<PAGE> 1
Filed pursuant to Rule 497(c)
of the Securities Act of 1933
File Nos. 2-86837 and 811-3859
AMERICAN PATHWAY II
AN INDIVIDUAL DEFERRED VARIABLE BENEFIT AND FIXED BENEFIT ANNUITY
FLEXIBLE PURCHASE PAYMENT-NONPARTICIPATING CONTRACT
ISSUED BY
VARIABLE SEPARATE ACCOUNT
The contract described in this Prospectus is an Individual Deferred
Variable Benefit and Fixed Benefit Annuity Contract ("Contract") designed to
provide annuity benefits to individual purchasers in connection with retirement
plans that do not qualify for special federal income tax treatment under the
Internal Revenue Code, as amended ("Code"). The Contract described herein,
however, may also be used to provide annuity benefits to individual purchasers
in connection with retirement plans that do qualify under the Code. This
Prospectus describes only the variable portion of the Contract. Purchase
payments under the Contract may be allocated to the underlying investments of
the Variable Separate Account ("Separate Account"). The Separate Account will be
invested in shares of the Anchor Pathway Fund, a diversified, open-end
investment company registered under the Investment Company Act of 1940, as
amended ("1940 Act"). Anchor Pathway Fund consists of seven series each of which
has its own investment objective and policies.
Anchor National Life Insurance Company discontinued new sales of the
Contract as of the close of business on August 31, 1993. The Company will
continue to accept subsequent payments on existing contracts and to issue the
Contract to new participants in existing qualified retirement plans using the
Contract as a funding vehicle.
This Prospectus and the Prospectus for Anchor Pathway Fund set forth
concisely the information a prospective investor ought to know before investing.
Additional information about the Separate Account has been filed with the
Securities and Exchange Commission in a Statement of Additional Information,
dated January 28, 1997, incorporated herein by reference. The Statement of
Additional Information is available without charge upon written request to
Anchor National Life Insurance Company, Service Center, P.O. Box 54299, Los
Angeles, California 90054-0299, or by telephoning (800) 445-7862. The Table of
Contents of the Statement of Additional Information appears on page 22 of this
Prospectus.
------------------------
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A
CURRENT PROSPECTUS OF ANCHOR PATHWAY FUND. BOTH
PROSPECTUSES SHOULD BE READ CAREFULLY AND
RETAINED FOR FUTURE REFERENCE.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS JANUARY 28, 1997.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
TOPIC PAGE
----
<S> <C>
DEFINITIONS..................................... 2
SUMMARY OF THE CONTRACTS........................ 3
CONDENSED FINANCIAL INFORMATION................. 7
FINANCIAL INFORMATION........................... 8
INSURANCE COMPANY............................... 8
SEPARATE ACCOUNT................................ 8
CHARGES AND DEDUCTIONS.......................... 9
ANCHOR PATHWAY FUND............................. 11
CONTRACT........................................ 12
VARIABLE ACCOUNT ACCUMULATION
PROVISIONS.................................... 12
DEATH BENEFIT................................... 13
EXERCISE OF RIGHTS UNDER THE
CONTRACT...................................... 13
FIXED AND VARIABLE ANNUITY
PROVISIONS.................................... 16
ANNUITY OPTIONS AVAILABLE ON A FIXED
OR VARIABLE BASIS............................. 17
ANNUITY OPTIONS AVAILABLE ON A FIXED
BASIS ONLY.................................... 17
ADDITIONAL VARIABLE ANNUITY
PROVISIONS.................................... 18
MISCELLANEOUS PROVISIONS........................ 18
FEDERAL INCOME TAX STATUS....................... 19
DISTRIBUTION OF CONTRACTS....................... 21
VOTING RIGHTS................................... 21
OTHER INFORMATION............................... 21
STATEMENT OF ADDITIONAL
INFORMATION -- Table of Contents.............. 22
APPENDIX -- The General Account................. A-1
</TABLE>
DEFINITIONS
Accumulation Unit: A measuring unit used to determine the value of a
Contract Owner's interest in a Variable Account of the Separate Account prior to
the Annuity Date.
Annuitant: The person on whose continuation of life annuity payments under
a Contract are based.
Annuity: A series of income payments made to the Contract Owner or
Contract Owner's designee for a defined period of time.
Annuity Date: The date on which annuity payments are to start.
Annuity Unit: A measuring unit used to compute the annuity payments from a
Variable Account of the Separate Account.
Beneficiary(ies): The person(s) designated to receive any benefits under a
Contract upon the death of the Annuitant.
Company: Anchor National Life Insurance Company, an Arizona corporation.
Contract: The Individual Deferred Variable Benefit and Fixed Benefit
Annuity Contract issued by the Company. Only the variable portion of the
Contract is described in this Prospectus.
Contract Owner: The person entitled to exercise all rights under a
Contract.
Contract Value: The sum of the Contract Owner's interest in the Variable
Accounts of the Separate Account and the Contract Owner's interest in the
General Account. The Contract Owner's interest in the Separate Account is the
sum of the Accumulation Unit values. The Contract Owner's interest in the
General Account is the accumulated value of the amounts allocated to the General
Account, plus the interest credited thereon as guaranteed in the Contract, less
any prior withdrawals and/or amounts applied to annuity options and transaction
charges.
Contract Year: A year starting from the date a Contract is issued in one
calendar year and ending in the succeeding calendar year.
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 Annuity: An Annuity providing guaranteed level payments. These
payments are not based upon the investment experience of the Separate Account.
General Account: All assets of the Company other than those in the Separate
Account or in any other segregated asset account of the Company.
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Net Contract Value: The Contract Value less any applicable charges and
deductions.
Net Investment Factor: An index used to measure the investment experience
of a Variable Account from one Valuation Period to the next.
Purchase Payments: The money paid for a Contract.
Separate Account: Variable Separate Account, formerly known as American
Pathway II -- Separate Account of Anchor National Life Insurance Company, a
segregated asset account established by the Company to receive and invest
amounts allocated to provide variable and fixed benefits under the Contract.
Valuation Period: The interval from one valuation date on which the
Separate Account's Accumulation and Annuity Units are valued to the following
valuation date on which these Units are valued.
Variable Account: A division of the Separate Account. The Separate Account
consists of seven Variable Accounts. Each Variable Account is invested in a
specified series of Anchor Pathway Fund ("Fund").
Variable Annuity: A series of periodic payments that vary in amount
according to the investment experience of the Variable Accounts.
SUMMARY OF THE CONTRACTS
QUALIFIED AND NON-QUALIFIED CONTRACTS -- The Contract is intended to be
issued primarily for retirement plans that do not qualify for special tax
treatment ("Non-Qualified Contracts") and for individuals seeking to accumulate
funds for retirement whether or not the individuals are otherwise participating
in qualified or non-qualified retirement plans. The Contract may also be issued
to plans qualifying for special tax treatment ("Qualified Contracts"), such as
individual retirement annuities ("IRAs"), section 403(b) tax-sheltered
annuities, section 457 deferred compensation plans, money purchase pension plans
and profit-sharing plans. This Prospectus is intended to serve as a disclosure
document for the variable portion of the Contract only.
PURCHASE PAYMENTS -- The full amount of each Purchase Payment, undiminished
by an initial sales charge, is credited to the Separate Account, the General
Account or allocated between them, according to the Contract Owner's
designation. A contingent deferred sales charge, however, may be imposed in the
event of an early withdrawal (redemption) of Contract Value. See "Charges and
Deductions".
The Contract permits Purchase Payments to be made on a flexible basis at
any time prior to annuitization subject to the following restrictions. The
minimum initial Purchase Payment the Company will accept is $5,000 for
Non-Qualified Contracts and $2,000 for Qualified Contracts. The minimum
subsequent Purchase Payment the Company will accept is $500 for Non-Qualified
Contracts and $250 for Qualified Contracts. Subsequent Purchase Payments into
either a Non-Qualified or Qualified Contract are subject to a $25 minimum if
they are paid through the Automatic Payment Authorization Program, provided the
Contract Owner's financial institution is a member of the National Data
Corporation clearinghouse network. An enrollment form for this program is
available from the Company. Subsequent Purchase Payments for all policies issued
on or before March 31, 1991, will continue to be subject to an annual minimum of
$300 with a minimum payment amount of $25, the minimum requirements in effect at
the time such policies were issued. See "Purchase Payments".
VARIABLE ACCOUNTS -- The Separate Account is divided into seven Variable
Accounts, each of which is invested in shares of a designated series of the
Fund. One or more Variable Accounts may be selected by Contract Owners and the
selections may be changed subject to certain conditions described herein. The
Contract Value and the amount of the periodic Variable Annuity payments reflect
the investment experience of the particular Variable Account selected, subject
to the deduction of certain fees and charges. See "Separate Account" and
"Charges and Deductions".
ANCHOR PATHWAY FUND -- The Fund consists of seven series: the Growth
Series, the International Series, the Growth-Income Series, the Asset Allocation
Series, the High-Yield Bond Series, the U.S. Government/ AAA-Rated Securities
Series and the Cash Management Series. See "Anchor Pathway Fund".
CHARGES AND DEDUCTIONS -- A contingent deferred sales charge is deducted in
the event of early withdrawals of the Contract Value, with certain exceptions.
The charge will be 5% of any amounts withdrawn that are attributable to Purchase
Payments made within five years prior to the date of withdrawal, determined on a
first-in, first-out basis. No charge will be
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made for the part of the first withdrawal in a Contract Year that does not
exceed 10% of the sum of Purchase Payments made more than one year prior to the
date of withdrawal. In addition, no charge will apply to scheduled withdrawals
made under the Systematic Withdrawal Program. However, during the time a
Contract Owner is participating in the Systematic Withdrawal Program, the charge
will apply to all nonscheduled withdrawals, including the first in any Contract
Year.
The cumulative sum of contingent deferred sales charges against amounts
attributable to Purchase Payments made within five years prior to the date of
withdrawal will never be more than 5% of the sum of all Purchase Payments made
during the same period. See "Contingent Deferred Sales Charge".
A Contract administration charge of $30 is deducted from the Contract Value
on each Contract anniversary that occurs on or prior to the Annuity Date. The
Contract administration charge is also deducted, without proration, if a full
withdrawal is made before the next Contract anniversary. See "Contract
Administration Charge".
Premium taxes payable to a state or other governmental entity are deducted
from the Contract Value at the time of surrender, upon death of the Annuitant or
when annuity payments begin. Premium taxes currently range from 0% to 3.5%. See
"Premium Taxes".
The Company deducts a daily mortality risk premium at an annual rate of
0.80% of the total net assets of the Separate Account. See "Mortality Risk
Charge". The Company deducts a daily expense risk charge at an annual rate of
0.35% of the total net assets of the Separate Account. See "Expense Risk
Charge". In addition, the Company deducts a daily distribution expense risk
charge at an annual rate of 0.15% of the total net assets of the Separate
Account. See "Distribution Expense Risk Charge".
A charge of $25 per transaction ($10 in Texas and Pennsylvania) is assessed
against any transaction effecting transfer in excess of the fifteen permitted
without charge in any Contract Year. See "Certain Transfers Charge".
An investment advisory fee and a management fee are charged on a monthly
basis, and accrued daily, for each series of the Fund. See the Anchor Pathway
Fund Prospectus for a discussion of the deductions and expenses paid out of the
assets of the Fund.
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CONTRACT OWNER TRANSACTION EXPENSES:
As a percentage of Purchase Payments during first 5 Contract Years.....5.00%
ANNUAL CONTRACT ADMINISTRATION CHARGE(1):.................................$30.00
TRANSFER FEE..............................................................$25.00
(applies solely to transfers in excess of fifteen in a Contract Year, $10 in
Pennsylvania and Texas)
SEPARATE ACCOUNT ANNUAL FEES AND CHARGES, as a percentage of total net assets:
<TABLE>
<S> <C> <C>
Mortality Risk Charge................................................................................ .80%
Expense Risk Charge............................................................................. .35%
Distribution Expense Charge..................................................................... .15%
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TOTAL SEPARATE ACCOUNT ANNUAL FEES AND CHARGES..................................................1.30%
======
</TABLE>
ANNUAL OPERATING EXPENSES OF ANCHOR PATHWAY FUND(2), as a percentage of average
net assets for the November 30, 1996 fiscal year:
<TABLE>
<CAPTION>
U.S.
GROWTH- ASSET GOVERNMENT/ CASH
GROWTH INTERNATIONAL INCOME ALLOCATION HIGH-YIELD AAA RATED MANAGEMENT
SERIES SERIES SERIES SERIES BOND SERIES SERIES SERIES
------ ------------- ------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Advisory Fee..... 0.30% 0.60% 0.30% 0.31% 0.31% 0.32% 0.32%
Business Management Fee..... 0.20% 0.24% 0.20% 0.21% 0.21% 0.21% 0.21%
Other Expenses:
Custodian and trustee
fees.................... 0.03% 0.16% 0.03% 0.04% 0.04% 0.05% 0.04%
Auditing and legal fees... 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%
Other expenses............ 0.01% 0.01% 0.01% 0.01% 0.01% 0.00% 0.00%
TOTAL FUND OPERATING
EXPENSES.................. 0.55% 1.02% 0.55% 0.58% 0.58% 0.59% 0.58%
</TABLE>
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(1) The administrative charge is deducted from the Contract Value on each
Contract anniversary prior to the Annuity Date, or in full upon surrender of
the Contract. The administrative charge is not deducted after the Annuity
Date.
(2) The operating expenses of Anchor Pathway Fund, the underlying investment of
the Separate Account, are paid by the Fund and accordingly, are borne
indirectly by Contract Owners.
Premium taxes, currently ranging between 0% and 3.5%, are not included. The rate
of the premium tax varies depending upon the Contract Owner's state of
residence, and not all states impose premium taxes.
<TABLE>
<CAPTION>
U.S.
GROWTH- ASSET GOVERNMENT/ CASH
GROWTH INTERNATIONAL INCOME ALLOCATION HIGH-YIELD AAA RATED MANAGEMENT
EXAMPLE(1) SERIES SERIES SERIES SERIES BOND SERIES SERIES SERIES
------ ------------- ------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
If you surrender your Contract at the end
of the applicable time period:
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets:
1 year........................... $ 69 $ 74 $ 69 $ 70 $ 70 $ 70 $ 70
3 years.......................... 110 124 110 111 111 111 111
5 years.......................... 153 177 153 155 155 155 155
10 years.......................... 223 272 223 227 227 228 227
</TABLE>
<TABLE>
<CAPTION>
U.S.
GROWTH- ASSET GOVERNMENT/ CASH
GROWTH INTERNATIONAL INCOME ALLOCATION HIGH-YIELD AAA RATED MANAGEMENT
EXAMPLE(1) SERIES SERIES SERIES SERIES BOND SERIES SERIES SERIES
------ ------------- ------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
If you do not surrender your Contract:
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets:
1 year........................... $ 19 $ 24 $ 19 $ 20 $ 20 $ 20 $ 20
3 years.......................... 60 74 60 61 61 61 61
5 years.......................... 103 127 103 105 105 105 105
10 years.......................... 223 272 223 227 227 228 227
</TABLE>
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(1) The EXAMPLE, a projection, should not be considered a representation of past
or future expenses. Actual expenses may be greater or lesser than those
shown.
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THE PURPOSE OF THE TABLE IS TO ASSIST CONTRACT OWNERS IN
UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT THEY BEAR
DIRECTLY AND INDIRECTLY. SEE "CHARGES AND DEDUCTIONS" AND
THE PROSPECTUS FOR ANCHOR PATHWAY FUND.
TEN DAY REVIEW -- Within 10 days (or longer period if required by state
law) of receipt of the Contract by a purchaser it may be returned to the Company
for cancellation. Except as otherwise required by law, the Company will refund
the Contract Value for the Valuation Period in which the Contract is received.
The Contract Owner bears the investment risk during the ten day review period,
except that for IRAs, the Purchase Payments or Contract Value, whichever is
greater, will be returned.
ANNUITY PAYMENTS -- Monthly annuity payments will start on the Annuity
Date. The Contract Owner selects the Annuity Date and an annuity payment option.
These selections may be changed prior to the Annuity Date. See "Change of
Annuity Date or Annuity Option". The amount of Variable Annuity payments vary
with the investment experience of the series in which Contract Value is
invested.
If the Net Contract Value at the Annuity Date is less than $5,000, the
Company reserves the right to pay the Net Contract Value in a lump sum. If any
annuity payment would be less than $50, the Company reserves the right to change
the frequency of payments to such intervals as will result in payments of at
least $50, or to pay the Contract Value in a lump sum. See "Minimum Annuity
Payments".
DEATH BENEFIT -- If the Annuitant dies prior to the Annuity Date, the
Company will pay to the Beneficiary the greater of (a) the sum of all Purchase
Payments net of withdrawals, or (b) the current Contract Value. Following the
fifth Contract anniversary, the Company will pay the Beneficiary the greater of
(a) above, (b) above or (c) the Contract Value on the Contract anniversary
preceding the death of the Annuitant less withdrawals and/or partial
annuitizations since such anniversary. See "Death Benefit -- Before the Annuity
Date".
