or more of such persons owns beneficially
more than 1/2 of 1% of the shares or securities, or both, all taken at
market value, of such issuer, and such persons owning more than 1/2 of
1% of such shares or securities together own beneficially more than 5%
of such shares or securities, or both, all taken at market value;
(xii) invest more than 5% of the Portfolio's net assets in warrants (valued
at the lower of cost or market) (other than warrants acquired by the
Portfolio as part of a unit or attached to securities at the time of
purchase), but not more than 2% of the Portfolio's net assets may be
invested in warrants not listed on the New York Stock Exchange Inc.
("NYSE") or the American Stock Exchange;
(xiii) make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
and equal in amount to, the securities sold short, and unless not more
than 10% of the Portfolio's net assets (taken at market value) is
represented by 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
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and the option is issued by the OCC, except for put and call options
issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate value of the obligations
underlying the puts determined as of the date the options are sold
shall not exceed 50% of the Portfolio's net assets; (c) the securities
subject to the exercise of the call written by the Portfolio must be
owned by the Portfolio at the time the call is sold and must continue
to be owned by the Portfolio until the call has been exercised, has
lapsed, or the Portfolio has purchased a closing call, and such
purchase has been confirmed, thereby extinguishing the Portfolio's
obligation to deliver securities pursuant to the call it has sold; and
(d) at the time a put is written, the Portfolio establishes a
segregated account with its custodian consisting of cash or liquid
securities equal in value to the amount the Portfolio will be obligated
to pay upon exercise of the put (this account must be maintained until
the put is exercised, has expired, or the Portfolio has purchased a
closing put, which is a put of the same series as the one previously
written); and
(xvi) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on
financial futures unless such options are written by other persons and:
(a) the options or futures are offered through the facilities of a
national securities association or are listed on a national securities
or commodities exchange, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Portfolio's total net
assets; and (c) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the
Portfolio's total assets.
Each Portfolio also will comply with the applicable investment limitations
found in the laws and regulations of any state in which the corresponding
Sub-Account investing in the Portfolio is registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Portfolio Advisors for the SAT Portfolios are responsible for decisions
to buy and sell securities, futures contracts and options on such securities and
futures for each SAT Portfolio, the selection of brokers, dealers and futures
commission merchants to effect transactions and the negotiation of brokerage
commissions, if any. Broker-dealers may receive brokerage commissions on
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon the
exercise of 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.
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The Portfolio Advisors seek to evaluate the overall reasonableness of any
brokerage commissions paid through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions. In placing orders for the purchase and sale
of securities for a Portfolio taking into account such factors as price,
commission (if any, negotiable in case of national securities exchange
transactions), size of order, difficulty of execution and skill required of the
executing broker-dealer. The Portfolio Advisors review on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Portfolio Advisors are authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio transactions
for a Portfolio with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. A Portfolio Advisor may use this research
information in managing an SAT Portfolio's assets, as well as the assets of
other clients.
Consistent with the policy stated above, the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and such other policies as the
Board of Trustees may determine, the Portfolio Advisors may consider sales of
shares of the SA Trust and of other investment company clients of the Advisor or
the Portfolio Advisor as a factor in the selection of broker-dealers to execute
portfolio transactions. The Portfolio Advisor will make such allocations if
commissions are comparable to those charged by nonaffiliated, qualified
broker-dealers for similar services.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders are
placed with the principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are available
otherwise.
Although certain research, market and statistical information from brokers
and dealers can be useful to a Portfolio and to the corresponding Portfolio
Advisor, it is the opinion of the management of the Portfolios that such
information is only supplementary to the Portfolio Advisor's own research
effort, since the information must still be analyzed, weighed and reviewed by
the Portfolio Advisor's staff. Such information may be useful to the Portfolio
Advisor in providing services to clients other than the SAT Portfolios, and not
all such information is used by the Portfolio Advisor in connection with such
Portfolios. Conversely, such information provided to the Portfolio Advisor by
brokers and dealers through whom other clients of the Portfolio Advisor effect
securities transactions may be useful to the Portfolio Advisor in providing
services to the Portfolios.
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In certain instances there may be securities which are suitable for an SAT
Portfolio as well as for one or more of the Advisor's other clients, including
Portfolios of the SA Trust that are not available to the Sub-Accounts.
Investment decisions for a Portfolio and for the Portfolio Advisor's other
clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for
only one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment advisor, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as a Portfolio is
concerned. However, it is believed that the ability of a Portfolio to
participate in volume transactions will produce better executions for the
Portfolio.
For the period November 21, 1994 (commencement of operations) to December
31, 1994, and for the fiscal years ended December 31, 1995 and 1996, the
aggregate brokerage commissions paid by each Portfolio is as follows:
Growth & Income Bond
Aggregate Commissions Portfolio Portfolio
- --------------------- --------- ---------
Period Ended December 31,
1996 $40,690 None
1995 $30,788 None
1994 $ 4,982 None
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.
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The accounting records of the Portfolios are maintained in U.S. dollars.
The market value of investment securities, other assets and liabilities and
forward contracts denominated in foreign currencies are translated into U.S.
dollars at the prevailing exchange rates at the end of the period. Purchases
and sales of securities, income receipts, and expense payments are translated at
the exchange rate prevailing on the respective dates of such transactions.
Reported net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, currency gains and losses realized
between the trade and settlement dates on securities transactions and the
difference between the amount of net investment income accrued and the U.S.
dollar amount actually received.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the:
type of security involved, financial statements, cost at
date of purchase, size of holding, discount from market
value of unrestricted securities of the same class at the
time of purchase, special reports prepared by analysts,
information as to any transactions or offers with respect to
the security, existence of merger proposals or tender offers
affecting the security, price and extent of public trading
in similar securities of the issuer or comparable companies,
and other relevant matters.
To the extent that an SAT Portfolio purchases securities which are
restricted as to resale or for which current market quotations are not
available, the Portfolio Advisor will value such securities based upon all
relevant factors as outlined in FRR 1.
Each SAT Portfolio reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the SA Trust or the Portfolio, as the case may be, and valued as they are for
purposes of computing the Portfolio's net asset value (a redemption in kind).
If payment is made in securities, an investor, including the corresponding
Sub-Account, may incur transactions expenses in converting these securities into
cash. The SA Trust, on behalf of each Portfolio, has elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which each Portfolio is
obligated to redeem shares or beneficial interests, as the case may be, with
respect to any one investor during any 90-day period, solely in cash up 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
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representing that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or reductions which are to be effected on that day
will then be effected. The investor's percentage of the aggregate beneficial
interests in a Portfolio will then be recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of 4:00 p.m. on such day plus or minus, as the case may be,
the amount of net additions to or reductions in the investor's investment in the
Portfolio effected on such day and (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of 4:00 p.m. on such day plus or
minus, as the case may be, the amount of net additions to or reductions in the
aggregate investments in the Portfolio by all investors in the Portfolio. The
percentage so determined will then be applied to determine the value of the
investor's interest in the Portfolio as of 4:00 p.m. on the following day the
NYSE is open for trading.
MANAGEMENT OF THE SA TRUST
The Trustees and officers of the SA Trust and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those Trustees who are "interested
persons" (as defined in the 1940 Act) of the SA Trust. Unless otherwise
indicated, the address of each Trustee and officer is 311 Pike Street,
Cincinnati, Ohio 45202. The Trustees and officers of the SA Trust also serve in
the same positions with the VI Trust and with two affiliated trusts of the SA
Trust, the Select Advisors Trust A and Select Advisors Trust C ("the "Fund
Complex").
TRUSTEES OF THE SA TRUST
*EDWARD G. HARNESS, JR., (Age 48) -- Chairman of the Board of Trustees,
President and Chief Executive Officer; Director, President and Chief Executive
Officer, Touchstone Advisors, Inc. (since December, 1993); Director and Chief
Executive Officer, Touchstone Securities, Inc. (since October, 1991); President,
Touchstone Securities, Inc. (since March, 1996); President, IFS Financial
Services, Inc. (since November, 1990); President, IFS Systems, Inc. (since
August, 1991).
*WILLIAM J. WILLIAMS, (Age 81) -- 400 Broadway, Cincinnati, OH 45202 --
Trustee; Chairman of the Board of Directors, The Western and Southern Life
Insurance Company (since March, 1984); Chief Executive Officer, The Western and
Southern Life Insurance Company (from March, 1984 to March, 1994).
JOSEPH S. STERN, JR., (Age 79), 3 Grandin Place, Cincinnati, OH 45208 --
Trustee; Retired Professor Emeritus, College of Business, University of
Cincinnati.
PHILLIP R. COX, (Age 49), 105 East Fourth Street, Cincinnati, OH 45202 --
Trustee; President and Chief Executive Officer, Cox Financial Corp. (since
1972); Director, Federal Reserve Bank of Cleveland; Director, Cincinnati Bell
Inc.; Director, PNC Bank; Director, Cinergy Corporation; Director, BDM
International, Inc.
ROBERT E. STAUTBERG, (Age 62), 4815 Drake Road, Cincinnati, OH 45243 --
Trustee; Chairman of the Board of Trustees, Good Samaritan Hospital; Retired
Partner and Director, KPMG Peat Marwick.
27
<PAGE>
DAVID POLLAK, (Age 79), 1313 Kemper, Suite 111, Cincinnati, OH 45246 --
Trustee; President, The Ultimate Distributing Company (1986-1993); Director
Emeritus, Fifth Third Bank.
OFFICERS OF THE SA TRUST
EDWARD S. HEENAN, (Age 53), 400 Broadway, Cincinnati, OH 45202 --
Treasurer; Vice President and Controller, Touchstone Advisors, Inc. (since
December, 1993); Director, Controller, Touchstone Securities, Inc. (since
October, 1991); Vice President and Comptroller, The Western and Southern Life
Insurance Company (since 1987).
BRIAN J. MANLEY, (Age 33), Assistant Treasurer; Vice President and Chief
Financial Officer, Touchstone Advisors, Inc. (since December, 1993); Vice
President and Chief Financial Officer, Touchstone Securities Inc.
SUSAN C. MOSHER (age 42) - Secretary; Director, Fund Administration - Legal
and Regulatory, Investors Bank (since August, 1995); Associate Counsel, 440
Financial Group of Worcester, Inc. (January, 1993 to August, 1995); Partner,
Gallagher, Callahan & Gartrell, P.A. (prior to September, 1992). Her address is
89 South Street/ADF29, Boston, MA 02111.
KEVIN M. CONNERTY (age 32) - Assistant Treasurer; Director, Fund
Administration - Reporting and Compliance, Investors Bank (since October, 1992);
Assistant Manager of Financial Reporting, The Boston Company (prior to October,
1992). His address is 89 South Street/ADF29, Boston, MA 02111.
PAUL J. JASINSKI (age 50) - Assistant Treasurer; Managing Director - Fund
Administration, Investors Bank (since July, 1985). His address is 89 South
Street/ADF29, Boston, MA 02111.
Ms. Mosher and Messrs. Connerty and Jasinski also hold similar positions
for other investment companies for which Investors Bank or an affiliate serves
as administrator or principal underwriter.
No director, officer or employee of the Advisor, the Portfolio Advisors,
the Distributor, the Administrator or any of their affiliates will receive any
compensation from the SA Trust or the VI Trust for serving as an officer or
Trustee of the SA Trust. The Fund Complex pays each Trustee who is not a
director, officer or employee of the Advisor, the Portfolio Advisors, the
Distributor, the Administrator or any of their affiliates an annual fee of
$5,000 plus $1,000 per meeting attended and reimburses them for travel and
out-of-pocket expenses. The annual and meeting fees are allocated among the
four trusts in proportion to their respective net assets. For the year ended
December 31, 1996, the SA Trust incurred $23,825 in Trustee fees and expenses.
28
<PAGE>
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation from the
Name of Person Aggregate Compensation from SA Trust Fund Complex Paid to Trustees
- -------------- ------------------------------------ -----------------------------
<S> <C> <C>
Phillip R. Cox
Trustee $5,916 $10,000
David Pollak
Trustee $5,354 $ 9,000
Robert E. Stautberg
Trustee $5,916 $10,000
Joseph S. Stern, Jr.
Trustee $5,354 $ 9,000
Edward G. Harness, Jr.
Trustee none none
William J. Williams
Trustee none none
</TABLE>
As of February 1, 1997, the Trustees and officers of the SA Trust owned in
the aggregate less than 1% of the interests of any Portfolio or the SA Trust
(all series taken together, including series in which the Sub-Accounts do not
invest).
ADVISOR, PORTFOLIO ADVISORS, ADMINISTRATOR AND SPONSOR
ADVISOR
The Advisor provides service to each Portfolio of the SA Trust pursuant to
an Investment Advisory Agreement with the SA Trust (the "ADVISORY AGREEMENT").
The services provided by the Advisor consist of directing and supervising each
Portfolio Advisor, reviewing and evaluating the performance of each Portfolio
Advisor and determining whether or not any Portfolio Advisor should be replaced.
The Advisor furnishes at its own expense all facilities and personnel necessary
in connection with providing these services. The Advisory Agreement will
continue in effect if such continuance is specifically approved at least
annually by the Board of Trustees of the SA Trust and by a majority of the
Trustees who are not parties to the Advisory Agreement or interested persons of
any such party, at a meeting called for the purpose of voting on the Advisory
Agreement.
The Advisory Agreement is terminable, with respect to a Portfolio, without
penalty on not more than 60 days' nor less than 30 days' written notice by the
SA Trust, when authorized either by majority vote of the investors in the
Portfolio (with the vote of each being in proportion to the amount of their
investment) or by a vote of a majority of the Board of Trustees or by the
Advisor, and will automatically terminate in the event of its assignment. The
Advisory Agreement provides that neither the Advisor nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in its services to the Portfolios,
except for willful misfeasance, bad faith or gross negligence or reckless
disregard of its or their obligations and duties under the Advisory Agreement.
29
<PAGE>
The Prospectus contains a description of fees payable to the Advisor for
services under the Advisory Agreement.
For the period November 21, 1994 (commencement of operations) to December
31, 1994 and for the fiscal years ended December 31, 1995 and 1996, each SAT
Portfolio incurred the following investment advisory fees equal on an annual
basis to the following percentages of the average daily net assets of the
Portfolio.
