<PAGE> 1
As filed with the Securities and Exchange Commission on February 27, 1998
Registration No. 033-79906
Registration No. 811-8550
================================================================================
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. 5 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 6 [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 LLP
Cincinnati, Ohio 45202 2500 PNC Center
(Name and Address of Agent for Service) 201 East Fifth Street
Cincinnati, Ohio 45202
Approximate Date of Proposed Public Offering: Continuous Offering
It is proposed that this filing will become effective (check appropriate box)
___ immediately upon filing pursuant to paragraph (b) of rule 485
___ on (date) pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
XX on May 1, 1998 pursuant to paragraph (a)(1) of Rule 485
---
If appropriate, check the following box:
___ this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
- -------------------------------------------------------------------------------
Title of Securities Being Registered: Variable Annuity Contracts
Select Advisors Portfolios has also executed this Registration Statement.
- -------------------------------------------------------------------------------
<PAGE> 2
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 2
TOUCHSTONE ADVISORS VARIABLE ANNUITY CONTRACT
CROSS-REFERENCE SHEET REQUIRED BY RULE 495(a)
PART I - DISCUSSION OF THE VARIABLE ANNUITY CONTRACT
<TABLE>
<CAPTION>
FORM N-4 PART A ITEM NO. HEADING IN PROSPECTUS
- ------------------------ ---------------------
<S> <C>
1. Cover Page Cover Page
2. Definitions Glossary
3. Synopsis Fee and Expense Tables; Summary of
the Contract
4. Condensed Financial Information
(a) Accumulation Unit Values Accumulation Unit Values
(b) Performance Information Performance Information
(c) Financial Statements Financial Statements
5. General Description of Registrant,
Depositor and Portfolio Companies
(a) Depositor The Company
(b) Registrant The Separate Account; The Fixed Account
(c) Portfolio Company The VI Trust and the SA Trust
(d) Prospectus The VI Trust and the SA Trust
(e) Voting Voting Rights
(f) Administrator The VI Trust and the SA Trust; Charges
6. Deductions and Expenses
(a) Deductions Charges
(b) Sales load Surrender Charge
(c) Special purchase plans Surrender Charge; Dollar Cost Averaging;
Purchase of a Contract
(d) Commissions Distribution of the Contracts
(e) Portfolio company deductions Expenses of the VIT Portfolios and
SAT Portfolios
(f) Registrant's expenses Charges
(g) Organizational expenses Administrative Charges
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
FORM N-4 PART A ITEM NO. HEADING IN PROSPECTUS
- ------------------------ ---------------------
<S> <C>
7. General Description of Variable
Annuity Contracts
(a) Rights Summary of the Contract; Allocation
of Purchase Payments; Surrenders and Partial
Withdrawals; Selection of Income Payment
Option; Statements to Owners; Voting Rights;
Other Contract Provisions
(b) Provisions and limitations Allocation of Purchase Payments; Transfers
(c) Changes in contracts or operations The Separate Account
(d) Contract owner inquiries Cover Page; Summary of the Contract
8. Annuity Period
(a) Level of benefits Selection of Annuity Income Option
(b) Annuity commencement date Income Date Selection
(c) Annuity payments Annuity Payout Plans
(d) Assumed investment return Selection of Annuity Income Option
(e) Minimums Annuity Payout Plans
(f) Rights to change options or transfer Selection of Annuity Payout Plans
contract value
9. Death Benefit
(a) Death benefit calculation Death Benefit
(b) Forms of benefits Selection of Income Payment Option
10. Purchases and Contract Value
(a) Procedures for purchases Purchase of a Contract
(b) Accumulation unit values Accumulation Unit Value
(c) Calculation of accumulation Allocation of Purchase Payments;
unit values Accumulation Unit Value
(d) Principal underwriter Distribution of the Contracts
11. Redemptions
(a) Redemption procedures Surrenders and Partial Withdrawals
(b) Texas Optional Retirement Program Not Applicable
(c) Delay Surrenders and Partial Withdrawals
(d) Lapse Surrenders and Partial Withdrawals
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
FORM N-4 PART A ITEM NO. HEADING IN PROSPECTUS
- ------------------------ ---------------------
<S> <C>
(e) Revocation rights Free Look Privilege
12. Taxes
(a) Tax consequences Federal Income Tax Information
(b) Qualified plans Federal Income Tax Information
(c) Impact of taxes Federal Income Tax Information
13. Legal Proceedings Legal Proceedings
14. Table of Contents for Statement of Table of Contents of Statement of
Additional Information Additional Information
FORM N-4 PART B ITEM NO. HEADING IN SAI
- ------------------------ --------------
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and History
(a) Name change Not Applicable
(b) Attribution of assets Not Applicable
(c) Control of depositor The Company (Prospectus)
18. Services
(a) Fees, expenses and costs Administrative Services; Charges
(Prospectus); Expenses of the VIT
Portfolios and the SAT Portfolios
(Prospectus)
(b) Management-related services Not applicable
(c) Custodian and independent public Independent Accountants
accountant
(d) Other custodianship Safekeeping of Assets
(e) Administrative servicing The Company (Prospectus); The Separate
Account (Prospectus)
(f) Depositor as principal underwriter Not Applicable
19. Purchase of Securities Being Offered
(a) Manner of offering Distribution of the Contracts (Prospectus)
(b) Sales Load Surrender Charge (Prospectus)
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
FORM N-4 PART B ITEM NO. HEADING IN SAI
- ------------------------ ---------------------
<S> <C>
20. Underwriters
(a) Depositor or affiliate as principal Distribution of Contracts (Prospectus)
underwriter
(b) Continuous offering Distribution of the Contracts (Prospectus)
(c) Underwriting commissions Distribution of the Contracts (Prospectus)
(d) Payments to underwriter Distribution of the Contracts (Prospectus)
21. Calculation of Performance Data Sub-Account Performance
22. Annuity Payments Fixed Annuity Income Payments
23. Financial Statements
(a) Registrant Financial Statements
(b) Depositor Financial Statements
PART II - DISCUSSION OF SELECT ADVISORS PORTFOLIOS
FORM N-1A PART A ITEM NO. HEADING IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Summary; Fee and Expense Tables
(Prospectus Part I)
3. Condensed Financial Information
(a) Financial Highlights Financial Highlights
(b) Debt Not Applicable
(c) Performance Information Performance Information (Prospectus Part I)
4. General Description of the Registrant
(a)(i) Organization The Separate Account (Prospectus Part I)
(a)(ii) Investment Objectives Investment Objectives, Policies and
Restrictions; Investment Techniques, Risk
Factors and Investment Restrictions
5. Management of the Portfolios Management of the Portfolios
5A. Management's Discussion of Portfolios' Financial Highlights
Performance
6. Capital Stock and Other Securities Additional Information; Taxation (SAI)
7. Purchase of Securities Being Offered Purchase and Valuation; Special Information
Concerning Hub and Spoke(R) Structure;
Management of the Portfolios
</TABLE>
iv
<PAGE> 6
<TABLE>
<CAPTION>
FORM N-4 PART A ITEM NO. HEADING IN PROSPECTUS
- ------------------------ ---------------------
<S> <C>
8. Redemption or Purchase Special Information Concerning Hub and Spoke(R)
Structure; Additional Information
9. Legal Proceedings Not Applicable
FORM N-1A PART B ITEM NO. HEADING IN SAI
- ------------------------- --------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Facts about the Company, The Separate
Account and the Fixed Account (Prospectus
Part I)
13. Investment Objectives and Policies Investment Objectives, Techniques, Policies and
Restrictions
14. Management of the Fund Management of the SA Trust
15. Control Persons and Principal Holders of Management of the SA Trust; The Variable Account
Securities (Prospectus Part I)
16. Investment Advisory and Other Persons Management of the Portfolios (Prospectus Part II);
Advisors, Portfolio Advisors, Administrator, and Sponsor
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage Commissions
18. Capital Stock and Other Securities Organization of the SA Trust
19. Purchase, Redemption and Pricing of Securities Valuation of Securities and Redemption in Kind
Being Offered
20. Tax Status Taxation
21. Underwriters Distribution of the Contracts (Prospectus Part I)
22. Calculation of Performance Data Performance Information (Prospectus Part I);
Sub-Account Performance
23. Financial Statements Financial Statements
</TABLE>
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.
v
<PAGE> 7
T O U C H S T O N E
-------------------
TOUCHSTONE ADVISORS VARIABLE ANNUITY
- Value Plus
- Emerging Growth
- International Equity
- Growth & Income
- Balanced
- Income Opportunity
- Bond
- Standby Income
PROSPECTUS
MAY 1, 1998
<PAGE> 8
This booklet contains the Prospectus for TOUCHSTONE ADVISORS 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> 9
- -------------------------------------------------------------------------------
PROSPECTUS
MAY 1, 1998
UNITS OF INTEREST UNDER WESTERN-SOUTHERN LIFE
FLEXIBLE PURCHASE ASSURANCE COMPANY
PAYMENT DEFERRED SEPARATE ACCOUNT 2
VARIABLE ANNUITY 400 BROADWAY
CONTRACTS CINCINNATI, OHIO 45202
- -------------------------------------------------------------------------------
This Prospectus describes individual variable annuity contracts (each a
"CONTRACT" and collectively the "CONTRACTS") offered by Western-Southern Life
Assurance Company (the "COMPANY"). The Contracts are designed for individual
investors and group plans that desire to accumulate capital on a tax-deferred
basis for retirement or other long term objectives. Contracts may be purchased
on either a non-qualified basis or on a qualified basis in connection with
qualified retirement and pension plans. 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 ("SEPARATE ACCOUNT 2"). Each Sub-Account invests in a
corresponding portfolio (a "PORTFOLIO") of Select Advisors Variable Insurance
Trust or of Select Advisors Portfolios.
The Sub-Accounts in which Owners may invest are: Value Plus, 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. The Value Plus, Emerging
Growth, International Equity, Balanced, Income Opportunity and Standby Income
Sub-Accounts invest in corresponding Portfolios of Select Advisors Variable
Insurance Trust (the "VI TRUST"). The Growth & Income and Bond Sub-Accounts
invest in corresponding Portfolios of Select Advisors Portfolios (the "SA
TRUST"). Unlike the Portfolios of the VI Trust which receive investments only
from Separate Account 2 and other separate accounts of the Company, the SA Trust
may also receive investments for its Portfolios from separate accounts of other
insurance companies registered as investment companies.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE CONTRACTS ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, THE NATIONAL
CREDIT UNION SHARE INSURANCE FUND OR ANY OTHER AGENCY. MUTUAL FUNDS AND VARIABLE
ANNUITIES INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THE INCOME OPPORTUNITY PORTFOLIO OF THE VI TRUST MAY INVEST UP TO 100%
OF ITS TOTAL ASSETS IN NON-INVESTMENT GRADE BONDS, (COMMONLY KNOWN AS "JUNK
BONDS") ISSUED BY BOTH U.S. AND FOREIGN ISSUERS. THESE BONDS ENTAIL GREATER RISK
OF UNTIMELY INTEREST AND PRINCIPAL
<PAGE> 10
PAYMENTS, DEFAULT AND PRICE VOLATILITY THAN HIGHER RATED SECURITIES, AND MAY
PRESENT PROBLEMS OF LIQUIDITY AND VALUATION. SEE "INCOME OPPORTUNITY PORTFOLIO"
IN THE VI TRUST PROSPECTUS.
This Prospectus tells investors briefly the information they should
know before investing in the Contracts. Investors should read and retain this
Prospectus for future reference. This Prospectus is valid only when accompanied
by the current prospectus for the VI Trust, a copy of which is bound with this
Prospectus. Additional information about the Contracts and Separate Account 2
has been filed with the Securities and Exchange Commission in a Statement of
Additional Information dated May 1, 1998. The Statement of Additional
Information is incorporated by reference in this Prospectus and is available
without charge by calling the Touchstone Variable Annuity Service Center at
1-800-669-2796. The table of contents of the Statement of Additional Information
appears on page ___ of this Prospectus. The Securities and Exchange Commission
maintains a web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference, and other
information regarding registrants (such as Separate Account 2) that file
electronically with the Commission.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY INTEREST OR PARTICIPATION IN
THE CONTRACTS OFFERED HEREBY IN ANY JURISDICTION OR TO ANY PERSON TO WHOM SUCH
OFFER WOULD BE UNLAWFUL THEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 11
PROSPECTUS CONTENTS
<TABLE>
<S> <C>
GLOSSARY............................................................................................................1
PART I -- DISCUSSION OF THE VARIABLE ANNUITY CONTRACT...............................................................5
FEE AND EXPENSE TABLES..............................................................................................5
SUMMARY OF THE CONTRACT.............................................................................................8
ACCUMULATION UNIT VALUES...........................................................................................11
PERFORMANCE INFORMATION............................................................................................12
FACTS ABOUT THE COMPANY AND THE VARIABLE ACCOUNT...................................................................12
The Company..................................................................................................12
The Separate Account.........................................................................................13
The VI Trust and the SA Trust................................................................................13
THE CONTRACT.......................................................................................................15
Purchase Of A Contract.......................................................................................15
Free Look Privilege..........................................................................................16
Allocation Of Purchase Payments..............................................................................16
Accumulation Unit Value......................................................................................17
Accumulation Unit Value -- VIT Sub-Accounts...............................................................17
Accumulation Unit Value -- Growth & Income And Bond Sub-Accounts..........................................18
Dollar Cost Averaging........................................................................................19
Transfers....................................................................................................19
Surrenders And Partial Withdrawals...........................................................................20
Selection Of Annuity Income Option...........................................................................21
Income Date Selection.....................................................................................21
Annuity Payout Plans......................................................................................21
Death Benefit................................................................................................22
CHARGES............................................................................................................23
Premium Taxes................................................................................................23
Other Taxes..................................................................................................23
Administrative Charges.......................................................................................23
Contract Maintenance Charge...............................................................................23
Contract Administration Charge............................................................................24
Mortality And Expense Risk Charges...........................................................................24
Expenses Of VIT Portfolios And SAT Portfolios................................................................24
OTHER INFORMATION..................................................................................................25
Distribution Of The Contracts................................................................................25
Statements To Owners.........................................................................................25
Adjustment Of Units And Values...............................................................................25
Voting Rights................................................................................................26
Substituted Securities.......................................................................................27
OTHER CONTRACT PROVISIONS..........................................................................................27
Misstatement Of Age Or Sex...................................................................................27
Assignment...................................................................................................27
Loans........................................................................................................27
No Dividends.................................................................................................27
</TABLE>
i
<PAGE> 12
<TABLE>
<S> <C>
FEDERAL INCOME TAX INFORMATION.....................................................................................28
Qualification As An "Annuity Contract".......................................................................28
Diversification...........................................................................................28
Excessive Control.........................................................................................29
Required Distributions....................................................................................29
Multiple Contracts........................................................................................30
Qualified Contracts And Qualified Plans......................................................................30
General...................................................................................................30
Section 401 Qualified Pension Or Profit-Sharing Plans.....................................................31
Section 403(b) Plans......................................................................................32
Simplified Employee Pension Plans.........................................................................36
Savings Incentive Match Plans For Employees (SIMPLE)......................................................36
Section 457 Deferred Compensation Plans...................................................................37
Federal Income Taxation......................................................................................38
General...................................................................................................38
Tax Treatment Of Assignments..............................................................................39
Tax Treatment Of Withdrawals--Non-Qualified Contracts.....................................................39
Tax Treatment Of Withdrawals--Qualified Contracts.........................................................39
Tax Treatment of Distributions From Roth IRAs.............................................................41
Penalty Tax on Withdrawals - Qualified Contracts and IRAs.................................................41
Required Distributions - Qualified Contracts, IRAs and Section 457 Plans..................................43
SIMPLE IRAs - Withdrawal Limitations......................................................................44
Tax-Sheltered Annuities--Withdrawal Limitations...........................................................44
LEGAL PROCEEDINGS..................................................................................................44
FINANCIAL STATEMENTS...............................................................................................44
PART II -- DISCUSSION OF SELECT ADVISORS PORTFOLIOS................................................................46
SUMMARY............................................................................................................46
General......................................................................................................46
Risks........................................................................................................46
Advisors.....................................................................................................47
Sub-Accounts.................................................................................................47
Other Investors..............................................................................................47
FINANCIAL HIGHLIGHTS...............................................................................................48
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS...................................................................49
Growth & Income Portfolio....................................................................................49
Bond Portfolio...............................................................................................50
General...................................................................................................50
SPECIAL INFORMATION CONCERNING HUB AND SPOKE(R) STRUCTURE..........................................................51
MANAGEMENT OF THE PORTFOLIOS.......................................................................................52
General......................................................................................................52
Consultant To The Advisor....................................................................................53
Portfolio Advisors...........................................................................................53
INVESTMENT TECHNIQUES, RISK FACTORS AND INVESTMENT RESTRICTIONS....................................................54
Techniques And Risk Factors..................................................................................54
Foreign Securities.....................................................................................54
Risks Associated With Emerging Markets Securities......................................................55
</TABLE>
ii
<PAGE> 13
<TABLE>
<S> <C>
Currency Exchange Rates................................................................................55
ADRS, EDRS and CDRS....................................................................................56
Convertible Securities.................................................................................56
Fixed-Income And Other Debt Instrument Securities......................................................56
Medium and Lower Rated And Unrated Securities..........................................................57
U.S. Government Securities.............................................................................58
Mortgage Related Securities............................................................................58
Stripped Mortgage Related Securities...................................................................59
Zero Coupon Securities.................................................................................60
Custodial Receipts.....................................................................................60
When-Issued And Delayed-Delivery Securities............................................................61
Real Estate Investment Trusts..........................................................................61
Standard & Poor's Depositary Receipts..................................................................62
Repurchase Agreements..................................................................................62
Reverse Repurchase Agreements and Forward Roll Transactions............................................62
Lending Portfolio Securities...........................................................................63
Illiquid Securities....................................................................................63
Non-Publicly Traded ("Restricted") Securities and Rule 144A Securities.................................63
Temporary Investments..................................................................................64
Derivatives............................................................................................64
Futures Contracts and Related Options..................................................................64
Options on Stock.......................................................................................65
Options on Securities Indexes..........................................................................66
Forward Currency Contracts.............................................................................66
Asset Coverage.........................................................................................67
Certain Investment Restrictions..............................................................................67
Portfolio Turnover...........................................................................................68
MANAGEMENT OF THE SA TRUST.........................................................................................68
Board Of Trustees............................................................................................68
Sponsor......................................................................................................69
Administrator, Fund Accounting Agent, Custodian and Transfer Agent...........................................69
Allocation of Expenses of the Portfolios.....................................................................69
PURCHASE AND VALUATION.............................................................................................70
Purchase.....................................................................................................70
Valuation....................................................................................................70
ADDITIONAL INFORMATION.............................................................................................71
Description of Beneficial Interests, Liabilities, Voting Rights and Reports..................................71
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION..........................................................73
</TABLE>
iii
<PAGE> 14
GLOSSARY
ACCUMULATION UNIT -- An accounting unit of measure used to calculate an
Owner's share of 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 flexible variable annuity contract, including
the Application Form and any amendments, riders or endorsements, offered by the
Company as set forth in this Prospectus.
CONTRACT ANNIVERSARY -- The same day and month as the Contract Date in
each subsequent year.
CONTRACT DATE -- The date, as set forth on page 3 of the Contract, on
which the Contract becomes effective, which generally will be within one
business day after receipt of the initial Purchase Payment and Application Form
in good order at the Touchstone Variable Annuity Service Center.
CONTRACT VALUE -- 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.
IRA -- An individual retirement account or an individual retirement
annuity.
OWNER OR JOINT OWNER -- The person(s) owning all rights under the
Contract.
PORTFOLIO -- An investment portfolio of the VI Trust or of the SA
Trust, each of which is a registered open-end management investment company.
Each Portfolio corresponds to a Sub-Account of the Variable Account.
1
<PAGE> 15
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.
ROTH IRA--An IRA established under Section 408A of the Code in which
contributions are not deductible and qualified withdrawals are not subject to
federal income tax.
SAT PORTFOLIO -- Either the Growth & Income Portfolio II ("GROWTH &
INCOME PORTFOLIO") or the Bond Portfolio II ("BOND PORTFOLIO") of the SA Trust.
SA TRUST -- Select Advisors Portfolios, a trust formed under New York
law that includes portfolios in which the Growth & Income and Bond Sub-Accounts
invest. Part II of this Prospectus, beginning at page ___, contains information
regarding the SA Trust and such Portfolios.
SEPARATE ACCOUNT 2 -- Western-Southern Life Assurance Company Separate
Account 2, a separate investment account of the Company in which Purchase
Payments allocated to the variable fund are held.
SUB-ACCOUNT -- A division of the Variable Account which invests in a
Portfolio of the VI Trust or the SA Trust. Purchase Payments allocated to the
Variable Account are further allocated among Sub-Accounts as designated by the
Owner.
SURRENDER VALUE -- The Contract Value less any Contract Maintenance
Charge. This amount, less any applicable premium tax, payable to an Owner upon
surrender of the Contract prior to the Income Date during the Annuitant's
lifetime.
TRADITIONAL IRA -- An IRA established under Section 408 of the Code in
which contributions may be deductible and federal income tax is deferred until
amounts are withdrawn from the IRA.
VALUATION DATE -- Each day on which valuation of the Sub-Accounts is
required by applicable law, including every day that the New York Stock Exchange
is open.
VALUATION PERIOD -- The period of time beginning at the close of
trading on the New York Stock Exchange on one Valuation Date and ending at the
close of trading on the New York Stock Exchange on the next succeeding Valuation
Date.
VI TRUST -- Select Advisors Variable Insurance Trust, a business trust
formed under Massachusetts law that includes portfolios in which the Value Plus,
Emerging Growth, International Equity, Balanced, Income Opportunity and Standby
Income Sub-Accounts invest.
2
<PAGE> 16
VI TRUST PROSPECTUS -- A separate Prospectus describing the VI Trust
and the Value Plus, Emerging Growth, International Equity, Balanced, Income
Opportunity and Standby Income 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.
<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
CONTRACT ADMINISTRATION CHARGE...................................................................................__
CONTRACT MAINTENANCE CHARGE......................................................................................__
DEATH BENEFIT....................................................................................................15
DESIGNATED BENEFICIARY...........................................................................................19
DISTRIBUTOR......................................................................................................16
DOLLAR COST AVERAGING............................................................................................12
EXPENSE CAP.......................................................................................................3
EXPENSE RISK.....................................................................................................16
EXPENSE RISK CHARGE..............................................................................................__
FORT WASHINGTON..................................................................................................32
FREE LOOK.........................................................................................................5
FREE LOOK PERIOD.................................................................................................11
IFS..............................................................................................................16
INVESTORS BANK...................................................................................................10
MORTALITY RISK...................................................................................................15
MORTALITY RISK CHARGE............................................................................................__
NYSE.............................................................................................................__
PIN..............................................................................................................13
PORTFOLIO ADVISORS...............................................................................................10
QUALIFIED PLANS..................................................................................................21
ROGERSCASEY......................................................................................................10
SAT NET INVESTMENT FACTOR........................................................................................12
SCUDDER KEMPER...................................................................................................__
SEC...............................................................................................................8
</TABLE>
3
<PAGE> 17
<TABLE>
<S> <C>
SECTION 457 PLANS................................................................................................__
SEP..............................................................................................................23
SIMPLE IRA.......................................................................................................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
1933 ACT.........................................................................................................43
1940 ACT..........................................................................................................8
</TABLE>
4
<PAGE> 18
PART I -- DISCUSSION OF THE VARIABLE ANNUITY CONTRACT
FEE AND EXPENSE TABLES
The following tables provide information concerning Owner transaction
expenses and annual operating expenses of the Variable Account, each Sub-Account
and the corresponding Portfolio.
OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Contingent Deferred Sales Charge.............................................0%
Annual Contract Maintenance Charge (1)..............................................$35
Variable Account Annual Expenses (as a percentage of average account value)
Mortality and Expense Risk Charges(2)....................................0.70%
Contract Administration Charge...........................................0.10%
-----
Total Variable Account Annual Expenses(2)................................0.80%
</TABLE>
PORTFOLIO EXPENSES (as a percentage of average daily net assets)
<TABLE>
<CAPTION>
ADVISOR FEES OTHER EXPENSES TOTAL EXPENSES
(AFTER EXPENSE (AFTER EXPENSE (AFTER EXPENSE
VIT PORTFOLIOS REIMBURSEMENT) REIMBURSEMENT) REIMBURSEMENT) (3)
- -------------- -------------- -------------- --------------
<S> <C> <C> <C>
Value Plus(4) ..................................... 0.75% 0.50% 1.25%
Emerging Growth ................................... 0.80% 0.35% 1.15%
International Equity............................... 0.95% 0.30% 1.25%
Balanced........................................... 0.80%* 0.10% 0.90%
Income Opportunity................................. 0.65% 0.20% 0.85%
Standby Income..................................... 0.25% 0.25% 0.50%
SAT PORTFOLIOS
- --------------
Growth & Income.................................... 0.80%* 0.05% 0.85%
Bond............................................... 0.55% 0.20% 0.75%
- ------------------------
<FN>
(1)In certain states in which the Company has received the necessary
regulatory approvals, it may waive, reduce or eliminate the annual
Contract Maintenance Charge.
(2)The Company reserves the right to increase the Mortality and Expense
Risk Charge to 0.90% at any time.
</TABLE>
5
<PAGE> 19
(3)Total Portfolio expenses absent reimbursement by the Sponsor would have
been as follows: Emerging Growth -- ____%; International Equity -- ____%;
Balanced -- ____%; Income Opportunity -- ____%; Standby Income -- ____%;
Growth & Income -- ____%; and Bond -- ____%.
(4)Expenses for the Value Plus Fund Portfolio are expressed as a percentage
of its projected average daily net assets and are based on estimates of
expenses to be incurred during the fiscal year ending December 31, 1998,
after any applicable fee waivers and expense reimbursements. For the
Value Plus Portfolio it is estimated that, for the year ending December
31, 1998, absent reimbursement, "Other Expenses" and "Total Operating
Expenses" will be 1.85% and 2.85% of the Portfolio's projected average
daily net assets.
*The advisory fee for the Balanced Portfolio was 0.70% prior to May 1,
1997, and the advisory fee for the Growth & Income Portfolio was 0.75%
prior to September 18, 1997. The information under "Advisor Fee" and
"Other Expenses" in the table for these two Portfolios has been restated
to reflect the current advisory fees.
The purpose of the above table is to assist an Owner in understanding
the various costs and expenses that an Owner will bear directly or indirectly.
Premium taxes charged by certain states or other governmental entities may be
applicable, but are not included in this table. For purposes of the table,
expenses of the Portfolio in which each Sub-Account invests are treated as if
they were expenses of that Sub-Account. The expenses of each Portfolio are
assessed at the underlying Portfolio level and are not direct charges against
the assets of the Sub-Accounts or reductions from Contract Value, although such
charges are borne indirectly by Owners. Portfolio expenses are taken into
consideration in computing the net asset value of each Portfolio, which is the
price used to calculate the Contract Value. It is expected that the combined
expenses [per Accumulation Unit] of a Sub Account and its corresponding
Portfolio will, at a minimum, be approximately equal to and may be less than the
expenses that would be incurred by the Sub-Account alone if, instead of
investing in such Portfolio, the Sub-Account retained an investment advisor and
portfolio advisors and invested directly in the types of securities held by the
Portfolio.
Under agreements (the "SPONSOR AGREEMENTS") with the VI Trust and the
SA Trust, Touchstone Advisors, Inc., as sponsor of the two trusts (the
"SPONSOR"), has agreed to reimburse each Portfolio for those annual operating
expenses of the Portfolio exceeding a specified percentage (the "EXPENSE CAP")
of the Portfolio's average daily net assets. Operating expenses for this purpose
include fees of the Advisor, fees of the Administrator, amortization of
organizational expenses, legal and accounting fees and Sponsor fees, but do not
include interest, taxes, brokerage commissions and other portfolio transaction
expenses, capital expenditures and extraordinary expenses. A Sponsor Agreement
may be terminated by the Sponsor as to any Portfolio, as of the end of any
calendar quarter by giving at least 30 days prior written notice, and will be
terminated if the Sponsor ceases to be the investment advisor for the Portfolio.
If a Sponsor Agreement is terminated, actual Portfolio expenses may exceed those
shown in the table.
For additional information regarding expenses related to a Contract,
see "Charges" at page ___. For more information regarding each Portfolio's
expenses, see "Expenses of the VIT
6
<PAGE> 20
Portfolios and SAT Portfolios" herein at page ___, the VI Trust Prospectus, and
the Statement of Additional Information (available on request from the
Touchstone Variable Annuity Service Center). For additional information
regarding the Sponsor Agreements, see "Sponsor" at page ___.
