<PAGE> 1
As filed pursuant to Rule 424(b)(3)
under the Securities Act of 1933
Registration No. 33-81476
- --------------------------------------------------------------------------------
VISTA CAPITAL ADVANTAGE
FLEXIBLE PAYMENT GROUP DEFERRED
ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
ANCHOR NATIONAL LIFE INSURANCE COMPANY
IN CONNECTION WITH
VARIABLE ANNUITY ACCOUNT TWO
<TABLE>
<S> <C>
CORRESPONDENCE ACCOMPANIED ALL OTHER CORRESPONDENCE,
BY PAYMENTS: ANNUITY SERVICE CENTER:
P.O. BOX 100330 P.O. BOX 54299
PASADENA, CALIFORNIA 91189-0001 LOS ANGELES, CALIFORNIA 90054-0299
TELEPHONE NUMBER: (800) 90-VISTA
</TABLE>
The Contracts offered by this prospectus provide for accumulation of
Contract Values and payment of annuity benefits on a fixed and/or variable
basis. The Contracts are available for both Qualified and Nonqualified Plans
(See "Taxes").
Purchase Payments under the Contracts may be allocated among the Portfolios
of the Separate Account, and/or to one or more of the Fixed Account options
funded through the Company's General Account. Each of the six Portfolios of the
Separate Account described in this prospectus is invested solely in the shares
of one of the following currently available Underlying Funds of Mutual Fund
Variable Annuity Trust:
<TABLE>
<S> <C>
- International Equity - Asset Allocation
- Capital Growth - U.S. Government Income
- Growth and Income - Money Market
</TABLE>
Additional Underlying Funds may be made available in the future.
The Fixed Account options pay fixed rates of interest declared by the
Company for specified Guarantee Periods from the dates amounts are allocated to
the Fixed Account. As of the date of this prospectus, one, three, five, seven
and ten year options were available in most states. Please contact the Company
or the financial representative from whom this prospectus was obtained for
information as to currently available guarantee options. Declared rates will
vary from time to time but will not be less than 3% per annum, and, once
established for a particular allocation, will not change during the course of
the Guarantee Period. However, withdrawals, transfers or annuitizations from the
one, three, five, seven and ten year Fixed Account options prior to the end of
the applicable Guarantee Period(s), will generally result in the imposition of a
Market Value Adjustment (See "Fixed Account Options -- Market Value
Adjustment").
This prospectus concisely sets forth the information a prospective investor
ought to know before investing. PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN
IT FOR YOUR FUTURE REFERENCE. Participants bear the complete investment risk for
all Purchase Payments allocated to the Separate Account. With respect to
allocations to the Fixed Account, Participants also bear the risk that amounts
prematurely withdrawn, transferred or annuitized from the General Account prior
to the end of their respective Guarantee Periods could result in the Participant
receiving less than Purchase Payments so allocated.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE CONTRACTS OFFERED BY THIS PROSPECTUS INVOLVE RISK, INCLUDING LOSS OF
PRINCIPAL, AND ARE NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE CONTRACTS OFFERED BY THIS PROSPECTUS ARE NOT AVAILABLE IN ALL STATES.
This Prospectus is dated December 29, 1997.
<PAGE> 2
ADDITIONAL INFORMATION:
The Company has filed registration statements (the "Registration
Statements") with the Securities and Exchange Commission ("Commission") under
the Securities Act of 1933, as amended, relating to the Contracts offered by
this prospectus. This prospectus has been filed as a part of the Registration
Statements and does not contain all of the information set forth in the
Registration Statements and exhibits thereto, and reference is hereby made to
the Registration Statements and exhibits for further information relating to the
Company, the Separate Account, and the Contracts. The Company is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith files reports and other information with the
Commission. Such reports and other information filed by the Company can be
inspected and copied, and copies can be obtained at the public reference
facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the regional offices in Chicago and New York. The addresses of
these regional offices are as follows: 500 West Madison Street, Chicago,
Illinois 60661, and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material also can be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of the fees prescribed by the rules and regulations of the
Commission at prescribed rates.
A Statement of Additional Information about the variable portion of the
Contracts has been filed with the Commission, as part of the Registration
Statements, and is incorporated herein by reference. The Statement of Additional
Information is available without charge upon written or oral request to the
Company at its Annuity Service Center at the address and telephone number given
on the prior page. The Table of Contents of the Statement of Additional
Information dated December 29, 1997, appears on page 50 of this prospectus.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
DEFINITIONS.......................................................................... 4
SUMMARY.............................................................................. 7
FEE TABLES........................................................................... 10
EXAMPLES............................................................................. 11
CONDENSED FINANCIAL INFORMATION -- ACCUMULATION UNIT VALUES.......................... 12
PERFORMANCE DATA..................................................................... 12
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT AND THE GENERAL ACCOUNT............. 13
Company......................................................................... 13
Separate Account................................................................ 14
General Account................................................................. 14
SEPARATE ACCOUNT INVESTMENTS......................................................... 15
Underlying Funds................................................................ 15
Voting Rights................................................................... 16
Substitution of Securities...................................................... 16
FIXED ACCOUNT OPTIONS................................................................ 17
Allocations..................................................................... 17
Renewals........................................................................ 17
Market Value Adjustment......................................................... 18
CONTRACT CHARGES..................................................................... 18
Mortality and Expense Risk Charge............................................... 19
Administrative Charges.......................................................... 19
Contract Administration Charge................................................ 19
Transfer Fee.................................................................. 19
Sales Charges................................................................... 19
Withdrawal Charge............................................................. 19
Free Withdrawals........................................................... 20
Nursing Home Waiver........................................................ 21
Distribution Expense Charge................................................... 21
Premium Taxes................................................................... 21
Deduction for Separate Account Income Taxes..................................... 21
Other Expenses.................................................................. 21
Reduction of Charges for Sales to Certain Groups................................ 22
DESCRIPTION OF THE CONTRACTS......................................................... 22
Summary......................................................................... 22
Participant..................................................................... 22
Annuitant....................................................................... 22
Modification of the Contract.................................................... 22
Assignment...................................................................... 22
Death Benefit................................................................... 23
Beneficiary..................................................................... 23
PURCHASES, WITHDRAWALS AND CONTRACT VALUE............................................ 24
Minimum Purchase Payment........................................................ 24
Automatic Payment Plan........................................................ 24
Automatic Dollar Cost Averaging Program....................................... 24
Asset Allocation Rebalancing Program.......................................... 24
Principal Advantage Program................................................... 25
Allocation of Purchase Payments................................................. 25
Transfer During Accumulation Period............................................. 26
Separate Account Accumulation Unit Value........................................ 26
Fixed Account Accumulation Value................................................ 26
Distribution of Contracts....................................................... 27
Withdrawals (Redemptions)....................................................... 27
Systematic Withdrawal Program................................................. 28
ERISA Plans................................................................... 28
Deferment of Fixed Account Withdrawal Payments................................ 28
Minimum Contract Value.......................................................... 29
ANNUITY PERIOD....................................................................... 29
Annuity Date.................................................................... 29
Deferment of Payments......................................................... 29
Payments to Participant....................................................... 29
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
Allocation of Annuity Payments.................................................. 29
Annuity Options................................................................. 29
Other Options................................................................... 31
Transfer During Annuity Period.................................................. 31
Death Benefit During Annuity Period............................................. 31
Annuity Payments................................................................ 31
Initial Monthly Annuity Payment............................................... 31
Subsequent Monthly Payments................................................... 31
ADMINISTRATION....................................................................... 32
TAXES................................................................................ 32
General......................................................................... 32
Withholding Tax on Distributions................................................ 33
Diversification -- Separate Account Investments................................. 33
Multiple Contracts.............................................................. 33
Tax Treatment of Assignments.................................................... 34
Qualified Plans................................................................. 34
Tax Treatment of Withdrawals.................................................... 34
Qualified Plans............................................................... 34
Nonqualified Plans............................................................ 35
ADDITIONAL INFORMATION ABOUT THE COMPANY............................................. 36
Selected Consolidated Financial Data............................................ 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS......................................................................... 37
PROPERTIES........................................................................... 46
DIRECTORS AND EXECUTIVE OFFICERS..................................................... 46
EXECUTIVE COMPENSATION............................................................... 48
Security Ownership of Certain Beneficial Owners and Management.................. 48
STATE REGULATION..................................................................... 49
CUSTODIAN............................................................................ 49
LEGAL PROCEEDINGS.................................................................... 50
REGISTRATION STATEMENTS.............................................................. 50
INDEPENDENT ACCOUNTANTS.............................................................. 50
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT.................................... 50
FINANCIAL STATEMENTS................................................................. 51
APPENDIX A -- WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT........ A-1
</TABLE>
- --------------------------------------------------------------------------------
DEFINITIONS
- --------------------------------------------------------------------------------
The following terms, as used in this prospectus, have the indicated
meanings:
ACCUMULATION PERIOD -- The period between the Certificate Date and the Annuity
Date; the build-up phase under the Contract.
ACCUMULATION UNIT -- A unit of measurement which the Company uses to calculate
Contract Value under the variable portion of the Contracts during the
Accumulation Period.
ANNUITANT -- The natural person on whose life the annuity benefits under a
Certificate are based.
ANNUITIZATION -- The process by which a Participant converts from the
Accumulation Period to the Annuity Period. Upon Annuitization, the Certificate
is converted from the build-up phase to the phase during which the Participant
or other payee(s) receive periodic annuity payments.
ANNUITY DATE -- The date on which annuity payments are to begin.
ANNUITY PERIOD -- The period starting on the Annuity Date.
4
<PAGE> 5
ANNUITY UNIT -- A unit of measurement which the Company uses to calculate the
amount of Variable Annuity payments during the Annuity Period.
BENEFICIARY(IES) -- The person(s) designated to receive any benefits under a
Certificate upon the death of the Annuitant or the Participant.
CERTIFICATE -- A document that describes and evidences a Participant's rights
under a group Contract.
CERTIFICATE DATE -- The date a Certificate is issued.
CODE -- The Internal Revenue Code of 1986, as amended.
COMPANY -- Anchor National Life Insurance Company, an Arizona corporation.
CONTRACT(S) -- The Flexible Payment Group Deferred Annuity Contracts offered by
this prospectus.
CONTRACT VALUE -- The value under a Contract of a Participant's account, equal
to the sum of the values of the Participant's interest in the Fixed Account and
the Separate Account.
CONTRACT YEAR -- A year starting from the Certificate Date in one calendar year
and ending on the Certificate Date in the succeeding calendar year.
CONTRIBUTION YEAR -- With respect to a given Purchase Payment, a year starting
from the date of the Purchase Payment in one calendar year and ending on the day
before the anniversary of such date in the succeeding calendar years. The
Contribution Year in which a Purchase Payment is made is "Contribution Year 1".
CURRENT INTEREST RATE -- The interest rate as declared from time to time by the
Company to be in effect for allocations to the Fixed Account for a specified
Guarantee Period. It is equal to the sum of the subsequent Guarantee Rate and
the excess interest rate, if any, declared by the Company for such allocation.
The subsequent Guarantee Rate will not be less than 3% per annum.
DUE PROOF OF DEATH -- (1) A certified copy of a death certificate; or (2) a
certified copy of a decree of a court of competent jurisdiction as to the
finding of death; or (3) a written statement by a medical doctor who attended
the deceased at the time of death; or (4) any other proof satisfactory to the
Company.
FIXED ACCOUNT -- Contract Values allocated to the Company's General Account
under one or more of the Fixed Account options under the Contract.
FIXED ANNUITY -- A series of payments that are fixed in amount and made during
the Annuity Period to a payee under a Certificate.
GENERAL ACCOUNT -- The Company's general investment account which contains all
the assets of the Company, with the exception of the Separate Account and other
segregated asset accounts.
GUARANTEE PERIOD -- A period during which an allocation to the Fixed Account
will earn interest at the Current Interest Rate that was in effect for that
period when the allocation was made.
GUARANTEE RATE -- The interest rate in effect for a particular allocation to the
Fixed Account for a specified Guarantee Period.
LATEST ANNUITY DATE -- The later of the first day of the month following the
90th birthday of the Owner or ten years after the Certificate Date. In the case
of Contracts issued in connection with Qualified Plans, the Code generally
requires that a minimum distribution be taken by April 1 of the calendar year
following the calendar year in which the Participant attains age 70 1/2.
Accordingly, the Company may require a Participant in a Qualified Plan to
annuitize prior to such date unless the Participant demonstrates that the
minimum distribution is otherwise being made.
5
<PAGE> 6
MARKET VALUE ADJUSTMENT -- An adjustment applied to amounts withdrawn,
transferred or annuitized from the one, three, five, seven and ten year Fixed
Account options prior to the end of the applicable Guarantee Period(s).
NONQUALIFIED PLAN -- A retirement plan which does not receive favorable tax
treatment under Sections 401, 403(b), 408 or 457 of the Internal Revenue Code.
OWNER -- The person(s) having the privileges of ownership defined in the
Contracts. Except to the extent restricted by the retirement plan pursuant to
which the Contract is issued, the Participant will be the Owner of the
Certificate.
PARTICIPANT -- The person entitled to benefits under a Contract as evidenced by
a Certificate issued to the Participant.
PORTFOLIO -- A subdivision of the Separate Account invested wholly in shares of
one of the investment series of the Trust.
PURCHASE PAYMENTS -- Amounts paid to the Company for the Contract by or on
behalf of a Participant.
QUALIFIED PLAN -- A retirement plan which receives favorable tax treatment under
Sections 401, 403(b), 408 or 457 of the Internal Revenue Code.
SEPARATE ACCOUNT -- A segregated investment account of the Company entitled
"Variable Annuity Account Two."
TRUST -- Mutual Fund Variable Annuity Trust, an open-end management investment
company.
UNDERLYING FUND(S) -- The underlying series of the Trust in which the Portfolios
invest.
VALUATION DATE -- Each day the New York Stock Exchange is open for business.
VALUATION PERIOD -- The period commencing at the close of normal trading on the
New York Stock Exchange ("NYSE") (currently 4:00 p.m. Eastern time) on each
Valuation Date and ending at the close of normal trading on the NYSE on the next
succeeding Valuation Date.
VARIABLE ANNUITY -- A series of payments made during the Annuity Period to a
payee under a Certificate which vary in amount in accordance with the investment
experience of the Portfolios to which Contract Values have been allocated.
WITHDRAWAL CHARGE -- The contingent deferred sales charge assessed against
certain withdrawals.
6
<PAGE> 7
- --------------------------------------------------------------------------------
SUMMARY
- --------------------------------------------------------------------------------
This prospectus describes the uses and objectives of the Contracts, their
costs, and the rights and privileges of the Participant and Contractholder, as
applicable. It also contains information about the Company, the Fixed Account,
the Separate Account and its Portfolios, and the Underlying Funds in which the
Portfolios invest. We urge you to read it carefully and retain it and the
prospectus for the Trust for future reference. (The prospectus for the Trust is
attached to and follows this prospectus).
WHAT IS THE CONTRACT?
The Contract offered is a tax deferred annuity which provides fixed
benefits, variable benefits or a combination of both. A group Contract is issued
to the Contractholder covering all Participants in the group. Each Participant
receives a Certificate which evidences his or her participation under the
Contract. For the purpose of determining benefits under the Contract, a
Participant's account is established for each Participant. The Owner is the
person entitled to the rights and privileges of ownership under a Certificate.
Except to the extent limited by the retirement plan pursuant to which the
Contract was issued, the Participant is the Owner. The Contract described in
this prospectus is not available in certain states and a Flexible Payment
Individual Fixed and Variable Deferred Annuity Contract ("Individual Contract")
may be available instead. The Individual Contract is substantially similar to
the group Contract except that the Individual Contract is issued directly to the
Owner, rather than to a Contractholder for the benefit of a Participant. Subject
to this difference, the information contained in this prospectus is applicable
to the Individual Contract.
Individuals wishing to purchase a Certificate must complete an application
and provide an initial Purchase Payment which will be sent to the Company at the
address for correspondence accompanied by payments indicated on the cover page
of this prospectus or in such other manner as deemed acceptable to the Company.
The minimum and maximum of Purchase Payments vary depending upon the type of
Contract purchased. (See "Minimum Purchase Payment").
WHAT IS THE DIFFERENCE BETWEEN A VARIABLE ANNUITY AND A FIXED ANNUITY?
The Contract has appropriate provisions relating to variable and fixed
accumulation values and variable and fixed annuity payments. A Variable Annuity
and a Fixed Annuity have certain similarities. Both provide that Purchase
Payments, less certain deductions, will be accumulated prior to the Annuity
Date. After the Annuity Date, annuity payments will be made to a designated
payee (normally, the Participant), for the life of the Annuitant or a period
certain or a combination thereof. The Company assumes mortality and expense
risks under the Contracts, for which it receives certain compensation.
The most significant difference between a Variable Annuity and a Fixed
Annuity is that under a Variable Annuity, all investment risk before and after
the Annuity Date is assumed by the Participant or other payee; the amounts of
the annuity payments vary with the investment performance of the Portfolios of
the Separate Account selected by the Participant. Under a Fixed Annuity, in
contrast, the investment risk after the Annuity Date is assumed by the Company
and the amounts of the annuity payments do not vary. In the case of amounts
allocated to the Fixed Account prior to the Annuity Date, the Participant bears
the risks (1) that the Guarantee Rate to be credited on amounts allocated to the
Fixed Account may not exceed the minimum guaranteed rate of 3% for any Guarantee
Period, and (2) that amounts withdrawn, transferred or annuitized from the
three, five, seven and ten year Fixed Account options prior to the end of their
respective Guarantee Periods could result in the Participant's receiving less
than the Purchase Payments so allocated (See "Fixed Account Options -- Market
Value Adjustment").
7
<PAGE> 8
HOW MAY PURCHASE PAYMENTS BE ALLOCATED?
Purchase Payments for the Contracts may be allocated pursuant to
instructions in the application to one or more Portfolios of the Separate
Account, and/or to the Company's General Account under one or more of the Fixed
Account options under the Contracts. The Separate Account invests in shares of
the following Underlying Funds (see "Separate Account Investments"):
<TABLE>
<S> <C>
- INTERNATIONAL EQUITY - ASSET ALLOCATION
- CAPITAL GROWTH - U.S. GOVERNMENT INCOME
- GROWTH AND INCOME - MONEY MARKET
</TABLE>
Purchase Payments allocated to Fixed Account option(s) will earn interest
at the then Current Interest Rate(s) for the selected Guarantee Period(s). (See
"Fixed Account Options").
Prior to the Annuity Date, transfers may be made among the Portfolios
and/or the Fixed Account options. Fifteen transfers per Contract Year are
permitted before a transfer fee will be assessed. A Market Value Adjustment may
also apply, in the case of a transfer from a Fixed Account option. (See
"Purchases, Withdrawals and Contract Value -- Transfer During Accumulation
Period").
MAY WITHDRAWALS BE MADE BEFORE ANNUITIZATION?
Except as explained below, Contract Value may be withdrawn at any time
during the Accumulation Period. In addition to potential losses due to
investment risks, withdrawals may be reduced by a Withdrawal Charge, and a
penalty tax and income tax may apply. Contracts in connection with Qualified
Plans may be subject to additional withdrawal restrictions imposed by the plan.
Earnings under a Certificate may be withdrawn at any time during such period
free of Withdrawal Charge (although withdrawals from the Fixed Account other
than at the end of the applicable Guarantee Periods are generally subject to a
Market Value Adjustment). Alternatively, there is a free withdrawal amount which
applies to the first withdrawal during a Contract Year after the first Contract
Year. (See "Contract Charges -- Sales Charges -- Withdrawal Charge"). Certain
Owners of Nonqualified Plan Contracts and Contracts issued in connection with
Individual Retirement Annuities ("IRAs") may choose to withdraw amounts which in
the aggregate add up to 10% of their Purchase Payments annually pursuant to a
systematic withdrawal program without charge. (See "Purchases, Withdrawals and
Contract Value -- Withdrawals (Redemptions) -- Systematic Withdrawal Program").
Withdrawals are taxable and a 10% federal tax penalty may apply to withdrawals
before age 59 1/2.
Participants should consult their own tax counsel or other tax adviser
regarding any withdrawals or distributions.
CAN I EXAMINE THE CONTRACT?
The Contractholder (or Participant) may return the Contract (or
Certificate, respectively) to the Company within 10 days (or longer period if
required by state law) after it is received by delivering or mailing it to the
Company's Annuity Service Center. If the Contract or Certificate is returned to
the Company, it will be terminated and, unless otherwise required by state law,
the Company will pay the Contractholder or Participant an amount equal to the
Contract Value represented by the Contract (or Certificate, respectively) on the
date it is received by the Company. The Contract Value may be more or less than
the Purchase Payments made, thus, the investment risk is borne by the
Participant. Since state laws differ as to the consequences of returning a
Contract or Certificate, purchasers should refer to the Contracts or
Certificates which they receive for information about their circumstances.
WHAT ARE THE CHARGES AND DEDUCTIONS UNDER A CONTRACT?
A mortality and expense risk charge is assessed daily against the assets of
each Portfolio at an annual rate of 1.25%. A distribution expense charge is
assessed daily against the assets of each Portfolio at an annual rate of 0.15%.
The Contracts also provide for certain deductions and charges, including a
contract administration charge of $30 annually. The Contract permits up to 15
free
8
<PAGE> 9
transfers each Contract Year, after which point a $25 transfer fee ($10 in Texas
and Pennsylvania) is applicable to each subsequent transfer. Additionally, a
Withdrawal Charge may be assessed against the Contract Value during the first
seven Contribution Years (6%-6%-5%-5%-4%-3%-2%-0%) when a withdrawal is made.
(See "Contract Charges").
DOES THE CONTRACT PAY ANY DEATH BENEFITS?
A death benefit is provided in the event of the death of the Participant
during the Accumulation Period. If the Participant was less than age 70 on the
Certificate Date, the death benefit is equal to the greater of:
(1) the total of Purchase Payments made prior to the death of the
Participant, reduced by any partial withdrawals and partial annuitizations;
or
(2) the Contract Value at the end of the Valuation Period during which
Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company; or
(3) where permitted by state law, the Contract Value on that
anniversary of the Certificate Date preceding the date of death, increased
by any Purchase Payments made since that anniversary and reduced by any
partial withdrawals and partial annuitizations since that anniversary,
which results in the greatest value.
If the Participant was age 70 or older on the Certificate Date, the death
benefit will equal the Contract Value at the end of the Valuation Period during
which Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company.
(See "Description of the Contracts -- Death Benefit").
WHAT ARE THE AVAILABLE ANNUITY OPTIONS UNDER THE CONTRACT?
There are five available annuity options under the Contract. They include
an annuity for life, a joint and survivor annuity, a joint and survivor life
annuity with 120 monthly payments guaranteed, a life annuity with 120 or 240
monthly payments guaranteed and monthly payments for a specified number of
years. The Annuity Date may not be deferred beyond an Owner's 90th birthday. If
a Contractholder does not elect otherwise, monthly annuity payments generally
will be made under the fourth option to provide a life annuity with 120 monthly
payments certain. (See "Annuity Period -- Annuity Options").
DOES THE OWNER HAVE ANY VOTING RIGHTS UNDER THE CONTRACT?
Owners will have the right to vote on matters affecting the Underlying
Funds to the extent that proxies are solicited by the Trust. If the Owner does
not vote, the Company will vote such interests in the same proportion as it
votes shares for which it has received instructions. (See "Separate Account
Investments -- Voting Rights").