Portfolio Year Rate Amount
- --------- ---- ---- ------
Growth & Income 1996 0.75% $127,974
1995 0.75% $88,934
1994 0.75% $8,015
Bond 1996 0.55% $72,111
1995 0.55% $61,568
1994 0.55% $6,064
For the period November 21, 1994 to December 31, 1994, and for the fiscal
years ended December 31, 1995 and 1996, the Advisor, under the terms of the
Sponsor Agreement, reimbursed the Growth & Income Portfolio $14,346, $85,300 and
$34,126, and the Bond Portfolio $15,160, $69,754 and $26,226, respectively.
See "Sponsor."
PORTFOLIO ADVISORS
The Advisor has, in turn, entered into a portfolio advisory agreement (each
a "PORTFOLIO AGREEMENT") with each Portfolio Advisor selected by the Advisor for
a Portfolio. Under the direction of the Advisor and, ultimately, of the Board
of Trustees of the SA Trust, each Portfolio Advisor is responsible for making
all of the day-to-day investment decisions for the respective Portfolio.
Each Portfolio Advisor furnishes at its own expense all facilities and
personnel necessary in connection with providing these services. Each Portfolio
Agreement contains provisions similar to those described above with respect to
the Advisory Agreement.
ADMINISTRATOR, CUSTODIAN AND FUND ACCOUNTING AGENT
Pursuant to Administration and Fund Accounting Agreements, Investors Bank
supervises the overall administration of the Trust, including but not limited
to, accounting, clerical and bookkeeping services; daily calculation of net
asset values; preparation and filing of all documents required for compliance by
the Trust with applicable laws and regulations. Investors Bank also provides
persons to serve as officers of the Trust. As custodian, Investors Bank holds
cash, securities and other assets of the Trust.
The Trust's Prospectus contains a description of fees payable to Investors
Bank for its services as administrator, fund accounting agent and custodian.
30
<PAGE>
Prior to December 1, 1996, Signature Financial Services, Inc. ("Signature")
served as administrator and fund accounting agent to the Trust.
Each of the Administration, Fund Accounting and Custodian Agreements
(collectively, the "Agreements") provide that neither Investors Bank nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission, except for wilful misfeasance, bad faith or negligence (gross
negligence in respect of the Custodian Agreement) in the performance of its or
their duties or by reason of disregard (reckless disregard in respect of the
Custodian Agreement) of its or their obligations and duties under the
Agreements.
Each Agreement may not be assigned without the consent of the non-assigning
party, and may be terminated after its Initial Term, with respect to a
Portfolio, without penalty by majority vote of the shareholders of the Portfolio
or by either party on not more than 60 days' written notice.
State Street Bank and Trust Company ("State Street") serves as transfer
agent of the Trust pursuant to a transfer agency agreement. Under its transfer
agency agreement with the Trust, State Street maintains the shareholder account
records for each Fund, handles certain communications between shareholders and
the Trust and causes to be distributed any dividends and distributions payable
by the Trust. State Street may be reimbursed by the Trust for its out-of-pocket
expenses.
For the period November 21, 1994 (commencement of operations) to December
31, 1994, and for the fiscal years ended December 31, 1995 and 1996, the Growth
& Income Portfolio incurred $4,384, $46,743 and $56,786, respectively, in
administrative and fund accounting fees, including out-of-pocket expenses. For
the same periods, the Bond Portfolio incurred $4,384, $47,124 and $56,396,
respectively, in administrative and fund accounting fees, including
out-of-pocket expenses.
SPONSOR
Touchstone Advisors, Inc. serves also (in addition to its services as
Advisor to each Portfolio of the SA Trust) as the sponsor ("SPONSOR") of each
SAT Portfolio pursuant to a sponsor agreement (the "SPONSOR AGREEMENT"). Under
each Sponsor Agreement, the Sponsor provides oversight of the various service
providers to each of the SA Trust and the SAT Portfolios, including the
Administrator and the Custodian. For its services in this regard, the Sponsor
is paid a fee, on an annual basis, equal to 0.20% of the average daily net
assets of each Portfolio. The Sponsor Agreement may be terminated by the
Sponsor on not less than 30 days prior written notice and by the SA Trust, as to
any Portfolio. The Sponsor has advised the SA Trust that it will waive all fees
under the Sponsor Agreement through April 30, 1998.
31
<PAGE>
COUNSEL AND INDEPENDENT ACCOUNTANTS
Frost & Jacobs LLP, 2500 PNC Center, 201 East 5th Street, Cincinnati, Ohio
45202, serves as counsel to the SA Trust and each SAT Portfolio. Coopers &
Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109, acts as
independent accountants of the SA Trust and each SAT Portfolio.
ORGANIZATION OF THE SA TRUST
Interests in the SA Trust do not have cumulative voting rights, which means
that holders of more than 50% of such interests (which includes the interests
held by other investors in the SAT Portfolios (Growth & Income and Bond) and the
interests of other investors in Portfolios of the SA Trust that are not
available for investment by the Sub-Accounts) voting for the election of
Trustees can elect all Trustees. Accordingly, it is unlikely that Owners having
Contract Value in the Sub-Accounts that invest in the SAT Portfolios will be
able to control the election of any of the Trustees. Matters affecting the SAT
Portfolios are generally decided by separate vote of each SAT Portfolio, except
with respect to the election of Trustees and the ratification of the selection
of independent accountants.
The SA Trust, in the Portfolios of which all of the assets of the
corresponding Sub-Accounts will be invested, is organized as a trust under the
laws of the State of New York. Each Sub-Account and other entity investing in
an SAT Portfolio (e.g., other investment companies, insurance company separate
accounts and common and commingled trust funds) will each be liable for all
obligations of the Portfolio. However, the risk of a Sub-Account incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself was unable to meet
its obligations. Accordingly, the SA Trust's Trustees believe that no
Sub-Account (or any Owner having Contract Value therein) will be adversely
affected by reason of the Sub-Account's investing in the corresponding
Portfolio.
TAXATION
TAXATION OF THE PORTFOLIOS
Each of the Portfolios will be classified as a partnership for federal
income tax purposes. Furthermore, none of the Portfolios will be a "publicly
traded partnership" for purposes of Section 7704 of the Code. Consequently, the
Portfolios will not be subject to federal income 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
32
<PAGE>
is adequately diversified within the meaning of Section 817(h) of the Code. The
diversification requirement must be satisfied in order for the Contract to be
treated as an "annuity contract" under the Code.
FINANCIAL STATEMENTS
The following financial statements for Western-Southern Life Assurance
Company Separate Account 2 for 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 Separate Account 2.
(2) Statement of Net Assets of Western-Southern Life Assurance Company
Separate Account 2 as of December 31, 1996.
(3) Statement of Operations and Changes in Net Assets of Western-Southern
Life Assurance Company Separate Account 2 for the Year Ended December
31, 1996 and for the period from February 23, 1995 to December 31,
1995.
(4) Supplementary Information - Selected Per Unit Data and Ratios of
Western-Southern Life Assurance Company Separate Account 2 for the
Year Ended December 31, 1996 and for the period from February 23,
1995 to December 31, 1995.
The following financial statements for Western-Southern Life Assurance
Company for 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, 1996 and 1995.
(3) Summaries of Operations for Western-Southern Life Assurance Company
for the Years Ended December 31, 1996, 1995 and 1994.
(4) Statements of Changes in Shareholder's Equity for Western-Southern
Life Assurance Company for the Years Ended December 31, 1996, 1995 and
1994.
(5) Statements of Cash Flows for Western-Southern Life Assurance Company
for the Years Ended December 31, 1996, 1995 and 1994.
33
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
AUDIT OF FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE PERIOD FROM FEBRUARY 23, 1995 TO DECEMBER 31, 1995
<PAGE>
CONTENTS
Pages
Report of Independent Accountants.......................................1
Financial Statements:
Statement of Net Assets as of December 31, 1996......................2
Statement of Operations and Changes in Net Assets for the
year ended December 31, 1996......................................3
Statement of Operations and Changes in Net Assets
for the Period from February 23, 1995 (Commencement
of Operations) to December 31, 1995...............................4
Notes to Financial Statements...................................5-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contractholders and Board of
Directors of Western-Southern Life
Assurance Company
We have audited the accompanying statement of net assets of Western-Southern
Life Assurance Company Separate Account 2 as of December 31, 1996, and the
related statements of operations, changes in net assets and selected per unit
data and ratios for the year ended December 31, 1996 and the period from
February 23, 1995 to December 31, 1995. These financial statements and per
unit data and ratios are the responsibility of the Separate Account's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and per
unit data and ratios are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996 by correspondence with the
custodians. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and selected per unit data and
ratios referred to above present fairly, in all material respects, the
financial position of Western-Southern Life Assurance Company Separate
Account 2 as of December 31, 1996, the results of operations, the changes in
its net assets and the selected per unit data and ratios for the year ended
December 31, 1996 and the period from February 23, 1995 to December 31, 1995
in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 9, 1997
1
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 2
STATEMENT OF NET ASSETS
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS 1996
<S> <C>
Investments at current market value:
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio (4,315 shares, cost $51,433) $52,646
International Equity Portfolio (5,114 shares, cost $54,232) 56,616
Balanced Portfolio (4,292 shares, cost $51,906) 55,100
Income Opportunity Portfolio (5,088 shares, cost $54,998) 57,037
Standby Income Portfolio (21,361 shares, cost $213,823) 213,823
Select Advisors Portfolios
Growth & Income Portfolio II (0.304956% beneficial interest,
cost $52,731) 67,028
Bond Portfolio II (0.223079% beneficial interest, cost $31,138) 33,409
--------
Total investments 535,659
--------
Total assets 535,659
--------
LIABILITIES
Accounts payable to Western-Southern Life Assurance Company 10
--------
Total net assets $535,649
--------
--------
NET ASSETS
Variable Annuity Contracts $534,731
Retained in the variable account by Western-Southern Life Assurance
Company 918
--------
Total net assets $535,649
--------
--------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
2
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 2
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY GROWTH &
GROWTH SUB- EQUITY SUB- BALANCED OPPORTUNITY INCOME SUB- INCOME II BOND II
TOTAL ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income:
Dividends and capital
gains $ 13,246 $ 1,359 $ 360 $ 1,880 $ 5,974 $ 3,673 -- --
Miscellaneous income
(loss) (5,239) (701) 360 456 (592) (105) $(4,332) $ (325)
Expenses:
Mortality and expense
risk, and
administrative charge 2,391 289 282 297 311 563 435 214
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net investment income
(loss) 5,616 369 438 2,039 5,071 3,005 (4,767) (539)
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net change in
unrealized
appreciation
(depreciation) on
investments 21,352 1,955 2,044 3,971 1,155 10 10,973 1,244
Realized gain (loss) on
investments 3,881 1,042 1,102 (373) 2,141 (31) -- --
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net realized and
unrealized gain (loss)
on investments 25,233 2,997 3,146 3,598 3,296 (21) 10,973 1,244
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net increase in net
assets resulting from
operations 30,849 3,366 3,584 5,637 8,367 2,984 6,206 705
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Contract owners activity:
Payments received from
contract owners 439,270 11,499 14,417 24,407 19,051 332,926 22,670 14,300
Net transfers between
sub-accounts -- 14,538 14,601 3,807 3,913 (42,365) 5,337 169
Withdrawals and
surrenders (91,285) (291) (303) -- -- (90,691) -- --
Contract maintenance
charge (245) (47) (37) (34) (40) (7) (57) (23)
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net increase from
contract activity 347,740 25,699 28,678 28,180 22,924 199,863 27,950 14,446
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net increase in net
assets 378,589 29,065 32,262 33,817 31,291 202,847 34,156 15,151
Net assets, at beginning
of period 157,060 23,580 24,351 21,282 25,744 10,972 32,872 18,259
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net assets, at end of
period $ 535,649 $52,645 $56,613 $55,099 $57,035 $213,819 $67,028 $33,410
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 2
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE PERIOD FROM FEBRUARY 23, 1995 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY GROWTH &
GROWTH SUB- EQUITY SUB- BALANCED OPPORTUNITY INCOME SUB- INCOME II BOND II
TOTAL ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income
Dividends and capital
gains $ 4,981 $ 1,566 $ 68 $ 1,643 $ 1,407 $ 297 $ -- $ --
Miscellaneous income
(loss) 45 10 34 3 (1) (15) 11 3
Expenses:
Mortality and expense
risk, and
administrative charge 524 76 82 74 85 43 101 63
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net investment income
(loss) 4,502 1,500 20 1,572 1,321 239 (90) (60)
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net change in
unrealized
appreciation
(depreciation)
on investments 4,046 (742) 339 (777) 885 (10) 3,324 1,027
Realized gain (loss) on
investments 178 6 85 19 69 (1) -- --
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net realized and
unrealized gain (loss)
on investments 4,224 (736) 424 (758) 954 (11) 3,324 1,027
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net increase in net
assets resulting from
operations 8,726 764 444 814 2,275 228 3,234 967
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Contract owners activity:
Payments received from
contract owners 148,334 22,816 23,907 20,468 23,469 10,744 29,638 17,292
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net increase from
contract activity 148,334 22,816 23,907 20,468 23,469 10,744 29,638 17,292
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net increase in net
assets 157,060 23,580 24,351 21,282 25,744 10,972 32,872 18,259
Net assets, at beginning
of period -- -- -- -- -- -- -- --
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net assets, at end of
period $ 157,060 $23,580 $24,351 $21,282 $25,744 $ 10,972 $32,872 $18,259
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
--------- ----------- ------------ ----------- ----------- ----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
Western-Southern Life Assurance Company Separate Account 2 (the
"Account") is a unit investment trust registered under the Investment
Company Act of 1940 (the "1940 Act"), established by the Western-Southern
Life Assurance Company (the "Company"), a life insurance company which is
a wholly-owned subsidiary of The Western and Southern Life Insurance
Company ("Western & Southern"). The Account is a funding vehicle for
individual variable annuity contracts and commenced operations on
February 23, 1995.
The variable annuity contracts are designed for individual investors and
group plans that desire to accumulate capital on a tax-deferred basis for
retirement or other long-term objectives. The variable annuity contracts
are distributed across the United States through a network of
broker-dealers and wholesalers.