EXAMPLE
The following charts depict the expenses that would be incurred under
the Contract assuming a $1,000 investment in each Sub-Account and a 5% annual
return on that investment. Portfolio expenses have been estimated at the Expense
Cap for each Portfolio. THE DOLLAR FIGURES IN EACH CHART ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The effect of the Contract
Maintenance Charge is calculated by expressing it as a percentage of the average
Contract Value, which is assumed, for this purpose only, to be $25,000. Premium
taxes currently are imposed by certain states and municipalities on Purchase
Payments made under the Contracts. Premium taxes are not reflected in the
examples below. Where applicable, such taxes may decrease the amount of each
Purchase Payment available for allocation.
AN OWNER SURRENDERING A CONTRACT at the end of the applicable time
period would pay the following aggregate Contract and Portfolio expenses on a
$1,000 investment in each Sub-Account, assuming a 5% annual return:
<TABLE>
<CAPTION>
1YEAR 3 YEARS 5 YEARS 10 YEARS
----- ------- ------- --------
<S> <C> <C> <C> <C>
Value Plus.................................................. $___ $___ $NA $NA
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>
1YEAR 3 YEARS 5 YEARS 10 YEARS
----- ------- ------- --------
<S> <C> <C> <C> <C>
Value Plus.................................................. $___ $___ $NA $NA
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%.
7
<PAGE> 21
OTHER PORTFOLIO FINANCIAL INFORMATION
Additional financial 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. Similar information regarding the Growth & Income and Bond
Portfolios may be found at page ___ of this Prospectus.
SUMMARY OF THE CONTRACT
GENERAL
The purpose of the Contract is (1) to permit an Owner to accumulate
funds on a tax-deferred basis by investing in one or more alternatives, and (2)
to permit the Owner or the Owner's designee to receive annuity income payments
starting on the Income Date. An Owner may invest in one or more of the eight
Sub-Accounts of the Variable Account. Each Sub-Account will, in turn, invest
solely in one of the following Portfolios:
VI TRUST PORTFOLIOS SA TRUST PORTFOLIOS
------------------- -------------------
Value Plus Portfolio Growth & Income Portfolio
Emerging Growth Portfolio Bond Portfolio
International Equity Portfolio
Balanced Portfolio
Income Opportunity Portfolio
Standby Income Portfolio
Assets allocated by Owners to the Variable Account are held by Separate
Account 2 but not from assets attributable to other variable annuity contracts
issued through Separate Account 2. Such assets are segregated from other assets
of the Company but not from assets attributable to other variable annuity
contracts issued through Separate Account 2. 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. If no Purchase Payments
have been received for two full years and both (a) the total Purchase Payments
less any partial withdrawals and (b) the Contract Value are less than $2,000,
the Company will, after 14 days prior written notice to the Owner, terminate the
Contract and pay the Surrender Value to the Owner. The cumulative total of all
Purchase Payments under a Contract may not exceed $500,000 without the prior
consent of the Company. See "Purchase Of A Contract."
VARIABLE ANNUITY SERVICE CENTER
Investments in or withdrawals from a Contract, transfers of amounts
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").
8
<PAGE> 22
TEN-DAY FREE LOOK
To be sure that the Owner is satisfied with the Contract, the Owner has
a ten-day "FREE LOOK." Within ten days of the date the Contract is received by
the Owner, it may be returned to the Company at the Touchstone Variable Annuity
Service Center. If the Contract is received by the Company within such time, the
Company will void the Contract, and the Contract Value, plus any amount deducted
from the initial Purchase Payment prior to allocation to the Sub-Accounts, 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 eight Sub-Accounts, each of which
invests exclusively in one of the VIT Portfolios or one of the SAT Portfolios.
The VIT Portfolios are the Value Plus, Emerging Growth, International Equity,
Balanced, Income Opportunity and Standby Income Portfolios. The SAT Portfolios
are the Growth & Income and Bond Portfolios.
Information regarding the investment objectives of the VIT Portfolios
and the SAT Portfolios is set forth under the caption "The VI Trust and the SA
Trust" herein. More detailed information regarding the SAT Portfolios will be
found under the caption "Investment Objectives, Policies and Restrictions" in
Part II of this Prospectus. Detailed information regarding the VIT Portfolios
will be found in the VI Trust Prospectus.
Owners may transfer funds among Sub-Accounts once every 30 days.
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 the close of regular trading on the New York Stock Exchange
("NYSE") on any Valuation Date. Payments received in good order later in the
day, or on any day that is not a Valuation Date, will be processed on the next
Valuation Date. Regular trading on the NYSE usually closes at 3:00 p.m. Central
Time. Purchases by the Sub-Accounts of shares of the corresponding VIT
Portfolios or of interests in the corresponding SAT Portfolios will be made on
the next Valuation Date following processing, at the value of the corresponding
Portfolio on the date of processing. As the value of the investments of the
Sub-Accounts in the corresponding Portfolios increases or decreases, the
Contract Value increases or decreases. See "Allocation of Purchase Payments."
WITHDRAWALS AND SURRENDER
Prior to the Income Date, the Owner may withdraw all or part of the
Contract Value. A withdrawal of all of the Contract Value is a "SURRENDER." The
minimum partial withdrawal is $250,
9
<PAGE> 23
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
a penalty on premature distributions as well as to federal income tax. See
"Federal Income Taxation."
INCOME OPTIONS
The Contract offers four fixed annuity payment options, unless otherwise
limited by applicable state insurance laws. Income may be paid in installments,
either for a fixed period of one to 30 years or in a fixed amount. Income also
may be paid under one of two life income alternatives. Other annuity income
options may be selected with prior approval of the Company. If no income option
is selected by the Owner, the Contract provides for a monthly annuity payment,
beginning on the Income Date if the Annuitant is then living, payable for life
with ten years certain. See "Selection of Annuity Income Option." If the
Annuitant dies after the Income Date, the amount and manner of any continuing
payments will depend upon the income option selected.
DEATH BENEFIT
If the Annuitant dies before the Income Date, the Company will pay
a Death Benefit to the Beneficiary selected by the Owner. See "Death Benefit."
CHARGES
Surrender 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.
Contract Maintenance and Contract Administration Charges. On each
Contract Anniversary (and upon surrender) the Company will deduct an annual
maintenance charge (the "CONTRACT MAINTENANCE CHARGE") of $35 from the Contract
Value. In certain states, the Company may waive, reduce or eliminate such
charge. The Company also will deduct on a daily basis an administration charge
(the "CONTRACT ADMINISTRATION CHARGE") at an annual rate equal to 0.10% 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."
Mortality and Expense Risk Charges. The Company deducts on a daily
basis a charge to compensate for the mortality risk assumed by the Company (the
"MORTALITY RISK CHARGE") at an annual rate equal to 0.50% of the Contract Value.
The Company also deducts on a daily basis a charge at an annual rate equal to
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 (the "EXPENSE RISK CHARGE"). See "Mortality and Expense
Risk Charges." The Company reserves the right to increase the Mortality Risk
Charge to 0.60% and the Expense Risk Charge to 0.30%.
10
<PAGE> 24
Other. Premium taxes payable to any governmental entity will be
charged against the Contracts. See "Premium Taxes" and "Other Taxes."
The Company may include as a component of the Net Investment Factor
(see "Accumulation Unit Value") a charge or credit for any taxes reserved, which
are determined by the Company to have resulted from the investment operations of
any Sub-Account. See "Allocation of Purchase Payments" and "Other Taxes."
The Portfolios of the VI Trust and of the SA Trust accrue management
fees and other expenses daily and pay them monthly. See "Expenses of VIT
Portfolios and SAT Portfolios."
THE FOREGOING SUMMARY IS INTENDED TO PROVIDE ONLY AN OVERVIEW OF THE
MORE SIGNIFICANT ASPECTS OF THE CONTRACT. DETAILED INFORMATION IS PROVIDED IN
SUBSEQUENT SECTIONS OF THIS PROSPECTUS AND IN THE CONTRACT. THE CONTRACT
(INCLUDING ANY AMENDMENTS, RIDERS AND ENDORSEMENTS) TOGETHER WITH THE
APPLICATION FORM CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE OWNER AND THE
COMPANY AND SHOULD BE RETAINED BY THE OWNER.
ACCUMULATION UNIT VALUES
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIODS)
<TABLE>
<CAPTION>
UNIT VALUE NUMBER OF
UNIT VALUE AT AT UNITS AT
YEAR ENDED DECEMBER 31, BEGINNING OF 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
1997 12.947664 17.169847 15,058
International Equity Sub-Account
1995* 10.000000 11.282669 2,158
1996 11.282669 12.475967 4,538
1997 12.475967 14.203413 10,507
Balanced Sub-Account
1995* 10.000000 12.018023 1,771
1996 12.018023 13.922266 3,958
1997 13.922266 16.382306 10,276
Income Opportunity Sub-Account
1995* 10.000000 12.572866 2,048
1996 12.572866 15.886632 3,590
1997 15.886632 17.673231 58,064
Standby Income Sub-Account
1995* 10.000000 10.364840 1,059
1996 10.364840 10.819908 19,762
1997 10.819908 11.314893 11,233
Growth & Income Sub-Account
1995* 10.000000 12.533949 2,623
1996 12.533949 14.291347 4,690
1997 14.291347 16.995828 15,766
Bond Sub-Account
1995* 10.000000 11.309517 1,615
1996 11.309517 11.505592 2,904
1997 11.505592 12.322051 7,005
</TABLE>
11
<PAGE> 25
- ------------------------
*Operations commenced on February 23, 1995.
For information explaining how Accumulation Unit Value is calculated
for the various Sub-Accounts, see "Accumulation Unit Value."
PERFORMANCE INFORMATION
Separate Account 2 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.
In reports or other communications to shareholders or in advertising
material, non-standardized total return figures, such as aggregate total return
figures and non-annualized figures, may also be quoted. These figures will be
accompanied by standardized total return figures calculated as described above.
The performance of a Sub-Account may be compared with that of other separate
accounts as listed in the rankings prepared by Lipper Analytical Services, Inc.
or similar independent services that monitor the performance of separate
accounts. The performance information also may include evaluations of the
separate accounts published by nationally recognized ranking services and by
financial publications that are nationally recognized.
It is important to note that total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes in more detail the methods used to
determine total return.
FACTS ABOUT THE COMPANY 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. 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.
12
<PAGE> 26
THE SEPARATE ACCOUNT
The Variable Account is held by Separate Account 2, a separate
investment account of the Company established pursuant to Ohio law on June 1,
1994. Separate Account 2 is used to support the Contracts described in this
Prospectus and other variable annuity contracts of the Company and for other
purposes permitted by law. Separate Account 2 is registered with the Securities
and Exchange Commission (the "SEC") as a unit investment trust under the
Investment Company Act of 1940 (the "1940 ACT"). Separate Account 2 consists of
Variable Account assets held for the benefit of Owners and assets held, through
similar accounts, for the benefit of owners of other variable annuity contracts
issued by Separate Account 2.
The Company owns the assets of Separate Account 2. As required by law,
however, the assets of Separate Account 2 are kept separate from the Company's
general account assets and any other separate account assets and are held
exclusively for the benefit of Owners and Beneficiaries of the Contracts and of
other variable annuity contracts issued by Separate Account 2. These assets may
not be charged with liabilities from any other business which the Company may
conduct. The Company is obligated to pay all benefits provided under the
Contracts and all benefits provided under other variable annuity contracts
issued by Separate Account 2.
Each Sub-Account of the Variable Account is administered and accounted
for as part of the general business of the Company; however, the income, capital
gains or capital losses of each Sub-Account are credited to or charged against
the assets held in that Sub-Account in accordance with the terms of each
Contract without regard to the income, capital gains or capital losses of any
other Sub-Account or arising out of any other business of the Company.
THE VI TRUST AND THE SA TRUST
The Variable Account consists of eight Sub-Accounts, each of which
invests exclusively in one of the Portfolios of the VI Trust or in one of the
Portfolios of the SA Trust. Each Trust is an open-end diversified management
investment company. The VI Trust is organized as a Massachusetts business trust
and the SA Trust is organized as a New York master trust.
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
VALUE PLUS PORTFOLIO has an investment objective of long-term growth of
capital through investment primarily in common stocks which are considered by
its Portfolio Advisor to be fundamentally undervalued in relation to earnings,
cash flow and financial strength.
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.
13
<PAGE> 27
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.
Each Portfolio listed below may invest a portion of its total assets in
non-investment grade (or "junk") bonds. These bonds entail greater risk of
untimely interest and principal payments, default and price volatility than
higher rated securities and may present problems of liquidity and valuation.
Investments in these Portfolios may not be appropriate for all investors.
<TABLE>
<CAPTION>
PERCENTAGE OF PORTFOLIO'S TOTAL ASSETS THAT MAY
PORTFOLIO BE INVESTED IN NON-INVESTMENT GRADE BONDS
- ---------------------------------------------------------------------------------------------------
<S> <C>
Income Opportunity Portfolio of VI Trust Up to 100% of the Portfolio's total assets
International Equity Portfolio of VI Trust Up to 35% of the Portfolio's total assets
Growth & Income Portfolio of SA Trust Up to 5% of the Portfolio's total assets
Bond Portfolio of SA Trust Up to 35% of the Portfolio's total assets
</TABLE>
For more information about non-investment grade bonds, see "Medium and Lower
Rated and Unrated Securities" in the VI Trust Prospectus and in Part II of this
Prospectus.
MORE COMPLETE INFORMATION ABOUT THE SIX PORTFOLIOS OF THE VI TRUST,
INCLUDING THE ASSOCIATED RISKS, IS SET FORTH IN THE VI TRUST PROSPECTUS. SIMILAR
INFORMATION WITH RESPECT TO THE GROWTH & INCOME AND THE BOND PORTFOLIOS OF THE
SA TRUST IS CONTAINED IN PART II OF THIS PROSPECTUS. PROSPECTIVE PURCHASERS OF
CONTRACTS SHOULD READ THE VI TRUST PROSPECTUS AND
14
<PAGE> 28
PART II OF THIS PROSPECTUS IN CONJUNCTION WITH THE INFORMATION REGARDING THE
VARIABLE ACCOUNT CONTAINED HEREIN.
Both the VI Trust and the SA Trust have entered into investment
advisory agreements with Touchstone Advisors, Inc. (the "ADVISOR"). The Advisor,
in turn, has entered into portfolio advisory agreements with separate investment
advisors selected for each Portfolio (the "PORTFOLIO ADVISORS"). It is the
responsibility of the Advisor to select the Portfolio Advisors, subject to the
review and approval of the trustees of the VI Trust or the SA Trust, as the case
may be, and to review the ongoing investment strategy of each Portfolio Advisor
and the performance of the Portfolios. Each Trust has entered into agreements
with Investors Bank and Trust Company ("INVESTORS BANK" or the "ADMINISTRATOR")
pursuant to which Investors Bank provides administrative and fund accounting
services for each Trust. 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 Owners or
approval of the SEC, to substitute a new investment portfolio or similar
investment option for the Portfolio in which a Sub-Account invests. A
substitution may become necessary if, in the Company's judgment, the Portfolio
or other investment option no longer suits the purposes of the Contracts. This
may happen due to unsatisfactory investment performance, a change in laws or
regulations, a change in a Portfolio's investment objectives or restrictions,
because the Portfolio is no longer available for investment, or for some other
reason. The Company would obtain prior approval from the SEC to the extent
required and any other required approvals before making such a substitution.
The Company also reserves the right to eliminate Sub-Accounts from the
Variable Account or to combine two or more Sub-Accounts. In addition, the
Company reserves the right to operate Separate Account 2 as a management
investment company under the 1940 Act or any other form permitted by law or to
deregister Separate Account 2 under the 1940 Act in the event such registration
no longer is required.
THE CONTRACT
PURCHASE OF A CONTRACT
General. The Company offers Contracts only in states in which it has
received the necessary regulatory approvals to do so. Contracts may be Qualified
or Non-Qualified. Qualified Contracts are accorded special federal income tax
treatment under the Code. Generally, Qualified Contracts may be purchased only
in connection with plans which qualify under Sections 401, 403(b), 408 or 457 of
the Code. Qualified Contracts contain provisions restricting the timing and
amount of payments to and distributions from such Contracts. See "Federal Income
Taxation."
15
<PAGE> 29
Minimum/Maximum Investments. 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.
Purchase Procedure. To purchase a Contract, the purchaser must submit
the initial Purchase Payment and the completed Application Form in good order to
the Company at the Touchstone Variable Annuity Service Center. The proposed
Annuitant must be no older than 85 years old. The Contract becomes effective on
the Contract Date, which is stated on page 3 of the Contract. The Contract Date
will be the Valuation Date on which the initial Purchase Payment and the
Application Form are received in good order at the Touchstone Variable Annuity
Service Center, if they are received by the close of regular trading on the
NYSE. If they are received after the close of regular trading on the NYSE, the
effective date of the Contract will be the following Valuation Date. Regular
trading on the NYSE usually closes at 3:00 p.m. Central Time.
If an incomplete Application Form is received, the Company will request
additional information to complete the application. If the Application Form
remains incomplete for five business days after its receipt, the Company will
return the initial Purchase Payment unless the purchaser consents to a delay.
FREE LOOK PRIVILEGE
A Contract may be returned for a refund within 10 days after the Owner
receives it (the "FREE LOOK Period"). If the Owner chooses not to retain the
Contract, it must be returned to the Company at the Touchstone Variable Annuity
Service Center within the free look period. In such circumstances, the Company
will cancel the Contract and refund promptly an amount that in most cases will
be equal to the Owner's Contract Value, plus any amount deducted from the
initial Purchase Payment prior to allocation to the 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. Each
Contract Owner should periodically review his or her allocations under the
Contract in light of market conditions and his or her own financial objectives.
16
<PAGE> 30
The initial Purchase Payment is allocated as of the Contract Date. For
all subsequent Purchase Payments allocated to Sub-Accounts, Accumulation Units
will be credited at the Accumulation Unit Value calculated as of the close of
business on the Valuation Date such Purchase Payment is received in good order
at the Touchstone Variable Annuity Service Center if received before the close
of regular trading on the NYSE on such Valuation Date. For payments received
after the close of regular trading on the NYSE, Accumulation Units will be
credited at the Accumulation Unit Value calculated as of the next Valuation
Date. Regular trading on the NYSE usually closes at 3:00 p.m. Central Time.
The number of Accumulation Units for each Sub-Account of the Variable
Account is determined by dividing the amount of the Purchase Payment allocated
to the Sub-Account by the Accumulation Unit Value for the Sub-Account as of the
close of business on the applicable Valuation Date. The Accumulation Unit Value
for each Sub-Account was set arbitrarily at $10 when the first Portfolio
interest was purchased by the Sub-Account. Thereafter, Accumulation Unit Value
fluctuates from day to day depending upon the investment performance of the
Portfolio in which the Sub-Account is invested.
ACCUMULATION UNIT VALUE
The procedure used to calculate Accumulation Unit Value for the
Sub-Accounts that invest in Portfolios of the VI Trust and the procedure used to
calculate Accumulation Unit Value for the Sub-Accounts that invest in Portfolios
of the SA Trust are described below. The procedures do not produce different
results. Rather, they reflect different accounting treatment at the Portfolio
level, with interests in the VI Trust being calculated on a per share basis and
interests in the SA Trust being calculated on a percentage basis.
ACCUMULATION UNIT VALUE -- VIT SUB-ACCOUNTS
The value of an Accumulation Unit at the close of any Valuation Period
is determined for each Sub-Account that invests in a VIT Portfolio (a "VIT
SUB-ACCOUNT") by multiplying the Accumulation Unit Value of the Sub-Account at
the close of the immediately preceding Valuation Period by the "VIT NET
INVESTMENT FACTOR" (described below). Depending upon investment performance of
the VIT Portfolio in which the Sub-Account is invested, the Accumulation Unit
Value may increase or decrease.
The VIT Net Investment Factor for each VIT Sub-Account, for any
Valuation Period, is determined by dividing (a) by (b) and subtracting (c) from
the result, where:
(a) equals:
(1) the net asset value per share of the corresponding
VIT Portfolio at the end of the current Valuation
Period, plus
17
<PAGE> 31
(2) the per share amount of any dividend or capital gain
distribution made by the VIT Portfolio on shares held
in the Sub-Account if the "ex-dividend" date occurs
during the current Valuation Period, plus or minus
(3) a per share charge or credit for any taxes reserved,
which are determined by the Company to have resulted
from the investment operations of the Sub-Account
during the current Valuation Period;
(b) is the net asset value per share of the corresponding VIT
Portfolio determined at the end of the immediately preceding
Valuation Period; and
(c) is a factor representing the charges deducted from the
Sub-Account on a daily basis for the daily portion of the
annual Mortality and Expense Risk Charge (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 Accumulation Unit Value may increase or decrease.
The SAT Net Investment Factor for each of the Growth & Income and Bond
Sub-Accounts for any Valuation Period is equal to one plus the net result of (a)
divided by (b) where:
(a) is the accrued gain or loss in the Sub-Account for the
Valuation Period, including investment income, capital gains
and losses, adjusted by:
(1) charging the Sub-Account a dollar amount representing
the portion of the annual Mortality and Expense Risk
Charge (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%.
18
<PAGE> 32
DOLLAR COST AVERAGING
An Owner may direct the Company, at any time prior to the Income Date,
to transfer automatically specified dollar or percentage amounts (or earnings
amounts) from the Standby Income Sub-Account to other Sub-Accounts on a monthly
or quarterly basis. This automatic transfer, known as "Dollar Cost Averaging,"
may be selected by an Owner subject to the following requirements:
(1) The Contract Value must be at least $10,00.
(2) Each Dollar Cost Averaging transfer must be at least $200.
(3) Each allocation to a Sub-Account must be at least 5% of the
amount transferred.
(4) Dollar Cost Averaging must be effective for a period of at
least 12 months.
All Dollar Cost Averaging transfers for all Contracts will be made effective on
the monthly or quarterly anniversary of the Contract Date as requested by the
Owner.
Owners may elect to participate in Dollar Cost Averaging by notifying
the Company in writing. Forms for this purpose are available from the Touchstone
Variable Annuity Service Center.
Dollar Cost Averaging will terminate when any of the following occurs:
(1) the number of designated transfers has been completed, (2) the portion of
the Contract Value in the Standby Income Sub-Account is insufficient to complete
the next scheduled transfer, (3) the Owner requests termination in writing, or
(4) the Contract is terminated. The Company also reserves the right to terminate
Dollar Cost Averaging, on a prospective basis, upon 30 days' written notice to
Owners. There is no charge at this time for Dollar Cost Averaging, but the
Company reserves the right to charge a fee for this service.
TRANSFERS
Subject to the conditions described below, an Owner may transfer all or
part of the Contract Value among the Sub-Accounts.
(1) The minimum transfer amount is $250.
(2) Transfers among Sub-Accounts other than by Dollar Cost
Averaging may be made once every 30 days.
(3) Each allocation to a Sub-Account must be at least 5% of the
amount transferred.
The Company will effect transfers pursuant to proper written or
telephone instructions received at the Touchstone Variable Annuity Service
Center which clearly specify the requested changes. Requests received in good
order at the Touchstone Variable Annuity Service Center by
19
<PAGE> 33
the close of regular trading on the NYSE on any Valuation Date will be
effected that day. Requests received after 3 the close of regular trading on the
NYSE will be effected on the next Valuation Date. Regular trading on the NYSE
usually closes at 3:00 p.m. Central Time.
The Company will not honor telephone transfer instructions unless
proper authorization has been provided either (1) in the completed Application
Form, or (2) in a properly completed telephone transfer authorization form. If
the proper authorization is on file at the Touchstone Variable Annuity Service
Center, requests for transfers may be made by calling 1-800-669-2796 (press 2)
between 8:00 a.m. and 3:00 p.m. Central Time on any Valuation Date. Telephone
transfer instructions must include a precise identification of the Owner's
Contract and Social Security number. A personal identification number ("PIN")
also may be required. The Company will accept telephone requests for transfers
from any person presenting the required information and claiming to be the
Owner. All or part of any telephone conversation relating to transfer
instructions may be recorded by the Company.
The Company will not be liable for following instructions received by
telephone that it reasonably believes to be genuine. The Company has established
certain procedures, some of which are described above, to confirm that telephone
instructions are genuine. If it does not follow reasonable procedures, it may be
liable for any losses due to unauthorized or fraudulent instructions.
Telephone transfer instructions apply only to previously invested
Purchase Payments and may not be employed to change the investment allocation of
future Purchase Payments under the Contract. Allocation of future Purchase
Payments can be changed only by proper written request. See "Allocation of
Purchase Payments."
The Company currently imposes no charges for any such transfer, but
reserves the right to modify availability of and conditions for transfers at any
time, including the right to charge transfer fees. The Company reserves the
right to modify, suspend or discontinue the telephone transfer privilege at any
time and without prior notice.
SURRENDERS AND PARTIAL WITHDRAWALS
While the Contract is in force and prior to the Income Date or the
death of the Annuitant, the Company will, upon proper written notification by
the Owner, allow the Owner to surrender all, or withdraw part, of the Contract
Value, less any applicable Contract Maintenance Charge and premium taxes. 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:
20
<PAGE> 34
(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.
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 total Purchase
Payments made.
Tax Matters. The Internal Revenue Code imposes a penalty tax equal to
10% of the amount treated as taxable income on most surrenders and partial
withdrawals made from Contracts prior to the Owner or the Annuitant (as
applicable) reaching age 59 1/2. See "Tax Treatment of Withdrawals --
Non-Qualified Contracts" and "-- Qualified Contracts."
SELECTION OF ANNUITY INCOME OPTION
INCOME DATE SELECTION
The Income Date is the later of the Contract Anniversary on or
following the Annuitant's 80th birthday and the 10th Contract Anniversary,
unless otherwise indicated on Page 3 of the Contract. The Income Date can be
changed to any date by written request to the Company, if such written request
is received at least 31 days prior to the scheduled Income Date. 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 by written notice to the Company.
21
<PAGE> 35
The Owner may apply the Surrender Value less any applicable premium tax
under any one of the annuity payout plans specified in the Contract and
described below. A change of annuity payout plan is permitted prior to the
Income Date upon 31 days' prior written notice to the Company. In the absence of
an election, annuity payments will be made in accordance with Life Income Plan
2A described below, with monthly payments guaranteed for ten years. Annuity
payments will be made monthly (or, if requested, quarterly, semiannually or
annually) except that: (1) proceeds of less than $1,000 shall be paid in a
single sum and (2) the Company may change the frequency of payment to avoid
periodic payments of less than $50.
The annuity payout plans currently available under the Contract are
described below.
Installment Income Plan 1A. Fixed period -- Paid in equal monthly
payments for the number of years selected,
but not more than 30 years.
Installment Income Plan 1B. Fixed Amount -- Paid in equal monthly
installments of $5 or more for each $1,000
applied until the full amount, with
compound interest at not less than 3% a
year, is used up.
Life Income Plan 2A. One Life -- Paid in equal monthly payments
during the lifetime of the Annuitant. The
Company guarantees payments for either 10
years or 20 years, and for as long as the
Annuitant lives. The amount of the monthly
payment is based on the Annuitant's sex
and age on the date of the first payment
and on the number of years for which
payments are guaranteed. Payments may not
be commuted (i.e., paid in lump sum).
Life Income Plan 2B. Joint and Survivor -- Paid in equal
monthly payments during the lifetimes of
the Annuitant and another designated
person. Payments will continue as long as
either person is living. The amount of
each payment is based on both persons' sex
and age on the date of the first payment.
If either one dies before the due date of
the first payment, the Company will make
payments during the survivor's lifetime
under Life Income Plan 2A, with payments
guaranteed for 10 years. Payments may not
be commuted.
Unless limited in any jurisdiction by applicable state insurance laws,
each of the plans is available under Non-Qualified Contracts. Under a Qualified
Contract, Installment Income Plans 1A and 1B are available provided that any
period certain does not extend beyond the life expectancy of the Annuitant.
Under a Qualified Contract, Life Income Plans 2A and 2B are available, provided
that any period certain may not extend beyond the life expectancy of the
Annuitant or joint life expectancies of the Annuitants.
DEATH BENEFIT
If the Annuitant dies before the Income Date, the Company will pay a
death benefit to the Beneficiary designated by the Owner (the "DEATH BENEFIT").