WITHDRAWALS -- Prior to the Annuity Date, the Contract Owner may withdraw
all or part of the Contract Value. No withdrawals are permitted after annuity
payments commence. The amount withdrawn must be at least $500 ($250 for
withdrawals made under the Systematic Withdrawal Program) and, if the Contract
is to continue in force, the remaining Contract Value must be at least $500. See
"Exercise of Rights Under the Contract -- Withdrawals". A contingent deferred
sales charge and a Contract administration charge may be imposed. See
"Contingent Deferred Sales Charge" and "Contract Administration Charge". In
addition, with the exception of section 403(b) Contracts, the earnings withdrawn
are taxable as ordinary income and may be subject to a 10% federal tax penalty
if withdrawn before age 59 1/2. Values may not be withdrawn from section 403(b)
Contracts except under certain circumstances. See "Federal Income Tax Status".
TRANSFERS TO AND FROM SEPARATE ACCOUNT -- Contract Owners may transfer all
or part of Contract Value between the Separate Account and the General Account,
subject to certain conditions. See "Transfers".
TRANSFERS AMONG VARIABLE ACCOUNTS -- Contract Owners may, subject to
certain conditions, transfer all or part of Contract Value from one Variable
Account to one or more of the remaining Variable Accounts. See "Transfers".
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE OFFER DESCRIBED HEREIN AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER IN ANY JURISDICTION TO ANY PERSON TO WHOM SUCH OFFER
WOULD BE UNLAWFUL THEREIN.
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CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
VARIABLE
ACCOUNTS
OF YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
SEPARATE ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
ACCOUNT 11/30/87 11/30/88 11/30/89 11/30/90 11/30/91 11/30/92 11/30/93 11/30/94 11/30/95 11/30/96
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth
Beg.
AUV... 15.59 14.72 17.70 25.99 23.47 29.37 35.17 41.05 41.86 57.00
End
AUV... 14.72 17.70 25.99 23.47 29.37 35.17 41.05 41.86 57.00 64.16
End #
AUs
(000)... 5,362 5,299 7,318 11,434 15,619 18,313 17,915 17,020 15,740 12,673
International(1)
Beg.
AUV... -- -- -- 10.00 9.61 10.01 9.91 12.48 13.32 14.62
End
AUV... -- -- -- 9.61 10.01 9.91 12.48 13.32 14.62 17.31
End #
AUs
(000)... -- -- -- 1,426 5,058 8,666 15,403 19,494 15,613 14,410
Growth-Income
Beg.
AUV... 17.86 16.12 19.50 25.58 23.35 27.93 31.99 35.47 35.70 47.04
End
AUV... 16.12 19.50 25.58 23.35 27.93 31.99 35.47 35.70 47.04 56.59
End #
AUs
(000)... 10,884 10,819 14,235 18,151 20,935 24,304 24,321 21,452 18,752 16,244
Asset
Allocation(2)
Beg.
AUV... -- -- 10.00 10.91 10.61 12.41 13.96 15.25 14.93 19.31
End
AUV... -- -- 10.91 10.61 12.41 13.96 15.25 14.93 19.31 22.74
End #
AUs
(000)... -- -- 2,138 5,189 6,306 9,611 10,926 9,558 7,954 6,731
High-Yield
Bond
Beg.
AUV... 15.77 16.03 18.40 19.78 19.55 24.93 28.06 32.25 30.34 35.62
End
AUV... 16.03 18.40 19.78 19.55 24.93 28.06 32.25 30.34 35.62 40.11
End #
AUs
(000)... 3,886 4,258 4,338 4,051 4,723 5,272 5,907 4,200 4,115 3,274
U.S.
Government/AAA-Rated
Securities(3)
Beg.
AUV... 11.69 11.17 12.13 13.39 14.16 15.89 17.23 19.15 18.12 20.73
End
AUV... 11.17 12.13 13.39 14.16 15.89 17.23 19.15 18.12 20.73 21.58
End #
AUs
(000)... 3,448 3,676 6,415 9,061 12,105 13,392 11,935 8,242 6,505 5,045
Cash
Management
Beg.
AUV... 11.86 12.39 13.10 14.08 15.01 15.69 15.99 16.20 16.56 17.24
End
AUV... 12.39 13.10 14.08 15.01 15.69 15.99 16.20 16.56 17.24 17.86
End #
AUs
(000)... 4,013 4,891 5,637 10,920 12,618 12,728 11,875 11,258 5,852 4,993
</TABLE>
- ------------
AUV -- Accumulation Unit Value
AU -- Accumulation Units
(1) First offered May 9, 1990.
(2) First offered March 31, 1989.
(3) Previously known as U.S. Government Guaranteed Securities Series (first
offered November 19, 1985).
PERFORMANCE DATA -- From time to time the Cash Management Account may
advertise its "yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Cash Management Account refers to the net income generated for a
Contract funded by an investment in the Account 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 Cash Management
Account 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 withdrawal charges. The impact of other recurring charges on
both 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 Variable Accounts may advertise "total return" data. 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 Variable Account 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 Cash Management Account. The effect of applicable withdrawal charges
due
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<PAGE> 8
to the assumed redemption will be reflected in the return figures, but may be
omitted in additional return figures given for comparison.
For a more complete description of Contract charges, see "Charges and
Deductions". For a more detailed description of the performance data
computations, please refer to the Statement of Additional Information.
FINANCIAL INFORMATION
Financial statements of the Separate Account may be found in the Statement
of Additional Information. Financial statements of the Company are also
contained in the Statement of Additional Information. A copy of the Statement of
Additional Information may be obtained without charge by sending a written
request to Anchor National Life Insurance Company, Service Center, P.O. Box
54299, Los Angeles, California 90054-0299 or by calling (800) 445-7862.
INSURANCE 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 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 three broker-dealers, offer a full line of financial services, including
fixed and variable annuities, mutual funds, premium finance, broker-dealer and
trust administration services.
The Company may from time to time publish in advertisements, sales
literature and reports to Contract 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 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 company'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 business in the District
of Columbia and in all states except New York. It markets the Contract in all
jurisdictions in which it is admitted to conduct life insurance business.
SEPARATE ACCOUNT
The Separate Account was initially established by the Company on June 25,
1981, pursuant to the provisions of California law, as a segregated investment
account of the Company. In connection with the redomestication of the Company,
the Separate Account was assumed intact by the Company. The Separate Account is
divided into seven Variable Accounts, each of which is invested in shares of a
designated series of the Fund. The Separate Account and each Variable Account
therein is administered as part of the general business of the Company, but the
income, gains and losses, whether or not realized, from assets allocated to each
Variable Account are credited to or charged against that Variable Account in
accordance with the terms of the Contract, without regard to other income, gains
or losses of any other Variable Account or arising out of any other business the
Company may conduct. The assets within each Variable Account are not chargeable
with liabilities arising out of the business conducted by any other Variable
Account, nor will the Separate Account be chargeable with liabilities arising
out of any other business the Company may conduct.
All obligations arising under a Contract, including the guarantee to make
annuity payments, are general corporate obligations of the Company, and all of
the Company's assets are available to meet its expenses and obligations under
the Contract. While the Company is obligated to make the variable benefit
annuity payments under a Contract, the amount of
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these payments is not guaranteed. The Contract Value allocated to the Separate
Account and the amount of the Variable Annuity payments vary with the investment
experience of the Variable Account(s) and are subject to certain fees and
charges. See "Charges and Deductions".
The Company has caused the Separate Account to be registered with the
Securities and Exchange Commission as a unit investment trust under the 1940
Act. Such registration does not involve supervision of the management or
investment practices or policies of the Separate Account or the Company by the
Securities and Exchange Commission.
CHARGES AND DEDUCTIONS
CONTINGENT DEFERRED SALES CHARGE -- No initial sales charge is deducted
from Purchase Payments. A contingent deferred sales charge, however, may be
imposed in the event of withdrawal (redemption) of the Contract Value. The
contingent deferred sales charge is intended to recover the Company's expenses
relating to the sale of the Contract, including commissions, preparation of
sales literature and other sales activities.
The contingent deferred sales charge is 5% of the amount withdrawn
attributable to Purchase Payments made within five years prior to the date of
withdrawal, determined on a first-in, first-out basis. The charge is assessed
against the amount requested, but is deducted from the remaining Contract Value
after the Contract Owner is paid the requested amount. If the Contract Owner is
not participating in the Systematic Withdrawal Program, no charge is made for
the part of the first withdrawal in a Contract Year that does not exceed 10% of
the sum of Purchase Payments made more than one year prior to the date of
withdrawal. If the Contract Owner is participating in the Systematic Withdrawal
Program, the charge will be assessed against all withdrawals other than those
made under that Program.
In no event will the cumulative sum of contingent deferred sales charges
against amounts attributable to Purchase Payments made within five years prior
to the day of withdrawal be more than 5% of the sum of all Purchase Payments
made during the same period.
The 10% free withdrawal right discussed above will result in a monetary
benefit to the Contract Owner only where the amount withdrawn is less than 110%
of applicable Purchase Payments.
The contingent deferred sales charge is eliminated when Contracts are
issued to officers, directors or bona fide full-time employees of the Company,
the investment adviser to the Fund or the principal underwriter of the Contract.
Contracts so purchased are purchased for investment purposes and may not be
resold.
In addition, the contingent deferred sales charge may be waived by the
Company on withdrawals from the Separate Account where the amount withdrawn is
used to purchase another annuity contract issued by the Company. Additional
information regarding the elimination or waiver of the contingent deferred sales
charge may be obtained by contacting the Company.
CONTRACT ADMINISTRATION CHARGE -- The Company has primary responsibility
for administration of the Contract. Administrative services include issuing
Contracts and maintaining Contract Owner records, including accounting,
valuation and reporting services. The Company deducts a Contract administration
charge of $30 per Contract Year for the administration charge. The Company does
not anticipate realizing a gain from this charge. The Company, in its sole
discretion, reserves the right to reduce the administration charge for Qualified
Contracts where certain economies in administration costs are realized. The
charge is deducted from the Contract Value on each Contract anniversary that
occurs on or prior to the Annuity Date. The charge is also deducted upon full
withdrawal of the Contract Value, without proration, if the withdrawal is made
other than on a Contract anniversary. Even though administrative expenses may
increase, the amount of this charge will not increase.
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 advance any premium taxes due at the time Purchase
Payments are made and then deduct premium taxes from a Contract Owner's Contract
Value at the time of surrender, upon death of the Annuitant or when annuity
payments begin. The Company, however, reserves the right to deduct premium taxes
when incurred. Premium taxes currently range from 0% to 3.5%.
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CERTAIN TRANSFERS CHARGE -- Up to fifteen transactions transferring amounts
from the General Account or one or more Variable Accounts of the Separate
Account, to one or more of the Variable Accounts or to the General Account may
be made each Contract Year without charge. A charge of $25 per transaction ($10
in Texas and Pennsylvania) is assessed against any transaction in excess of the
fifteen permitted without charge in any Contract Year. The charge will be
deducted from the account or accounts from which the transfer was made. If the
entire Contract Value in an account is transferred then the charge will be
deducted from the transferred Contract Value.
MORTALITY RISK CHARGE -- Annuity payments are not affected by the mortality
experience (death rate) of persons receiving annuity payments or of the general
population. For assuming this mortality risk and the risk inherent in the death
benefit (see "Death Benefit -- Before the Annuity Date"), the Company deducts a
mortality risk premium from the Separate Account daily. The premium is computed
and deducted from each Variable Account at an annual rate of 0.80% of the total
net assets of the Variable Account. If the mortality risk premium is
insufficient to cover the actual costs of the mortality risk, the Company will
bear the loss. However, if the amount proves more than sufficient, the excess
will be a gain that the Company may use in its discretion to pay distribution
and other expenses. The rate imposed for the mortality risk premium may not be
increased.
EXPENSE RISK CHARGE -- The Company guarantees that the Contract
administration charge will not increase, regardless of actual expenses incurred
by the Company. For assuming this expense risk, the Company deducts an expense
risk charge from the Separate Account. The charge is computed and deducted daily
from each Variable Account, at an annual rate of 0.35% of the total net assets
of the Variable Account. If the expense risk charge is insufficient to cover the
actual cost of the expense risk, the Company will bear the loss. However, if the
charge is more than sufficient, the excess will be a gain that the Company may
use in its discretion to pay distribution and other expenses. The rate imposed
for the expense risk charge may not be increased.
DISTRIBUTION EXPENSE CHARGE -- The Company guarantees that the contingent
deferred sales charge stated in the Contract will not be increased. For assuming
this distribution expense risk, the Company deducts a distribution expense
charge daily from each Variable Account at an annual rate of 0.15% of the total
net assets of the Variable Account. If the distribution expense charge and the
contingent deferred sales charge are insufficient to cover the actual cost of
distribution, the Company will bear the loss. However, if the charges are more
than sufficient, the excess will be a gain that the Company may use in its
discretion. The rate imposed for the distribution expense charge may not be
increased.
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ANCHOR PATHWAY FUND
Anchor Pathway Fund was organized as a Massachusetts business trust on
March 23, 1987, and is registered as a diversified, open-end management
investment company under the 1940 Act. Such registration does not involve
supervision by the Securities and Exchange Commission of the investments or
investment policies of the Fund. The Fund consists of seven series: the Growth
Series, the International Series, the Growth-Income Series, the Asset Allocation
Series, the High-Yield Bond Series, the U.S. Government/AAA-Rated Securities
Series and the Cash Management Series. The Board of Trustees of the Fund may
establish additional series at any time. Series' assets are segregated and a
shareholder's interest is limited to the series in which he or she owns shares.
Capital Research and Management Company, 333 South Hope Street, Los
Angeles, California 90071, one of the nation's largest and oldest investment
management organizations, serves as the investment adviser to the Fund. The
administration and business affairs of the Fund are managed by Anchor Investment
Adviser, Inc., an indirectly wholly owned subsidiary of the Company.
The seven series have, and are subject to, certain investment policies and
restrictions that may not be changed without a majority vote of the shareholders
in that series. The rights of Contract Owners to instruct the Company on the
voting of the Fund shares are described under "Voting Rights".
The GROWTH SERIES seeks growth of capital by investing primarily in common
stocks or securities with common stock characteristics.
The INTERNATIONAL SERIES seeks long-term growth of capital by investing in
securities of issuers domiciled outside the United States.
The GROWTH-INCOME SERIES seeks growth of capital and income by investing
primarily in securities which demonstrate the potential for appreciation and/or
dividends.
The ASSET ALLOCATION SERIES seeks high total return (including income and
capital gains) consistent with preservation of capital over the long term
through a diversified portfolio that can include common stocks and other
equity-type securities (such as convertible bonds and preferred stocks), bonds
and other intermediate and long-term fixed-income securities and money market
instruments (debt securities maturing in one year or less) in any combination.
The HIGH-YIELD BOND SERIES seeks a high level of current income and
secondarily seeks capital appreciation by investing primarily in intermediate
and long-term corporate obligations, with emphasis on higher-yielding,
higher-risk, lower-rated or unrated securities.
The U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES seeks a high level of
current income consistent with prudent investment risk and preservation of
capital by investing primarily in a combination of (i) securities guaranteed by
the U.S. Government and (ii) other debt securities rated AAA by Standard &
Poor's Corporation or Aaa by Moody's Investors Service, Inc. or that have not
received a rating but are determined to be of comparable quality by the
investment adviser.
The CASH MANAGEMENT SERIES seeks high current yield while preserving
capital by investing in a diversified selection of money market instruments.
The Fund offers its shares solely to the Separate Account. Fund shares are
used solely as the underlying investment medium for the Contracts offered in
this Prospectus. In the future, however, Fund shares may be used as the
underlying investment medium for other annuity contracts or variable life
contracts offered by the Company. The offering of Fund shares to variable
annuity and variable life separate accounts is referred to as "mixed funding."
It may be disadvantageous for variable life separate accounts and variable
annuity separate accounts to invest in the Fund simultaneously. Although neither
the Company nor the Fund currently foresees such disadvantages either to
variable life or variable annuity owners, the Board of Trustees of the Fund
would monitor events in order to identify any material conflicts to determine
what action, if any, would need to be taken in response thereto.
DETAILED INFORMATION ABOUT THE FUND IS CONTAINED IN THE ACCOMPANYING
CURRENT PROSPECTUS OF THE FUND. AN INVESTOR SHOULD CAREFULLY
REVIEW THE FUND'S PROSPECTUS BEFORE ALLOCATING AMOUNTS
TO BE INVESTED IN ITS SERIES.
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CONTRACT
CONTRACT DESCRIPTION -- This Prospectus describes only the variable portion
and not the fixed portion of the Contract. See the Appendix for a description of
the fixed portion of the Contract.
PURCHASE PAYMENTS -- The minimum initial Purchase Payment the Company will
accept is $5,000 for Non-Qualified Contracts and $2,000 for Qualified Contracts.
The minimum subsequent Purchase Payment the Company will accept is $500 for
Non-Qualified Contracts and $250 for Qualified Contracts. Subsequent Purchase
Payments into either a Non-Qualified or Qualified Contract are subject to a $25
minimum if they are paid through the Automatic Payment Authorization Program,
provided the Contract Owner's financial institution is a member of the National
Data Corporation clearinghouse network. An enrollment form for this program is
available from the Company. Subsequent Purchase Payments for all policies issued
on or before March 31, 1991, will continue to be subject to an annual minimum of
$300 with a minimum payment amount of $25, the minimum requirements in effect at
the time such policies were issued.