2. SIGNIFICANT ACCOUNTING POLICIES:
The Account has seven investment sub-accounts each of which invests in
the corresponding portfolio ( a "Portfolio") of Select Advisors Variable
Insurance Trust or of Select Advisors Portfolios, each of which is an
open-ended diversified management investment company. The sub-accounts'
values fluctuate on a day to day basis depending on the investment
performance of the Portfolio in which each sub-account is invested.
Sub-account transactions are recorded on the trade date and income from
dividends is recorded on the ex-dividend date. Realized gains and losses
on the sales of investments are computed on the basis of specific
identification.
Upon annuitization, the contract assets are transferred to the general
account of the Company. Accordingly, contract reserves are recorded by
the Company. See the related prospectus for a more detailed understanding
of the annuity contracts.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. CONTRACT CHARGES:
Certain deductions for administrative and risk charges are deducted from
the contract value, in order to compensate the Company for administrative
expenses and for the assumption of mortality and expense risks. These
charges are made daily at an annual effective rate of .80% of the
contract value.
The Company also deducts an annual contract maintenance charge of $35
from the contract value on each contract anniversary and upon any full
surrender.
4. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
5. TAXES:
The Account is not taxed separately because the operations of the Account
are part of the total operations of the Company. The Company is taxed as
a life insurance company under the Internal Revenue Code. Under existing
federal income tax law, no taxes are payable on the investment income or
on the capital gains of the Account.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. PURCHASES AND SALES OF INVESTMENTS:
The following table shows aggregate cost of shares and beneficial
interests of the portfolios purchased and proceeds from shares and
beneficial interests of the portfolios sold by the corresponding
sub-accounts for the period January 1, 1996 to December 31, 1996:
<TABLE>
<CAPTION>
Purchases Sales
--------- --------
<S> <C> <C>
Select Advisors Variable Insurance Trust
Emerging Growth Portfolio $61,972 $35,896
International Equity Portfolio 52,047 22,924
Balanced Portfolio 83,153 52,935
Income Opportunity Portfolio 68,984 40,990
Standby Income Portfolio 359,293 156,423
Select Advisors Portfolios
Growth & Income Portfolio II 188,341 165,149
Bond Portfolio II 57,593 43,685
</TABLE>
7. UNIT VALUES:
The following table shows a summary of units outstanding for variable
annuity contracts for the period January 1, 1996 to December 31, 1996.
<TABLE>
<CAPTION>
TRANSFERS
BEGINNING UNITS UNITS BETWEEN SUB- ENDING ENDING UNIT ENDING
UNIT PURCHASED REDEEMED ACCOUNTS UNITS VALUE VALUE
--------- --------- -------- ------------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Sub-account 2,008 931 (29) 1,156 4,066 12.947664 $ 52,645
International Equity Sub-account 2,158 1,203 (29) 1,206 4,538 12.475967 56,613
Balanced Sub-account 1,771 1,913 (3) 277 3,958 13.922266 55,099
Income Opportunity Sub-account 2,048 1,293 (3) 252 3,590 15.886632 57,035
Standby Income Sub-account 1,059 31,065 (8,415) (3,947) 19,762 10.819908 213,819
Growth & Income Sub-account 2,623 1,694 (4) 377 4,690 14.291347 67,028
Bond Sub-account 1,615 1,276 (2) 15 2,904 11.505592 33,410
---------
$ 535,649
---------
---------
</TABLE>
7
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 2
SUPPLEMENTARY INFORMATION--SELECTED PER UNIT DATA AND RATIOS
(SELECTED DATA FOR A SHARE OF ACCUMULATION UNIT OUTSTANDING THOUGHOUT EACH YEAR)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY GROWTH &
GROWTH SUB- EQUITY SUB- BALANCED OPPORTUNITY INCOME SUB- INCOME II BOND II
ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- --------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data
Investment income $ 0.337947 $ 0.084052 $ 0.569146 $ 1.977619 $ 0.550219 $ -- $ --
Expenses 0.098968 0.095651 0.101787 0.113609 0.084812 0.108541 0.089697
----------- --------------- ----------- ----------- ----------- ----------- -----------
Investment income-net 0.238979 (0.011599) 0.467359 1.864010 0.465407 (0.108541) (0.089697)
Net realized and unrealizable
gain (loss) on investments 0.967583 1.204897 1.436884 1.449756 (0.010339) 1.865939 0.285772
----------- --------------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
asset value 1.206562 1.193298 1.904243 3.313766 0.455068 1.757398 0.196075
Beginning of year 11.741102 11.282669 12.018023 12.572866 10.364840 12.533949 11.309517
----------- --------------- ----------- ----------- ----------- ----------- -----------
End of year $12.947664 $12.475967 $13.922266 $15.886632 $10.819908 $14.291347 $11.505592
----------- --------------- ----------- ----------- ----------- ----------- -----------
----------- --------------- ----------- ----------- ----------- ----------- -----------
Ratios
Ratio of operating expense
to average net assets (%) 0.76% 0.70% 0.78% 0.75% 0.50% 0.87% 0.83%
Ratio of investment income-net
to average net assets (%) 0.97% 1.08% 5.34% 12.25% 2.67% (9.54)% (2.09)%
</TABLE>
8
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 2
SUPPLEMENTARY INFORMATION--SELECTED PER UNIT DATA AND RATIOS
(SELECTED DATA FOR A SHARE OF ACCUMULATION UNIT OUTSTANDING THOUGHOUT EACH YEAR)
FOR THE PERIOD FROM FEBRUARY 23, 1995 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME STANDBY GROWTH &
GROWTH SUB- EQUITY SUB- BALANCED OPPORTUNITY INCOME SUB- INCOME II BOND II
ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- --------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data
Investment income $ 0.789879 $ 0.033748 $ 1.125981 $ 1.550039 $ 0.483304 $ -- $ --
Expenses 0.073756 0.073298 0.076118 0.076165 0.068599 0.075378 0.071770
----------- --------------- ----------- ----------- ----------- ----------- -----------
Investment income-net 0.716123 (0.039550) 1.049863 1.473874 0.414705 (0.075378) (0.071770)
Net realized and unrealizable
gain (loss) on investments 1.024979 1.322219 0.968160 1.098992 (0.049865) 2.609327 1.381287
----------- --------------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
asset value 1.741102 1.282669 2.018023 2.572866 0.364840 2.533949 1.309517
Beginning of year 10.000000 10.000000 10.000000 10.000000 10.000000 10.000000 10.000000
----------- --------------- ----------- ----------- ----------- ----------- -----------
End of year $11.741102 $11.282669 $12.018023 $12.572866 $10.364840 $12.533949 $11.309517
----------- --------------- ----------- ----------- ----------- ----------- -----------
----------- --------------- ----------- ----------- ----------- ----------- -----------
Ratios
Ratio of operating expense
to average net assets (%) 0.64% 0.67% 0.69% 0.66% 0.78% 0.62% 0.69%
Ratio of investment income-net
to average net assets (%) 12.73% 0.17% 14.78% 10.26% 4.35% (0.55)% (0.66)%
</TABLE>
9
<PAGE>
WESTERN - SOUTHERN LIFE ASSURANCE
COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF
THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<PAGE>
CONTENTS
Pages
Report of Independent Accountants 1
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 2-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 6-7
Notes to Financial Statements 8-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Western-Southern Life Assurance Company
We have audited the accompanying consolidated balance sheets of
Western-Southern Life Assurance Company (a wholly-owned subsidiary of The
Western and Southern Life Insurance Company) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations and
statements of changes in shareholder's equity and cash flows for the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of
Western-Southern Life Assurance Company and Subsidiaries as of December 31,
1996 and 1995, and the consolidated results of their operations and their
cash flows for the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1, the Company adopted Statement of Financial
Accounting Standards No. 120 (SFAS 120), Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts, and Financial Accounting Standards
Board Interpretation No. 40 (FIN 40), Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and Other Enterprises
effective January 1, 1993, which required implementation of several
accounting pronouncements not previously adopted. The effects of adopting
SFAS 120 and FIN 40 were retroactively applied to the Company's previously
issued financial statements consistent with the implementation guidance of
those standards.
Cincinnati, Ohio
April 25, 1997
1
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
--------- ------------
(in thousands)
------------------------
Investments:
Securities available-for-sale, at fair value:
Debt securities $2,548,307 $2,170,703
Equity securities 64,462 52,836
Mortgage loans, net 93,499 122,465
Real estate 10,374 15,512
Policy Loans 51,331 51,952
Short term investments 88,012 103,924
Other invested assets 10,881 22,258
Cash and cash equivalents 593 6,514
---------- ----------
Total investments 2,867,459 2,546,164
---------- ----------
Accrued investment income 35,140 31,209
Deferred acquisition costs, net 284,135 242,998
Other assets 6,417 6,695
Assets held in separate accounts 27,971 2,225
---------- ----------
Total assets $3,221,122 $2,829,291
---------- ----------
---------- ----------
CONTINUED
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
2
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED BALANCE SHEETS, CONTINUED
AS OF DECEMBER 31, 1996 AND 1995
LIABILITIES AND SHAREHOLDER'S EQUITY 1996 1995
--------- ------------
(in thousands)
------------------------
Policy reserves $2,614,250 $2,261,627
Other policyholder funds 20,434 14,773
Pending policyholder claims 6,961 6,956
---------- ----------
Total policy liabilities 2,641,645 2,283,356
---------- ----------
Payable to parent company 139,885 136,853
Other accrued expenses 57,953 46,870
Federal income tax liability
Current 11,735 11,107
Deferred 55,385 62,286
Liabilities related to separate accounts 27,971 2,225
---------- ----------
Total liabilities 2,934,574 2,542,697
---------- ----------
Commitments and contingencies (see Note 8)
Common stock, $1 par value, authorized
10,000,0000 shares issued and outstanding
1,500,000 shares 1,500 1,500
Paid-in capital 221,285 221,285
Net unrealized appreciation (depreciation)
on securities available-for-sale 12,348 32,770
Retained earnings 51,415 31,039
---------- ----------
Total shareholder's equity 286,548 286,594
---------- ----------
Total liabilities and shareholder's equity $3,221,122 $2,829,291
---------- ----------
---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
1996 1995 1994
---- ------------- ----
(in thousands)
---------------------------------
Revenue:
Insurance premiums and other
considerations $ 91,740 $ 89,706 $ 85,433
Policy and contract charges 32,895 32,886 31,626
Net investment income 195,147 231,231 144,110
Net realized investment gains (losses) 14,256 5,095 (8,736)
Other income 1,093 785 1,181
-------- -------- --------
Total revenues 335,131 359,703 253,614
-------- -------- --------
Benefits and expenses:
Policy benefits 54,575 52,620 43,498
Interest expense on annuities and
financial products 143,989 127,082 104,016
Amortization and write-off of
deferred policy acquisition costs 49,013 43,631 41,860
Other operating expenses 53,744 51,647 49,898
-------- -------- --------
Total benefits and expenses 301,321 274,980 239,272
-------- -------- --------
Income before income taxes 33,810 84,723 14,342
Income tax expense (benefit)
Current 8,858 488 4,301
Deferred 2,818 1,133 668
-------- -------- --------
11,676 1,621 4,969
-------- -------- --------
Net income $22,134 $83,102 $9,373
-------- -------- --------
-------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Unrealized
Appreciation
(Depreciation)
on
Securities
Common Paid-in available- Retained Total
Stock Capital for-sale Earnings Equity
------ ------- ----------- -------- ------
<S> <C> <C> <C> <C>
Shareholders' equity, January 1, 1994 $1,500 $150,000 $21,489 $1,989 $174,978
Net income 9,373 9,373
Unrealized appreciation (depreciation)
on securities, net of deferred income
tax and adjustments to deferred
policy acquisition costs (50,551) (50,551)
Capital contribution from Parent 11,285 11,285
------ -------- -------- ------- --------
Shareholder's equity, December 31, 1994 1,500 161,285 (29,062) 11,362 145,085
------ -------- -------- ------- --------
Net income 83,102 83,102
Unrealized appreciation (depreciation)
on securities, net of deferred income
tax and adjustments to deferred
policy acquisition costs 61,832 61,832
Capital contribution from Parent 60,000 60,000
Dividend to Parent (63,425) (63,425)
------ -------- -------- ------- --------
Shareholder's equity, December 31, 1995 1,500 221,285 32,770 31,039 286,594
------ -------- -------- ------- --------
Net income 22,134
Unrealized appreciation (depreciation)
on securities, net of deferred income
tax and adjustments to deferred
policy acquisition costs (20,422) (20,422)
Dividend to Parent (1,758) (1,758)
------ -------- -------- ------- --------
Shareholder's equity,
December 31, 1996 $1,500 $221,285 $12,348 $51,415 $286,548
------ -------- -------- ------- --------
------ -------- -------- ------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(in thousands)
------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 22,134 $ 83,102 $ 9,373
Adjustments to reconcile net
income to net cash provided
by operating activities:
Capitalization of deferred policy
acquisition costs (51,036) (42,837) (50,401)
Amortization and write-off of deferred policy
acquisition costs 49,013 43,631 41,860
Realized (gains) losses on invested assets, net (14,256) (5,095) 8,736
Deferred Federal income tax 2,818 1,133 (668)
Increase in policy liabilities 26,078 10,372 29,601
(Increase) decrease in other assets (29,399) (6,883) (6,855)
Increase (decrease) in other liabilities 40,491 33,853 (6,535)
---------- ---------- ---------
Net cash provided by operating activities 45,843 11,276 26,447
---------- ---------- ---------
Cash flows from investing activities:
Purchases:
Debt securities, available-for-sale (1,447,588) (960,371) (717,240)
Equity securities, available-for-sale (35,851) (27,527) (32,144)
Mortgage loans (10,295) (1,628)
Real Estate (583) (8,918) (2,438)
Short-term and other invested assets (2,788,146) (2,740,652) (3,295,518)
Proceeds from sales, calls or maturities
Debt securities, available-for-sale 1,003,920 652,316 343,321
Equity securities, available-for-sale 31,317 17,503 10,180
Mortgage loans 30,109 21,758 9,253
Real Estate 7,000 2,950
Short-term and other invested assets 2,817,605 2,696,859 3,300,496
---------- --------- ---------
Net cash used by investing activities (382,217) (359,327) (383,312)
---------- ---------- ----------
</TABLE>
CONTINUED
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
1996 1995 1994
------ ------ ------
(in thousands)
----------------------------
Cash flows from financing activities:
Deposits to universal life and
investment product account balances 513,635 385,562 416,342
Withdrawals from universal life and
investment product account balances (181,424) (134,740) (73,341)
Capital contributions from parent 60,000 11,285
Dividends to parent (1,758) (63,425)
-------- -------- -------
Net cash provided by financing
activities 330,453 247,397 354,286
-------- -------- -------
Net decrease in cash and cash
equivalents (5,921) 5,346 (2,579)
Cash and cash equivalents at
beginning of year 6,514 1,168 3,747
-------- -------- -------
Cash and cash equivalents at end of year $593 $6,514 $1,168
-------- -------- -------
-------- -------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
<PAGE>
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING
POLICIES:
A. NATURE OF OPERATIONS: Western-Southern Life Assurance Company is a
wholly-owned subsidiary of The Western and Southern Life Insurance
Company (the "Parent"), a mutual life insurance Company.