9
<PAGE> 10
- --------------------------------------------------------------------------------
FEE TABLES
- --------------------------------------------------------------------------------
OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGE (AS A PERCENTAGE OF PURCHASE PAYMENTS):
<TABLE>
<CAPTION>
CONTRIBUTION YEAR
<S> <C>
One............................................................................................... 6%
Two............................................................................................... 6%
Three............................................................................................. 5%
Four.............................................................................................. 5%
Five.............................................................................................. 4%
Six............................................................................................... 3%
Seven............................................................................................. 2%
Eight and later................................................................................... 0%
ANNUAL CONTRACT ADMINISTRATION CHARGE................................................................... $30
TRANSFER FEE............................................................................................ $25*
(applies solely to each transfers in excess of fifteen in a Contract Year)
</TABLE>
- ---------------
* $10 in Texas and Pennsylvania.
The Owner Transaction Expenses apply to the Contract Value allocated to the
Fixed Account, as well as the Separate Account.
- --------------------------------------------------------------------------------
ANNUAL SEPARATE ACCOUNT EXPENSES
(AS A PERCENTAGE OF DAILY NET ASSET VALUE)
<TABLE>
<S> <C>
MORTALITY RISK CHARGE.................................................................................. 0.90%
EXPENSE RISK CHARGE.................................................................................... 0.35%
DISTRIBUTION EXPENSE CHARGE............................................................................ 0.15%
----
TOTAL EXPENSE CHARGE............................................................................. 1.40%
====
</TABLE>
- ---------------
ANNUAL TRUST EXPENSES*
(AS A PERCENTAGE OF AVERAGE NET ASSETS FOR THE TRUST'S
FISCAL YEAR ENDED AUGUST 31, 1997):
<TABLE>
<CAPTION>
ADVISORY FEE ADMINISTRATION FEE TOTAL ANNUAL
(AFTER WAIVER OF FEE) (AFTER WAIVER OF FEE) OTHER EXPENSES EXPENSES
--------------------- --------------------- -------------- ------------
<S> <C> <C> <C> <C>
International Equity....................... 0.00% 0.00% 1.11% 1.11%
Capital Growth............................. 0.00% 0.00% .90% .90%
Growth and Income.......................... 0.00% 0.00% .90% .90%
Asset Allocation........................... 0.00% 0.00% .85% .85%
U.S. Government Income..................... 0.00% 0.00% .80% .80%
Money Market............................... 0.00% 0.00% .55% .55%
</TABLE>
- ---------------
*Reflects current waiver arrangements to maintain Total Annual Expenses at the
levels indicated above. Absent such waivers, the Advisory Fee for the
International Equity, Capital Growth, Growth and Income, Asset Allocation, U.S.
Government Income and Money Market Portfolios would be 0.80%, 0.60%, 0.60%,
0.55%, 0.50% and 0.25%, respectively, and Total Annual Expenses for the
International Equity, Capital Growth, Growth and Income, Asset Allocation, U.S.
Government Income and Money Market Portfolios would be 2.99%, 1.70%, 1.70%,
2.03%, 1.50% and 1.48%, respectively.
THE ABOVE EXPENSES FOR THE UNDERLYING FUNDS WERE PROVIDED BY THE TRUST. NEITHER
THE COMPANY NOR THE SEPARATE ACCOUNT HAVE INDEPENDENTLY VERIFIED THE ACCURACY OF
SUCH INFORMATION.
10
<PAGE> 11
- --------------------------------------------------------------------------------
EXAMPLES
- --------------------------------------------------------------------------------
An Owner would pay the following expenses on a $1,000 investment in each
indicated Portfolio assuming 5% annual return on assets, and:
(a) the Contract was surrendered at the end of the applicable time
period
(b) the Contract was not surrendered at the end of the applicable time
period
<TABLE>
<CAPTION>
TIME PERIODS
-------------------------------------------
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
International Equity......................... (a) $ 86 $ 130 $ 177 $292
(b) $ 26 $ 80 $ 137 $292
Capital Growth............................... (a) $ 84 $ 124 $ 167 $271
(b) $ 24 $ 74 $ 127 $271
Growth and Income............................ (a) $ 84 $ 124 $ 167 $271
(b) $ 24 $ 74 $ 127 $271
Asset Allocation............................. (a) $ 84 $ 123 $ 164 $266
(b) $ 24 $ 73 $ 124 $266
U.S. Government Income....................... (a) $ 83 $ 121 $ 162 $261
(b) $ 23 $ 71 $ 122 $261
Money Market................................. (a) $ 81 $ 114 $ 149 $235
(b) $ 21 $ 64 $ 109 $235
</TABLE>
- ---------------
1. The purpose of the foregoing table and examples is to assist an investor in
understanding the various costs and expenses that he or she will bear
directly or indirectly by investing in the Separate Account. The Owner
Transaction Expenses shown under "Fee Tables" are applicable to Contract
Value allocated to the Fixed Account as well as to the Separate Account.
However, the balance of the Fee Tables, and the Examples, apply only to
investments in the Separate Account. The table reflects expenses of the
Separate Account as well as the Underlying Funds. For additional information
see "Contract Charges"; see also the sections relating to management of the
Underlying Funds in the Trust prospectus. The Examples do not illustrate the
tax consequences of surrendering a Contract.
2. The examples assume that there were no transactions which would result in the
imposition of the transfer fee. The amount of the transfer fee is $25 ($10 in
Pennsylvania and Texas), except that the first 15 transfers per Contract Year
are not subject to a fee. (See "Administrative Charges -- Transfer Fee").
Premium taxes are not reflected. (See "Sales Charges -- Premium Taxes").
Transfers from the Fixed Account may be subject to a Market Value Adjustment
even if they are not subject to a transfer fee.
3. For purposes of the amounts reported in the Examples, the contract
administration charge is reflected by applying a percentage equivalent
charge, obtained by dividing the total amount of such charges anticipated to
be collected during the year by the total estimated average net assets of the
Portfolios and the Fixed Account attributable to the Contracts.
4. NEITHER THE FEE TABLES NOR THE EXAMPLES ARE REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
11
<PAGE> 12
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCEPTION TO FISCAL YEAR FISCAL YEAR
PORTFOLIOS 8/31/95 8/31/96 8/31/97
- ----------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
International Equity*
Beginning AUV...................................... $10.00 $10.81 $10.92
Ending AUV......................................... $10.81 $10.92 $11.67
Ending #AUs........................................ 3,583 87,008 133,652
Capital Growth*
Beginning AUV...................................... $10.00 $11.82 $13.95
Ending AUV......................................... $11.82 $13.95 $17.51
Ending #AUs........................................ 31,966 232,242 289,931
Growth and Income*
Beginning AUV...................................... $10.00 $11.40 $13.07
Ending AUV......................................... $11.40 $13.07 $17.47
Ending #AUs........................................ 44,573 227,688 340,235
Asset Allocation*
Beginning AUV...................................... $10.00 $10.96 $12.00
Ending AUV......................................... $10.96 $12.00 $14.49
Ending #AUs........................................ 2,555 40,986 76,458
U.S. Government Income**
Beginning AUV...................................... $10.00 $10.67 $10.79
Ending AUV......................................... $10.67 $10.79 $11.50
Ending #AUs........................................ 4,042 22,094 37,216
Money Market***
Beginning AUV...................................... $10.00 $10.10 $10.47
Ending AUV......................................... $10.10 $10.47 $10.84
Ending #AUs........................................ 28,015 13,593 163,778
</TABLE>
- ---------------
AUV -- Accumulation Unit Value
AU -- Accumulation Units
* Inception Date is March 13, 1995
** Inception Date is July 13, 1995
*** Inception Date is June 2, 1995
- --------------------------------------------------------------------------------
PERFORMANCE DATA
- --------------------------------------------------------------------------------
From time to time the Separate Account may advertise the Money Market
Portfolio's "yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Money Market Portfolio refers to the net income generated for a
Contract funded by an investment in the Portfolio (which invests in shares of
the Money Market Portfolio of the Trust) over a seven-day period (which period
will be stated in the advertisement). This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Portfolio is assumed to be reinvested
at the end of each seven-day period. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. Neither the yield nor the effective yield takes into consideration
the effect of any capital changes that might have occurred during the seven-day
period, nor do they reflect the impact of premium taxes or any Withdrawal
Charges. The impact of other recurring charges on both
12
<PAGE> 13
yield figures is, however, reflected in them to the same extent it would affect
the yield (or effective yield) for a Contract of average size.
In addition, the Separate Account may advertise "total return" data for its
other Portfolios. Like the yield figures described above, total return figures
are based on historical data and are not intended to indicate future
performance. The "total return" is a computed rate of return that, when
compounded annually over a stated period of time and applied to a hypothetical
initial investment in a Portfolio made at the beginning of the period, will
produce the same Contract Value at the end of the period that the hypothetical
investment would have produced over the same period (assuming a complete
redemption of the Contract at the end of the period). Recurring Contract charges
are reflected in the total return figures in the same manner as they are
reflected in the yield data for Contracts funded through the Money Market
Portfolio. The effect of applicable Withdrawal Charges due to the assumed
redemption will be reflected in the return figures, but may be omitted in
additional return figures given for comparison.
The Separate Account may also advertise an annualized 30-day (or one month)
yield figure for Portfolios other than the Money Market Portfolio. These yield
figures are based upon the actual performance of the Portfolio over a 30-day (or
one month) period ending on a date specified in the advertisement. Like the
total return data described above, the 30-day (or one month) yield data will
reflect the effect of all recurring Contract charges (but will not reflect any
Withdrawal Charges or premium taxes). The yield figure is derived from net
investment gain (or loss) over the period expressed as a fraction of the
investment's value at the end of the period.
More detailed information on the computation of advertised performance data
for the Separate Account is contained in the Statement of Additional
Information.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT
AND THE GENERAL ACCOUNT
- --------------------------------------------------------------------------------
COMPANY
The Company is a stock life insurance company originally organized under
the laws of the state of California in April 1965. On January 1, 1996, the
Company redomesticated under the laws of the state of Arizona. Its legal
domicile is Arizona and its principal business address is 1 SunAmerica Center,
Los Angeles, California 90067-6022. The Company is an indirect wholly-owned
subsidiary of SunAmerica Inc., a Maryland corporation.
The Company and its affiliates, SunAmerica Life Insurance Company, First
SunAmerica Life Insurance Company, CalFarm Life Insurance Company, SunAmerica
Asset Management Corp., Imperial Premium Finance, Inc., Resources Trust Company
and four broker-dealers, offer a full line of financial services, including
fixed and variable annuities, mutual funds, premium finance, broker-dealer and
trust administration services. As of September 30, 1997 the Company owned $12.57
billion in assets while SunAmerica Inc., the Company's ultimate parent, together
with its subsidiaries, held $51.98 billion of assets, consisting of $35.64
billion of assets on its balance sheet, $2.59 billion of assets managed in
mutual funds and private accounts, and $13.75 billion under custody in
retirement trust accounts.
The Company may from time to time publish in advertisements, sales
literature and reports to Owners, the ratings and other information assigned to
it by one or more independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("Standard & Poor's"), and Duff & Phelps. A.M. Best's
and Moody's ratings reflect their current opinion on the relative financial
strength and operating performance of an insurance company in comparison to the
norms of the life/health insurance industry. Standard & Poor's and Duff & Phelps
provide ratings which measure the claims-paying ability of insurance companies.
These ratings are opinions of an operating insurance com-
13
<PAGE> 14
pany's financial capacity to meet the obligations of its insurance policies in
accordance with their terms. Claims-paying ability ratings do not refer to an
insurer's ability to meet non-policy obligations (i.e., debt/commercial paper).
These ratings do not apply to the Separate Account. However, the contractual
obligations under the Contracts are the general corporate obligations of the
Company.
The Company is admitted to conduct life insurance and annuity business in
the District of Columbia and in all states except New York. It intends to market
the Contract in most of the jurisdictions in which it is admitted to conduct
annuity business. The Contracts offered by this prospectus are issued by the
Company and will be funded in the Separate Account as well as the Company's
General Account.
For more detailed information about the Company, see "Additional
Information About the Company".
SEPARATE ACCOUNT
Variable Annuity Account Two was originally established by the Company on
May 24, 1994, pursuant to the provisions of California law, as a segregated
asset account of the Company. In connection with the redomestication of the
Company to Arizona, the separate account was assumed intact by the Company. The
Separate Account meets the definition of a "separate account" under the federal
securities laws and is registered with the Securities and Exchange Commission as
a unit investment trust under the Investment Company Act of 1940. This
registration does not involve supervision of the management of the Separate
Account or the Company by the Commission.
The assets of the Separate Account are the property of the Company.
However, the assets of the Separate Account, equal to its reserves and other
contract liabilities, are not chargeable with liabilities arising out of any
other business the Company may conduct.
Income, gains, and losses, whether or not realized, from assets allocated
to the Separate Account are credited to or charged against the Separate Account
without regard to other income, gains, or losses of the Company.
The Separate Account is divided into Portfolios, with the assets of each
Portfolio invested in the shares of one of the Underlying Funds. The Company
does not guarantee the investment performance of the Separate Account, its
Portfolios or the Underlying Funds. Values allocated to the Separate Account and
the amount of Variable Annuity payments will vary with the values of shares of
the Underlying Funds, and are also reduced by Contract charges.
GENERAL ACCOUNT
The General Account is made up of all of the general assets of the Company
other than those allocated to the Separate Account or any other segregated asset
account of the Company. A Purchase Payment may be allocated to one or more
Guarantee Periods of one, three, five, seven and ten years available through the
General Account. In addition, all or part of the Participant's Contract Value
may be transferred to Guarantee Periods available under the Contract as
described under "Purchases, Withdrawals and Contract Value -- Transfer During
Accumulation Period" and "Annuity Period -- Transfer During Annuity Period".
Assets supporting amounts allocated to Guarantee Periods become part of the
Company's General Account assets and are available to fund the claims of all
classes of customers of the Company, as well as all classes of its creditors.
Accordingly, all of the Company's assets held in the General Account will be
available to fund the Company's obligations under the Contracts as well as other
such claims.
The Company will invest the assets of the General Account in the manner
chosen by the Company and allowed by applicable state laws regarding the nature
and quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
14
<PAGE> 15
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT INVESTMENTS
- --------------------------------------------------------------------------------
UNDERLYING FUNDS
Each of the Portfolios of the Separate Account invests in the shares of one
of the following Underlying Funds, which are investment series of Mutual Fund
Variable Annuity Trust, an open-end management investment company registered
under the Investment Company Act of 1940:
<TABLE>
<S> <C>
- INTERNATIONAL EQUITY - ASSET ALLOCATION
- CAPITAL GROWTH - U.S. GOVERNMENT INCOME
- GROWTH AND INCOME - MONEY MARKET
</TABLE>
The Chase Manhattan Bank ("Chase" or the "Adviser") is the investment
adviser, administrator and custodian for each of the Underlying Funds. Chase
Asset Management, Inc. ("CAM") is the investment subadviser to each of the
Portfolios except the International Equity Portfolio. Chase Asset Management
(London) Limited, an English corporation ("CAM London") is the investment
subadviser to the International Equity Portfolio. As investment adviser to the
Underlying Funds, Chase makes investment decisions subject to such policies as
the Board of Trustees of the Trust may determine. As administrator of the
Underlying Funds, Chase provides certain services including coordinating
relationships with independent contractors and agents; preparing for signature
by officers and filing of certain documents; preparing financial statements;
arranging for the maintenance of books and records; and providing office
facilities. Certain of these services have been delegated to Vista Fund
Distributors, Inc. ("VFD") which serves as sub-administrator to the Underlying
Funds. As custodian for the Underlying Funds, Chase's responsibilities include
safeguarding and controlling the Underlying Funds' cash and securities, handling
the receipt and delivery of securities, determining income and collecting
interest on investments, maintaining books of original entry and other required
books and accounts, and calculating daily net asset values.
The Underlying Funds and their investment objectives are as follows:
INTERNATIONAL EQUITY PORTFOLIO seeks to provide a total return on assets
from long-term growth of capital and from income principally through a broad
portfolio of marketable equity securities of established foreign companies
organized in countries other than the United States and foreign subsidiaries of
U.S. companies participating in foreign economies.
CAPITAL GROWTH PORTFOLIO seeks to provide long-term capital growth
primarily through diversified holdings (i.e., at least 80% of its assets under
normal circumstances) in common stocks. The Portfolio will seek to invest its
assets in stocks of issuers (including foreign issuers) with small to medium
capitalizations. The Adviser intends to utilize both quantitative and
fundamental research to identify undervalued stocks with a catalyst for positive
change. Dividend income, if any, is a consideration incidental to the
Portfolio's investment objective of growth of capital. This investment policy
involves the risks that the issues identified by the Adviser will not appreciate
or appreciate as significantly as projected.
GROWTH AND INCOME PORTFOLIO seeks to provide long-term capital appreciation
and to provide dividend income primarily through a broad portfolio (i.e., at
least 80% of its assets under normal circumstances) of common stocks. In
addition, the Portfolio may invest up to 20% of its total assets in convertible
securities. The Adviser intends to utilize both quantitative and fundamental
research to identify undervalued stocks with a catalyst for positive change. The
Adviser believes that the risk involved in seeking capital appreciation will be
moderated somewhat by the anticipated dividend returns on the stocks to be held
by the Portfolio.
ASSET ALLOCATION PORTFOLIO seeks to provide maximum total return through a
combination of long-term growth of capital and current income by investing in a
diversified portfolio of equity and debt securities, including common stocks,
convertible securities and government and corporate fixed-income obligations.
Under normal market conditions, between 35%-70% of the
15
<PAGE> 16
Portfolio's total assets will be invested in common stocks and other equity
investments and at least 25% of the Portfolio's assets will be invested in
fixed-income senior securities, defined for this purpose to include
non-convertible corporate debt securities and government obligations. The
Adviser considers both the opportunity for gain and the risk of loss in making
investments, and may alter the relative percentages of assets invested in equity
and fixed income securities from time to time, depending on the judgment of the
Adviser as to general market and economic conditions, trends and yields and
interest rates and changes in fiscal and monetary policies.
U.S. GOVERNMENT INCOME PORTFOLIO seeks to provide monthly dividends as well
as to protect the value of an investor's investment (i.e., to preserve
principal) by investing at least 65% of its assets in U.S. Treasury obligations,
obligations issued or guaranteed by U.S. government agencies or
instrumentalities if such are backed by the "full faith and credit" of the U.S.
Treasury, and securities issued or guaranteed as to principal or interest by the
U.S. government or by agencies or instrumentalities thereof. Neither the United
States nor any of its agencies insures or guarantees the market value of shares
of this Portfolio.
MONEY MARKET PORTFOLIO seeks to provide maximum current income consistent
with preservation of capital and maintenance of liquidity through investments in
U.S. dollar denominated commercial paper, obligations of foreign governments,
obligations issued or guaranteed by U.S. banks, securities issued by the U.S.
government, its agencies or its instrumentalities and repurchase agreement.
There is no assurance that the investment objective of any of the
Underlying Funds will be met. Participants bear the complete investment risk for
Purchase Payments allocated to a Portfolio. Contract Values will fluctuate in
accordance with the investment performance of the Portfolio(s) to which Purchase
Payments are allocated, and in accordance with the imposition of the fees and
charges assessed under the Contracts.
DETAILED INFORMATION ABOUT THE UNDERLYING FUNDS IS CONTAINED IN THE
ACCOMPANYING CURRENT PROSPECTUS OF THE TRUST. AN INVESTOR SHOULD CAREFULLY
REVIEW THAT PROSPECTUS BEFORE ALLOCATING AMOUNTS TO BE INVESTED IN THE
PORTFOLIOS OF THE SEPARATE ACCOUNT.
VOTING RIGHTS
To the extent required by applicable law, the Company will vote the shares
of the Underlying Funds held in the Separate Account at meetings of the
shareholders of the Trust in accordance with instructions received from persons
having the voting interest in the corresponding Portfolios. The Company will
vote shares for which it has not received instructions in the same proportion as
it votes shares for which it has received instructions. The Trust does not hold
regular meetings of shareholders.
The number of shares which a person has a right to vote will be determined
as of a date to be chosen by the Trust not more than 60 days prior to the
meeting of the Underlying Fund's shareholders. Voting instructions will be
solicited by written communication in advance of such meeting. Except as may be
limited by the terms of the retirement plan pursuant to which the Contract was
issued, the person having such voting rights will be the Participant before the
Annuity Date; thereafter the payee entitled to receive payments under the
Certificate.
SUBSTITUTION OF SECURITIES
If the shares of any of the Underlying Funds should no longer be available
for investment by the Separate Account or if, in the judgment of the Company's
Board of Directors, further investment in the shares of an Underlying Fund is no
longer appropriate in view of the purposes of the Contract, the Company may
substitute shares of another mutual fund (or series thereof) for Underlying Fund
shares already purchased and/or to be purchased in the future by Purchase
Payments under the
16
<PAGE> 17
Contract. No such substitution of securities may take place without prior
approval of the Commission and under such requirements as the Commission may
impose.
- --------------------------------------------------------------------------------
FIXED ACCOUNT OPTIONS
- --------------------------------------------------------------------------------
ALLOCATIONS
Purchase Payments may also be allocated, and Contract Values in the
Separate Account transferred, to one or more of the fixed options available
through the Company's General Account. Amounts thus applied will earn interest
for one or more of the available Guarantee Periods selected by the Owner, at
Guarantee Rates based on the Current Interest Rates set by the Company for such
Guarantee Periods. Current Interest Rates may change from time to time due to
changes in market conditions or other factors. However, the Guarantee Rate in
effect at the time one of these options is selected will not change for the
remainder of the Guarantee Period. THE COMPANY'S OBLIGATION TO PAY INTEREST AT
THE GUARANTEE RATE IS NOT AFFECTED BY THE PERFORMANCE OF THE COMPANY'S GENERAL
ACCOUNT INVESTMENTS.
Guarantee Periods are currently available for periods of one, three, five,
seven and ten years; not all options are available in all states. An Owner may
elect to allocate Purchase Payments to one or more of those Guarantee Periods.
Each such allocation (to the extent not withdrawn, transferred or annuitized
prior to the end of the Guarantee Period), will earn interest, credited daily,
at the annual effective Guarantee Rate established for the Guarantee Period at
the time the allocation is made. The Guarantee Rate is based on the Current
Interest Rate in effect at the time the allocation is made. The Current Interest
Rate applicable to renewals for new Guarantee Periods of amounts already
allocated to the Fixed Account, or to transfers from the Separate Account to the
Fixed Account, may differ from the Current Interest Rates applicable to Purchase
Payments. The Current Interest Rates are set at the sole discretion of the
Company. OWNERS BEAR THE RISK THAT CURRENT INTEREST RATES AVAILABLE AT FUTURE
TIMES MAY BE MORE OR LESS THAN THOSE CURRENTLY OR INITIALLY AVAILABLE. THEY ALSO
BEAR THE RISK THAT SUCH RATES MAY NOT EXCEED THE GUARANTEED MINIMUM RATE OF 3%.
RENEWALS
Within 30 days after the end of a Guarantee Period, amounts accumulated
during that Guarantee Period may be reallocated to the Fixed Account for a new
Guarantee Period of the same or of a different duration. If the new Guarantee
Period is of the same duration, the amounts will receive the Current Interest
Rate in effect for that duration as of the last day of the previous Guarantee
Period and the new Guarantee Period will begin the next following business day.