At the time the initial Purchase Payment is made, Contract Owners should
instruct the Company how to allocate the Payment among the General Account and
the seven Variable Accounts. If no allocation is indicated, the entire amount of
the initial Purchase Payment will be allocated to the Cash Management Series
pending instruction from the Contract Owner. Subsequent Purchase Payments may be
made at any time prior to the Annuity Date and will be allocated in accordance
with the Contract Owner's instructions. If no allocation instructions are
provided, the Payment will be deposited in accordance with the most recent
allocation instructions received by the Company. The Contract will not be in
default if subsequent Purchase Payments are not made. No Purchase Payments will
be accepted after the Annuity Date.
The Company reserves the right to reject any application or Purchase
Payments not in compliance with the terms of the Contract or applicable state
law provisions. In the event that an application fails to recite all necessary
information, the Company will promptly request that the Contract Owner furnish
further instructions and will hold the initial Purchase Payment in a suspense
account, without interest, for a period of up to five business days pending
receipt of the information by the Company. If the necessary information is not
received within five business days, the Company will return the initial Purchase
Payment to the prospective Contract Owner unless the prospective Contract Owner,
after being informed of the reasons for the delay, specifically consents to the
Company retaining the initial Purchase Payment until the application is made
complete.
VARIABLE ACCOUNT ACCUMULATION PROVISIONS
ACCUMULATION UNITS -- The number of Accumulation Units purchased for a
Contract Owner with respect to his or her initial Purchase Payment is determined
by dividing the amount credited to each Variable Account by the Accumulation
Unit value for that Variable Account next computed following acceptance of the
application (generally the next business day after receipt of payment by the
Company). The number of Accumulation Units purchased with respect to subsequent
Purchase Payments is determined by dividing the amount credited to each Variable
Account by the applicable Accumulation Unit value for the Valuation Period next
determined following receipt of the payment by the Company. The Accumulation
Unit value of each Variable Account varies in accordance with the investment
experience of that Variable Account and is affected by the investment experience
of the respective Fund series, by expenses and by the deduction of certain
charges.
VALUE OF AN ACCUMULATION UNIT -- The value of an Accumulation Unit of a
particular Variable Account may increase or decrease from one Valuation Period
to the next. The value is determined by multiplying the value of an Accumulation
Unit for the last prior Valuation Period by the Net Investment Factor for that
Variable Account for the current Valuation Period. The value of an Accumulation
Unit is independently computed for each Variable Account using the Net
Investment Factor applicable to that Variable Account. The Contract Owner bears
the investment risk that the aggregate value of the amounts allocated to the
Separate Account may at any time be less than, equal to, or more than the
amounts invested in the Separate Account. Accumulation Unit value calculations
are made at the close of general trading on the New York Stock Exchange,
currently 4 p.m., New York time.
NET INVESTMENT FACTOR -- The Net Investment Factor is an index used to
measure the investment performance of a Variable Account from one Valuation
Period to the next. For each Variable Account, the Net Investment Factor for a
Valuation Period may be greater or less than 1.0, depending upon the investment
performance of the particular series in whose shares the Variable Account is
invested.
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DEATH BENEFIT
BEFORE THE ANNUITY DATE -- If the Annuitant dies prior to the Annuity Date,
the Company will pay to the Beneficiary, upon receipt by the Company of Due
Proof of Death of the Annuitant, the greater of (a) the sum of all Purchase
Payments, adjusted for withdrawals; or (b) the Contract Value for the Valuation
Period in which such proof is received at the Company. After the fifth Contract
anniversary, the Company will pay to the Beneficiary the greater of (a) above,
(b) above or, (c) the Contract Value on the Contract anniversary preceding the
death of the Annuitant less withdrawals since such anniversary. Payment will be
in a lump sum unless the Beneficiary elects an annuity option or elects to apply
the amount payable under the Contract to the purchase of a new Contract on the
same form.
AFTER THE ANNUITY DATE -- If the Annuitant dies after the Annuity Date, the
amount payable, if any, is specified in the annuity option selected. See "Fixed
and Variable Annuity Provisions".
The death benefit is calculated upon receipt by the Company of Due Proof of
Death.
EXERCISE OF RIGHTS UNDER THE CONTRACT
BENEFICIARY -- The Beneficiary is named in the application. Unless the
Beneficiary has been irrevocably designated, the Beneficiary may be changed
while the Annuitant is living if a written request of the Contract Owner is
received by the Company. The estate or heirs of any Beneficiary who dies before
the Annuitant have no rights under the Contract. If no Beneficiary survives the
Annuitant, payment is made to the Contract Owner, the contingent owner (if any),
or to the Contract Owner's estate.
OWNERSHIP -- The Contract Owner is the person entitled to exercise all
rights under the Contract. The Annuitant is the Contract Owner unless otherwise
designated in the application or by endorsement. If permitted by the retirement
plan under which a Contract is purchased, a contingent owner may be designated
by a Contract Owner other than the Annuitant. The interest of any contingent
owner who dies before the Contract Owner will end at the death of such
contingent owner. If ownership passes to the contingent owner and the contingent
owner is the surviving spouse of the Contract Owner, the new Contract Owner will
have all the rights and privileges of the previous Contract Owner. If the
contingent owner is not the surviving spouse, the contingent owner must elect to
continue the Contract and receive the entire Contract Value within five years of
the Contract Owner's death, unless an Annuity for the life or a period not
exceeding the life expectancy of the contingent owner is elected and commenced
within one year of the Contract Owner's death. Ownership of the Contract may be
transferred to a new Contract Owner. Such a transfer of ownership cancels any
designation of a contingent owner, but does not affect a Beneficiary
designation. The Contract Owner should consult a competent tax adviser prior to
making any such designations or transfers.
ASSIGNMENT -- Unless the Contract is issued in connection with a Qualified
Plan, a Contract Owner may assign the Contract at any time prior to the earlier
of the Annuity Date or the date of death of the Annuitant. The right to change
the Beneficiary under the Contract may be assigned after the Annuity Date, if
prior to the date of death of the Annuitant. Amounts payable under a Contract
may not be assigned or encumbered and, to the extent permitted by law, are not
subject to levy, attachment or any other judicial process for the payment of the
payee's debts or obligations, except that the right to change the Beneficiary
may be assigned prior to the date of death of the Annuitant. Moreover, in the
event that the Contract is issued pursuant to a Qualified Plan or a
Non-Qualified Plan that is subject to Title I of the Employee Retirement Income
Security Act of 1974 ("ERISA"), it may not be assigned, pledged or transferred
except as permitted by law. A collateral assignment does not change Contract
ownership. Because an assignment may be a taxable event, the Contract Owner
should consult a competent tax adviser prior to making any such designations,
transfers or assignments.
No assignment of any interest under the Contract is binding upon the
Company until a written assignment is filed with the Company, and the Company
assumes no obligation with respect to the effect or validity of any such
assignment. An assignment will not affect any payments the Company may make or
actions it may take before it receives notice of the assignment.
TRANSFERS -- Transfers, subject to the restrictions listed below, may be
made before or after the Annuity Date by sending a written request to the
Company or by telephone authorization. If the Contract application does not
require the Contract Owner to make an election to permit telephone transfers,
telephone transfers are automatically accepted unless the Company is otherwise
instructed by the Contract Owner. The Company has in place procedures which are
designed to provide reasonable
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<PAGE> 14
assurance that telephone authorizations are genuine, including tape recording
all 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 Contract
Owner. However, if the Company fails to employ reasonable procedures to ensure
that all telephone transfer or withdrawal instructions are properly authorized,
the Company may be held liable for such losses. Telephone calls authorizing
transfers must be completed by 4 p.m. Eastern time in order to effect the
transfer the day of receipt. All other transfers will be processed on the next
business day. The Company reserves the right to modify, suspend or terminate the
telephone transfer service at any time. Transfers are effected at the first
valuation date after receipt of written instructions.
MINIMUM AMOUNTS, ALL TRANSFERS -- The amount transferred must be at least
$500. No transfer is permitted if such transfer would result in the
transferor account having a balance of less than $500, unless the entire
amount is transferred. For transfers made after the Annuity Date, also see
"Additional Variable Annuity Provisions -- Transfers".
TIME LIMITATIONS, ALL TRANSFERS; CHARGES -- Transfers may not be made
during the first 30 days after the date of issue of the Contract, and
transactions effecting transfer may not be made more often than fifteen
times in any Contract year without charge. A charge of $25 per
transaction is assessed ($10 in Texas and Pennsylvania) against any
transaction effecting transfer in excess of the fifteen permitted without
charge in any Contract year. Transfers made under the Dollar Cost Averaging
Program, described below, are counted against this limitation in the same
manner as other transfers.
TRANSFER WITHIN THE SEPARATE ACCOUNT -- The Contract Owner may transfer all
or part of the Contract Value or Annuity Unit value from one Variable
Account of the Separate Account to one or more of the remaining Variable
Accounts.
TRANSFER TO SEPARATE ACCOUNT -- The Contract Owner may transfer all or part
of the Contract Value from the General Account to the Separate Account
subject to the following additional limitations: (a) no more than 25% of
the total amount allocated to the General Account may be transferred to the
Separate Account in any one Contract Year, and (b) any such transfer may be
made not later than 90 days before the Annuity Date. These limitations also
apply to transfers made from the General Account under the Automatic Dollar
Cost Averaging Program, below.
TRANSFER TO GENERAL ACCOUNT -- The Contract Owner may transfer all or part
of the Contract Value from the Separate Account to the General Account. To
the extent that monies are transferred to the General Account, they are not
affected by the investment performance of the Fund.
AUTOMATIC DOLLAR COST AVERAGING PROGRAM -- Contract Owners who wish to
purchase units of the Variable Accounts over a period of time may be able to do
so through the Dollar Cost Averaging ("DCA") Program. Under the DCA Program, a
Contract Owner may authorize the automatic transfer of a fixed dollar amount
($100 minimum) of his or her choice at regular intervals from either the Cash
Management Account or the General Account to one or more of the Variable
Accounts (other than the Cash Management Account) at the unit values determined
on the dates of the transfers. The intervals between transfers may be monthly,
quarterly, semi-annually or annually, at the option of the Contract Owner. The
theory of Dollar Cost Averaging is that greater numbers of units are purchased
at times when the unit prices are relatively low than are purchased when the
prices are higher. This has 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 Contract Owner of
a greater profit, or any profit, from his or her purchases under the 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 Cash Management Account or the General Account to
one of the Variable Accounts (other than the Cash Management Account). Although
the various options under the DCA Program will allow transfers to be made either
from the Cash Management Account or the General Account, a Contract Owner must
elect to have the transfers made exclusively from one or the other of these two
sources.
A Contract Owner may not simultaneously participate in both the DCA Program
and the Systematic Withdrawal Program described below. Participation in the DCA
Program will be effective one month after the Company has received and approved
the application to participate in the DCA Program, which application must be in
writing. A Contract Owner may elect to increase, decrease or change the
frequency or amount of Purchase Payments under the DCA Program. The Company
reserves the right to modify, suspend or terminate the DCA Program at any time.
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WITHDRAWALS -- A Contract Owner may effect a withdrawal by submitting a
written request to the Company or by completing a Systematic Withdrawal Program
enrollment form. The request must be signed by the Contract Owner. The signature
should be in exactly the same form as the name reflected on the Contract Owner's
account. The request should include the name of the General Account and/or the
Variable Accounts involved, and the Contract Owner's account number. The request
must also be accompanied by the Contract or a Lost Contract Affidavit (which may
be obtained by calling the Company) where a complete withdrawal is requested.
The Contract Owner may make a partial or complete withdrawal (redemption)
of the Net Contract Value. A request for withdrawal must be received prior to
the earlier of the Annuity Date or the death of the Annuitant. Upon request for
a complete withdrawal, the Contract Owner will receive his or her Net Contract
Value as of the date that the written request for the withdrawal is received by
the Company. If the withdrawal is partial, the amount withdrawn must be at least
$500 ($250 for withdrawals made pursuant to the Systematic Withdrawal Program
described below). Moreover, no partial withdrawal may be effected if it would
cause the remaining Contract Value to be less than $500. Unless otherwise
directed by the Contract Owner, a partial withdrawal will be made from the
General Account and each Variable Account in which Contract Value is invested,
in the ratio that the Contract Value in the General Account and each Variable
Account bears to total Contract Value. Under certain circumstances, withdrawals
are subject to a contingent deferred sales charge as well as a Contract
administration charge. See "Contingent Deferred Sales Charge" and "Contract
Administration Charge".
A withdrawal may result in adverse federal income tax consequences. See
"Federal Income Tax Status". In regard to section 403(b) contracts, neither
salary reduction contributions nor earnings accrued after December 31, 1988, may
be withdrawn except under certain circumstances.
Payment of withdrawals are normally made within seven days. The Company
reserves the right, however, to defer any withdrawal payment or transfer of
values if (a) the New York Stock Exchange is closed (other than customary
weekend and holiday closings), (b) trading on the New York Stock Exchange is
restricted, (c) an emergency exists making disposal of the Separate Account's
securities or the valuation of net assets of the Separate Account not reasonably
practicable, or (d) the Securities and Exchange Commission has by order
permitted suspension of redemptions for the protection of Contract Owners. The
Securities and Exchange Commission by rules and regulations determines the
conditions under which trading of securities shall be deemed to be restricted
and the conditions under which an emergency shall be deemed to exist.
SYSTEMATIC WITHDRAWAL PROGRAM -- The Systematic Withdrawal ("SW") Program
allows Contract Owners to initiate, at the time the Contract is issued or on or
after the first anniversary of the Contract issuance date, a procedure for
automatically withdrawing a portion of their investment at either monthly,
quarterly, semi-annual or annual intervals, subject to certain limitations.
Under the SW Program, the minimum payout amount is $250 per withdrawal and the
maximum amount that can be withdrawn in any twelve month period is equal to 10%
of the aggregate Purchase Payments paid under the Contract. A Contract Owner
electing the SW Program must specify, subject to the foregoing limits, the
amount to be withdrawn by prescribing either a fixed dollar amount per
withdrawal or a fixed percentage of the aggregate Purchase Payments paid to the
date of the withdrawal. The Contract Owner may, at least one month in advance,
specify a date for the termination of scheduled withdrawals under the SW
Program, which cannot be later than the Annuity Date (see "Annuity Date").
Applications for participating in the SW Program must be in writing.
Participation under the SW Program will commence one month after the Company has
received and approved the application. If participation under the SW Program is
terminated, it cannot be reinstated before one year after the last withdrawal
made under the SW Program prior to termination.
The contingent deferred sales charge will be waived for withdrawals made
under the SW Program. Nonscheduled withdrawals made during the time the SW
Program is in effect (i.e., any withdrawals other than those scheduled under the
SW Program) will be subject to the contingent deferred sales charge, including
the charge that would normally not apply to the first withdrawal in each
calendar year. See "Contingent Deferred Sales Charge".
Amounts withdrawn under to the SW Program may be electronically wired to
the Contract Owner's financial institution by completing the instructions on the
Electronic Fund Transfer Form or by written request delivered to the Company. 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. The Company reserves the right to modify,
suspend or terminate the availability of electronic fund transfers at any time.
A Contract Owner may not simultaneously participate in both the SW Program
and the DCA Program. Like other withdrawals, withdrawals under the SW Program
may have adverse tax consequences. See "Federal Income Tax Status".
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SUBSTITUTION AND CHANGE -- The Company reserves the right to offer Contract
Owners, at some future date and in accordance with the requirements of the 1940
Act, the option of directing their Purchase Payments to an investment company
other than the Fund, or to substitute another fund or series of the Fund for
their current investment in the Fund.
If shares of the Fund are not available for purchase by the Separate
Account, or if in the judgment of the Company, further investment in such shares
is no longer appropriate in view of the purposes of the Separate Account, then
(i) shares of another registered open-end, diversified management investment
company ("mutual fund") may be substituted for Fund shares held in the Separate
Account and/or (ii) payments received after a date specified by the Company may
be applied to the purchase of shares of another mutual fund in lieu of Fund
shares. In either event, approval of the Securities and Exchange Commission
shall be obtained. It is intended that any substitution would be of shares of a
mutual fund with investment objectives similar to those of the Fund.
FIXED AND VARIABLE ANNUITY PROVISIONS
MINIMUM ANNUITY PAYMENTS -- Annuity payments are made monthly, but if any
payment would be less than $50, the Company may change the frequency so payments
are at least $50 each. If the Net Contract Value to be applied at the Annuity
Date is less than $5,000, the Company may elect to pay such amount in a lump
sum. For tax consequences of a lump-sum payment, see "Federal Income Tax
Status".
ANNUITY DATE -- The Contract Owner selects the Annuity Date, which must be
the first day of a calendar month. It must be at least two years after the date
of issue of the Contract. It may not be later than the first day of the next
month after the Annuitant's 80th birthday (85th birthday for Contracts issued on
or after June 1, 1990).
PROOF OF AGE, SEX AND SURVIVAL -- The Company may require proof of age, sex
or survival of any payee upon whose continuation of life annuity payments
depend.
MISSTATEMENT OF AGE OR SEX -- If the age or sex of the Annuitant has been
misstated, any annuity amount payable shall be the annuity amount which the
proceeds applied would have purchased using the correct age and sex.
Overpayments made by the Company because of such misstatement, with interest at
6% per year, compounded annually, will be charged against benefits payable
subsequent to adjustment. The dollar amount of any underpayment made by the
Company as a result of a misstatement will be paid in full with the next payment
due under the Contract.