The Company offers individual annuities and interest-sensitive life
insurance products through its parent company's agents and various
financial institutions. The Company is licensed in forty-three states
and the District of Columbia, actively selling in twenty-one states,
and has 94% of its field force located in twelve midwest and
south-central states.
B. BASIS OF PRESENTATION: The accompanying financial
statements have been prepared in conformity with generally
accepted accounting principles (GAAP). The Company adopted
Financial Accounting Standards Board (FASB) Statement
No. 120 (SFAS 120), "Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts," and Financial
Accounting Standards Board Interpretation No. 40 (FIN 40),
"Applicability of Generally Accepted Accounting Principles for
Mutual Life Insurance and Other Enterprises" effective January 1,
1993. SFAS 120 and FIN 40 require financial statements of mutual
life insurance companies and their subsidiaries referred to as
prepared in accordance with generally accepted accounting principles
to apply all applicable authoritative GAAP pronouncements.
Previously, the financial statements prepared in conformity
with accounting practices prescribed or permitted by the
Department of Insurance of the State of Ohio ("statutory
accounting") were considered to be GAAP for mutual life
insurers and their subsidiaries.
The cumulative effect of applying SFAS 120 and FIN 40 primarily consists
of the initial deferral of acquisition costs, the establishment of
deferred taxes, a change in methodology for insurance reserves, the
elimination of the statutory asset valuation reserve and the effect of
classifying certain investments as available-for-sale. The effect of the
changes has been reported retroactively through restatement of previously
issued financial information.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. PRINCIPAL ACCOUNTING POLICIES, CONTINUED:
B. BASIS OF PRESENTATION, CONTINUED:
As a result of the change in accounting principles, net income as
previously reported has been restated as follows:
1995 1994
Net income, as previously reported $ 18,272 $ 7,068
Add adjustments for effect of
retroactively applying a new basis
of accounting on prior years
Deferred policy acquisition costs (794) 8,541
Policy reserves 14,133 13,063
Deferred income taxes (1,133) (668)
Interest maintenance reserve 2,141 (6,006)
Current income taxes 543 (2,026)
Federal income tax refund 53,000 --
Other, net (3,060) (10,599)
-------- ---------
Total 64,830 2,305
-------- ---------
Net income, as adjusted $ 83,102 $ 9,373
-------- ---------
-------- ---------
As a result of the change in accounting principles, shareholder's equity,
as previously reported has been restated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year,
as previously reported $166,942 $ 97,835 $ 90,452
Add adjustments for the cumulative
effect on prior years of applying
retroactively the new basis of
accounting
Deferred policy acquisition costs 243,179 367,591 303,984
Asset valuation reserve and interest
maintenance reserve 36,263 28,645 32,154
Policy reserves (76,916) (91,049) (104,101)
Reinsurance (141,714) (137,340) (131,419)
Deferred income taxes (62,280) (27,433) (53,489)
Excess of fair value over amortized
cost of debt and equity securities
available-for-sale, net of tax and deferred
policy acquisition costs 120,925 (94,470) 36,963
Other, net 195 1,306 434
--------- --------- ---------
Total 119,652 47,250 84,526
--------- --------- ---------
Balance at beginning of year, as adjusted $286,594 $145,085 $174,978
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company also files financial statements with insurance regulatory
authorities which are prepared on the basis of statutory accounting
practices which are significantly different from financial statements
prepared in accordance with GAAP. These differences are described in
detail in Note 7.
The following is a description of the principle accounting
policies and practices used in the preparation of these
financial statements.
C. CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Courtyard
Nursing Care, Inc. and IFS Financial Services, Inc. Significant
intercompany transactions have been eliminated.
D. PREMIUM REVENUE AND BENEFITS TO POLICYHOLDERS: The premiums and
benefits for whole life and term insurance products and certain
annuities with life contingencies (immediate annuities) are fixed
and guaranteed. Such premiums are recognized as premium revenue
when due. Benefits and expenses are associated with earned premiums
so as to result in recognition of profits over the life of the
contracts. This association is accomplished by means of the provision
for liabilities for future policy benefits and the amortization of
deferred policy acquisition costs.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. PRINCIPAL ACCOUNTING POLICIES, CONTINUED:
D. PREMIUM REVENUE AND BENEFITS TO POLICYHOLDERS, CONTINUED:
Universal life policies and investment contracts are policies
with terms that are not fixed and guaranteed. The terms that
may be changed could include one or more of the amounts
assessed the policyholder, premiums paid by the policyholder
or interest accrued to policyholder balances. The amounts
collected from policyholders for these policies are
considered deposits, and only the deductions during the period
for cost of insurance, policy administration and surrenders
are included in revenue. Policy benefits and claims that are
charged to expense include interest credited to contracts and
benefit claims incurred in the period in excess of related
policy account balances.
E. DEFERRED POLICY ACQUISITION COSTS: Those costs of
acquiring new business, which vary with and are primarily
related to the production of new business, have been deferred
to the extent that such costs are deemed recoverable. Such
costs include commissions, certain costs of policy
underwriting and issue and certain variable agency expenses.
These costs are amortized with interest as follows:
For universal life-type policies and investment contracts,
over the lesser of the lifetime of the policy or 15-30 years
in relation to the present value of estimated gross profits
from surrender charges and investment, mortality and expense
margins, discounted using the interest rate credited to the
policy.
Recoverability of the unamortized balance of deferred policy
acquisition costs is evaluated regularly. For universal
life-type contracts, and investment contracts, the accumulated
amortization is adjusted (increased or decreased) whenever
there is a material change in the estimated gross profits
expected over the life of a block of business in order to
maintain a constant relationship between cumulative
amortization and the present value of gross profits. For most
other contracts, the unamortized asset balance is reduced by a
charge to income only when the present value of future cash
flows, net of the policy liabilities, is not sufficient to
cover such asset balance.
The Company states actively managed fixed maturities at fair
value. The Company also adjusts the cost of policies produced
to reflect the change in cumulative amortization that would
have been recorded if they had sold the securities at their
fair value and reinvested the proceeds at current yields. If
future yields on such securities decline, it may be necessary
to increase certain insurance liabilities. The Company will
adjust such liabilities when their balances and future net
cash flows (including investment income) are insufficient to
cover future benefits and expenses.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. PRINCIPAL ACCOUNTING POLICIES, CONTINUED:
E. DEFERRED POLICY ACQUISITION COSTS, CONTINUED: A summary of deferred
acquisition costs follows:
1996 1995 1994
------ ------ ------
Deferred acquisition costs, January 1 $242,998 $367,409 $252,365
Capitalization of costs 51,036 42,837 50,401
Amortization and write-off (49,013) (43,631) (41,860)
Additional amount related to
unrealized gains (losses)
on securities 39,114 (123,617) 106,503
-------- -------- --------
$284,135 $242,998 $367,409
-------- -------- --------
-------- -------- --------
F. VALUATION OF INVESTMENTS:
- Debt securities which may be sold to meet liquidity and
other needs of the Company are categorized as
available-for-sale and are stated at fair value. Equity
securities are classified as available-for-sale and are stated
at fair value. Realized gains and losses on sale or maturity
of investments are based upon specific identification of the
investments sold and do not include amounts allocable to
separate accounts. At the time a decline in value of an
investment is determined to be other than temporary, a
provision for loss is recorded which is included in realized
investment gains and losses. Unrealized gains and losses,
resulting from carrying available-for-sale securities at fair
value, are reported in shareholder's equity, net of deferred
taxes of $6,649 and $17,645, respectively, and deferred
acquisition costs of $29,619 and $68,733, respectively, at
December 31, 1996 and 1995.
- Mortgage loans on real estate are carried at amortized cost less an
impairment allowance for estimated uncollectible amounts. The
Company records interest income from impaired loans on the
cash-basis method.
- Policy loan values are carried at outstanding indebtedness not in
excess of policy cash surrender value.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. PRINCIPAL ACCOUNTING POLICIES, CONTINUED:
F. VALUATION OF INVESTMENTS, CONTINUED:
- Real estate joint ventures and partnerships where the Company
can exercise significant influence are accounted for on the
equity method.
- Short-term investments are those investments with a maturity
of less than one year at the time of purchase and consist
primarily of debt securities and money market funds.
G. RESERVES FOR FUTURE POLICY AND CONTRACT BENEFITS: Liabilities for
future policy benefits on universal life and investment contracts
consist principally of policy account values plus certain deferred
policy fees which are amortized using the same assumptions and factors
used to amortize the cost of policies produced. If the future benefits
on investment contracts are guaranteed (immediate annuities with
benefits paid for a period certain) the liability for future
benefits is the present value of such guaranteed benefits. Claim
liabilities include provisions for reported claims and estimates
based on historical experience, for claims incurred but not reported.
H. ASSETS HELD IN SEPARATE ACCOUNTS: The Company maintains separate
account funds on which investment income and gains or losses accrue
directly to certain policyholders of variable annuity contracts.
The assets of these accounts are legally segregated and are valued
at fair value. The related liabilities are recorded at amounts equal
to the underlying assets; the fair value of these liabilities is equal
to their carrying amount.
I. CASH AND CASH EQUIVALENTS: The Company considers short-term
investments with an original maturity of three months or less to be
cash and cash equivalents.
J. FEDERAL INCOME TAXES: The provision for income taxes is computed on
the separate return method and includes amounts currently payable
and deferred income taxes resulting from the temporary differences in
the assets and liabilities determined on a tax and financial reporting
basis.
The Company's Parent files a consolidated tax return with its
eligible subsidiaries, including the Company. The Company
pays tax to its Parent based on the provisions of a written
agreement. Under the agreement, the benefits from losses of
subsidiaries is not retained by the subsidiary companies but
are allocated among those companies in the consolidated group
having taxable income. Differences between the Company's
current provision recorded for financial reporting purposes
and the amount of tax allocated to the Company under its legal
tax sharing agreement are considered to be dividends or
capital contributions to/from its Parent. In 1996, 1995 and 1994,
the Company (paid) received capital to/from its Parent of $1,285,
($975) and ($1,758), respectively, under this agreement.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. PRINCIPAL ACCOUNTING POLICIES, CONTINUED:
K. USE OF ESTIMATES: The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. INVESTMENTS:
The amortized cost and estimated fair values of securities
available-for-sale at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale
- ------------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 53,740 $ 429 $ 413 $ 53,756
Debt securities issued by states
of the U.S. and political
subdivisions of the states 85,735 3,545 180 89,100
Corporate securities 1,430,217 54,142 6,201 1,478,158
Mortgage-backed securities 928,954 14,645 16,306 927,293
---------- ------- ------- ----------
Total debt securities $2,498,646 $72,761 $23,100 $2,548,307
---------- ------- ------- ----------
---------- ------- ------- ----------
Equity securities $ 59,253 $ 7,940 $ 2,731 $ 64,462
---------- ------- ------- ----------
---------- ------- ------- ----------
</TABLE>
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
<TABLE>
1995
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale:
- -------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 11,980 $ 396 $ - $ 12,376
Debt securities issued by states
of the U.S. and political
subdivisions of the states 111,554 8,070 - 119,624
Corporate securities 1,125,228 86,730 1,287 1,210,671
Mortgage-backed securities 801,772 30,322 4,062 828,032
---------- -------- ------ ----------
Total debt securities $2,050,534 $125,518 $5,349 $2,170,703
---------- -------- ------ ----------
---------- -------- ------ ----------
Equity securities $ 51,221 $ 3,085 $1,470 $ 52,836
---------- -------- ------ ----------
---------- -------- ------ ----------
1994
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale:
- ------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 16,641 $ 66 $ 613 $ 16,094
Debt securities issued by states
of the U.S. and political
subdivisions of the states 74,407 104 3,813 70,698
Debt securities issued by Foreign
governments 4,854 34 4,820
Corporate securities 961,633 12,013 53,761 919,885
Mortgage-backed securities 676,562 1,590 51,040 627,112
---------- ------- -------- ----------
Total debt securities $1,734,097 $13,773 $109,261 $1,638,609
---------- ------- -------- ----------
---------- ------- -------- ----------
Equity securities $ 39,593 $ 77 $ 996 $ 38,674
---------- ------- -------- ----------
---------- ------- -------- ----------
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
The amortized cost and estimated fair value of debt securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
Total
------------------------
Amortized Estimated
Cost Fair Value
---------- -----------
Due in one year or less $ 18,416 $ 18,637
Due after one year through five years 386,240 400,504
Due after five years through ten years 902,491 928,997
Due after ten years 262,545 272,876
---------- ----------
1,569,692 1,621,014
Mortgage-backed securities 928,954 927,293
---------- ----------
Total $2,498,646 $2,548,307
---------- ----------
---------- ----------
Net investment income consisted of the following for the years ended
December 31:
1996 1995 1994
-------- -------- --------
Debt securities $172,331 $152,328 $119,623
Equity securities 3,391 3,392 2,671
Mortgage loans 10,195 12,967 14,270
Rental income from real estate 2,604 2,246 1,247
Policy loans 3,743 3,739 3,728
Other invested assets 1,694 2,466 2,335
Short-term investments 5,121 4,643 2,707
Interest on Federal tax refund 53,000
-------- -------- --------
Gross investment income 199,079 234,781 146,581
Investment expense 3,932 3,550 2,471
-------- -------- --------
Net investment income $195,147 $231,231 $144,110
-------- -------- --------
-------- -------- --------
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
Proceeds from sales of investments in debt securities during 1996,
1995 and 1994 were $1,003,920, $652,316 and $343,321, respectively.