If the new Guarantee Period is of a different duration and the election is
received after the expiration of the Guarantee Period, the amounts will receive
the Current Interest Rate described in the previous sentence until such time as
the election is received (at which time interest will be credited at the Current
Interest Rate then in effect for the new selected Guarantee Period). In that
case, the new Guarantee Period will begin on the day that the reallocation is
made. Also, during such 30-day period, those amounts may be withdrawn,
transferred or annuitized without application of the Market Value Adjustment
(See below). However, any such amounts withdrawn may nevertheless be subject to
the Withdrawal Charge.
At the end of a Guarantee Period, the Company will, unless the Participant
has elected otherwise, assume reallocation for the same period, unless the new
Period would expire after the Annuity Date (or, if none has been selected, the
Latest Annuity Date). In the latter case, the Company will choose the longest
available Guarantee Period that will not extend beyond such date. If the renewal
occurs within one year prior to that date, interest will be credited to such
Annuity Date at the then Current Interest Rate for a one-year Guarantee Period.
17
<PAGE> 18
MARKET VALUE ADJUSTMENT
Contract Value withdrawn, transferred or, prior to the Annuity Date,
annuitized from the Fixed Account under the one, three, five, seven and ten year
Fixed Account options described above prior to the expiration of the Guarantee
Period (other than withdrawals for the purpose of paying the death benefit upon
the death of the Participant, withdrawals from the one year Fixed Account option
under the Automatic Dollar Cost Averaging Program or Asset Allocation
Rebalancing Program or withdrawals made to pay Contract fees or charges), may be
subject to a Market Value Adjustment ("MVA"). The MVA reflects the impact that
changing interest rates have on the value of money invested at a fixed interest
rate, such as a Guarantee Rate. The MVA may be either positive or negative, and
is computed by multiplying the amount withdrawn, transferred or annuitized by
the following factor:
N/12
[(1 + I)/(1 + J + 0.005)] -1
where
I is the Guarantee Rate in effect;
J is the Current Interest Rate available for a period equal to the number
of years remaining in the Guarantee Period at the time of withdrawal,
transfer or annuitization (fractional years are rounded up to the next
full year); and
N is the number of full months remaining in the Guarantee Period at the
time the withdrawal, transfer or annuitization request is processed.
In general, whether the MVA will operate to increase or decrease the
Contract Value upon withdrawal, transfer or annuitization is determined by
comparing the Guarantee Rate in effect for that allocation to the Current
Interest Rate (as of the date of the transaction) that would apply for a
Guarantee Period equal to the number of years remaining in the Guarantee Period
as of that date. (For purposes of determining the MVA, if the Company does not
offer a Guarantee Period of that duration, the applicable Current Interest Rate
will be determined by linear interpolation between Current Interest Rates for
the nearest two Guarantee Periods that are available). If the Current Interest
Rate thus determined plus one-half of one percent is greater than the Guarantee
Rate, the MVA will be negative and Contract Value will be decreased. Similarly,
if the Current Interest Rate plus one-half of one percent is less than the
Guarantee Rate, the Contract Value will be increased. If the Current Interest
Rate is exactly one-half of one percent less than the Guarantee Rate, the MVA
will be zero and Contract Value will not be affected by the MVA.
The impact of the MVA is more significant the greater the time remaining in
the Guarantee Period at the time of withdrawal, transfer or annuitization. If
the MVA is negative, it will be assessed first against any remaining value
allocated to the Fixed Account under the affected option; any remaining
unsatisfied MVA charge will be applied against the proceeds of the withdrawal,
transfer or annuitization. If the MVA is positive, it will be credited to the
amount withdrawn, transferred or annuitized. Some examples of how the MVA is
computed and its impact on Contract Value appear in Appendix A.
The Company will waive any negative MVA for amounts allocated to the one
year Fixed Account option. That portion of the Contracts relating to allocations
to the one year Fixed Account option is not registered under the Securities Act
of 1933 (the "Act") and is therefore not subject to the provisions of the Act.
The Fixed Account options, including the one year Fixed Account, are not subject
to the provisions of the Investment Company Act of 1940.
- --------------------------------------------------------------------------------
CONTRACT CHARGES
- --------------------------------------------------------------------------------
As is more fully described below, charges under the Contract offered by
this prospectus are assessed in three ways: (1) as deductions for administrative
expenses and, if applicable, for premium taxes; (2) as charges against the
assets of the Separate Account for the assumption of mortality and expense risks
and distribution expense charges; and (3) as Withdrawal Charges (contingent
deferred sales charges). In addition, certain deductions are made from the
assets of the Underlying Funds for
18
<PAGE> 19
investment advisory, administrative, custodial and other fees and expenses;
those fees and expenses are described in the prospectus for the Trust.
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a Mortality and Expense Risk Charge from each Portfolio
during each Valuation Period. The aggregate Mortality and Expense Risk Charge is
equal, on an annual basis, to 1.25% of the net asset value of each Portfolio
(approximately .90% is for mortality risks and approximately 0.35% is for
expense risks). The Mortality and Expense Risk Charge is assessed during both
the Accumulation Period and the Annuity Period; however, it is not applied to
Contract Values allocated to the Fixed Account. The mortality risks assumed by
the Company arise from its contractual obligations: (1) to make annuity payments
after the Annuity Date for the life of the Annuitant(s); (2) to waive the
Withdrawal Charge in the event of the death of the Participant; and (3) to
provide a death benefit prior to the Annuity Date.
The expense risk assumed by the Company is that the costs of administering
the Contracts and the Separate Account will exceed the amount received from the
Contract Administration Charge. (See "Administrative Charges"). The expense risk
charge is guaranteed by the Company and cannot be increased.
ADMINISTRATIVE CHARGES
CONTRACT ADMINISTRATION CHARGE
An annual Contract Administration Charge of $30 is charged against each
Certificate. The amount of this charge is guaranteed and cannot be increased by
the Company. This charge reimburses the Company for expenses incurred in
establishing and maintaining records relating to a Contract. The Contract
Administration Charge will be assessed on each anniversary of the Certificate
Date that occurs on or prior to the Annuity Date. In the event that a total
surrender of Contract Value is made, the Charge will be assessed as of the date
of surrender without proration. This Charge is not assessed during the Annuity
Period.
The total Contract Administration Charge is allocated between the
Portfolios and the Fixed Account in proportion to the respective Contract Values
similarly allocated. The Contract Administration Charge is at cost with no
margin included for profit.
TRANSFER FEE
In general, a transfer fee of $25 ($10 in Pennsylvania and Texas) is
assessed on each transaction effecting transfer(s) from Portfolio(s) to other
Portfolio(s), from Portfolio(s) to the Fixed Account, from the Fixed Account to
Portfolio(s), and from one Guarantee Period to another within the Fixed Account
prior to the end of a Guarantee Period. However, the first fifteen such
transactions effecting transfer(s) in any Contract Year are permitted without
the imposition of the transfer fee, which will be assessed on the sixteenth and
each subsequent transaction within the Contract Year.
This fee will be deducted from Contract Values which remain in the
Portfolio(s) (or, where applicable, the Fixed Account) from which the transfer
was made. If such remaining Contract Value is insufficient to pay the transfer
fee, then the fee will be deducted from transferred Contract Values. The
transfer fee is at cost with no margin included for profit.
SALES CHARGES
WITHDRAWAL CHARGE
Federal tax law places a number of constraints on withdrawals from annuity
contracts. Subject to those limitations, the Contract Value may be withdrawn at
any time during the Accumulation Period. Owners should consult their own tax
counsel or other tax advisers regarding any withdrawals. (See "Taxes -- Tax
Treatment of Withdrawals").
19
<PAGE> 20
A contingent deferred sales charge, which is referred to as the Withdrawal
Charge, may be imposed upon certain withdrawals. Withdrawal Charges will vary in
amount depending upon the Contribution Year of the purchase payment at the time
of withdrawal in accordance with the Withdrawal Charge table shown below.
WITHDRAWAL CHARGE TABLE
<TABLE>
<CAPTION>
APPLICABLE WITHDRAWAL
CONTRIBUTION YEAR CHARGE PERCENTAGE
------------------------------------------------------- ---------------------
<S> <C>
One.................................................... 6%
Two.................................................... 6%
Three.................................................. 5%
Four................................................... 5%
Five................................................... 4%
Six.................................................... 3%
Seven.................................................. 2%
Eight and later........................................ 0%
</TABLE>
The Withdrawal Charge is deducted from remaining Contract Value so that the
actual reduction in Contract Value as a result of the withdrawal will be greater
than the withdrawal amount requested and paid. For purposes of determining the
Withdrawal Charge, withdrawals will be allocated first to investment income, if
any (which may generally be withdrawn free of Withdrawal Charge), and then to
Purchase Payments on a first-in, first-out basis so that all withdrawals are
allocated to Purchase Payments to which the lowest (if any) Withdrawal Charge
applies.
If the withdrawal request does not specify from which Portfolio(s) or
Guarantee Amount(s) the withdrawal is to be made, the request will be processed
by reducing the Contract Values in each category in proportion to their
allocations. Therefore, FAILURE TO SPECIFY AN ALLOCATION MAY RESULT IN THE
IMPOSITION OF A MARKET VALUE ADJUSTMENT IN CASES WHERE AMOUNTS ARE ALLOCATED TO
THE FIXED ACCOUNT.
For examples of how the Withdrawal Charge is applied, see Appendix A.
The amounts obtained from the Withdrawal Charge will be used to pay sales
commissions and other promotional or distribution expenses associated with the
marketing of the Contracts. To the extent that the Withdrawal Charge is
insufficient to cover all sales commissions and other promotional or
distribution expenses, the Company may use any of its corporate assets,
including potential profit which may arise from the Mortality and Expense Risk
Charge and the Distribution Expense Charge, to make up any difference.
FREE WITHDRAWALS
Purchase Payments that are no longer subject to the Withdrawal Charge (and
not previously withdrawn), plus earnings in the Participant's account may be
withdrawn free of Withdrawal Charges at any time.
In addition, for the first withdrawal during a Contract Year after the
first Contract Year, no Withdrawal Charge is applied to that part of the
withdrawal which does not exceed the greater of (a) earnings in the Contract or
(b) 10% of Purchase Payments made more than one year prior to the date of
withdrawal that remain subject to the Withdrawal Charge and that have not
previously been withdrawn. Participants may take their 10% free withdrawal of
Purchase Payments (or an amount up to 10%) pursuant to the Systematic Withdrawal
Program. (See "Purchases, Withdrawals and Contract Value -- Withdrawals
(Redemptions) -- Systematic Withdrawal Program"). The portion of a free
withdrawal which exceeds the sum of earnings in a Participant's account and
premiums which are both no longer subject to a Withdrawal Charge and not yet
withdrawn, is assumed to be a withdrawal against future earnings. Although
amounts withdrawn free of a Withdrawal Charge reduce principal in a Contract for
purposes of calculating amounts available for future withdrawal of earnings,
20
<PAGE> 21
they do not reduce Purchase Payments for purposes of calculating the Withdrawal
Charge. As a result, a Participant will not receive the benefit of a free
withdrawal in a full surrender.
The Company will waive the Withdrawal Charge on any withdrawal necessary to
satisfy the minimum distribution requirements of the Code or upon payment of a
death benefit. Where legally permitted, the Withdrawal Charge may be eliminated
when a Certificate is issued to an officer, director or employee of the Company
or its affiliates.
NURSING HOME WAIVER
For Certificates issued with an appropriate endorsement, if the Owner is
confined to a nursing care facility (as defined in the endorsement) for sixty
(60) consecutive days or longer, the Company will waive the Withdrawal Charge on
certain withdrawals prior to the Annuity Date. Such confinement must begin after
the Certificate Date and the Company must receive satisfactory written evidence
of such confinement. The Company will waive the Withdrawal Charge under the
endorsement only for withdrawals made during such confinement or within ninety
(90) days after the confinement ends. The endorsement is not available in all
states. Participants should contact the Company or the financial representative
from which this prospectus was obtained as to the availability of this
endorsement.
DISTRIBUTION EXPENSE CHARGE
The Company deducts a Distribution Expense Charge from each Portfolio
during each Valuation Period which is equal, on an annual basis, to 0.15% of the
net asset value of each Portfolio. This charge is designed to compensate the
Company for assuming the risk that the cost of distributing the Contracts will
exceed the revenues from the Withdrawal Charge. The Commission considers the
Distribution Expense Charge to constitute a sales charge for purposes of the
Investment Company Act of 1940. In no event will this charge be increased.
Moreover, the sum of all Withdrawal Charges described above and the Distribution
Expense Charges assessed will at no time exceed 9% of all Purchase Payments
previously made. The Distribution Expense Charge is assessed during both the
Accumulation Period and the Annuity Period; however, it is not applied to
Contract Values allocated to the Fixed Account.
PREMIUM TAXES
Premium taxes or other taxes payable to a state or other governmental
entity will be charged against the Contract Values. Some states assess premium
taxes at the time Purchase Payments are made; others assess premium taxes at the
time of surrender or when annuity payments begin. The Company currently intends
to deduct premium taxes at the time of surrender, upon death of the Participant
or upon annuitization; however, it reserves the right to deduct any premium
taxes when incurred. Premium taxes generally range from 0% to 3.5%.
DEDUCTION FOR SEPARATE ACCOUNT INCOME TAXES
While the Company is not currently maintaining a provision for taxes, the
Company has reserved the right to establish such a provision for taxes in the
future if it determines, in its sole discretion, that it will incur a tax as a
result of the operation of the Separate Account. The Company will deduct for any
taxes incurred by it as a result of the operation of the Separate Account
whether or not there was a provision for taxes and whether or not it was
sufficient. (See "Taxes").
OTHER EXPENSES
The charges and expenses applicable to the various Underlying Funds are
borne indirectly by Participants having Contract Values allocated to the
Portfolios that invest in the respective Underlying Funds. For a summary of
current estimates of those charges and expenses, see "Fee Tables". For more
detailed information about those charges and expenses, please refer to the
prospectus for the Trust.
21
<PAGE> 22
REDUCTION OF CHARGES FOR SALES TO CERTAIN GROUPS
The Company may reduce the sales and administrative charges on Contracts
sold to certain groups of individuals, or to a trustee, employer or other entity
representing a group, where it is expected that such sales will result in
savings of sales or administrative expenses. The Company determines the
eligibility of groups for such reduced charges, and the amount of such
reductions for particular groups, by considering the following factors: (1) the
size of the group; (2) the total amount of Purchase Payments expected to be
received from the group; (3) the nature of the group for which the Contracts are
purchased, and the persistency expected in that group; (4) the purpose for which
the Contracts are purchased and whether that purpose makes it likely that
expenses will be reduced; and (5) any other circumstances which the Company
believes to be relevant to determining whether reduced sales or administrative
expenses may be expected. None of the reductions in charges for group sales is
contractually guaranteed. Such reductions may be withdrawn or modified by the
Company on a uniform basis. The Company's reductions in charges for group sales
will not be unfairly discriminatory to the interests of any Owners.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE CONTRACTS
- --------------------------------------------------------------------------------
SUMMARY
The Contracts provide for the accumulation of Contract Values during the
Accumulation Period. (See "Purchases, Withdrawals and Contract Value"). Upon
Annuitization, benefits are payable under the Contracts in the form of an
annuity, either for the life of the Annuitant or for a fixed number of years.
(See "Annuity Period -- Annuity Options").
PARTICIPANT
The Participant is the person normally entitled to exercise all rights of
ownership under the Contracts. The Participant is also the person entitled to
receive benefits under the Contract, although the Participant may, subject to
limitations in the case of Qualified Plans, designate an alternative payee.
ANNUITANT
The Annuitant is the person on whose life annuity payments under a
Certificate depend. The Participant may change the designated Annuitant at any
time prior to the Annuity Date. In the case of a Certificate issued in
connection with a plan qualified under Section 403(b) or 408 of the Code, the
Participant is the Annuitant. The Participant may also designate a second person
on whose life, together with that of the Annuitant, annuity payments depend. In
the case of Qualified Plans, the designated second person is generally required
to be the Participant's spouse if the Participant is married. In the event an
Annuitant dies prior to the Annuity Date, the Participant must notify the
Company and designate a new Annuitant. The Participant must attest to the
Annuitant being alive before the Company will annuitize a Contract.
MODIFICATION OF THE CONTRACT
Only the Company's President, a Vice President or Secretary may approve a
change or waive any provisions of the Contract. Any change or waiver must be in
writing. No agent has the authority to change or waive the provisions of the
Contract.
The Company reserves the right to change the terms of the Contract as may
be necessary to comply with changes in applicable law.
ASSIGNMENT
Contracts issued pursuant to Nonqualified Plans that are not subject to
Title 1 of the Employee Retirement Income Security Act of 1974 ("ERISA") may be
assigned by the Owner at any time during the lifetime of the Annuitant prior to
the Annuity Date. The Company will not be bound by any
22
<PAGE> 23
assignment until written notice is received by the Company at its Annuity
Service Center. The Company is not responsible for the validity, tax or other
legal consequences of any assignment. An assignment will not affect any payments
the Company may make or actions it may take before it receives notice of the
assignment.
If the Contract is issued pursuant to a Qualified Plan (or a Nonqualified
Plan that is subject to Title 1 of ERISA), it may not be assigned, pledged or
otherwise transferred except under such conditions as may be allowed under
applicable law.
BECAUSE AN ASSIGNMENT MAY BE A TAXABLE EVENT, CONTRACT OWNERS SHOULD
CONSULT COMPETENT TAX ADVISERS SHOULD THEY WISH TO ASSIGN THEIR CONTRACTS.
DEATH BENEFIT
If the Participant dies during the Accumulation Period, a death benefit
will be payable to the Beneficiary upon receipt by the Company of Due Proof of
Death of the Participant. Provided the Beneficiary provides a written election
to the Company within 60 days of the Company's receipt of Due Proof of Death of
the Participant, the Beneficiary may alternatively elect to (i) receive the
death benefit in a lump sum payment, (ii) receive the death benefit in the form
of one of the annuity options (over the life of the Beneficiary or over a period
not extending beyond the life expectancy of the Beneficiary), with payments
commencing within one year of the Participant's death, (iii) elect to continue
the Contract and receive the entire Contract Value (adjusted for any applicable
Withdrawal Charge and Market Value Adjustment) within 5 years after the
Participant's death, or (iv) if the Participant was the Beneficiary's spouse,
elect to continue the Certificate in force. If no option is selected within 60
days of the Company's receipt of Due Proof of Death of the Participant, the
Company will pay the death benefit in a single lump sum to the Beneficiary.
If the Participant was less than age 70 at the Certificate Date, the death
benefit is equal to the greater of:
(1) the total dollar amount of Purchase Payments made prior to the
death of the Participant, reduced by any partial withdrawals and partial
annuitizations; or
(2) the Contract Value at the end of the Valuation Period during which
Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company, at its Annuity Service Center; or
(3) where permitted by state law, the Contract Value on that
anniversary of the Certificate Date preceding the date of death, increased
by the dollar amount of any Purchase Payments made since that anniversary
and reduced by the dollar amount of any partial withdrawals and partial
annuitizations since that anniversary, which results in the greatest value.
If the Participant was age 70 or more at the Certificate Date, the death
benefit will equal the Contract Value at the end of the Valuation Period during
which Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company, at its Annuity Service Center.
BENEFICIARY
The Participant may designate the Beneficiary(ies) to receive any amount
payable on death. The original Beneficiary(ies) will be named in the
application. Unless an irrevocable Beneficiary(ies) designation was previously
filed, the Participant may change the Beneficiary(ies) prior to the Annuity Date
by written request delivered to the Company at its Annuity Service Center or by
completing a Change of Beneficiary Form provided by the Company. Any change will
take effect when recorded by the Company. The Company is not liable for any
payment made or action taken before it records the change.
23
<PAGE> 24
- --------------------------------------------------------------------------------
PURCHASES, WITHDRAWALS AND CONTRACT VALUE
- --------------------------------------------------------------------------------
MINIMUM PURCHASE PAYMENT
The minimum initial Purchase Payment for Contracts issued pursuant to a
Nonqualified Plan is $5,000 and the maximum is $1,000,000. The minimum initial
Purchase Payment for Contracts issued pursuant to a Qualified Plan is $2,000 and
the maximum is $1,000,000. Subsequent Purchase Payments for either a
Nonqualified Plan or Qualified Plan may be made in amounts of $250 or more ($100
or more if made in connection with an Automatic Payment Plan). The Company
reserves the right to refuse any Purchase Payment at any time. Generally, the
Company will not issue a Certificate under a Nonqualified Plan to a Participant
who is age 85 or older or under a Qualified Plan to a Participant who is age
70 1/2 or older.
AUTOMATIC PAYMENT PLAN
Owners utilizing automatic bank drafts through the Company's Automatic
Payment Plan may make scheduled subsequent Purchase Payments of $100 or more per
month. An enrollment form for this program is available through the Company's
Annuity Service Center.
AUTOMATIC DOLLAR COST AVERAGING PROGRAM
Owners who wish to purchase units of the Portfolios over a period of time
may be able to do so through the Automatic Dollar Cost Averaging ("DCA")
Program. Under the DCA Program, the Owner may authorize the automatic transfer
of a fixed dollar amount ($100 minimum) of his or her choice at regular
intervals from a source account to one or more of the Portfolios (other than the
source account) at the unit values determined on the dates of the transfers.
Currently, all variable Portfolios and the one year Fixed Account option are
available as source accounts. However, the Owner must elect to have the
transfers made exclusively from one source account. The intervals between
transfers may be monthly, quarterly, semiannually or annually, at the option of
the Owner. The theory of dollar cost averaging is that, if purchases are made at
fluctuating prices, this will have the effect of reducing the aggregate average
cost per unit to less than the average of the unit prices on the same purchase
dates. However, participation in the DCA Program does not assure the Owner of a
greater profit from his or her purchases under the DCA Program; nor will it
prevent or necessarily alleviate losses in a declining market.
Another option under the DCA Program is the periodic transfer of a selected
percentage of the value of the source account to one of the Portfolios (other
than the source account). A third option is to transfer the entire Contract
Value in the source account in a stated number of transfers as selected by the
Participant.
An Owner may elect to increase, decrease or change the frequency or amount
of Purchase Payments under a DCA Program. The application and any Purchase
Payments should be sent to the Company at its Annuity Service Center. The
Company reserves the right to modify, suspend and terminate the DCA Program at
any time.
ASSET ALLOCATION REBALANCING PROGRAM
Owners may participate in the Asset Allocation Rebalancing ("AAR") Program
pursuant to which Owners authorize the Company to automatically transfer their
Contract Value on a periodic basis to maintain a particular percentage
allocation among the Portfolios or the one year Fixed Account option as selected
by the Owner. Since the Contract Value allocated to each Portfolio will grow or
decline at different rates depending on the investment experience of the
Portfolio, AAR automatically reallocates the Contract Value in the Portfolios
and the one year Fixed Account option to the allocation selected by the Owner.
One theory behind this type of reallocation is that it may help an Owner
purchase Accumulation Units low and sell Accumulation Units high. However,
participation in AAR does not assure the Owner of a greater profit from his or
her purchases under the program nor will it prevent or necessarily alleviate
losses in a declining market.