The Death Benefit will be calculated as of the Valuation Date on which
satisfactory proof of death and Death Benefit payment instructions are received
in good order by the Company (the "BENEFIT DETERMINATION DATE"). If the
22
<PAGE> 36
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 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 on or after the first day of the calendar month
after the Annuitant's 80th birthday (but before the Income Date), the Death
Benefit will equal the Contract Value on the Benefit Determination Date.
If the Annuitant dies after the Income Date, the benefits, if any,
remaining to be paid will depend upon the annuity payout plan in effect. See
"Annuity Payout Plans."
CHARGES
All charges under the Contract are described below.
PREMIUM TAXES
Certain states or other governmental entities impose premium taxes,
with rates that range up to 3.5% of the Purchase Payment. Some states assess the
tax at the time Purchase Payments are made, and others assess at the time
annuity payments begin. The Company will pay the premium tax at the time imposed
by applicable law. The Company reserves the right to deduct for the tax,
however, at the time the tax is paid, at the time the Contract is surrendered or
amounts are withdrawn, when the Death Benefit is paid or when the annuity
payments begin.
OTHER TAXES
The Company reserves the right to deduct the amount of certain taxes
(other than premium taxes) that it may have to pay. See "Federal Income Tax
Information."
ADMINISTRATIVE CHARGES
The Company incurs costs in establishing and maintaining the Contracts,
and in maintaining records and systems and issuing reports to Owners. The
administrative charges discussed below have been established at the levels
indicated to reimburse the Company for its expected actual costs of
administering the Contracts over time.
CONTRACT MAINTENANCE CHARGE
On each Contract Anniversary before the Income Date, an annual Contract
Maintenance Charge is deducted from the Contract Value to cover such costs. The
Contract Maintenance Charge is also deducted on any date not a Contract
Anniversary on which the Owner fully surrenders the Contract, or on the Income
Date. 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 states in which
23
<PAGE> 37
it has received regulatory approval, the Company may waive, reduce or eliminate
the Contract Maintenance Charge.
CONTRACT ADMINISTRATION CHARGE
On each Valuation Date, the Company deducts from the Accumulation Unit
Value a Contract Administration Charge that is the daily equivalent of an
effective annual rate of 0.10%.
MORTALITY AND EXPENSE RISK CHARGES
As compensation for its assumption of mortality and expense risks, the
Company deducts from the Accumulation Unit Value a Mortality and Expense Risk
Charges that are the daily equivalent of an effective annual rate of 0.70%. The
Company reserves the right, however, to increase the mortality and expense risk
charges 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
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>
Value Plus Portfolio.................................................. 1.25%
Emerging Growth Portfolio............................................. 1.15%
International Equity Portfolio........................................ 1.25%
Balanced Portfolio.................................................... 0.90%
Income Opportunity Portfolio.......................................... 0.85%
Standby Income Portfolio.............................................. 0.50%
</TABLE>
24
<PAGE> 38
<TABLE>
<S> <C>
SA TRUST
- --------
Growth & Income Portfolio............................................. 0.85%
Bond Portfolio........................................................ 0.75%
</TABLE>
Operating expenses, for purposes of expense reimbursement, include fees
of the Advisor, fees of the Administrator, amortization of organizational
expenses, legal and accounting fees and Sponsor fees, but do not include
interest, taxes, brokerage commissions and other portfolio transaction expenses,
capital expenditures and extraordinary expenses. The Sponsor Agreements may be
terminated by the Sponsor as of the end of any calendar quarter upon not less
than 30 days prior written notice. The Sponsor's agreement to reimburse a
Portfolio also terminates as to a Portfolio if the Sponsor ceases to be the
investment advisor to that Portfolio. See "Sponsor." Under the Sponsor
Agreements, the Sponsor is entitled to an annual fee of 0.20% of average daily
net assets, but the Sponsor has waived such fees through December 31, 1998.
OTHER INFORMATION
DISTRIBUTION OF THE CONTRACTS
Contracts are distributed through Touchstone Securities, Inc. (the
"DISTRIBUTOR"). The Distributor is a wholly-owned subsidiary of IFS Financial
Services, Inc. ("IFS") which is a wholly-owned subsidiary of the Company. The
principal business address of the Distributor is 311 Pike Street, Cincinnati,
Ohio 45202. 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."
STATEMENTS TO OWNERS
Prior to the Income Date, a confirmation of each Purchase Payment and
certain other transactions, such as transfers and partial withdrawals, will be
sent to the Owner.
At least once in each Contract Year prior to the Income Date, each
Owner will be sent a statement that includes the 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
Separate Account 2. 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.
25
<PAGE> 39
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 shares of any VIT Portfolio (or
interest in any SAT Portfolio) held in the Sub-Account that is attributable to
the Owner's Contract.
The Company calculates that portion of the shares (interest, in the
case of the SA Trust) in the Portfolio that the Owner may direct the Company to
vote by applying the Owner's percentage interest, if any, in a particular
Sub-Account to the total number of shares (interest, in the case of the SA
Trust) attributable to such Sub-Account as of the record date. Fractional votes
will be counted. The Company reserves the right to modify the manner in which it
calculates the weight given to voting instructions where such change is
necessary to comply with then-current federal regulations or interpretations of
those regulations.
The Company will determine 90 days or less before the applicable
meeting the number of shares in each VIT Portfolio (or, in the case of the SA
Trust, the portion of the interest in each SAT Portfolio) that each Owner can
instruct the Company to vote. At least 14 days before such meeting, the Company
will mail to each Owner materials enabling him or her to instruct the Company
how to vote.
If voting instructions are not received from an Owner, the Company will
vote the shares of the VI Trust (or interest in the SAT Portfolio) attributable
to such Owner in the same proportion as the voting instructions which are
received from other Owners. The Company also will vote shares or interest it
holds in the Sub-Accounts that are not attributable to Owners in the same
manner. Under certain circumstances, the Company may be required by state
regulatory authorities to disregard voting instructions. This could happen if
such instructions would change the sub-classification or investment objectives
of the Portfolios, or result in approval or disapproval of an investment
advisory contract.
Under federal regulations, the Company also may disregard instructions
to vote for Owner-initiated changes in investment policies or the investment
advisor if the Company disapproves of the proposed changes. The Company would
disapprove of a proposed change only if it were contrary to state law,
prohibited by state regulatory authorities or if the Company concluded that the
change would result in overspeculative or unsound investment practices. If the
Company disregards voting instructions, it will include a summary of its actions
in the next report to Owners.
26
<PAGE> 40
SUBSTITUTED SECURITIES
Shares of the VIT Portfolios or interests in the SAT Portfolios may not
always be available for purchase by the Sub-Accounts of the Variable Account, or
the Company may decide that further investment in any such shares or interest or
in any such Portfolios is no longer appropriate in view of the purposes of the
Variable Account. In either event, shares of or an interest in another open-end
investment company or unit investment trust may be substituted both for the
Portfolio shares or interest already purchased by the corresponding Sub-Accounts
and/or as the security to be purchased in the future, provided that these
substitutions have been approved by the Securities and Exchange Commission. In
the event of any substitution pursuant to this provision, the Company may make
an appropriate endorsement to the Contract to reflect the substitution.
OTHER CONTRACT PROVISIONS
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Annuitant is misstated to the Company, the
Company will change any benefits under the Contract to those which the proceeds
would have purchased had the correct age and sex been stated. If the
misstatement is not discovered until after annuity payments have started, any
overpayments will be charged, with compound interest, against subsequent
payments. Any amount the Company owes as the result of underpayments will be
paid, with compound interest, in a lump sum.
ASSIGNMENT
An Owner may assign a Non-Qualified Contract in writing, but may not
assign a Qualified Contract except as may be allowed under applicable law and
the documents governing the plan. The Company will not be bound by any
assignment until written notice of the assignment is received and recorded at
the Touchstone Variable Annuity Service Center. The rights of the Owner and any
Beneficiary will be affected by an assignment, and the Company disclaims any
responsibility for the validity or tax consequences of any assignment.
LOANS
Loans may be permitted under Qualified Contracts purchased in
connection with a plan established under Section 403(b), if the plan documents
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.
27
<PAGE> 41
FEDERAL INCOME TAX INFORMATION
PROSPECTIVE OWNERS SHOULD CONSULT THEIR OWN TAX ADVISORS PRIOR TO
PURCHASING A CONTRACT.
THE FOLLOWING DISCUSSION IS NOT INTENDED AND SHOULD NOT BE RELIED UPON
AS TAX ADVICE, BUT MERELY AS A SYNOPSIS OF CERTAIN FEDERAL INCOME TAX LAWS.
ALTHOUGH THE FOLLOWING DISCUSSION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
FEDERAL INCOME TAX LAWS AS CURRENTLY INTERPRETED, THERE IS NO GUARANTEE THAT
THOSE LAWS AND INTERPRETATIONS WILL NOT CHANGE. THE DISCUSSION DOES NOT TAKE
INTO ACCOUNT STATE OR LOCAL TAX LAWS WHICH MAY AFFECT THE PURCHASE OF A CONTRACT
OR THE BENEFITS PAID OUT UNDER A CONTRACT, AND DOES NOT CONSIDER FEDERAL ESTATE
AND GIFT TAXES AND STATE AND LOCAL ESTATE, INHERITANCE AND OTHER SIMILAR TAXES
WHICH WILL DEPEND UPON THE INDIVIDUAL SITUATION OF EACH OWNER OR BENEFICIARY.
QUALIFICATION AS AN "ANNUITY CONTRACT"
The following discussion is based upon the Company's assumption that
the Contract will be treated as an "annuity contract" under the Code. The
Company does not guarantee the tax status of any Contract. A purchaser bears the
complete risk that the Contract may not be treated as an "annuity contract"
under federal income tax laws. Disqualification of the Contract as an annuity
contract generally would result in imposition of federal income tax to the Owner
with respect to yearly earnings allocable to the Contract prior to the receipt
of payments under the Contract.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of all variable annuity contracts. The Code generally
provides that a variable contract will not be treated as an annuity contract for
any period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("TREASURY DEPARTMENT"), adequately diversified. The Code contains a safe harbor
provision which provides that variable contracts such as the Contracts meet the
diversification requirements if, as of the end of each quarter, (1) the
underlying assets meet the diversification standards prescribed elsewhere in the
Code for an entity to be classified as a regulated investment company and (2) no
more than 55% of the total assets consist of cash, cash items, U.S. government
securities and securities of other regulated investment companies.
In March 1989, the Treasury Department issued regulations that
established diversification requirements for the investment portfolios such as
the Portfolios underlying variable contracts such as the Contracts. The
regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described in Section 817(h) of the Code. Under the Regulations, an investment
portfolio will be deemed adequately diversified if: (1) no more than 55% of the
value of the total assets of the investment portfolio is represented by any one
investment; (2) no more than 70% of the value of the total assets of the
investment portfolio is represented by any two investments; (3) no more than 80%
of the value of the total assets of the investment portfolio is represented by
any three investments; and (4) no more than
28
<PAGE> 42
90% of the value of the total assets of the investment portfolio is represented
by any four investments.
The Variable Account, through each of the VIT Portfolios and each of
the SAT Portfolios, intends to comply with the diversification requirements of
the Code and the regulations. The Advisor has agreed to manage the Portfolios so
as to comply with such requirements.
EXCESSIVE CONTROL
The Treasury Department has from time to time suggested that guidelines
may be forthcoming under which a variable annuity contract will not be treated
as an annuity contract for tax purposes if the owner of the contract has
excessive control over the investments underlying the contract (i.e., the owner
is able to transfer values among Sub-Accounts with only limited restrictions).
If a variable contract is not treated as an annuity contract, the owner of such
contract would be considered the owner of the assets of a separate account, and
income and gains from that account would be included each year in the owner's
gross income. No such guidelines have been issued to date.
The issuance of such guidelines, or regulations or rulings dealing with
excessive control issues, might require the Company to impose limitations on an
Owner's right to transfer all or part of the Contract Value among the
Sub-Accounts or to make other changes in the Contract as necessary to attempt to
prevent an Owner from being considered the owner of any assets of the Variable
Account. The Company therefore reserves the right to make such changes. It is
not known whether any such guidelines, regulations or rulings, if adopted, would
have retroactive effect.
REQUIRED DISTRIBUTIONS
Additionally, in order to qualify as an annuity contract under the
Code, a Non-Qualified Contract must meet certain requirements regarding
distributions in the event of the death of the Owner. In general, if the Owner
dies before the entire value of the Contract is distributed, the remaining value
of the Contract must be distributed according to provisions of the Code. Upon
the death of an Owner prior to commencement of annuity payments, (1) the amounts
accumulated under a Contract must be distributed within five years, or (2) if
distributions to a designated beneficiary within the meaning of Section 72 of
the Code (a "DESIGNATED BENEFICIARY") begin within one year of the Owner's
death, distributions are permitted over a period not extending beyond the life
(or life expectancy) of the designated beneficiary.
The above rules are modified if the designated beneficiary is the
surviving spouse. The surviving spouse is not required to take distributions
from the Contract under the above rules as a beneficiary and may continue the
Contract and take distributions under the above rules as if the surviving spouse
were the original Owner. If distributions have begun prior to the death of the
Owner, such distributions must continue at least as rapidly as under the method
in effect at the date of the Owner's death (unless the method in effect provides
that payments cease at the death of the Owner).
29
<PAGE> 43
For Qualified Contracts issued in connection with tax-qualified plans
and traditional individual retirement annuities, the plan documents and rules
will determine mandatory distribution rules. However, under the Code,
distributions from Contracts issued under Qualified Plans (other than
traditional and Roth individual retirement annuities and certain governmental or
church-sponsored Qualified Plans) for employees who are not 5% owners of the
sponsoring employer generally must commence no later than April 1 of the
calendar year following the calendar year in which the employee terminates
employment or reaches age 70 1/2, whichever is later. Such distributions must be
made over a period that does not exceed the life expectancy of the employee or
the joint and last survivor life expectancy of the employee and a designated
beneficiary. Distributions from Contracts issued under traditional individual
retirement annuities (but not Roth IRAs) or to 5% owners of the sponsoring
employer from Contracts issued under Qualified Plans (other than certain
governmental or church-sponsored Qualified Plans) must commence by April 1 of
the calendar year after the calendar year in which the individuals reach age 70
1/2 even if they have not terminated employment. A penalty tax of 50% may be
imposed on any amount by which the required minimum distribution in any year
exceeds the amount actually distributed.
If the Contract is a Qualified Contract issued in connection with a
traditional individual retirement annuity, a SIMPLE account, or a plan which
qualifies under Sections 403(b), 408 or 457 of the Code, the Company will send a
notice to the Owner when the Owner, or Annutitant, as applicable reaches age 70
1/2. The notice will summarize the required minimum distribution rules and
advise the Owner of the date that such distributions must begin from the
Qualified Contract or other traditional individual retirement annuities of the
Owner. The Owner has sole responsibility for requesting distributions under the
Qualified Contract or other traditional individual retirement annuities (to the
extent permitted by the Code) that will satisfy the minimum distribution rules.
In the case of a distribution from a Qualified Contract issued under a qualified
plan which qualifies under Section 401 of the Code, the Company will not send a
notice when the Owner, or Annuitant, as applicable, reaches age 70 1/2, and the
Owner (or the employer sponsoring the qualified plan) has sole responsibility
for requesting distributions under the Qualified Contract that will satisfy the
minimum distribution rules.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which
are issued within a calendar year period to the same contract owner by one
company or its affiliates are treated as one annuity contract for purposes of
determining the tax consequences of any distribution. Such treatment may result
in adverse tax consequences, including accelerated taxation of the gain deemed
distributed from such combination of contracts. Owners should consult a tax
advisor prior to purchasing more than one non-qualified annuity contract in any
calendar year period.
QUALIFIED CONTRACTS AND QUALIFIED PLANS
GENERAL
The Qualified Contracts offered by this Prospectus are designed to be
suitable for use under various types of plans which qualify under Sections 401,
403(b), 408 or 408A of the Code ("QUALIFIED PLANS") and under plans which
qualify under Section 457 of the Code ("SECTION 457
30
<PAGE> 44
PLANS"). Because of the minimum purchase payment requirements, such Contracts
may not be appropriate for some retirement plans. Taxation of participants in
each Qualified Plan varies with the type of plan and terms and conditions of
each specific plan.
Owners, Annuitants and Beneficiaries are cautioned that benefits under
a Qualified Plan usually are subject to the terms and conditions of such plan
regardless of the terms and conditions of Qualified Contracts issued pursuant to
such plan. Although the Company provides administration for Qualified Contracts,
it does not provide administrative support for Qualified Plans. Qualified
Contracts may include special provisions restricting Contract provisions that
may otherwise be available and described in this Prospectus. Generally,
Qualified Contracts issued pursuant to Qualified Plans are not transferable
except upon surrender or annuitization. Various penalty and excise taxes may
apply to contributions or distributions made in violation of applicable
limitations. Furthermore, certain withdrawal penalties and restrictions may
apply to surrenders from Qualified Contracts. See "Tax Treatment of
Withdrawals--Qualified Contracts."
On July 8, 1983, the Supreme Court decided in Arizona Governing
Committee v. Norris that optional annuity benefits provided under an employer's
deferred compensation plan could not, under Title VII of the Civil Rights Act of
1964, vary between men and women. Accordingly, Contracts sold by the Company in
connection with Qualified Plans (excluding individual retirement annuities) will
utilize annuity tables which do not differentiate on the basis of sex.
The following are general descriptions of the types of Qualified Plans
with which the Qualified Contracts may be used. Such descriptions are not
exhaustive and are for general informational purposes only. The tax rules
regarding Qualified Plans are complex, 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."
31
<PAGE> 45
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-Sheltered Annuities -- Withdrawal Limitations."
Loans from Section 403(b) Plans. With respect to Section 403(b) Plans,
the Contract provides for loans that conform to the specific terms set forth in
the Contract and Code Section 72(p). In general, the maximum amount and other
terms and conditions of loans from a Contract are determined as though the
Contract was a qualified plan covered under Title I of ERISA. Among other
things, the Contract specifically requires that each such loan must be a minimum
of $1,000 and that the maximum term for repayment of loans (other than
residential purchase loans) is 5 years, at an interest rate comparable to that
charged by commercial lenders for similar loans. Residential purchase loans may
be repaid over a 15-year period. Under the Contract, an Owner may, subject to
certain requirements, receive loans from a Contract that is issued as a 403(b)
tax-sheltered annuity beginning 30 days after the date of issue.
A Contract cannot be surrendered or annuitized while a Contract loan is
outstanding, unless the Contract Value can be reduced by the outstanding loan
balance plus interest and such reduction satisfies Section 403(b)(11) of the
Code if applicable.
TRADITIONAL IRAS
The Code permits eligible individuals to contribute to an individual
retirement program known as an "Individual Retirement Annuity" ("IRA"). Subject
to applicable limitations, certain amounts contributed to a traditional IRA may
be deductible from the individual's gross income for federal income tax
purposes. A Qualified Contract can be used in connection with a traditional IRA
that is governed under Section 408 of the Code.
The maximum amount that may be contributed to all traditional IRAs for
the benefit of an individual for any tax year beginning on or after January 1,
1998 will generally be equal to the lesser of (a) $2,000 or (b) the compensation
includible in the individual's income (for federal income tax purposes) with
respect to such tax year.
A special rule applies if the individual for whom the contributions are
being made files a joint federal income tax return with his or her spouse for
the applicable tax year but has compensation includible in income (for federal
income tax purposes) with respect to such tax year that is less than the taxable
compensation of his or her spouse for such tax year (such as will occur when the
individual is a "nonworking spouse"). In such case, the maximum amount that may
be
32
<PAGE> 46
contributed to all traditional IRAs for such individual with respect to such
tax year can generally be up to the lesser of (a) $2,000 or (b) the sum of the
taxable compensation of such individual for such tax year plus the taxable
compensation of his or her spouse for such tax year (minus any deduction allowed
his or her spouse with respect to such tax year for contributions to traditional
IRAs and any contributions made by his or her spouse to Roth IRAs with respect
to such tax year).
Annual contributions cannot be made to a traditional IRA for an
individual after he or she has attained age 70 1/2.
Contributions to traditional IRAs in excess of the contribution limits
summarized above may be subject to certain tax penalties or other restrictions.
In determining the deduction limit on contributions made to all
traditional IRAs held for the benefit of an individual with respect to any tax
year beginning or after January 1, 1998, the $2,000 limit noted above begins to
be phased out if (1) such individual (or, if applicable, his or her spouse) is
an active participant in an employer-provided tax-qualified retirement plan for
a plan year ending within such tax year and (2) his or her adjusted gross income
(for federal income tax purposes) with respect to such tax year exceeds a
certain amount (the "initial traditional IRA limit"). In addition, if the
individual is an active participant in an employer-provided tax-qualified
retirement plan for a plan year ending with or within such tax year, such $2,000
limit is reduced to zero if such adjusted gross income is equal to or in excess
of a higher amount (the "totally phased out traditional IRA limit").
For this purpose, the initial traditional IRA limit for any tax year is
generally:
(1) $150,000 if the applicable individual is not an active
participant in an employer-provided tax-qualified retirement
plan at any time in a plan year ending within such tax year
but whose spouse has been such an active participant;
(2) $50,000 (increasing in stages in tax years beginning after
1998 until it is $80,000 for tax years beginning in 2007 and
thereafter) if the applicable individual files a joint federal
income tax return for such tax year and has been an active
participant in an employer-provided tax-qualified retirement
plan at any time in a plan year ending within such tax year;
(3) $30,000 (increasing in stages in tax years beginning after
1998 until it is $50,000 for tax years beginning in 2005 and
thereafter) if the applicable individual files a separate
federal income tax return for such tax year, is not married
and has been an active participant in an employer-provided
tax-qualified retirement plan at any time in a plan year
ending within such tax year; or
(4) $0 if the applicable individual files a separate federal
income tax return for such tax year, is married and has been
an active participant in an employer-
33
<PAGE> 47
provided tax-qualified retirement plan at any time in a plan
year ending within such tax year.
Further, for this purpose, the totally phased out traditional IRA limit
for any individual and with respect to any tax year prior to 2007 is an amount
that is $10,000 above the initial traditional IRA limit applicable to such
individual and tax year. The $10,000 amount will be increased to $20,000 with
respect to a tax year beginning in 2007 or later if the applicable individual
files a joint federal income tax return for such tax year.
Under certain conditions, distributions from other traditional IRAs or
Qualified Plans may be rolled over or transferred to a traditional IRA on a
tax-deferred basis. Traditional IRAs are subject to limitations on eligibility,
contributions, transferability and distributions. See "Tax Treatment of
Withdrawals-- Qualified Contracts."
Sales of Contracts for use with traditional IRAs are subject to special
requirements imposed by the Code, including the requirement that certain
informational disclosure be given to persons desiring to establish a traditional
IRA. Purchasers of Contracts to be qualified as traditional IRAs should obtain
tax advice as to the tax treatment and suitability of such an investment.
ROTH IRAS
A Qualified Contract can also be used in connection with a Roth IRA
that is governed under Section 408A of the Code. Unlike a traditional IRA, no
contributions to a Roth IRA can, under any circumstances, be deducted by an
individual. Instead, all contributions made to a Roth IRA are nondeductible.
Subject to the following discussion, the maximum amount that may be
contributed to all Roth IRAs for the benefit of an individual with respect to
any tax year will generally be equal to the amount (if any) by which (1) the
lesser of $2,000 or the compensation includible in the individual's income (for
federal income tax purposes) with respect to such tax year exceeds (2) the
aggregate amount of contributions made for the benefit of such individual with
respect to such tax year to all traditional IRAs.
A special rule applies if the individual for whom the contributions are
being made files a joint federal income tax return with his or her spouse for
the applicable tax year but has an amount of compensation includible in income
(for federal income tax purposes) with respect to such tax year that is less
than the taxable compensation of his or her spouse for such tax year (such as
will occur when the individual is a "nonworking spouse"). In such case, subject
to the following discussion, the maximum amount that may be contributed to all
Roth IRAs for such individual with respect to such tax year can generally be up
to the amount (if any) by which (1) the lesser of $2,000 or the sum of the
taxable compensation of such individual for such tax year plus the taxable
compensation of his or her spouse for such tax year (minus any deduction allowed
his or her spouse with respect to such tax year for contributions to traditional
IRAs and any contributions made for his or her spouse to Roth IRAs with respect
to such tax year) exceeds (2) the aggregate amount of contributions made for the
benefit of such individual with respect to such tax year to all traditional
IRAs.
34
<PAGE> 48
The maximum contribution amount that can be made to Roth IRAs for any
individual with respect to any tax year under the rules described above
generally begins to be phased out for such individual if his or her adjusted
gross income (for federal income tax purposes) with respect to such tax year
exceeds a certain amount (the "initial Roth IRA limit") and is reduced to zero
(so that no contributions can be made to Roth IRAs for his or her benefit for
such tax year) if his or her adjusted gross income for such tax year is equal to
or in excess of a higher amount (the "totally phased out Roth IRA limit").
For this purpose, the initial Roth IRA limit and the totally phased out
Roth IRA limit are generally:
(1) $150,000 and $160,000, respectively, if the applicable
individual files a joint federal income tax return for such
tax year;
(2) $95,000 and $110,000, respectively, if such individual files a
separate federal income tax return for such tax year and is
not married; and
(3) $0 and $15,000, respectively, if such individual files a
separate return for such tax year and is married.
Unlike traditional IRAs, if otherwise permitted, annual contributions
can be made to Roth IRAs for an individual even after he or she has attained age
70-1/2.
Similar to traditional IRAs, contributions made to Roth IRAs in excess
of the contribution limits summarized above may be subject to certain tax
penalties or other restrictions.
Rollover Contributions to a Roth IRA. Under certain conditions
described in Sections 408(d)(3) and 408A(e) of the Code, an individual may be
able to roll over a distribution from a Roth IRA or a traditional IRA to a Roth
IRA on a tax-deferred basis during any tax year; except that such a rollover
from a traditional IRA to a Roth IRA can be made in a tax year only if (1) the
applicable individual's adjusted gross income (for federal income tax purposes)
with respect to such tax year is $100,000 or less and (2) such individual is not
a married individual filing a separate federal income tax return for such tax
year. Any proper rollover is not taken into account in determining the amount of
annual contributions made to Roth IRAs for purposes of the contribution limits
described above.
However, if any distribution from an individual's traditional IRA is
rolled over to a Roth IRA held for the benefit of such individual, the
individual must generally include in income (for federal income tax purposes)
the amount of such distribution. Under a special rule applicable to any such
distribution made before January 1, 1999, such distribution is included in
income only ratably over the four-tax year period beginning with the tax year in
which the distribution is made. No early distribution penalty tax under Section
72(t) of the Code, which generally provides a 10% penalty in cases of
distributions from IRAs unless the applicable individual is age 59-1/2 or in
certain other situations, will apply to such a distribution.
35
<PAGE> 49
Any individual considering a rollover to a Roth IRA should review the
conditions applicable to making such rollover that are set forth in Sections
408(d)(3) and 408A(e) of the Code.
If an individual's traditional IRA is converted into a Roth IRA, it is
generally subject to the same tax rules and limits that would apply to a
distribution from a traditional IRA that is rolled over to a Roth IRA.
Like traditional IRAs, Roth IRAs are subject to limitations on
eligibility, contributions, transferability and distributions. See "Tax
Treatment of Withdrawals--Qualified Contracts." Sales of Contracts for use with
Roth IRAs are subject to special requirements imposed by the Code, including the
requirement that certain informational disclosure must be given to persons
desiring to establish a Roth IRA. Purchasers of Contracts to be qualified as
Roth IRAs should obtain tax advice as to the tax treatment and suitability of
such an investment.
SIMPLIFIED EMPLOYEE PENSION PLANS
Employers may establish what is known as a simplified employee pension
plan ("SEP") under Section 408(k) of the Code. Employer contributions to a SEP
can be invested in an individual retirement annuity selected by a participant in
the SEP. Contributions generally must be made as a uniform percentage of
employee compensation and are excluded from gross income of the employee for
federal income tax purposes. Employer contributions to a SEP cannot exceed the
lesser of $30,000 or 15% of an employee's eligible compensation (which may not
exceed $160,000 for the year 1998, indexed to reflect certain cost-of-living
changes for 1999 and later years).
The Code also permits employees of certain small employers to have SEP
contributions made on the basis of salary reduction if the SEP was established
as a salary reduction SEP no later than December 31, 1996. Such salary reduction
contributions may not exceed $10,000 for 1998, indexed annually for inflation.