Gross gains of $14,494, $14,839 and $7,688 and gross losses of
$8,135, $9,739 and $13,698 were realized on those sales in 1996,
1995 and 1994, respectively.
Proceeds from sales of investments in equity securities during 1996,
1995 and 1994 were $31,317, $17,503 and $10,180, respectively. Gross
gains of $4,936, $3,303 and $166 and gross losses of $1,407, $598 and
$411 were realized on those sales in 1996, 1995 and 1994, respectively.
3. MORTGAGE LOANS:
The Company maintains a diversified mortgage loan portfolio,
consisting principally of commercial real estate loans, and
exercises internal limits on concentrations of loans by geographic
area, industry, use and individual mortgagor. Mortgage loans on
various properties in Ohio account for approximately 38% of the
total amortized cost of the Company's mortgage loans. The
remaining mortgage loans relate to properties located throughout
the United States.
Activity in the allowance for loan losses is summarized as follows:
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Balance, beginning of year $5,684 $4,043 $3,282
Provisions charged to operations - 2,513 761
Charge-offs, net of recoveries 1,152 872 -
------ ------ ------
Balance, end of year $4,532 $5,684 $4,043
------ ------ -------
------ ------ -------
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following sets forth the fair values of the Company's financial
instruments:
1996 1995
-----------------------------------------------------
Book Value Fair Value Book Value Fair Value
---------- ---------- ---------- ----------
Assets
Debt securities $2,548,307 $2,548,307 $2,170,703 $2,170,703
Equity securities 64,462 64,462 52,836 52,836
Mortgage loans, net 93,499 96,800 122,465 130,884
Short-term investments 88,012 88,012 103,924 103,924
Cash and cash
equivalents 593 593 6,514 6,514
---------- ---------- ---------- ----------
Total assets $2,794,873 $2,798,174 $2,456,442 $2,464,861
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Liabilities
Investment-type
contract reserves $2,614,250 $2,478,682 $2,261,627 $2,120,043
---------- ---------- ---------- ----------
Total liabilities $2,614,250 $2,478,682 $2,261,627 $2,120,043
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fair values for debt, equity and short-term investment securities are based
on quoted market prices.
The fair values for mortgage loans, consisting principally of commercial
real estate loans, are estimated using discounted cash flow analyses, using
interest rates currently being offered for similar loans collateralized by
properties with similar investment risk. The fair values for mortgage loans
in default are established at the lower of the fair market value of the
related underlying collateral or carrying value of the loan.
Fair value for the Company's liability under investment type contracts is
disclosed using two methods. For investment contracts without defined
maturities, fair value is the amount payable on demand. For investment
contracts with known or determined maturities, fair value is estimated using
discounted cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining for the
contracts being valued.
Interest changes may have temporary effects on the sale and profitability
of annuity products offered by the Company. Although the rates offered by
the companies are adjustable in the long-term, in the short-term they may be
subject to contractual and competitive restrictions which may prevent timely
adjustment. The Company's management monitors interest rates with respect to
a spectrum of duration and sells annuities that permit flexible responses
to interest rate changes as part of the Company's management of interest
spreads. However, adverse changes in investment yields on invested assets
will affect the earnings on those products with a guaranteed return.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED:
The Company believes it is not practicable to estimate the fair value of
policy loans. These assets are carried at their aggregate unpaid principal
balances. Estimation of the fair value is not practicable as the loans
have no stated maturity and are an integral part of the related insurance
contracts.
5. RELATED PARTY TRANSACTIONS:
The Company has three modified coinsurance agreements under which it cedes
all of its universal life insurance business to its parent. The Company
also has a coinsurance agreement under which it assumes all of its parent's
flexible premium annuity business. These contracts are accounted for as
financing arrangements as the contracts do not provide for adequate transfer
of risk. Under the agreements, the Company holds as a deposit liability
$139,885 and $136,853 at December 31, 1996 and 1995, respectively, and has
recorded interest expense of $9,426, $8,351 and $7,861 for the years ended
December 31, 1996, 1995 and 1994, respectively, in its Statement of
Operations as charges relating to this arrangement.
The Company has no employees of its own and reimburses its parent for
management services and rent. Management services provided by the parent
amounted to $37,798 and $33,750 in 1996 and 1995, respectively. Rent
expense was $4,253 and $4,391 in 1996 and 1995, respectively.
During 1995 and 1994, the Company's parent made capital contributions of
$60,000 and $10,000, respectively, to the Company.
At December 31, 1996 and 1995, the Company had $35,915 and $31,118,
respectively, invested in the Touchstone Funds, mutual funds administered
by a subsidiary of the Company.
6. FEDERAL INCOME TAXES:
A reconciliation of the income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to the income tax expense
included in the consolidated statement of operations follows:
1996 1995 1994
Income tax computed at statutory tax rate $ 11,834 $29,653 $50,20
Federal income tax refund related to
IRS assessment (28,000)
Dividends received deduction (178) (32) (54)
Other, net 20 - 3
-------- ------- ------
Federal income tax $ 11,676 $ 1,621 $4,969
-------- ------- ------
-------- ------- ------
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. FEDERAL INCOME TAXES, CONTINUED:
1996 1995
Deferred income tax (asset) liability:
Deferred policy acquisition costs $93,475 $79,208
Investments 18,267 42,485
Future policy and contract benefits (59,833) (63,091)
Other 3,476 3,684
------- -------
Deferred income tax (asset) liability $55,385 $62,286
------- -------
------- -------
Federal income taxes paid under the Company's tax-sharing agreement with
its parent were $11,735, $11,107 and $3,852 for 1996, 1995 and 1994,
respectively.
In 1987, the Company's parent recorded an assessment from the Internal
Revenue Service relating to an audit of the 1982 and 1983 consolidated
tax returns in which the Company was included. The assessment related
to the Company amounted to $71,725 and included interest in the amount
of $26,380. The assessment related to the disallowance of certain
universal life reserve deductions taken in excess of amounts computed
for statutory purposes. The assessment was paid with the intent of
litigating the issue as the Company maintained that the original
deductions were proper and in accordance with the Internal Revenue Code.
In 1995, the U.S. District Court issued a summary judgment which stated
the original deductions were proper, entitling the Company's parent to a
refund of all related assessments paid including interest, which
approximated $115,000. This judgment was appealed by the IRS, and in
1995, the IRS settled this issue through a refund totaling $81,000,
including interest of $53,000. The effect of the resolution of this
matter was recorded by the Company and the refund was remitted to the
Company's parent. Thus, the Company has recorded a dividend to its
Parent in 1995 of $62,450, reflecting the refund, net of taxes on the
interest received.
7. REGULATORY MATTERS:
The Company, which is domiciled in Ohio, prepares statutory financial
statements in accordance with accounting principles and practices
prescribed or permitted by the State of Ohio Department of Insurance (SAP).
Prescribed statutory accounting practices include state laws, regulations,
and general administrative rules, as well as a variety of publications of
the National Association of Insurance Commissioners (NAIC). Permitted
statutory accounting practices encompass all accounting practices that are
not prescribed; such practices differ from state-to-state, may differ from
company-to-company within a state, and may change in the future.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. REGULATORY MATTERS:
A reconciliation of SAP shareholder's equity to GAAP shareholder's equity at
December 31 follows:
1996 1995 1994
SAP shareholder's equity $ 170,603 $ 166,942 $ 97,835
Deferred policy acquisition costs 284,308 243,179 367,591
Policy reserves (63,340) (76,916) (91,049)
Asset valuation and interest
maintenance reserves 47,463 36,263 28,645
Deferred income taxes (55,375) (62,280) (27,433)
Unrealized gain (loss) on
available-for-sale securities 49,688 120,925 (94,470)
Reinsurance (144,372) (141,714) (137,340)
Other, net (2,427) 195 1,306
-------- -------- --------
Total GAAP shareholder's equity $286,548 $286,594 $145,085
-------- -------- --------
-------- -------- --------
A reconciliation of SAP net income to GAAP income at December 31, follows:
1996 1995 1994
SAP net income $ 13,673 $18,272 $ 7,068
Deferred policy acquisition costs 2,023 (794) 8,541
Policy reserves 13,576 14,133 13,063
Deferred income taxes (2,818) (1,133) (668)
Federal income tax refund 53,000
Interest maintenance reserve 1,362 2,141 (6,006)
Current income taxes (2,146) 543 (2,026)
Other, net (3,536) (3,060) (10,599)
-------- -------- ---------
Total GAAP net income $22,134 $83,102 $ 9,373
-------- -------- ---------
-------- -------- ---------
The Company is required by statutory regulations to meet minimum
risked-based capital standards. Risk-based capital is a method of
measuring the minimum amount of capital appropriate for an insurance
company to support its overall business operations in consideration of
its size and risk profile. At December 31, 1996 and 1995, the Company
substantially exceeded all levels of risk-based capital required.
State regulatory authorities have powers relating to granting and
revoking licenses to transact business, the licensing of agents, the
regulation of premium rates and trade practices, the form and content of
insurance policies, the content of advertising material.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. REGULATORY MATTERS, CONTINUED:
Under Ohio law, the Company is subject to certain statutory restrictions
on dividends it may pay to its Parent. Dividends paid from other than
"earned surplus" also require regulatory approval. During 1996, the
Company paid dividends of $1.758 to its Parent. This distribution
represents amounts remitted to the Parent under the tax sharing
agreement between the Company and its Parent.
The Company received written approval from the State of Ohio Department of
Insurance to record guaranty fund assessments as incurred and defer the
amount on the balance sheet to the extent that they are recoverable through
premium tax credits. When the tax credits are realized, the deferred tax
assessment is removed from the balance sheet as a charge to premium tax
expense. There is no prescribed statutory accounting treatment for these
transactions.
The Company also received approval to record all taxes, including interest,
assessments, settlements and corrections through the Summary of Operations,
rather than as a direct charge to shareholder's equity. There is no
prescribed accounting treatment for these transactions.
8. CONTINGENCIES:
The Company is currently a defendant in various lawsuits, which
allege improper sales practices by the Company. In certain of these,
the plaintiffs seek to certify the case as class action. At this point
in time, management is unable to estimate the potential outcome of the
lawsuits.
9. BUSINESS SEGMENT INFORMATION:
The Company operates primarly in the interest-sensitive life insurance and
annuity lines of business in the life insurance industry. The following table
summarizes the revenue and net income before income taxes for the year ended
December 31, by business segment.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues
Interest-sensitive life insurance and other $ 194,829 $ 245,945 $172,233
Annuities 140,302 113,758 81,381
---------- ---------- --------
$ 335,131 $ 359,703 $253,614
---------- ---------- --------
---------- ---------- --------
Net income before income taxes
Interest-sensitive life insurance and other $ 6,026 $ 61,560 $ 1,417
Annuities 27,784 23,163 12,925
---------- ---------- --------
$ 33,810 $ 84,723 $ 14,342
---------- ---------- --------
---------- ---------- --------
Assets
Interest-sensitive life insurance and other $1,483,240 $1,443,040
Annuities 1,737,882 1,386,251
---------- ----------
$3,221,122 $2,829,291
---------- ----------
---------- ----------
</TABLE>
10. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
Standard is effective for transactions occurring after December 31, 1996 and
provides guidelines for accounting for transfers and servicing of financial
assets and extinguishment of liabilities. The Company does not believe the
adoption of this Standard will have a material impact on its financial
statements.
21
<PAGE>
DISTRIBUTOR
Touchstone Securities, Inc. SUB-ACCOUNTS
311 Pike Street
Cincinnati, Ohio 45202 -Emerging Growth
(800) 669-2796 (press 3) -International Equity
-Growth & Income
INVESTMENT ADVISOR; SPONSOR -Balanced
-Income Opportunity
Touchstone Advisors, Inc. -Bond
311 Pike Street -Standby 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 (press 2)
TRANSFER AGENT
State Street Bank and Trust Company
P.O. Box 8518
Boston, Massachusetts 02266-8518
ADMINISTRATOR, CUSTODIAN
AND FUND ACCOUNTING AGENT
Investors Bank & Trust Company STATEMENT OF
89 South Street ADDITIONAL INFORMATION
Boston, Massachusetts 02111 May 1, 1997
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
312 Walnut Street
Cincinnati, Ohio 45202
LEGAL COUNSEL
Frost & Jacobs LLP
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
<PAGE>
PART C
ITEM 24 -- FINANCIAL STATEMENTS AND EXHIBITS
(a) There are no financial statements included in Part A. The following
Financial Statements and Financial Statement Schedules of Western-Southern
Life Assurance Company Separate Account 2 and Western-Southern Life
Assurance Company are omitted from Part C and instead included in Part B:
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 2
(1) Report of Coopers & Lybrand on the Financial Statements of
Western-Southern Life Assurance Company Separate Account 2.
(2) Statement of Net Assets of Western-Southern Life Assurance Company
Separate Account 2 as of December 31, 1996.
(3) Statement of Operations and Changes in Net Assets of Western-Southern
Life Assurance Company Separate Account 2 for the Year Ended December
31, 1996 and for the period from February 23, 1995 to December 31,
1995.
(4) Supplementary Information -- Selected Per Unit Data and Ratios of
Western-Southern Life Assurance Company Separate Account 2 for the
Year Ended December 31, 1996 and for the period from February 23,
1995 to December 31, 1995.
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(1) Report of Coopers & Lybrand on the Financial Statements of
Western-Southern Life Assurance Company.
(2) Balance Sheets of Western-Southern Life Assurance Company as of
December 31, 1996 and 1995.
(3) Summaries of Operations for Western-Southern Life Assurance Company
for the Years Ended December 31, 1996, 1995 and 1994.
(4) Statements of Changes in Shareholder's Equity for Western-Southern
Life Assurance Company for the Years Ended December 31, 1996, 1995 and
1994.