24
<PAGE> 25
An Owner may select that rebalancing occur on a calendar quarter,
semiannual or annual basis. Contract Value reallocation will occur on the last
business day before the selected period ends. If an Owner elects to participate
in AAR, the entire Contract Value must be included in the program, except for
allocations to the three, five, seven and ten year Fixed Account options.
Amounts transferred under AAR are not counted against the 15 free transfers per
Contract Year or subject to any transfer charge or MVA. Owners may participate
in AAR by completing an Asset Allocation Rebalancing Authorization form or by
calling the Company at its Annuity Service Center. On the application or form,
as appropriate, the Owner must select the Portfolios or one year Fixed Account
option, the percentage of Contract Value to be allocated to each under the
program, and the frequency of rebalancing. Owners may modify their allocations
or terminate participation in the program by completing an Asset Allocation
Rebalancing Form and indicating the appropriate instructions. The Company
reserves the right to modify, suspend, or terminate AAR at any time.
PRINCIPAL ADVANTAGE PROGRAM
Owners may participate in the Principal Advantage Program pursuant to which
the Owner's Purchase Payment is divided between one or more of the Fixed Account
options and one or more of the Portfolios. While the Owner selects the Fixed
Account options and the Portfolio(s), the Principal Advantage Program determines
the portion of Purchase Payments allocated to each. When determined in
accordance with the Principal Advantage Program, the portion allocated to the
Fixed Account option(s) will be guaranteed by the Company to grow to equal the
full amount of the Purchase Payment over an established period of time. The
remaining portion of Purchase Payment is then invested in the Portfolios, where
it has the potential to achieve greater growth.
An Owner may elect to participate in the Principal Advantage Program (1) at
the time of initial purchase, by completing the instructions on the Vista
Capital Advantage application and requesting it in the "Special Instructions"
section of the application or (2) at the time of a subsequent purchase or by
reallocation of the existing Contract Value, by contacting the Company or the
financial representative from whom this prospectus was obtained. The Company
reserves the right to modify, suspend or terminate the Principal Advantage
Program at any time.
ALLOCATION OF PURCHASE PAYMENTS
Purchase Payments are allocated to the Fixed Account and/or the
Portfolio(s) selected by the Participant. Participants making initial Purchase
Payments should specify their allocations on the application for a Contract. If
the application is in good order, the Company will apply the initial Purchase
Payment to the Fixed Account and/or the Portfolio(s), as selected, and credit
the Contract with Accumulation Units within two business days of receipt at the
Company's principal place of business. The number of Accumulation Units in a
Portfolio attributable to a Purchase Payment is determined by dividing that
portion of the Purchase Payment which is allocated to the Portfolio by that
Portfolio's Accumulation Unit value as of the end of the Valuation Period when
the allocation occurs.
IF THE APPLICATION DOES NOT SPECIFY AN ALLOCATION, THE APPLICATION IS NOT
IN GOOD ORDER. If the application for a Contract or Certificate is not in good
order for this or any other reason, the Company will attempt to rectify it
within five business days of its receipt at the Company's principal place of
business. The Company will credit the initial Purchase Payment within two
business days after the application has been rectified. Unless the prospective
Owner consents otherwise, the application and the initial Purchase Payment will
be returned if the application cannot be put in good order within five business
days of such receipt.
Just like Participants making initial Purchase Payments, Participants
making subsequent Purchase Payments should specify how they want their payments
allocated. OTHERWISE, THE COMPANY WILL AUTOMATICALLY PROCESS THE PURCHASE
PAYMENT BASED ON THE PREVIOUS ALLOCATION.
25
<PAGE> 26
TRANSFER DURING ACCUMULATION PERIOD
During the Accumulation Period, the Participant, or his or her designated
agent, may transfer Contract Values among Portfolios and/or the Fixed Account.
Participants may authorize telephone transfers by written request delivered to
the Company at its Annuity Service Center, if applicable law permits. The
Company has in place procedures which are designed to provide reasonable
assurance that telephone authorizations are genuine, including tape recording of
telephone communications and requesting identifying information. Accordingly,
the Company and its affiliates disclaim all liability for any claim, loss or
expense resulting from any alleged error or mistake in connection with a
telephone transfer which was not properly authorized by the Participant.
However, if the Company fails to employ reasonable procedures to ensure that all
telephone transfers are properly authorized, the Company may be held liable for
such losses. Telephone calls authorizing transfers must be completed by 4:00
p.m. Eastern time on a Valuation Date in order to be effected at the price
determined on such date. Transfer authorizations which are received after 4:00
p.m. Eastern time will be processed as of the next Valuation Date. The Company
reserves the right to modify or discontinue at any time and without notice the
use of telephone transfers and acceptance of transfer instructions from someone
other than the Participant.
The minimum partial transfer amount is $100. Also, no partial transfer may
be made if the value of the Participant's interest in the Portfolio from which a
transfer is being made (or the remaining Guarantee Amount, where applicable)
would be less than $100 after the transfer. These dollar amounts are subject to
change at the Company's option. The Company may waive the minimum partial
transfer amount in connection with preauthorized automatic transfer programs.
Both prior to and after the Annuity Date, Contract Values may be
transferred from the Separate Account to the Fixed Account. Any amounts
allocated or transferred to the Fixed Account may, however, be transferred from
the Fixed Account to the Separate Account only prior to the Annuity Date.
Transfers may be made within the Fixed Account prior to the expiration date
of one or more Guarantee Periods, by electing to have the respective Guarantee
Amount(s) applied to newly established Guarantee Periods. Such transfers are
counted against the 15 transfer allowance on free transfers. In addition, such
transfers are generally subject to a Market Value Adjustment.
SEPARATE ACCOUNT ACCUMULATION UNIT VALUE
On each day that the New York Stock Exchange is open for business, a
separate Accumulation Unit value is determined for each Portfolio. If the
Company elects or is required to assess a charge for taxes, a separate
Accumulation Unit value may be calculated for Contracts issued in connection
with Nonqualified and Qualified Plans, respectively, within each account.
The Accumulation Unit value for each Portfolio will vary with the price of
a share in the Underlying Fund and in accordance with the Mortality and Expense
Risk Charge, Distribution Expense Charge, and any provision for taxes.
Assessments of Withdrawal Charges, transfer fees and Contract Administration
Charges are made separately for each Certificate. They are effected by
redemption of Accumulation Units and do not affect Accumulation Unit value.
The Accumulation Unit value of a Portfolio for any Valuation Period is
calculated by subtracting (2) from (1) and dividing the result by (3) where:
(1) is the total value at the end of the Valuation Period of the
assets attributable to the Accumulation Units of the Portfolio minus
liabilities;
(2) is the cumulative unpaid charge for the assumption of mortality
and expense risks and for the distribution expense; and
(3) is the number of Accumulation Units outstanding at the end of the
Valuation Period.
FIXED ACCOUNT ACCUMULATION VALUE
The accumulation value of the fixed portion of a Participant's account at
any Valuation Date is equal to the sum of the values of all amounts allocated to
the Fixed Account that have been credited to
26
<PAGE> 27
the Participant's account up to and including that date. Each amount reflects
interest accumulated to the Valuation Date at the applicable Guarantee Rate,
compounded annually, less withdrawals.
DISTRIBUTION OF CONTRACTS
Contracts are sold by registered representatives of broker-dealers who are
licensed insurance agents of the Company, either individually or through an
incorporated insurance agency. Commissions on initial Purchase Payments paid to
registered representatives may vary, but are not anticipated to exceed 6.50% of
any Purchase Payment (including any promotional sales incentives). In addition,
under certain circumstances and in exchange for lower initial commission,
certain sellers of the Contracts may be paid persistency bonuses which will take
into account, among other things, the length of time Purchase Payments have been
held under a Contract, and Contract Values. A persistency bonus is not
anticipated to exceed 1.00%, on an annual basis, of the Contract Values
considered in connection with the bonus. All such commissions, incentives and
bonuses are paid by the Company.
Vista Fund Distributors, Inc. ("VFD"), located at 101 Park Avenue, New
York, New York, 10178, serves as distributor of the Contracts. VFD is registered
as a broker-dealer under the Securities Exchange Act of 1934, as amended, and is
a member of the National Association of Securities Dealers, Inc. VFD is not
affiliated with the Company or the Adviser to the Trust.
WITHDRAWALS (REDEMPTIONS)
Except as explained below, an Owner may redeem a Certificate for all or a
portion of its Contract Value during the Accumulation Period. Withdrawal Charges
may be applicable, however, which would reduce the Contract Value upon
redemption. A Market Value Adjustment may also be applied, in the case of
redemptions from the Fixed Account, which would also affect Contract Value. (See
"Contract Charges -- Sales Charges -- Withdrawal Charge" and "Fixed Account
Options -- Market Value Adjustment").
Withdrawals and distributions from Contracts issued in connection with
certain Qualified Plans may be subject to a mandatory 20% withholding
requirement. (See "Taxes -- Withholding Tax on Distributions").
Withdrawals of amounts attributable to contributions made pursuant to a
salary reduction agreement (in accordance with Section 403(b)(11) of the Code)
are limited to circumstances only: when the Participant attains age 59 1/2,
separates from service, dies, becomes disabled (within the meaning of Section
72(m)(7) of the Code), or in the case of hardship. Withdrawals for hardship are
restricted to the portion of the Contract Value which represents contributions
made by the Participant and does not include any investment results. These
limitations on withdrawals apply to: (1) salary reduction contributions made
after December 31, 1988; (2) income attributable to such contributions; and (3)
income attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect rollovers or exchanges between certain Qualified
Plans. Tax penalties may also apply. While the foregoing limitations only apply
to certain Contracts issued in connection with Section 403(b) Qualified Plans,
all Participants should seek competent tax advice regarding any withdrawals or
distributions. (See "Taxes").
Except in connection with a Systematic Withdrawal Program, described below,
the minimum partial withdrawal amount is $1,000, or, if less, the Participant's
entire interest in the Portfolio or Fixed Account option from which a withdrawal
is requested. The Participant's interest in the Portfolio or Fixed Account
option from which the withdrawal is requested must be at least $100 after the
withdrawal is completed if anything is left in that Portfolio or Fixed Account
allocation.
A written withdrawal request or Systematic Withdrawal Program enrollment
form, as the case may be, must be sent to the Company at its Annuity Service
Center. The required program form will not be in good order unless it includes
the Participant's Tax I.D. Number (e.g., Social Security Number) and provides
instructions regarding withholding of income taxes. The Company provides the
required forms.
27
<PAGE> 28
If the request is for total withdrawal, the Certificate (or Contract), or a
Lost Certificate Affidavit (which may be obtained by calling the Company at its
Annuity Service Center), must be submitted as well. The withdrawal value is
determined on the basis of the Contract Values next computed following receipt
of a request in proper order. The withdrawal value will normally be paid within
seven days after the day a proper request is received by the Company. However,
the Company may suspend the right of withdrawal from the Separate Account or
delay payment for such withdrawal more than seven days: (1) during any period
when the New York Stock Exchange ("NYSE") is closed (other than customary
weekend and holiday closings); (2) when trading on the NYSE is restricted or an
emergency exists as determined by the Commission so that disposal of the
Separate Account's investments or determination of Accumulation Unit value is
not reasonably practicable; or (3) for such other periods as the Commission, by
order, may permit for protection of Owners.
SYSTEMATIC WITHDRAWAL PROGRAM
Certain Participants of Nonqualified Plan Contracts and Contracts issued in
connection with IRAs may choose to withdraw amounts which in the aggregate add
up to a maximum of 10% of their Purchase Payments annually without charge
pursuant to a Systematic Withdrawal Program. Systematic withdrawals will not be
limited to 10% of Purchase Payments once the Withdrawal Charge is no longer
applicable. Total withdrawals not subject to a Withdrawal Charge, including
systematic withdrawals, cannot exceed the free withdrawal amount described under
"Contract Charges -- Sales Charges -- Free Withdrawal." Withdrawals are taxable
and a 10% federal tax penalty may apply to withdrawals before age 59 1/2. In
addition, withdrawals from the Fixed Account prior to the end of their
respective Guarantee Periods are generally subject to a Market Value Adjustment.
(See "Fixed Account Options -- Market Value Adjustment").
Participation in the Systematic Withdrawal Program may be elected at the
time the Certificate is issued or on any date prior to the Annuity Date. Amounts
withdrawn under the Systematic Withdrawal Program may be electronically wired to
the Participant's financial institution by completing the instructions on the
Electronic Fund Transfer Form or by written request delivered to the Company at
its Annuity Service Center. A voided check (for checking accounts), the account
number and bank ABA number must accompany all requests. Electronic transfers may
also be requested on the Systematic Withdrawal Request Form. Depending on
fluctuations in the net asset value of the Portfolios, systematic withdrawals
may reduce or even exhaust Contract Value. The minimum systematic withdrawal
amount is $250 per withdrawal. Participants must complete an enrollment form and
send it to the Company at its Annuity Service Center. The Company reserves the
right to modify, suspend or terminate the Systematic Withdrawal Program and the
availability of electronic fund transfers at any time.
ERISA PLANS
Spousal consent may be required when a married Participant seeks a
distribution from a Contract that has been issued in connection with a Qualified
Plan (or a Nonqualified Plan that is subject to Title 1 of ERISA). Participants
should obtain competent advice.
DEFERMENT OF FIXED ACCOUNT WITHDRAWAL PAYMENTS
In the case of withdrawals or annuity payments from the Fixed Account, the
Company may defer making payment for a period of up to six months (or the period
permitted by applicable state insurance law, if less) from the date the Company
receives notice of such withdrawal request. Only under highly unusual
circumstances will the Company defer a withdrawal payment from the Fixed Account
for more than 7 days, and if the Company defers payment for more than 7 days, it
will pay interest of at least 3% per annum on the amount deferred. While all the
circumstances under which the Company could defer payment upon withdrawal may
not be foreseeable at this time, such circumstances could include, for example,
a time of unusually high surrender rate among Owners, accompanied by a radical
shift in interest rates. If the Company intends to withhold payment for more
than 7 days, it will notify affected Owners in writing.
28
<PAGE> 29
MINIMUM CONTRACT VALUE
If the Contract Value is less than $500 and no Purchase Payments have been
made during the previous three full calendar years, the Company reserves the
right, after 60 days written notice to the Participant, to terminate the
Certificate and distribute its Withdrawal Value to the Participant. This
privilege will be exercised only if the Contract Value has been reduced to less
than $500 as a result of withdrawals, and state law permits. In no instance
shall such termination occur if the value has fallen below $500 due to either
decline in Accumulation Unit value or the imposition of fees and charges.
- --------------------------------------------------------------------------------
ANNUITY PERIOD
- --------------------------------------------------------------------------------
ANNUITY DATE
The Participant selects an Annuity Date at the time of application. The
Annuity Date must always be the first day of a calendar month and must be at
least two years after the Certificate Date, but in any event will be no later
than the Latest Annuity Date. Annuity payments will begin no later than the
Latest Annuity Date. If no Annuity Date is selected, the Annuity Date will be
the Latest Annuity Date. The Participant may change the Annuity Date at any time
at least seven days prior to the Annuity Date then indicated on the Company's
records by written notice to the Company at its Annuity Service Center.
DEFERMENT OF PAYMENTS
The Company may defer making Fixed Annuity payments for a period of up to
six months or such lesser time as state law may permit. Interest, subject to
state law requirements, will be credited during the deferral period. For a
discussion of the circumstances under which the Company could defer these
payments, please refer to "Purchases, Withdrawals and Contract
Value -- Deferment of Fixed Account Withdrawal Payments."
PAYMENTS TO PARTICIPANT
The Company will make annuity payments to the Participant, unless the
Participant designates an alternate payee. Such designation must be made in
writing to the Company's Annuity Service Center and must be received more than
30 days before the Annuity Date.
ALLOCATION OF ANNUITY PAYMENTS
If all of the Contract Value on the Annuity Date is allocated to the Fixed
Account, the annuity will be paid as a Fixed Annuity. If all of the Contract
Value on that date is allocated to the Separate Account, the annuity will be
paid as a Variable Annuity. If the Contract Value on that date is allocated to
both the Fixed Account and the Separate Account, the Annuity will be paid as a
combination of a Fixed Annuity and a Variable Annuity to reflect the allocation
between the Portfolios and the Fixed Account. Variable Annuity payments will
reflect the investment performance of the Portfolios. The Participant(s) may, by
written notice to the Company, convert Variable Annuity payments to Fixed
Annuity payments. However, Fixed Annuity payments may not be converted to
Variable Annuity payments.
ANNUITY OPTIONS
The Participant, or any Beneficiary who is so entitled, may elect to
receive a lump sum at the end of the Accumulation Period. However, a lump sum
distribution may be deemed to be a withdrawal, and at least a portion of it may
be subject to federal income tax. (See "Taxes -- Tax Treatment of Withdrawals").
Alternatively, any of the annuity options listed below may be elected. The
Participant may elect an annuity option or change an annuity option at any time
prior to the Annuity Date.
29
<PAGE> 30
Annuity payments will be made monthly, unless the Owner requests annuity
payments to be at quarterly, semiannual or annual intervals. If no other annuity
option is elected, monthly annuity payments will be made in accordance with
annuity option 4 below, a life annuity with a 120-month period certain (option 3
in the case where payments are to be made for the joint lives of the Annuitant
and a designated second person and for the life of the survivor). If the amount
available to apply under an annuity option is less than $5,000, and state law
permits, the Company has the right to pay the annuity in one lump sum. In
addition, if the first payment provided would be less than $50, and state law
permits, the Company shall have the right to require the frequency of payments
be at quarterly, semiannual or annual intervals so as to result in an initial
payment of at least $50.
Participants may elect to have annuity payments electronically wired to his
or her financial institution by completing the instructions on the Electronic
Fund Transfer Form or by written request delivered to the Company at its Annuity
Service Center. A voided check (for checking accounts), the account number and
bank ABA number must accompany all requests. Electronic transfers may also be
requested on the Annuity Option Selection Form. The Company reserves the right
to modify, suspend or terminate the availability of electronic fund transfers
for annuity payments at any time.
NO WITHDRAWALS OF CONTRACT VALUE ARE PERMITTED DURING THE ANNUITY PERIOD
FOR ANY ANNUITY OPTION IN WHICH PAYMENTS ARE BASED ON A PERSON'S LIFE.
The following annuity options are generally available under the Contract.
Each is available in the form of either a Fixed Annuity or a Variable Annuity
(or a combination of both Fixed and Variable Annuity). However, there may be
restrictions in the retirement plan pursuant to which a Contract has been
purchased.
OPTION 1 -- LIFE INCOME
An annuity payable monthly during the lifetime of the Annuitant. Under this
option, no further payments are payable after the death of the Annuitant and
there is no provision for a death benefit payable to the Beneficiary. Therefore,
it is possible under option 1 for the payee to receive only one monthly annuity
payment under the Contract.
OPTION 2 -- JOINT AND SURVIVOR ANNUITY
An annuity payable monthly while both the Annuitant and a designated second
person are living. Upon the death of either person, the monthly income payable
will continue during the lifetime of the survivor at either the full amount
previously payable or as a percentage (either one-half or two-thirds) of the
full amount, as chosen by the Participant at the time of election of this
option.
Annuity payments terminate automatically and immediately upon the death of
the surviving person without regard to the number or total amount of payments
received. There is no minimum number of guaranteed payments and it is possible
to have only one annuity payment if both the Annuitant and the designated second
person die before the due date of the second payment.
OPTION 3 -- JOINT AND SURVIVOR LIFE ANNUITY --
120 MONTHLY PAYMENTS GUARANTEED
This option is similar to option 2, above, but with the additional
guarantee that payments will be made for not fewer than 120 monthly periods. If
the surviving Annuitant dies before all such payments have been made, the
balance of the guaranteed number of payments will be made to the Beneficiary.
OPTION 4 -- LIFE ANNUITY WITH 120 OR 240 MONTHLY
PAYMENTS GUARANTEED
An annuity payable monthly during the lifetime of the Annuitant, with the
guarantee that if, at the death of the Annuitant, payments have been made for
fewer than the guaranteed 120 or 240 monthly periods, as elected by the Owner,
the balance of the guaranteed number of payments will be made to the
Beneficiary.
30
<PAGE> 31
OPTION 5 -- INCOME FOR A SPECIFIED PERIOD
Under this option, a payee can elect an annuity payable monthly for any
period of years from 3 to 30. This election must be made for full 12 month
periods. In the event the payee dies before the specified number of payments has
been made, the Beneficiary may elect to continue receiving the scheduled
payments or may alternatively elect to receive the discounted present value of
any remaining guaranteed payments as a lump sum.
The value of an Annuity Unit, regardless of the option chosen, takes into
account the Mortality and Expense Risk Charge. (See "Contract
Charges -- Mortality and Expense Risk Charge"). Since option 5 does not contain
an element of mortality risk, the payee is not getting the benefit of the
Mortality and Expense Risk Charge if option 5 is selected on a variable basis.
OTHER OPTIONS
At the sole discretion of the Company, other annuity options may be made
available. However, to the extent that Withdrawal Charges would otherwise apply
to a withdrawal or termination, the identical Withdrawal Charge may apply with
respect to any additional options.
With respect to Contracts issued under Sections 401, 403(b) or 408 of the
Internal Revenue Code, any payments will be made only to the Participant and/or
the Participant's spouse.
TRANSFER DURING ANNUITY PERIOD
During the Annuity Period, the Owner may transfer the Contract Value to the
Fixed Account and/or among Portfolios. Such transfers are subject to the same
limitations and conditions as are prescribed for transfers during the
Accumulation Period except that, in addition, no transfers may be made from the
Fixed Account to the Separate Account during the Annuity Period.
DEATH BENEFIT DURING ANNUITY PERIOD
If the Annuitant dies after the Annuity Date while the Contract is in
force, the death proceeds, if any, will depend upon the annuity option in effect
at the time of the Annuitant's death. If the Annuitant dies after the Annuity
Date and before the entire interest in the Contract has been distributed, the
remaining interest, if any, as provided for in the option elected, will be
distributed at least as rapidly as under the method of distribution in effect at
the Annuitant's death.
ANNUITY PAYMENTS
INITIAL MONTHLY ANNUITY PAYMENT
The initial annuity payment is determined by taking the Contract Value,
less any premium tax, less any Market Value Adjustment that may apply in the
case of a premature annuitization, and applying it to the annuity table
specified in the Contract (or, if more favorable to the payee, the annuity
tables in effect as of the Annuity Date for similar immediate annuity contracts
issued by the Company). Those tables are based on a set amount per $1,000 of
proceeds applied. The appropriate rate must be determined by the sex (except
where, as in the case of certain Qualified Plans and other employer-sponsored
retirement plans, such classification is not permitted) and age of the Annuitant
and designated second person, if any.
The dollars applied are then divided by 1,000 and the result multiplied by
the appropriate annuity factor appearing in the table to compute the amount of
the first monthly annuity payment. In the case of a Variable Annuity, that
amount is divided by the value of an Annuity Unit as of the Annuity Date to
establish the number of Annuity Units representing each Variable Annuity
payment. The number of Annuity Units determined for the first Variable Annuity
payment remains constant for the second and subsequent monthly Variable Annuity
payments, assuming that no reallocation of Contract Values is made.
SUBSEQUENT MONTHLY PAYMENTS
For a Fixed Annuity, the amount of the second and each subsequent monthly
annuity payment is the same as that determined above for the first monthly
payment.