The tax consequences to participants may vary depending upon the
particular plan design. However, the Code places limitations and restrictions on
all such plans including on such items as: amounts of allowable contributions;
form, manner and timing of distributions; vesting and nonforfeitability of
interests; 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 that establish a Savings Incentive Match Plan for Employees
(a "SIMPLE IRA") under Section 408(p) of the Code may make employee salary
deferral contributions and employer contributions to individual retirement
annuities established for the eligible employees. Employees who have earned or
expect to earn $5,000 or more annually may defer the lesser of $6,000 or 100% of
earned income through a salary deferral arrangement. Employee salary deferrals
are not includable in the employee's federal taxable gross income.
36
<PAGE> 50
The employer must make a company contribution (not to exceed $6,000
annually) based on one of two schedules. The schedules are either (1) a dollar
for dollar matching contribution for all employees who make salary deferral
contributions based on the employee's salary deferral up to a maximum of 3% of
the employee's compensation, or (2) a 2% nonelective contribution for all
eligible employees based on compensation (which may not exceed $160,000 for
1998). Employers sponsoring SIMPLE IRAs may not maintain other qualified
retirement plans.
The Code places certain limitations and restrictions on these plans
including: manner and timing of contributions; vesting and nonforfeitability of
interests; nondiscrimination in eligibility and participation; tax treatment of
distributions, withdrawals and surrenders; frequency of notification and
eligibility to participate; and annual employee reporting. See "Tax Treatment of
Withdrawals--Qualified Contracts."
SECTION 457 DEFERRED COMPENSATION PLANS
Under Section 457 of the Code, governmental and certain other tax
exempt employers may establish deferred compensation plans for the benefit of
their employees and may purchase annuity contracts in connection with those
plans. Under such plans, contributions made for the benefit of an employee will
not be includable in the employee's gross income for federal income tax purposes
until distributed from the plan. If the program is considered an "eligible
deferred compensation plan" under the Code, an individual generally may
contribute, on a tax-deferred basis, subject to the reductions described below,
the lesser of $8,000 or 33 1/3% of gross income from the employer. Amounts so
deferred may be used by the employer to purchase Contracts pursuant to this
Prospectus.
Contributions to a Section 457 Plan must be reduced by (1) amounts
excluded from income under Sections 403(b) (tax sheltered annuities), Section
402(e)(3) (elective salary deferrals under Section 401(k) or 403(b) plans),
Section 402(h)(1)(B) (elective salary deferrals under Simplified Employee
Pensions) or Section 402(k) (SIMPLE IRAs) of the Code or (2) for which a
deduction is allowed under Section 501(c)(18) (for certain "employee pay-all"
plans created before June 25, 1959) for the taxable year.
Under a Section 457 Plan that is not a governmental plan, all the plan
assets, including any Contract, must remain solely the property of the employer
subject only to the claims of the employer's general creditors until such time
as made available to the participant or beneficiary. The employee has no present
rights or vested interest in the Contract and is entitled to payment only under
the terms of the plan.
Under a governmental Section 457 Plan that is maintained by a state, a
political subdivision of a state, or any agency or instrumentality of a state or
political subdivision, all assets of a Section 457 Plan must be held in a trust,
a custodial account or an annuity contract for the exclusive benefit of
participants and their beneficiaries.
Distributions from such plans generally are not permitted prior to
termination of employment except in cases of unforeseeable emergencies (as
defined in Treas. Reg. Section 1.457-2(b)(4)).
37
<PAGE> 51
FEDERAL INCOME TAXATION
GENERAL
Section 72 of the Code governs taxation of annuities in general. Except
as described below for Owners who are not natural persons, an Owner is not taxed
on increases in the value of the Contract when those increases occur. Instead,
an Owner is taxed only when a distribution occurs, either in the form of a lump
sum payment or as annuity payments under the payout plan selected.
For a lump sum payment received as a total surrender (total
redemption), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For Non-Qualified Contracts, this cost basis is
generally the sum of the Purchase Payments. For a Qualified Contract, there may
be no cost basis in the Contract within the meaning of Section 72 of the Code.
The taxable portion of the lump sum payment is taxed at ordinary income tax
rates.
For annuity payments under Non-Qualified Contracts, a fixed portion of
each payment is excludable from gross income as a tax-free recovery of the
Owner's Purchase Payments (if any), and the balance is taxed at ordinary income
tax rates. The excludable portion can be determined by dividing (1) the Owner's
Purchase Payments (in the case of Non-Qualified Contracts only, as adjusted for
any period-certain or refund guarantee), less any withdrawals from those
Purchase Payments, by (2) the number of years over which it is anticipated that
the annuity will be paid. The method of determining the number of years over
which payments are anticipated is different for Qualified and Non-Qualified
Contracts. If annuity payments continue beyond the anticipated number of years,
such payments will be fully taxable.
Owners who are not natural persons generally must include in income any
increase in the excess of the Contract's Value over the "investment in the
contract" during the taxable year. As a result, Contracts used in connection
with unfunded deferred compensation plans of private employers (sometimes called
"top hat" plans) generally are currently subject to income tax on such increase
in value. There are some exceptions to this rule, including an exception for
Contracts owned by certain tax-qualified plans. A prospective Owner that is not
a natural person may wish to discuss availability of these exceptions with its
own tax advisor.
Annuity payments or other amounts received under all Contracts are
subject to income tax withholding under the Code unless the recipient is
eligible to elect not to have taxes withheld and so elects. However, annuity
payments to former employees under deferred compensation plans pursuant to
Section 457 of the Code are subject to income tax withholding as if such
payments are wages. Also, amounts that are "eligible rollover distributions" are
subject to mandatory withholding unless distributed as "direct rollovers". See
"Tax Treatment of Withdrawals -- Qualified Contracts." Amounts so withheld will
vary among recipients depending upon the tax status of the recipient and the
type of payment.
38
<PAGE> 52
Owners, Annuitants and Beneficiaries under the Contracts should seek
financial advice about the tax consequences of any withdrawals or other
distributions.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. An Owner
should therefore consult his or her tax advisors prior to assigning any
Contract.
TAX TREATMENT OF WITHDRAWALS--NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of all payments (including
withdrawals of Contract Value) from annuity contracts. Applied to a Contract, it
provides that if the Contract Value exceeds the aggregate Purchase Payments
made, any payment that is not received as an annuity payment will be treated as
coming first from earnings and then, only after the earnings portion is
exhausted, as coming from the principal. If the Contract contains investments in
the Contract made prior to August 14, 1982, special taxation rules apply to such
withdrawals and related earnings. These special rules provide that any amount
withdrawn that is not received as an annuity payment will be treated as coming
first from principal and then, only after the principal portion is exhausted, as
coming from earnings. Withdrawn earnings are includable in gross income.
Section 72 further provides that a 10% penalty will apply to the income
portion of amounts received other than under the following circumstances:
(1) on or after the date the taxpayer reaches age 59 1/2;
(2) on or after the death of the Owner;
(3) if the taxpayer is totally disabled (as defined in Section
72(m)(7) of the Code);
(4) in a series of substantially equal periodic payments made not
less frequently than annually for the life (or life
expectancy) of the taxpayer or for the joint lives (or joint
life expectancies) of the taxpayer and the joint annuitant;
(5) amounts attributable to investment in the Contract prior to
August 14, 1982; or
(6) under an immediate annuity within the meaning of Code Section
72(u)(4);
The above paragraph does not apply to Qualified Contracts. However,
separate withdrawal restrictions and tax penalties and restrictions may apply to
such Qualified Contracts. See "Tax Treatment of Withdrawals--Qualified
Contracts."
TAX TREATMENT OF WITHDRAWALS--QUALIFIED CONTRACTS
The discussion in this section applies to Qualified Plans other than
IRAs. It does not apply to Section 457 Plans.
39
<PAGE> 53
Distributions from Qualified Contracts purchased under Qualified
generally are taxable as ordinary income, except to the extent allocable to an
employee's after-tax contributions. Special rules described below apply to
distributions from Qualified Contracts that are rolled over to a traditional
individual retirement account, a traditional individual retirement annuity or
another Qualified Plan.
If an employee or the Beneficiary receives from a Qualified Plan (not
including distributions from an individual retirement account, individual
retirement annuity or tax-sheltered annuity) a "lump sum distribution" as
defined in Section 402(d)(4) of the Code, the taxable portion of the
distribution may be subject to special tax treatment. For most individuals
receiving lump sum distributions after age 59 1/2 and on or before December 31,
1999, the tax rate may be determined under five-year income averaging provisions
of the Code. Those who reached age 50 on or before January 1, 1986 instead may
elect to use a ten-year income averaging. In addition, such individuals may
elect capital gains treatment for the taxable portion of a lump sum distribution
attributable to years of service before 1974.
Rollover Distributions. Distributions from Qualified Contracts
purchased under Qualified Plans (but not from IRAs) that are "eligible rollover
distributions" are subject to certain direct rollover and federal income tax
withholding rules.
A distribution is not an "eligible rollover distribution" and cannot be
paid as a direct rollover if (1) it represents the return of "after-tax"
employee contributions, (2) it is part of a series of payments made for a period
of ten years or more, (3) to the extent it is a "required minimum distribution"
that is made after age 70 1/2 and is required by law, or (4) it is made for
certain other reasons. The administrator of the Qualified Plan will provide
additional information about these tax rules when a distribution is made.
The Qualified Plan is required to give the Owner, Annuitant or
Beneficiary (as applicable) the choice of having payments that are eligible
rollover distributions paid in one of the following ways:
(1) a "direct rollover" to a traditional IRA or to certain other
types of Qualified Plans, or
(2) a "direct payment" to the Owner, Annuitant or Beneficiary.
Direct Rollovers. If a direct rollover is chosen, the payment will be
made directly to the traditional IRA or other Qualified Plan. Such payment will
not be subject to federal income tax in the year the direct rollover is made,
but will be taxed later when it is taken out of the traditional IRA or other
Qualified Plan. Nonspouse Beneficiaries cannot elect direct rollovers.
Direct Payments. If a payment to the Owner, Annuitant or Beneficiary is
chosen, he or she will receive only 80% of the payment because the Qualified
Plan administrator is required to withhold 20% of the payment and send it to the
Internal Revenue Service to be credited against
40
<PAGE> 54
federal income taxes. Also, the Owner, Annuitant or Beneficiary will be taxed on
the payment for the year it is made unless he or she rolls the payment over to a
traditional IRA or certain other types of Qualified Plans within 60 days of
receiving the payment. Nonspouse Beneficiaries cannot make such rollovers. If
the Owner, Annuitant or Beneficiary wants to roll over 100% of a payment, he or
she must find other funds to replace the 20% that was withheld.
TAX TREATMENT OF DISTRIBUTIONS FROM ROTH IRAs
Any distribution from a Roth IRA that is considered a qualified
distribution is not includible in income for federal income tax purposes and
hence also is not subject to the early distribution penalty tax under Section
72(t) of the Code.
A distribution from a Roth IRA is treated as a "qualified distribution"
for this purpose if (1) it is made after the end of the five-tax year period
beginning with the first tax year for which a contribution was made to a Roth
IRA for the benefit of the applicable individual (or, to the extent any portion
of such distribution is allocable to a rollover contribution, if it is made
after the end of the five-tax year period beginning with the tax year in which
the rollover contribution was made) and (2) it meets one of the following
conditions:
(1) It is made on or after the date the individual attains age
59-1/2;
(2) It is made to a beneficiary or the individual's estate on or
after the death of the individual;
(3) It is attributable to the individual's being disabled (within
the meaning of Section 72(m)(7) of the Code); or
(4) It meets the conditions of a "qualified first-time homeowner
distribution," which are summarized below. See "Penalty Tax on
Withdrawals--Qualified Contracts and IRAs."
Any distribution from a Roth IRA that is not considered a qualified
distribution under the above rules is generally excluded from income (for
federal income tax purposes) to the extent it does not, when added to all
previous distributions from such Roth IRA, exceed the aggregate amount of
contributions made to such Roth IRA and is included in income (and may be
subject to the early distribution penalty tax under Section 72(t) of the Code)
to the extent it does exceed such amount.
PENALTY TAX ON WITHDRAWALS - QUALIFIED CONTRACTS AND IRAs
Section 72(t) of the Code imposes a 10% penalty tax on the taxable
portion of any distribution from a Qualified Plan or an IRA, including Contracts
issued in connection with plans that are qualified under Code Sections 401,
403(b), 408 and 408A. To the extent amounts are not includable in gross income
because they have been properly rolled over (as direct rollovers or as
41
<PAGE> 55
rollovers of other payments) to an IRA or to another eligible Qualified Plan, no
tax penalty will be imposed.
In addition, the tax penalty will not apply to the following
distributions:
(1) distributions made on or after the date on which the Owner or
Annuitant (as applicable) reaches age 59 1/2;
(2) distributions following the death or disability of the Owner
or Annuitant (as applicable) (disability is defined in Section
72(m)(7) of the Code);
(3) distributions that are part of substantially equal periodic
payments made not less frequently than annually for the life
(or life expectancy) of the Owner or Annuitant (as applicable)
or the joint lives (or joint life expectancies) of such Owner
or Annuitant (as applicable) and the designated beneficiary
(provided that if the Qualified Plan is other than an IRA,
distributions do not begin before the Contract Owner or
Annuitant separates from service);
(4) for Qualified Plans other than IRAs, distributions to an Owner
or Annuitant (as applicable) who has separated from service
after attaining age 55;
(5) distributions made to the Owner or Annuitant (as applicable)
to the extent such distributions do not exceed the amount
allowable as a deduction under Code Section 213 to the Owner
or Annuitant (as applicable) for amounts paid during the
taxable year for medical care;
(6) for Qualified Plans other than IRAs, distributions made to an
alternate payee pursuant to a qualified domestic relations
order;
(7) distributions to unemployed individuals for health insurance
premiums under certain conditions;
(8) for traditional IRAs and Roth IRAs, "qualified educational
distributions"; and
(9) for traditional IRAs and Roth IRAs, "qualified first-time
homeowner distributions."
A "qualified educational distribution" refers to any distribution
received by an individual to the extent it does not exceed the expenses for
tuition, fees, books, supplies, and equipment required for the enrollment or
attendance of the individual, his or her spouse or any child or grandchild of
the individual or his or her spouse at a qualified post-secondary institution of
education (less certain scholarships or other assistance received for the same
expenses).
A "qualified first-time homeowner distribution" refers to any
distribution received by an individual to the extent it is used by him or her,
before the close of the 120th day after the day on which it is received, to pay
the costs of acquiring, constructing or reconstructing a principal residence of
a first-time homebuyer who is such individual, his or her spouse or any child,
42
<PAGE> 56
grandchild or ancestor of such individual or his or her spouse. No more than
$10,000 can be excluded in the aggregate from the early distribution penalty tax
by an individual under this exception over all tax years.
REQUIRED DISTRIBUTIONS - QUALIFIED CONTRACTS, IRAs AND SECTION 457
PLANS
Distributions from a Qualified Contract issued in connection with a
Qualified Plan or a traditional IRA generally must commence by April 1 of the
calendar year after the calendar year in which the Owner or Annuitant, as
applicable, reaches age 70 1/2 (or, if later, by April 1 of the calendar year
after the calendar year in which he or she terminates employment in the case of
a Qualified Plan but not in the case of a traditional IRA). Distributions from a
Qualified Contract issued in connection with a traditional IRA and distributions
to 5% owners of the sponsoring employer from Contracts issued under Qualified
Plans (other than certain governmental or church-sponsored Qualified Plans) must
commence by April 1 of the calendar year after the calendar year in which the
Owner or Annuitant, as applicable, reaches age 70 1/2 even if he or she has not
terminated employment.
Required distributions must be made in minimum annual amounts
determined under rules issued pursuant to the Code. See "Required
Distributions."
Other rules apply to a Qualified Contract issued in connection with a
Qualified Plan or a traditional IRA to determine when and how required minimum
distributions must be made in the event of the death of the Owner or Annuitant.
The plan or IRA documents will contain such rules. In addition, if the Owner's
or Annuitant's surviving spouse is the beneficiary of the interest in the
Qualified Plan or the traditional IRA, the surviving spouse may be able to elect
to defer the commencement of distributions past the commencement date that
otherwise would apply, to roll over a distribution to the surviving spouse's own
IRA or to treat a traditional IRA as his or her own.
Under certain conditions, distributions from other traditional IRAs and
other Qualified Plans may be rolled over or transferred on a tax-deferred basis
into a traditional IRA or another Qualified Plan. Persons seeking to roll over
distributions in such a manner should obtain tax advice as to the limitations
imposed by the Code on such rollovers.
Roth IRAs. A Roth IRA is not subject to the requirements governing
distributions and they will not apply unless the applicable Roth IRA document
itself imposes such requirements. However, minimum distributions may be required
from a Roth IRA after the death of the individual for whose benefit the Roth IRA
was established, in accordance with the rules of the Code and the IRS. In
general, such rules appear to require that the funds held under the individual's
Roth IRA be completely distributed by the end of the calendar year in which the
fifth annual anniversary of the date of the death of the individual occurs. As
an alternative, if distributions to the individual's beneficiary as designated
under the Roth IRA begin by the end of the calendar year immediately following
the calendar year in which the individual's death occurs (or, if the designated
beneficiary is the individual's surviving spouse, by the later of the end of the
calendar year immediately following the calendar year in which the individual
dies or the end of the calendar year in which the individual would have attained
age 70-1/2), distributions from the individual's Roth IRA may be
43
<PAGE> 57
able to be made over a period not extending beyond the life (or life expectancy)
of the designated beneficiary.
Section 457 Plans. Distributions from a Contract issued in connection
with a Section 457 Plan generally must meet the same rules as distributions from
Qualified Plans. See "Required Distributions." However, in the case of a
distribution from such a Contract which does not begin before the death of the
Owner or Annuitant, distributions must be made over a period not exceeding 15
years (or, if greater, the life expectancy of the surviving spouse if that
spouse is the beneficiary).
SIMPLE IRAs - WITHDRAWAL LIMITATIONS
Because contributions to a SIMPLE IRA are placed in traditional IRAs,
many of the traditional IRA rules apply to SIMPLE IRAs. In addition, during the
first two years after the individual first participates in any salary reduction
arrangement that is part of a SIMPLE IRA, any amounts distributed from the
SIMPLE IRA are subject to a 25% early withdrawal penalty imposed by the IRS
unless the distributions are rolled over to another SIMPLE retirement account or
unless one of the exceptions to the Section 72(t) tax, as discussed above,
applies. During this first two year period, employees may transfer SIMPLE IRAs
to other SIMPLE IRAs without a 25% early withdrawal penalty. Employees who have
not reached age 59 1/2 and do not qualify for one of the exceptions to the
Section 72(t) tax must wait two years after first participating in the SIMPLE
IRA before transferring employee and/or employer contributions to other IRAs or
IRA rollover annuities under Section 408(d)(3). After the two year period, the
normal IRA rules regarding withdrawals apply to SIMPLE IRAs.
TAX-SHELTERED ANNUITIES--WITHDRAWAL LIMITATIONS
Effective January 1, 1989, the Code limits the withdrawal of amounts
attributable to contributions made pursuant to a salary reduction agreement (as
defined in Section 403(b)(11) of the Code) to circumstances only: (1) when the
Owner attains age 59 1/2; (2) separates from service; (3) dies; (4) becomes
disabled (within the meaning of Section 72(m)(7) of the Code); or (5) in the
case of hardship. However, withdrawals for hardship are restricted to the
portion of the Owner's Contract Value which represents contributions by the
Owner and does not include any investment results. The limitations on
withdrawals apply only to salary reduction contributions made after December 31,
1988 and to income attributable to such contributions and to income attributable
to amounts held as of December 31, 1988. The limitations on withdrawals do not
affect rollovers between certain Qualified Plans. Owners should consult their
own tax counsel or other tax advisor regarding any distributions.
LEGAL PROCEEDINGS
There are no material legal proceedings, other than ordinary routine
litigation incidental to the businesses of the Company, Separate Account 2, 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 STATEMENT
44
<PAGE> 58
Financial Statements of the Company and of 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).
45
<PAGE> 59
PART II -- DISCUSSION OF SELECT ADVISORS PORTFOLIOS
SUMMARY
GENERAL
Select Advisors Portfolios (the "SA TRUST") is a diversified, open-end
management investment company which was organized as a trust under the laws of
the State of New York on February 7, 1994. The SA Trust includes nine separate
portfolios, two of which, the Growth & Income Portfolio and the Bond Portfolio
(each as "SAT PORTFOLIO" and collectively the "SAT PORTFOLIOS"), are discussed
in this Part II. Each of the SAT Portfolios has a different investment objective
and different policies and practices.
GROWTH & INCOME PORTFOLIO has an investment objective of long term
capital appreciation and dividend income through investment primarily
in common stocks of high quality companies.
BOND PORTFOLIO has an investment objective of providing a high level of
current income primarily through investment in investment grade bonds.
For further information regarding the investment objectives, policies
and restrictions of each of the SAT Portfolios, see "Investment Objectives,
Policies and Restrictions." There can, of course, be no assurance that the
investment objectives of the SAT Portfolios can be achieved. Except for certain
investment restrictions designated as fundamental in this Prospectus or the
Statement of Additional Information, the investment objectives and policies of
any SAT Portfolio may be changed by the Trustees of the SA Trust without the
approval of the investors in the respective Portfolio.
RISKS
There are certain risks associated with the investment policies of each
SAT Portfolio. The value of a Sub-Account will fluctuate with the value of the
underlying securities in the corresponding SAT Portfolio in which all of the
Sub-Account's assets are invested.
To the extent that a Portfolio invests in income securities, the market
value of those securities will be affected by general changes in interest rates,
which may result in either increases or decreases in the value of those
securities. To the extent that a Portfolio invests in securities of foreign
issuers and governments, the Portfolio may face risks that are different from
those associated with investment in domestic securities. The Growth & Income
Portfolio and Bond Portfolio may invest up to 5% and 35%, respectively, of its
total assets in non-investment grade bonds, commonly known as junk bonds. These
bonds entail greater risk of untimely interest and principal payments, default
and price volatility than higher rated securities, and may present problems of
liquidity and valuation. For additional information, see "Investment Objectives,
Policies and Restrictions" and " Investment Techniques, Risk Factors and
Investment Restrictions."
46
<PAGE> 60
ADVISORS
Each SAT Portfolio is managed by one or more Portfolio Advisors
selected by the Board of Trustees of the SA Trust based on the recommendations
of the Advisor. The Advisor is paid advisory fees for the general management of
the SAT Portfolios. The Portfolio Advisors are paid fees by the Advisor to
manage the assets of each of the SAT Portfolios. See "Management of the
Portfolios."
SUB-ACCOUNTS
Each SAT Portfolio corresponds to a Sub-Account of the Variable
Account. The investment objectives of each Sub-Account are the same as the
investment objectives of its corresponding SAT Portfolio, and each Sub-Account
invests the funds it receives from Contract Owners only in an interest in the
corresponding SAT Portfolio.
Owners electing to allocate a portion of their Purchase Payments to the
Variable Account acquire interests in the Sub-Account(s) that they select. Each
Sub-Account, in turn, holds an interest in the corresponding SAT Portfolio.
Owners do not invest directly in the corresponding SAT Portfolio. See "Purchase
Payments." Similarly, Owners that surrender or make withdrawals from their
Contracts do not directly redeem interests in the Portfolios. See "Surrenders
and Partial Withdrawals."
Although Owners who allocate all or any portion of their Purchase
Payments to the Growth & Income and Bond Sub-Accounts do not directly own
interests in the SAT Portfolios or the SA Trust, they do have voting rights in
certain circumstances. If at any time any Sub-Account is requested to vote on a
matter regarding the corresponding SAT Portfolio, the Company will solicit the
directions of each Owner who has allocated Contract Value to such Sub-Account
and will cast the votes of the Sub-Account in accordance with the directions
received from such Owners. See "Voting Rights."
OTHER INVESTORS
Owners should be aware that each SAT may also receive investments from
other separate accounts of the Company or of other insurance companies. Owners
should be aware that other investors in an SAT Portfolio could control the
results of voting on any matter submitted to investors in that Portfolio. In
certain instances, such as a change in an SAT Portfolio's fundamental policies,
it might be advisable for the affected Sub-Account (subject to receipt of
required approvals) to redeem its investment in the Portfolio. Substantial
redemptions could result in that Portfolio effecting any such redemption by
means of a distribution in kind of securities held by the Portfolio. Any such
distribution in kind could adversely affect the diversification and liquidity of
the Sub-Accounts' investments. In addition, the Sub-Account could incur
brokerage and other transaction costs in order to convert the resulting
securities to cash.
As is true with many investments generally, investors in the 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
47
<PAGE> 61
corresponding reduction in return. Large redemptions could, as well, cause a
Sub-Account's holdings to become less diverse, resulting in increased risk.
FINANCIAL HIGHLIGHTS
The following table shows ratios to average net assets and other
financial data for each SAT Portfolio for the periods indicated and was derived
from financial statements audited by Coopers & Lybrand L.L.P., the SA Trust's
independent accountants, whose report thereon appears in the SA Trust's Annual
Report which is incorporated by reference in the SA Trust's Statement of
Additional Information. The Annual Report, which includes further information
about each Portfolio's performance, is available without charge and upon request
by calling (800) 669-2796.
<TABLE>
<CAPTION>
Growth & Income Portfolio Bond Portfolio
--------------------------------------- -----------------------------------------
For the period ended December 31, 1997 1996 1995 1994(a) 1997 1996 1995 1994(a)
- ---------------------------------- ---- ---- ---- ------- ---- ---- ---- -------
Ratios and supplemental data (b):
Net assets at end of period
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(000's)........................ $46,563 $21,971 $13,894 $9,923 $24,684 $14,979 $12,304 $10,104
Ratios to average net assets:
Expenses......................... 0.85% 0.85% 0.85% 0.85% 0.75% 0.75% 0.75% 0.75%
Net investment income............ 1.28% 1.07% 1.27% 2.06% 6.28% 6.16% 6.91% 6.76%
Expenses, without waiver and
reimbursement.................. 1.47% 1.71% 1.77% 2.94% 1.49% 1.72% 1.58% 2.67%
Portfolio turnover 153% 69% 96% 0% 79% 79% 80% 0%
Average commission rate (c) $0.0551 $0.0571 -- -- -- -- -- --
<FN>
- ------------------------
(a) The Portfolios commenced operations on November 21, 1994.
(b) Ratios are annualized. Portfolio turnover is not annualized.
(c) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary between
periods and funds depending on the volume and character of trades
executed in various markets whose trading practices and commission rate
structures may differ.
</TABLE>
48
<PAGE> 62
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
GROWTH & INCOME PORTFOLIO
The investment objective of the Portfolio is long term capital
appreciation and dividend income by investing primarily in a diversified
portfolio of dividend-paying common stocks, preferred stock and securities
convertible into common stocks. The Portfolio may also purchase such securities
which do not pay current dividends but which offer prospects for growth of
capital and future income. Convertible securities (which may be current coupon
or zero coupon securities) are bonds, notes, debentures, preferred stocks and
other securities which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. The Portfolio may also
invest in non-convertible preferred stocks consistent with the Portfolio's
objective. Under normal conditions, at least 80% of the Portfolio's total assets
will be invested in common stocks and at least 65% of the Portfolio's total
assets will be invested in common stocks that, at the time of investment, will
be expected to pay regular dividends.
The Portfolio will generally invest a majority of its assets in common
stocks of issuers with total market capitalization of $1 billion or greater at
the time of purchase, but may invest in securities of companies having various
levels of market capitalization, including smaller companies whose securities
may be more volatile and less liquid than securities issued by larger companies
with higher levels of net worth. Investments will be in companies in various
industries.
The Portfolio may also invest up to 20% of its total assets in foreign
securities, including securities of foreign issuers in the form of ADRs. The
Portfolio may not invest more than 5% of its total assets in the securities of
companies based in an emerging market. See "Investment Techniques, Risk Factors
and Investment Restrictions - Foreign Securities" and "--Risks Associated with
Emerging Markets Securities."
The Portfolio may invest under normal circumstances up to 20% of its
total assets in preferred stocks, convertible preferred stock, bonds,
convertible debentures and other fixed-income instruments (the "Fixed Income
Instruments"). Within this 20% limitation, the Portfolio may invest in any
combination of Fixed Income Instruments subject to the following additional
limitations: (1) the Portfolio may invest up to 20% of its total assets in
convertible preferred stock and convertible debentures rated at least Ba by
Moody's Investor Services, Inc. ("Moody's") or BB by Standard & Poor's Rating
Service, a division of McGraw-Hill Companies ("S&P"), (2) the Portfolio may
invest up to 20% of its total assets in non-convertible fixed income instruments
rated at least Baa by Moody's or BBB by S&P and (3) the Portfolio may invest up
to 5% of its total assets in non-convertible debt rated below Baa by Moody's or
BBB by S&P. See "Investment Techniques, Risk Factors and Investment Restrictions
- - Convertible Securities" and "--Medium and Lower Rated and Unrated Debt
Securities."