(5) Statements of Cash Flows for Western-Southern Life Assurance Company
for the Years Ended December 31, 1996, 1995 and 1994.
<PAGE>
(b) Exhibits:
(1) Resolutions of Board of Directors of Western-Southern Life
Assurance Company (the "Company") establishing Western-Southern
Life Assurance Company Separate Account 2 incorporated herein by
reference to the Registration Statement filed with the Securities
and Exchange Commission ("SEC") on June 7, 1994 (File No.
33-79906).
(2) Not Applicable.
(3) (a) Distributor Agreement between the Company (on behalf of
Separate Account 2) and Touchstone Securities, Inc.
incorporated herein by reference to Pre-Effective Amendment
No. 1 to the Registration Statement filed with the SEC on
November 14, 1994 (File No. 33-79906).
(b) Commission Schedule incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement
filed with the SEC on November 14, 1994 (File No. 33-79906).
(c) Specimens of agreements between Touchstone Securities, Inc.
and its dealers incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement
filed with the SEC on November 14, 1994 (File No. 33-79906).
(4) (a) Specimen Variable Annuity Contract incorporated herein by
reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed with the SEC on November 14,
1994 (File No. 33-79906).
(b) Specimen Endorsements for Qualified Contracts incorporated
herein by reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed with the SEC on November 14,
1994 (File No. 33-79906).
(5) Specimen Application Form for Variable Annuity Contract
incorporated herein by reference to Pre-Effective Amendment No. 1
to the Registration Statement filed with the SEC on November 14,
1994 (File No. 33-79906).
(6) (a) Amended Articles of Incorporation of the Company
incorporated herein by reference to Post-Effective Amendment
No. 2 to the Registration Statement filed with the SEC on
April 29, 1996 (File No. 33-79906).
-2-
<PAGE>
(b) Amended Code of Regulations of the Company incorporated
herein by reference to Post-Effective Amendment No. 2 to the
Registration Statement filed with the SEC on April 29, 1996
(File No. 33-79906).
(7) Not Applicable.
(8) (a) (i) Administrative Services Agreement between the Company
and Vantage Computer Systems, Inc. incorporated herein
by reference to the Registration Statement filed with
the SEC on June 7, 1994 (File No. 33-79906).
(ii) Fund Accounting Agreement between Investors Bank and
Trust Company and Select Advisors Portfolios.
(b) (i) Investment Advisory Agreement between Touchstone
Advisors, Inc. and Select Advisors Portfolios
incorporated herein by reference to Post-Effective
Amendment No. 2 to the Registration Statement filed
with the SEC on April 29, 1996 (File No. 33-79906).
(ii) Amendment to Investment Advisory Agreement between
Touchstone Advisors, Inc. and Select Advisors
Portfolios.
(c) (i) Portfolio Advisory Agreement between Touchstone
Advisors, Inc. and Fort Washington Investment Advisors,
Inc. (Growth & Income) incorporated herein by reference
to Post-Effective Amendment No. 2 to the Registration
Statement filed with the SEC on April 29, 1996 (File
No. 33-79906).
(ii) Portfolio Advisory Agreement between Touchstone
Advisors, Inc. and Fort Washington Investment Advisors,
Inc. (Bond) incorporated herein by reference to
Post-Effective Amendment No. 2 to the Registration
Statement filed with the SEC on April 29, 1996 (File
No. 33-79906).
(d) Custodian Agreement between Select Advisors Portfolios and
Investors Bank & Trust Company incorporated herein by
reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed with the SEC on November 14,
1994 (File No. 33-79906).
(e) (i) Sponsor Agreement between Select Advisors Variable
Insurance Trust and Touchstone Advisors, Inc.
incorporated herein by reference to Pre-Effective
Amendment No. 1 to
-3-
<PAGE>
the Registration Statement filed with the SEC on
November 14, 1994 (File No. 33-79906).
(ii) Sponsor Agreement between Select Advisors Portfolios
and Touchstone Advisors, Inc. incorporated herein by
reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed with the SEC on November
14, 1994 (File No. 33-79906).
(f) Fund Participation Agreement between Select Advisors
Portfolios and Touchstone Advisors, Inc. incorporated herein
by reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed with the SEC on November 14,
1994 (File No. 33-79906).
(9) Opinion and consent of Donald B. Wuebbling, Esq. as to legality
of securities being issued incorporated herein by reference to
the Registration Statement filed with the SEC on June 7, 1994
(File No. 33-79906).
(10) Written consent of Coopers & Lybrand.
(11) Not Applicable.
(12) Not Applicable.
(13) Schedule for Computation of Performance Quotations provided in
Registration Statement in response to Item 21 incorporated herein
by reference to Post-Effective Amendment No. 3 to the
Registration Statement filed with the SEC on February 28, 1997.
(14) Not applicable.
(15) (a) Powers of Attorney -- Directors of the Company incorporated
herein by reference to Post-Effective Amendment No. 3 to
the Registration Statement filed with the SEC on
February 28, 1997.
(b) Powers of Attorney -- Trustees of Select Advisors
Portfolios incorporated herein by reference to
Post-Effective Amendment No. 3 to the Registration
Statement filed with the SEC on February 28, 1997.
ITEM 25. -- DIRECTORS AND OFFICERS OF THE DEPOSITOR
The directors and officers of the Company are:
William J. Williams Chairman of the Board and Director
John F. Barrett Director, Chief Executive Officer and
President
James N. Clark Director, Executive Vice President,
Secretary and Treasurer
-4-
<PAGE>
Dr. J. Harold Kotte Director
Dr. Lawrence C. Hawkins Director
Omni-Man, Inc.
3909 Reading Road
Cincinnati, Ohio 45229
Carl A. Kroch Director
Kroch's & Brentano's
29 South Wabash Avenue
Chicago, Illinois 60603
Eugene P. Ruehlmann Director
Vorys, Sater, Seymour and Pease
Suite 2100 Atrium Two
221 East Fourth Street
Cincinnati, Ohio 45202
Charles M. Williams Director
Thomas L. Williams Director
North American Properties
212 East Third Street
Suite 300
Cincinnati, Ohio 45202
Chalmers Wylie Director
754 Stonewood Court
Columbus, Ohio 43235
Robert A. Bodeker Vice President
Herbert R. Brown Vice President
James W. Carpenter Vice President and Senior Counsel
Keith T. Clark Vice President and Medical Director
Charles W. Craig Vice President and Chief Technology
Officer
Bryan C. Dunn Senior Vice President and Chief
Marketing Officer
-5-
<PAGE>
David G. Ennis Vice President and Auditor
Noreen J. Hayes Vice President
Edward S. Heenan Vice President and Comptroller
Dale P. Hennie Vice President
Carroll R. Hutchinson Senior Vice President and Chief Actuary
Donald W. Kaplan Vice President and Actuary
William F. Ledwin Senior Vice President and Chief
Investment Officer
Harold V. Lyons Vice President and Actuary
Jill T. McGruder Senior Vice President
J. J. Miller Senior Vice President
Kenneth A. Palmer Senior Vice President
Mario J. San Marco Vice President
Thomas M. Stapleton Vice President
Robert H. Starnes Vice President
Richard K. Taulbee Vice President
Donald J. Wuebbling Vice President and General Counsel
G. H. Schellpeper Vice President
8901 Indian Hills Drive
Omaha, Nebraska 68144
Unless otherwise noted, the principal business address of all persons
listed in Item 25 is 400 Broadway, Cincinnati, Ohio 45202.
ITEM 26. -- PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The Western and Southern Life Insurance Company ("WSLIC")
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<PAGE>
Western-Southern Life Assurance Company ("WSLAC"); 100% owned by WSLIC
Courtyard Nursing Care, Inc.; Ohio corporation; 100% owned by
WSLAC; ownership and operation of real estate.
IFS Financial Services, Inc. ("IFS"); Ohio corporation; 100%
owned by WSLAC; development and marketing of financial products
for distribution through financial institutions.
IFS Systems, Inc.; Delaware corporation; 100% owned by IFS;
development, marketing and support of software systems.
IFS Insurance Agency, Inc.; Ohio corporation; 99% owned by
IFS, 1% owned by William F. Ledwin; general insurance
agency.
Touchstone Securities, Inc.; Nebraska corporation; 100%
owned by IFS; securities broker-dealer.
Touchstone Advisors, Inc.; Ohio corporation; 100% owned by
IFS; registered investment adviser.
IFS Agency Services, Inc.; Pennsylvania corporation; 100%
owned by IFS; general insurance agency.
IFS Agency, Inc.; Texas corporation; 100% owned by an
individual; general insurance agency.
IFS General Agency, Inc.; Pennsylvania corporation; 100%
owned by William F. Ledwin; general insurance agency.
Seasons Congregate Living, Inc.; Ohio corporation; 100% owned by
WSLIC; ownership and operation of real estate.
Latitudes at the Moors, Inc.; Florida corporation; 100% owned by
WSLIC; ownership and operation of real estate.
WestAd Inc.; Ohio corporation; 100% owned by WSLIC, general
advertising, book-selling and publishing.
Fort Washington Investment Advisors, Inc.; Ohio corporation; 100%
owned by WSLIC; registered investment adviser.
Columbus Life Insurance Company; Ohio corporation; 100% owned by
WSLIC; insurance.
-7-
<PAGE>
Colmain Properties, Inc.; Ohio corporation; 100% owned by
Columbus Life Insurance Company; acquiring, owning, managing,
leasing, selling real estate.
Colpick, Inc.; Ohio corporation; 100% owned by Colmain
Properties, Inc.; acquiring, owning, managing, leasing and
selling real estate.
CAI Holding Company, Inc.; Ohio corporation; 100% owned by
Columbus Life Insurance Company; holding company.
Capital Analysts, Incorporated; Delaware corporation; 100%
owned by CAI Holding Company; securities broker-dealer.
Capital Analysts Agency, Inc.; Ohio corporation; 99% owned
by Capital Analysts Incorporated, 1% owned by William F.
Ledwin; general insurance agency.
Capital Analysts Agency, Inc.; Texas corporation; 100%
owned by an individual who is a resident of Texas, but
under contractual association with Capital Analysts
Incorporated; general insurance agency.
Capital Analysts Insurance Agency, Inc.; Massachusetts
corporation; 100% owned by Capital Analysts Incorporated;
general insurance agency.
CLIC Company I; Delaware corporation; 100% owned by Columbus Life
Insurance Company; holding company.
CLIC Company II; Delaware corporation; 100% owned by Columbus
Life Insurance Company; holding company.
Eagle Properties, Inc.; Ohio corporation; 100% owned by WSLIC;
ownership, development and management of real estate.
Seasons Management Company; Ohio corporation; 100 % owned by
Eagle Properties, Inc.; management of real estate.
Continental General Corporation; Nebraska corporation; 100% owned by
WSLIC; holding company.
Continental Agency Services, Inc.; Nebraska corporation; 100%
owned by Continental General Corporation.
Continental General Insurance Company; Nebraska corporation; 100%
owned by Continental General Corporation; insurance.
-8-
<PAGE>
Continental Print & Photo Co.; Nebraska corporation; 100% owned
by Continental General Corporation; printing.
Waslic Company II; Delaware corporation; 100% owned by WSLIC; holding
company.
WestTax, Inc.; Ohio corporation, 100% owned by WSLIC; preparation and
electronic filing of tax returns.
Florida Outlet Marts, Inc.; Florida corporation; 100% owned by WSLIC;
ownership and operation of real estate.
AM Concepts Inc.; Delaware corporation, 100% owned by WSLIC; venture
capital investment in companies engaged in alternative marketing of
financial products.
Western-Southern Agency, Inc.; Ohio corporation; 99% owned by WSLIC;
1% owned by William F. Ledwin; general insurance agency.
Western-Southern Agency Services, Inc.; Pennsylvania corporation; 100%
owned by WSLIC; general insurance agency.
W-S Agency of Texas, Inc.; Texas corporation; 100% owned by an
individual; general insurance agency.
ITEM 27. -- NUMBER OF CONTRACT OWNERS
As of January 31, 1997, there were 14 owners of Non-Qualified Contracts
and 8 owners of Qualified Contracts.
ITEM 28. --INDEMNIFICATION
The Amended Code of Regulations of the Company provides that, to the
fullest extent not prohibited by applicable law, the Company shall
indemnify each director, officer and employee against any and all costs and
expenses (including attorney fees, judgments, fines, penalties, amounts
paid in settlement, and other disbursements) actually and reasonably
incurred by or imposed upon such director, officer or employee in
connection with any action, suit, investigation or proceedings (or any
claim or other matter therein), whether civil, criminal, administrative or
otherwise in nature, including any settlements thereof of any appeals
therein, with respect to which such director, officer or employee is named
or otherwise becomes or is threatened to be made a party by reason of being
or at any time having been a director, officer or employee of the Company,
or, at the direction or request of the Company, a director, trustee,
officer, administrator, manager, employee, adviser or other agent of or
fiduciary for any other corporation, partnership, trust, venture or other
entity or enterprise including any employee benefit plan; provided,
however, that no person shall be indemnified to the extent, if any, that
the directors of the Company, acting at a meeting at which a quorum of
directors who are not parties to or threatened with any
-9-
<PAGE>
such action, suit, investigation or proceeding, determine that such
indemnification is contrary to applicable law.
Any director of the Company who is a party to or threatened with any such
action, suit, investigation or proceeding shall not be qualified to vote;
and if for this reason a quorum of directors, who are not disqualified from
voting by reason of being parties to or threatened with such action, suit,
investigation or proceeding, cannot be obtained, such determination shall
be made by three attorneys at law, who have not theretofore represented the
Company in any matter and who shall be selected by all of the officers and
directors of the Company who are not parties to or threatened with any such
action, suit, investigation or proceeding. If there are no officers or
directors who are qualified to make such selection, the selection shall be
made by a Judge of the Court of Common Pleas of Hamilton County, Ohio.
Such indemnification shall not be deemed exclusive of any other right to
which such director, officer or employee may be entitled under the
Company's articles of incorporation, code of regulations, any agreement,
any insurance purchased by the Company, vote of shareholders or otherwise.