31
<PAGE> 32
The amount of the second and each subsequent monthly Variable Annuity
payment is determined by multiplying the number of Annuity Units, as determined
in connection with the calculation of the initial monthly annuity payment,
above, by the annuity unit value, below, as of the Valuation Period next
preceding the date on which each annuity payment is due.
- --------------------------------------------------------------------------------
ADMINISTRATION
- --------------------------------------------------------------------------------
The Company has primary responsibility for all administration of the
Contracts and the Separate Account. The mailing address of the Company's Annuity
Service Center is P.O. Box 54299, Los Angeles, California 90054-0299, and its
telephone number is (800) 90-VISTA.
The administrative services provided include, but are not limited to:
issuance of the Contracts; maintenance of Participant records; Participant
services; calculation of unit values; and preparation of Participant reports.
Contract statements and transaction confirmations are mailed to
Participants at least quarterly. Participants should read their statements and
confirmations carefully and verify their accuracy. Questions about periodic
statements should be communicated to the Company promptly. The Company will
investigate all complaints and make any necessary adjustments retroactively,
provided that it has received notice of a potential error within 30 days after
the date of the questioned statement. If the Company has not received notice of
a potential error within this time, any adjustment shall be made as of the date
that the Annuity Service Center receives notice of the potential error.
The Company will also provide Participants with such additional periodic
and other reports, information and prospectuses as may be required by federal
securities laws.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING
OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE
COMPANY CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE
MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS.
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended (the "Code")
governs taxation of annuities in general. A Participant is not taxed on
increases in the value of a Contract until distribution occurs, either in the
form of a non-annuity distribution or as annuity payments under the annuity
option elected. 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 a payment received as a withdrawal (partial
redemption), federal tax liability is determined on a last-in, first-out basis,
meaning taxable income is withdrawn before the cost basis of the Contract is
withdrawn. For Contracts issued in connection with Nonqualified Plans, the cost
basis is generally the Purchase Payments, while for Contracts issued in
connection with Qualified Plans there may be no cost basis. The taxable portion
of the lump sum payment is taxed at ordinary income tax rates. Tax penalties may
also apply.
32
<PAGE> 33
For annuity payments, the taxable portion is determined by a formula which
establishes the ratio that the cost basis of the Contract bears to the total
value of annuity payments for the term of the annuity Contract. The taxable
portion is taxed at ordinary income tax rates. Participants, Annuitants and
Beneficiaries under the Contracts should seek competent financial advice about
the tax consequences of distributions under the retirement plan under which the
Contracts are purchased.
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity from
the Company and its operations form a part of the Company.
WITHHOLDING TAX ON DISTRIBUTIONS
The Code generally requires the Company (or, in some cases, a plan
administrator) to withhold tax on the taxable portion of any distribution or
withdrawal from a Contract. For "eligible rollover distributions" from Contracts
issued under certain types of Qualified Plans, 20% of the distribution must be
withheld, unless the payee elects to have the distribution "rolled over" to
another eligible plan in a direct "trustee to trustee" transfer. This
requirement is mandatory and cannot be waived by the Participant. Withholding on
other types of distributions can be waived.
An "eligible rollover distribution" is the estimated taxable portion of any
amount received by a covered employee from a plan qualified under Section 401(a)
or 403(a) of the Code, or from a tax-sheltered annuity qualified under Section
403(b) of the Code (other than (1) annuity payments for the life (or life
expectancy) of the employee, or joint lives (or joint life expectancies) of the
employee and his or her designated beneficiary, or for a specified period of ten
years or more; and (2) distributions required to be made under the Code).
Failure to "roll over" the entire amount of an eligible rollover distribution
(including an amount equal to the 20% portion of the distribution that was
withheld) could have adverse tax consequences, including the imposition of a
penalty tax on premature withdrawals, described later in this section.
Withdrawals or distributions from a Contract other than eligible rollover
distributions are also subject to withholding on the estimated taxable portion
of the distribution, but the Participant may elect in such cases to waive the
withholding requirement. If not waived, withholding is imposed (1) for periodic
payments, at the rate that would be imposed if the payments were wages, or (2)
for other distributions, at the rate of 10%. If no withholding exemption
certificate is in effect for the payee, the rate under (1) above is computed by
treating the payee as a married individual claiming 3 withholding exemptions.
DIVERSIFICATION -- SEPARATE ACCOUNT INVESTMENTS
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified, in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the Contract as
an annuity contract would result in imposition of federal income tax to the
Participant with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract.
The Company expects that each of the Underlying Funds will be managed by
its investment adviser in such a manner as to comply with these diversification
requirements.
MULTIPLE CONTRACTS
Multiple annuity contracts which are issued within a calendar year to the
same contract owner by one company 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 more rapid taxation of the
distributed amounts from such multiple contracts. The Company believes that
Congress intended to affect the purchase of multiple deferred annuity contracts
which may have been
33
<PAGE> 34
purchased to avoid withdrawal income tax treatment. Owners should consult a tax
adviser prior to purchasing more than one annuity contract in any calendar year.
TAX TREATMENT OF ASSIGNMENTS
An assignment of a Contract may have tax consequences, and may also be
prohibited by ERISA in some circumstances. Owners should therefore consult
competent legal advisers should they wish to assign their Contracts.
QUALIFIED PLANS
The Contracts offered by this prospectus are designed to be suitable for
use under various types of Qualified Plans. Taxation of Participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Participants, Annuitants and Beneficiaries are cautioned that
benefits under a Qualified Plan may be subject to the terms and conditions of
the plan, regardless of the terms and conditions of the contracts issued
pursuant to the plan.
General descriptions of the types of Qualified Plans with which the
Contracts may be used are contained in the Statement of Additional Information.
Such descriptions are not exhaustive and are for general information purposes
only. The tax rules regarding Qualified Plans are very complex and will have
differing applications depending on individual facts and circumstances. Each
purchaser should obtain competent tax advice prior to purchasing a Contract or
Certificate issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available and described in
this Prospectus. Generally, 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 Plans").
TAX TREATMENT OF WITHDRAWALS
QUALIFIED PLANS
Section 72(t) of the Code imposes a 10% penalty tax on the taxable portion
of any early distribution from qualified retirement plans, including contracts
issued and qualified under Code Sections 401 (Corporate and Self-Employed
Pension and Profit Sharing Plans), 403(b) (Tax-Sheltered Annuities) and 408(b)
(IRAs).
The tax penalty will not apply to the following distributions: (1) if
distribution is 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) (for this purpose
"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 his or her designated beneficiary; (4)
distributions to an Owner or Annuitant (as applicable) who has separated from
service after he or she has attained 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; and
(6) distributions made to an alternate payee pursuant to a qualified domestic
relations order.
The exceptions stated in items (4), (5) and (6) above do not apply in the
case of an IRA.
Limitations imposed by the Code on withdrawals from tax-sheltered annuities
are described above under "Purchases, Withdrawals and Contract
Value -- Withdrawals (Redemptions)".
The taxable portion of a withdrawal or distribution from Contracts issued
under certain types of plans may, under some circumstances, be "rolled over"
into another eligible plan so as to continue to
34
<PAGE> 35
defer income tax on the taxable portion. Effective January 1, 1993, such
treatment is available for any "eligible rollover distribution" made by certain
types of plans (as described above under "Taxes -- Withholding Tax on
Distributions," page 34) that is transferred within 60 days of receipt into a
plan qualified under section 401(a) or 403(a) of the Code, a tax-sheltered
annuity, an IRA, or an individual retirement account described in section 408(a)
of the Code. Plans making such eligible rollover distributions are also
required, with some exceptions specified in the Code, to provide for a direct
"trustee to trustee" transfer of the distribution to the transferee plan
designated by the recipient.
Amounts received from IRAs may also be rolled over into other IRAs,
individual retirement accounts or certain other plans, subject to limitations
set forth in the Code.
NONQUALIFIED PLANS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate Purchase
Payments made, any amount withdrawn not in form of an annuity payment will be
treated as coming first from the earnings and then, only after the income
portion is exhausted, as coming from the principal. Withdrawn earnings are
includible in a taxpayer's gross income. Section 72 further provides that a 10%
penalty will apply to the income portion of any premature distribution. The
penalty is not imposed on amounts received: (1) after the taxpayer reaches
59 1/2; (2) upon the death of the Owner or Annuitant (as applicable); (3) if the
taxpayer is totally disabled; (4) in a series of substantially equal periodic
payments made for the life of the taxpayer or for the joint lives of the
taxpayer and his or her designated Beneficiary; (5) under an immediate annuity;
or (6) which are allocable to purchase payments made prior to August 14, 1982.
The above information applies to Contracts issued pursuant to Section 457
of the Code, but does not apply to other Qualified Plan Contracts. Separate tax
withdrawal penalties and restrictions apply to Qualified Plan Contracts.
35
<PAGE> 36
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE COMPANY
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company and its
subsidiaries should be read in conjunction with the consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations, both of which are included in
this prospectus. Certain items have been reclassified to conform to the current
year's presentation.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net investment income........... $ 73,201 $ 56,843 $ 50,083 $ 58,996 $ 48,912
Net realized investment
losses........................ (17,394) (13,355) (4,363) (33,713) (22,247)
Fee income...................... 213,146 169,505 145,105 141,753 123,567
General and administrative
expenses...................... (98,802) (81,552) (64,457) (54,363) (50,783)
Provision for future guaranty
fund assessments.............. -- -- -- -- (4,800)
Amortization of deferred
acquisition costs............. (66,879) (57,520) (58,713) (44,195) (30,825)
Annual commissions.............. (8,977) (4,613) (2,658) (1,158) (312)
---------- ---------- ---------- ---------- ----------
Pretax income................... 94,295 69,308 64,997 67,320 63,512
Income tax expense.............. (31,169) (24,252) (25,739) (22,705) (21,794)
---------- ---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR
INCOME TAXES.................. 63,126 45,056 39,258 44,615 41,718
Cumulative effect of change in
accounting for income taxes... -- -- -- (20,463) --
---------- ---------- ---------- ---------- ----------
NET INCOME...................... $ 63,126 $ 45,056 $ 39,258 $ 24,152 $ 41,718
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments..................... $ 2,608,301 $2,329,232 $2,114,908 $1,632,072 $2,093,100
Variable annuity assets......... 9,343,200 6,311,557 5,230,246 4,486,703 4,170,275
Deferred acquisition costs...... 536,155 443,610 383,069 416,289 336,677
Other assets.................... 83,283 120,136 55,474 67,062 71,337
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS.................... $12,570,939 $9,204,535 $7,783,697 $6,602,126 $6,671,389
========== ========== ========== ========== ==========
Reserves for fixed annuity
contracts..................... $ 2,098,803 $1,789,962 $1,497,052 $1,437,488 $1,562,136
Reserves for guaranteed
investment contracts.......... 295,175 415,544 277,095 -- --
Variable annuity liabilities.... 9,343,200 6,311,557 5,230,246 4,486,703 4,170,275
Other payables and accrued
liabilities................... 155,256 96,196 227,953 195,134 495,308
---------- ---------- ---------- ---------- ----------
Subordinated notes payable to
Parent........................ 36,240 35,832 35,832 34,712 34,432
Deferred income taxes........... 67,047 70,189 73,459 64,567 38,145
Shareholder's equity............ 575,218 485,255 442,060 383,522 371,093
---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY.......... $12,570,939 $9,204,535 $7,783,697 $6,602,126 $6,671,389
========== ========== ========== ========== ==========
</TABLE>
36
<PAGE> 37
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations of Anchor National Life Insurance Company (the "Company") for the
three years in the period ended September 30, 1997 follows. In connection with
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as
"expect," "anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and uncertainties
discussed in documents filed by the Company with the SEC. The Company disclaims
any obligation to update forward-looking information.
RESULTS OF OPERATIONS
NET INCOME totaled $63.1 million in 1997, compared with $45.1 million in
1996 and $39.3 million in 1995.
PRETAX INCOME totaled $94.3 million in 1997, $69.3 million in 1996 and
$65.0 million in 1995. The 36.1% improvement in 1997 over 1996 primarily
resulted from increased fee income and net investment income, partially offset
by higher general and administrative expenses and increased amortization of
deferred acquisition costs. The 6.6% improvement in 1996 over 1995 primarily
resulted from increased net investment income and significantly increased fee
income, partially offset by increased net realized investment losses and
additional general and administrative expenses.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, increased to $73.2 million in 1997 from $56.8
million in 1996 and $50.1 million in 1995. These amounts equal 2.77% on average
invested assets (computed on a daily basis) of $2.65 billion in 1997, 2.59% on
average invested assets of $2.19 billion in 1996 and 2.95% on average invested
assets of $1.70 billion in 1995.
Net investment spreads include the effect of income earned on the excess of
average invested assets over average interest-bearing liabilities. This excess
amounted to $126.5 million in 1997, $142.9 million in 1996 and $108.4 million in
1995. The difference between the Company's yield on average invested assets and
the rate paid on average interest-bearing liabilities (the "Spread Difference")
was 2.51% in 1997, 2.25% in 1996 and 2.63% in 1995.
37
<PAGE> 38
Investment income (and the related yields on average invested assets)
totaled $210.8 million (7.97%) in 1997, compared with $164.6 million (7.50%) in
1996 and $129.5 million (7.62%) in 1995. These increased yields in 1997 include
the effects of a greater proportion of mortgage loans in the Company's
portfolio. On average, mortgage loans have higher yields than that of the
Company's overall portfolio. In addition, the Company experienced higher returns
on its investments in partnerships. The increases in investment income in 1997
and 1996 also reflect increases in average invested assets.
Partnership income increased to $6.7 million (a yield of 15.28% on related
average assets of $44.0 million) in 1997, compared with $4.1 million (a yield of
10.12% on related average assets of $40.2 million) in 1996 and $5.1 million (a
yield of 10.60% on related average assets of $48.4 million) in 1995. Partnership
income is based upon cash distributions received from limited partnerships, the
operations of which the Company does not influence. Consequently, such income is
not predictable and there can be no assurance that the Company will realize
comparable levels of such income in the future.
Total interest expense equalled $137.6 million in 1997, $107.8 million in
1996 and $79.4 million in 1995. The average rate paid on all interest-bearing
liabilities was 5.46% in 1997, compared with 5.25% in 1996 and 4.99% in 1995.
Interest-bearing liabilities averaged $2.52 billion during 1997, compared with
$2.05 billion during 1996 and $1.59 billion during 1995.
The increases in the overall rates paid on interest-bearing liabilities
during 1997 and 1996 primarily resulted from the impact of certain promotional
one-year interest rates offered on the fixed account portion of the Company's
Polaris variable annuity product. The increase in the overall rates paid on all
interest-bearing liabilities during 1996 was also impacted by the growth in
average reserves for GICs, which generally bear higher rates of interest than
fixed annuity contracts. Average GIC reserves were $340.5 million in 1996 and
$60.8 million in 1995. Most of the Company's GICs are variable rate and are
repriced quarterly at the then-current interest rates.
GROWTH IN AVERAGE INVESTED ASSETS since 1995 primarily reflects the sales
of the Company's fixed-rate products, consisting of both fixed annuity premiums
(including those for the fixed accounts of variable annuity products) and GIC
premiums. Fixed annuity premiums totaled $1.10 billion in 1997, compared with
$741.8 million in 1996 and $284.4 million in 1995. The premiums for the fixed
accounts of variable annuities have increased primarily because of increased
sales of the Company's Polaris product and greater inflows into the one-year
fixed account of that product. The Company has observed that many purchasers of
its variable annuity contracts allocate new premiums to the one-year fixed
account and concurrently elect the option to dollar cost average into one or
more variable funds. Accordingly, the Company anticipates that it will see a
large portion of these premiums transferred into the variable funds.
GIC premiums totaled $55.0 million in 1997, $135.0 million in 1996 and
$275.0 million in 1995. GIC surrenders and maturities totaled $198.1 million in
1997, $16.5 million in 1996 and $1.6 million in 1995. The Company does not
actively market GICs, so premiums may vary substantially from period to period.
The large increase in surrenders and maturities in 1997 was primarily due to
contracts maturing in 1997. The GICs issued by the Company generally guarantee
the payment of principal and interest at fixed or variable rates for a term of
three to five years. Contracts that are purchased by banks for their long-term
portfolios, or state and local governmental entities either prohibit withdrawals
or permit scheduled book value withdrawals subject to terms of the underlying
indenture or agreement. GICs purchased by asset management firms for their short
term portfolios either prohibit withdrawals or permit withdrawals with notice
ranging from 90 to 270 days. In pricing GICs, the Company analyzes cash flow
information and prices accordingly so that it is compensated for possible
withdrawals prior to maturity.
NET REALIZED INVESTMENT LOSSES totaled $17.4 million in 1997, $13.4 million
in 1996 and $4.4 million in 1995. Net realized investment losses include
impairment writedowns of $20.4 million in 1997, $16.0 million in 1996 and $4.8
million in 1995. Therefore, net gains from sales of investments totaled $3.0
million in 1997, $2.6 million in 1996 and $0.4 million in 1995.
38
<PAGE> 39
The Company sold invested assets, principally bonds and notes, aggregating
$2.19 billion, $1.28 billion and $1.15 billion in 1997, 1996 and 1995,
respectively. Sales of investments result from the active management of the
Company's investment portfolio. Because sales of investments are made in both
rising and falling interest rate environments, net gains from sales of
investments fluctuate from period to period, and represent 0.11%, 0.12% and
0.02% of average invested assets for 1997, 1996 and 1995, respectively. Active
portfolio management involves the ongoing evaluation of asset sectors,
individual securities within the investment portfolio and the reallocation of
investments from sectors that are perceived to be relatively overvalued to
sectors that are perceived to be relatively undervalued. The intent of the
Company's active portfolio management is to maximize total returns on the
investment portfolio, taking into account credit interest-rate risk.
Impairment writedowns reflect $15.7 million and $15.2 million of provisions
applied to non-income producing land owned in Arizona in 1997 and 1996,
respectively. The statutory carrying value of this land had been guaranteed by
the Company's ultimate Parent, SunAmerica Inc. ("SunAmerica"). SunAmerica made
capital contributions of $28.4 million and $27.4 million on December 31, 1996
and 1995, respectively, to the Company through the Company's direct parent in
exchange for the termination of its guaranty with respect to this land.
Accordingly, the Company reduced the carrying value of this land to estimated
fair value to reflect the full termination of the guaranty. Impairment
writedowns in 1995 include $3.8 million of additional provisions applied to
defaulted bonds. Impairment writedowns represent 0.77%, 0.73% and 0.28% of
average invested assets for 1997, 1996 and 1995, respectively. For the five
years ended September 30, 1997, impairment writedowns as a percentage of average
invested assets have ranged from 0.28% to 2.20% and have averaged 1.16%. Such
writedowns are based upon estimates of the net realizable value of the
applicable assets. Actual realization will be dependent upon future events.
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $139.5 million
in 1997, $104.0 million in 1996 and $84.2 million in 1995. These increased fees
reflect growth in average variable annuity assets, principally due to the
receipt of variable annuity premiums, increased market values and net exchanges
into the separate accounts from the fixed accounts of variable annuity
contracts, partially offset by surrenders. Variable annuity assets averaged
$7.55 billion during 1997, $5.70 billion during 1996 and $4.65 billion during
1995. Variable annuity premiums, which exclude premiums allocated to the fixed
accounts of variable annuity products, totaled $1.27 billion in 1997, $919.8
million in 1996 and $577.2 million in 1995. Sales of variable annuity products
(which include premiums allocated to the fixed accounts) ("Variable Annuity
Product Sales") amounted to $2.37 billion, $1.66 billion and $861.0 million in
1997, 1996 and 1995, respectively. Increases in Variable Annuity Product Sales
are due, in part, to market share gains through enhanced distribution efforts
and growing consumer demand for flexible retirement savings products that offer
a variety of equity, fixed income and guaranteed fixed account investment
choices. The Company has encountered increased competition in the variable
annuity marketplace during recent years and anticipates that the market will
remain highly competitive for the foreseeable future.
NET RETAINED COMMISSIONS are primarily derived from commissions on the
sales of nonproprietary investment products by the Company's broker-dealer
subsidiary, after deducting the substantial portion of such commissions that is
passed on to registered representatives. Net retained commissions totaled $39.1
million in 1997, $31.5 million in 1996 and $24.1 million in 1995. Broker-dealer
sales (mainly sales of general securities, mutual funds and annuities) totaled
$11.56 billion in 1997, $8.75 billion in 1996 and $5.67 billion in 1995. The
increases in sales and net retained commissions reflect a greater number of
registered representatives, due to the Company's ongoing recruitment of
representatives and to the transfer of representatives from an affiliated
broker-dealer, higher average production per representative and generally
favorable market conditions. Increases in net retained commissions may not be
proportionate to increases in sales primarily due to differences in sales mix.
SURRENDER CHARGES on fixed and variable annuities totaled $5.5 million in
1997, compared with $5.2 million in 1996 and $5.9 million in 1995. Surrender
charges generally are assessed on annuity withdrawals at declining rates during
the first seven years of an annuity contract. Withdrawal
39
<PAGE> 40
payments, which include surrenders and lump-sum annuity benefits, totaled $1.06
billion in 1997, compared with $898.0 million in 1996 and $908.9 million in
1995. These payments represent 11.22%, 12.44% and 15.06%, respectively, of
average fixed and variable annuity reserves. Withdrawals include variable
annuity withdrawals from the separate accounts totaling $822.0 million in 1997,
$634.1 million in 1996 and $632.1 million in 1995. Management anticipates that
withdrawal rates will remain relatively stable for the foreseeable future.
ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed in mutual
funds by SunAmerica Asset Management Corp. Such fees totaled $25.8 million on
average assets managed of $2.34 billion in 1997, $25.4 million on average assets
managed of $2.14 billion in 1996 and $26.9 million on average assets managed of
$2.07 billion in 1995. Asset management fees are not proportionate to average
assets managed, principally due to changes in product mix. Sales of mutual
funds, excluding sales of money market accounts, amounted to $454.8 million in
1997, compared with $223.4 million in 1996 and $140.2 million in 1995.
Redemptions of mutual funds, excluding redemptions of money market accounts,
amounted to $412.8 million in 1997, $379.9 million in 1996 and $426.5 million in
1995. The significant increases in sales during 1997 principally resulted from
the introduction in November 1996 of the Company's "Style Select Series"
product. Higher mutual fund sales and lower redemptions in 1996 both reflect
enhanced marketing efforts and the favorable performance records of certain of
the Company's mutual funds, and heightened consumer demand for equity
investments generally.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $98.8 million in 1997, compared
with $81.6 million in 1996 and $65.3 million in 1995. General and administrative
expenses in 1997 include a $5.0 million provision for estimated programming
costs associated with the year 2000. Management believes that this provision is
adequate and does not anticipate any material future expenses associated with
this project. General and administrative expenses remain closely controlled
through a company-wide cost containment program and continue to represent less
than 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $66.9 million in 1997,
compared with $57.5 million in 1996 and $58.7 million in 1995. The increase in
amortization during 1997 was primarily due to additional fixed and variable
annuity sales and the subsequent amortization of related deferred commissions
and other direct selling costs. The decline in amortization for 1996 is due to
lower redemptions of mutual funds from the rate experienced in 1995, partially
offset by additional fixed and variable annuity and mutual fund sales in recent
years and the subsequent amortization of related deferred commissions and other
acquisition costs.