CHANGE OF ANNUITY DATE OR ANNUITY OPTION -- The Contract Owner may change
the Annuity Date or the annuity option on written notice to the Company at least
30 days prior to the Annuity Date previously selected. The Annuity Date may not
be changed to a date later than the first day of the month following the
Annuitant's 80th birthday (85th birthday for Contracts issued on or after June
1, 1990).
IF NO ANNUITY OPTION IS SELECTED -- For amounts allocated to the Separate
Account, a variable life Annuity with 120 monthly payments guaranteed (option 4
below), will be paid if no Annuity election has been made by the Annuity Date.
If the Contract Owner has not chosen an Annuity option prior to the Annuitant's
death, a Beneficiary may make this choice upon the Annuitant's death.
ANNUITY OPTIONS UNDER EMPLOYER SPONSORED PLANS -- The Contract contains
annuity options calculated on the basis of the sex of the Annuitant. The United
States Supreme Court in its decision entitled Arizona Governing Committee for
Tax Deferred Annuity and Deferred Compensation Plans v. Norris determined that
an employer subject to Title VII of the Civil Rights Act of 1964 (primarily
section 403(b) tax-sheltered annuities) may not offer to its employees the
option of receiving retirement benefits calculated on the basis of sex. In
accordance with the Norris decision, the Company does not offer participants of
these plans the option of receiving retirement benefits calculated on the basis
of sex, but offers retirement benefits calculated on a unisex basis, as included
in the Contract.
ANNUITY OPTIONS -- Subject to the provisions of a retirement plan under
which a Contract is purchased, the Contract Owner shall select in the
application any one of the following annuity options.
Upon written election filed with the Company, the Contract Value, as
computed 10 days before the Annuity Date, is applied to provide one of the
following options. The Company will allow the Contract Owner the option of
choosing both a fixed and a variable annuity option if the Contract Owner so
desires.
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<PAGE> 17
Contract Owners 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. 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 at any time.
ANNUITY OPTIONS AVAILABLE ON A FIXED OR VARIABLE BASIS
OPTION 1: LIFE ANNUITY, LIFETIME MONTHLY PAYMENTS GUARANTEED -- Monthly
payments during the lifetime of the Annuitant. No further payments are payable
after the death of the Annuitant and there is no provision for a death benefit
payable to a Beneficiary. While this option will generally offer a higher level
of monthly payments than the other options discussed below, it is possible that
only one payment could be made if the Annuitant dies before the due date of the
second payment, two if the Annuitant dies before the third payment, and so on.
OPTION 2: JOINT AND TWO-THIRDS SURVIVOR ANNUITY -- Monthly payments
payable during the joint lifetime of the payee and a designated second person
and during the lifetime of the survivor. During the lifetime of the survivor,
variable monthly payments will be determined using two-thirds of the number of
each type of Annuity Units credited to the Contract. Fixed monthly payments
during the lifetime of the survivor will be equal to two-thirds of the fixed
monthly payment payable during the joint lifetimes.
OPTION 3: JOINT AND SURVIVOR LIFE ANNUITY, 120 MONTHLY PAYMENTS
GUARANTEED -- Monthly payments, during the joint lifetime of two persons and
continuing during the remaining lifetime of the survivor, with the guarantee
that payments will be made for not less than 120 months. Payments will be made
as follows:
(a) If the Annuitant was the payee, then upon the death of the Annuitant,
any guaranteed annuity payments will be continued during the remainder of
the selected period to the Beneficiary. The Beneficiary may elect to have
the present value of the guaranteed number of annuity payments remaining
paid in a lump sum as specified in (b) immediately below.
(b) If the Beneficiary was the payee, then upon the death of the
Beneficiary, the present value of the remaining unpaid guaranteed annuity
payments shall be paid in a lump sum to the estate of the Beneficiary. Such
present value shall be determined as of the end of the Valuation Period
during which notice of the Beneficiary's death is received by the Company
and by discounting each remaining unpaid guaranteed annuity payment at the
effective annual interest rate assumed in determining the annuity purchase
rate.
OPTION 4: LIFE ANNUITY, 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 less than
the 120 or 240 monthly periods, as selected, payments will be made in the same
manner as provided in paragraph (a) and (b) under option 3 above.
ANNUITY OPTIONS AVAILABLE ON A FIXED BASIS ONLY
OPTION 5: MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN -- Monthly
payments for any specified period of time (three (3) years or more, but not
exceeding thirty (30) years), as elected. In the event of death of the payee
under this option, the Contract provides that in certain circumstances, the
discounted value of the remaining payments, if any, will be calculated and paid
in one sum.
OPTION 6: FIXED PAYMENTS -- The amount applied to provide fixed payments in
accordance with this option will be held by the Company at interest. Fixed
payments will be made in such amounts and at such times as may be agreed upon
with the Company, and will continue until the amount held by the Company with
interest is exhausted. The final payment will be for the balance remaining and
may be less than the amount of each preceding payment. Interest will be credited
yearly on the amount remaining unpaid at a rate determined by the Company from
time to time, but not less than 4% per year compounded annually. The rate may be
changed at any time and as often as may be determined by the Company, provided,
however, that the rate may not be reduced more frequently than once during each
calendar year.
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<PAGE> 18
ADDITIONAL VARIABLE ANNUITY PROVISIONS
FIRST VARIABLE ANNUITY PAYMENT -- The dollar amount of the first monthly
annuity payment is determined by applying the Contract Value to the Annuity
table applicable to the annuity option chosen. If more than one Variable Account
has been selected, the value of the interest in each series is applied
separately to the Annuity table to determine the amount of the first annuity
payment attributable to that Variable Account. The Annuity tables are in the
Contract, and are based on the 1971 Individual Annuity Mortality Table with
interest at 4% for the life of the Contract.
ASSUMED INVESTMENT RATE -- A 4% assumed investment rate is built into the
Annuity tables in the Contract. A higher assumption would mean a higher first
annuity payment but more slowly rising and more rapidly falling subsequent
payments. A lower assumption would have the opposite effect. If the actual net
investment rate is 4% annually, annuity payments would be level.
NUMBER OF ANNUITY UNITS -- The number of Annuity Units for each applicable
Variable Account is the amount of the first monthly annuity payment attributable
to that Variable Account divided by the value of an Annuity Unit of that
Variable Account as of the Annuity Date. The number used in computing monthly
payments remains constant during the annuity period unless amounts are
transferred among the Variable Accounts.
SUBSEQUENT VARIABLE ANNUITY PAYMENTS -- Subsequent monthly annuity payments
vary in amount according to the investment performance of the applicable
Variable Account. The part of each subsequent Variable Annuity payment
attributable to a Variable Account is the number of Annuity Units of that
Variable Account multiplied by the value of an Annuity Unit of that Variable
Account for the Valuation Period in which payment is due. The amount of each
subsequent annuity payment is not affected by variations in expenses or
mortality experience.
VALUE OF EACH ANNUITY UNIT -- The Annuity Unit value of each Variable
Account was arbitrarily set at $10 when the Variable Account was established.
The value may increase or decrease from one Valuation Period to the next. For
any Valuation Period, the value of an Annuity Unit of a particular Variable
Account is the value of that Annuity Unit during the last Valuation Period
multiplied by the Net Investment Factor for that Variable Account for the
current Valuation Period. The result is then multiplied by a factor that
neutralizes the assumed investment rate.
TRANSFERS -- After the Annuity Date, transfers may be requested at the end
of any month. Transfers will then be effected on the first day of the month
following such request.
MISCELLANEOUS PROVISIONS
NOTICES AND ELECTIONS -- All notices and elections under the Contract must
be in writing, signed by the proper party and received at the Company to be
effective. All notices and elections should refer to the General Account and/or
the Variable Accounts involved, and should note the Contract Owner's account
number. If acceptable to the Company, notices or elections relating to
beneficiaries and ownership will take effect as of the date signed, unless the
Company has already acted in reliance on the prior status. The Company is not
responsible for the validity of such notices and elections.
AMENDMENT OF CONTRACT -- A condition or provision of the Contract may be
waived or modified only in writing signed by the Chairman, President, a Vice
President, Secretary or Assistant Secretary of the Company.
The Contract may be amended at any time as required to make it conform with
any law or regulation issued by any government agency to which the Contract is
subject.
TEN DAY RIGHT TO REVIEW -- Within 10 days (or longer period if required by
state law) of the receipt of a Contract it may be returned to the Company for
cancellation. Except as otherwise required by law, the Company will refund the
Contract Value for the Valuation Period in which the Contract is received.
Except for IRA Contracts, the Contract Owner bears the investment risk during
the ten day review period. For IRA Contracts, the Owner will receive the greater
of Contract Value or Purchase Payments made.
RETIREMENT PLAN CONDITIONS -- A Contract acquired in connection with a
Qualified Plan may be subject to special restrictions or consequences. The
Contract Owner should understand the features of any Qualified Plan in which he
or she participates and, if necessary, seek an explanation thereof from a
competent tax adviser.
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<PAGE> 19
REPORTS TO CONTRACT OWNERS -- The Company keeps all records relating to the
Contracts. At least once a year, a report setting forth information regarding
Contract Value is sent to Contract Owners. Contract Owners will also be
furnished notices, proxies and solicitation materials relating to the Fund.
FEDERAL INCOME TAX STATUS
GENERAL -- The operations of the Separate Account form part of the
operations of the Company; however, the Internal Revenue Code of 1986, as
amended ("Code") provides that no federal income tax will be payable by the
Company on the investment income and capital gains of the Separate Account
provided it complies with certain requirements.
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
Contract Owner. 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 Contract Owner 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.
NON-QUALIFIED CONTRACTS -- Distributions before the Annuity Date are
treated as coming first from earnings, rather than Purchase Payments, until the
entire amount of earnings has been distributed. For federal tax purposes, these
distributions include the receipt of proceeds from loans and the assignment or
pledge of any portion of the Contract Value, as well as partial withdrawals and
surrenders. Distributions before the Annuity Date are taxable as ordinary income
to the extent that Contract Value, unreduced by surrender charges, exceeds
Purchase Payments.
A 10% penalty may apply to the income portion of any distribution. However,
the penalty is not imposed on amounts received: (1) after the taxpayer reaches
age 59 1/2; (2) after the death of the Contract Owner; (3) if the taxpayer is
disabled as defined in the Code; (4) in a series of substantially equal payments
made not less frequently than annually for the life (or life expectancy) of the
taxpayer or for the joint lives (or life expectancies) of the taxpayer and his
or her Beneficiary; (5) under an immediate annuity; or (6) which are allocable
to Purchase Payments made prior to August 14, 1982.
The Contract provides that upon death of the Annuitant prior to the Annuity
Date, the death benefit will be paid to the named Beneficiary. Such payments
made upon the death of the Annuitant who is not the Contract Owner do not
qualify for the death of Contract Owner exception described above, and will be
subject to the 10% distribution penalty unless the Beneficiary is 59 1/2 years
old or one of the other exceptions to the penalty applies.
Section 817(h) of the Code authorized the Secretary of the Treasury
("Treasury") to set standards by regulation or otherwise for the investments of
separate accounts to be considered "adequately diversified" in order for the
contract to be treated as an annuity contract for federal tax purposes. The
Separate Account, through the Fund, intends to comply with the diversification
requirements. The Company has entered into an agreement regarding participation
in the Fund, that requires the Fund to be operated in compliance with the
requirements prescribed by the Treasury. Thus, the Company believes that the
Contract will be treated as an annuity contract for federal tax purposes.
19
<PAGE> 20
In certain circumstances, variable Contract Owners may be considered the
owners, for federal tax purposes, of the assets of the separate account used to
support such contracts. In those circumstances, income and gains from separate
account assets would be includible in the variable Contract Owners' gross
income.
QUALIFIED CONTRACTS -- If the Contract is used with a corporate pension or
profit-sharing plan described in section 401(a) of the Code, an annuity plan
described in section 403(a), a simplified employee pension plan described in
section 408(k), or a tax-sheltered annuity described in section 403(b) of the
Code ("Qualified Plans"), deductible employer contributions up to prescribed
limits are permitted. Employers may deduct their contributions to self-employed
and corporate pension and profit-sharing plans and tax-sheltered annuities in
the year when made, up to the limits specified in the Code. In addition, some
Qualified Plans may permit nondeductible employee contributions. If the Contract
is used as an IRA, all or a portion of the contribution up to $2,000 may be
deducted. Under present interpretations and authority, until a distribution is
made, no federal income tax is payable on the investment earnings.
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 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 "Federal Income Tax Status -- Withholding Tax on Distributions")
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.
Distributions to a participant in a Qualified Plan under section 401(a)
that are made prior to age 59 1/2 and that are not on account of death,
disability, a domestic relations order, for deductible medical expense, early
retirement after age 55, or that are not received as a series of substantially
equal payments for the life or a period equal to the life expectancy of the
participant or the joint life expectancy of the participant and a designated
beneficiary, will be subject to an additional 10% tax. The 10% tax also applies
to certain distributions from IRAs under similar circumstances.
The Code also contains requirements as to the ages by which distributions
must begin under Qualified Plans, and the percentage of payments that must go to
the participant vis-a-vis a Beneficiary.
All distributions, with the exception of a return of nondeductible employee
contributions, received from a section 401, 403(b), 457 plan or IRA are included
in gross income. After the Annuity Date, any nondeductible contributions are
recovered tax-free as a portion of each annuity payment. In the case of section
401 or 403(b) plans and IRAs, a distribution is includible in the year in which
it is paid. In the case of a section 457 plan, a distribution is includible in
the year it is paid or when made available, depending upon whether certain Code
requirements are met.
The Code imposes restrictions on distributions (i.e., withdrawals or
surrenders) from annuity contracts sold to plans qualified under section 403(b)
of the Code. Section 403(b)(11) of the Code requires that for these annuity
contracts to receive tax-deferred treatment, they must provide that
distributions attributable to contributions made pursuant to a salary reduction
agreement be paid only:
(1) when the employee attains age 59 1/2, separates from service, dies,
or becomes disabled (within the meaning of section 72(m)(7)); or
(2) in hardship cases, where only the distribution of contributed
amounts is permitted; distribution of any income attributable to these
amounts is prohibited.
Assets held as of December 31, 1988, are not subject to such Code
restrictions.
The Contracts have been modified to comply with these changes in the Code.
The Company is relying on a no-action letter from the Securities and Exchange
Commission that was issued to the American Council of Life Insurance and made
publicly available on November 28, 1988. That letter outlines further conditions
that must be met if a company offering registered annuity contracts imposes the
limitations required by the Code. The Company will comply with the conditions of
the no-action letter.
TAXATION OF ANNUITY PAYMENTS AND OTHER DISTRIBUTIONS -- Where Purchase
Payments were nondeductible, a portion of each annuity payment is treated as a
nontaxable return of Purchase Payments. The remaining portion of this Annuity
20
<PAGE> 21
payment is taxable as ordinary income. The taxable amount of each annuity
payment is based on the period over which payments are to be made or, in the
case of a life Annuity, the life expectancy of the Annuitant. On annuities paid
out under Qualified Contracts consisting of Purchase Payments that were not
taxed currently to the Contract Owner, the entire annuity payment is taxable
since the Purchase Payments have not been included in taxable income when made.
The Company is required to withhold federal income tax on annuity payments,
distributions, and partial and full surrenders. However, recipients of such
Contract distributions are allowed to make an election not to have federal
income tax withheld, except as provided in "Federal Income Tax
Status -- Withholding Tax on Distributions". After an election is made with
respect to annuity payments, an Annuitant may revoke the election at any time,
and thereafter commence withholding. The Company will notify the payee at least
annually of his or her right to revoke the election. Payees are required by law
to provide the Company (as payor) with their correct taxpayer identification
number ("TIN"). If the payee is an individual, the TIN is his or her Social
Security number.
The above discussion is for information only and is not to be considered to
constitute tax advice. For advice regarding your particular tax situation, you
should consult a competent tax adviser.
DISTRIBUTION OF CONTRACTS
Contracts are sold by broker-dealers who are licensed insurance agents of
the Company, either individually or through an incorporated insurance agency.
Sales commissions are paid by the Company and typically range to 5.5% of
Purchase Payments paid.
SunAmerica Capital Services, Inc., located at 733 Third Avenue, 4th Floor,
New York, New York 10017, serves as the distributor of the Contracts pursuant to
a distribution agreement. SunAmerica Capital Services, Inc., an indirect wholly
owned subsidiary of SunAmerica Inc., 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.
VOTING RIGHTS
Unless otherwise restricted by the plan under which a Contract is issued,
each Contract Owner has the right to instruct the Company with respect to voting
his or her interest in the shares of the Fund held by the Separate Account at
all shareholder meetings. Shareholder meetings ordinarily will not be held
unless required by the 1940 Act.
The number of votes that may be cast by a Contract Owner is based on the
number of units owned as of the record date of the meeting. Shares for which no
instructions are received are voted in the same proportion as the shares for
which instructions have been received. Contract Owners receive various
materials, such as proxy materials and voting instruction forms, that relate to
voting Fund shares. Contract Owners will also receive periodic reports relating
to the Fund series in which they have an interest.
OTHER INFORMATION
LEGAL PROCEEDINGS -- There are no legal proceedings to which the Separate
Account is a party or to which the assets of the Separate Account are subject.
The Company is engaged in various kinds of routine litigation that in the
Company's judgment are not material to the Company's economic condition. None of
this litigation relates to the Separate Account.
REGISTRATION STATEMENT -- A registration statement has been filed with the
Securities and Exchange Commission under the Securities Act of 1933 with respect
to the Contract. This Prospectus does not contain all information set forth in
the registration statement, its amendments and exhibits, to all of which
reference is made for further information concerning the Separate Account, the
Company and the Contract. Statements contained in this Prospectus as to the
content of the Contract and other legal instruments are summaries. For a
complete statement of the terms thereof, reference is made to these instruments
as filed.
CUSTODIAN OF ASSETS -- State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, serves as the custodian of the assets of
the Separate Account. The custodian is remunerated by the Company based on a
schedule of fees under an agreement between the custodian and the Company.
CONTRACT OWNER INQUIRIES -- Any questions regarding the Contract should be
directed to the insurance agent from whom the Contract was purchased, or to the
Company. Contract Owners may telephone the Company at (800) 445-7862.
21
<PAGE> 22
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TOPIC PAGE
<S> <C>
Insurance Company.................................................................................. 2
Variable Account Accumulation Provisions........................................................... 2
Performance Data................................................................................... 3
Additional Federal Income Tax Information.......................................................... 5
The Company and the Separate Account.......................................................... 5
Non-Qualified Plans........................................................................... 5
Qualified Plans............................................................................... 6
Distributions................................................................................. 7
Tax Withholding............................................................................... 7
Withholding Tax on Distributions.............................................................. 8
Distribution of Contracts.......................................................................... 8
Financial Statements............................................................................... 9
</TABLE>
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<PAGE> 23
APPENDIX
THE GENERAL ACCOUNT
Contributions under the fixed portion of the Contract become part of the
General Account of the Company, that supports insurance and annuity obligations.
Because of exemptive and exclusionary provisions, interests in the General
Account have not been registered under the Securities Act of 1933, as amended
("1933 Act"), nor is the General Account registered as an investment company
under the Investment Company Act of 1940, as amended ("1940 Act"). Accordingly,
neither the General Account nor any interests therein is generally subject to
the provisions of the 1933 or 1940 Acts. Disclosures regarding the fixed portion
of the Annuity Contract and the General Account, however, may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of statements made in prospectuses. The staff
of the Securities and Exchange Commission has not reviewed this portion of the
Prospectus relating to the General Account.
If selected by the Contract Owner, Purchase Payments may be allocated to
the General Account in addition to, or in lieu of, the Separate Account.
Interest is credited to the General Account from the day the amounts are
received at a guaranteed rate of 4%. The Company may in its discretion determine
an effective annual rate of interest to be applied to the General Account over
and above the guaranteed interest rate ("excess interest"). The rate of excess
interest is declared in advance of the date that amounts are credited, and may
vary from time to time except that once a rate of excess interest is declared,
that rate is maintained by the Company for at least twelve months. Interest is
compounded annually on the anniversary of the date amounts are first allocated
to the General Account by the Contract Owner.
GENERAL ACCOUNT ACCUMULATION PROVISION
ACCUMULATION VALUE -- The General Account Accumulation Value under a
Contract shall be the sum of all monies allocated or transferred to the General
Account after giving effect to the crediting of and compounding of all
guaranteed interest and excess interest on the General Account during the period
that the Contract has been in effect. This amount shall be adjusted for all
transfers out of the General Account and withdrawals from the General Account.
A-1
<PAGE> 24
Please forward a copy (without charge) of the Statement of Additional
Information concerning American Pathway II Variable Annuity Contracts to:
(Please print or type and fill in all information.)
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
City State Zip
- ------------------------------------------------------------------------------
Date: Signed:
------------------- ----------------------------------------------
Return to: Anchor National Life Insurance Company, Service Center,
P.O. Box 54299, Los Angeles, California 90054-0299
<PAGE> 25
Filed pursuant to Rule 497(c)
of the Securities Act of 1933
File Nos. 2-86837 and 811-3859
Statement of Additional Information
VARIABLE SEPARATE ACCOUNT
Individual Deferred Variable Benefit and Fixed Benefit Annuity
Flexible Purchase Payment - Non-Participating Contract
ANCHOR NATIONAL LIFE INSURANCE COMPANY
January 28, 1997
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the American Pathway II Prospectus, dated
January 28, 1997, as it may be supplemented, a copy of which may be obtained
without charge by writing to Anchor National Life Insurance Company, Service
Center, P.O. Box 54299, Los Angeles, California 90054-0299, or by calling
(800) 445-7862.
<PAGE> 26
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Topic Page
<S> <C>
Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Variable Account Accumulation Provision . . . . . . . . . . . . . . . . 2
Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Additional Federal Income Tax Information . . . . . . . . . . . . . . . 5
The Company and the Separate Account . . . . . . . . . . . . . . . . 5
Non-Qualified Plans . . . . . . . . . . . . . . . . . . . . . . . . 5
Qualified Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Withholding Tax on Distributions . . . . . . . . . . . . . . . . . . 8
Distribution of Contracts . . . . . . . . . . . . . . . . . . . . . . . 8
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
<PAGE> 27
INSURANCE COMPANY
Information regarding the Company and its ownership is contained in
the Prospectus.
VARIABLE ACCOUNT ACCUMULATION PROVISIONS
Accumulation Units - The number of accumulation units purchased for a
Contract Owner with respect to his or her initial purchase payment is
determined by dividing the amount credited to each Variable Account by the
accumulation unit value for that Variable Account next computed following
acceptance of the application (generally the next business day after receipt of
payment by the Company). In the event that an application fails to recite all
necessary information, the Company will promptly request that the Contract
Owner furnish further instructions and will hold the initial purchase payment
in a suspense account, without interest, for a period not exceeding five
business days from receipt of the application at the Company. If the necessary
information is not received within five business days, the Company will return
the initial purchase payment to the prospective Contract Owner unless the
prospective Contract Owner, after being informed of the reasons for the delay,
specifically consents to the Company retaining the initial purchase payment
until the application is made complete. The number of accumulation units
purchased with respect to subsequent purchase payments is determined by
dividing the amount credited to each Variable Account by the applicable
accumulation unit value for the valuation period next determined following
receipt of the payment by the Company. The accumulation unit value of each
Variable Account varies in accordance with the investment experience of that
Variable Account, and is affected by the investment experience of the
respective Fund series, by expenses and by the deduction of certain charges.
Value of an Accumulation Unit - The accumulation unit value of each
Variable Account was arbitrarily set at $10 when the Variable Account was
established. The value of an accumulation unit may increase or decrease from
one valuation period to the next. All Variable Accounts are valued as of the
close of general trading on the New York Stock Exchange, currently 4 p.m., New
York time. The value for any valuation period is determined by multiplying the
value of an accumulation unit for the last prior valuation period by the net
investment factor for that Variable Account for the current valuation period.
The value of an accumulation unit is independently computed for each Variable
Account using the net investment factor applicable to that Variable Account.
Net Investment Factor - This is an index used to measure the
investment performance of a Variable Account from one valuation period to the
next. For each Variable Account, the net investment factor for a valuation
period is found by dividing (a) by (b), and reducing the result by (c):
Where (a) is:
The net asset value as of the end of the current valuation
period of a share of the series of the Fund in which the
assets of the Variable Account are invested, plus the per
share amount of any dividends and other distributions on those
shares since the end of the immediately preceding valuation
period;
Where (b) is:
The net asset value of a share of the specified series of the
Fund as of the end of the immediately preceding valuation
period;
And where (c) is:
2
<PAGE> 28
The deduction for mortality, expense and distribution expense
risks, that shall remain constant at .00356% for each day in
the current valuation period. The maximum daily deduction for
mortality, expense risks and distribution risks is equivalent
to an annual rate of 1.30%.
To the extent that the net investment factor is less than 1, the
accumulation unit value will decrease. To the extent that the net investment
factor is greater than 1, the accumulation unit value will increase.
PERFORMANCE DATA
Performance data for the various Variable Accounts are determined in
the manner described below.
Cash Management Account
The annualized current yield and the effective yield for the Cash
Management Account for the 7 day period ended November 30, 1996 were 3.89% and
3.96%, respectively.
Current yield is computed by first determining the Base Period Return
attributable to a hypothetical Contract having a balance of one Accumulation
Unit at the beginning of a 7 day period using the formula:
Base Period Return = (EV - SV - CAC)/(SV)
where:
SV = value of one Accumulation Unit at the start of a 7 day period
EV = value of one Accumulation Unit at the end of the 7 day period
CAC = an allocated portion of the $30 annual Contract Administration
Charge, prorated for 7 days
The change in the value of the Accumulation Unit during the 7 day
period reflects the income received, minus any expenses incurred during such 7
day period. The Contract Administration Charge is first allocated among the
Fixed and Variable Accounts so that each Account's allocated portion of the
charge is proportional to the percentage of the number of Contract Owners'
accounts that have money allocated to that Account. The portion of the Charge
allocable to the Cash Management Account is further reduced, for purposes of
the yield computation, by multiplying it by the ratio that the value of the
hypothetical Contract bears to the value of an account of average size for
Contracts funded by the Cash Management Account. Finally, as is done with the
other charges discussed above, the result is multiplied
by the fraction 7/365 to arrive at the portion attributable to the 7 day
period.
The current yield is then obtained by annualizing the Base Period
Return:
Current Yield = (Base Period Return) x (365/7)
The Cash Management Account also quotes an "effective yield" that
differs from the current yield given above in that it takes into account the
effect of dividend reinvestment in the Cash Management Series. The effective
yield, like the current yield,
3
<PAGE> 29
is derived from the Base Period Return over a 7 day period. However, the
effective yield accounts for dividend reinvestment by compounding the
current yield according to the formula:
365/7
Effective Yield = [(Base Period Return + 1) - 1].
Net investment income for yield quotation purposes will not include
either realized capital gains and losses or unrealized appreciation and
depreciation, whether reinvested or not. The yield quotations also do not
reflect any impact of premium taxes, transfer fees, or withdrawal charges.
The yields quoted should not be considered a representation of the
yield of the Cash Management Account in the future since the yield is not
fixed. Actual yields will depend not only on the type, quality and maturities
of the investments held by the Cash Management Account and changes in interest
rates on such investments, but also on factors such as a Contract Owner's
account size (since the impact of fixed dollar charges will be greater for
small accounts than for larger accounts).
Yield information may be useful in reviewing the performance of the
Cash Management Account and for providing a basis for comparison with other
investment alternatives. However, the Cash Management Account's yield
fluctuates, unlike bank deposits or other investments that typically pay a
fixed yield for a stated period of time.
All Other Variable Accounts
The Variable Accounts other than the Cash Management Account compute
their performance data as "total return." The total returns of the various
Accounts over the last 1, 5, and 10 year periods, and since their inception,
are shown below, both with/without an assumed complete redemption at the end of
the period.
TOTAL ANNUAL RETURN (IN PERCENT) FOR PERIODS ENDING ON
NOVEMBER 30, 1996
(RETURN WITH/WITHOUT REDEMPTION)
<TABLE>
<CAPTION>
Inception Since
Variable Account Date 1 Year 5 Years 10 Years Inception
- ---------------- -------- ------ ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Growth 2/07/84 7.50/12.50 16.32/16.86 15.14 15.56
International 5/09/90 13.33/18.33 10.79/11.44 * 8.55
Growth-Income 2/07/84 15.27/20.27 14.54/15.11 12.16 14.44
Asset Allocation 3/31/89 12.68/17.68 12.16/12.79 * 11.22
High-Yield Bond 2/07/84 7.48/12.48 9.19/9.88 9.69 11.38
U.S. Government/ 11/19/85 -1.04/3.96 5.43/6.23 6.25 7.16
AAA-Rated Securities
- --------------------------------
</TABLE>
* These returns are not applicable since this Variable Account has not been
available for these periods of time.
These figures show the total return hypothetically experienced by
Contracts funded through the various Accounts over the time periods shown.
Total return for an Account represents a computed annual rate of
return that, when compounded annually over the time period shown and applied to
a hypothetical initial investment in a Contract funded by that Account made at
the beginning of the period, will produce the same Contract Value at the end of
the period that the
4
<PAGE> 30
hypothetical investment would have produced over the same period. The total
rate of return (T) is computed so that it satisfies the formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1000
T = average annual total return
n = number of year
ERV = ending redeemable value of a hypothetical $1000
payment made at the beginning of the 1, 5, or 10 year
periods at the end of the 1, 5, or 10 year periods
(or fractional portion thereof).
The total return figures given above reflect the effect of both
non-recurring and recurring charges, as discussed herein. Recurring charges
are taken into account in a manner similar to that used for the yield
computations for the Cash Management Account, described above. The applicable
withdrawal charge (if any) is deducted as of the end of the period, to reflect
the effect of the assumed complete redemption in the case of the first of the
two sets of figures given in the table for each Account, tax qualification
status and time period. Because the impact of Contract Administration Charges
on a particular Contract Owner's account would generally have differed from
those assumed in the computation, due to differences between most actual
allocations and the assumed ones, as well as differences due to varying account
sizes, the total return experienced by an actual account over these same time
periods would generally have been different from those given above. As with
the Cash Management Account's yield figures, total return figures are derived
from historical data and are not intended to be a projection of future
performance.
ADDITIONAL FEDERAL INCOME TAX INFORMATION
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under subchapter L of
the Internal Revenue Code, as amended (the "Code"). The operations of the
Separate Account form, and are taxed as, a part of the total operations of the
Company. The Company intends that the Separate Account be operated in a manner
so that the Contracts will meet the definition of a "variable contract" under
section 817(d) of the Code. The Code provides that if the Separate Account
meets certain diversification requirements, set forth in Treasury Regulations
under section 817(h) of the Code, the income from the assets of the Separate
Account used to fund the Contracts will be treated as earned by the Company.
The Company will not be subject to tax on this income to the extent it is
offset by an addition to Contract Owner reserves. There is no capital gain or
loss recognized with respect to the assets of the Separate Account.
NON-QUALIFIED PLANS
Accumulation Period - The Contract may be issued to individuals in
connection with retirement plans that do not qualify for the tax benefits
available to qualified plans. A so-called "non-qualified plan" may be
established by an individual seeking to accumulate funds for retirement or by
an employer for one or more employees. With certain exceptions, such a
Contract held by a non-natural person is not treated as an annuity contract.
The tax consequences of participation in a non-qualified plan vary from plan to
plan. Income credited to a non-qualified Contract is not includible in the
5
<PAGE> 31
gross income of the Contract Owner. Amounts received before the annuity date
are includible as ordinary income to the extent Contract value exceeds the
Contract Owner's purchase payments.
Withdrawals - A partial or complete withdrawal from a non-qualified
Contract before commencement of annuity payments is treated first as a
withdrawal of income earned on investments to the extent of such income, then
as a tax-free return of capital. Moreover, amounts received upon assignment or
pledge of the Contract are treated as amounts withdrawn under the Contract and
therefore subject to income taxes. A withdrawal before the Contract Owner
attains age 59 1/2 is subject to an additional income (penalty) tax of 10% of
the income amount withdrawn. This penalty would not apply where the withdrawal
is made on account of the Contract Owner's death or disability or where
substantially equal annuity payments are to be paid over the life expectancy of
the annuitant or the lives of the annuitant and a designated beneficiary. A
portion of each payment after the annuity date is ordinary income based on the
ratio of purchase payments made to total payments expected to be received.
QUALIFIED PLANS
Tax Advantages - Certain tax advantages are available for retirement
plans ("qualified plans") that satisfy the requirements of sections 401(a),
403(b), 408(b) or 457 of the Code. The tax advantages available under a
qualified plan may include: the deductibility of employer or Contract Owner
contributions; the inclusion of contributions and their earnings in the
participant's gross income only when received or made available to the
participant and, within certain limits, the exclusion from the beneficiary's
gross income of distributions to the beneficiary of a deceased participant. A
general information outline with respect to each type is provided below. If
the Contract is used to fund a qualified plan, competent tax advice should be
sought.
Plans for Corporations and Self-Employed Individuals - Under section
401(a) of the Code, contributions may be made on behalf of the participants up
to the limits provided by section 415, and the payments are deductible as
provided by section 404. Participants are also permitted to make
non-deductible voluntary contributions subject to certain non-discrimination
rules.
The tax treatment of plans established by self-employed individuals
("Keogh" or "H.R. 10" plans) is essentially the same as corporate plans. Some
special restrictions apply to self-employed individuals who are
"owner-employees". An owner-employee is a sole proprietor or a partner who
owns more than a 10% capital or profits interest in the partnership.
Tax-Sheltered Annuities - Contributions made by public school systems,
churches and certain tax-exempt organizations to purchase Contracts on behalf
of their employees are excludible from the employees' gross income, within
certain limits, if the requirements of section 403(b) of the Code are met.
Deferred Compensation Plans for State and Local Government Employees -
Section 457 of the Code provides special tax treatment for certain deferred
compensation plans for employees of state and local governments, their
political subdivisions, agencies, instrumentalities and affiliates, and certain
tax-exempt rural electric cooperatives. These plans permit employees to
specify the form of investment for their deferred compensation that can include
investment in the Contract. However, the investments are owned by, and subject
to, the claims of the general creditors of the employer.
Individual Retirement Annuities - Section 408(b) of the Code permits
individuals to establish an Individual Retirement Annuity ("IRA"). No more
than $2,000 or 100% of
6
<PAGE> 32
compensation may be contributed to an IRA. Under section 219 of the Code,
the entire amount is deductible if the individual is not a participant in an
employer's qualified plan (except a section 457 plan). If the individual
participates in an employer's qualified plan, all, a portion or none of the
contribution may be deductible, depending on adjusted gross income. An IRA
is subject to penalty and excise taxes on excess contributions and
insufficient distributions, as well as early distributions (see below).
DISTRIBUTIONS
A participant who has attained age 50 before January 1, 1986, may
elect favorable tax treatment for a lump-sum distribution from a section 401(a)
plan. This may include capital gains treatment on the pre-1974 portion and
5-year or 10-year forward averaging. A distribution before age 59 1/2 from a
qualified plan (except a section 457 plan) is subject to a 10% additional
income tax on the amount of the distribution. However, there should be no
penalty tax on distributions (1) made as a result of death or disability, or
(2) received in substantially equal installments as a life or life expectancy
annuity. The penalty will also be imposed if an individual receiving
substantially equal annuity payments changes the method of distribution before
age 59 1/2 or before payments have been received for five years. Except for
the recovery of non-deductible contributions, the entire amount of the annuity
payments are included in the participant's gross income. The participant is
entitled to recover tax-free any non-deductible contributions as a portion of
each annuity payment. In the case of an
annuity for life, the portion excluded remains the same no matter how long the
annuitant lives.
The Code, as amended by the Tax Reform Act of 1986, imposes
restrictions on distributions (i.e., withdrawals or surrenders) from annuity
contracts sold to plans qualified under section 403(b) of the Code. Section
403(b)(11) of the Code requires that for these annuity contracts to receive
tax-deferred treatment, they must provide that distributions attributable to
contributions made pursuant to a salary reduction agreement be paid only:
(1) when the employee attains age 59 1/2, separates from service,
dies, or becomes disabled (within the meaning of section
72(m)(7)); or
(2) in the case of hardship. In hardship cases, only the
distribution of contributed amounts is permitted; distribution
of any income attributable to these amounts is prohibited.
Assets held as of December 31, 1988, are not subject to these Code
restrictions.
The Contracts have been modified to comply with these changes in the
Code. The Company is relying on a no-action letter from the Securities and
Exchange Commission that was issued to the American Council of Life Insurance
and made publicly available on November 28, 1988. That letter outlines further
conditions that must be met if a company offering registered annuity contracts
imposes the limitations required by the Code. The Company will comply with the
conditions of the no-action letter.
TAX WITHHOLDING
With certain exceptions, withholding on annuity payments and other
distributions (such as lump-sum distributions or partial withdrawals) is
required. However, recipients of annuity payments or other distributions are
allowed to make an election not to have federal income tax withheld except as
described in "Additional Federal Income Tax Information - Withholding Tax on
Distributions" below. After such election
7
<PAGE> 33
is made with respect to annuity payments, a payee may revoke the election at
any time, and thereafter, commence withholding. In such a case, the Company
notifies the payee at least annually of his or her right to change this
election.
The withholding rate followed by the Company is applied only against
the taxable portion of annuity payments or other distributions. This rate is
determined based upon the nature of the distribution(s). Federal income tax is
withheld from annuity payments pursuant to the recipient's withholding
certificate. If no withholding certificate is filed with the Company, federal
income tax is withheld from annuity payments on the basis that the payee is
married with three withholding exemptions. If a qualified total distribution
is made from a qualified plan on account of the participant's death, the amount
of withholding reflects the exclusion from federal income tax for
employer-provided death benefits. On all other non-periodic payments or
distributions, federal income tax is withheld at a flat 10% rate.
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 within 60 days. This requirement is mandatory and cannot be waived by
the Contract Owner. 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 Contract Owner 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.
DISTRIBUTION OF CONTRACTS
Effective as of January 28, 1994, SunAmerica Capital Services, Inc.,
located at 733 Third Avenue, 4th Floor, New York, New York 10017, serves as the
distributor of the Contracts pursuant to a distribution agreement (the
"Distribution Agreement"). Prior to this date SunAmerica Securities, Inc. and
Royal Alliance Associates, Inc., both affiliates of SunAmerica Capital Services
and located at 2201 East Camelback Road, Phoenix, Arizona 85016 and 733 Third
Avenue, 4th Floor, New York, New York 10017,
8
<PAGE> 34
respectively, served as co-distributors of the Contract. SunAmerica Capital
Services, Inc., SunAmerica Securities, Inc. and Royal Alliance Associates,
Inc. are each an indirect wholly- owned subsidiary of SunAmerica Inc., and
each 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.
For the year ended November 30, 1996, the aggregate amount of
underwriting commissions paid by the Company to SunAmerica Capital Services was
$504,981. For the year ended November 30, 1995, the aggregate amount of
underwriting commissions paid by the Company to SunAmerica Capital Services was
$565,395. For the year ended November 30, 1994, the aggregate amount of
underwriting commissions paid by the Company to SunAmerica Securities, Inc.
and Royal Alliance Associates, Inc. was $1,017,768. Of these amounts, $55,739,
$80,741, and $119,521 in 1996, 1995, and 1994, respectively, were retained by
SunAmerica Capital Services, Inc., SunAmerica Securities, Inc., and/or Royal
Alliance Associates, Inc.
Contracts are offered on a continuous basis.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company as of September
30, 1996 and 1995 and for each of the three years in the period ended September
30, 1996 are presented in this Statement of Additional Information. The
consolidated financial statements of the Company should be considered only as
bearing on the ability of the Company to meet its obligation under the
Contracts. The financial statements of the Separate Account (Portion Relating
to PATHWAY Variable Annuity) as of November 30, 1996 and for each of the two
years in the period ended November 30, 1996, also are included in this
Statement of Additional Information.
Price Waterhouse LLP, 400 South Hope Street, Los Angeles, California
90071, serves as the independent accountants for the Separate Account and the
Company. The financial statements referred to above included in this Statement
of Additional Information have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
9
<PAGE> 35
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, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1996, 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.
As discussed in Note 2, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," in fiscal 1994.
Price Waterhouse LLP
Los Angeles, California
November 8, 1996
10
<PAGE> 36
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
-------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 122,058,000 $ 249,209,000
Bonds, notes and redeemable
preferred stocks:
Available for sale, at fair value
(amortized cost: 1996, $2,001,024,000;
1995, $1,500,062,000) 1,987,271,000 1,489,213,000
Held for investment, at amortized cost
(fair value: 1995, $165,004,000) --- 157,901,000
Mortgage loans 98,284,000 94,260,000
Common stocks, at fair value (cost:
1996, $2,911,000; 1995, $6,576,000) 3,970,000 4,097,000
Real estate 39,724,000 55,798,000
Other invested assets 77,925,000 64,430,000
-------------- --------------
Total investments 2,329,232,000 2,114,908,000
Variable annuity assets 6,311,557,000 5,230,246,000
Receivable from brokers for sales
of securities 52,348,000 ---
Accrued investment income 19,675,000 14,192,000
Deferred acquisition costs 443,610,000 383,069,000
Other assets 48,113,000 41,282,000
-------------- --------------
TOTAL ASSETS $9,204,535,000 $7,783,697,000
============== ==============
</TABLE>
11
<PAGE> 37
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
<TABLE>
<CAPTION>
September 30,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $1,789,962,000 $1,497,052,000
Reserves for guaranteed investment
contracts 415,544,000 277,095,000
Payable to brokers for purchases of
securities --- 155,861,000
Income taxes currently payable 21,486,000 15,720,000
Other liabilities 74,710,000 56,372,000
-------------- --------------
Total reserves, payables
and accrued liabilities 2,301,702,000 2,002,100,000
-------------- --------------
Variable annuity liabilities 6,311,557,000 5,230,246,000
-------------- --------------
Subordinated notes payable to Parent 35,832,000 35,832,000
-------------- --------------
Deferred income taxes 70,189,000 73,459,000
-------------- --------------
Shareholder's equity:
Common Stock 3,511,000 3,511,000
Additional paid-in capital 280,263,000 252,876,000
Retained earnings 207,002,000 191,346,000
Net unrealized losses on debt and equity
securities available for sale (5,521,000) (5,673,000)
-------------- --------------
Total shareholder's equity 485,255,000 442,060,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $9,204,535,000 $7,783,697,000
============== ==============
</TABLE>
See accompanying notes
12
<PAGE> 38
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Investment income $ 164,631,000 $ 129,466,000 $ 127,758,000
------------- ------------- -------------
Interest expense on:
Fixed annuity contracts (82,690,000) (72,975,000) (66,311,000)
Guaranteed investment contracts (19,974,000) (3,733,000) ---
Senior indebtedness (2,568,000) (227,000) (71,000)
Subordinated notes payable
to Parent (2,556,000) (2,448,000) (2,380,000)
------------- ------------ -------------
Total interest expense (107,788,000) (79,383,000) (68,762,000)
------------- ------------ -------------
NET INVESTMENT INCOME 56,843,000 50,083,000 58,996,000
------------- ------------ -------------
NET REALIZED INVESTMENT LOSSES (13,355,000) (4,363,000) (33,713,000)
------------- ------------ -------------
Fee income:
Variable annuity fees 103,970,000 84,171,000 79,101,000
Asset management fees 25,413,000 26,935,000 31,302,000
Net retained commissions 31,548,000 24,108,000 20,822,000
------------- ------------ -------------
TOTAL FEE INCOME 160,931,000 135,214,000 131,225,000
------------- ------------- -------------
Other income and expenses:
Surrender charges 5,184,000 5,889,000 5,034,000
General and administrative
expenses (80,048,000) (61,629,000) (52,636,000)
Amortization of deferred
acquisition costs (57,520,000) (58,713,000) (44,195,000)
Annual commissions (4,613,000) (2,658,000) (1,158,000)
Other, net 1,886,000 1,174,000 3,767,000
------------- ------------- -------------
TOTAL OTHER INCOME AND EXPENSES (135,111,000) (115,937,000) (89,188,000)
------------- ------------- -------------
PRETAX INCOME 69,308,000 64,997,000 67,320,000
Income tax expense (24,252,000) (25,739,000) (22,705,000)
------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR
INCOME TAXES 45,056,000 39,258,000 44,615,000
Cumulative effect of change
in accounting for income taxes --- --- (20,463,000)
------------- ------------- -------------
NET INCOME $ 45,056,000 $ 39,258,000 $ 24,152,000
============= ============= =============
</TABLE>
See accompanying notes
13
<PAGE> 39
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,056,000 $ 39,258,000 $ 24,152,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Interest credited to:
Fixed annuity contracts 82,690,000 72,975,000 66,311,000
Guaranteed investment contracts 19,974,000 3,733,000 ---
Net realized investment losses 13,355,000 4,363,000 33,713,000
Accretion of net discounts
on investments (8,976,000) (6,865,000) (2,050,000)
Amortization of goodwill 1,169,000 1,168,000 1,169,000
Provision for deferred
income taxes (3,351,000) (1,489,000) 19,395,000
Cumulative effect of change
in accounting for income taxes --- --- 20,463,000
Change in:
Accrued investment income (5,483,000) 3,373,000 (1,310,000)
Deferred acquisition costs (60,941,000) (7,180,000) (34,612,000)
Other assets (8,000,000) 7,047,000 5,133,000
Income taxes currently payable 5,766,000 3,389,000 6,559,000
Other liabilities 5,474,000 4,063,000 46,000
Other, net (129,000) 7,000 360,000
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 86,604,000 123,842,000 139,329,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts 651,649,000 245,320,000 138,526,000
Guaranteed investment contracts 134,967,000 275,000,000 ---
Net exchanges to (from) the fixed
accounts of variable annuity
contracts (236,705,000) 10,475,000 (29,286,000)
Withdrawal payments on:
Fixed annuity contracts (173,489,000) (237,977,000) (269,412,000)
Guaranteed investment contracts (16,492,000) (1,638,000) ---
Claims and annuity payments on
fixed annuity contracts (31,107,000) (31,237,000) (31,146,000)
Net receipts from (repayments of)
other short-term financings (119,712,000) 3,202,000 (166,685,000)
Capital contribution received 27,387,000 --- ---
Dividend paid (29,400,000) --- ---
------------- ------------ -------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 207,098,000 263,145,000 (358,003,000)
------------- ------------ -------------
</TABLE>
14
<PAGE> 40
ANCHOR NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable
preferred stocks $(1,937,890,000) $(1,556,586,000) $(1,197,743,000)
Mortgage loans (15,000,000) --- (10,666,000)
Other investments, excluding
short-term investments (36,770,000) (13,028,000) (26,317,000)
Sales of:
Bonds, notes and redeemable
preferred stocks 1,241,928,000 1,026,078,000 877,068,000
Real estate 900,000 36,813,000 33,443,000
Other investments, excluding
short-term investments 4,937,000 5,130,000 2,353,000
Redemptions and maturities of:
Bonds, notes and redeemable
preferred stocks 288,969,000 178,688,000 173,763,000
Mortgage loans 11,324,000 14,403,000 10,087,000
Other investments, excluding
short-term investments 20,749,000 13,286,000 13,500,000
------------- ------------- -------------
NET CASH USED BY INVESTING
ACTIVITIES (420,853,000) (295,216,000) (124,512,000)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS (127,151,000) 91,771,000 (343,186,000)
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 249,209,000 157,438,000 500,624,000
------------- ------------- -------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 122,058,000 $ 249,209,000 $ 157,438,000
============= ============= =============
Supplemental cash flow information:
Interest paid on indebtedness $ 5,982,000 $ 3,235,000 $ 1,175,000
============= ============= =============
Net income taxes paid (recovered) $ 22,031,000 $ 23,656,000 $ (3,328,000)
============= ============= =============
</TABLE>
See accompanying notes
15
<PAGE> 41
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, on a consolidated basis,
conducts its business through three segments: annuity operations, asset
management operations and broker-dealer operations. Annuity operations
include the sale and administration of fixed and variable annuities and
guaranteed investment contracts. Asset management operations, which
include 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 is 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 market; 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 risks. 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 1995 and 1994 amounts have been
reclassified to conform with the 1996 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.
16
<PAGE> 42
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RECENTLY ISSUED ACCOUNTING STANDARDS: Effective October 1, 1993, the
Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Accordingly, the
cumulative effect of this change in accounting for income taxes was
recorded on October 1, 1993 to increase the liability for Deferred Income
Taxes by $20,463,000.
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 held for investment
(the "Held for Investment Portfolio") are carried at amortized cost. On
December 1, 1995, the Company reassessed the appropriateness of
classifying a portion of its portfolio of bonds, notes and redeemable
preferred stocks as held for investment. This reassessment was made
pursuant to the provisions of "Special Report: A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," issued by the Financial Accounting Standards Board in
November 1995. As a result of its reassessment, the Company reclassified
all of its Held for Investment Portfolio as available for sale. At
December 1, 1995, the amortized cost of the Held for Investment Portfolio
aggregated $157,830,000 and its fair value was $166,215,000. Upon
reclassification, the resulting net unrealized gain of $8,385,000 was
credited to Net Unrealized Losses on Debt and Equity Securities Available
for Sale in the shareholder's equity section of the balance sheet.
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.
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.
17
<PAGE> 43
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, over the estimated lives of the contracts in
relation to the present value of estimated gross profits, which 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
increased by $4,200,000 at September 30, 1996, and by $4,600,000 at
September 30, 1995 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 $19,478,000 at September 30, 1996, is
amortized by using the straight-line method over periods averaging 25
years and is included in Other Assets in the balance sheet.
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 and asset management fees are recorded
in income as earned. Net retained commissions are recognized as income
on a trade-date basis.
18
<PAGE> 44
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
19
<PAGE> 45
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale and held for investment by major
category follow:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
-------------- --------------
<S> <C> <C>
AT SEPTEMBER 30, 1996:
AVAILABLE FOR SALE:
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
============== ==============
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States
Government $ 59,756,000 $ 60,258,000
Mortgage-backed securities 1,121,064,000 1,110,676,000
Securities of public utilities 792,000 774,000
Corporate bonds and notes 290,924,000 288,883,000
Redeemable preferred stocks 3,945,000 4,937,000
Other debt securities 23,581,000 23,685,000
-------------- --------------
Total available for sale $1,500,062,000 $1,489,213,000
============== ==============
HELD FOR INVESTMENT:
Securities of the United States
Government $ 10,379,000 $ 10,797,000
Mortgage-backed securities 8,378,000 8,378,000
Corporate bonds and notes 105,980,000 112,665,000
Other debt securities 33,164,000 33,164,000
-------------- --------------
Total held for investment $ 157,901,000 $ 165,004,000
============== ==============
</TABLE>
20
<PAGE> 46
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks available for sale by contractual maturity, as of
September 30, 1996, follow:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
-------------- --------------
<S> <C> <C>
AVAILABLE FOR SALE:
Due in one year or less $ 18,792,000 $ 19,357,000
Due after one year through
five years 505,564,000 499,163,000
Due after five years through
ten years 378,249,000 378,250,000
Due after ten years 350,766,000 348,625,000
Mortgage-backed securities 747,653,000 741,876,000
-------------- --------------
Total available for sale $2,001,024,000 $1,987,271,000
============== ==============
</TABLE>
Actual maturities of bonds, notes and redeemable preferred stocks will
differ from those shown above due to prepayments and redemptions.
21
<PAGE> 47
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
Gross unrealized gains and losses on bonds, notes and redeemable preferred
stocks available for sale and held for investment by major category
follow:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
gains losses
------------- -------------
<S> <C> <C>
AT SEPTEMBER 30, 1996:
AVAILABLE FOR SALE:
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)
============= =============
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States
Government $ 553,000 $ (51,000)
Mortgage-backed securities 12,013,000 (22,401,000)
Securities of public utilities --- (18,000)
Corporate bonds and notes 5,344,000 (7,385,000)
Redeemable preferred stocks 992,000 ---
Other debt securities 104,000 ---
------------- -------------
Total available for sale $ 19,006,000 $ (29,855,000)
============= =============
HELD FOR INVESTMENT:
Securities of the United States
Government $ 432,000 $ (14,000)
Corporate bonds and notes 6,685,000 ---
------------- -------------
Total held for investment $ 7,117,000 $ (14,000)
============= =============
</TABLE>
22
<PAGE> 48
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
At September 30, 1996, gross unrealized gains on equity securities
aggregated $1,368,000 and gross unrealized losses aggregated $309,000. At
September 30, 1995, gross unrealized gains on equity securities aggregated
$1,082,000 and gross unrealized losses aggregated $3,561,000.
Gross realized investment gains and losses on sales of all types of
investments are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
BONDS, NOTES AND REDEEMABLE
PREFERRED STOCKS:
Available for sale:
Realized gains $ 14,532,000 $ 15,983,000 $ 12,760,000
Realized losses (10,432,000) (21,842,000) (31,066,000)
Held for investment:
Realized gains --- 2,413,000 890,000
Realized losses --- (586,000) (1,913,000)
EQUITIES:
Realized gains 511,000 994,000 467,000
Realized losses (3,151,000) (114,000) (303,000)
OTHER INVESTMENTS:
Realized gains 1,135,000 3,561,000 ---
Realized losses (1,729,000) (12,000) (358,000)
IMPAIRMENT WRITEDOWNS (14,221,000) (4,760,000) (14,190,000)
------------ ------------ ------------
Total net realized
investment losses $(13,355,000) $ (4,363,000) $(33,713,000)
============ ============ ============
</TABLE>
23
<PAGE> 49
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------------
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Short-term investments $ 10,647,000 $ 8,308,000 $ 4,648,000
Bonds, notes and
redeemable preferred stocks 140,387,000 107,643,000 98,935,000
Mortgage loans 8,701,000 7,419,000 12,133,000
Common stocks 8,000 3,000 1,000
Real estate (196,000) (51,000) 1,379,000
Limited partnerships 4,073,000 5,128,000 9,487,000
Other invested assets 1,011,000 1,016,000 1,175,000
-------------- ------------- -------------
Total investment income $164,631,000 $129,466,000 $127,758,000
============== ============= =============
</TABLE>
Expenses incurred to manage the investment portfolio amounted to
$1,737,000 for the year ended September 30, 1996, $1,983,000 for the year
ended September 30, 1995, and $1,714,000 for the year ended September 30,
1994 and are included in General and Administrative Expenses in the income
statement.
At September 30, 1996, no investment exceeded 10% of the Company's
consolidated shareholder's equity.
At September 30, 1996, mortgage loans were collateralized by properties
located in 11 states, with loans totaling approximately 21% of the
aggregate carrying value of the portfolio secured by properties located in
Colorado, approximately 17% by properties located in New Jersey and
approximately 14% by properties located in California. No more than 12% of
the portfolio was secured by properties in any other single state.
At September 30, 1996, bonds, notes and redeemable preferred stocks
included $160,801,000 (fair value, $160,158,000) of bond and notes not
rated investment grade by either Standard & Poor's Corporation, Moody's
Investors Service, Duff and Phelps Credit Rating Co., Fitch Investor
Service, Inc. or under National Association of Insurance Commissioners'
guidelines. The Company had no material concentrations of
non-investment-grade assets at September 30, 1996.
At September 30, 1996, the amortized cost of investments in default as to
the payment of principal or interest was $3,115,000, consisting of
$1,580,000 of non-investment-grade bonds and $1,535,000 of mortgage loans.
Such nonperforming investments had an estimated fair value of $2,935,000.
24
<PAGE> 50
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (continued)
At September 30, 1996, $6,486,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory
requirements.
The Company has undertaken to dispose of certain real estate investments,
having an aggregate carrying value of $28,410,000, during the next year,
to affiliated or nonaffiliated parties, and the Parent has guaranteed that
the Company will receive its current carrying value for these assets.
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 other invested assets,
equity investments and real estate investments) 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.
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.
25
<PAGE> 51
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
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.
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.
26
<PAGE> 52
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The estimated fair values of the Company's financial instruments at
September 30, 1996 and 1995, compared with their respective carrying
values, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
value value
-------------- --------------
<S> <C> <C>
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
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
============== ==============
1995:
ASSETS:
Cash and short-term investments $ 249,209,000 $ 249,209,000
Bonds, notes and redeemable
preferred stocks 1,647,114,000 1,654,217,000
Mortgage loans 94,260,000 95,598,000
Variable annuity assets 5,230,246,000 5,230,246,000
LIABILITIES:
Reserves for fixed annuity contracts 1,497,052,000 1,473,757,000
Reserves for guaranteed investment
contracts 277,095,000 277,095,000
Payable to brokers for purchases
of securities 155,861,000 155,861,000
Variable annuity liabilities 5,230,246,000 5,077,257,000
Subordinated notes payable to Parent 35,832,000 34,620,000
============== ==============
</TABLE>
27
<PAGE> 53
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUBORDINATED NOTES PAYABLE TO PARENT
Subordinated notes payable to Parent averaged $35,832,000 at a weighted
average interest rate of 8.71% (with rates ranging from 7% to 9%) at
September 30, 1996 and require principal payments of $5,272,000 in 1997,
$7,500,000 in 1998 and $23,060,000 in 1999.
6. CONTINGENT LIABILITIES
The Company has entered into two agreements in which it has guaranteed the
liquidity of certain short-term securities of two 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. These
guarantees total up to $182,600,000. Management does not anticipate any
material future losses with respect to these guarantees.
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.
7. SHAREHOLDER'S EQUITY
The Company is authorized to issue 4,000 shares of its $1,000 par value
Common Stock. At September 30, 1996, 1995 and 1994, 3,511 shares are
outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balance $ 252,876,000 $ 252,876,000 $ 252,876,000
Capital contributions received 27,387,000 --- ---
------------- ------------- -------------
Ending balance $ 280,263,000 $ 252,876,000 $ 252,876,000
============= ============= =============
RETAINED EARNINGS:
Beginning balance 191,346,000 152,088,000 127,936,000
Net income 45,056,000 39,258,000 24,152,000
Dividend paid (29,400,000) --- ---
------------- ------------- -------------
Ending balance $ 207,002,000 $ 191,346,000 $ 152,088,000
============= ============= =============
</TABLE>
28
<PAGE> 54
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. SHAREHOLDER'S EQUITY (continued)
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
NET UNREALIZED LOSSES ON
DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balance $ (5,673,000) $ (24,953,000) $ (13,230,000)
Change in net unrealized
gains/losses on debt
securities available
for sale (2,904,000) 71,302,000 (69,407,000)
Change in net unrealized
gains/losses on equity
securities available for sale 3,538,000 (1,240,000) (753,000)
Change in adjustment to
deferred acquisition costs (400,000) (40,400,000) 45,000,000
Tax effects of net changes (82,000) (10,382,000) 13,437,000
------------- ------------- -------------
Ending balance $ (5,521,000) $ (5,673,000) $ (24,953,000)
============= ============= =============
</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 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. A dividend in the amount of $29,400,000
was paid on March 18, 1996. No dividends were paid in fiscal years 1995 or
1994.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1996 was $21,898,000. The statutory net income for the year
ended December 31, 1995 was $30,673,000 and for the year ended December 31,
1994 was $35,060,000. The Company's statutory capital and surplus was
$282,275,000 at September 30, 1996, $294,767,000 at December 31, 1995 and
$219,577,000 at December 31, 1994.
29
<PAGE> 55
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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>
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
============= ============ ============
1994:
Currently payable $ (6,825,000) $ 10,135,000 $ 3,310,000
Deferred (1,320,000) 20,715,000 19,395,000
------------- ------------ ------------
Total income tax expense $ (8,145,000) $ 30,850,000 $ 22,705,000
============= ============ ============
</TABLE>
30
<PAGE> 56
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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,
------------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Amount computed at
statutory rate $ 24,258,000 $ 22,749,000 $ 23,562,000
Increases (decreases)
resulting from:
Amortization of differences
between book and tax
bases of net assets
acquired 464,000 3,049,000 465,000
State income taxes, net of
federal tax benefit 2,070,000 437,000 (662,000)
Dividends-received deduction (2,357,000) --- ---
Tax credits (257,000) (168,000) (612,000)
Other, net 74,000 (328,000) (48,000)
------------ ------------ ------------
Total income tax expense $ 24,252,000 $ 25,739,000 $ 22,705,000
============ ============ ============
</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, 1996. The Company does not anticipate any
transactions which would cause any part of this surplus to be taxable.
31
<PAGE> 57
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. INCOME TAXES (continued)
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,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments $ 15,036,000 $ 14,181,000
Deferred acquisition costs 136,747,000 118,544,000
State income taxes 1,466,000 1,847,000
------------- -------------
Total deferred tax liabilities 153,249,000 134,572,000
------------- -------------
DEFERRED TAX ASSETS:
Contractholder reserves (77,522,000) (55,910,000)
Guaranty fund assessments (1,031,000) (1,123,000)
Other assets (1,534,000) (1,025,000)
Net unrealized losses on certain
debt and equity securities (2,973,000) (3,055,000)
------------- -------------
Total deferred tax assets (83,060,000) (61,113,000)
------------- -------------
Deferred income taxes $ 70,189,000 $ 73,459,000
============= =============
</TABLE>
32
<PAGE> 58
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. RELATED PARTY MATTERS
The Company pays commissions to two affiliated companies, SunAmerica
Securities, Inc. and Advantage Capital Corp. These broker-dealers
represent a significant portion of the Company's business, amounting to
approximately 15.6%, 14.1% and 14.5% of premiums in 1996, 1995 and 1994,
respectively. Commissions paid to these broker-dealers totaled $16,906,000
in 1996, $9,435,000 in 1995 and $9,725,000 in 1994.
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 $65,351,000 for the year ended September
30, 1996, $42,083,000 for the year ended September 30, 1995 and
$36,934,000 for the year ended September 30, 1994. Such amounts are
included in General and Administrative Expenses in the income statement.
On December 31, 1995, the Parent made a $27,387,000 capital contribution
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, 1996, the Company sold various
invested assets to the Parent, SunAmerica Life Insurance Company and Ford
Life Insurance Company ("Ford") for cash equal to their current market
values of $274,000, $8,968,000 and $38,353,000, respectively. The Company
recorded net losses of $3,000 on such transactions.
During the year ended September 30, 1996, the Company also purchased
certain invested assets from SunAmerica Life Insurance Company and Ford
for cash equal to their current market values of $5,159,000 and
$23,220,000, respectively.
33
<PAGE> 59
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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>
1996:
Annuity operations $ 250,645,000 $ 43,974,000 $ 53,827,000 $9,092,770,000
Asset management 29,711,000 18,295,000 2,448,000 74,410,000
Broker-dealer operations 31,851,000 449,000 13,033,000 37,355,000
------------- ------------ ------------ --------------
Total $ 312,207,000 $ 62,718,000 $ 69,308,000 $9,204,535,000
============= ============ ============ ==============
1995:
Annuity operations $ 205,698,000 $ 38,350,000 $ 55,462,000 $7,667,946,000
Asset management 30,253,000 24,069,000 510,000 86,510,000
Broker-dealer operations 24,366,000 411,000 9,025,000 29,241,000
------------- ------------ ------------ --------------
Total $ 260,317,000 $ 62,830,000 $ 64,997,000 $7,783,697,000
============= ============ ============ ==============
1994:
Annuity operations $ 171,553,000 $ 26,501,000 $ 52,284,000 $6,473,065,000
Asset management 32,803,000 19,330,000 7,916,000 102,192,000
Broker-dealer operations 20,914,000 408,000 7,120,000 26,869,000
------------- ------------ ------------ --------------
Total $ 225,270,000 $ 46,239,000 $ 67,320,000 $6,602,126,000
============= ============ ============ ==============
</TABLE>
34
<PAGE> 60
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS
NOVEMBER 30, 1996
35
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
January 20, 1997
To the Board of Directors of Anchor National Life Insurance Company
and the Contractholders of its separate account,
Variable Separate Account (Portion Relating to the PATHWAY Variable Annuity)
In our opinion, the accompanying statement of net assets, including the
schedule of portfolio investments, and the related statements of operations and
of changes in net assets present fairly, in all material respects, the
financial position of each of the Variable Accounts constituting Variable
Separate Account (Portion Relating to the PATHWAY Variable Annuity), a separate
account of Anchor National Life Insurance Company (the "Separate Account") at
November 30, 1996, the results of their operations for the year then ended, and
the changes in their net assets for each of the two years in the period then
ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Separate Account's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
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, which included
confirmation of securities owned at November 30, 1996 by correspondence with
the custodian, provide a reasonable basis for the opinion expressed above.
36
<PAGE> 62
VARIABLE SEPARATE ACCOUNT
(Portion Relating to the PATHWAY Variable Annuity)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS
November 30, 1996
<TABLE>
<CAPTION>
Growth International Growth-Income Asset Allocation
Series Series Series Series
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Assets:
Investments in Anchor
Pathway Fund,
at market value $813,164,326 $249,143,771 $919,356,072 $153,068,328
Liabilities 0 0 0 0
------------ ------------ ------------- ------------
Net Assets $813,164,326 $249,143,771 $919,356,072 $153,068,328
============ ============ ============= ============
Accumulation units outstanding 12,673,375 14,409,986 16,243,742 6,731,149
============ ============ ============= ============
Unit value of accumulation units $64.16 $17.31 $56.59 $22.74
============ ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
U.S. Government/ Cash
High-Yield AAA-Rated Management
Bond Series Securities Series Series TOTAL
------------ ----------------- ----------- --------------
<S> <C> <C> <C> <C>
Assets:
Investments in Anchor
Pathway Fund,
at market value $131,337,116 $108,852,345 $89,236,009 $2,464,149,967
Liabilities 0 0 0 0
------------ ----------------- ----------- --------------
Net Assets $131,337,116 $108,852,345 $89,236,009 $2,464,149,967
============ ================= =========== ==============
Accumulation units outstanding 3,274,458 5,044,716 4,993,168
============ ================= ===========
Unit value of accumulation units $40.11 $21.58 $17.86
============ ================= ===========
</TABLE>
See accompanying notes to financial statements.
37
<PAGE> 63
VARIABLE SEPARATE ACCOUNT
(Portion related to the PATHWAY Variable Annuity)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
SCHEDULE OF PORTFOLIO INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
Market Value Market
Variable Accounts Shares Per Share Value Cost
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Series 19,232,095 $42.28 $ 813,164,326 $ 629,114,668
International Series 15,763,167 15.81 249,143,771 197,904,924
Growth-Income Series 26,038,481 35.31 919,356,072 618,758,550
Asset Allocation Series 9,431,170 16.23 153,060,328 116,457,491
High-Yield Bond Series 9,484,090 13.85 131,337,116 126,709,754
U.S. Government/
AAA-Rated Securities Series 9,460,680 11.51 108,852,345 110,636,089
Cash Management Series 7,840,519 11.38 89,236,009 88,668,040
----------------------------------
$2,464,149,967 $1,888,249,516
==================================
</TABLE>
See accompanying notes to financial statements.
38
<PAGE> 64
VARIABLE SEPARATE ACCOUNT
(Portion related to the PATHWAY Variable Annuity)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
November 30, 1996
<TABLE>
<CAPTION>
Growth International Growth-Income Asset Allocation
Series Series Series Series
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Investment income:
Dividends and capital
gains distributions $126,165,000 $12,230,000 $ 76,650,000 $16,940,000
------------ ------------ ------------- ------------
Total investment income 126,165,000 12,230,000 76,650,000 16,940,000
------------ ------------ ------------- ------------
Expenses:
Mortality risk charge (6,556,317) (1,881,087) (7,076,687) (1,208,882)
Expense risk charge (2,868,388) (822,976) (3,096,050) (528,886)
Distribution expense
charge (1,229,309) (352,704) (1,326,879) (226,665)
------------ ------------ ------------- ------------
Total expenses (10,654,014) (3,056,767) (11,499,616) (1,964,433)
------------ ------------ ------------- ------------
Net investment income 115,510,986 9,173,233 65,150,384 14,975,567
------------ ------------ ------------- ------------
Net realized gains (losses)
from securities transactions:
Proceeds from shares sold 265,938,388 50,452,015 148,221,213 30,571,705
Cost of shares sold (220,977,442) (43,545,006) (108,892,356) (24,977,639)
------------ ------------ ------------- ------------
Net realized gains (losses) from
securities transactions 44,960,946 6,907,009 39,328,857 5,594,066
------------ ------------ ------------- ------------
Net unrealized appreciation
(depreciation) of
investments:
Beginning of period 255,482,783 27,380,385 241,486,481 32,660,322
End of period 184,049,658 51,238,847 300,597,522 36,602,837
------------ ------------ ------------- ------------
Change in net unrealized
appreciation/depreciation
of investments (71,433,125) 23,858,462 59,111,041 3,942,515
------------ ------------ ------------- ------------
Increase in net assets
from operations $89,038,807 $39,938,704 $163,590,282 $24,512,148
============ ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
U.S. Government/ Cash
High-Yield AAA-Rated Management
Bond Series Securities Series Series TOTAL
------------ ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment income:
Dividends and capital
gains distributions $13,970,000 $11,160,000 $7,520,600 $264,635,600
------------ ------------------ ------------ ------------
Total investment income 13,970,000 11,160,000 7,520,600 264,635,600
------------ ------------------ ------------ ------------
Expenses:
Mortality risk charge (1,073,583) (964,273) (798,600) (19,559,429)
Expense risk charge (469,692) (421,870) (349,388) (8,557,250)
Distribution expense
charge (201,297) (180,801) (149,738) (3,667,393)
------------ ------------------ ------------ ------------
Total expenses (1,744,572) (1,566,944) (1,297,726) (31,784,072)
------------ ------------------ ------------ ------------
Net investment income 12,225,428 9,593,056 6,222,874 232,851,528
------------ ------------------ ------------ ------------
Net realized gains (losses)
from securities transactions:
Proceeds from shares sold 57,104,191 38,568,074 185,244,978 776,100,564
Cost of shares sold (56,730,785) (40,245,819) (186,940,996) (682,310,043)
------------ ------------------ ------------ ------------
Net realized gains (losses) from
securities transactions 373,406 (1,677,745) (1,696,018) 93,790,521
------------ ------------------ ------------ ------------
Net unrealized appreciation
(depreciation) of
investments:
Beginning of period 1,080,278 1,857,123 1,537,508 561,484,880
End of period 4,627,362 (1,783,744) 567,969 575,900,451
------------ ------------------ ------------ ------------
Change in net unrealized
appreciation/depreciation
of investments 3,547,084 (3,640,867) (969,539) 14,415,571
------------ ------------------ ------------ ------------
Increase in net assets
from operations $16,145,918 $ 4,274,444 $3,557,317 $341,057,620
============ ================== ============ ============
</TABLE>
See accompanying notes to financial statements.
39
<PAGE> 65
VARIABLE SEPARATE ACCOUNT
(Portion Relating to the PATHWAY Variable Annuity)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
November 30, 1996
<TABLE>
<CAPTION>
Growth International Growth-Income Asset Allocation
Series Series Series Series
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $115,510,986 $9,173,233 $ 65,150,384 $ 14,975,567
Net realized gains (losses)
from securities transactions 44,960,946 6,907,009 39,328,857 5,594,066
Change in net unrealized appreciation/
depreciation of investments (71,433,125) 23,858,462 59,111,041 3,942,515
------------ ------------ ------------- ------------
Increase in net assets from operations 89,038,807 39,938,704 163,590,282 24,512,148
------------ ------------ ------------- ------------
From capital transactions:
Net proceeds from units sold 17,843,677 6,548,080 15,725,475 2,732,107
Cost of units redeemed (156,337,476) (47,337,310) (148,465,506) (28,024,353)
Net transfers (34,656,167) 21,859,961 6,362,361 232,137
------------ ------------ ------------- ------------
Decrease in net assets from capital
transactions (173,149,966) (18,929,269) (126,377,670) (25,060,109)
------------ ------------ ------------- ------------
Increase (decrease) in net assets (84,111,159) 21,009,435 37,212,612 (547,961)
Net assets at beginning of period 897,275,485 228,134,336 882,143,460 153,608,289
------------ ------------ ------------- ------------
Net assets at end of period $813,164,326 $249,143,771 $919,356,072 $153,060,328
============ ============ ============= ============
ANALYSIS OF INCREASE (DECREASE)
IN UNITS OUTSTANDING:
Units sold 310,207 430,428 319,204 138,060
Units redeemed (2,717,251) (3,026,384) (2,943,661) (1,368,513)
Units transferred (660,002) 1,392,908 116,017 7,955
------------ ------------ ------------- ------------
Decrease in units outstanding (3,067,046) (1,203,048) (2,508,440) (1,222,498)
Beginning units 15,740,421 15,613,034 18,752,182 7,953,647
------------ ------------ ------------- ------------
Ending units 12,673,375 14,409,986 16,243,742 6,731,149
============ ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
U.S. Government/ Cash
High-Yield AAA-Rated Management
Bond Series Securities Series Series TOTAL
------------ ----------------- ------------ --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 12,225,428 $9,593,056 $6,222,874 $232,851,528
Net realized gains (losses)
from securities transactions 373,406 (1,677,745) (1,696,018) 93,790,521
Change in net unrealized appreciation/
depreciation of investments 3,547,084 (3,640,867) (969,539) 14,415,571
------------ ----------------- ------------ --------------
Increase in net assets from operations 16,145,918 4,274,444 3,557,317 341,057,620
------------ ----------------- ------------ --------------
From capital transactions:
Net proceeds from units sold 2,228,121 1,424,312 3,872,552 50,374,324
Cost of units redeemed (24,728,660) (25,503,716) (45,284,698) (475,681,719)
Net transfers (8,898,289) (6,280,708) 26,218,823 4,838,118
------------ ----------------- ------------ --------------
Decrease in net assets from capital
transactions (31,398,828) (30,360,112) (15,193,323) (420,469,277)
------------ ----------------- ------------ --------------
Increase (decrease) in net assets (15,252,910) (26,085,668) (11,636,006) (79,411,657)
Net assets at beginning of period 146,590,026 134,938,013 100,872,015 2,543,561,624
------------ ----------------- ------------ --------------
Net assets at end of period $131,337,116 $108,852,345 $ 89,236,009 $2,464,149,967
============ ================= ============ ==============
ANALYSIS OF INCREASE (DECREASE)
IN UNITS OUTSTANDING:
Units sold 61,598 74,200 222,509
Units redeemed (659,399) (1,232,100) (2,577,596)
Units transferred (242,416) (302,844) 1,496,689
------------ ----------------- ------------
Decrease in units outstanding (840,217) (1,460,744) (858,398)
Beginning units 4,114,675 6,505,460 5,851,566
------------ ----------------- ------------
Ending units 3,274,458 5,044,716 4,993,168
============ ================= ============
</TABLE>
See accompanying notes to financial statements.
40
<PAGE> 66
VARIABLE SEPARATE ACCOUNT
(Portion Relating to the PATHWAY Variable Annuity)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
November 30, 1995
<TABLE>
<CAPTION>
Growth International Growth-Income Asset Allocation
Series Series Series Series
------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 47,395,359 $9,850,552 $ 71,892,238 $9,122,061
Net realized gains
(losses) from securities
transactions 42,787,067 7,978,864 28,054,385 4,252,973
Change in net unrealized
appreciation/depreciation
of investments 159,678,566 3,407,523 126,332,034 24,529,870
------------ ------------ ------------- ----------------
Increase in net assets
from operations 249,860,992 21,236,939 226,278,657 37,904,904
------------ ------------ ------------- ----------------
From capital transactions:
Net proceeds from
units sold 19,722,464 6,916,813 16,265,961 2,456,876
Cost of units redeemed (126,938,659) (31,899,343) (134,266,945) (28,668,986)
Net transfers 42,028,410 (27,617,774) 7,894,297 (762,214)
------------ ------------ ------------- ----------------
Decrease in net assets
from capital
transactions (65,187,785) (52,600,304) (110,106,687) (26,974,324)
------------ ------------ ------------- ----------------
Increase (decrease) in
net assets 184,673,207 (31,363,365) 116,171,970 10,930,580
Net assets at beginning
of period 712,602,278 259,497,701 765,971,490 142,677,709
------------ ------------ ------------- ----------------
Net assets at end
of period $897,275,485 $228,134,336 $882,143,460 $153,608,289
============ ============ ============= ================
ANALYSIS OF INCREASE
(DECREASE) IN UNITS
OUTSTANDING:
Units sold 396,886 504,968 401,649 145,560
Units redeemed (2,511,273) (2,303,679) (3,286,354) (1,680,655)
Units transferred 834,921 (2,082,047) 185,102 (69,592)
------------ ------------ ------------- ----------------
Decrease in units
outstanding (1,279,466) (3,880,758) (2,699,603) (1,604,687)
Beginning units 17,019,887 19,493,792 21,451,785 9,558,334
------------ ------------ ------------- ----------------
Ending units 15,740,421 15,613,034 18,752,182 7,953,647
============ ============ ============= ================
</TABLE>
<TABLE>
<CAPTION>
U.S. Government/ Cash
High-Yield AAA-Rated Management
Bond Series Securities Series Series TOTAL
------------ ------------------ ------------ --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 15,169,707 $ 13,462,061 $4,525,646 $171,417,624
Net realized gains
(losses) from securities
transactions (2,055,681) (1,255,169) 1,557,154 81,319,593
Change in net unrealized
appreciation/depreciation
of investments 9,800,759 7,260,546 (396,529) 330,612,769
------------ ------------------ ------------ --------------
Increase in net assets
from operations 22,914,785 19,467,438 5,686,271 583,349,986
------------ ------------------ ------------ --------------
From capital transactions:
Net proceeds from
units sold 2,562,573 1,654,003 4,627,334 54,206,024
Cost of units redeemed (24,309,890) (29,660,948) (58,505,044) (434,249,815)
Net transfers 17,955,809 (5,890,457) (37,332,946) (3,724,875)
------------ ------------------ ------------ --------------
Decrease in net assets
from capital
transactions (3,791,508) (33,897,402) (91,210,656) (383,768,666)
------------ ------------------ ------------ --------------
Increase (decrease) in
net assets 19,123,277 (14,429,964) (85,524,385) 199,581,320
Net assets at beginning
of period 127,466,749 149,367,977 186,396,400 2,343,980,304
------------ ------------------ ------------ --------------
Net assets at end
of period $146,590,026 $134,938,013 $100,872,015 $2,543,561,624
============ ================== ============ ==============
ANALYSIS OF INCREASE
(DECREASE) IN UNITS
OUTSTANDING:
Units sold 78,057 86,387 274,417
Units redeemed (733,237) (1,534,528) (3,459,826)
Units transferred 569,721 (288,010) (2,220,944)
------------ ------------------ ------------
Decrease in units
outstanding (85,459) (1,736,151) (5,406,353)
Beginning units 4,200,134 8,241,611 11,257,919
------------ ------------------ ------------
Ending units 4,114,675 6,505,460 5,851,566
============ ================== ============
</TABLE>
See accompanying notes to financial statements.
41
<PAGE> 67
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Variable Separate Account (Portion Relating to the PATHWAY Variable
Annuity) of Anchor National Life Insurance Company (the "Separate
Account") is a segregated investment account of Anchor National Life
Insurance Company (the "Company"). The Company is an indirect, wholly
owned subsidiary of SunAmerica Inc. The Separate Account is
registered as a segregated unit investment trust pursuant to the
provisions of the Investment Company Act of 1940, as amended.
The Separate Account is composed of seven variable series (the
"Variable Accounts"). Each of the Variable Accounts is invested
solely in shares of a designated series of the Anchor Pathway Fund
(the "Fund"). The Fund is a diversified, open-end, affiliated
investment company, which retains an investment advisor to assist in
the investment activities of the Fund. The contractholder may elect
to have payments allocated to a guaranteed-interest fund of the
Company (the "General Account"), which is not a part of the Separate
Account. If no election is made, all payments are allocated to the
Cash Management Series of the Separate Account. The financial
statements include balances allocated by the contractholder to the
seven Variable Accounts and do not include balances allocated to the
General Account.
The investment objectives and policies of the seven series of the Fund
are summarized below:
The GROWTH SERIES seeks growth of capital. This portfolio invests
primarily in common stocks or securities with common stock
characteristics.
The INTERNATIONAL SERIES seeks long-term growth of capital. This
portfolio invests in securities of issuers domiciled outside the
United States.
The GROWTH-INCOME SERIES seeks growth of capital and income. This
portfolio invests primarily in securities which demonstrate the
potential for appreciation and/or dividends.
42
<PAGE> 68
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY
VARIABLE ANNUITY) OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The ASSET ALLOCATION SERIES seeks high total return (including income
and capital gains) consistent with preservation of capital over the
long term. This portfolio invests in a diversified selection of
common stocks and other equity-type securities (such as convertible
bonds and preferred stocks), bonds and other intermediate and
long-term fixed-income securities and money market instruments (debt
securities maturing in one year or less) in any combination.
The HIGH-YIELD BOND SERIES seeks a high level of current income and
secondarily seeks capital appreciation. This portfolio invests
primarily in intermediate and long-term corporate obligations, with
emphasis on higher-yielding, higher-risk, lower-rated or unrated
securities.
The U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES seeks a high level of
current income consistent with prudent investment risk and
preservation of capital. This portfolio invests primarily in a
combination of (i) securities guaranteed by the U.S. Government and
(ii) other debt securities rated AAA by Standard & Poor's Corporation
or Aaa by Moody's Investors Service, Inc. or that have not received a
rating but are determined to be of comparable quality by the
investment advisor.
The CASH MANAGEMENT SERIES seeks high current yield while preserving
capital. This portfolio invests in a diversified selection of money
market instruments.
Purchases and sales of shares of the series of the Fund are valued at
the net asset values of the shares on the date the shares are
purchased or sold. Dividends and capital gains distributions are
recorded when received. Realized gains and losses on the sale of
investments in the Fund are recognized at the date of sale and are
determined on an average cost basis.
Accumulation unit values are computed daily based on the total net
assets of the Variable Accounts.
43
<PAGE> 69
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. CHARGES AND DEDUCTIONS
Charges and deductions are applied against the current value of the
Separate Account and are paid as follows:
CONTINGENT DEFERRED SALES CHARGE: The contract value may be withdrawn
at any time during the accumulation period. There is a free withdrawal
amount for the first withdrawal during a contract year after the first
contract year. The free withdrawal amount equals 10% of the total of
purchase payments made more than one year prior to the date of
withdrawal. Should a withdrawal exceed the free withdrawal amount, a
contingent deferred sales charge of 5% is imposed and paid to the
Company on the excess.
The withdrawal charge is deducted from the 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 to purchase payments on a first-in, first-out basis
so that the lowest (if any) withdrawal charge will apply.
CONTRACT ADMINISTRATION CHARGE: An annual contract administration
charge of $30 is charged against each contract, which 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 issue date of the contract prior
to the date when annuity payments begin. 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.
TRANSFER FEE: A transfer fee of $25 ($10 in Pennsylvania and Texas)
is assessed on each transfer of funds in excess of fifteen
transactions within a contract year.
PREMIUM TAXES: Premium taxes or other taxes payable to a state or
other governmental entity will be charged against contract values.
Some states assess premium taxes at the time purchase payments are
made; others assess premium taxes at the time annuity payments begin.
The Company currently intends to deduct premium taxes at the time of
surrender, upon death of the contractholder or upon
44
<PAGE> 70
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
annuitization; however, it reserves the right to deduct premium taxes
when incurred. Premium taxes generally range from 0% to 3.5%.
2. CHARGES AND DEDUCTIONS (continued)
MORTALITY RISK CHARGE: The Company deducts a mortality risk charge,
which equals an annual rate of 0.80% of the net asset value of each
series, computed on a daily basis. The mortality risk charge is
compensation for the mortality risks assumed by the Company from its
contractual obligations to make annuity payments after the contract
has annuitized for the life of the annuitant and to provide a death
benefit if the contractholder dies prior to the date annuity payments
begin.
EXPENSE RISK CHARGE: The Company deducts an expense risk charge,
which equals an annual rate of 0.35% of the net asset value of each
series, computed on a daily basis. The expense risk charge is
compensation for the risk assumed by the Company that the cost of
administering the contracts will exceed the amount received from the
contract administration charge.
DISTRIBUTION EXPENSE CHARGE: The Company deducts a distribution
expense charge at an annual rate of 0.15% of the net asset value of
each series, computed on a daily basis. The distribution expense
charge is designed to compensate the Company for assuming a
distribution expense risk due to the guarantee that the contingent
deferred sales charge stated in the Contract will not be increased.
SEPARATE ACCOUNT INCOME TAXES: The Company currently does not
maintain a provision for taxes, but 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.
45
<PAGE> 71
VARIABLE SEPARATE ACCOUNT
(PORTION RELATING TO THE PATHWAY VARIABLE ANNUITY)
OF
ANCHOR NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENT IN ANCHOR PATHWAY FUND
The aggregate cost of the Fund's shares acquired and the aggregate
proceeds from shares sold during the year ended November 30, 1996
consist of the following:
<TABLE>
<CAPTION>
Cost of Shares Proceeds from
Variable Accounts Acquired Shares Sold
-------------------------- --------------- ---------------
<S> <C> <C>
Growth Series $ 208,299,408 $ 265,938,388
International Series 40,695,980 50,452,015
Growth-Income Series 86,993,927 148,221,213
Asset Allocation Series 20,487,164 30,571,705
High-Yield Bond Series 37,930,790 57,104,191
U.S. Government/AAA-Rated
Securities Series 17,801,018 38,568,074
Cash Management Series 176,274,529 185,244,978
=============== ===============
</TABLE>
4. FEDERAL INCOME TAXES
The Company qualifies for federal income tax treatment granted to life
insurance companies under subchapter L of the Internal Revenue Service
Code (the "Code"). The operations of the Separate Account are part of
the total operations of the Company and are not taxed separately. The
Separate Account is not treated as a regulated investment company
under the Code.
46