The Board of Directors of the Company also may, in its discretion, secure
and maintain insurance policies against any liability asserted against and
incurred by any of the Company's directors, officers or employees.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a trustee, director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such trustee, director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issues.
ITEM 29. -- PRINCIPAL UNDERWRITERS
(a) Touchstone Securities, Inc. ("Touchstone") acts as distributor for
Contracts issued under Western-Southern Life Assurance Company
Separate Account 2 and as distributor for the shares of several series
(Funds) of Select Advisors Trust A and Select Advisors Trust C, each
of which is affiliated with Depositor.
(b) Set forth below are the names, principal business addresses and
positions of each director and officer of Touchstone. Unless
otherwise noted, the principal business
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<PAGE>
address of these individuals is Touchstone Securities, Inc., 311 Pike
Street, Cincinnati, Ohio 45202. Unless otherwise specified, none of
the officers and directors of Touchstone serves as an officer or
Trustee of the SA Trust.
Name Position/Office with Distributor
- ---- ---------------------------------
James N. Clark(1) Director
Edward G. Harness, Jr. Director, Chief Executive Officer and
President; Trustee and President, SA Trust
Edward S. Heenan(1) Director and Controller;
Trustee, SA Trust
William F. Ledwin(1) Director
Donald J. Wuebbling(1) Director
Brian Manley Vice President and Chief Financial
Officer;
Assistant Treasurer, SA Trust
Richard K. Taulbee(1) Vice President
Carl A. Ramsey(2) Vice President
E. Duane Clay(2) Vice President
Robert F. Morand(1) Secretary
Patricia Wilson Chief Compliance Officer
-------------------
(1) 400 Broadway
Cincinnati, Ohio 45202
(2) 8901 Indian Hills Drive
Omaha, Nebraska 68114
(c)
<TABLE>
<CAPTION>
Net Underwriting
Name of Principal Discounts and Compensation Brokerage
Underwriter Commissions on Redemption Commissions Compensation
- ----------------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Touchstone Securities, $0 $0 $0 $0
Inc.
</TABLE>
-11-
<PAGE>
ITEM 30.-- LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained by the Company at 400 Broadway, Cincinnati, Ohio
45202, and the Company's administrative services agent, CSC Continuum at
301 West 11th Street, Kansas City, Missouri 64105.
ITEM 31. -- MANAGEMENT SERVICES
Not Applicable.
ITEM 32. -- UNDERTAKINGS
Registrant undertakes to:
(a) file a post-effective amendment to this Registration Statement as
frequently as is necessary to ensure that the audited financial
statements in the Registration Statement are never more than 16 months
old for so long as payments under the Contracts may be accepted;
(b) include either (1) as part of any application to purchase a Contract
offered by the Prospectus, a space that an applicant can check to
request a Statement of Additional Information, or (2) a postcard or
similar written communication affixed to or included in the Prospectus
that the applicant can remove to send for a Statement of Additional
Information; and
(c) deliver any Statement of Additional Information and any financial
statements required to be made available under this Form promptly upon
written or oral request directed to the address or telephone number
contained in the Prospectus.
Registrant represents that it is relying upon a "no-action" letter issued
to the American Council of Life Insurance concerning that conflict between
the redeemability requirements of sections 22(e), 27(c)(1) and 27(d) of the
Investment Company Act of 1940 and the limits on the redeemability of
variable annuities imposed by Section 403(b)(11) of the Internal Revenue
Code. The Registrant has included disclosure concerning the 403(b)(11)
restrictions in its prospectus and sales literature, and established a
procedure whereby each plan participant will sign a statement acknowledging
these restrictions before a Contract is issued. Sales representatives have
been instructed to bring the restrictions to the attention of potential
plan participants.
Pursuant to Section 26(e) of the Investment Company Act of 1940, as
amended, Western-Southern Life Assurance Company represents that, with
respect to the Contracts registered with the Commission by this Registration
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<PAGE>
Statement, as it may be amended, and offered by the Prospectus included in
this Registration Statement, all fees and charges imposed for any purpose
and in any manner and deducted under the Contracts, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by the Western-Southern Life Assurance
Company.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Depositor, on behalf of itself and the Registrant,
certifies that it meets the requirements of Securities Act Rule 485 for
effectiveness, it is filing this Registration Statement on Form N-4 (the
"Registration Statement") pursuant to Rule 485(b) of the Securities Act of 1933
to update its financial statements and other information, and has duly caused
this Post-Effective Amendment No. 4 to the Registration Statement (the
"Post-Effective Amendment") to be signed on its behalf, in the City of
Cincinnati and State of Ohio on the 30th day of April, 1997.
WESTERN-SOUTHERN LIFE ASSURANCE
COMPANY SEPARATE ACCOUNT 2
by
WESTERN-SOUTHERN LIFE ASSURANCE
COMPANY
By /s/ EDWARD S. HEENAN
-----------------------------------
Edward S. Heenan, Vice President and
Controller
As required by the Securities Act of 1933, this Post-Effective
Amendment has been signed below by the following persons in the capacities and
on the date indicated below.
Principal Executive Officer:
- ---------------------------
/s/JOHN F. BARRETT April 30, 1997
- ----------------------------
John F. Barrett, President, Director
and Chief Executive Officer
Principal Financial and
Accounting Officer:
- -----------------------
Edward S. Heenan, Vice
President and Controller By /s/EDWARD S. HEENAN
----------------------------
Edward S. Heenan, as Principal
Financial and Accounting
Officer and as attorney-in-fact
for each Director
Directors:
- ---------
JAMES N. CLARK
LAWRENCE C. HAWKINS
J. HAROLD KOTTE April 30, 1997
CHARLES M. WILLIAMS
THOMAS L. WILLIAMS
WILLIAM J. WILLIAMS
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<PAGE>
SIGNATURES
Select Advisors Portfolios (the "Portfolios") has duly caused this
Post-Effective Amendment No. 4 to the Registration Statement on Form N-4 (the
"Post-Effective Amendment") of Western-Southern Life Assurance Company Separate
Account 2 to be signed on its behalf, in the City of Cincinnati and State of
Ohio on the 30th day of April, 1997.
SELECT ADVISORS PORTFOLIOS
By /s/EDWARD G. HARNESS, JR.
-------------------------------------------
Edward G. Harness, Jr., President
The Post-Effective Amendment has also been signed below by the following
persons in the capacities indicated on the 30th day of April, 1997.
Principal Executive Officer:
- ---------------------------
/s/EDWARD G. HARNESS, JR. April 30, 1997
- ---------------------------
Edward G. Harness, Jr.
Trustee and President
Principal Financial and
Accounting Officer:
- -----------------------
Edward S. Heenan
Treasurer By: /s/EDWARD S. HEENAN
--------------------------------
Edward S. Heenan, as Principal
Financial and Accounting
Officer and as attorney-in-fact
for each Trustee
Trustees:
- ---------
PHILIP R. COX
DAVID POLLAK
ROBERT E. STAUTBERG April 30, 1997
JOSEPH S. STERN, JR.
WILLIAM J. WILLIAMS
<PAGE>
EXHIBIT 8(a)(ii)
FUND ACCOUNTING AGREEMENT
AGREEMENT made as of this 1st day of December, 1996, between Select
Advisors Portfolios, a New York master trust fund (the "Trust") and Investors
Bank & Trust Company ("IBT").
The Trust, an open-end management investment company, on behalf of the
portfolios listed on APPENDIX A hereto, desires to retain IBT to perform
certain Trust accounting services for the Trust, and IBT has indicated its
willingness to so act, subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties hereto agree as follows:
1. DEFINITIONS. Whenever used herein, the terms listed below will have
the following meaning:
1.1 AUTHORIZED PERSON. Authorized Person will mean any of the
persons duly authorized to give Proper Instructions or otherwise act on
behalf of the Trust by appropriate resolution of its Board, and set forth in
a certificate as required by Section 1.4 hereof.
1.2 BOARD. Board will mean the Board of Trustees of the Trust, as
the case may be.
1.3 OFFICERS' CERTIFICATE. Officers' Certificate will mean, unless
otherwise indicated, any request, direction, instruction, or certification in
writing signed by any two Authorized Persons of the Trust.
1.4 PROPER INSTRUCTIONS. Proper Instructions shall mean
instructions (which may be continuing instructions) regarding matters signed
or initialed by an Authorized Person. Oral instructions will be considered
Proper Instructions if IBT reasonably believes them to have been given by an
Authorized Person. The Trust shall cause all oral instructions to be promptly
confirmed in writing. IBT shall act upon and comply with any subsequent
Proper Instruction which modifies a prior instruction and the sole obligation
of IBT with respect to any follow-up or confirmatory instruction shall be to
make reasonable efforts to detect any discrepancy between the original
instruction and such confirmation and to report such discrepancy to the
Trust. The Trust shall be responsible, at the Trust's expense, for taking any
action, including any reprocessing, necessary to correct any such discrepancy
or error, and to the extent such action requires IBT to act, the Trust shall
give IBT specific Proper Instructions as to the action required. Upon receipt
by IBT of an Officers' Certificate as to the authorization by the Board
accompanied by a detailed description of procedures approved by the Trust,
Proper Instructions may include communication effected directly between
electro-mechanical or electronic devices provided that the Board and IBT
agree in writing that such procedures afford adequate safeguards for the
Trust's assets.
2. CERTIFICATION AS TO AUTHORIZED PERSONS. The Secretary or Assistant
Secretary of the Trust will at all times maintain on file with IBT his or her
certification to IBT, in such form as may be acceptable to IBT, of (i) the
names and signatures of the Authorized Persons and (ii) the names of the
members of the Board, it being understood that upon the occurrence of any
change in the information set forth in the most recent certification on file
(including without limitation any person named in the most recent
certification who is no longer an Authorized Person as designated therein),
the Secretary or Assistant Secretary of the Trust will sign a new or amended
certification setting forth the change and the new, additional or omitted
names or signatures. IBT will be entitled to rely and act upon any Officers'
Certificate given to it by the Trust which has been signed by Authorized
Persons named in the most recent certification received by IBT.
<PAGE>
3. TRUST EVALUATION AND YIELD CALCULATION
3.1 TRUST EVALUATION. IBT shall compute and, unless otherwise
directed by the Board, determine as of the close of regular trading on the
New York Stock Exchange on each day on which said Exchange is open for
unrestricted trading and as of such other days, or hours, if any, as may be
authorized by the Board, the value of beneficial interests of the Trust and
their allocation between or among portfolios that invest in the Trust, such
determination to be made in accordance with the provisions of the Declaration
of Trust and By-laws of the Trust, as they may from time to time be amended,
and any applicable resolutions of the Board at the time in force and
applicable; and promptly to notify the Trust, the proper exchange and the
NASD or such other persons as the Trust may request of the results of such
computation and determination. In computing the value of beneficial interests
hereunder, IBT may rely in good faith upon information furnished to it by any
Authorized Person in respect of (i) the manner of accrual of the liabilities
of the Trust and in respect of liabilities of the Trust not appearing on its
books of account kept by IBT, (ii) reserves, if any, authorized by the Board
or that no such reserves have been authorized, (iii) the source of the
quotations to be used in computing values hereunder, (iv) the value to be
assigned to any security for which no price quotations are available, and (v)
the method of computation and allocation of beneficial interests in the
Trust, and IBT shall not be responsible for any loss occasioned by such
reliance or for any good faith reliance on any quotations received from a
source pursuant to (iii) above.
3.2. YIELD CALCULATION. IBT will compute the performance results of
the Trust (the "Yield Calculation") in accordance with the provisions of
Release No. 33-6753 and Release No. IC-16245 (February 2, 1988) (the
"Releases") promulgated by the Securities and Exchange Commission, and any
subsequent amendments to, published interpretations of or general conventions
accepted by the staff of the Securities and Exchange Commission with respect
to such releases or the subject matter thereof ("Subsequent Staff
Positions"), subject to the terms set forth below:
(a) IBT shall compute the Yield Calculation for the Trust for the
stated periods of time as shall be mutually agreed upon, and communicate in a
timely manner the result of such computation to the Trust.
(b) In performing the Yield Calculation, IBT will derive the items
of data necessary for the computation from the records it generates and
maintains for the Trust pursuant Section 11 hereof. IBT shall have no
responsibility to review, confirm, or otherwise assume any duty or liability
with respect to the accuracy or correctness of any such data supplied to it
by the Trust, any of the Trust's designated agents or any of the Trust's
designated third party providers.
(c) At the request of IBT, the Trust shall provide, and IBT shall
be entitled to rely on, written standards and guidelines to be followed by
IBT in interpreting and applying the computation methods set forth in the
Releases or any Subsequent Staff Positions as they specifically apply to the
Trust. In the event that the computation methods in the Releases or the
Subsequent Staff Positions or the application to the Trust of a standard or
guideline is not free from doubt or in the event there is any question of
interpretation as to the characterization of a particular security or any
aspect of a security or a payment with respect thereto (e.g., original issue
discount, participating debt security, income or return of capital, etc.) or
otherwise or as to any other element of the computation which is pertinent to
the Trust, the Trust or its designated agent shall have the full
responsibility for making the determination of how the security or payment is
to be treated for purposes of the computation and how the computation is to
be made and shall inform IBT thereof on a timely basis. IBT shall have no
responsibility to make independent determinations with respect to any item
which is covered by this Section, and shall not be
2
<PAGE>
responsible for its computations made in accordance with such determinations
so long as such computations are mathematically correct.
(d) The Trust shall keep IBT informed of all publicly available
information relating specifically to the Trust (as opposed to investment
companies generally) and of any non-public advice, or non-public information
obtained by the Trust from its independent auditors or by its personnel or
the personnel of its investment adviser related to the computations to be
undertaken by IBT pursuant to this Agreement and IBT shall not be deemed to
have knowledge of such information (except as contained in the Releases and
the Subsequent Staff Positions or as publicly available regarding investment
companies generally) unless it has been furnished to IBT in writing.
4. FEES. For the services rendered pursuant to this Agreement, the
Trust agrees to pay IBT the fees set forth on APPENDIX B hereto.
5. ADDITIONAL SERVICES. IBT shall perform the additional services for
the Trust as are set forth on APPENDIX C hereto. APPENDIX C may be amended
from time to time upon agreement of the parties to include further additional
services to be provided by IBT to the Trust, at which time the fees set forth
in APPENDIX B shall be appropriately increased.