ANNUAL COMMISSIONS represent renewal commissions paid quarterly in arrears
to maintain the persistency of certain of the Company's variable annuity
contracts. Substantially all of the Company's currently available variable
annuity products allow for an annual commission payment option in return for a
lower immediate commission. Annual commissions totaled $9.0 million in 1997,
$4.6 million in 1996 and $2.7 million in 1995. The increase in annual
commissions since 1995 reflects increased sales of annuities that offer this
commission option. The Company estimates that approximately 45% of the average
balances of its variable annuity products is currently subject to such annual
commissions. Based on current sales, this percentage is expected to increase in
future periods.
INCOME TAX EXPENSE totaled $31.2 million in 1997, compared with $24.3
million in 1996 and $25.7 million in 1995, representing effective tax rates of
33% in 1997, 35% in 1996 and 40% in 1995. The higher effective tax rate in 1995
was due to a prior year tax settlement. Without such payment, the effective tax
rate would have been 33%.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased 18.5% to $575.2 million at September 30,
1997 from $485.3 million at September 30, 1996, primarily due to $63.1 million
of net income recorded in 1997 and $18.4 million of net unrealized gains on debt
and equity securities available for sale (credited directly to shareholder's
equity), versus $5.5 million of net unrealized losses on such securities
40
<PAGE> 41
recorded at September 30, 1996. In addition, the Company received a contribution
of capital of $28.4 million in December 1996 and paid a dividend of $25.5
million in April 1997.
INVESTED ASSETS at year end totaled $2.61 billion in 1997, compared with
$2.33 billion at year-end 1996. This 12.0% increase primarily resulted from
sales of fixed annuities and the $44.7 million net unrealized gain recorded on
debt and equity securities available for sale at September 30, 1997, versus the
$12.7 million net unrealized loss recorded on such securities at September 30,
1996.
The Company manages most of its invested assets internally. The Company's
general investment philosophy is to hold fixed-rate assets for long-term
investment. Thus, it does not have a trading portfolio. However, the Company has
determined that all of its portfolio of bonds, notes and redeemable preferred
stocks (the "Bond Portfolio") is available to be sold in response to changes in
market interest rates, changes in relative value of asset sectors and individual
securities, changes in prepayment risk, changes in the credit quality outlook
for certain securities, the Company's need for liquidity and other similar
factors.
THE BOND PORTFOLIO, which comprises 76% of the Company's total investment
portfolio (at amortized cost), had an aggregate fair value that exceeded its
amortized cost by $43.7 million at September 30, 1997. At September 30, 1996,
the amortized cost exceeded the fair value of the Bond Portfolio by $13.8
million. The net unrealized gains on the Bond Portfolio since September 30, 1996
principally reflect the lower prevailing interest rates at September 30, 1997
and the corresponding effect on the fair value of the Bond Portfolio.
At September 30, 1997, the Bond Portfolio (at amortized cost, excluding
$6.1 million of redeemable preferred stocks) included $1.82 billion of bonds
rated by Standard & Poor's Corporation ("S&P"), Moody's Investors Service
("Moody's"), Duff & Phelps Credit Rating Co. ("DCR"), Fitch Investors Service,
L.P. ("Fitch") or the National Association of Insurance Commissioners ("NAIC"),
and $124.4 million of bonds rated by the Company pursuant to statutory ratings
guidelines established by the NAIC. At September 30, 1997, approximately $1.72
billion of the Bond Portfolio was investment grade, including $650.3 million of
U.S. government/agency securities and mortgage-backed securities ("MBSs").
At September 30, 1997, the Bond Portfolio included $216.9 million (at
amortized cost with a fair value of $227.2 million) of bonds that were not
investment grade. Based on their September 30, 1997 amortized cost, these
noninvestment-grade bonds accounted for 1.7% of the Company's total assets and
8.5% of its invested assets.
Non-investment-grade securities generally provide higher yields and involve
greater risks than investment-grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. The
Company had no material concentrations of non-investment-grade securities at
September 30, 1997.
41
<PAGE> 42
The following table summarizes the Company's rated bonds by rating
classification as of September 30, 1997 (dollars in thousands):
RATED BONDS BY RATING CLASSIFICATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUES NOT RATED BY S&P/MOODY'S/
ISSUES RATED BY S&P/MOODY'S/DCR/FITCH DCR/FITCH, BY NAIC CATEGORY TOTAL
- ------------------------------------------------- ---------------------------------- --------------------------------------
S&P/(MOODY'S)/ ESTIMATED NAIC ESTIMATED PERCENT OF ESTIMATED
[DCR]/GFITCHH AMORTIZED FAIR CATEGORY AMORTIZED FAIR AMORTIZED INVESTED FAIR
CATEGORY(1) COST VALUE (2) COST VALUE COST ASSETS(3) VALUE
- ---------------------- ---------- ---------- -------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3)
[AAA to A-]
GAAA to A-H......... $ 935,866 $ 953,440 1 $142,548 $143,940 $1,078,414 42.07% $1,097,380
BBB+ to BBB-
(Baal to Baa3)
[BBB+ to BBB-]
GBBB+ to BBB-H...... 494,521 504,442 2 146,548 150,521 641,069 25.01 654,963
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
GBB+ to BB-H........ 13,080 14,597 3 13,811 13,917 26,891 1.05 28,514
B+ to B-
(B1 to B3)
[B+ to B-]
GB+ to B-H.......... 163,603 170,960 4 25,777 27,089 189,380 7.39 198,049
CCC+ to C
(Caa to C)
[CCC]
GCCC+ to C-H........ 0 0 5 0 0 0 0.00 0
C1 to D
[DD]
GDH................. 0 0 6 606 606 606 0.02 606
---------- ---------- -------- -------- ---------- ----------
Total rated issues.... $1,607,070 $1,643,439 $329,290 $336,073 $1,936,360 $1,979,512
========== ========== ======== ======== ========== ==========
</TABLE>
- ---------------
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-) indicates
the debt's relative standing within the rating category. A security rated
BBB- or higher is considered investment grade. Moody's rates debt securities
in rating categories ranging from Aaa (the highest) to C (extremely poor
prospects of ever attaining any real investment standing). The number 1, 2
or 3 (with 1 the highest and 3 the lowest) indicates the debt's relative
standing within the rating category. A security rated Baa3 or higher is
considered investment grade. DCR rates debt securities in rating categories
ranging from AAA (the highest) to DD (in payment default). A plus (+) or
minus (-) indicates the debt's relative standing within the rating category.
A security rated BBB-or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moody's, D&P and Fitch ratings
if rated by multiple agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest)
for nondefaulted bonds plus one category, 6, for bonds in or near default.
These six categories correspond with the S&P/Moody's/DCR/Fitch rating groups
listed above, with categories 1 and 2 considered investment grade. The NAIC
categories include $124.4 million (at amortized cost) of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines.
(3) At amortized cost.
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and their amortized cost aggregated $329.3 million at September 30, 1997.
Secured Loans are senior to subordinated debt and equity, and are secured by
assets of the issuer. At September 30, 1997, Secured Loans consisted of loans to
80 borrowers spanning 28 industries, with 17% of these assets (at amortized
cost) concentrated in financial institutions. No other industry concentration
constituted more than 10% of these assets.
While the trading market for Secured Loans is more limited than for
publicly traded corporate debt issues, management believes that participation in
these transactions has enabled the Company to improve its investment yield. As a
result of restrictive financial covenants, Secured Loans involve greater risk of
technical default than do publicly traded investment-grade securities. However,
management believes that the risk of loss upon default for its Secured Loans is
mitigated by such
42
<PAGE> 43
financial covenants and the collateral values underlying the Secured Loans. The
Company's Secured Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by
the Company, pursuant to comparable statutory ratings guidelines established by
the NAIC.
MORTGAGE LOANS aggregated $339.5 million at September 30, 1997 and
consisted of 73 commercial first mortgage loans with an average loan balance of
approximately $4.7 million, collateralized by properties located in 21 states.
Approximately 23% of this portfolio was multifamily residential, 18% was office,
14% was manufactured housing, 13% was hotels, 11% was retail, 11% was industrial
and 10% was other types. At September 30, 1997, approximately 13% and 12% of
this portfolio was secured by properties located in New York and California,
respectively, and no more than 10% of this portfolio was secured by properties
located in any other single state. At September 30, 1997, there were four
mortgage loans with outstanding balances of $10 million or more, which loans
collectively aggregated approximately 17% of this portfolio. At the time of
their origination or purchase by the Company, virtually all mortgage loans had
loan-to-value ratios of 75% or less. At September 30, 1997, approximately 23% of
the mortgage loan portfolio consisted of loans with balloon payments due before
October 1, 2000. During 1997, 1996 and 1995, loans delinquent by more than 90
days, foreclosed loans and restructured loans have not been significant in
relation to the total mortgage loan portfolio.
At September 30, 1997, approximately 18% of the mortgage loans were
seasoned loans underwritten to the Company's standards and purchased at or near
par from other financial institutions. Such loans generally have higher average
interest rates than loans that could be originated today. The balance of the
mortgage loan portfolio has been originated by the Company under strict
underwriting standards. Commercial mortgage loans on properties such as offices,
hotels and shopping centers generally represent a higher level of risk than do
mortgage loans secured by multifamily residences. This greater risk is due to
several factors, including the larger size of such loans and the more immediate
effects of general economic conditions on these commercial property types.
However, due to the seasoned nature of the Company's mortgage loan portfolio,
its emphasis on multifamily loans and its strict underwriting standards, the
Company believes that it has prudently managed the risk attributable to its
mortgage loan portfolio while maintaining attractive yields.
OTHER INVESTED ASSETS aggregated $143.7 million at September 30, 1997,
including $46.9 million of investments in limited partnerships, $70.9 million of
separate account investments and an aggregate of $25.9 million of miscellaneous
investments, including policy loans, residuals and leveraged leases. The
Company's limited partnership interests, accounted for by using the cost method
of accounting, are invested primarily in a combination of debt and equity
securities.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed-rate investments that generate predictable rates of return. The Company
does not have a specific target rate of return. Instead, its rates of return
vary over time depending on the current interest rate environment, the slope of
the yield curve, the spread at which fixed-rate investments are priced over the
yield curve, and general economic conditions. Its portfolio strategy is
constructed with a view to achieve adequate risk-adjusted returns consistent
with its investment objectives of effective asset-liability matching, liquidity
and safety. The Company's fixed-rate products incorporate surrender charges or
other restrictions in order to encourage persistency. Approximately 77% of the
Company's fixed annuity and GIC reserves had surrender penalties or other
restrictions at September 30, 1997.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
of the fixed-rate assets to that of its fixed-rate liabilities. The Company's
fixed-rate assets include: cash and short-term investments; bonds, notes and
redeemable preferred
43
<PAGE> 44
stocks; mortgage loans; and investments in limited partnerships that invest
primarily in fixed-rate securities and are accounted for by using the cost
method. At September 30, 1997, these assets had an aggregate fair value of $2.46
billion with a duration of 3.4. The Company's fixed-rate liabilities include
fixed annuities and GICs. At September 30, 1997, these liabilities had an
aggregate fair value (determined by discounting future contractual cash flows by
related market rates of interest) of $2.32 billion with a duration of 1.3. The
Company's potential exposure due to a relative 10% increase in interest rates
prevalent at September 30, 1997 is a loss of approximately $31.2 million in fair
value of its fixed-rate assets that is not offset by an increase in the fair
value of its fixed-rate liabilities. Because the Company actively manages its
assets and liabilities and has strategies in place to minimize its exposure to
loss as interest rate changes occur, it expects that actual losses would be less
than the estimated potential loss.
Duration is a common option-adjusted measure for the price sensitivity of a
fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the Company
will continue to utilize its existing strategies of pricing its fixed annuity
and GIC products, allocating its available cash flow amongst its various
investment portfolio sectors and maintaining sufficient levels of liquidity.
Because the calculation of duration involves estimation and incorporates
assumptions, potential changes in portfolio value indicated by the portfolio's
duration will likely be different from the actual changes experienced under
given interest rate scenarios, and the differences may be material.
As a component of its asset and liability management strategy, the Company
utilizes interest rate swap agreements ("Swap Agreements") to match assets and
liabilities more closely. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an underlying
principal balance (notional principal) to hedge against interest rate changes.
The Company currently utilizes Swap Agreements to create a hedge that
effectively converts fixed-rate liabilities into floating-rate instruments. At
September 30, 1997, the Company had one outstanding Swap Agreement with a
notional principal amount of $15.9 million. This agreement matures in December
2024.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos") and by investing in MBSs. It
also seeks to enhance its spread income by using Reverse Repos. Reverse Repos
involve a sale of securities and an agreement to repurchase the same securities
at a later date at an agreed upon price and are generally over-collateralized.
MBSs are generally investment-grade securities collateralized by large pools of
mortgage loans. MBSs generally pay principal and interest monthly. The amount of
principal and interest payments may fluctuate as a result of prepayments of the
underlying mortgage loans.
There are risks associated with some of the techniques the Company uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Company's Reverse Repos and
Swap Agreements is counterparty risk. The Company believes, however, that the
counterparties to its Reverse Repos and Swap Agreements are financially
responsible and that the counterparty risk associated with those transactions is
minimal. In addition to counterparty risk, Swap Agreements also have interest
rate risk. However, the Company's Swap Agreements typically hedge variable-rate
assets or liabilities, and interest rate fluctuations that adversely affect the
net cash received or paid under the terms of a Swap Agreement would be offset by
increased interest income earned on the variable-rate assets or reduced interest
expense paid on the variable-rate liabilities. The primary risk associated with
MBSs is that a changing interest rate environment might cause prepayment of the
underlying obligations at speeds slower or faster than anticipated at the time
of their purchase. As part of its decision to purchase an MBS, the Company
assesses the risk of prepayment by analyzing the security's projected
performance over an array of interest-rate scenarios. Once an MBS is purchased,
the Company monitors its actual prepayment experience monthly to reassess the
relative attractiveness of the security with the intent to maximize total
return.
44
<PAGE> 45
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying values of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews for
bonds, management principally considers the adequacy of any collateral,
compliance with contractual covenants, the borrower's recent financial
performance, news reports and other externally generated information concerning
the creditor's affairs. In the case of publicly traded bonds, management also
considers market value quotations, if available. For mortgage loans, management
generally considers information concerning the mortgaged property and, among
other things, factors impacting the current and expected payment status of the
loan and, if available, the current fair value of the underlying collateral.
The carrying values of bonds that are determined to have declines in value
that are other than temporary are reduced to net realizable value and no further
accruals of interest are made. The valuation allowances on mortgage loans are
based on losses expected by management to be realized on transfers of mortgage
loans to real estate, on the disposition and settlement of mortgage loans and on
mortgage loans that management believes may not be collectible in full. Accrual
of interest is suspended when principal and interest payments on mortgage loans
are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to
the payment of principal or interest, totaled $1.4 million at September 30, 1997
(at amortized cost after impairment writedowns, with a fair value of $1.4
million), including $0.5 million of bonds and notes and $0.9 million of mortgage
loans. At September 30, 1997, defaulted investments constituted 0.1% of total
invested assets. At September 30, 1996, defaulted investments totaled $3.1
million, including $1.6 million of bonds and notes and $1.5 million of mortgage
loans, and constituted 0.1% of total invested assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Company's existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. At September 30, 1997, approximately $1.80 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $46.5 million, while approximately
$139.8 million of the Bond Portfolio had an aggregate unrealized loss of $2.7
million. In addition, the Company's investment portfolio currently provides
approximately $22.5 million of monthly cash flow from scheduled principal and
interest payments. Historically, cash flows from operations and from the sale of
the Company's annuity and GIC products have been more than sufficient in amount
to satisfy the Company's liquidity needs.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities and GICs to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding
the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease
over time, reflecting lower interest crediting rates on its fixed annuities and
GICs. Should increased liquidity be required for withdrawals, the Company
believes that a significant portion of its investments could be sold without
adverse consequences in light of the general strengthening that would be
expected in the bond market.
45
<PAGE> 46
- --------------------------------------------------------------------------------
PROPERTIES
- --------------------------------------------------------------------------------
The Company's executive offices and its principal office are in leased
premises at 1 SunAmerica Center, Los Angeles, California. The Company, through
an affiliate, also leases office space in Torrance, California and in Woodland
Hills, California. The Company's broker-dealer and asset management subsidiaries
lease offices in New York, New York.
The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of the Company's
businesses.
- --------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
The directors and principal officers of Anchor National Life Insurance
Company (the "Company") as of December 23, 1997 are listed below, together with
information as to their ages, dates of election and principal business
occupation during the last five years (if other than their present business
occupation).
<TABLE>
<CAPTION>
OTHER POSITIONS AND
YEAR OTHER BUSINESS
PRESENT ASSUMED EXPERIENCE WITHIN
NAME AGE POSITION(S) POSITION(S) LAST FIVE YEARS** FROM-TO
- -------------------- --- ------------------------- ---------- ------------------------- ----------
<S> <C> <C> <C> <C> <C>
Eli Broad* 64 Chairman, 1986 Cofounded SAI
Chief Executive 1994 in 1957
Officer and President of
the Company
Chairman, Chief 1976
Executive Officer and 1986
President of
SunAmerica Inc. ("SAI")
Joseph M. Tumber* 48 Executive Vice 1996 President and Chief 1989-1995
President of the Company Executive Officer,
Vice Chairman of SAI 1995 Providian Capital
Management
Jay S. Wintrob* 40 Executive Vice President 1991 Senior Vice President 1989-1991
of the Company (Joined SAI in 1987)
Vice Chairman of SAI 1995
James R. Belardi* 40 Senior Vice President of 1992 Vice President and 1989-1992
the Company Treasurer
Executive Vice President 1995 (Joined SAI in 1986)
of SAI
Jana Waring Greer* 45 Senior Vice President of 1991 (Joined SAI in 1974)
the Company and SAI
Peter McMillan, III* 40 Executive Vice President 1994 Senior Vice President, 1989-1994
and Chief Investment SunAmerica Investments,
Officer of SunAmerica Inc.
Investments, Inc.
Scott L. Robinson* 51 Senior Vice President of 1991 (Joined SAI in 1978)
the Company
Senior Vice President and
Controller of SAI
Lorin M. Fife* 44 Senior Vice President, 1994 Vice President and 1994-1995
General Counsel and General Counsel-
Assistant Secretary of Regulatory Affairs
the
Company Senior Vice of SAI
President and Vice President and 1989-1994
General Counsel- Associate General
Regulatory Affairs 1995 Counsel of SAI
of SAI (Joined SAI in 1989)
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
OTHER POSITIONS AND
YEAR OTHER BUSINESS
PRESENT ASSUMED EXPERIENCE WITHIN
NAME AGE POSITION(S) POSITION(S) LAST FIVE YEARS** FROM-TO
- -------------------- --- ------------------------- ---------- ------------------------- ----------
<S> <C> <C> <C> <C> <C>
Susan L. Harris* 40 Senior Vice President and 1994 Vice President, 1994-1995
Secretary of the General Counsel-
Company Senior Vice Corporate Affairs and
President, General Secretary of SAI
Counsel-Corporate Affairs 1995 Vice President, 1989-1994
and Secretary of SAI Associate General
Counsel and Secretary
of SAI (Joined SAI
in 1985)
James Rowan* 35 Senior Vice President 1996 Vice President 1993-1995
of the Company Assistant to the 1992
Senior Vice President Chairman
of SAI 1995 Senior Vice President, 1990-1992
Security Pacific Corp.
N. Scott Gillis 44 Senior Vice President 1994 Vice President and 1989-1994
and Controller of the Controller, SunAmerica
Company Life Companies ("SLC")
Vice President of SAI 1997 (Joined SAI in 1985)
Edwin R. Reoliquio 40 Senior Vice President 1995 Vice President 1990-1995
and Chief Actuary Actuary, SLC
of the Company
Victor E. Akin 33 Senior Vice President 1996 Vice President, SLC 1995-1996
of the Company Director, Product
Development, SLC 1994-1995
Manager, Business
Development, SLC 1993-1994
Actuary, Milliman &
Robertson Consultant, 1992-1993
Chalke Inc. 1991-1992
Scott H. Richland 35 Vice President and 1994 Vice President 1994-1995
Treasurer 1995 and Asst. Treasurer
of the Company Vice President and 1995-1997
Senior Vice President 1997 Treasurer of SAI
and Treasurer of SAI Vice President and 1994-1995
Asst. Treasurer of SAI
Asst. Treasurer of SAI 1993-1994
Director, SunAmerica 1990-1993
Investments, Inc. (Joined
SAI in 1990)
</TABLE>
- ---------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
47
<PAGE> 48
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
All of the executive officers of the Company also serve as employees of
SunAmerica Inc. or its affiliates and receive no compensation directly from the
Company. Some of the officers also serve as officers of other companies
affiliated with the Company. Allocations have been made as to each individual's
time devoted to his or her duties as an executive officer of the Company.
The following table shows the cash compensation paid or earned, based on
these allocations, to the chief executive officer and top four executive
officers of the Company whose allocated compensation exceeds $100,000 and to all
executive officers of the Company as a group for services rendered in all
capacities to the Company during 1997:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL OR CAPACITIES IN ALLOCATED CASH
NUMBER IN GROUP WHICH SERVED COMPENSATION
- ---------------------------------------- ---------------------------------- --------------
<S> <C> <C>
Eli Broad Chairman, Chief Executive $1,438,587
Officer and President
Joseph M. Tumbler Executive Vice President 835,680
Jay S. Wintrob Executive Vice President 837,376
James R. Belardi Senior Vice President 357,144
Jana W. Greer Senior Vice President 630,854
All Executive Officers as a Group(14) $5,769,122
============
</TABLE>
Directors of the Company who are also employees of SunAmerica Inc. or its
affiliates receive no compensation in addition to their compensation as
employees of SunAmerica Inc. or its affiliates.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No shares of the Company are owned by any executive officer or director.
The Company is an indirect wholly owned subsidiary of SunAmerica Inc. Except for
Mr. Broad, the percentage of shares of SunAmerica Inc. beneficially owned by any
director does not exceed one percent of the class outstanding. At December 15,
1997, Mr. Broad was the beneficial owner of 10,706,006 shares of Common Stock
(5.68% of the class outstanding) and 13,740,441 shares of Class B Common Stock
(84.40% of the class outstanding). Of the Common Stock, 1,063,773 shares
represent restricted shares granted under the Company's employee stock plans as
to which Mr. Broad has no investment power; and 6,949,512 shares represent
employee stock options held by Mr. Broad which are or will become exercisable on
or before February 15, 1998 and as to which he has no voting or investment
power. Of the Class B Stock, 12,684,210 shares are held directly by Mr. Broad;
and 1,056,231 shares are registered in the name of a corporation as to which Mr.
Broad exercises sole voting and dispositive powers. At December 15, 1997, all
directors and officers as a group beneficially owned 14,338,041 shares of Common
Stock (7.64% of the class outstanding) and 13,740,441 shares of Class B Common
Stock (84.40% of the class outstanding). All share numbers reflect a 3-for-2
stock split paid in the form of a stock dividend on August 29, 1997 to holders
of record on August 20, 1997.