The Fund may invest up to 10% of its total assets in real estate
investment trusts ("REITs"), which pool investors' funds for investment
primarily in income-producing real estate or real estate-related loans or
interests. See "Investment Techniques, Risk Factors and Investment Restrictions
- -- Real Estate Investment Trusts."
49
<PAGE> 63
The Portfolio may also invest up to 5% of its total assets in Standard
& Poor's Depositary Receipts ("SPDRs") in order to invest uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions, or to minimize
trading costs. SPDRs represent ownership in a unit investment trust that holds a
portfolio of stocks designed to track the performance of the S&P 500 Index.
SPDRs are traded on the American Stock Exchange. See "Investment Techniques,
Risk Factors and Investment Restrictions -- Standard & Poor's Depositary
Receipts."
BOND PORTFOLIO
The investment objective of the Portfolio is to provide high current
income primarily through investments in investment grade bonds. Investment grade
bonds are those rated at least Baa by Moody's or BBB by S&P or unrated bonds
considered by the Portfolio Advisor to be of comparable quality. Under normal
circumstances, at least 65% of the value of the Portfolio's total assets will be
invested in the following types of securities: U.S. Treasury obligations,
corporate bonds, debentures, mortgage related securities issued by various
governmental agencies, such as GNMA and government related organizations, such
as FNMA and FHLMC, including collateralized mortgage obligations ("CMOs"),
privately issued mortgage related securities (including CMOs), stripped U.S.
Government and mortgage related securities, non-publicly registered securities,
asset backed securities, and Eurodollar certificates of deposit and Eurodollar
bonds. The Portfolio will also invest in preferred stock.
No more than 60% of the Portfolio's total assets will be invested in
mortgage related securities. The Portfolio will not invest in any bond rated
lower than B by S&P or by Moody's. The Portfolio will invest less than 35% of
its assets in U.S. or foreign non-investment grade (or junk) bonds and preferred
stock. High risk, lower quality debt securities are regarded as predominantly
speculative with respect to the issuer's ability to pay interest and repay
principal in accordance with the terms of the obligation. See "Medium and
Lower-Rated 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."
The average maturity of the Portfolio will be between five and fifteen
years. The average maturity of the Portfolio's holdings may be shortened in
order to preserve capital if the Portfolio Advisor anticipates a rise in
interest rates. Conversely, the maturity may be lengthened to maximize returns
if interest rates are expected to decline.
GENERAL
The investment objective of an SAT Portfolio may be changed without the
approval of the investors in the Portfolio, but not without 30 days prior
written notice to the investors in the Portfolio (and notice by the
corresponding Sub-Account to its Owners). If a Sub-Account's investment
objective is changed, an Owner should consider whether the Sub-Account remains
an appropriate investment in light of his or her then-current financial position
and needs. There can, of course, be no assurance that the investment objective
of any SAT Portfolio will be achieved.
50
<PAGE> 64
SPECIAL INFORMATION CONCERNING HUB AND SPOKE(R) STRUCTURE
The SA Trust is utilizing certain proprietary rights, know-how and
financial services referred to as Hub and Spoke(R) from Signature Financial
Group, Inc.
The Growth & Income and Bond Sub-Accounts seek to achieve their
investment objectives by investing all of their respective assets in the
corresponding SAT Portfolio, each of which is a series of a separate registered
investment company with the same investment objectives as the Sub-Account. In
addition to selling an interest to the corresponding Sub-Account, each SAT
Portfolio may sell interests to other separate accounts of the Company or of
other insurance companies. Such investors will invest in an SAT Portfolio on the
same terms and conditions and will pay a proportionate share of that Portfolio's
expenses. However, the other investors investing in the SAT Portfolio are not
required to sell their shares at the same public offering price as the
Sub-Account due to variations in sales commissions and other operating expenses.
Therefore, Owners investing in either the Growth & Income or Bond Sub-Account
should be aware that these differences may result in differences in returns
experienced by investors in the different investment vehicles that invest in a
Portfolio. Such differences in returns are also present in other mutual fund
structures. Information concerning other holders of interests in an SAT
Portfolio is available from the Distributor at (800) 669-2796 (press 3).
Smaller investors in an SAT Portfolio may be materially affected by the
actions of larger investors in the Portfolio. For example, if a larger investor
withdraws from a Portfolio, the remaining investors may experience higher pro
rata operating expenses, thereby producing lower returns. Additionally, a
Portfolio may become less diverse, resulting in increased portfolio risk.
(However, this possibility exists as well for traditionally structured
investment vehicles which have large or institutional investors.)
Also, investors with a greater pro rata ownership in an SAT Portfolio
could have effective voting control of the operations of the Portfolio. Whenever
a Sub-Account is requested to vote on matters pertaining to the corresponding
Portfolio (other than a vote by the Sub-Account to continue the operation of the
Portfolio upon the withdrawal of another investor in the Portfolio), the Company
will solicit voting instructions of each Owner who has allocated Contract Value
to the Sub-Account and will cast all of the votes of the Sub-Account in the same
proportion as the voting instructions received from Owners. Owners who do not
provide voting instructions will not affect the Sub-Account's vote at the
Portfolio meeting. The percentage of a Sub-Account's votes representing Owners
not providing voting instructions will be voted by the Company in the same
proportion as the Sub-Account Owners who do, in fact, provide voting
instructions.
Certain changes in a Portfolio's investment objective, policies or
restrictions might cause a Sub-Account to withdraw its interest in an SAT
Portfolio. Any such withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the Portfolio). If
securities are distributed, a Sub-Account could incur brokerage, tax or other
charges in converting the securities to cash. In addition, the distribution in
kind may result in a less diversified portfolio of investments or adversely
affect the liquidity of a Sub-Account. Notwithstanding the above, there are
other means for meeting shareholder redemption requests, such as borrowing.
51
<PAGE> 65
MANAGEMENT OF THE PORTFOLIOS
GENERAL
The business of the SA Trust is governed by a board of trustees (the
"TRUSTEES" or "BOARD OF TRUSTEES") who are elected by a vote of the investors in
the Portfolios. The Trustees exercise broad supervision over the affairs of the
SA Trust. They have retained the services of the Advisor, a subsidiary of IFS
(in turn a subsidiary of the Company), to serve as the investment advisor to
each of the SAT Portfolios
Under the terms of the investment advisory agreement between the SA
Trust and the Advisor ( the "ADVISORY AGREEMENT"), it is the Advisor's
responsibility to select, subject to review and approval by the Trustees, one or
more Portfolio Advisors. The Advisor is responsible for the continuing
evaluation, selection and monitoring of the Portfolio Advisors. 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 makes all day-to-day decisions to purchase and sell
particular portfolio securities.
For its services, the Advisor receives an advisory fee from each SAT
Portfolio. The Advisor in turn pays each Portfolio Advisor a fee for its
services. The Advisor or any Portfolio Advisor may waive any or all of its
advisory fees.
The allocation of the fees paid by the SAT Portfolios to the Advisor,
showing the amount received by the Advisor and the amounts paid by it to the two
Portfolio Advisors is set forth below. Such fees are computed daily and paid
monthly at an annual rate equal to the percentage specified below of the value
of the average daily net assets of the SAT Portfolio:
GROWTH & INCOME PORTFOLIO
Advisor 0.80% on the first $150 million
0.75% thereafter
Portfolio Advisor 0.50% on the first $150 million
Scudder Kemper Investments, Inc. 0.45% thereafter
BOND PORTFOLIO
Advisor 0.55%
Portfolio Advisor 0.30%
Fort Washington Investment Advisors, Inc.
Fort Washington Investment Advisors, Inc. ("FORT WASHINGTON") is an
affiliate of the Advisor, and the Advisor may be subject to a conflict of
interest when making decisions regarding the retention and compensation of that
particular Portfolio Advisor. However, the Advisor's decisions, including the
identity of a Portfolio Advisor and the specific amount of the Advisor's
compensation to be paid to the Portfolio Advisor, are subject to review and
approval by a majority of the Board of Trustees and separately by a majority of
such Trustees who are not affiliated with the Advisor or any of its affiliates.
52
<PAGE> 66
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. In 1996 RogersCasey was acquired by BARRA, Inc., a leader in risk
management analytics. BARRA has provided innovative analytical models, software,
and consulting services to clients worldwide since 1975. 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.
Scudder Kemper Investments, Inc. ("SCUDDER KEMPER") serves as the
Portfolio Advisor to the Growth & Income Portfolio. Scudder, Stevens & Clark,
Inc, ("Scudder"), which registered in 1943 as an investment advisor under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"), served as the
Portfolio Advisor to the Portfolio until December 31, 1997. As of December 31,
1997, a strategic alliance between Scudder and Zurich Group ("Zurich") was
completed, the operations of Scudder and Zurich Kemper Investments, Inc, a
subsidiary of Zurich, were combined, and the combined operations were named
Scudder Kemper Investments, Inc. Scudder Kemper is owned 69.5% by Zurich and
30.5% by senior employees of Scudder Kemper. Scudder Kemper provides investment
advisory services to mutual fund investors, retirement and pension plans,
institutional and corporation clients, insurance companies, and private family
and individual accounts. As of December 31, 1997, Scudder Kemper had assets
under management of more than $200 billion. Zurich is a leading, internationally
recognized provider of insurance and financial services in non-life and life
insurance, and reinsurance as well as asset management.
Robert T. Hoffman, Lori Ensinger, Deborah Chaplin, Benjamin W.
Thorndike and Kathleen T. Millard are the individuals primarily responsible for
the day-to-day management of the Growth & Income Portfolio. Mr. Hoffman, Lead
Product Manager, joined Scudder in 1990. He has 13 years of experience in the
investment industry, including several years of pension fund management
experience. Lori Ensinger, Lead Portfolio Manager, focuses on stock selection
and investment strategy. She has worked as a portfolio manager since 1983 and
joined Scudder in 1993. Deborah Chaplin, Portfolio Manager, also focuses on
stock selection and investment strategy. Ms. Chaplin, who joined Scudder in
1996, has over four years of experience as a
53
<PAGE> 67
securities analyst and portfolio manager. Prior to joining Scudder, Ms. Chaplin
was a research fellow in the Faculty of Letters at Kyoto University, Japan.
Benjamin W. Thorndike, Portfolio Manager, is the Growth & Income Portfolio's
chief analyst and strategist for convertible securities. Mr. Thorndike, who has
18 years of investment experience, joined Scudder in 1983. Kathleen T. Millard,
Portfolio Manager, has been involved in the investment industry since 1983 and
has worked as a portfolio manager since 1986. Ms. Millard, who joined Scudder in
1991, focuses on strategy and stock selection. Scudder Kemper's principal
executive officers are located at 345 Park Avenue, New York, New York.
Scudder Kemper may use its affiliated broker to execute portfolio
transactions for the Growth & Income Portfolio provided the commissions paid to
the affiliated broker are reasonable and fair in comparison to commissions paid
to other brokers in connection with comparable transactions. The Board of
Trustees reviews transactions executed through an affiliated broker on a
quarterly basis.
Fort Washington serves as the Portfolio Advisor to the Bond Portfolio.
Fort Washington is a wholly-owned subsidiary of The Western and Southern Life
Insurance Company. Fort Washington has been registered as an investment advisor
under the Advisors Act since 1990. Fort Washington provides investment advisory
services to individual and institutional clients. As of December 31, 1997, Fort
Washington had assets under management of $9 billion.
Roger M. Lanham and Brendan White are the individuals primarily
responsible for the day-to-day investment management of the Bond Portfolio. Mr.
Lanham is a CFA and has been with Western & Southern/Fort Washington since 1981.
Mr. White is a CFA and has been with Western & Southern/Fort Washington since
1993. [Prior to 1993, Mr. White was with Ohio Casualty Insurance Co. for six
years, managing high yield and mortgage backed assets.] Fort Washington's
principal executive offices are located at 420 East Fourth Street, Cincinnati,
Ohio 45202.
INVESTMENT TECHNIQUES, RISK FACTORS AND INVESTMENT RESTRICTIONS
TECHNIQUES AND RISK FACTORS
The following are descriptions of certain types of securities invested
in by the SAT Portfolios, certain investment techniques employed by those
Portfolios and risks associated with utilizing either the securities or the
investment techniques.
Foreign Securities
Investing in securities issued by foreign companies and governments
involves considerations and potential risks not typically associated with
investing in obligations issued by the U.S. government and domestic
corporations. Less information may be available about foreign companies than
about domestic companies and foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
54
<PAGE> 68
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.
Risks Associated With Emerging Markets Securities
"Emerging markets" securities include the securities of issuers based
in some of the world's underdeveloped markets, including Eastern Europe. These
typically include countries where per capita GNP is less than $8,355.
Investments in securities of issuers based in such countries entail all of the
risks of investing in foreign issuers outlined in this section but to a
heightened degree. These heightened risks include: (i) expropriation,
confiscatory taxation, nationalization, and less social, political and economic
stability; (ii) the smaller size of the market for such securities and a low or
nonexistent volume of trading, resulting in a lack of liquidity and in price
volatility; (iii) certain national policies that may restrict a Portfolio's
investment opportunities including restrictions on investing in issuers in
industries deemed sensitive to relevant national interests; and (iv) in the case
of Eastern Europe, the absence of developed capital markets and legal structures
governing private or foreign investment and private property and the possibility
that recent favorable economic and political developments could be slowed or
reversed by unanticipated events.
So long as the Communist Party continues to exercise a significant or,
in some cases, dominant role in Eastern European countries, investments in such
countries will involve risk of nationalization, expropriation and confiscatory
taxation. The former communist governments of a number of Eastern European
countries expropriated large amounts of private property in the past, in many
cases without adequate compensation. There is no assurance that such
expropriation will not occur in the future at the hands of either an existing
non-communist regime or upon the return to power of the Communist Party. In the
event of any such expropriation, a Portfolio could lose a substantial portion of
any investments it has made in the affected countries. Finally, even though the
currencies of less developed countries may be convertible into U.S. dollars, the
conversion rates may be artificial in relation to the actual market values and
may be adverse to Portfolio shareholders.
Currency Exchange Rates
A Portfolio's share value may change significantly when the currencies,
other than the U.S. dollar, in which the Portfolio's investments are denominated
strengthen or weaken against the U.S. dollar. Currency exchange rates generally
are determined by the forces of supply and demand in the foreign exchange
markets and the relative merits of investments in different countries as seen
from an international perspective. Currency exchange rates can also be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
by currency controls or political developments in the United States or abroad.
55
<PAGE> 69
ADRS, EDRS and CDRS
American Depositary Receipts ("ADRs") are U.S. dollar-denominated
receipts typically issued by domestic banks or trust companies that represent
the deposit with those entities of securities of a foreign issuer. ADRs are
publicly traded on exchanges or over-the-counter in the United States. European
Depositary Receipts ("EDRs"), which are sometimes referred to as Continental
Depositary Receipts ("CDRs"), may also be purchased by the Portfolios. EDRs and
CDRs are generally issued by foreign banks and evidence ownership of either
foreign or domestic securities. Certain institutions issuing ADRs or EDRs may
not be sponsored by the issuer of the underlying foreign securities. A
non-sponsored depository may not provide the same shareholder information that a
sponsored depository is required to provide under its contractual arrangements
with the issuer of the underlying foreign securities.
Convertible Securities
Convertible securities may offer higher income than the common stocks
into which they are convertible and include fixed-income or zero coupon debt
securities, which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. Prior to their
conversion, convertible securities may have characteristics similar to both
non-convertible debt securities and equity securities.
While convertible securities generally offer lower yields than
non-convertible debt securities of similar quality, their prices may reflect
changes in the value of the underlying common stock. Convertible securities
entail less credit risk than the issuer's common stock.
Fixed-Income And Other Debt Instrument Securities
Fixed-income and other debt instrument securities include all bonds,
high yield or "junk" bonds, municipal bonds, debentures, U.S. Government
securities, mortgage-related securities including government stripped
mortgage-related securities, zero coupon securities and custodial receipts. The
market value of fixed-income obligations of the Portfolios will be affected by
general changes in interest rates which will result in increases or decreases in
the value of the obligations held by the Portfolios. The market value of the
obligations held by a Portfolio can be expected to vary inversely to changes in
prevailing interest rates. Investors in the Portfolio also should recognize
that, in periods of declining interest rates, a Portfolio's yield will tend to
be somewhat higher than prevailing market rates and, in periods of rising
interest rates, a Portfolio's yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money to a Portfolio from the
continuous sale of its shares will tend to be invested in instruments producing
lower yields than the balance of its portfolio, thereby reducing the Portfolio's
current yield. In periods of rising interest rates, the opposite can be expected
to occur. In addition, securities in which a Portfolio may invest may not yield
as high a level of current income as might be achieved by investing in
securities with less liquidity, less creditworthiness or longer maturities.
Ratings made available by S&P and Moody's are relative and subjective
and are not absolute standards of quality. Although these ratings are initial
criteria for selection of portfolio
56
<PAGE> 70
investments, a Portfolio Advisor also will make its own evaluation of these
securities. Among the factors that will be considered are the long-term ability
of the issuers to pay principal and interest and general economic trends.
Fixed-income securities may be purchased on a when-issued or
delayed-delivery basis. See "When-Issued and Delayed-Delivery Securities."
Medium and Lower Rated And Unrated Securities
Securities rated in the fourth highest category by S&P or Moody's, BBB
and Baa, respectively, although considered investment grade, possess speculative
characteristics, and changes in economic or other conditions are more likely to
impair the ability of issuers of these securities to make interest and principal
payments than is the case with respect to issuers of higher grade bonds.
Generally, medium or lower rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds", offer a higher
current yield than is offered by higher rated securities, but also (i) will
likely have some quality and protective characteristics that, in the judgment of
the rating organizations, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (ii) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The yield of junk bonds will
fluctuate over time.
The market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher quality bonds. In addition, medium and lower rated
securities and comparable unrated securities generally present a higher degree
of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium and lower rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. Since the risk of
default is higher for lower-rated securities, the Portfolio Advisor's research
and credit analysis are an especially important part of managing securities of
the type held by a Portfolio. In light of these risks, the Board of Trustees has
instructed the Portfolio Advisor, in evaluating the creditworthiness of an
issue, whether rated or unrated, to take various factors into consideration,
which may include, as applicable, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
In addition, the market value of securities in lower rated categories
is more volatile than that of higher quality securities, and the markets in
which medium and lower rated or unrated securities are traded are more limited
than those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Portfolios to obtain accurate market
quotations for purposes of valuing their respective portfolios and calculating
their respective net asset values. Moreover, the lack of a liquid trading market
may restrict the availability of securities for the Portfolios to purchase and
may also have the effect of limiting the ability of a Portfolio to sell
securities at their fair value either to meet redemption requests or to respond
to changes in the economy or the financial markets.
57
<PAGE> 71
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.
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.
58
<PAGE> 72
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.
Mortgage related securities may not be readily marketable. To the
extent any of these securities are not readily marketable in the judgment of the
Portfolio Advisor, the investment restriction limiting a Portfolio's investment
in illiquid instruments to not more than 15% of the value of its net assets will
apply.
Stripped Mortgage Related Securities
These securities are either issued and guaranteed, or privately-issued
but collateralized by securities issued, by GNMA, FNMA or FHLMC. These
securities represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only") on
mortgage related certificates issued by GNMA, FNMA or FHLMC, as the case may be.
The certificates underlying the stripped mortgage related securities represent
all or part of the beneficial interest in pools of mortgage loans. The Portfolio
will invest in stripped mortgage related securities in order to enhance yield or
to benefit from anticipated appreciation in value of the securities at times
when its Portfolio Advisor believes that interest rates will remain stable or
increase. In periods of rising interest rates, the expected increase in the
value of stripped mortgage related securities may offset all or a portion of any
decline in value of the securities held by the Portfolio.
59
<PAGE> 73
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
60
<PAGE> 74
of future interest payments, principal payments or both on certain notes or
bonds issued by the U.S. Government, its agencies, authorities or
instrumentalities. The underwriters of these certificates or receipts purchase a
U.S. Government security and deposit the security in an irrevocable trust or
custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the U.S. Government Security. Custodial
receipts evidencing specific coupon or principal payments have the same general
attributes as zero coupon U.S. Government securities, described above. Although
typically under the terms of a custodial receipt a Portfolio is authorized to
assert its rights directly against the issuer of the underlying obligation, the
Portfolio may be required to assert through the custodian bank such rights as
may exist against the underlying issuer. Thus, if the underlying issuer fails to
pay principal and/or interest when due, a Portfolio may be subject to delays,
expenses and risks that are greater than those that would have been involved if
the Portfolio had purchased a direct obligation of the issuer. In addition, if
the trust or custodial account in which the underlying security has been
deposited is determined to be an association taxable as a corporation, instead
of a non-taxable entity, the yield on the underlying security would be reduced
in respect of any taxes paid.
When-Issued And Delayed-Delivery Securities
To secure prices deemed advantageous at a particular time, each
Portfolio may purchase securities on a when-issued or delayed-delivery basis, in
which case delivery of the securities occurs beyond the normal settlement
period; payment for or delivery of the securities would be made prior to the
reciprocal delivery or payment by the other party to the transaction. A
Portfolio will enter into when-issued or delayed-delivery transactions for the
purpose of acquiring securities and not for the purpose of leverage. When-issued
securities purchased by the Portfolio may include securities purchased on a
"when, as and if issued" basis under which the issuance of the securities
depends on the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring.
Securities purchased on a when-issued or delayed-delivery basis may
expose a Portfolio to risk because the securities may experience fluctuations in
value prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.
Real Estate Investment Trusts
The Growth & Income Portfolio may invest in REITs, which can generally
be classified as equity REITs, mortgage REITs and hybrid REITs. Equity REITs,
which invest the majority of their assets directly in real property, derive
their income primarily from rents. Equity REITs can also realize capital gains
by selling properties that have appreciated in value. Mortgage REITs, which
invest the majority of their assets in real estate mortgages, derive their
income primarily from interest payments on real estate mortgages in which they
are invested. Hybrid REITs combine the characteristics of both equity REITs and
mortgage REITs.
61
<PAGE> 75
Investment in REITs is subject to risks similar to those associated
with the direct ownership of real estate (in addition to securities markets
risks). REITs are sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
supply and demand, and the management skill and creditworthiness of the issuer.
REITs may also be affected by tax and regulatory requirements.
Standard & Poor's Depositary Receipts
The Growth & Income Portfolio may invest in SPDRs. SPDRs typically
trade like a share of common stock and provide investment results that generally
correspond to the price and yield performance of the component common stocks of
the S&P 500 Index. There can be no assurance that this can be accomplished as it
may not be possible for the Portfolio to replicate and maintain exactly the
composition and relative weightings of the S&P 500 Index securities. SPDRs are
subject to the risks of an investment in a broadly based portfolio of common
stocks, including the risk that the general level of stock prices may decline,
thereby adversely affecting the value of such investment.
Repurchase Agreements
Each of the Portfolios may engage in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, a Portfolio would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Portfolio's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Portfolio's holding period. A Portfolio may enter into repurchase
agreements with respect to U.S. government securities with member banks of the
Federal Reserve System and certain non-bank dealers approved by the respective
Board of Trustees. Under each repurchase agreement, the selling institution is
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. The Portfolio Advisor, acting
under the supervision of the Advisor and the Board of Trustees, reviews on an
ongoing basis the value of the collateral and the creditworthiness of those
non-bank dealers with whom the Portfolio enters into repurchase agreements. In
entering into a repurchase agreement, a Portfolio bears a risk of loss in the
event that the other party to the transaction defaults on its obligations and
the Portfolio is delayed or prevented from exercising its rights to dispose of
the underlying securities, including the risk of a possible decline in the value
of the underlying securities during the period in which the Portfolio seeks to
assert its rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or a part of the income from
the agreement. Repurchase agreements are considered to be collateralized loans
under the 1940 Act.
Reverse Repurchase Agreements and Forward Roll Transactions
The Portfolios may enter into reverse repurchase agreements and forward
roll transactions. In a reverse repurchase agreement the Portfolio agrees to
sell portfolio securities to financial institutions such as banks and
broker-dealers and to repurchase them at a mutually agreed date and price.
Forward roll transactions are equivalent to reverse repurchase agreements but
involve mortgage-backed securities and involve a repurchase of a substantially
similar security. At the time
62
<PAGE> 76
the Portfolio enters into a reverse repurchase agreement or forward roll
transaction it will place in a segregated custodial account cash or liquid
securities having a value equal to the repurchase price, including accrued
interest. Reverse repurchase agreements and forward roll transactions involve
the risk that the market value of the securities sold by the Portfolio may
decline below the repurchase price of the securities. Reverse repurchase
agreements and forward roll transactions are considered to be borrowings by a
Portfolio for purposes of the limitations described in "Certain Investment
Restrictions" below and in the Statement of Additional Information.
Lending Portfolio Securities
To generate income for the purpose of helping to meet its operating
expenses, each Portfolio may lend securities to brokers, dealers and other
financial organizations. These loans, if and when made, may not exceed 30% of a
Portfolio's assets taken at value. A Portfolio's loans of securities will be
collateralized by cash, letters of credit or U.S. Government securities. The
cash or instruments collateralizing a Portfolio's loans of securities will be
maintained at all times in a segregated account with the Portfolio's custodian,
or with a designated subcustodian, in an amount at least equal to the current
market value of the loaned securities. In lending securities to brokers, dealers
and other financial organizations, a Portfolio is subject to risks, which, like
those associated with other extensions of credit, include delays in recovery and
possible loss of rights in the collateral should the borrower fail financially.
For further information regarding measures to be taken to protect a lending
Portfolio, see the Statement of Additional Information.
Illiquid Securities
No Portfolio may invest more than 15% of its net assets in securities
which are illiquid or otherwise not readily marketable. If a security becomes
illiquid after purchase by the Portfolio, the Portfolio will normally sell the
security unless to do so would not be in the best interests of shareholders.
Non-Publicly Traded ("Restricted") Securities and Rule 144A Securities
Each Portfolio may purchase securities in the United States that are
not registered for sale under federal securities laws but which can be resold to
institutions under SEC Rule 144A or under an exemption from such laws. If a
dealer or institutional trading market in such securities exists, these
restricted securities or Rule 144A securities are treated as exempt from the
Portfolio's 15% limit on illiquid securities. The Board of Trustees of the SA
Trust, with advice and information from the respective Portfolio Advisor, will
determine the liquidity of restricted securities or Rule 144A securities by
looking at factors such as trading activity and the availability of reliable
price information and, through reports from such Portfolio Advisor, the Board of
Trustees of the Portfolio Trust will monitor trading activity in restricted
securities. If 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).
63
<PAGE> 77
Temporary Investments
For temporary defensive purposes during periods when the Portfolio
Advisor of a Portfolio believes, in consultation with the Advisor, that pursuing
the Portfolio's basic investment strategy may be inconsistent with the best
interests of its shareholders, the Portfolio may invest its assets without limit
in the following money market instruments: securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities (including those
purchased in the form of custodial receipts), repurchase agreements,
certificates of deposit, master notes, time deposits and bankers' acceptances
issued by banks or savings and loan associations having assets of at least $500
million as of the end of their most recent fiscal year and high quality
commercial paper.
In addition, for the same purposes the Portfolio Advisor may invest
without limit in obligations issued or guaranteed by foreign governments or by
any of their political subdivisions, authorities, agencies or instrumentalities
that are rated at least AA by S&P or Aa by Moody's or, if unrated, are
determined by the Portfolio Advisor to be of equivalent quality. Each Portfolio
also may hold a portion of its assets in money market instruments or cash in
amounts designed to pay expenses, to meet anticipated redemptions or pending
investments in accordance with its objectives and policies. Any temporary
investments may be purchased on a when-issued basis.
Derivatives
The Portfolios may invest in various instruments that are commonly
known as derivatives. Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security, asset, or
market index. Some "derivatives" such as certain mortgage-related and other
asset-backed securities are in many respects like any other investment, although
they may be more volatile or less liquid than more traditional debt securities.
There are, in fact, many different types of derivatives and many different ways
to use them. There is a range of risks associated with those uses. Futures and
options are commonly used for traditional hedging purposes to attempt to protect
a fund from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. However, some
derivatives are used for leverage, which tends to magnify the effects of an
instrument's price changes as market conditions change. Leverage involves the
use of a small amount of money to control a large amount of financial assets,
and can in some circumstances, lead to significant losses. A Portfolio Advisor
will use derivatives only in circumstances where the Portfolio Advisor believes
they offer the most economic means of improving the risk/reward profile of the
Portfolio. Derivatives will not be used to increase portfolio risk above the
level that could be achieved using only traditional investment securities or to
acquire exposure to changes in the value of assets or indexes that by themselves
would not be purchased for the Portfolio. The use of derivatives for non-hedging
purposes may be considered speculative. A description of the derivatives that
the Portfolios may use and some of their associated risks is found below.
Futures Contracts and Related Options
Each Portfolio may enter into futures contracts and purchase and write
(sell) options on these contracts, including but not limited to interest rate,
securities index and foreign currency
64
<PAGE> 78
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.
65
<PAGE> 79
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.
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
66
<PAGE> 80
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.
CERTAIN INVESTMENT RESTRICTIONS
The SA Trust, on behalf of each SAT Portfolio, has adopted certain
investment restrictions that are enumerated in detail in the Statement of
Additional Information. The following are summaries of some of these
restrictions. The full text of all of the restrictions is set forth in the
Statement of Additional Information.
1. Neither Portfolio may, with respect to 75% of its total assets
taken at market value, invest more than 5% of its total assets
in the securities of any one issuer or acquire more than 10%
of the outstanding voting securities of any one issuer, except
U.S. Government securities.
67
<PAGE> 81
2. Neither Portfolio may invest more than 25% of its total assets
in securities of issuers in any one industry.
3. Each Portfolio may borrow money as a temporary measure from
banks in an aggregate amount not exceeding one-third of the
value of the Portfolio's total assets to meet redemptions and
for other temporary or emergency purposes not involving
leveraging. Reverse repurchase agreements and forward roll
transactions involving mortgage-related securities will be
aggregated with bank borrowings for purposes of this
calculation. Neither Portfolio may purchase securities while
borrowings exceed 5% of the value of the Portfolio's total
assets.
4. Neither Portfolio will invest more than 15% of the value of
its net assets in securities that are illiquid, including
certain government stripped mortgage related securities,
repurchase agreements maturing in more than seven days and
that cannot be liquidated prior to maturity and securities
that are illiquid by virtue of the absence of a readily
available market. Securities that have legal or contractual
restrictions on resale but have a readily available market,
such as certain Rule 144A securities, are deemed not illiquid
for this purpose. No Portfolio may invest more than 10% of its
assets in restricted securities (excluding Rule 144A
securities).
PORTFOLIO TURNOVER
Generally, the SAT Portfolios will not trade in securities for
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held. The SAT Portfolios may engage in
active short-term trading to benefit from yield disparities among different
issues of securities, to seek short-term profits during periods of fluctuating
interest rates or for other reasons. Active trading will increase a Portfolio's
rate of turnover, certain transaction expenses and the incidence of short-term
capital gain taxable as ordinary income. An annual turnover rate of 100% would
occur when all the securities held by the Portfolio are replaced one time during
a period of one year. The turnover rates of the Growth & Income Portfolio and
the Bond Portfolio for 1997 and 1996 were 15% and 82% and 79% and 79%,
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.
68
<PAGE> 82
SPONSOR
Touchstone Advisors, Inc., as Sponsor to the SA Trust pursuant to a
Sponsor Agreement, provides oversight of the various service providers to the SA
Trust, including the Administrator, Custodian and Transfer Agent. As Sponsor to
the SA Trust, Touchstone Advisors reserves the right to receive a sponsor fee
from each Portfolio equal on an annual basis to 0.20% of the average daily net
assets of that Portfolio for its then current fiscal year. The Sponsor Agreement
may be terminated (1) by the Sponsor as of the end of any calendar quarter on
not less than 30 days prior written notice or (2) by the SA Trust at any time on
not less than 30 days prior written notice. The Sponsor has advised the SA Trust
that it will waive all fees under the Sponsor Agreement through December 31,
1998.
ADMINISTRATOR, FUND ACCOUNTING AGENT, CUSTODIAN AND TRANSFER AGENT
Investors Bank, 200 Clarendon Street, Boston, Massachusetts 02116,
serves as administrator, fund accounting agent, custodian and transfer agent for
the SA Trust. Investors Bank was organized in 1969 as a Massachusetts-chartered
trust company and is a wholly-owned subsidiary of Investors Financial Services
Corp., a publicly-held corporation and holding company registered under the Bank
Holding Company Act of 1956.
As administrator and fund accounting agent, Investors Bank provides, on
behalf of the SA Trust, accounting, clerical and bookkeeping services; the daily
calculation of net asset values; state securities registration services;
corporate secretarial services; assistance in the preparation of management
reports; preparation and filing of tax returns, registration statements, and
reports to shareholders and to the SEC. Investors Bank also provides personnel
to serve as certain officers of the SA Trust.
As custodian, Investors Bank holds cash, securities and other assets of
the SA Trust as required by the 1940 Act. As transfer agent, Investors Bank is
responsible for maintaining records of shareholder interests for the SA Trust.
For its services as fund accounting agent and administrator, each SAT
Portfolio pays fees to Investors Bank that are computed and paid monthly. Such
fees equal, in the aggregate, 0.12% on an annual basis of the average daily net
assets of all the portfolios and funds for which Investors Bank acts as fund
accounting agent and administrator up to $1 billion in assets and 0.08% on an
annual basis of average daily net assets which exceed $1 billion, subject to
certain annual minimum fees. As compensation for its services as custodian to
the SA Trust, Investors Bank receives fees, computed and paid monthly, that
aggregate 0.03% on an annual basis of the average daily net assets of all the
portfolios and funds for which Investors Bank acts as custodian up to $500
million and 0.02% on an annual basis of such average daily net assets for the
next $500 million and 0.01% on an annual basis of such average daily net assets
which exceed $1 billion.
ALLOCATION OF EXPENSES OF THE PORTFOLIOS
Each SAT Portfolio bears its own expenses, which generally include all
costs not specifically borne by the Advisor, the SAT Portfolio Advisors and the
Administrator. Included
69
<PAGE> 83
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 CAP"). The Sponsor's obligation to reimburse
the SA Trust for such amounts may be terminated by the Sponsor as of the end of
any calendar quarter by giving at least 30 days prior written notice.
PURCHASE AND VALUATION
PURCHASE
Interests in the Growth & Income and Bond Portfolios are not offered to
the public and are issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of the 1933
Act. Investments in the Growth & Income and Bond Portfolios may be made only by
a limited number of insurance company separate accounts. This Prospectus and its
accompanying Statement of Additional Information do not constitute an offer to
sell, or the solicitation of an offer to buy, any "security" (within the meaning
of the 1933 Act) of the Portfolios.
VALUATION
The net asset value of each SAT Portfolio is determined as of the close
of regular trading on the NYSE on each day on which the NYSE is open for
trading, by deducting the amount of the Portfolio's liabilities from the value
of its assets. At the close of each such business day, the value of each
Sub-Account's interest in the Portfolio will be determined by multiplying the
net asset value of the corresponding Portfolio by the percentage, effective for
that day, that represents the Sub-Account's share of the aggregate interests in
that Portfolio.
Generally, a Portfolio's investments are valued at market value or, in
the absence of a market value, at fair value as determined by or under the
direction of the SA Trust's Board of Trustees.
Securities that are primarily traded on foreign exchanges are generally
valued at the preceding closing values of the securities on their respective
exchanges, except that, when an occurrence subsequent to the time a value was so
established is likely to have changed that value, the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Board of Trustees of the SA Trust. A security that is primarily
traded on a domestic stock exchange is valued at the last sales price on that
exchange or, if no sales occurred during the day, at the current quoted bid
price. All short-term dollar-denominated investments that mature in 60 days or
less are valued on the basis of amortized cost (which involves valuing an
investment at its cost and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of fluctuating
interest rates on the market value of the investment) when the Board of Trustees
of the SA Trust has determined that amortized cost represents fair value. An
option that is written by a Portfolio is generally valued at the last sale
70
<PAGE> 84
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, LIABILITIES, VOTING RIGHTS AND REPORTS
Each investor in an SAT Portfolio, including the corresponding
Sub-Account, may add to or reduce its investment in the Portfolio on each day
the Portfolio determines its net asset value. At the close of each such business
day, the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
withdrawals, which are to be effected as of the close of business on that day,
will then be effected.
The investor's percentage of the aggregate beneficial interests in the
Portfolio will then be re-computed as the percentage equal to the fraction (1)
the numerator of which is the value of such investor's investment in the
Portfolio as of the close of business on such day plus or minus, as the case may
be, the amount of any additions to or withdrawals from the investor's investment
in the Portfolio effected as of the close of business on such day, and (2) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of business on such day plus or minus, as the case may be, the amount of
the net additions to or withdrawals from the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as of the close of business on the following business day.
The SA Trust was organized as a trust under the laws of the State of
New York pursuant to a Declaration of Trust dated February 7, 1994, at which
time each SAT Portfolio was established and designated as a separate series of
the SA Trust. The interests of the SA Trust are divided into separate series. No
series of the SA Trust has any preference over any other series.
71
<PAGE> 85
The Declaration of Trust provides that the Sub-Accounts and other
entities investing in the Portfolios (e.g., other insurance company separate
accounts) will each be liable for all obligations of the corresponding
Portfolio. However, the risk of a Sub-Account incurring financial loss on
account of such liability is limited to circumstances in which both inadequate
insurance existed and the corresponding Portfolio itself was unable to meet its
obligations. Accordingly, the Trustees of the SA Trust believe that a
Sub-Account and the Owners having Contract Value therein will not be adversely
affected by reason of the Sub-Account investing in the corresponding SAT
Portfolio.
Each Sub-Account will be involved only in votes that affect the
corresponding SAT Portfolio. Sub-Accounts investing in the SAT Portfolios will,
however, vote with all other interestholders of the SA Trust's Portfolios to
elect Trustees of the SA Trust and for certain other matters. Under certain
circumstances the investors of one or more series of the SA Trust (including the
SAT Portfolios) could control the outcome of these votes. Each Portfolio will
vote separately on matters affecting only that Portfolio. Under certain
circumstances, other investors in a Portfolio could control the outcome of these
votes.
The SA Trust sends to each shareholder a semi-annual report and an
audited annual report. At least one such report in each year will include a list
of the investment securities held by the SAT Portfolios. See "Statements to
Owners."
72
<PAGE> 86
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
Page
Part I - Discussion Regarding the Variable Annuity Contracts................__
Part II - Discussion Regarding the Select Advisors Portfolios...............__
Summary................................................................__
Investment Objectives, Techniques, Policies and Restrictions...........__
Investment Objectives..............................................__
Investment Techniques..............................................__
Investment Restrictions............................................__
Portfolio Transactions and Brokerage Commissions.......................__
Valuation of Securities and Redemption in Kind.........................__
Management of the SA Trust.............................................__
Organization of the SA Trust...........................................__
Taxation...............................................................__
Financial Statements...................................................__
No person has been authorized to give any information or to make any
representations other than those contained within this Prospectus, the related
Statement of Additional Information and related official sales literature in
connection with the offering of Contracts, and if given or made, such other
information or representations must not be relied upon as having been authorized
by Separate Account 2, the Company, the Advisor or the Distributor. This
Prospectus does not constitute an offer in any state in which, or to any person
to whom, such offer may not lawfully be made.
73
<PAGE> 87
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 2
FLEXIBLE PURCHASE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACTS
--------------------
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
--------------------
This Statement of Additional Information is not a prospectus, but
contains information in addition to that set forth in the current prospectus
dated May 1, 1998 (the "PROSPECTUS") for certain variable annuity contracts
("CONTRACTS") offered by Western-Southern Life Assurance Company (the "Company")
through its Separate Account 2 ("SEPARATE ACCOUNT 2"), 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.
FORM 7136-9705
<PAGE> 88
<TABLE>
<S> <C>
PART I - DISCUSSION REGARDING THE VARIABLE ANNUITY CONTRACTS.............................................1
General.........................................................................................1
Administrative Services.........................................................................1
Safekeeping of Assets...........................................................................1
Distribution of the Contracts...................................................................2
Sub-Account Performance.........................................................................2
Fixed Annuity Income Payments...................................................................4
Independent Accountants.........................................................................4
PART II - DISCUSSION REGARDING THE SELECT ADVISORS PORTFOLIOS............................................6
SUMMARY..................................................................................................6
INVESTMENT OBJECTIVES, TECHNIQUES, POLICIES AND RESTRICTIONS.............................................6
INVESTMENT OBJECTIVES....................................................................................6
INVESTMENT TECHNIQUES....................................................................................6
Certificates of Deposit and Bankers' Acceptances................................................6
Commercial Paper................................................................................7
Lower-Rated Debt Securities.....................................................................7
Illiquid Securities.............................................................................8
Foreign Securities: Special Considerations Concerning Eastern Europe...........................9
Lending Portfolio Securities....................................................................9
Futures Contracts and Options on Futures Contracts.............................................10
General...............................................................................10
Futures Contracts.....................................................................10
Options on Futures Contracts..........................................................12
Options on Foreign Currencies.........................................................13
Additional Risks of Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies............................................14
Options on Securities..........................................................................16
Options on Securities Indexes..................................................................18
Forward Currency Contracts.....................................................................18
Rating Services................................................................................20
INVESTMENT RESTRICTIONS.................................................................................20
Fundamental Policies...........................................................................20
Additional Restrictions........................................................................22
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS........................................................25
VALUATION OF SECURITIES AND REDEMPTION IN KIND..........................................................27
MANAGEMENT OF THE SA TRUST .............................................................................29
Trustees of the SA Trust.......................................................................29
Officers of the SA Trust.......................................................................29
</TABLE>
i
<PAGE> 89
<TABLE>
<S> <C>
Trustee Compensation Table.....................................................................31
Advisor, Portfolio Advisors, Administrator and Sponsor.........................................31
Advisor...............................................................................31
Portfolio Advisors....................................................................32
Administrator, Custodian and Fund Accounting Agent....................................32
Sponsor...............................................................................33
Counsel and Independent Accountants...................................................34
ORGANIZATION OF THE SA TRUST............................................................................34
TAXATION................................................................................................34
Taxation of the Portfolios.....................................................................34
Sub-Account Diversification....................................................................35
FINANCIAL STATEMENTS....................................................................................35
</TABLE>
ii
<PAGE> 90
PART I - DISCUSSION REGARDING THE VARIABLE ANNUITY CONTRACTS
GENERAL
Except as otherwise indicated herein, all capitalized terms shall have the
meanings assigned to them in the Prospectus.
The Company is subject to regulation by the Ohio Department of Insurance,
which periodically examines its financial condition and operations. The Company
also is subject to the insurance laws and regulations of all jurisdictions in
which it offers Contracts. Copies of the Contract have been filed with, and,
where required, approved by insurance regulators in those jurisdictions. The
Company must submit annual statements of its operations, including financial
statements, to such state insurance regulators so that they may determine
solvency and compliance with applicable state insurance laws and regulations.
The Company and Separate Account 2 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
Separate Account 2. Under the agreement, CSC maintains certain records regarding
the Contracts and assists the Company in administering the daily operations of
Separate Account 2 and other separate accounts of the Company. Pursuant to the
terms of the agreement, the Company paid the following amounts to CSC for
services rendered during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, Amount Paid to CSC
--------------------------------------------------------------
<S> <C>
1995 $444,324
1996 $356,801
1997
</TABLE>
SAFEKEEPING OF ASSETS
The assets of Separate Account 2 are held by the Company, separate from the
Company's general account assets and any other separate accounts that the
Company has or will establish. The Company maintains records of all purchases
and redemptions of the interests in the Portfolios held by the Sub-Accounts.
The Company maintains fidelity bond coverage for the acts of its officers and
employees.
1
<PAGE> 91
DISTRIBUTION OF THE CONTRACTS
As disclosed in the Prospectus, the Contracts are distributed through
Touchstone Securities, Inc. (the "DISTRIBUTOR"), which is a wholly-owned
subsidiary of IFS Financial Services, Inc. ("IFS"). IFS is a wholly-owned
subsidiary of the Company. The Distributor is a member of the National
Association of Securities Dealers, Inc. The offering of the Contracts is
continuous, and the Company does not anticipate discontinuing offering the
Contracts, although it reserves the right to do so.
SUB-ACCOUNT PERFORMANCE
The performance of the Sub-Accounts may be quoted or advertised by the
Company in various ways. All performance information supplied by the Company in
advertising is based upon historical results of the Sub-Accounts and the
Portfolios and is not intended to indicate future performance of either one.
Total returns and other performance information may be quoted numerically or in
a table, graph or similar illustration. The value of an Accumulation Unit and
total returns fluctuate in response to market conditions, interest rates and
other factors.
Average annual total returns are calculated by determining the average
annual compounded rates of return over one, five and ten year periods (or since
commencement of operations) that would equate an initial hypothetical investment
to the ending redeemable value according to the following formula:
P(1 + T)(to the power of n) = ERV
where:
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> 92
The following table sets forth the type of total return data for each of the
Sub-Accounts that will be used in advertising, in each case for the period ended
December 31, 1997.
<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
For Year
Total Return
For Year
Measured By
Change In
Accumulation
Unit Value**
Average
Annual Total
Return Since
Inception*
Total Return
Since Inception
Measured by
Change in
Accumulation
Unit Value**
<FN>
* Based on a period beginning February 28, 1995.
** Calculated by determining the change in the Accumulation Unit Value from
the beginning of the period to the end of the period and dividing such
amount by the Accumulation Unit Value at the end of the period.
</TABLE>
While average annual total returns are convenient means of comparing
investment alternatives, investors should realize that any Sub-Account's
performance is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of any Sub-Account.
Average annual total return is calculated as required by applicable
regulations. In addition to average annual total returns, a Sub-Account may
quote cumulative total returns reflecting the simple change in value of any
investment over a stated period. Average annual and cumulative total returns may
be quoted as a percentage or as a dollar amount.
"Total return" or "average annual total return" quoted in advertising
reflects all aspects of a Sub Account's return, including the effect of
reinvestment by the Sub-Account of Portfolio income and capital gain
distributions and any change in the Sub-Account's value over the applicable
period. Such quotations reflect Contract Maintenance, Contract Administration
and Mortality and Expense Risk Charges. Since the Contract is intended as a
long-term investment, total return calculations will assume that no partial
withdrawals from the hypothetical Contract occurred during the applicable
period.
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
3
<PAGE> 93
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.
The Company may advertise examples of the effects of dollar cost averaging,
whereby an Owner periodically invests a fixed dollar amount in a Sub-Account,
thereby purchasing fewer Accumulation Units when prices are high and more
Accumulation Units when prices are low. While such a strategy does not assure a
profit nor guard against a loss in a declining market, the Owner's average cost
per Accumulation Unit can be lower than if fixed numbers of Accumulation Units
had been purchased at the same intervals. In evaluating dollar cost averaging,
Owners should consider their ability to continue purchasing Accumulation Units
during periods of low price levels.
Performance information for any Sub-Account may be compared, in reports to
Owners and in advertising, to stock indices, other variable annuity separate
accounts or other products tracked by Lipper Analytical Services, or other
widely used independent research firms, which rank variable annuities and
investment companies by overall performance, investment objectives and assets.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges and investment management costs.
FIXED ANNUITY INCOME PAYMENTS
The Contracts provide only for fixed annuity payment options. The amount of
such payments is calculated by applying the Surrender Value, less any applicable
premium tax, at annuitization to the income payment rates for the income payment
option selected. Annuity payments will be the larger of:
(a) the income based on the rates shown in the Contract's Annuity
Tables for the income payment option chosen; and
(b) the income calculated by applying the proceeds as a single premium
at the Company's current rates in effect on the date of the first
annuity payment for the same option.
Annuity payments under any of the income payment options will not vary in
dollar amount and will not be affected by the future investment performance of
the Variable Account.
INDEPENDENT ACCOUNTANTS
The financial statements of Western-Southern Life Assurance Company
Separate Account 2 and the financial statements of Western-Southern Life
Assurance Company, included in this registration statement and described on
pages ____, have been included herein in reliance on the
4
<PAGE> 94
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
5
<PAGE> 95
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, each Sub-Account seeks to achieve its
investment objectives by investing all the investable assets of the Sub-Account
in a diversified open-end management investment company having the same
investment objectives as such Sub-Account. These investment companies are,
respectively, Value Plus Portfolio, 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 Value Plus, 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 portfolio
advisors (collectively, the "PORTFOLIO ADVISORS"). Investors Bank & Trust
Company ("INVESTORS BANK" or the "ADMINISTRATOR") serves as administrator and
fund accounting agent to each Portfolio.
INVESTMENT OBJECTIVES, TECHNIQUES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objective(s) of each Sub-Account is described in the
Prospectus. There can be no assurance that any Sub-Account will achieve its
investment objective(s). See THE VI TRUST AND THE SA TRUST in the Prospectus.
INVESTMENT TECHNIQUES
Since the investment characteristics of each Sub-Account will correspond
directly to those of the corresponding SAT Portfolio, the following is a
discussion of certain investments of and techniques employed by the SAT
Portfolios.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES
Certificates of deposit are receipts issued by a depository institution in
exchange for the deposit of funds. The issuer agrees to pay the amount deposited
plus interest to the bearer of the receipt on the date specified on the
certificate. The certificate usually can be traded in the secondary market prior
to maturity. Bankers' acceptances typically arise from short-term credit
6
<PAGE> 96
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see the Appendix.
LOWER-RATED DEBT SECURITIES
While the market for high yield corporate debt securities (commonly known
as "junk bonds") has been in existence for many years and has weathered previous
economic downturns, the 1980's brought a dramatic increase in the use of such
securities to fund highly leveraged corporate acquisitions and restructuring.
Past experience may not provide an accurate indication of future performance of
the high yield, high risk bond market, especially during periods of economic
recession. In fact, from 1989 to 1991, the percentage of lower-rated debt
securities that defaulted rose significantly above prior levels.
The market for junk bonds may be thinner and less active than that for
higher rated debt securities, which can adversely affect the prices at which the
former are sold. If market quotations are not available, such lower-rated debt
securities will be valued in accordance with procedures establish by the Board
of Trustees of the SA Trust, including the use of outside pricing services.
Judgment plays a greater role in valuing high yield, high risk corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the ability of outside pricing services
to value lower-rated debt securities and the ability to dispose of these
securities.
In considering investments for the Portfolio, the Portfolio Advisor will
attempt to identify those issuers of high yielding debt securities ("junk
bonds") whose financial condition is adequate to meet future obligations, has
improved or is expected to improve in the future. The Portfolio Advisor's
analysis focuses on relative values based on such factors as interest on
dividend coverage, asset coverage, earnings prospects and the experience and
managerial strength of the issuer.
7
<PAGE> 97
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 securities or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a Portfolio might not be able to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A Portfolio might also have
to register such restricted securities in order to dispose of them, resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities otherwise
subject to restriction on their resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the 1933 Act
on resales of certain securities to qualified institutional buyers.
The Advisor and each Portfolio Advisor anticipate that the market for certain
restricted securities such as institutional commercial paper will expand further
as a result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc.
Each Portfolio Advisor will monitor the liquidity of Rule 144A securities
in the respective Portfolio's portfolio under the supervision of the SA Trust's
Board of Trustees. In reaching liquidity decisions, each Portfolio Advisor will
consider, among other things, the following
8
<PAGE> 98
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
interests of a Portfolio's shareholders.
LENDING PORTFOLIO SECURITIES
By lending its securities, a Portfolio can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or obtaining yield in the
form of interest paid by the borrower when U.S. Government obligations are used
as collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. Each
Portfolio will adhere to the following conditions whenever its securities are
loaned: (i) the Portfolio must receive at least 100 percent cash collateral or
equivalent securities from the borrower; (ii) the borrower must increase this
collateral whenever the market value of the securities loaned, including accrued
interest, rises above the value of the collateral; (iii) the Portfolio must be
able to terminate the loan at any
9
<PAGE> 99
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.
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
10
<PAGE> 100
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 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.
11
<PAGE> 101
Second, the liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point of
view of speculators, the margin deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest rate trends by the Portfolio Advisor may still not result in a
successful transaction.
In addition, futures contracts entail risks. Although each applicable
Portfolio Advisor believes that use of such contracts will benefit the
respective Portfolio, if the Portfolio Advisor's investment judgment about the
general direction of interest rates is incorrect, a Portfolio's overall
performance would be poorer than if it had not entered into any such contract.
For example, if an SAT Portfolio has hedged against the possibility of an
increase in interest rates which would adversely affect the price of debt
securities held in its portfolio and interest rates decrease instead, the
Portfolio will lose part or all of the benefit of the increased value of its
debt securities which it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if a Portfolio has
insufficient cash, it may have to sell debt securities from its portfolio to
meet daily variation margin requirements. Such sales of bonds may be, but will
not necessarily be, at increased prices which reflect the rising market. An SAT
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
OPTIONS ON FUTURES CONTRACTS
Each SAT Portfolio may purchase and write options on futures contracts for
hedging purposes. The purchase of a call option on a futures contract is similar
in some respects to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of futures
contracts, when an SAT Portfolio is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, an SAT Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Portfolio's holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon 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
12
<PAGE> 102
existing options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Portfolio may purchase a put option on a futures contract to hedge
its portfolio against the risk of rising interest rates.
The amount of risk an SAT Portfolio assumes when it purchases an option on
a futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
An SAT Portfolio will not enter into any futures contracts or options on
futures contracts if immediately thereafter the amount of margin deposits on all
the futures contracts of the Portfolio and premiums paid on outstanding options
on futures contracts owned by the Portfolio would exceed 5% of the market value
of the total assets of the Portfolio.
OPTIONS ON FOREIGN CURRENCIES
Options on foreign currencies are used for hedging purposes in a manner
similar to that in which futures contracts on foreign currencies, or forward
contracts, are utilized. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such diminutions in the value of portfolio
securities, the Portfolio may purchase put options on the foreign currency. If
the value of the currency does decline, a Portfolio will have the right to sell
such currency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, an SAT Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
Options on foreign currencies may be written for the same types of hedging
purposes. For example, where an SAT Portfolio anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
13
<PAGE> 103
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the SAT
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the Portfolio also may be required
to forego all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
Each SAT Portfolio may write covered call options on foreign currencies. A
call option written on a foreign currency by a Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Portfolio has a call
on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash and
liquid securities in a segregated account with its custodian.
Each SAT Portfolio also may write call options on foreign currencies that
are not covered for cross-hedging purposes. A call option on a foreign currency
is for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. dollar value of a security which the
Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange rate. In
such circumstances, the Portfolio collateralizes the option by maintaining in a
segregated account with its custodian, cash or liquid securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD
CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Unlike transactions entered into by a Portfolio in futures contracts,
options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market
14
<PAGE> 104
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 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
15
<PAGE> 105
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 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
16
<PAGE> 106
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.
17
<PAGE> 107
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
18
<PAGE> 108
into forward currency transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar. A
Portfolio either enters into these transactions on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market or uses forward
currency contracts to purchase or sell foreign currencies.
A forward currency contract is an obligation by a Portfolio to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract. Forward currency contracts establish an exchange
rate at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward currency contract generally has no deposit
requirement and is traded at a net price without commission. Each SAT Portfolio
maintains with its custodian a segregated account of liquid securities in an
amount at least equal to its obligations under each forward currency contract.
Neither spot transactions nor forward currency contracts eliminate fluctuations
in the prices of the Portfolio's securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
An SAT Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into a Portfolio Advisor's long-term
investment decisions, an SAT Portfolio will not routinely enter into foreign
currency hedging transactions with respect to 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.
19
<PAGE> 109
The matching of the increase in value of a forward currency contract and
the decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedge generally will not be
precise. In addition, a Portfolio may not always be able to enter into forward
currency contracts at attractive prices and this will limit the SAT Portfolio's
ability to use such contract to hedge or cross-hedge its assets. Also, with
regard to a Portfolio's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying a Portfolio's cross-hedges and the movements in the exchange rates of
the foreign currencies in which the Portfolio's assets that are the subject of
such cross-hedges are denominated.
RATING SERVICES
The ratings of nationally recognized statistical rating organizations
represent their opinions as to the quality of the securities that they undertake
to rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. Although these ratings are
an initial criterion for selection of portfolio investments, the Portfolio
Advisors also make their own evaluation of these securities, subject to review
by the Board of Trustees of the SA Trust. After purchase by a Portfolio, an
obligation may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event would require a Portfolio
to eliminate the obligation from its portfolio, but a Portfolio Advisor will
consider such an event in its determination of whether a Portfolio should
continue to hold the obligation. A description of the ratings used herein and in
the Funds' Prospectuses is set forth in the Appendix to this Statement of
Additional Information.