6. LIMITATION OF LIABILITY.
6.1 IBT, its directors, officers, employees and agents shall not be
liable for any error of judgment or mistake of law or for any loss suffered
by the Trust in connection with the performance of its obligations and duties
under this Agreement, except in respect of an error, mistake or loss
resulting from willful misfeasance, bad faith or negligence in the
performance of such obligations and duties, or by reason of its disregard
thereof or a material breach of the provisions hereof.
6.2 The Trust will indemnify IBT, its directors, officers, employees
and agents against and hold it and them harmless from any and all losses,
claims, damages, liabilities or expenses (including legal fees and expenses)
resulting from any claim, demand, action or suit (i) arising as a result of
any act or omission by IBT or any of its officers, directors, employees or
agents in good faith reliance upon the terms of this Agreement, any Officer's
Certificate or Proper Instructions; (ii) arising as a result of information
supplied by any Authorized Person and relied on in good faith by IBT in
connection with the calculation of (A) the net asset value and public
offering price of the shares of capital stock of the Trust or (B) the Yield
Calculation; or (iii) not resulting from the willful misfeasance, bad faith
or negligence of IBT in the performance of such obligations and duties or by
reason of its disregard thereof or a material breach of the provisions
hereof.
6.3 IBT may apply to the Trust at any time for instructions and may
consult counsel for the Trust (except as to matters where the interests of
the Trust and IBT, in the opinion of such counsel, differ), or its own
counsel, knowledgeable in the field, and with accountants and other experts
with respect to any matter arising in connection with its duties hereunder,
and IBT shall not be liable or accountable for any action taken or omitted by
it in good faith in accordance with such instruction, or with the opinion of
such counsel, accountants, or other experts. IBT shall not be liable for any
act or omission taken or not taken in reliance upon any document, certificate
or instrument which it reasonably believes to be genuine and to be signed or
presented by any person or persons duly authorized by the Trust (as set forth
in a certificate duly executed by an officer of the Trust). IBT shall not be
held to have notice of any change of authority of any officers, employees, or
agents of the Trust until receipt of written notice thereof has been received
by IBT from the Trust.
6.4 In the event IBT is unable to perform, or is delayed in
performing, its obligations under the terms of this Agreement because of acts
of God, strikes, legal constraint, government actions, war,
3
<PAGE>
emergency conditions, interruption of electrical power or other utilities,
equipment or transmission failure or damage reasonably beyond its control or
other causes reasonably beyond its control, IBT shall not be liable to the
Trust for any damages resulting from such failure to perform, delay in
performance, or otherwise that is attributable to such causes.
6.5 IBT acknowledges that the portfolios comprising the Trust are
organized under a two-tier financial services structure, known as the Hub &
Spoke-Registered Trademark-(1) structure, under and pursuant to a certain
Hub & Spoke License and Service Agreement dated December 14, 1993 (the
"License Agreement"), by and between the Trust's adviser, Touchstone Advisors,
Inc., and Signature Financial Group, Inc. ("Signature"). As a material
inducement to the Trust to enter into this Agreement, IBT hereby warrants and
represents that IBT is a duly licensed and authorized third party Hub & Spoke
processing agent of Signature, and is duly licensed and authorized by
Signature to provide Hub & Spoke processing and administration services to,
for and on behalf of the Trust and its portfolios in accordance with the
terms of this Agreement; and further, that no consent, which has not already
been obtained in writing by IBT, is required by Touchstone Securities, Inc.,
or by either party to this Agreement from Signature in order for IBT to
provide Hub & Spoke processing and administration services, for and on behalf
of the Trust and its portfolios.
6.6 IBT will indemnify the Trust, its trustees, officers, employees
and agents against and hold them harmless from any and all losses, claims,
damages, liabilities or expenses (including legal fees and related expenses)
resulting from any claim, demand, action or suit (i) arising out of IBT's
failure to obtain and maintain in effect all licenses rights and permissions
(all without cost to the Trust for so long as the Trust remains a party to
the License Agreement and the License Agreement remains in full force and
effect) required to enable it to use, to the full extent necessary for the
performance of its duties and obligations under this Agreement, all
intellectual property belonging to Signature Financial Services, Inc. and its
affiliates that relates to the Hub & Spoke structure and related Trust
accounting and administration and the software and processes associated
therewith and (ii) resulting from the willful misfeasance, bad faith or
negligence of IBT in the performance of its duties and obligations under this
Agreement or from its disregard thereof.
6.7 In no event shall IBT be liable for special, incidental or
consequential damages, even if advised of the possibility of such damages.
7. TERMINATION.
7.1 The term of this Agreement shall be eighteen months commencing
upon the date hereof (the "Initial Term"), unless earlier terminated as
provided herein. After the expiration of the Initial Term, the term of this
Agreement shall automatically renew for successive one-year terms (each a
"Renewal Term") unless notice of non-renewal is delivered by the non-renewing
party to the other party no later than sixty days prior to the expiration of
the Initial Term or any Renewal Term, as the case may be.
(a) Either party hereto may terminate this Agreement prior to the
expiration of the Initial Term in the event the other party violates any
material provision of this Agreement, provided that the non-violating party
gives written notice of such violation to the violating party and the
violating party does not cure such violation within 60 days of receipt of
such notice.
(b) Either party may terminate this Agreement during any Renewal
Term upon sixty days written notice to the other party. Any termination
pursuant to this paragraph 7.1(b) shall be effective upon expiration of such
sixty days, provided, however, that the effective date of such termination
may be postponed, at the request of the Trust, to a date not more than ninety
days after
- --------------
(1)Hub & Spoke is a registered service mark of Signature Financial Group, Inc.
4
<PAGE>
delivery of the written notice in order to give the Trust an opportunity to
make suitable arrangements for a successor Trust accountant.
(c) If the Trust determines at any time to cease using the Hub &
Spoke structure in the conduct of its business, whether it changes to a
master-feeder, multiple class or other structure, the Trust may terminate
this Agreement if, after the Trust gives IBT at least 30 days prior written
notice of such change, the parties, after making diligent and good faith
efforts, are unable to agree to amendments to this Agreement that are
reasonable and fair to both parties under the circumstances, such termination
to be effective 90 days after the delivery of such prior written notice.
(d) The Trust may terminate this Agreement if and at such time as
a court of competent jurisdiction either (A) finds, after the exhaustion of
all appeals, that the performance by IBT of the services called for by this
Agreement or the engagement by the Trust of IBT to perform such services
infringes the intellectual property rights of Signature Financial Services,
Inc., or any affiliate thereof, in any manner whatsoever, or (B) enjoins or
restrains the performance by Investors Bank of the services called for by
this Agreement.
(e) The Trust may terminate this Agreement if and at such time as
any of the Trust accounting agreements between Investors Bank and Select
Advisors Trust A, Select Advisors Portfolio or Select Advisors Portfolios are
terminated due to a material violation of the terms of any such Trust
accounting agreement by Investors Bank.
7.2 The Trust shall reimburse IBT for any reasonable expenses
incurred by IBT for transition accounting and transfer of records in
connection with the termination of this Agreement.
7.3 At any time after the termination of this Agreement, the Trust
may, upon written request, have reasonable access to the records of IBT
relating to its performance of its duties as hereunder.
8. CONFIDENTIALITY. Both parties hereto agree that any non-public
information obtained hereunder concerning the other party is confidential and
may not be disclosed without the consent of the other party, except as may be
required by applicable law or at the request of a governmental agency. The
parties further agree that a breach of this provision would irreparably
damage the other party and accordingly agree that each of them is entitled,
in addition to all other remedies at low or in equal to an injunction or
injunctions without bond or other security to prevent breaches of this
provision.
9. NOTICES. Any notice or other instrument in writing authorized or
required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and delivered via (I) United
States Postal Service registered mail, (ii) telecopier with written
confirmation, (iii) hand delivery with signature to such party at its office
at the address set forth below, namely:
(a) In the case of notices sent to the Trust to:
Select Advisors Portfolios
311 Pike Street
Cincinnati, OH 45202
Attention: Edward G. Harness, Jr.
5
<PAGE>
(b) In the case of notices sent to IBT to:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
Attention: Carol Lowd, Client Manager
With a copy to: John E. Henry, General Counsel
or at such other place as such party may from time to time
designate in writing.
10. AMENDMENTS. This Agreement may not be altered or amended, except
by an instrument in writing, executed by both parties.
11. PARTIES. This Agreement will be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and
assigns; provided, however, that this Agreement will not be assignable by the
Trust without the written consent of IBT or by IBT without the written
consent of the Trust, authorized and approved by its Board; and provided
further that termination proceedings pursuant to Section 16 hereof will not
be deemed to be an assignment within the meaning of this provision.
12. GOVERNING LAW. This Agreement and all performance hereunder will be
governed by the laws of the Commonwealth of Massachusetts, without regard to
conflict of laws provisions.
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
14. ENTIRE AGREEMENT. This Agreement, together with its Appendices,
constitutes the sole and entire agreement between the parties relating to the
subject matter herein and does not operate as an acceptance of any
conflicting terms or provisions of any other instrument and terminates and
supersedes any and all prior agreements and undertakings between the parties
relating to the subject matter herein.
15. LIMITATION OF LIABILITY. IBT is hereby expressly put on notice of
the limitation of liability set forth in the Declaration of Trust of the
Trust and agrees that the obligations assumed by the Trust hereunder shall be
limited in all cases to the assets of the Trust and that IBT shall not seek
satisfaction of any such obligation from the officers, agents, employees,
trustees, or shareholders of the Trust.
16. SEVERAL OBLIGATIONS OF THE PORTFOLIOS. This Agreement is an
agreement entered into between IBT and the Trust with respect to each
Portfolio. With respect to any obligation of the Trust on behalf of any
Portfolio arising out of this Agreement, IBT shall look for payment or
satisfaction of such obligation solely to the assets of the Portfolio to
which such obligation relates as though IBT had separately contracted with
the Trust by separate written instrument with respect to each Portfolio.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first written above.
SELECT ADVISORS PORTFOLIOS
By:
----------------------------------
Name:
Title:
INVESTORS BANK & TRUST COMPANY
By:
----------------------------------
Name:
Title:
7
<PAGE>
APPENDIX A
PORTFOLIOS
Emerging Growth Portfolio
International Equity Portfolio
Growth & Income Portfolio
Growth & Income Portfolio II
Balanced Portfolio
Bond Portfolio
Bond Portfolio II
Income Opportunity Portfolio
Municipal Bond Portfolio
<PAGE>
APPENDIX C
ADDITIONAL SERVICES
None
<PAGE>
Exhibit 8(b)(ii)
AMENDMENT NO. 1
INVESTMENT ADVISORY AGREEMENT
This Amendment No. 1 to Investment Advisory Agreement is dated as of May
1, 1997 and amends the Investment Advisory Agreement (the "Advisory
Agreement") dated September 9, 1994 made by and between Touchstone Advisors,
Inc., an Ohio corporation (the "Advisor"), and Select Advisors Portfolios, a
New York master trust created pursuant to a Declaration of Trust dated
February 7, 1994 (the "Trust").
WHEREAS, the Advisor acts as investment advisor to the Trust pursuant to
the Advisory Agreement; and in such capacity the Advisor has engaged separate
portfolio advisors for each of the Trust's portfolios; and
WHEREAS, the Trust, by its Board of Trustees, has taken action to
terminate the Trust's Municipal Bond Portfolio and the Portfolio Advisory
Agreement, dated September 9, 1994, presently in effect between the Advisor
and Neuberger & Berman, Portfolio Advisor to such portfolio, each as of the
close of business on April 30, 1997; and
WHEREAS, such Board of Trustees also has taken action to terminate
Portfolio Advisory Agreements presently in effect between the Advisor and
Harbor Capital Management Company, Inc. ("Harbor Capital") and Morgan
Grenfell Capital Management, Inc. ("Morgan Grenfell"), each such Portfolio
Advisory Agreement being dated as of September 9, 1994; and
WHEREAS, such Board of Trustees also has taken action to enter into a
Portfolio Advisory Agreement with Op Cap Advisors, a subsidiary of
Oppenheimer Capital, a registered investment advisor, under which Op Cap
Advisors will act as Portfolio Advisor to the Trust's Balanced Portfolio,
replacing Harbor Capital and Morgan Grenfell; and
WHEREAS, the advisory fees to be paid to Op Cap Advisors under such
Portfolio Advisory Agreement will be higher than the fees currently being
paid to Harbor Capital and Morgan Grenfell under their Portfolio Advisor
Agreements; and
WHEREAS, the trust is agreeable to an increase in the fees being paid
under the Advisory Agreement sufficient to offset the increase in fees to be
paid to Op Cap Advisors, having found that such increased fees are comparable
to the average fees being paid to advisors of balanced portfolios generally.
NOW, THEREFORE, Schedule 1 to the Advisory Agreement is hereby amended,
effective as of the close of business on April 30, 1997, to read as set forth
in Exhibit A to this Amendment, the only changes in such Schedule being an
increase in the advisory fees to be paid by the Balanced Portfolio, from
0.70% to 0.80% of average daily net assets, and the deletion of the Municipal
Bond Portfolio.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and delivered in their names and on their behalf as of the day and
year first above written.
SELECT ADVISORS PORTFOLIO
By:
-----------------------------------
Edward G. Harness, Jr., President
TOUCHSTONE ADVISORS INC.
By:
---------------------------------
<PAGE>
Exhibit A to Amendment No 1 to
Advisory Agreement
SCHEDULE 1
Emerging Growth Portfolio 0.80%
International Equity Portfolio 0.95%
Growth & Income Portfolio 0.75%
Growth & Income Portfolio II 0.75%
Balanced Portfolio 0.80%
Income Opportunity 0.65%
Bond Portfolio 0.55%
Bond Portfolio II 0.55%
<PAGE>
Exhibit 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form N-4 (File
No. 33-79906) of our report, dated April 25, 1997, on our audits of the
financial statements of Western-Southern Life Assurance Company and our
report dated January 9, 1997, on our audit of the financial statements of
Western-Southern Life Assurance Company Separate Account 2. We also consent
to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand LLP
Cincinnati, Ohio
April 29, 1997