48
<PAGE> 49
- --------------------------------------------------------------------------------
STATE REGULATION
- --------------------------------------------------------------------------------
The Company is subject to regulation and supervision by the insurance
regulatory agencies of the states in which it is authorized to transact
business. State insurance laws establish supervisory agencies with broad
administrative and supervisory powers. Principal among these powers are granting
and revoking licenses to transact business, regulating marketing and other trade
practices, operating guaranty associations, licensing agents, approving policy
forms, regulating certain premium rates, regulating insurance holding company
systems, establishing reserve requirements, prescribing the form and content of
required financial statements and reports, performing financial, market conduct
and other examinations, determining the reasonableness and adequacy of statutory
capital and surplus, defining acceptable accounting principles, regulating the
type, valuation and amount of investments permitted, and limiting the amount of
dividends that can be paid and the size of transactions that can be consummated
without first obtaining regulatory approval.
During the last decade, the insurance regulatory framework has been placed
under increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation that changes, and in many
cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies or allowing combinations between insurance companies, banks and other
entities. In recent years, the NAIC has approved and recommended to the states
for adoption and implementation several regulatory initiatives designed to
reduce the risk of insurance company insolvencies and market conduct violations.
These initiatives include investment reserve requirements, risk-based capital
standards, codification of insurance accounting principles, new investment
standards and restrictions on an insurance company's ability to pay dividends to
its stockholders. The NAIC is also currently developing model laws relating to
product design and illustrations for annuity products. Current proposals are
still being debated and the Company is monitoring developments in this area and
the effects any changes would have on the Company.
SunAmerica Asset Management is registered with the SEC as a registered
investment advisor under the Investment Advisors Act of 1940. The mutual funds
that it markets are subject to regulation under the Investment Company Act of
1940. SunAmerica Asset Management and the mutual funds are subject to regulation
and examination by the SEC. In addition, variable annuities and the related
separate accounts of the Company are subject to regulation by the Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933 and the
Investment Company Act of 1940.
The Company's broker-dealer subsidiary is subject to regulation and
supervision by the states in which it transacts business, as well as by the SEC
and the National Association of Securities Dealers ("NASD"). The NASD has broad
administrative and supervisory powers relative to all aspects of business and
may examine the subsidiary's business and accounts at any time.
- --------------------------------------------------------------------------------
CUSTODIAN
- --------------------------------------------------------------------------------
Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, serves as
the custodian of the assets of the Separate Account.
49
<PAGE> 50
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The Company is involved in various kinds of litigation common to its
businesses. These cases are in various stages of development and, based on
reports of counsel, management believes that provisions made for potential
losses are adequate and any further liabilities and costs will not have a
material adverse impact upon the Company's financial position or results of
operations.
- --------------------------------------------------------------------------------
REGISTRATION STATEMENTS
- --------------------------------------------------------------------------------
Registration statements have been filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 as amended, with
respect to the Contracts offered by this prospectus. This prospectus does not
contain all the information set forth in the registration statements and the
exhibits filed as part of the registration statements, to all of which reference
is hereby made for further information concerning the Separate Account, the
General Account, the Company, the Underlying Funds, the Contract and the
Certificates. Statements found in this prospectus as to the terms of the
Contracts, the Certificates and other legal instruments are summaries, and
reference is made to such instruments as filed.
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
The financial statements of Anchor National Life Insurance Company as of
September 30, 1997 and 1996 and for each of the three years in the period ended
September 30, 1997 included in this Prospectus have been so included in reliance
on the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
Additional information concerning the operations of the Separate Account is
contained in a Statement of Additional Information, which is available without
charge upon written request addressed to the Company at its Annuity Service
Center, P.O. Box 54299, Los Angeles, California 90054-0299 or by calling
(800)90-VISTA. The contents of the Statement of Additional Information are
tabulated below.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Data...................................................................... 3
Annuity Payments...................................................................... 5
Annuity Unit Values................................................................... 6
Qualified Plans....................................................................... 9
Distribution of Contracts............................................................. 10
Financial Statements.................................................................. 11
</TABLE>
50
<PAGE> 51
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements of the Company which are included in this
prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the General Account
and with respect to the death benefit and the Company's assumption of the
mortality and expense risks and the risk that the Withdrawal Charge will be
insufficient to cover the cost of distributing the Contracts. They should not be
considered as bearing on the investment performance of the Underlying Fund
shares held in the Portfolios of the Separate Account. The value of the
interests of Owners, Participants, Annuitants, payees and Beneficiaries under
the variable portion of the Contracts is affected primarily by the investment
results of the Underlying Funds.
51
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Anchor National Life Insurance Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated income statement and statement of cash flows present fairly, in all
material respects, the financial position of Anchor National Life Insurance
Company and its subsidiaries at September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Los Angeles, California
November 7, 1997
52
<PAGE> 53
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
ASSETS
INVESTMENTS:
Cash and short-term investments......................... $ 113,580,000 $ 122,058,000
Bonds, notes and redeemable preferred stocks:
Available for sale, at fair value (amortized cost:
1997, $1,942,485,000; 1996, $2,001,024,000)........ 1,986,194,000 1,987,271,000
Mortgage loans.......................................... 339,530,000 98,284,000
Common stocks, at fair value (cost: 1997, $271,000;
1996, $2,911,000).................................... 1,275,000 3,970,000
Real estate............................................. 24,000,000 39,724,000
Other invested assets................................... 143,722,000 77,925,000
-------------- -------------
Total investments....................................... 2,608,301,000 2,329,232,000
Variable annuity assets................................... 9,343,200,000 6,311,557,000
Receivable from brokers for sales of securities........... -- 52,348,000
Accrued investment income................................. 21,759,000 19,675,000
Deferred acquisition costs................................ 536,155,000 443,610,000
Other assets.............................................. 61,524,000 48,113,000
-------------- -------------
TOTAL ASSETS.............................................. $12,570,939,000 $9,204,535,000
============== =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts.................... $ 2,098,803,000 $1,789,962,000
Reserves for guaranteed investment contracts............ 295,175,000 415,544,000
Payable to brokers for purchases of securities.......... 263,000 --
Income taxes currently payable.......................... 32,265,000 21,486,000
Other liabilities....................................... 122,728,000 74,710,000
-------------- -------------
Total reserves, payables and accrued liabilities........ 2,549,234,000 2,301,702,000
-------------- -------------
Variable annuity liabilities.............................. 9,343,200,000 6,311,557,000
-------------- -------------
Subordinated notes payable to Parent...................... 36,240,000 35,832,000
-------------- -------------
Deferred income taxes..................................... 67,047,000 70,189,000
-------------- -------------
Shareholder's equity:
Common Stock............................................ 3,511,000 3,511,000
Additional paid-in capital.............................. 308,674,000 280,263,000
Retained earnings....................................... 244,628,000 207,002,000
Net unrealized gains (losses) on debt and equity
securities available for sale........................ 18,405,000 (5,521,000)
-------------- -------------
Total shareholder's equity.............................. 575,218,000 485,255,000
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY................ $12,570,939,000 $9,204,535,000
============== =============
</TABLE>
See accompanying notes.
53
<PAGE> 54
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Investment income.......................... $ 210,759,000 $ 164,631,000 $129,466,000
------------- ------------- ------------
Interest expense on:
Fixed annuity contracts.................. (109,217,000) (82,690,000) (72,975,000)
Guaranteed investment contracts.......... (22,650,000) (19,974,000) (3,733,000)
Senior indebtedness...................... (2,549,000) (2,568,000) (227,000)
Subordinated notes payable to Parent..... (3,142,000) (2,556,000) (2,448,000)
------------- ------------- ------------
Total interest expense................... (137,558,000) (107,788,000) (79,383,000)
------------- ------------- ------------
NET INVESTMENT INCOME...................... 73,201,000 56,843,000 50,083,000
------------- ------------- ------------
NET REALIZED INVESTMENT LOSSES............. (17,394,000) (13,355,000) (4,363,000)
------------- ------------- ------------
Fee income:
Variable annuity fees.................... 139,492,000 103,970,000 84,171,000
Net retained commissions................. 39,143,000 31,548,000 24,108,000
Surrender charges........................ 5,529,000 5,184,000 5,889,000
Asset management fees.................... 25,764,000 25,413,000 26,935,000
Other fees............................... 3,218,000 3,390,000 4,002,000
------------- ------------- ------------
TOTAL FEE INCOME........................... 213,146,000 169,505,000 145,105,000
------------- ------------- ------------
GENERAL AND ADMINISTRATIVE EXPENSES........ (98,802,000) (81,552,000) (64,457,000)
------------- ------------- ------------
AMORTIZATION OF DEFERRED ACQUISITION
COSTS.................................... (66,879,000) (57,520,000) (58,713,000)
------------- ------------- ------------
ANNUAL COMMISSIONS......................... (8,977,000) (4,613,000) (2,658,000)
------------- ------------- ------------
PRETAX INCOME.............................. 94,295,000 69,308,000 64,997,000
Income tax expense......................... (31,169,000) (24,252,000) (25,739,000)
------------- ------------- ------------
NET INCOME................................. $ 63,126,000 $ 45,056,000 $ 39,258,000
============= ============= ============
</TABLE>
See accompanying notes
54
<PAGE> 55
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 63,126,000 $ 45,056,000 $ 39,258,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Interest credited to:
Fixed annuity contracts.............................. 109,217,000 82,690,000 72,975,000
Guaranteed investment contracts...................... 22,650,000 19,974,000 3,733,000
Net realized investment losses....................... 17,394,000 13,355,000 4,363,000
Accretion of net discounts on investments............ (18,576,000) (8,976,000) (6,865,000)
Amortization of goodwill............................. 1,187,000 1,169,000 1,168,000
Provision for deferred income taxes.................. (16,024,000) (3,351,000) (1,489,000)
Change in:
Accrued investment income................................. (2,084,000) (5,483,000) 3,373,000
Deferred acquisition costs................................ (113,145,000) (60,941,000) (7,180,000)
Other assets.............................................. (14,598,000) (8,000,000) 7,047,000
Income taxes currently payable............................ 10,779,000 5,766,000 3,389,000
Other liabilities......................................... 14,187,000 5,474,000 4,063,000
Other, net.................................................. 418,000 (129,000) 7,000
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 74,531,000 86,604,000 123,842,000
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts................................... 1,097,937,000 651,649,000 245,320,000
Guaranteed investment contracts........................... 55,000,000 134,967,000 275,000,000
Net exchanges to (from) the fixed accounts of variable
annuity contracts......................................... (620,367,000) (236,705,000) 10,475,000
Withdrawal payments on:
Fixed annuity contracts................................... (242,589,000) (173,489,000) (237,977,000)
Guaranteed investment contracts........................... (198,062,000) (16,492,000) (1,638,000)
Claims and annuity payments on fixed annuity contracts...... (35,731,000) (31,107,000) (31,237,000)
Net receipts from (repayments of) other short-term
financings................................................ 34,239,000 (119,712,000) 3,202,000
Capital contribution received............................... 28,411,000 27,387,000 --
Dividends paid.............................................. (25,500,000) (29,400,000) --
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................... 93,338,000 207,098,000 263,145,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks.............. $(2,566,211,000) $(1,937,890,000) $(1,556,586,000)
Mortgage loans............................................ (266,771,000) (15,000,000) --
Other investments, excluding short-term investments....... (75,556,000) (36,770,000) (13,028,000)
Sales of:
Bonds, notes and redeemable preferred stocks.............. 2,299,063,000 1,241,928,000 1,026,078,000
Real estate............................................... -- 900,000 36,813,000
Other investments, excluding short-term investments....... 6,421,000 4,937,000 5,130,000
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks.............. 376,847,000 288,969,000 178,688,000
Mortgage loans............................................ 25,920,000 11,324,000 14,403,000
Other investments, excluding short-term investments....... 23,940,000 20,749,000 13,286,000
------------- ------------- -------------
NET CASH USED BY INVESTING ACTIVITIES......................... (176,347,000) (420,853,000) (295,216,000)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS.... (8,478,000) (127,151,000) 91,771,000
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD........ 122,058,000 249,209,000 157,438,000
------------- ------------- -------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD.............. $ 113,580,000 $ 122,058,000 $ 249,209,000
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness............................... $ 7,032,000 $ 5,982,000 $ 3,235,000
============= ============= =============
Net income taxes paid....................................... $ 36,420,000 $ 22,031,000 $ 23,656,000
============= ============= =============
</TABLE>
See accompanying notes.
55
<PAGE> 56
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Anchor National Life Insurance Company (the "Company") is a wholly owned
indirect subsidiary of SunAmerica, Inc. (the "Parent"). The Company is an
Arizona-domiciled life insurance company and conducts its business through three
segments: annuity operations, asset management and broker-dealer operations.
Annuity operations include the sale and administration of fixed and variable
annuities and guaranteed investment contracts. Asset management, which includes
the sale and management of mutual funds, is conducted by SunAmerica Asset
Management Corp. Broker-dealer operations include the sale of securities and
financial services products, and are conducted by Royal Alliance Associates,
Inc.
The operations of the Company are influenced by many factors, including
general economic conditions, monetary and fiscal policies of the federal
government, and policies of state and other regulatory authorities. The level of
sales of the Company's financial products is influenced by many factors,
including general market rates of interest; strength, weakness and volatility of
equity markets; and terms and conditions of competing financial products. The
Company is exposed to the typical risks normally associated with a portfolio of
fixed-income securities, namely interest rate, option, liquidity and credit
risk. The Company controls its exposure to these risks by, among other things,
closely monitoring and matching the duration of its assets and liabilities,
monitoring and limiting prepayment and extension risk in its portfolio,
maintaining a large percentage of its portfolio in highly liquid securities, and
engaging in a disciplined process of underwriting, reviewing and monitoring
credit risk. The Company also is exposed to market risk, as market volatility
may result in reduced fee income in the case of assets managed in mutual funds
and held in separate accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and include the accounts of the Company and all of its wholly owned
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Certain prior period amounts have been reclassified
to conform with the 1997 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and short-term
bank participations. All such investments are carried at cost plus accrued
interest, which approximates fair value, have maturities of three months or less
and are considered cash equivalents for purposes of reporting cash flows.
Bonds, notes and redeemable preferred stocks available for sale and common
stocks are carried at aggregate fair value and changes in unrealized gains or
losses, net of tax, are credited or charged directly to shareholder's equity.
Bonds, notes and redeemable preferred stocks are reduced to estimated net
realizable value when necessary for declines in value considered to be other
than temporary. Estimates of net realizable value are subjective and actual
realization will be dependent upon future events.
Mortgage loans are carried at amortized unpaid balances, net of provisions
for estimated losses. Real estate is carried at the lower of cost or fair value.
Other invested assets include investments in limited partnerships, which are
accounted for by using the cost method of accounting; separate account
investments; leveraged leases; policy loans, which are carried at unpaid
balances; and collateralized mortgage obligation residuals.
56
<PAGE> 57
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income using the interest method over the contractual lives of the
investments.
INTEREST RATE SWAP AGREEMENTS: The net differential to be paid or received
on interest rate swap agreements ("Swap Agreements") entered into to reduce the
impact of changes in interest rates is recognized over the lives of the
agreements, and such differential is classified as Interest Expense in the
income statement. All outstanding Swap Agreements are designated as hedges and,
therefore, are not marked to market. However, in the event that a hedged
asset/liability were to be sold or repaid before the related Swap Agreement
matures, the Swap Agreement would be marked to market and any gain/loss
classified with any gain/loss realized on the disposition of the hedged
asset/liability. Subsequently, the Swap Agreement would be marked to market and
the resulting change in fair value would be included in Investment Income in the
income statement. In the event that a Swap Agreement that is designated as a
hedge were to be terminated before its contractual maturity, any resulting
gain/loss would be credited/charged to the carrying value of the asset/liability
that it hedged.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net interest income, net realized
investment gains and losses, variable annuity fees, surrender charges and direct
administrative expenses. Costs incurred to sell mutual funds are also deferred
and amortized over the estimated lives of the funds obtained. Deferred
acquisition costs consist of commissions and other costs that vary with, and are
primarily related to, the production or acquisition of new business.
As debt and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to deferred acquisition costs equal to the
change in amortization that would have been recorded if such securities had been
sold at their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains or losses on debt and equity securities available for
sale that is credited or charged directly to shareholder's equity. Deferred
Acquisition Costs have been decreased by $16,400,000 at September 30, 1997 and
increased by $4,200,000 at September 30, 1996 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities
resulting from the receipt of variable annuity premiums are segregated in
separate accounts. The Company receives administrative fees for managing the
funds and other fees for assuming mortality and certain expense risks. Such fees
are included in Variable Annuity Fees in the income statement.
GOODWILL: Goodwill, amounting to $18,311,000 at September 30, 1997, is
amortized by using the straight-line method over periods averaging 25 years and
is included in Other Assets in the balance sheet. Goodwill is evaluated for
impairment when events or changes in economic conditions indicate that the
carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts and guaranteed investment contracts are accounted for as
investment-type contracts in accordance with Statement of Financial Accounting
Standards No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," and are recorded at accumulated value (premiums received, plus
accrued interest, less withdrawals and assessed fees).
FEE INCOME: Variable annuity fees, asset management fees and surrender
charges are recorded in income as earned. Net retained commissions are
recognized as income on a trade-date basis.
57
<PAGE> 58
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: The Company is included in the consolidated federal income
tax return of the Parent and files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Income taxes have been
calculated as if the Company filed a separate return. Deferred income tax assets
and liabilities are recognized based on the difference between financial
statement carrying amounts and income tax bases of assets and liabilities using
enacted income tax rates and laws.
3. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by major category follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
<S> <C> <C>
AT SEPTEMBER 30, 1997:
Securities of the United States
Government.............................. $ 18,496,000 $ 18,962,000
Mortgage-backed securities................. 636,018,000 649,196,000
Securities of public utilities............. 22,792,000 22,893,000
Corporate bonds and notes.................. 984,573,000 1,012,559,000
Redeemable preferred stocks................ 6,125,000 6,681,000
Other debt securities...................... 274,481,000 275,903,000
-------------- --------------
Total available for sale................... $1,942,485,000 $1,986,194,000
============== ==============
AT SEPTEMBER 30, 1996:
Securities of the United States
Government.............................. $ 311,458,000 $ 304,538,000
Mortgage-backed securities................. 747,653,000 741,876,000
Securities of public utilities............. 3,684,000 3,672,000
Corporate bonds and notes.................. 590,071,000 591,148,000
Redeemable preferred stocks................ 9,064,000 8,664,000
Other debt securities...................... 339,094,000 337,373,000
-------------- --------------
Total available for sale................... $2,001,024,000 $1,987,271,000
============== ==============
</TABLE>
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by contractual maturity, as of September 30,
1997, follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less...................... $ 19,067,000 $ 20,575,000
Due after one year through five years........ 277,350,000 281,296,000
Due after five years through ten years....... 631,083,000 650,242,000
Due after ten years.......................... 378,967,000 384,885,000
Mortgage-backed securities................... 636,018,000 649,196,000
-------------- --------------
Total available for sale..................... $1,942,485,000 $1,986,194,000
============== ==============
</TABLE>
Actual maturities of bonds, notes and redeemable preferred stocks will
differ from those shown above due to prepayments and redemptions.
58
<PAGE> 59
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Gross unrealized gains and losses on bonds, notes and redeemable preferred
stocks available for sale by major category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
----------- ------------
<S> <C> <C>
AT SEPTEMBER 30, 1997:
Securities of the United States Government..... $ 498,000 $ (32,000)
Mortgage-backed securities..................... 14,998,000 (1,820,000)
Securities of public utilities................. 141,000 (40,000)
Corporate bonds and notes...................... 28,691,000 (705,000)
Redeemable preferred stocks.................... 556,000 --
Other debt securities.......................... 1,569,000 (147,000)
----------- ------------
Total available for sale....................... $46,453,000 $ (2,744,000)
=========== ============
AT SEPTEMBER 30, 1996:
Securities of the United States Government..... $ 284,000 $ (7,204,000)
Mortgage-backed securities..................... 7,734,000 (13,511,000)
Securities of public utilities................. 1,000 (13,000)
Corporate bonds and notes...................... 11,709,000 (10,632,000)
Redeemable preferred stocks.................... 16,000 (416,000)
Other debt securities.......................... 431,000 (2,152,000)
----------- ------------
Total available for sale....................... $20,175,000 $(33,928,000)
=========== ============
</TABLE>
At September 30, 1997, gross unrealized gains on equity securities
available for sale aggregated $1,004,000 and there were no unrealized losses. At
September 30, 1996, gross unrealized gains on equity securities available for
sale aggregated $1,368,000 and gross unrealized losses aggregated $309,000.
59
<PAGE> 60
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Gross realized investment gains and losses on sales of investments are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
BONDS, NOTES AND REDEEMABLE
PREFERRED STOCKS:
Available for sale:
Realized gains............................... $ 22,179,000 $ 14,532,000 $ 15,983,000
Realized losses.............................. (25,310,000) (10,432,000) (21,842,000)
Held for investment:
Realized gains............................... -- -- 2,413,000
Realized losses.............................. -- -- (586,000)
COMMON STOCKS:
Realized gains.................................. 4,002,000 511,000 994,000
Realized losses................................. (312,000) (3,151,000) (114,000)
OTHER INVESTMENTS:
Realized gains.................................. 2,450,000 1,135,000 3,561,000
Realized losses................................. -- -- (12,000)
IMPAIRMENT WRITEDOWNS............................. (20,403,000) (15,950,000) (4,760,000)
------------ ------------ ------------
Total net realized investment losses.............. $(17,394,000) $(13,355,000) $ (4,363,000)
============ ============ ============
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Short-term investments............................ $ 11,780,000 $ 10,647,000 $ 8,308,000
Bonds, notes and redeemable preferred stocks...... 163,038,000 140,387,000 107,643,000
Mortgage loans.................................... 17,632,000 8,701,000 7,419,000
Common stocks..................................... 16,000 8,000 3,000
Real estate....................................... (296,000) (196,000) (51,000)
Limited partnerships.............................. 6,725,000 4,073,000 5,128,000
Other invested assets............................. 11,864,000 1,011,000 1,016,000
------------ ------------ ------------
Total investment income......................... $210,759,000 $164,631,000 $129,466,000
============ ============ ============
</TABLE>
Expenses incurred to manage the investment portfolio amounted to $2,050,000
for the year ended September 30, 1997, $1,737,000 for the year ended September
30, 1996, and $1,983,000 for the year ended September 30, 1995 and are included
in General and Administrative Expenses in the income statement.
At September 30, 1997, no investment exceeded 10% of the Company's
consolidated shareholder's equity.
At September 30, 1997, mortgage loans were collateralized by properties
located in 21 states, with loans totaling approximately 13% of the aggregate
carrying value of the portfolio secured by properties located in New York and
approximately 12% by properties located in California. No more than 10% of the
portfolio was secured by properties in any other single state.
60
<PAGE> 61
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
At September 30, 1997, bonds, notes and redeemable preferred stocks
included $216,877,000 (fair value of $227,169,000) of bonds and notes not rated
investment grade. The Company had no material concentrations of
noninvestment-grade assets at September 30, 1997.
At September 30, 1997, the amortized cost of investments in default as to
the payment of principal or interest was $1,378,000, consisting of $500,000 of
non-investment-grade bonds and $878,000 of mortgage loans. Such nonperforming
investments had an estimated fair value of $1,378,000.