INVESTMENT RESTRICTIONS
The investment restrictions described below as "fundamental policies" of
each SAT Portfolio may not be changed with respect to any Portfolio without the
approval of a "majority of the outstanding voting securities" of the SAT
Portfolio. "MAJORITY OF THE OUTSTANDING VOTING SECURITIES" under the Investment
Company Act of 1940, as amended (the "1940 ACT"), and as used in this Statement
of Additional Information and the Prospectus, means, with respect to the
Portfolio, the lesser of (i) 67% or more of the outstanding voting securities of
the Portfolio present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Portfolio are present or represented by
proxy or (ii) more than 50% of the outstanding voting securities of the
Portfolio.
FUNDAMENTAL POLICIES
The fundamental policies of each SAT Portfolio are described below.
Investment restriction of an SAT Portfolio shall prevent a Portfolio from
investing all of its assets in an open-end investment company with substantially
the same investment objectives.
(1) No SAT Portfolio may borrow money or mortgage or hypothecate
assets of the Portfolio, except that, in an amount not to exceed
1/3 of the current value of the
20
<PAGE> 110
Portfolio's net assets, it may borrow money (including through
reverse repurchase agreements, forward roll transactions involving
mortgage-backed securities or other investment techniques entered
into for the purpose of leverage), and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure
such borrowings, provided that collateral arrangements with
respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of
assets for purposes of this restriction and except that assets may
be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the
Investment Company Institute; for additional related restrictions,
see clause (i) under the caption "Additional Restrictions" below;
(2) No SAT Portfolio may underwrite securities issued by other persons
except insofar as the Portfolio may technically be deemed an
underwriter under the 1933 Act in selling a portfolio security.
(3) No SAT Portfolio may make loans to other persons except: (a)
through the lending of the Portfolio's portfolio securities and
provided that any such loans not exceed 30% of the Portfolio's
total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short-term obligations;
or (c) by purchasing a portion of an issue of debt securities of
types distributed publicly or privately.
(4) The Bond Portfolio may not purchase or sell real estate (including
limited partnership interests but excluding securities secured by
real estate or interests therein), interests in oil, gas or
mineral leases, commodities or commodity contracts (except futures
and option contracts) in the ordinary course of business (except
that the Portfolio may hold and sell, for its portfolio, real
estate acquired as a result of the Portfolio's ownership of
securities).
(5) No SAT Portfolio may concentrate its investments in any particular
industry (excluding U.S. Government securities), but if it is
deemed appropriate for the achievement of a Portfolio's investment
objective(s), up to 25% of its total assets may be invested in any
one industry
(6) No SAT Portfolio may issue any senior security (as that term is
defined in the 1940 Act) if such issuance is specifically
prohibited by the 1940 Act or the rules and regulations
promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial
deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.
(7) No SAT Portfolio may with respect to 75% of its total assets taken
at market value, invest in assets other than cash and cash items
(including receivables), U.S. Government securities, securities of
other investment companies, and other securities for purposes of
this calculation limited in respect of any one issuer to an amount
not
21
<PAGE> 111
greater in value than 5% of the value of the total assets of
the Portfolio and to not more than 10% of the outstanding voting
securities of such issuer.
(8) The Growth & Income Portfolio may not purchase or sell real estate
except that (a) the Portfolio may invest in (i) securities of
entities that invest or deal in real estate, mortgages, or
interests therein and (ii) securities secured by real estate or
interests therein and (b) the Portfolio may hold and sell real
estate acquired as a result of the Portfolio's ownership of
securities.
(9) The Growth & Income Portfolio may not purchase or sell interests
in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of
business.
ADDITIONAL RESTRICTIONS
Neither SAT Portfolio will, as a matter of operating policy (changeable by
the respective Board of Trustees without a shareholder vote) (except that no
operating policy shall prevent a Portfolio from investing all of its assets in
an open-end investment company with substantially the same investment
objectives), do any of the following:
(1) borrow money (including through reverse repurchase agreements or
forward roll transactions involving mortgage-backed securities or
similar investment techniques entered into for leveraging
purposes), except that the Portfolio may borrow for temporary or
emergency purposes up to 10% of its total assets; provided,
however, that no Portfolio may purchase any security while
outstanding borrowings exceed 5%;
(2) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the Portfolio's total assets (taken at market value), provided
that collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, and
reverse repurchase agreements are not considered a pledge of
assets for purchase of this restriction;
(3) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and
except that deposits of initial deposit and variation margin may
be made in connection with the purchase, ownership, holding or
sale of futures;
(4) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right
to obtain securities, without payment of further consideration,
equivalent in kind and amount to the securities sold and provided
that if such right is conditional the sale is made upon the same
conditions;
(5) invest for the purpose of exercising control or management;
22
<PAGE> 112
(6) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase,
though not made in the open market, is part of a plan of merger or
consolidation; provided, however, that securities of any
investment company will not be purchased for the Portfolio if such
purchase at the time thereof would cause: (a) more than 10% of the
Portfolio's total assets (taken at the greater of cost or market
value) to be invested in the securities of such issuers; (b) more
than 5% of the Portfolio's total assets (taken at the greater of
cost or market value) to be invested in any one investment
company; or (c) more than 3% of the outstanding voting securities
of any such issuer to be held for the Portfolio; provided further
that, except in the case of a merger or consolidation, the
Portfolio shall not purchase any securities of any open-end
investment company unless the Portfolio (1) waives the investment
advisory fee, with respect to assets invested in other open-end
investment companies and (2) incurs no sales charge in connection
with the investment;
(7) invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid
or not readily marketable (defined as a security that cannot be
sold in the ordinary course of business within seven days at
approximately the value at which the Portfolio has valued the
security) excluding (a) Rule 144A securities determined to be
liquid by the Board of Trustees of the SA Trust; and (b)
commercial paper that is sold under Section 4(2) of the Securities
Act of 1933 which is not traded flat or in default as to interest
or principal, and either (i) is rated in one of the two highest
categories by at least two nationally recognized statistical
rating organizations and the Board of Trustees of the SA Trust
have determined the commercial paper to be liquid; or (ii) is
rated in one of the two highest categories by one nationally
recognized statistical rating agency and the Board of Trustees of
the SA Trust have determined that the commercial paper is
equivalent quality and is liquid);
(8) invest more than 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;
(9) 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);
(10) 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;
23
<PAGE> 113
(11) 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;
(12) 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;
(13) 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);
(14) 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;
(15) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio and the option is
issued by the OCC, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate value of the obligations underlying
the puts determined as of the date the options are sold shall not
exceed 50% of the Portfolio's net assets; (c) the securities
subject to the exercise of the call written by the Portfolio must
be owned by the Portfolio at the time the call is sold and must
continue to be owned by the Portfolio until the call has been
exercised, has lapsed, or the Portfolio has purchased a closing
call, and such purchase has been confirmed, thereby extinguishing
the Portfolio's obligation to deliver securities pursuant to the
call it has sold; and (d) at the time a put is written, the
Portfolio establishes a segregated account with its custodian
consisting of cash or liquid securities equal in value to the
amount the Portfolio will be obligated to pay upon exercise of the
put (this account must be maintained until the put is exercised,
has expired, or the Portfolio has purchased a closing put, which
is a put of the same series as the one previously written); and
24
<PAGE> 114
(16) 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.
The Portfolio Advisors seek to evaluate the overall reasonableness of any
brokerage commissions paid through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions. In placing orders for the purchase and sale
of securities for a Portfolio, the Portfolio Advisors take into account such
factors as price, commission (if any, negotiable in case of national securities
exchange transactions), size of order, difficulty of execution and skill
required of the executing broker-dealer. The Portfolio Advisors review on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
The Portfolio Advisors are authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio transactions
for a Portfolio with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of
25
<PAGE> 115
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.
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.
26
<PAGE> 116
However, it is believed that the ability of a Portfolio to participate in volume
transactions will produce better executions for the Portfolio.
For the fiscal years ended December 31, 1997, 1996 and 1995, the aggregate
brokerage commissions paid by each Portfolio is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Growth & Income Portfolio Bond Portfolio
-----------------------------------------------------------------------------
<S> <C> <C>
1997
1996 $40,690 None
1995 $30,788 None
</TABLE>
[Info on affiliated brokerage to be added]
VALUATION OF SECURITIES AND REDEMPTION IN KIND
The value of each security for which readily available market quotations
exists is based on a decision as to the broadest and most representative market
for such security. The value of such security is based either on the last sale
price on a national securities exchange, or, in the absence of recorded sales,
at the readily available closing bid price on such exchanges, or at the quoted
bid price in the over-the-counter market. Securities listed on a foreign
exchange are valued at the last quoted sale price available before the time net
assets are valued. Unlisted securities are valued at the average of the quoted
bid and asked prices in the over-the-counter market. Debt securities are valued
by a pricing service which determines valuations based upon market transactions
for normal, institutional-size trading units of similar securities. Securities
or other assets for which market quotations are not readily available are valued
at fair value in accordance with procedures established by the SA Trust. Such
procedures include the use of independent pricing services, which use prices
based upon yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. All portfolio securities with a remaining maturity of less than 60
days are valued at amortized cost, which approximates market.
The accounting records of the Portfolios are maintained in U.S. dollars.
The market value of investment securities, other assets and liabilities and
forward contracts denominated in foreign 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
27
<PAGE> 117
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 the close of regular trading on the NYSE on each
such day, the value of each investor's interest in a Portfolio will be
determined by multiplying the net asset value of the Portfolio by the percentage
representing that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or reductions which are to be effected on that day will
then be effected. The investor's percentage of the aggregate beneficial
interests in a Portfolio will then be recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of the close of regular trading on the NYSE on such day plus
or minus, as the case may be, the amount of net additions to or reductions in
the investor's investment in the Portfolio effected on such day and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of regular trading on the NYSE on such day plus or minus, as the case may
be, the amount of net additions to or reductions in the aggregate investments in
the Portfolio by all investors in the Portfolio. The percentage so determined
will then be applied to determine the value of the investor's interest in the
Portfolio as of the close of regular trading on the NYSE on the following day
the NYSE is open for trading.
28
<PAGE> 118
MANAGEMENT OF THE SA TRUST
The Trustees and officers of the SA Trust and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those Trustees who are "interested
persons" (as defined in the 1940 Act) of the SA Trust. Unless otherwise
indicated, the address of each Trustee and officer is 311 Pike Street,
Cincinnati, Ohio 45202. The Trustees and officers of the SA Trust also serve in
the same positions with the VI Trust and with two affiliated trusts of the SA
Trust, the Select Advisors Trust A and Select Advisors Trust C (collectively,
the "Fund Complex").
TRUSTEES OF THE SA TRUST
*EDWARD G. HARNESS, JR. (Age 49) -- Chairman of the Board of Trustees,
President and Chief Executive Officer; Director, President and Chief Executive
Officer, Touchstone Advisors, Inc. (since February, 1994); Director and Chief
Executive Officer, Touchstone Securities, Inc. (since October, 1991); President,
Touchstone Securities, Inc. (since March, 1996); President, IFS Financial
Services, Inc. (since January, 1991); President, IFS Systems, Inc. (since
August, 1991).
*WILLIAM J. WILLIAMS (Age 82), 400 Broadway, Cincinnati, OH 45202 --
Trustee; Chairman of the Board of Directors, The Western and Southern Life
Insurance Company (since March, 1984); Chief Executive Officer, The Western and
Southern Life Insurance Company (from March, 1984 to March, 1994).
JOSEPH S. STERN, JR. (Age 80), 3 Grandin Place, Cincinnati, OH 45208 --
Trustee; Retired Professor Emeritus, College of Business, University of
Cincinnati.
PHILLIP R. COX (Age 50), 105 East Fourth Street, Cincinnati, OH 45202 --
Trustee; President and Chief Executive Officer, Cox Financial Corp. (since
1972); Director, Federal Reserve Bank of Cleveland; Director, Cincinnati Bell
Inc.; Director, PNC Bank; Director, Cinergy Corporation; Director, BDM
International, Inc.
ROBERT E. STAUTBERG (Age 63), 4815 Drake Road, Cincinnati, OH 45243 --
Trustee; Chairman of the Board of Trustees, Good Samaritan Hospital; Retired
Partner and Director, KPMG Peat Marwick.
DAVID POLLAK (Age 80), 1313 Kemper Road, Suite 111, Cincinnati, OH 45246 --
Trustee; President, The Ultimate Distributing Company (1986-1993); Director
Emeritus, Fifth Third Bank.
OFFICERS OF THE SA TRUST
EDWARD S. HEENAN (Age 53) -- Controller; Vice President and Controller,
Touchstone Advisors, Inc. (since December, 1993); Director, Controller,
Touchstone Securities, Inc. (since October, 1991); Vice President and
Comptroller, The Western and Southern Life Insurance Company (since 1987). His
address is 400 Broadway, Cincinnati, OH 45202.
29
<PAGE> 119
JAMES J. VANCE (Age 36) -- Treasurer; Treasurer, The Western and Southern
Life Insurance Company (since January 1994); Corporate Finance Manager, Eastman
Kodak Company (June, 1988 to December, 1994). His address is 400 Broadway,
Cincinnati, OH 45202.
ANDREW S. JOSEF (Age 33) -- Secretary; Director, Legal Administration,
Investors Bank (since May, 1997); Senior Associate, Sullivan & Worcester LLP
(November, 1995 to May, 1997); Associate, Goodwin, Procter & Hoar LLP (January,
1993 to November, 1995); Associate, Simpson, Thacher & Bartlett LLP (prior to
January, 1993). His address is 200 Clarendon Street, Boston, MA 02116.
SUSAN C. MOSHER (age 42) -- Assistant Secretary; Director, Legal
Administration, Investors Bank (since August, 1995); Associate Counsel, 440
Financial Group of Worcester, Inc. (January, 1993 to August, 1995. Her address
is 200 Clarendon Street, Boston, MA 02116.
KEVIN M. CONNERTY (age 32) -- Assistant Treasurer; Director, Fund
Administration - Reporting and Compliance, Investors Bank (since October, 1992).
His address is 200 Clarendon Street, Boston, MA 02116.
PAUL J. JASINSKI (age 50) -- Assistant Treasurer; Managing Director - Fund
Administration, Investors Bank (since July, 1985). His address is 200 Clarendon
Street, Boston, MA 02116.
Ms. Mosher and Messrs. Josef, Connerty and Jasinski also hold similar
positions for other investment companies for which Investors Bank or an
affiliate serves as administrator or principal underwriter.
No director, officer or employee of the Advisor, the Portfolio Advisors,
the Distributor, the Administrator or any of their affiliates will receive any
compensation from the SA Trust or the VI Trust for serving as an officer or
Trustee of the SA Trust. The Fund Complex pays each Trustee who is not a
director, officer or employee of the Advisor, the Portfolio Advisors, the
Distributor, the Administrator or any of their affiliates an annual fee of
$5,000 plus $1,000 per meeting attended and reimburses them for travel and
out-of-pocket expenses. The annual and meeting fees are allocated among the four
trusts in proportion to their respective net assets. For the year ended December
31, 1997, the SA Trust incurred $________ in Trustee fees and expenses.
30
<PAGE> 120
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation from the Fund Complex
Name of Person from SA Trust Paid to Trustees
------------------------------- ------------------------------------- -------------------------------------------
<S> <C> <C>
Phillip R. Cox $ $
David Pollak $ $
Robert E. Stautberg $ $
Joseph S. Stern, Jr. $ $
Edward G. Harness, Jr. none none
William J. Williams none none
</TABLE>
As of February 1, 1998, the Trustees and officers of the SA Trust owned in
the aggregate less than 1% of the interests of any Portfolio or the SA Trust
(all series taken together, including series in which the Sub-Accounts do not
invest).
ADVISOR, PORTFOLIO ADVISORS, ADMINISTRATOR AND SPONSOR
ADVISOR
The Advisor provides service to each Portfolio of the SA Trust pursuant to
an Investment Advisory Agreement with the SA Trust (the "ADVISORY Agreement").
The services provided by the Advisor consist of directing and supervising each
Portfolio Advisor, reviewing and evaluating the performance of each Portfolio
Advisor and determining whether or not any Portfolio Advisor should be replaced.
The Advisor furnishes at its own expense all facilities and personnel necessary
in connection with providing these services. The Advisory Agreement will
continue in effect if such continuance is specifically approved at least
annually by the Board of Trustees of the SA Trust and by a majority of the
Trustees who are not parties to the Advisory Agreement or interested persons of
any such party, at a meeting called for the purpose of voting on the Advisory
Agreement.
The Advisory Agreement is terminable, with respect to a Portfolio, without
penalty on not more than 60 days' nor less than 30 days' written notice by the
SA Trust, when authorized either by majority vote of the investors in the
Portfolio (with the vote of each being in proportion to the amount of their
investment) or by a vote of a majority of the Board of Trustees or by the
Advisor, and will automatically terminate in the event of its assignment. The
Advisory Agreement provides that neither the Advisor nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in its services to the Portfolios,
except for willful misfeasance, bad faith or gross negligence or reckless
disregard of its or their obligations and duties under the Advisory Agreement.
The Prospectus contains a description of fees payable to the Advisor for
services under the Advisory Agreement.
31
<PAGE> 121
For the fiscal years ended December 31, 1997, 1996 and 1995, each SAT
Portfolio incurred the following investment advisory fees equal on an annual
basis to the following percentages of the average daily net assets of the
Portfolio.
<TABLE>
<CAPTION>
Portfolio Year Rate Amount
---------------------------------------- -----------------------------
<S> <C> <C> <C>
Growth & Income 1997 0.80%* $183,664
1996 0.75% $127,974
1995 0.75% $88,934
Bond 1997 0.55% $66,023
1996 0.55% $72,111
1995 0.55% $61,568
<FN>
*Prior to September 1997 the rate was 0.75%.
</TABLE>
For the fiscal years ended December 31, 1997, 1996 and 1995, the Advisor,
under the terms of the Sponsor Agreement, reimbursed each SAT Portfolio the
amount set forth below.
<TABLE>
<CAPTION>
Portfolio Year Amount
- --------------------------- ----------------------- --------------------
<S> <C> <C>
Growth & Income 1997 $134,442
1996 $118,276
1995 $85,300
Bond 1997 $102,119
1996 $106,315
1995 $69,754
</TABLE>
PORTFOLIO ADVISORS
The Advisor has, in turn, entered into a portfolio advisory agreement (each
a "PORTFOLIO AGREEMENT") with each Portfolio Advisor selected by the Advisor for
a Portfolio. Under the direction of the Advisor and, ultimately, of the Board of
Trustees of the SA Trust, each Portfolio Advisor is responsible for making all
of the day-to-day investment decisions for the respective Portfolio.
Each Portfolio Advisor furnishes at its own expense all facilities and
personnel necessary in connection with providing these services. Each Portfolio
Agreement contains provisions similar to those described above with respect to
the Advisory Agreement.
ADMINISTRATOR, CUSTODIAN AND FUND ACCOUNTING AGENT
Pursuant to Administration and Fund Accounting Agreements, Investors Bank
supervises the overall administration of the Trust, including but not limited
to, accounting, clerical and bookkeeping services; daily calculation of net
asset values; preparation and filing of all
32
<PAGE> 122
documents required for compliance by the Trust with applicable laws and
regulations. Investors Bank also provides persons to serve as officers of the
Trust. As custodian, Investors Bank holds cash, securities and other assets of
the Trust.
The Trust's Prospectus contains a description of fees payable to Investors
Bank for its services as administrator, fund accounting agent and custodian.
Prior to December 1, 1996, Signature Financial Services, Inc. ("SIGNATURE")
served as administrator and fund accounting agent to the Trust.
Each of the Administration, Fund Accounting and Custodian Agreements
(collectively, the "Agreements") provide that neither Investors Bank nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission, except for willful misfeasance, bad faith or negligence (gross
negligence in respect of the Custodian Agreement) in the performance of its or
their duties or by reason of disregard (reckless disregard in respect of the
Custodian Agreement) of its or their obligations and duties under the
Agreements.
Each Agreement may not be assigned without the consent of the non-assigning
party, and may be terminated after its Initial Term, with respect to a
Portfolio, without penalty by majority vote of the shareholders of the Portfolio
or by either party on not more than 60 days' written notice.
State Street Bank and Trust Company ("STATE STREET") serves as transfer
agent of the Trust pursuant to a transfer agency agreement. Under its transfer
agency agreement with the Trust, State Street maintains the shareholder account
records for each Fund, handles certain communications between shareholders and
the Trust and causes to be distributed any dividends and distributions payable
by the Trust. State Street may be reimbursed by the Trust for its out-of-pocket
expenses.
For the fiscal years ended December 31, 1997, 1996 and 1995, each SAT
Portfolio incurred the following administrative and fund accounting fees,
including out-of-pocket expenses.
<TABLE>
<CAPTION>
Portfolio Year Amount
- --------------------------- ----------------------- --------------------
<S> <C> <C>
Growth & Income 1997 $79,501
1996 $56,786
1995 $46,743
Bond 1997 $79,501
1996 $56,396
1995 $47,124
</TABLE>
SPONSOR
Touchstone Advisors, Inc. serves also (in addition to its services as
Advisor to each Portfolio of the SA Trust) as the sponsor ("SPONSOR") of each
SAT Portfolio pursuant to a sponsor
33
<PAGE> 123
agreement (the "SPONSOR AGREEMENT"). Under each Sponsor Agreement, the Sponsor
provides oversight of the various service providers to each of the SA Trust and
the SAT Portfolios, including the Administrator and the Custodian. For its
services in this regard, the Sponsor is paid a fee, on an annual basis, equal to
0.20% of the average daily net assets of each Portfolio. The Sponsor Agreement
may be terminated by the Sponsor on not less than 30 days prior written notice
and by the SA Trust, as to any Portfolio. The Sponsor has advised the SA Trust
that it will waive all fees under the Sponsor Agreement through December 31,
1998.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Frost & Jacobs LLP, 2500 PNC Center, 201 East Fifth Street, Cincinnati,
Ohio 45202, serves as counsel to the SA Trust and each SAT Portfolio. Coopers &
Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109, acts as
independent accountants of the SA Trust and each SAT Portfolio.
ORGANIZATION OF THE SA TRUST
Interests in the SA Trust do not have cumulative voting rights, which means
that holders of more than 50% of such interests (which includes the interests
held by other investors in the SAT Portfolios (Growth & Income and Bond) and the
interests of other investors in Portfolios of the SA Trust that are not
available for investment by the Sub-Accounts) voting for the election of
Trustees can elect all Trustees. Accordingly, it is unlikely that Owners having
Contract Value in the Sub-Accounts that invest in the SAT Portfolios will be
able to control the election of any of the Trustees. Matters affecting the SAT
Portfolios are generally decided by separate vote of each SAT Portfolio, except
with respect to the election of Trustees and the ratification of the selection
of independent accountants.
The SA Trust, in the Portfolios of which all of the assets of the
corresponding Sub-Accounts will be invested, is organized as a trust under the
laws of the State of New York. Each Sub-Account and other entity investing in an
SAT Portfolio (e.g., other investment companies, insurance company separate
accounts and common and commingled trust funds) will each be liable for all
obligations of the Portfolio. However, the risk of a Sub-Account incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself was unable to meet
its obligations. Accordingly, the SA Trust's Trustees believe that no
Sub-Account (or any Owner having Contract Value therein) will be adversely
affected by reason of the Sub-Account's investing in the corresponding
Portfolio.
TAXATION
TAXATION OF THE PORTFOLIOS
Each of the Portfolios will be classified as a partnership for federal
income tax purposes. Furthermore, none of the Portfolios will be a "publicly
traded partnership" for purposes of Section 7704 of the Code. Consequently, the
Portfolios will not be subject to federal income taxation. Instead, each entity
that invests in a Portfolio must take into account, in computing its
34
<PAGE> 124
federal income tax liability, its share of the Portfolio's income, gains,
losses, deductions, credits and tax preference items for the year, without
regard to the amount of cash distributions it has received during the year from
the Portfolio. Although no Portfolio will be subject to federal income tax, each
will file appropriate income tax returns as required by the Code.
SUB-ACCOUNT DIVERSIFICATION
Each Sub-Account that invests in a Portfolio will be treated as owning a
proportionate interest in the assets held by the Portfolio for purposes of
determining whether the Sub-Account is adequately diversified within the meaning
of Section 817(h) of the Code. The diversification requirement must be satisfied
in order for the Contract to be treated as an "annuity contract" under the Code.
FINANCIAL STATEMENTS
The following financial statements for Western-Southern Life Assurance
Company Separate Account 2 at and for the fiscal periods indicated are attached
hereto (to be supplied by amendment):
(1) Report of Coopers & Lybrand L.L.P
(2) Statement of Net Assets as of December 31, 1997.
(3) Statement of Operations and Changes in Net Assets for the years
ended December 31, 1997 and 1996.
(4) Notes to Financial Statements.
(5) Supplementary Information - Selected Per Unit Data and Ratios for
the years ended December 31, 1997 and 1996.
The following financial statements for Western-Southern Life Assurance
Company at and for the fiscal periods indicated are attached hereto (to be
supplied by amendment):
(1) Report of Coopers & Lybrand L.L.P
(2) Balance Sheets as of December 31, 1997 and 1996.
(3) Summaries of Operations for the years ended December 31, 1997, 1996
and 1995.
(4 Statements of Changes in Shareholder's Equity for the years ended
December 31, 1997, 1996 and 1995.
(5) Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995.
35
<PAGE> 125
The following financial statements for Select Advisor Portfolios
(Growth & Income Portfolio and Bond Portfolio) at and for the fiscal periods
indicated are incorporated by reference from their current reports to
shareholders filed with the Securities and Exchange Commission pursuant to
Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder. A copy of each such
report will be provided to each person receiving this Statement of Additional
Information.
(1) Schedule of Investments December 31, 1997.
(2) Statement of Operations for the year ended December 31, 1997.
(3) Statement of Assets and Liabilities December 31, 1997.
(4) Statement of Changes in Net Assets for the years ended December 31,
1997 and 1996.
(5) Supplementary Data for the years ended December 31, 1997, 1996, 1995
and 1994.
(6) Notes to Financial Statements.
(7) Report of Coopers & Lybrand L.L.P.
36
<PAGE> 126
DISTRIBUTOR
Touchstone Securities, Inc. Sub-Accounts
311 Pike Street ---------------
Cincinnati, Ohio 45202 -Value Plus
(800) 669-2796 (press 3) -Emerging Growth
-International Equity
INVESTMENT ADVISOR AND SPONSOR -Growth & Income
-Balanced
Touchstone Advisors, Inc. -Income Opportunity
311 Pike Street -Bond
Cincinnati, Ohio 45202 -Standby Income
TOUCHSTONE VARIABLE ANNUITY SERVICE CENTER
Touchstone Special Markets 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 8578
Boston, Massachusetts 02266-8518
ADMINISTRATOR, CUSTODIAN
AND FUND ACCOUNTING AGENT
Investors Bank & Trust Company STATEMENT OF
200 Clarendon Street ADDITIONAL INFORMATION
Boston, Massachusetts 02116 May 1, 1998
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
312 Walnut Street
Cincinnati, Ohio 45202
LEGAL COUNSEL
Frost & Jacobs LLP
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
<PAGE> 127
PART C
ITEM 24 -- FINANCIAL STATEMENTS AND EXHIBITS
(a) No financial statements are included in Part A.
The following financial statements are included in Part B (to be
supplied by amendment):
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY SEPARATE ACCOUNT 2
(1) Report of Coopers & Lybrand L.L.P.
(2) Statement of Net Assets as of December 31, 1997.
(3) Statement of Operations and Changes in Net Assets for
the years ended December 31, 1997 and 1996.
(4) Notes to Financial Statements.
(5) Supplementary Information -- Selected Per Unit Data
and Ratios for the years ended December 31, 1997 and
1996.
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
(1) Report of Coopers & Lybrand L.L.P.
(2) Balance Sheets as of December 31, 1997 and 1996.
(3) Summaries of Operations for the years ended December
31, 1997, 1996 and 1995.
(4) Statements of Changes in Shareholder's Equity for the
years ended December 31, 1997, 1996 and 1995.
(5) Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995.
The following financial statements are incorporated by reference into
Part B (to be supplied by amendment):
SELECT ADVISORS PORTFOLIOS (GROWTH & INCOME PORTFOLIO II AND BOND
PORTFOLIO II)
(1) Schedule of Investments December 31, 1997.
(2) Statement of Operations for the year ended December
31, 1997.
(3) Statement of Assets and Liabilities December 31, 1997.
(4) Statement of Changes in Net Assets for the years ended
December 31, 1997 and 1996.
-1-
<PAGE> 128
(5) Supplementary Data for the years ended December 31,
1997, 1996, 1995 and 1994.
(6) Notes to Financial Statements.
(7) Report of Coopers & Lybrand L.L.P.
(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).
(b) Amended Code of Regulations of the Company
incorporated herein by reference to
Post-Effective Amendment No. 2 to the
-2-
<PAGE> 129
Registration Statement filed with the SEC on
April 29, 1996 (File No. 33-79906).
(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) Administration Agreement between
Investors Bank & Trust Company and
Select Advisors Portfolios. (to be
supplied by amendment)
(ii) Fund Accounting Agreement between
Investors Bank & Trust Company and
Select Advisors Portfolios
incorporated herein by reference to
Post-Effective Amendment No. 4 to
the Registration Statement filed
with the SEC on April 30, 1997 (File
No. 33-79906).
(b) Investment Advisory Agreement between
Touchstone Advisors, Inc. and Select
Advisors Portfolios including Amendments No.
1, No. 2 and No. 3. (to be supplied by
amendment)
(c) Portfolio Advisory Agreement between
Touchstone Advisors, Inc. and:
(i) Scudder Kemper Investments, Inc.
(Growth & Income). (to be supplied
by amendment)
(ii) Fort Washington Investment
Advisors, Inc. (Bond) incorporated
herein by reference to
Post-Effective Amendment No. 2 to
the Registration Statement filed
with the SEC on April 29, 1996
(File 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 the
Registration Statement filed with
the SEC on November 14, 1994 (File
No. 33-79906).
(ii) Amendment No. 1 to Sponsor
Agreement between Select Advisors
Variable Insurance Trust and
Touchstone Advisors, Inc. (to be
supplied by amendment)
-3-
<PAGE> 130
(iii) 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) (i) 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).
(ii) Amendment No. 1 to Fund
Participation Agreement. (to be
supplied by amendment)
(9) Opinion and consent of Donald J. Wuebbling, Esq.
incorporated herein by reference to the Registration
Statement filed with the SEC on June 7, 1994 (File No.
33-79906).
(10) Consent of Coopers & Lybrand L.L.P. (to be supplied by
amendment)
(11) Not Applicable.
(12) Not Applicable.
(13) Schedule for Computation of Performance Quotations
provided in Registration Statement in response to Item
21. (to be supplied by amendment)
(14) Not applicable.
(99) (a) Powers of Attorney -- Directors of the Company.
(b) Powers of Attorney -- Trustees of Select
Advisors Portfolios.
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
Dr. J. Harold Kotte Director
-4-
<PAGE> 131
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
Herbert R. Brown Vice President
James W. Carpenter Vice President and Senior Counsel
Keith T. Clark Vice President and Medical Director
Bryan C. Dunn Senior Vice President and Chief
Marketing Officer
David G. Ennis Vice President and Auditor
Noreen J. Hayes Vice President
Edward S. Heenan Vice President and Comptroller
Dale P. Hennie Senior Vice President
Carroll R. Hutchinson Senior Vice President and Chief
Actuary
Donald W. Kaplan Vice President and Actuary
-5-
<PAGE> 132
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
James J. Vance Treasurer
Unless otherwise noted, the principal business address of all persons
listed in Item 25 is 400 Broadway, Cincinnati, Ohio 45202.
ITEM 26. -- PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The Western and Southern Life Insurance Company ("WSLIC")
Western-Southern Life Assurance Company ("WSLAC"); 100% owned
by WSLIC
Courtyard Nursing Care, Inc.; Ohio corporation; 100%
owned by WSLAC; ownership and operation of real estate.
IFS Financial Services, Inc. ("IFS"); Ohio corporation;
100% owned by WSLAC; development and marketing of
financial products for distribution through financial
institutions.
IFS Systems, Inc.; Delaware corporation;
100% owned by IFS; development, marketing
and support of software systems.
-6-
<PAGE> 133
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.
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 and
registered investment advisor.
-7-
<PAGE> 134
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.
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.
-8-
<PAGE> 135
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 ________________, 1998, there were _____ owners of Qualified
Contracts and _____ owners of Non-Qualified Contracts offered pursuant to
this Registration Statement.
ITEM 28. -- INDEMNIFICATION
The Amended Code of Regulations of the Company provides that, to the
fullest extent not prohibited by applicable law, the Company shall
indemnify each director, officer and employee against any and all costs
and expenses (including attorney fees, judgments, fines, penalties,
amounts paid in settlement, and other disbursements) actually and
reasonably incurred by or imposed upon such director, officer or
employee in connection with any action, suit, investigation or
proceedings (or any claim or other matter therein), whether civil,
criminal, administrative or otherwise in nature, including any
settlements thereof of any appeals therein, with respect to which such
director, officer or employee is named or otherwise becomes or is
threatened to be made a party by reason of being or at any time having
been a director, officer or employee of the Company, or, at the
direction or request of the Company, a director, trustee, officer,
administrator, manager, employee, adviser or other agent of or fiduciary
for any other corporation, partnership, trust, venture or other entity
or enterprise including any employee benefit plan; provided, however,
that no person shall be indemnified to the extent, if any, that the
directors of the Company, acting at a meeting at which a quorum of
directors who are not parties to or threatened with any such action,
suit, investigation or proceeding, determine that such indemnification
is contrary to applicable law.
Any director of the Company who is a party to or threatened with any
such action, suit, investigation or proceeding shall not be qualified to
vote; and if for this reason a quorum of directors, who are not
disqualified from voting by reason of being parties to or threatened
with such action, suit, investigation or proceeding, cannot be obtained,
such determination shall be made by three attorneys at law, who have not
theretofore represented the Company in any matter and who shall be
selected by all of the officers and directors of the Company who are not
parties to or threatened with any such action, suit, investigation or
proceeding. If there are no officers or directors who are qualified to
make such selection, the selection shall be made by a Judge of the Court
of Common Pleas of Hamilton County, Ohio. Such indemnification shall not
be deemed exclusive of any other right to which such director, officer
or employee may be entitled under the Company's articles of
incorporation, code of regulations, any agreement, any insurance
purchased by the Company, vote of shareholders or otherwise.
-9-
<PAGE> 136
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 Accounts 1 and 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 the
Depositor.
(b) Set forth below are the names, principal business addresses and
positions of each director and officer of Touchstone. Unless
otherwise noted, the principal business address of these
individuals is Touchstone Securities, Inc., 311 Pike Street,
Cincinnati, Ohio 45202. Unless otherwise specified, none of the
officers and directors of Touchstone serves as an officer or
Trustee of the SA Trust.
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; Controller,
SA Trust
William F. Ledwin(1) Director
Donald J. Wuebbling(1) Director
Richard K. Taulbee(1) Vice President
Carl A. Ramsey(2) Vice President
-10-
<PAGE> 137
E. Duane Clay(2) Vice President
Robert F. Morand(1) Secretary
Patricia Wilson Chief Compliance Officer
(c) The following table sets forth information about all commissions
and compensation received by Touchstone Securities, Inc.
<TABLE>
<CAPTION>
Name of Principal Net Underwriting Compensation on Brokerage Compensation
Underwriter Discounts and Redemptions Commissions
Commissions
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Touchstone $ $ $ $
Securities, Inc.
</TABLE>
ITEM 30. -- LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules
promulgated thereunder are maintained by the Company at 400 Broadway,
Cincinnati, Ohio 45202.
- ----------
(1) 400 Broadway, Cincinnati, Ohio 45202
(2) 8901 Indian Hills Drive, Omaha, Nebraska 68114
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.
-11-
<PAGE> 138
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 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.
-12-
<PAGE> 139
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Depositor, on behalf of itself and the
Registrant has duly caused this Post-Effective Amendment No. 5 to its
Registration Statement under the Securities Act of 1933 and Amendment No. 6 to
its Registration Statement under the Investment Company Act of 1940 to be signed
on its behalf, in the City of Cincinnati and State of Ohio on the 26th day of
February, 1998.
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 Registration Statement
has been signed below by the following persons in the capacities and on the
date(s) indicated below.
PRINCIPAL EXECUTIVE OFFICER:
/s/ JOHN F. BARRETT February 25, 1998
- -------------------
John F. Barrett,
President, Director and
Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER:
/s/ JAMES J. VANCE February 23, 1998
- ------------------
James J. Vance,
Treasurer
DIRECTORS:
JAMES N. CLARK
LAWRENCE C. HAWKINS
J. HAROLD KOTTE By /s/EDWARD S. HEENAN
CARL A. KROCH ----------------------------------
EUGENE P. RUEHLMANN Edward S. Heenan,
THOMAS L. WILLIAMS as attorney-in fact for each Director
WILLIAM J. WILLIAMS
CHALMERS P. WYLIE February 26, 1998
-13-
<PAGE> 140
SIGNATURES
Select Advisors Portfolios has duly caused Post-Effective Amendment No.
5 to the Registration Statement under the Securities Act of 1933 and Amendment
No. 6 to the Registration Statement under the Investment Company Act of 1940 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 26th day of
February, 1998.
SELECT ADVISORS PORTFOLIOS
By /s/EDWARD G. HARNESS, JR.
--------------------------------
Edward G. Harness, Jr.,
President
This Registration Statement under the Securities Act of 1933 has also
been signed below by the following persons in the capacities indicated and on
the date(s) indicated below.
PRINCIPAL EXECUTIVE OFFICER:
/s/EDWARD G. HARNESS, JR. February 25, 1998
- -------------------------
Edward G. Harness, Jr.
Trustee and President
PRINCIPAL FINANCIAL OFFICER:
/s/ JAMES J. VANCE February 23, 1998
- ------------------
James J. Vance,
Treasurer
TRUSTEES:
DAVID POLLAK By /s/EDWARD S. HEENAN
JOSEPH S. STERN, JR. -----------------------------------
WILLIAM J. WILLIAMS Edward S. Heenan,
as attorney-in fact for each Trustee
February 26, 1998
<PAGE> 141
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
8(a)(i) Administration Agreement between Investors Bank & Trust *
Company and Select Advisors Portfolios
8(b) Investment Advisory Agreement with Touchstone Advisors, *
Inc. including Amendments No. 1, No. 2 and No.3
8(c)(i) Portfolio Advisory Agreement with Scudder Kemper *
Investments, Inc.
8(e)(ii) Amendment No. 1 to Sponsor Agreement between Select *
Advisors Variable Insurance Trust and Touchstone
Advisors, Inc.
8(f)(i) Amendment No. 1 to Fund Participation Agreement *
10 Consent of Coopers & Lybrand L.L.P. *
13 Schedule for Computation of Performance Quotations *
99 Powers of Attorney 141
*To be supplied by amendment
-15-
<PAGE> 1
POWER OF ATTORNEY
WHEREAS, WESTERN-SOUTHERN LIFE ASSURANCE COMPANY, an Ohio corporation
(the "Company"), proposes to file with the Securities and Exchange Commission on
or before May 1, 1998, pursuant to the provisions of the Securities Act of 1933,
as amended, and the rules and regulations thereunder, and the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder,
post-effective amendments to the registration statement of the Company's
Separate Account 1 and post-effective amendments to the registration statement
of the Company's Separate Account 2 (collectively, the "Post-Effective
Amendments") ; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett and Edward S. Heenan, and each of them individually, his attorney in
fact, for him and in his name, place and stead and in his office and capacity
with the Company, to execute and file the Post-Effective Amendments, including
the prospectuses, statements of additional information and exhibits included
therein, and thereafter to execute and file any additional amended
post-effective amendment or amendments, amended prospectus or prospectuses,
amended statement or statements of additional information, amended exhibits or
any supplements to any of the foregoing (collectively, the "Amended Documents"),
hereby giving and granting to said attorneys full power and authority to do and
perform each and every act and thing whatsoever requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he might
or could do if personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do or cause to be done
by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effective only until such Post-Effective Amendments shall
have become effective under the federal securities laws and in any event no
later than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th
day of February, 1998.
/s/ John F. Barrett
-----------------------------
John F. Barrett
<PAGE> 2
POWER OF ATTORNEY
WHEREAS, WESTERN-SOUTHERN LIFE ASSURANCE COMPANY, an Ohio corporation
(the "Company"), proposes to file with the Securities and Exchange Commission on
or before May 1, 1998, pursuant to the provisions of the Securities Act of 1933,
as amended, and the rules and regulations thereunder, and the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder,
post-effective amendments to the registration statement of the Company's
Separate Account 1 and post-effective amendments to the registration statement
of the Company's Separate Account 2 (collectively, the "Post-Effective
Amendments") ; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett and Edward S. Heenan, and each of them individually, his attorney in
fact, for him and in his name, place and stead and in his office and capacity
with the Company, to execute and file the Post-Effective Amendments, including
the prospectuses, statements of additional information and exhibits included
therein, and thereafter to execute and file any additional amended
post-effective amendment or amendments, amended prospectus or prospectuses,
amended statement or statements of additional information, amended exhibits or
any supplements to any of the foregoing (collectively, the "Amended Documents"),
hereby giving and granting to said attorneys full power and authority to do and
perform each and every act and thing whatsoever requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he might
or could do if personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do or cause to be done
by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effective only until such Post-Effective Amendments shall
have become effective under the federal securities laws and in any event no
later than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th
day of February, 1998.
/s/ James N. Clark
------------------------------
James N. Clark
<PAGE> 3
POWER OF ATTORNEY
WHEREAS, WESTERN-SOUTHERN LIFE ASSURANCE COMPANY, an Ohio corporation
(the "Company"), proposes to file with the Securities and Exchange Commission on
or before May 1, 1998, pursuant to the provisions of the Securities Act of 1933,
as amended, and the rules and regulations thereunder, and the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder,
post-effective amendments to the registration statement of the Company's
Separate Account 1 and post-effective amendments to the registration statement
of the Company's Separate Account 2 (collectively, the "Post-Effective
Amendments") ; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett and Edward S. Heenan, and each of them individually, his attorney in
fact, for him and in his name, place and stead and in his office and capacity
with the Company, to execute and file the Post-Effective Amendments, including
the prospectuses, statements of additional information and exhibits included
therein, and thereafter to execute and file any additional amended
post-effective amendment or amendments, amended prospectus or prospectuses,
amended statement or statements of additional information, amended exhibits or
any supplements to any of the foregoing (collectively, the "Amended Documents"),
hereby giving and granting to said attorneys full power and authority to do and
perform each and every act and thing whatsoever requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he might
or could do if personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do or cause to be done
by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effective only until such Post-Effective Amendments shall
have become effective under the federal securities laws and in any event no
later than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th
day of February, 1998.
/s/ Dr. Lawrence C. Hawkins
---------------------------
Dr. Lawrence C. Hawkins
<PAGE> 4
POWER OF ATTORNEY
WHEREAS, WESTERN-SOUTHERN LIFE ASSURANCE COMPANY, an Ohio corporation
(the "Company"), proposes to file with the Securities and Exchange Commission on
or before May 1, 1998, pursuant to the provisions of the Securities Act of 1933,
as amended, and the rules and regulations thereunder, and the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder,
post-effective amendments to the registration statement of the Company's
Separate Account 1 and post-effective amendments to the registration statement
of the Company's Separate Account 2 (collectively, the "Post-Effective
Amendments") ; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett and Edward S. Heenan, and each of them individually, his attorney in
fact, for him and in his name, place and stead and in his office and capacity
with the Company, to execute and file the Post-Effective Amendments, including
the prospectuses, statements of additional information and exhibits included
therein, and thereafter to execute and file any additional amended
post-effective amendment or amendments, amended prospectus or prospectuses,
amended statement or statements of additional information, amended exhibits or
any supplements to any of the foregoing (collectively, the "Amended Documents"),
hereby giving and granting to said attorneys full power and authority to do and
perform each and every act and thing whatsoever requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he might
or could do if personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do or cause to be done
by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effective only until such Post-Effective Amendments shall
have become effective under the federal securities laws and in any event no
later than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 20th
day of February, 1998.
/s/ Dr. J. Harold Kotte
------------------------------
Dr. J. Harold Kotte
<PAGE> 5
POWER OF ATTORNEY
WHEREAS, WESTERN-SOUTHERN LIFE ASSURANCE COMPANY, an Ohio corporation
(the "Company"), proposes to file with the Securities and Exchange Commission on
or before May 1, 1998, pursuant to the provisions of the Securities Act of 1933,
as amended, and the rules and regulations thereunder, and the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder,
post-effective amendments to the registration statement of the Company's
Separate Account 1 and post-effective amendments to the registration statement
of the Company's Separate Account 2 (collectively, the "Post-Effective
Amendments") ; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett and Edward S. Heenan, and each of them individually, his attorney in
fact, for him and in his name, place and stead and in his office and capacity
with the Company, to execute and file the Post-Effective Amendments, including
the prospectuses, statements of additional information and exhibits included
therein, and thereafter to execute and file any additional amended
post-effective amendment or amendments, amended prospectus or prospectuses,
amended statement or statements of additional information, amended exhibits or
any supplements to any of the foregoing (collectively, the "Amended Documents"),
hereby giving and granting to said attorneys full power and authority to do and
perform each and every act and thing whatsoever requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he might
or could do if personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do or cause to be done
by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effective only until such Post-Effective Amendments shall
have become effective under the federal securities laws and in any event no
later than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 23rd
day of February, 1998.
/s/ Carl A. Kroch
----------------------------
Carl A. Kroch
<PAGE> 6
POWER OF ATTORNEY
WHEREAS, WESTERN-SOUTHERN LIFE ASSURANCE COMPANY, an Ohio corporation
(the "Company"), proposes to file with the Securities and Exchange Commission on
or before May 1, 1998, pursuant to the provisions of the Securities Act of 1933,
as amended, and the rules and regulations thereunder, and the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder,
post-effective amendments to the registration statement of the Company's
Separate Account 1 and post-effective amendments to the registration statement
of the Company's Separate Account 2 (collectively, the "Post-Effective
Amendments") ; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett and Edward S. Heenan, and each of them individually, his attorney in
fact, for him and in his name, place and stead and in his office and capacity
with the Company, to execute and file the Post-Effective Amendments, including
the prospectuses, statements of additional information and exhibits included
therein, and thereafter to execute and file any additional amended
post-effective amendment or amendments, amended prospectus or prospectuses,
amended statement or statements of additional information, amended exhibits or
any supplements to any of the foregoing (collectively, the "Amended Documents"),
hereby giving and granting to said attorneys full power and authority to do and
perform each and every act and thing whatsoever requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he might
or could do if personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do or cause to be done
by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effective only until such Post-Effective Amendments shall
have become effective under the federal securities laws and in any event no
later than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 20th
day of February, 1998.
/s/ Eugene P. Ruehlmann
------------------------------
Eugene P. Ruehlmann
<PAGE> 7
POWER OF ATTORNEY
WHEREAS, WESTERN-SOUTHERN LIFE ASSURANCE COMPANY, an Ohio corporation
(the "Company"), proposes to file with the Securities and Exchange Commission on
or before May 1, 1998, pursuant to the provisions of the Securities Act of 1933,
as amended, and the rules and regulations thereunder, and the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder,
post-effective amendments to the registration statement of the Company's
Separate Account 1 and post-effective amendments to the registration statement
of the Company's Separate Account 2 (collectively, the "Post-Effective
Amendments") ; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett and Edward S. Heenan, and each of them individually, his attorney in
fact, for him and in his name, place and stead and in his office and capacity
with the Company, to execute and file the Post-Effective Amendments, including
the prospectuses, statements of additional information and exhibits included
therein, and thereafter to execute and file any additional amended
post-effective amendment or amendments, amended prospectus or prospectuses,
amended statement or statements of additional information, amended exhibits or
any supplements to any of the foregoing (collectively, the "Amended Documents"),
hereby giving and granting to said attorneys full power and authority to do and
perform each and every act and thing whatsoever requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he might
or could do if personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do or cause to be done
by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effective only until such Post-Effective Amendments shall
have become effective under the federal securities laws and in any event no
later than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 23rd
day of February, 1998.
/s/ Thomas L. Williams
----------------------------
Thomas L. Williams
<PAGE> 8
POWER OF ATTORNEY
WHEREAS, WESTERN-SOUTHERN LIFE ASSURANCE COMPANY, an Ohio corporation
(the "Company"), proposes to file with the Securities and Exchange Commission on
or before May 1, 1998, pursuant to the provisions of the Securities Act of 1933,
as amended, and the rules and regulations thereunder, and the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder,
post-effective amendments to the registration statement of the Company's
Separate Account 1 and post-effective amendments to the registration statement
of the Company's Separate Account 2 (collectively, the "Post-Effective
Amendments") ; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett and Edward S. Heenan, and each of them individually, his attorney in
fact, for him and in his name, place and stead and in his office and capacity
with the Company, to execute and file the Post-Effective Amendments, including
the prospectuses, statements of additional information and exhibits included
therein, and thereafter to execute and file any additional amended
post-effective amendment or amendments, amended prospectus or prospectuses,
amended statement or statements of additional information, amended exhibits or
any supplements to any of the foregoing (collectively, the "Amended Documents"),
hereby giving and granting to said attorneys full power and authority to do and
perform each and every act and thing whatsoever requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he might
or could do if personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do or cause to be done
by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effective only until such Post-Effective Amendments shall
have become effective under the federal securities laws and in any event no
later than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th
day of February, 1998.
/s/ William J. Williams
-----------------------------
William J. Williams
<PAGE> 9
POWER OF ATTORNEY
WHEREAS, WESTERN-SOUTHERN LIFE ASSURANCE COMPANY, an Ohio corporation
(the "Company"), proposes to file with the Securities and Exchange Commission on
or before May 1, 1998, pursuant to the provisions of the Securities Act of 1933,
as amended, and the rules and regulations thereunder, and the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder,
post-effective amendments to the registration statement of the Company's
Separate Account 1 and post-effective amendments to the registration statement
of the Company's Separate Account 2 (collectively, the "Post-Effective
Amendments") ; and
WHEREAS, the undersigned is a Director of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett and Edward S. Heenan, and each of them individually, his attorney in
fact, for him and in his name, place and stead and in his office and capacity
with the Company, to execute and file the Post-Effective Amendments, including
the prospectuses, statements of additional information and exhibits included
therein, and thereafter to execute and file any additional amended
post-effective amendment or amendments, amended prospectus or prospectuses,
amended statement or statements of additional information, amended exhibits or
any supplements to any of the foregoing (collectively, the "Amended Documents"),
hereby giving and granting to said attorneys full power and authority to do and
perform each and every act and thing whatsoever requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he might
or could do if personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do or cause to be done
by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effective only until such Post-Effective Amendments shall
have become effective under the federal securities laws and in any event no
later than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 23rd
day of February, 1998.
/s/ Chalmers P. Wylie
-----------------------------
Chalmers P. Wylie
<PAGE> 10
POWER OF ATTORNEY
WHEREAS, SELECT ADVISORS PORTFOLIOS, a New York trust (the "Trust"), is
required, under rules, regulations and interpretations of the Securities and
Exchange Commission to sign the registration statements of investment companies
who invest primarily in the portfolios of the Trust, and
WHEREAS, Western-Southern Life Assurance Separate Account 1 ("SA1") and
Separate Account 2 ("SA2") each invests, through one or more of its respective
Sub-Accounts, solely in one or more portfolios of the Trust, thus requiring that
the officers and trustees of the Trust sign the post-effective amendments to the
registration statement of the SA1 and the post-effective amendments to the
registration statement of SA2 (collectively, the "Post-Effective Amendments") to
be filed on or before May 1, 1998, and
WHEREAS, the undersigned is a Trustee of the Trust;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett, Edward S. Heenan and Edward G. Harness, Jr., and each of them
individually, his attorney in fact, for him and in his name, place and stead and
in his office and capacity with the Trust, to sign and participate in the filing
of the Post-Effective Amendments, including the prospectuses, statements of
additional information and exhibits included therein, and thereafter to execute
and file any additional amended post-effective amendment or amendments, amended
prospectus or prospectuses, amended statement or statements of additional
information, amended exhibits or any supplements to any of the foregoing
(collectively, the "Amended Documents"), hereby giving and granting to said
attorneys full power and authority to do and perform each and every act and
thing whatsoever requisite and necessary to be done in and about the premises as
fully to all intents and purposes as he might or could do if personally present
at the doing thereof, hereby ratifying and confirming all that said attorneys
may or shall lawfully do or cause to be done by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effect only until such Post-Effective Amendments shall have
become effective under the federal securities laws and in any event no later
than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th
of February, 1998.
/s/ Joseph S. Stern, Jr.
-------------------------------
Joseph S. Stern, Jr.
<PAGE> 11
POWER OF ATTORNEY
WHEREAS, SELECT ADVISORS PORTFOLIOS, a New York trust (the "Trust"), is
required, under rules, regulations and interpretations of the Securities and
Exchange Commission to sign the registration statements of investment companies
who invest primarily in the portfolios of the Trust, and
WHEREAS, Western-Southern Life Assurance Separate Account 1 ("SA1") and
Separate Account 2 ("SA2") each invests, through one or more of its respective
Sub-Accounts, solely in one or more portfolios of the Trust, thus requiring that
the officers and trustees of the Trust sign the post-effective amendments to the
registration statement of the SA1 and the post-effective amendments to the
registration statement of SA2 (collectively, the "Post-Effective Amendments") to
be filed on or before May 1, 1998, and
WHEREAS, the undersigned is a Trustee of the Trust;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett, Edward S. Heenan and Edward G. Harness, Jr., and each of them
individually, his attorney in fact, for him and in his name, place and stead and
in his office and capacity with the Trust, to sign and participate in the filing
of the Post-Effective Amendments, including the prospectuses, statements of
additional information and exhibits included therein, and thereafter to execute
and file any additional amended post-effective amendment or amendments, amended
prospectus or prospectuses, amended statement or statements of additional
information, amended exhibits or any supplements to any of the foregoing
(collectively, the "Amended Documents"), hereby giving and granting to said
attorneys full power and authority to do and perform each and every act and
thing whatsoever requisite and necessary to be done in and about the premises as
fully to all intents and purposes as he might or could do if personally present
at the doing thereof, hereby ratifying and confirming all that said attorneys
may or shall lawfully do or cause to be done by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effect only until such Post-Effective Amendments shall have
become effective under the federal securities laws and in any event no later
than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th
of February, 1998.
/s/ David Pollak
-------------------------
David Pollak
<PAGE> 12
POWER OF ATTORNEY
WHEREAS, SELECT ADVISORS PORTFOLIOS, a New York trust (the "Trust"), is
required, under rules, regulations and interpretations of the Securities and
Exchange Commission to sign the registration statements of investment companies
who invest primarily in the portfolios of the Trust, and
WHEREAS, Western-Southern Life Assurance Separate Account 1 ("SA1") and
Separate Account 2 ("SA2") each invests, through one or more of its respective
Sub-Accounts, solely in one or more portfolios of the Trust, thus requiring that
the officers and trustees of the Trust sign the post-effective amendments to the
registration statement of the SA1 and the post-effective amendments to the
registration statement of SA2 (collectively, the "Post-Effective Amendments") to
be filed on or before May 1, 1998, and
WHEREAS, the undersigned is a Trustee of the Trust;
NOW, THEREFORE, the undersigned hereby constitutes and appoints John F.
Barrett, Edward S. Heenan and Edward G. Harness, Jr., and each of them
individually, his attorney in fact, for him and in his name, place and stead and
in his office and capacity with the Trust, to sign and participate in the filing
of the Post-Effective Amendments, including the prospectuses, statements of
additional information and exhibits included therein, and thereafter to execute
and file any additional amended post-effective amendment or amendments, amended
prospectus or prospectuses, amended statement or statements of additional
information, amended exhibits or any supplements to any of the foregoing
(collectively, the "Amended Documents"), hereby giving and granting to said
attorneys full power and authority to do and perform each and every act and
thing whatsoever requisite and necessary to be done in and about the premises as
fully to all intents and purposes as he might or could do if personally present
at the doing thereof, hereby ratifying and confirming all that said attorneys
may or shall lawfully do or cause to be done by virtue hereof.
This authority hereby granted is limited to the execution and delivery
of the Post-Effective Amendments and Amended Documents and included documents
and, unless earlier revoked by me or expressly extended by me in writing, shall
remain in force and effect only until such Post-Effective Amendments shall have
become effective under the federal securities laws and in any event no later
than June 1, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th
of February, 1998.
/s/ William J. Williams
----------------------------
William J. Williams