As a component of its asset and liability management strategy, the Company
utilizes Swap Agreements to match assets more closely to liabilities. Swap
Agreements are agreements to exchange with a counterparty interest rate payments
of differing character (for example, variable-rate payments exchanged for
fixed-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. The Company typically
utilizes Swap Agreements to create a hedge that effectively converts
floating-rate assets and liabilities to fixed-rate instruments. At September 30,
1997, the Company had one outstanding Swap Agreement with a notional principal
amount of $15.9 million, which matures in December, 2024. The net interest paid
amounted to $0.1 million for the year ended September 30, 1997, and is included
in Interest Expense on Guaranteed Investment Contracts in the income statement.
At September 30, 1997, $5,276,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory requirements.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to reasonable
estimates of the fair value of only the Company's financial instruments. The
disclosures do not address the value of the Company's recognized and
unrecognized nonfinancial assets (including its real estate investments and
other invested assets except for cost-method partnerships) and liabilities or
the value of anticipated future business. The Company does not plan to sell most
of its assets or settle most of its liabilities at these estimated fair values.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Selling expenses and potential taxes
are not included. The estimated fair value amounts were determined using
available market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND SHORT TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based
principally on independent pricing services, broker quotes and other independent
information.
MORTGAGE LOANS: Fair values are primarily determined by discounting future
cash flows to the present at current market rates, using expected prepayment
rates.
61
<PAGE> 62
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
COST-METHOD PARTNERSHIPS: Fair value of limited partnerships accounted for
by using the cost method is based upon the fair value of the net assets of the
partnerships as determined by the general partners.
VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the market
value of the underlying securities.
RECEIVABLE FROM (PAYABLE TO) BROKERS FOR SALES (PURCHASES) OF
SECURITIES: Such obligations represent net transactions of a short-term nature
for which the carrying value is considered a reasonable estimate of fair value.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and single
premium life contracts are assigned a fair value equal to current net surrender
value. Annuitized contracts are valued based on the present value of future cash
flows at current pricing rates.
RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the
present value of future cash flows at current pricing rates and is net of the
estimated fair value of hedging Swap Agreements, determined from independent
broker quotes.
VARIABLE ANNUITY LIABILITIES: Fair values of contracts in the accumulation
phase are based on net surrender values. Fair values of contracts in the payout
phase are based on the present value of future cash flows at assumed investment
rates.
SUBORDINATED NOTES PAYABLE TO PARENT: Fair value is estimated based on the
quoted market prices for similar issues.
62
<PAGE> 63
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at
September 30, 1997 and 1996, compared with their respective carrying values, are
as follows:
<TABLE>
<CAPTION>
CARRYING
VALUE FAIR VALUE
-------------- --------------
<S> <C> <C>
1997:
ASSETS:
Cash and short-term investments........ $ 113,580,000 $ 113,580,000
Bonds, notes and redeemable preferred
stocks.............................. 1,986,194,000 1,986,194,000
Mortgage loans......................... 339,530,000 354,495,000
Common stocks.......................... 1,275,000 1,275,000
Cost-method partnerships............... 46,880,000 84,186,000
Variable annuity assets................ 9,343,200,000 9,343,200,000
LIABILITIES:
Reserves for fixed annuity contracts... 2,098,803,000 2,026,258,000
Reserves for guaranteed investment
contracts........................... 295,175,000 295,175,000
Payable to brokers for purchases of
securities.......................... 263,000 263,000
Variable annuity liabilities........... 9,343,200,000 9,077,200,000
Subordinated notes payable to Parent... 36,240,000 37,393,000
============== ==============
1996:
ASSETS:
Cash and short-term investments........ $ 122,058,000 $ 122,058,000
Bonds, notes and redeemable preferred
stocks.............................. 1,987,271,000 1,987,271,000
Mortgage loans......................... 98,284,000 102,112,000
Common stocks.......................... 3,970,000 3,970,000
Cost-method partnerships............... 45,070,000 70,553,000
Receivable from brokers for sales of
securities.......................... 52,348,000 52,348,000
Variable annuity assets................ 6,311,557,000 6,311,557,000
LIABILITIES:
Reserves for fixed annuity contracts... 1,789,962,000 1,738,784,000
Reserves for guaranteed investment
contracts........................... 415,544,000 416,695,000
Variable annuity liabilities........... 6,311,557,000 6,117,508,000
Subordinated notes payable to Parent... 35,832,000 37,339,000
============== ==============
</TABLE>
5. SUBORDINATED NOTES PAYABLE TO PARENT
Subordinated notes payable to Parent equalled $36,240,000 at an interest
rate of 9% at September 30, 1997 and require principal payments of $7,500,000 in
1998, $23,060,000 in 1999 and $5,400,000 in 2000.
63
<PAGE> 64
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CONTINGENT LIABILITIES
The Company has entered into three agreements in which it has provided
liquidity support for certain short-term securities of three municipalities by
agreeing to purchase such securities in the event there is no other buyer in the
short-term marketplace. In return the Company receives a fee. The maximum
liability under these guarantees is $242,600,000. Management does not anticipate
any material future losses with respect to these liquidity support facilities.
The Company is involved in various kinds of litigation common to its
businesses. These cases are in various stages of development and, based on
reports of counsel, management believes that provisions made for potential
losses relating to such litigation are adequate and any further liabilities and
costs will not have a material adverse impact upon the Company's financial
position or results of operations.
7. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value
Common Stock. At September 30, 1997 and 1996, 3,511 shares were outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balance......... $280,263,000 $252,876,000 $252,876,000
Capital contributions
received............... 28,411,000 27,387,000 --
----------- ----------- -----------
Ending balance............ $308,674,000 $280,263,000 $252,876,000
=========== =========== ===========
RETAINED EARNINGS:
Beginning balance......... 207,002,000 191,346,000 152,088,000
Net income................ 63,126,000 45,056,000 39,258,000
Dividend paid............. (25,500,000) (29,400,000) --
----------- ----------- -----------
Ending balance............ $244,628,000 $207,002,000 $191,346,000
=========== =========== ===========
NET UNREALIZED GAINS/LOSSES
ON DEBT AND EQUITY
SECURITIES AVAILABLE FOR
SALE:
Beginning balance......... $ (5,521,000) $ (5,673,000) $(24,953,000)
Change in net unrealized
gains/losses on debt
securities available
for sale............... 57,463,000 (2,904,000) 71,302,000
Change in net unrealized
gains/losses on equity
securities available
for sale............... (55,000) 3,538,000 (1,240,000)
Change in adjustment to
deferred acquisition
costs.................. (20,600,000) (400,000) (40,400,000)
Tax effects of net
changes................ (12,882,000) (82,000) (10,382,000)
----------- ----------- -----------
Ending balance............ $ 18,405,000 $ (5,521,000) $ (5,673,000)
=========== =========== ===========
</TABLE>
Dividends that the Company may pay to its shareholder in any year without
prior approval of the Arizona Department of Insurance are limited by statute.
The maximum amount of dividends which
64
<PAGE> 65
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREHOLDER'S EQUITY (CONTINUED)
can be paid to shareholders of insurance companies domiciled in the state of
Arizona without obtaining the prior approval of the Insurance Commissioner is
limited to the lesser of either 10% of the preceding year's statutory surplus or
the preceding year's statutory net gain from operations. Dividends in the
amounts of $25,500,000 and $29,400,000 were paid on April 1, 1997 and March 18,
1996, respectively. No dividends were paid in fiscal year 1995.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1997 was $45,743,000. The statutory net income for the year ended
December 31, 1996 was $27,928,000 and for the year ended December 31, 1995 was
$30,673,000. The Company's statutory capital and surplus was $325,712,000 at
September 30, 1997, $311,176,000 at December 31, 1996 and $294,767,000 at
December 31, 1995.
8. INCOME TAXES
The components of the provisions for federal income taxes on pretax income
consist of the following:
<TABLE>
<CAPTION>
NET REALIZED
INVESTMENT
GAINS (LOSSES) OPERATIONS TOTAL
-------------- ------------ ------------
<S> <C> <C> <C>
1997:
Currently payable................. $ (3,635,000) $ 50,828,000 $ 47,193,000
Deferred.......................... (2,258,000) (13,766,000) (16,024,000)
------------ ------------ ------------
Total income tax
expense............... $ (5,893,000) $ 37,062,000 $ 31,169,000
============ ============ ============
1996:
Currently payable................. $ 5,754,000 $ 21,849,000 $ 27,603,000
Deferred.......................... (10,347,000) 6,996,000 (3,351,000)
------------ ------------ ------------
Total income tax
expense............... $ (4,593,000) $ 28,845,000 $ 24,252,000
============ ============ ============
1995:
Currently payable................. $ 4,248,000 $ 22,980,000 $ 27,228,000
Deferred.......................... (6,113,000) 4,624,000 (1,489,000)
------------ ------------ ------------
Total income tax
expense............... $ (1,865,000) $ 27,604,000 $ 25,739,000
============ ============ ============
</TABLE>
65
<PAGE> 66
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
Income taxes computed at the United States federal income tax rate of 35%
and income taxes provided differ as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Amount computed at statutory
rate........................... $33,003,000 $24,258,000 $22,749,000
Increases (decreases) resulting
from:
Amortization of differences
between book and tax bases
of net assets acquired...... 666,000 464,000 3,049,000
State income taxes, net of
federal tax benefit......... 1,950,000 2,070,000 437,000
Dividends-received deduction... (4,270,000) (2,357,000) --
Tax credits.................... (318,000) (257,000) (168,000)
Other, net..................... 138,000 74,000 (328,000)
----------- ----------- -----------
Total income tax
expense.............. $31,169,000 $24,252,000 $25,739,000
=========== =========== ===========
</TABLE>
For United States federal income tax purposes, certain amounts from life
insurance operations are accumulated in a memorandum policyholders' surplus
account and are taxed only when distributed to shareholders or when such account
exceeds prescribed limits. The accumulated policyholders' surplus was
$14,300,000 at September 30, 1997. The Company does not anticipate any
transactions which would cause any part of this surplus to be taxable.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The significant
components of the liability for Deferred Income Taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1997 1996
------------- ------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments.................................... $ 13,160,000 $ 15,036,000
Deferred acquisition costs..................... 154,949,000 136,747,000
State income taxes............................. 1,777,000 1,466,000
Net unrealized gains on debt and equity
securities available for sale................ 9,910,000 --
------------- ------------
Total deferred tax liabilities....... 179,796,000 153,249,000
------------- ------------
DEFERRED TAX ASSETS:
Contractholder reserves........................ (108,090,000) (77,522,000)
Guaranty fund assessments...................... (2,707,000) (1,031,000)
Other assets................................... (1,952,000) (1,534,000)
Net unrealized losses on debt and equity
securities available for sale................ -- (2,973,000)
------------- ------------
Total deferred tax assets............ (112,749,000) (83,060,000)
------------- ------------
Deferred income taxes.......................... $ 67,047,000 $ 70,189,000
============= ============
</TABLE>
66
<PAGE> 67
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RELATED PARTY MATTERS
The Company pays commissions to two affiliated companies, SunAmerica
Securities, Inc. and Advantage Capital Corp. Commissions paid to these
broker-dealers totaled $25,492,000 in 1997, $16,906,000 in 1996, and $9,435,000
in 1995. These broker-dealers, when combined with the Company's wholly owned
broker-dealer, represent a significant portion of the Company's business,
amounting to approximately 36.1%, 38.3%, and 40.6% of premiums in 1997, 1996,
and 1995, respectively. The Company also sells its products through unaffiliated
broker-dealers, the largest two of which represented approximately 19.2% and
10.1% of premiums in 1997, 19.7% and 10.2% in 1996, and 18.8% and 4.3% in 1995,
respectively.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, Inc., whose
purpose is to provide services to the SunAmerica companies. Amounts paid for
such services totaled $86,116,000 for the year ended September 30, 1997,
$65,351,000 for the year ended September 30, 1996 and $42,083,000 for the year
ended September 30, 1995. Such amounts are included in General and
Administrative Expenses in the income statement.
The Parent made capital contributions of $28,411,000 in December, 1996 and
$27,387,000 in December 1995 to the Company, through the Company's direct
parent, in exchange for the termination of its guaranty with respect to certain
real estate owned in Arizona. Accordingly, the Company reduced the carrying
value of this real estate to estimated fair value to reflect the termination of
the guaranty.
During the year ended September 30, 1995, the Company sold to the Parent
real estate for cash equal to its carrying value of $29,761,000.
During the year ended September 30, 1997, the Company sold various invested
assets to SunAmerica Life Insurance Company and to CalAmerica Life Insurance
Company for cash equal to their current market values of $15,776,000 and
$15,000, respectively. The Company recorded net gains aggregating $276,000 on
such transactions.
During the year ended September 30, 1997, the Company also purchased
certain invested assets from SunAmerica Life Insurance Company and from
CalAmerica Life Insurance Company for cash equal to their current market values
of $8,717,000 and $284,000, respectively.
During the year ended September 30, 1996, the Company sold various invested
assets to the Parent and to SunAmerica Life Insurance Company for cash equal to
their current market values of $274,000 and $47,321,000, respectively. The
Company recorded net losses aggregating $3,000 on such transactions.
During the year ended September 30, 1996, the Company also purchased
certain invested assets from SunAmerica Life Insurance Company for cash equal to
their current market values, which aggregated $28,379,000.
67
<PAGE> 68
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. BUSINESS SEGMENTS
Summarized data for the Company's business segments follow:
<TABLE>
<CAPTION>
TOTAL
DEPRECIATION
AND
TOTAL AMORTIZATION PRETAX TOTAL
REVENUES EXPENSE INCOME ASSETS
------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C>
1997:
Annuity operations................ $332,845,000 $55,675,000 $74,792,000 $12,438,021,000
Broker-dealer operations.......... 38,005,000 689,000 16,705,000 51,400,000
Asset management.................. 35,661,000 16,357,000 2,798,000 81,518,000
------------ ----------- ----------- ---------------
Total................... $406,511,000 $72,721,000 $94,295,000 $12,570,939,000
============ =========== =========== ===============
1996:
Annuity operations................ $256,681,000 $43,974,000 $53,827,000 $ 9,092,770,000
Broker-dealer operations.......... 31,053,000 449,000 13,033,000 37,355,000
Asset management.................. 33,047,000 18,295,000 2,448,000 74,410,000
------------ ----------- ----------- ---------------
Total................... $320,781,000 $62,718,000 $69,308,000 $ 9,204,535,000
============ =========== =========== ===============
1995:
Annuity operations................ $211,587,000 $38,350,000 $55,462,000 $ 7,667,946,000
Broker-dealer operations.......... 24,194,000 411,000 9,025,000 29,241,000
Asset management.................. 34,427,000 24,069,000 510,000 86,510,000
------------ ----------- ----------- ---------------
Total................... $270,208,000 $62,830,000 $64,997,000 $ 7,783,697,000
============ =========== =========== ===============
</TABLE>
68
<PAGE> 69
APPENDIX A
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1 -- SEPARATE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
SEPARATE ACCOUNT)
These examples assume the following:
(1) The Initial Purchase Payment was $10,000, allocated solely to one
Portfolio;
(2) The date of full surrender or partial withdrawal occurs during the
3rd Contribution Year;
(3) The Owner's Contract Value at the time of surrender or withdrawal
is $12,000; and
(4) No other Purchase Payments or previous partial withdrawals have
been made.
EXAMPLE A -- FULL SURRENDER:
(1) Earnings in the Portfolio ($12,000 - $10,000 = $2,000) are not
subject to the Withdrawal Charge.
(2) The balance of the full surrender ($12,000 - $2,000 = $10,000) is
subject to a 5% Withdrawal Charge applicable during the 3rd Contribution
Year.
(3) The amount of the Withdrawal Charge is .05 X $10,000 = $500.
(4) The Contract Administration Charge is deducted from the full
surrender amount. The amount of the full surrender is
$12,000 - $500 - $30 = $11,470.
EXAMPLE B -- PARTIAL WITHDRAWAL (IN THE AMOUNT OF $3,000):
(1) For the same reasons as given in Steps 1 and 2 of Example A,
above, $2,000 can be withdrawn free of the Withdrawal Charge.
(2) Although 10% of the Purchase Payment is available without
imposition of a Withdrawal Charge (.10 X $10,000 = $1,000), this free
withdrawal amount is, like the Withdrawal Charge, applied first to
earnings. Since the earnings exceed the free withdrawal amount, only the
earnings can be withdrawn free of the scheduled Withdrawal Charge.
(3) The balance of the requested partial withdrawal
($3,000 - $2,000 = $1,000) is subject to the Withdrawal Charge applicable
during the 3rd Contribution Year (5%).
(4) The amount of the Withdrawal Charge is equal to the amount
required to complete the partial withdrawal ($3,000 - $2,000 = $1,000)
divided by (1 - .05) = 0.95, less the amount required to complete the
partial withdrawal.
Withdrawal Charge = ($1,000/0.95) - $1,000
= $52.63
In this example, in order for the Owner to receive the amount requested
($3,000), a gross withdrawal of $3,052.63 must be processed with $52.63
representing the Withdrawal Charge calculated above.
Examples C and D assume the following:
(1) The Initial Purchase Payment was $20,000, allocated solely to one
Portfolio;
(2) The full surrender or partial withdrawal occurs during the 3rd
Contribution Year;
A-1
<PAGE> 70
(3) The Owner's Contract Value at the time of surrender or withdrawal
is $21,500; and
(4) No other Purchase Payments or partial withdrawals have been made.
EXAMPLE C -- PARTIAL WITHDRAWAL (IN THE MAXIMUM AMOUNT AVAILABLE WITHOUT
WITHDRAWAL CHARGE):
(1) Earnings in the Portfolio ($21,500 - $20,000 = $1,500) are not
subject to the Withdrawal Charge.
(2) An Additional Free Withdrawal of 10% of the Purchase Payments less
earnings (.10 X $20,000 - $1,500 = $500) is also available free of the
Withdrawal Charge, so that
(3) The maximum partial withdrawal without Withdrawal Charge is the
sum of the Earnings and the Additional Free Withdrawal
($1,500 + $500 = $2,000).
EXAMPLE D -- FULL SURRENDER IMMEDIATELY FOLLOWING THE PARTIAL WITHDRAWAL IN
EXAMPLE C:
(1) The Owner's Contract Value after the partial withdrawal in Example
C is $21,500 - $2,000 = $19,500.
(2) The Purchase Payment amount for calculating the Withdrawal Charge
is the original $20,000 (Additional Free Withdrawal amounts do not reduce
the Purchase Payment amount for purposes of calculating the Withdrawal
Charge).
(3) The amount of the Withdrawal Charge is .05 X $20,000 = $1,000.
(4) The Contract Administration Charge is deducted from the full
surrender amount. The amount of the full surrender is
$19,500 - $1,000 - $30 = $18,470.
PART 2 -- GENERAL ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The Market Value Adjustment Factor is reproduced here for convenience:
N/12
[(1 + I)/(1 + J + 0.005)] -1
where
I is the Guarantee Rate in effect;
J is the Current Interest Rate available for a period equal to the
number of years remaining in the Guarantee Period at the time of
withdrawal, transfer or annuitization (fractional years are rounded up
to the next full year); and
N is the number of full months remaining in the Guarantee Period at the
time the withdrawal, transfer or annuitization request is processed.
These examples assume the following:
(1) An initial Purchase Payment of $10,000 was made and allocated to a
ten year Guarantee Period with a Guarantee Rate of 7.25% (.0725);
(2) a partial withdrawal of $4,000 is requested 2 1/2 years (30
months) from the expiration date (i.e., N = 30);
(3) the accumulated value attributable to the Purchase Payment (i.e.,
the Guarantee Amount) on the date of withdrawal is $16,632.69; and
(4) no transfers, additional Purchase Payments, or other withdrawals
have been made.
The Guarantee Amount of $16,632.69 reflects deductions for Contract
Administration Charges at each anniversary. Since the withdrawal is effected in
the Purchase Payment's 8th Contribution Year, no Withdrawal Charge is
applicable.
A-2
<PAGE> 71
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of withdrawal, the Current Interest Rate for a
new Guarantee Period of 3 years (2 1/2 years rounded up to the next full
year) is 8.25%:
N/12
The MVA factor = [(1 + I)/(1 + J + .005)] -1
(30/12)
= [(1.0725)/(1.0825 + .005)] -1
2.5
= (0.986207) -1
= 0.965873 -1
= -0.034127
The requested withdrawal amount is multiplied by the MVA factor to
determine the MVA:
MVA = $4,000 X (-0.034127) = -$136.51
$136.51 represents the MVA that will be deducted from the remaining
accumulated value.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of withdrawal, the Current Interest Rate for a
new Guarantee Period of 3 years is 6.25%:
N/12
The MVA factor = [(1 + I)/(1 + J + .005)] -1
(30/12)
= [(1.0725)/(1.0625 +.005)] -1
2.5
= (1.004684) -1
= 1.011751 -1
= 0.011751
The requested withdrawal amount is multiplied by the MVA factor to
determine the MVA:
$4,000 X 0.011751 = +$47.00
$47.00 represents the MVA that would be added to the amount withdrawn.
PART 3 -- GENERAL ACCOUNT -- EXAMPLE OF FULL WITHDRAWAL WITH MVA AND WITHDRAWAL
CHARGE
Assume the same facts as in Part 2, above, except that under assumption (2)
a complete withdrawal is requested with 4 1/2 years (54 months) remaining in the
Guarantee Period (i.e., N = 54). The Guarantee Amount on the date of withdrawal
is $14,515.97. As was the case with the Examples in Part 1, above, the earnings
may be withdrawn free of Withdrawal Charge, leaving the initial Purchase Payment
of $10,000 subject to the Charge. The applicable Withdrawal Charge is 3% or
$300.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of withdrawal the Current Interest Rate for a
new Guarantee Period of 5 years is 8.25%:
N/12
The MVA factor = [(1 + I)/(1 + J + .005)] -1
(54/12)
= [(1.0725)/(1.0825 + .005)] -1
4.5
= (0.986207) -1
= 0.939412 -1
= -0.060588
The Withdrawal Charge of $300 is applied first; the MVA factor is
applied against the remaining Guarantee Amount:
MVA = ($14,515.97 - $300 - $30) X (-0.060588) = -$859.50
A-3
<PAGE> 72
The net amount available upon withdrawal is the Guarantee Amount
reduced by the Withdrawal Charge, the MVA and the Contract Administration
Charge:
$14,515.97 - $300 - $859.50 - $30 = $13,326.47
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of withdrawal the Current Interest Rate for a
new Guarantee Period of 5 years is 6.25%:
N/12
The MVA factor = [(1 + I)/(1 + J + .005)] -1
(54/12)
= [(1.0725)/(1.0625 + .005)] -1
4.5
= (1.004684) -1
= 1.021251 -1
= +0.021251
The MVA is:
($14,515.97 - $300 - $30) X (+0.021251) = +$301.46
And the net amount available upon surrender is:
$14,515.97 - $300 + $301.46 - $30 = $14,487.43
A-4
<PAGE> 73
<TABLE>
<S> <C> <C>
==============================
- ------------------------------ Stamp
</TABLE>
ANCHOR NATIONAL LIFE INSURANCE COMPANY
ANNUITY SERVICE CENTER
P.O. BOX 54299
LOS ANGELES, CA 90054-0299
<PAGE> 74
Please forward a copy, without charge, of the Statement of Additional
Information concerning the Vista Capital Advantage issued by Anchor National
Life Insurance Company to:
(Please print or type and fill in all information.)
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
City/State/Zip
- ------------------------------------------------------------------------------
Date: ________________________ Signed:
