<PAGE> 1
As filed pursuant to Rule 497
under the Securities Act of 1933
Registration No. 33-39888
ICAP II
PROSPECTUS
JANUARY 29, 1999
FLEXIBLE PAYMENT VARIABLE ANNUITY CONTRACTS
ISSUED BY
FIRST SUNAMERICA LIFE INSURANCE COMPANY
IN CONNECTION WITH
VARIABLE ANNUITY ACCOUNT ONE
The annuity has 12 investment choices -- 1 fixed account option and 11
variable investment portfolios listed below. The one year fixed account option
is funded through First SunAmerica's General Account. Each of the 11 variable
investment portfolios invest solely in the shares of one of the following
currently available divisions of the Anchor Series Trust:
<TABLE>
<S> <C>
- Foreign Securities Portfolio - Multi-Asset Portfolio
- Capital Appreciation Portfolio - High Yield Portfolio
- Growth Portfolio - Fixed Income Portfolio
- Natural Resources Portfolio - Government and Quality Bond Portfolio
- Growth and Income Portfolio - Money Market Portfolio
- Strategic Multi-Asset Portfolio
</TABLE>
Please read this prospectus carefully before investing and keep it for
future reference. It contains important information about the ICAP II contract.
To learn more about the annuity offered by this prospectus, obtain a copy
of the Statement of Additional Information ("SAI") dated January 29, 1999. The
SAI is on file with the Securities and Exchange Commission ("SEC") and is
incorporated by reference into this prospectus. The Table of Contents of the SAI
appears on page 26 of this prospectus. For a free copy of the SAI, call us at
(800) 99-NYSUN or write to us at our Annuity Service Center, P.O. Box 54299, Los
Angeles, California 90054-0299.
In addition, the SEC maintains a website (http://www.sec.gov) that contains
the SAI, materials incorporated by reference and other information filed
electronically with the SEC by First SunAmerica.
ANNUITIES INVOLVE RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. ANNUITIES
ARE NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THEY
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC, NOR HAS
THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS CRIMINAL.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ITEM ----
<S> <C>
DEFINITIONS................................................. 3
SUMMARY..................................................... 4
FEE TABLES.................................................. 7
EXAMPLES.................................................... 8
CONDENSED FINANCIAL INFORMATION -- ACCUMULATION UNIT
VALUES.................................................... 9
PERFORMANCE DATA............................................ 9
DESCRIPTION OF FIRST SUNAMERICA, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT....................................... 10
First SunAmerica Life Insurance Company................ 10
Separate Account....................................... 11
General Account........................................ 11
VARIABLE PORTFOLIO OPTIONS.................................. 11
Equity Portfolios...................................... 11
Managed Portfolios..................................... 11
Fixed Income Portfolios................................ 11
Target '98 Portfolio................................... 12
Voting Rights.......................................... 12
Substitution of Securities............................. 12
FIXED ACCOUNT OPTION........................................ 12
Allocations............................................ 12
CONTRACT CHARGES............................................ 12
Insurance Charges...................................... 13
Withdrawal Charges..................................... 13
Investment Charges..................................... 13
Contract Maintenance Fee............................... 13
Transfer Fee........................................... 13
Annuity Charge......................................... 14
Income Taxes........................................... 14
Reduction or Elimination of Charges and Expenses, and
Additional Amounts Credited........................... 14
Free Withdrawal Amount................................. 14
DESCRIPTION OF THE CONTRACTS................................ 14
Summary................................................ 14
Ownership.............................................. 15
Annuitant.............................................. 15
Modification of the Contract........................... 15
Assignment............................................. 15
Death Benefit.......................................... 15
PURCHASES, WITHDRAWALS AND CONTRACT VALUE................... 16
Purchase Payments...................................... 16
Automatic Dollar Cost Averaging Program................ 16
Allocation of Purchase Payments........................ 17
Accumulation Units..................................... 18
Free Look.............................................. 18
Transfers During the Accumulation Phase................ 18
Distribution of Contracts.............................. 19
Withdrawals............................................ 20
Systematic Withdrawal Program.......................... 20
Minimum Contract Value................................. 20
INCOME PHASE................................................ 21
Annuity Date........................................... 21
Income Options......................................... 21
Transfers During the Income Phase...................... 22
Deferment of Payments.................................. 22
ADMINISTRATION.............................................. 22
</TABLE>
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<TABLE>
<CAPTION>
PAGE
ITEM ----
<S> <C>
TAXES....................................................... 23
Annuity Contracts in General........................... 24
Tax Treatment of Distributions -- Non-Qualified
Contracts............................................. 24
Tax Treatment of Distributions -- Qualified
Contracts............................................. 24
Minimum Distributions.................................. 24
Diversification........................................ 25
CUSTODIAN................................................... 25
LEGAL PROCEEDINGS........................................... 25
REGISTRATION STATEMENTS..................................... 25
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT........... 26
FINANCIAL STATEMENTS........................................ 26
</TABLE>
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DEFINITIONS
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The following terms, as used in this prospectus, have the indicated
meanings:
ACCUMULATION PHASE -- The period during which you invest money in your contract.
ACCUMULATION UNIT -- A unit of measurement which we use to calculate the value
of the variable portion of your contract during the Accumulation Phase.
ANNUITANT(S) -- The person(s) on whose life (lives) we base income payments.
ANNUITY DATE -- The date on which income payments begin, as selected by you.
ANNUITY UNIT(S) -- A measurement we use to calculate the amount of income
payments you receive from the variable portion of your contract during the
Income Phase.
BENEFICIARY -- The person designated to receive any benefits under the contract
if you or the Annuitant dies.
INCOME PHASE -- The period during which we make income payments to you.
IRS -- The Internal Revenue Service.
NON-QUALIFIED (CONTRACT) -- A contract purchased with after-tax dollars. In
general, these contracts are not under any pension plan, specially sponsored
program or individual retirement account ("IRA").
PURCHASE PAYMENTS -- The money you give us to buy the contract, as well as any
additional money you give us to invest in the contract after you own it.
QUALIFIED (CONTRACT) -- A contract purchased with pre-tax dollars. These
contracts are generally purchased under a pension plan, specially sponsored
program or IRA.
TRUST -- Anchor Series Trust, an open-end management investment company.
VARIABLE PORTFOLIO(S) -- The variable investment options available under the
contract. Each Variable Portfolio has its own investment objective and is
invested in the underlying investments of the Trust.
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SUMMARY
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This summary sets forth some of the more important points that you should
know and consider before purchasing the ICAP II Variable Annuity. The remainder
of the prospectus discusses the topics in more detail. We urge you to read it
carefully and retain it, and the prospectus for the Trust, for future reference.
WHAT IS AN ANNUITY CONTRACT?
An annuity is a contract between you and an insurance company. You are the
owner of the contract. The contract provides three main benefits:
- Tax Deferral: This means that you do not pay taxes on your earnings from
the annuity until you withdraw them.
- Death Benefit: If you die during the Accumulation Phase, the insurance
company pays a death benefit to your Beneficiary.
- Guaranteed Income: If elected, you receive a stream of income for your
lifetime, or another available period you select.
The ICAP II Variable Annuity is a contract between you and First SunAmerica
(the Company, Us, We). It is designed to help you invest on a tax deferred basis
and meet long-term financial goals, such as retirement funding.
Like most annuities, this contract has an Accumulation Phase and an Income
Phase. During the Accumulation Phase, you invest money in your contract. Your
earnings are based on the investment performance of the Variable Portfolios you
allocate money to and/or the interest rate earned on the fixed account option.
During the Income Phase, you will receive income payments from your annuity.
Your payments may be fixed in dollar amount, may vary with investment
performance of the Variable Portfolios or be a combination of both. Among other
factors, the amount of money you are able to accumulate in your contract during
the Accumulation Phase will determine the amount of your payments during the
Income Phase.
WHAT IS THE DIFFERENCE BETWEEN A VARIABLE ANNUITY AND A FIXED ANNUITY?
A fixed annuity earns interest at a fixed rate guaranteed by the insurance
company. A variable annuity typically provides a fixed account option but also
provides Variable Portfolios. The Variable Portfolios are similar to a mutual
fund, but are only available through the purchase of an annuity. Most
significantly, you as the contract owner bear the entire investment risk with
respect to any Purchase Payments allocated to the Variable Portfolios of an
annuity. This means that the value of your contract will go up and down,
depending on the performance of the Variable Portfolios.
The ICAP II Variable Annuity is a variable annuity with one fixed account
option and eleven Variable Portfolios.
WHAT ARE THE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT?
You may allocate money to the following Variable Portfolios of the Trust:
<TABLE>
<S> <C>
- Foreign Securities Portfolio - Multi-Asset Portfolio
- Capital Appreciation Portfolio - High Yield Portfolio
- Growth Portfolio - Fixed Income Portfolio
- Natural Resources Portfolio - Government and Quality Bond
- Growth and Income Portfolio Portfolio
- Strategic Multi-Asset Portfolio - Money Market Portfolio
</TABLE>
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You may also allocate money to the fixed account option for a period of one
year. We call this time period the guarantee period. First SunAmerica guarantees
the interest rate credited to money in the fixed account option. The interest
rate offered for the guarantee period may differ from time to time, but we will
never credit less than a 4% annual effective rate.
During the Accumulation Phase, you may transfer among the Variable
Portfolios and/or the fixed account option. Fifteen free transfers are permitted
per contract year. After that, we assess a transfer fee.
HOW MAY I ACCESS MY MONEY?
During the Accumulation Phase, you may withdraw money from your contract at
any time. After your first contract year, the first withdrawal you take each
contract year will be free of a withdrawal charge if it does not exceed 10% of
your total Purchase Payments still subject to a withdrawal charge, less prior
withdrawals. You will not get the benefit of a free withdrawal amount upon a
full surrender of your contract.
Withdrawals in excess of these limits may be assessed a withdrawal charge.
Generally, withdrawals may be made from your contract in the amount of $500 or
more. You may request withdrawals in writing or by establishing systematic
withdrawals. Under systematic withdrawals, the minimum withdrawal amount is
$250.
There are no withdrawal charges on that portion of your money invested for
five years or more. Of course, upon a withdrawal you may have to pay income tax.
A 10% IRS penalty tax may also apply if you are under age 59 1/2. Additionally,
we do not assess withdrawal charges upon payment of a death benefit.
CAN I EXAMINE THE CONTRACT?
You may cancel your contract within ten days of your receipt of the
contract by mailing it to our Annuity Service Center. Your contract will be
treated as void on the date we receive it and we will refund an amount equal to
the contract value. Its value may be more or less than the money you initially
invested.
WHAT ARE THE CHARGES AND DEDUCTIONS UNDER A CONTRACT?
Each year, we deduct a $30 contract maintenance fee from your contract. We
also deduct insurance charges which equal 1.40% annually of the average daily
value of your contract allocated to the Variable Portfolios. The insurance
charges include: mortality and expense risk, 1.25%, and distribution expense,
.15%.
As with other professionally managed investments, there are also investment
charges imposed on contracts with money allocated to the Variable Portfolios,
which are estimated to range from .58% to 1.48%.
If you take money out in excess of the free withdrawal amount allowed for
in your contract, you may be assessed a withdrawal charge which is a percentage
of the Purchase Payments you withdraw. The percentage declines with each year
the money is in the contract as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
YEAR 1 2 3 4 5 6
- ----------------------------------------------------------------------------------
WITHDRAWAL CHARGE 5% 4% 3% 2% 1% 0%
- ----------------------------------------------------------------------------------
</TABLE>
Each year, you are allowed to make 15 transfers without charge. After your
first 15 free transfers, a $25 transfer fee will apply to each subsequent
transfer.
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WHAT IS THE DEATH BENEFIT UNDER THE CONTRACT?
If you die during the Accumulation Phase of your contract, your Beneficiary
will receive a death benefit.
The death benefit is the greater of:
1. the value of your contract at the time we receive satisfactory proof of
death; or
2. total Purchase Payments less any withdrawals and partial annuitizations
(and any fees or charges applicable to such distributions), compounded
at a 5% annual growth rate; or
3. after your fifth contract year, your contract value on the last contract
anniversary plus any Purchase Payments and less any withdrawals and
partial annuitizations (and any fees or charges applicable to such
distributions) since that contract anniversary.
WHAT ARE THE AVAILABLE INCOME OPTIONS UNDER THE CONTRACT?
You can select from one of three income options:
(1) payments for your lifetime, but for not less than 10 or 20 years;
(2) payments for your lifetime and your survivor's lifetime;
(3) payments for a specified period of 5 to 30 years.
You will also need to decide when your income payments begin and if you
want your income payments to fluctuate with investment performance or remain
constant. Once you begin receiving income payments, you cannot change your
income option.
If your contract is part of a Non-qualified retirement plan (one that is
established with after-tax dollars), payments during the Income Phase are
considered partly a return of your original investment. The "original
investment" part of each payment is not taxable as income. For contracts which
are part of a Qualified retirement plan using before-tax dollars, the entire
payment is taxable as income.
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FEE TABLES
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OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGE (AS A PERCENTAGE OF EACH PURCHASE PAYMENT):
<TABLE>
<CAPTION>
YEAR
<S> <C>
One.................................................. 5%
Two.................................................. 4%
Three................................................ 3%
Four................................................. 2%
Five................................................. 1%
Six and later........................................ 0%
ANNUAL CONTRACT MAINTENANCE FEE............................. $30
TRANSFER FEE................................................ $25
(no transfer fee applies to the first 15 transfers in a
contract year)
</TABLE>
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ANNUAL SEPARATE ACCOUNT EXPENSES
(AS A PERCENTAGE OF DAILY NET ASSET VALUE)
<TABLE>
<S> <C>
MORTALITY RISK CHARGE....................................... 0.90%
EXPENSE RISK CHARGE......................................... 0.35%
DISTRIBUTION EXPENSE CHARGE................................. 0.15%
----
TOTAL EXPENSE CHARGE................................. 1.40%
====
</TABLE>
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ANNUAL TRUST EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS FOR THE TRUST'S
TWELVE MONTH PERIOD ENDED NOVEMBER 30, 1998):
<TABLE>
<CAPTION>
TOTAL ANNUAL
MANAGEMENT FEE OTHER EXPENSES EXPENSES
-------------- -------------- ------------
<S> <C> <C> <C>
Foreign Securities................................. 0.90% 0.58% 1.48%
Capital Appreciation............................... 0.64% 0.04% 0.68%
Growth............................................. 0.70% 0.05% 0.75%
Natural Resources.................................. 0.75% 0.13% 0.88%
Growth and Income.................................. 0.70% 0.10% 0.80%
Strategic Multi-Asset.............................. 1.00% 0.47% 1.47%
Multi-Asset........................................ 1.00% 0.08% 1.08%
High Yield......................................... 0.70% 0.24% 0.94%
Fixed Income....................................... 0.63% 0.32% 0.95%
Government & Quality Bond.......................... 0.61% 0.06% 0.67%
Money Market....................................... 0.50% 0.08% 0.58%
</TABLE>
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THE ABOVE EXPENSES WERE PROVIDED BY THE TRUST.
THE COMPANY HAS NOT VERIFIED THE ACCURACY OF THE INFORMATION.
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EXAMPLES
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You would pay the following expenses on a $1,000 investment in each Variable
Portfolio, assuming 5% annual return on assets, and:
(a) surrender of the contract at the end of the applicable time period;
and
(b) if the contract is not surrendered or is switched to the Income
Phase.*
<TABLE>
<CAPTION>
TIME PERIODS
----------------------------------------
VARIABLE PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------ ------ ------- ------- --------
<S> <C> <C> <C> <C>
Foreign Securities................................ A $80 $119 $165 $328
B $30 $ 92 $156 $328
Capital Appreciation.............................. A $72 $ 95 $125 $249
B $22 $ 68 $116 $249
Growth............................................ A $73 $ 97 $129 $257
B $23 $ 70 $120 $257
Natural Resources................................. A $74 $101 $135 $270
B $24 $ 74 $126 $270
Growth and Income................................. A $73 $ 98 $131 $262
B $23 $ 71 $122 $262
Strategic Multi-Asset............................. A $80 $118 $164 $327
B $30 $ 91 $155 $327
Multi-Asset....................................... A $76 $107 $145 $290
B $26 $ 80 $136 $290
High Yield........................................ A $75 $102 $138 $276
B $25 $ 75 $129 $276
Fixed Income...................................... A $75 $103 $139 $277
B $25 $ 76 $130 $277
Government and Quality Bond....................... A $72 $ 94 $124 $248
B $22 $ 67 $115 $248
Money Market...................................... A $71 $ 92 $120 $239
B $21 $ 65 $111 $239
</TABLE>
* We do not currently charge a withdrawal when you elect to begin the Income
Phase.
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EXPLANATION OF FEE TABLES AND EXAMPLES
1. The purpose of the fee tables is to show you the various expenses you would
incur directly and indirectly by investing in the contract. The table
reflects expenses of the separate account as well as the Trust. The examples
do not illustrate the tax consequences of surrendering the contract.
2. The examples assume that no transfer fees were imposed. The contracts are
only sold in the state of New York, which does not assess premium taxes.
Accordingly, premium taxes are not reflected.
3. For purposes of the amounts reported in the examples, the contract
maintenance fee is calculated by dividing the total amount of contract
maintenance fees anticipated to be collected during the year by the total net
assets of the separate account's divisions and the related fixed accounts
assets.
4. THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
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<TABLE>
<CAPTION>
9/23/91 FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
(INCEPTION) YEAR YEAR YEAR YEAR YEAR YEAR YEAR
TO ENDED ENDED ENDED ENDED ENDED ENDED ENDED
SEPARATE ACCOUNT DIVISION 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ------------------------- ----------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Foreign Securities
Beginning AUV........... $11.66 $11.26 $ 9.64 $12.39 $11.83 $13.13 $14.43 $14.08
End AUV................. $11.26 $ 9.64 $12.39 $11.83 $13.13 $14.43 $14.08 $15.37
Ending Number of AUs.... 6,197 32,027 110,045 165,468 130,525 81,476 49,753 36,001
Capital Appreciation
Beginning AUV........... $13.71 $15.36 $19.09 $22.79 $21.62 $28.68 $35.39 $43.78
End AUV................. $15.36 $19.09 $22.79 $21.62 $28.68 $35.39 $43.78 $52.75
Ending Number of AUs.... 244 27,092 111,129 167,384 131,688 106,421 82,226 45,191
Growth
Beginning AUV........... $23.45 $23.36 $27.40 $29.12 $27.36 $34.08 $42.03 $54.05
End AUV................. $26.36 $27.40 $29.12 $27.36 $34.08 $42.03 $54.05 $68.72
Ending Number of AUs.... 4,483 108,874 179,035 170,859 146,484 97,902 63,077 43,070
Natural Resources
Beginning AUV........... $11.51 $11.13 $11.25 $15.11 $15.05 $17.43 $19.61 $17.68
End AUV................. $11.13 $11.25 $15.11 $15.05 $17.43 $19.61 $17.68 $14.41
Ending Number of AUs.... 451 8,283 20,215 43,075 23,005 21,096 11,485 11,838
Growth and Income
Beginning AUV........... $12.66 $13.12 $15.55 $18.70 $16.67 $19.16 $22.69 $28.81
End AUV................. $13.12 $15.55 $18.70 $16.67 $19.16 $22.69 $28.81 $36.98
Ending Number of AUs.... 1,911 19,305 58,427 69,818 59,120 49,540 33,513 26,657
Strategic Multi-Asset
Beginning AUV........... $12.65 $13.55 $13.88 $15.78 $15.16 $18.35 $20.78 $23.43
End AUV................. $13.55 $13.88 $15.78 $15.16 $18.35 $20.78 $23.43 $26.63
Ending Number of AUs.... 545 11,556 32,409 77,616 55,855 34,452 20,329 13,136
Multi-Asset
Beginning AUV........... $13.78 $14.98 $15.97 $16.90 $16.39 $20.19 $22.67 $27.09
End AUV................. $14.98 $15.97 $16.90 $16.39 $20.19 $22.67 $27.09 $33.24
Ending Number of AUs.... 8,409 141,059 310,679 287,625 241,450 171,566 118,421 67,060
High Yield
Beginning AUV........... $13.75 $14.44 $16.24 $19.07 $17.96 $21.03 $23.17 $25.42
End AUV................. $14.44 $16.24 $19.07 $17.96 $21.03 $23.17 $25.42 $23.95
Ending Number of AUs.... 1,395 34,946 63,091 80,486 64,930 42,707 24,819 18,381
Fixed Income
Beginning AUV........... $19.00 $20.31 $21.34 $22.71 $21.67 $25.46 $25.73 $27.76
End AUV................. $20.31 $21.34 $22.71 $21.67 $25.46 $25.73 $27.76 $29.57
Ending Number of AUs.... 1,266 40,684 66,362 56,430 36,124 16,119 7,626 5,743
Government &
Quality Bond
Beginning AUV........... $19.61 $21.00 $22.13 $23.63 $22.60 $26.60 $26.99 $29.16
End AUV................. $21.00 $22.13 $23.63 $22.60 $26.60 $26.99 $29.16 $31.37
Ending Number of AUs.... 3,572 177,925 217,255 176,490 148,101 90,313 53,619 27,540
Money Market
Beginning AUV........... $15.06 $15.23 $15.53 $15.72 $16.10 $16.77 $17.36 $18.00
End AUV................. $15.23 $15.53 $15.72 $16.10 $16.77 $17.36 $18.00 $18.66
Ending Number of AUs.... 48 91,048 82,889 15,560 29,241 12,090 5,430 12,042
</TABLE>
- ------------------------------
AUV -- Accumulation Unit Value.
AU -- Accumulation Units.
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PERFORMANCE DATA
- --------------------------------------------------------------------------------
We advertise the Money Market Portfolio's "yield" and "effective yield."
Both figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Money Market Portfolio refers to the net
income generated for a contract funded by an investment in the Money Market
Portfolio over a seven-day period. This income is then "annualized." That is,
the amount of income
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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 Money Market Portfolio is assumed to be
reinvested at the end of each seven-day period. The "effective yield" will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment. Neither the yield nor the effective yield takes into
consideration the effect of any capital changes that might have occurred during
the seven-day period, nor do they reflect the impact of premium taxes or any
withdrawal charges. The impact of other recurring charges on both yield figures
is, however, reflected in them to the same extent it would affect the yield (or
effective yield) for a contract of average size.
In addition, the separate account may advertise "total return" data for its
other Variable Portfolios. Like the yield figures described above, total return
figures are based on historical data and are not intended to indicate future
performance. The "total return" is a computed rate of return that, when
compounded annually over a stated period of time and applied to a hypothetical
initial investment in a Variable Portfolio made at the beginning of the period,
will produce the same contract value at the end of the period that the
hypothetical investment would have produced over the same period (assuming a
complete redemption of the contract at the end of the period). Recurring
contract charges are reflected in the total return figures in the same manner as
they are reflected in the yield data for contracts funded through the Money
Market Portfolio. The effect of applicable withdrawal charges due to the assumed
redemption will be reflected in the return figures, but may be omitted in
additional return figures given for comparison.
The separate account may also advertise an annualized 30-day (or one month)
yield figure for Variable Portfolios other than the Money Market Portfolio.
These yield figures are based upon the actual performance of the Variable
Portfolio over a 30-day (or one month) period ending on a date specified in the
advertisement. Like the total return data described above, the 30-day (or one
month) yield data will reflect the effect of all recurring contract charges (but
will not reflect any withdrawal charges or premium taxes). The yield figure is
derived from net investment gain (or loss) over the period expressed as a
fraction of the investment's value at the end of the period.
More detailed information on the computation of advertised performance data
for the separate account is contained in the SAI.
- --------------------------------------------------------------------------------
DESCRIPTION OF FIRST SUNAMERICA, THE SEPARATE ACCOUNT
AND THE GENERAL ACCOUNT
- --------------------------------------------------------------------------------
FIRST SUNAMERICA LIFE INSURANCE COMPANY
First SunAmerica is a stock life insurance company organized under the laws
of the state of New York. Its principal place of business is 733 Third Avenue,
New York, New York 10017. We are an indirect wholly-owned subsidiary of American
International Group, Inc. ("AIG"), a Delaware corporation.
First SunAmerica and its affiliates, SunAmerica Life Insurance Company,
Anchor National Life Insurance Company, CalAmerica Life Insurance Company,
SunAmerica National Life Insurance Company, SunAmerica Asset Management Corp.,
Resources Trust Company and six broker-dealers, specialize in retirement savings
and investment products and services. Business focuses include fixed and
variable annuities, mutual funds, premium finance, broker-dealer services and
trust administration services.
First SunAmerica may advertise the rating and other information assigned to
it by independent industry ratings organizations. Some of those organizations
are A.M. Best Company ("A.M. Best"), Moody's Investor's Service ("Moody's"),
Standard & Poor's Insurance Rating Services ("S&P"), and Duff & Phelps. A.M.
Best's and Moody's ratings reflect their current opinion of First SunAmer-
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ica's financial strength and performance in comparison to others in the life and
health insurance industry. S&P's and Duff & Phelps' ratings measure the ability
of an insurance company to meet its obligations under insurance policies it
issues. These two ratings do not measure the insurer's ability to meet
non-policy obligations. These ratings do not relate to the performance of the
Variable Portfolios.
SEPARATE ACCOUNT
First SunAmerica established Variable Annuity Account One (the "separate
account") on May 30, 1990. The separate account is registered with the SEC as a
unit investment trust under the Investment Company Act of 1940, as amended.
First SunAmerica owns the assets of the separate account. However, the assets in
the separate account are not chargeable with liabilities arising our of any
other business conducted by First SunAmerica. Income, gains and losses (realized
and unrealized), resulting from assets in the separate account are credited to
or charged against the separate account without regard to other income, gains or
losses of First SunAmerica.
GENERAL ACCOUNT
Money allocated to the fixed account option goes into First SunAmerica's
general account. The general account consists of all of First SunAmerica's
assets other than assets attributable to a separate account. All of the assets
in the general account are chargeable with the claims of any First SunAmerica
contract holders as well as all of its creditors. The general account funds are
invested as permitted under state insurance laws.
- --------------------------------------------------------------------------------
VARIABLE PORTFOLIO OPTIONS
- --------------------------------------------------------------------------------
The contract currently offers eleven Variable Portfolios. These Variable
Portfolios invest in shares of the Trust. These Variable Portfolios operate
similarly to a mutual fund but are only available through the purchase of this
annuity contract. The Variable Portfolios are:
<TABLE>
<S> <C>
EQUITY PORTFOLIOS FIXED INCOME PORTFOLIOS
- FOREIGN SECURITIES - HIGH YIELD
- CAPITAL APPRECIATION - FIXED INCOME
- GROWTH - GOVERNMENT AND QUALITY BOND
- NATURAL RESOURCES - MONEY MARKET
- GROWTH AND INCOME
MANAGED PORTFOLIOS
- STRATEGIC MULTI-ASSET
- MULTI-ASSET
</TABLE>
The Trust is an open-end diversified management investment company
registered under the Investment Company Act of 1940. Comprehensive information,
including a discussion of potential risks, is found in the prospectus for the
Trust, attached or enclosed. SAAMCo, an affiliate of First SunAmerica, is the
investment manager for the Trust. Wellington Management Company, LLP, which is
not affiliated with First SunAmerica, serves as sub-adviser for the Trust.
There is no assurance that the investment objective of any of the Variable
Portfolios will be met. The contract owners bear the complete investment risk
for Purchase Payments allocated to a division. Contract values will fluctuate in
accordance with the investment performance of the division(s) to which Purchase
Payments are allocated, and in accordance with the imposition of the fees and
charges assessed under the contracts.
Shares of the Trust are and will be issued and redeemed only in connection
with investments in and payments under variable contracts sold by the company
and its affiliate, Anchor National Life
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<PAGE> 12
Insurance Company, as well as two unaffiliated companies, Presidential Life
Insurance Company and Phoenix Mutual Life Insurance Company. No disadvantage to
contract owners is seen to arise from the fact that the Trust offers its shares
in this fashion.
Additional Variable Portfolios may be established by the Trust from time to
time and may be made available to contract owners. However, there is no
assurance that this will occur.
TARGET '98 PORTFOLIO
On January 1, 1998, we stopped accepting Purchase Payment allocations
and/or transfers to the Target '98 Portfolio. In addition, we requested that
contract owners who had money allocated to the Target '98 Portfolio provide
First SunAmerica with reallocation instructions before November 16, 1998. On
November 16, 1998, we automatically reallocated contract values in the Target
'98 Portfolio to the Money Market Portfolio. The reallocations of contract
values from the Target '98 Portfolio were not considered "transfers" for
purposes of determining applicable transfer fees.
VOTING RIGHTS
First SunAmerica is the legal owner of the Trust's shares. However, when a
Variable Portfolio solicits proxies in conjunction with a vote of shareholders,
we must obtain your instructions on how to vote those shares. We vote all of the
shares we own in proportion to your instructions. Should we determine that we
are no longer required to comply with these rules, we will vote the shares in
our own right.
SUBSTITUTION OF SECURITIES
If Variable Portfolios become unavailable for investment, we may be
required to substitute shares of another Variable Portfolios. We will seek prior
approval of the SEC and give you notice before substituting shares.
- --------------------------------------------------------------------------------
FIXED ACCOUNT OPTION
- --------------------------------------------------------------------------------
ALLOCATIONS
The contract also offers a fixed account option for a one year period. We
call this time period the guarantee period. The fixed account option pays
interest at rate set and guaranteed by First SunAmerica. The interest rate may
differ from time to time and is set at our sole discretion. We will never credit
less than a 4% annual effective rate to the fixed account option. The interest
rate offered for new Purchase Payments may differ from interest rates offered
for subsequent Purchase Payments and money already in the fixed account option.
Once established, the rates for specified payments do not change during the
guarantee period.
When a guarantee period ends, you may leave your money in the fixed
account. You may also reallocate your money to the Variable Portfolios. If you
want to reallocate your money you must contact us within 30 days after the end
of the current guarantee period and instruct us how to reallocate the money. If
we do not hear from you, we will keep your money in the fixed account where it
will earn the renewal interest rate applicable at that time.
- --------------------------------------------------------------------------------
CONTRACT CHARGES
- --------------------------------------------------------------------------------
There are charges and expenses associated with your contract. These charges
and expenses reduce your investment return. We will not increase the contract
maintenance fee and withdrawal charges
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under your contract. However, the investment charges under your contract may
increase or decrease. Some states may require that we charge less than the
amounts described below.
INSURANCE CHARGES
The amount of this charge is 1.40% annually, of the value of your contract
invested in the Variable Portfolios. We deduct the charge daily.
The insurance charge compensates us for the mortality and expense risks and
the costs of contract distribution we assume. If these charges do not cover all
expenses, we will pay the difference. Likewise, if these charges exceed our
expenses, we will keep the difference.
WITHDRAWAL CHARGES
The contract provides a free withdrawal amount every year. (SEE CONTRACT
CHARGES, FREE WITHDRAWAL AMOUNT, PAGE 18.) If you take money out in excess of
the free withdrawal amount, you may incur a withdrawal charge.
We apply a withdrawal charge against each Purchase Payment you put into the
contract. After a Purchase Payment has been in the contract for five complete
years, no withdrawal charge applies. The withdrawal charge equals a percentage
of Purchase Payments you take out of the contract which are still subject to the
withdrawal charge and not previously withdrawn. The withdrawal charge percentage
declines each year a Purchase Payment is in the contract, as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
YEAR 1 2 3 4 5 6
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WITHDRAWAL CHARGE 5% 4% 3% 2% 1% 0%
- ------------------------------------------------------------------------------------------------
</TABLE>
When calculating the withdrawal charge, we treat withdrawals as coming
first from the Purchase Payments that have been in your contract the longest.
However, for tax purposes, your withdrawals are considered earnings first, then
Purchase Payments.
Whenever possible, we deduct the withdrawal charge from the money remaining
in your contract. If you withdraw all of your contract value, applicable
withdrawal charges are deducted from the amount withdrawn.
We do not assess a withdrawal charge for money withdrawn to pay a death
benefit. Withdrawals made prior to age 59 1/2 may result in a 10% IRS penalty
tax. SEE TAXES, PAGE 24.
INVESTMENT CHARGES
Charges are deducted from the Variable Portfolios for the advisory and
other expenses of the underlying Variable Portfolios. THE FEE TABLES LOCATED AT
PAGE 7 illustrate these charges and expenses. For more detailed information on
these investment charges, refer to the attached prospectus for the Trust.
CONTRACT MAINTENANCE FEE
During the Accumulation Phase, we subtract a $30 contract maintenance fee
from your account once per contract year. This charge compensates us for the
cost of contract administration. We deduct the fee on your contract anniversary.
If you withdraw your entire contract value, the fee is deducted from that
withdrawal.
TRANSFER FEE
The contract currently provides for 15 free transfers between investment
options each contract year. After that, a charge of $25 applies to each
additional transfer in any one contract year. SEE TRANSFERS DURING THE
ACCUMULATION PHASE, PAGE 21.
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<PAGE> 14
ANNUITY CHARGE
If you elect to have your income payments made under income option 1, Life
Annuity with 10 or 20 Years Guaranteed, or income option 2, Joint and Survivor
Life Annuity, we do not assess an annuity charge. If you elect income option 3,
Income for a Specified Period, and if your Purchase Payments were made in the
contract year in which income payments begin or in any of the four preceding
contract years, we may assess an annuity charge. This annuity charge equals the
withdrawal charge that would apply if your contract was being surrendered. If
income option 3 is elected by your Beneficiary under the death benefit, we will
not assess an annuity charge. Under certain income options, we will assess the
annuity charge against the portion of your contract in the fixed account.
INCOME TAXES
We do not currently deduct income taxes from your contract. We reserve the
right to do so in the future.
REDUCTION OR ELIMINATION OF CHARGES AND EXPENSES, AND ADDITIONAL AMOUNTS
CREDITED
Sometimes sales of the contracts to groups of similarly situated
individuals may lower our administrative and/or sales expenses. We reserve the
right to reduce or waive certain charges and expenses when this type of sale
occurs. In addition, we may also credit additional interest to policies sold to
such groups. We determine which groups are eligible for such treatment. Some of
the criteria used to make a determination are: size of the group; amount of
expected Purchase Payments; relationship existing between us and prospective
purchaser; nature of the purchase; length of time a group of contracts is
expected to remain active; purpose of the purchase and whether that purpose
increases the likelihood that our expenses will be reduced; and/or any other
factors that we believe indicate that administrative and/or sales expenses may
be reduced.
We may make such a determination regarding sales to our employees, our
affiliates' employees and employees of currently contracted broker-dealers, our
registered representatives and immediate family members of all of those
described.
We reserve the right to change or modify any such determination or the
treatment applied to a particular group, at any time.
FREE WITHDRAWAL AMOUNT
Your contract provides for a free withdrawal amount. Purchase Payments that
are no longer subject to a withdrawal charge and not previously withdrawn, plus
earnings, may be withdrawn without penalty.
After the first full contract year, the contract provides for a free
withdrawal amount on your first withdrawal of each contract year. The free
withdrawal amount is equal to 10% of your total Purchase Payments still subject
to a withdrawal charge, less prior withdrawals.
We will waive the withdrawal charge upon payment of a death benefit.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE CONTRACTS
- --------------------------------------------------------------------------------
SUMMARY
This contract works in two stages, the Accumulation Phase and the Income
Phase. Your contract is in the Accumulation Phase while you make payments into
the contract. The Income Phase begins
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<PAGE> 15
when you request that we begin making payments to you out of the money
accumulated in your contract.
OWNERSHIP
You, as the contract owner, are entitled to the rights and privileges of
the contract. If you die during the Accumulation Phase, your Beneficiary will
become the owner of the contract, unless you elect otherwise. Joint owners have
equal ownership interests in the contract unless we advise otherwise in writing.
Only spouses may be joint owners.
ANNUITANT
The annuitant is the person on whose life we base income payments. You may
change the Annuitant at any time before the Annuity Date. You may also designate
a second person on whose life, together with the annuitant, income payments
depend. If the annuitant dies before the Annuity Date, you must notify us and
select a new annuitant.
MODIFICATION OF THE CONTRACT
Only the Company's President, a Vice President or Secretary may approve a
change or waive a provision of the contract. Any change or waiver must be in
writing. We reserve the right to modify the terms of the contract as necessary
to comply with changes in applicable law.
ASSIGNMENT
Contracts issued pursuant to Non-qualified plans that are not subject to
Title 1 of the Employee Retirement Income Security Act of 1974 ("ERISA") may be
assigned by the owner at any time during the lifetime of the Annuitant prior to
the Annuity Date. We will not be bound by any assignment until written notice is
received by us at our Annuity Service Center. We are not responsible for the
validity, tax or other legal consequences of any assignment. An assignment will
not affect any payments we may make or actions we may take before we receive
notice of the assignment.
If the contract is issued pursuant to a Qualified plan (or a Non-qualified
plan that is subject to Title 1 of ERISA), it may not be assigned, pledged or
otherwise transferred except under such conditions as may be allowed under
applicable law.
BECAUSE AN ASSIGNMENT MAY BE A TAXABLE EVENT, YOU SHOULD CONSULT A
COMPETENT TAX ADVISER SHOULD YOU WISH TO ASSIGN YOUR CONTRACT.
DEATH BENEFIT
If you die during the Accumulation Phase of your contract, we pay a death
benefit to your Beneficiary.
The death benefit is equal to the greater of:
1. the value of your contract at the time we receive satisfactory proof of
death; or
2. total Purchase Payments less any withdrawals and partial annuitizations
(and any fees or charges applicable to such distributions), compounded
at a 5% annual growth rate; or
3. after your fifth contract year, your contract value on the last contract
anniversary plus any Purchase Payments and less any withdrawals and
partial annuitizations (and any fees or charges applicable to such
distributions) since that contract anniversary.
We do not pay the death benefit if you die after you switch to the Income
Phase. However, if you die during the Income Phase, your Beneficiary receives
any remaining guaranteed income payments in accordance with the income option
you selected. (SEE INCOME PHASE, INCOME OPTIONS, PAGE 21.)
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<PAGE> 16
You name your Beneficiary. You may change the Beneficiary at any time,
unless you previously made an irrevocable Beneficiary designation.
We pay the death benefit when we receive satisfactory proof of death. We
consider the following satisfactory proof of death:
1. a certified copy of the 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 us.
We may require additional proof before we pay the death benefit.
The death benefit payment must begin immediately upon receipt of all
necessary documents. In any event, the death benefit must be paid within 5 years
of the date of death unless the Beneficiary elects to have it payable in the
form of an income option. If the Beneficiary elects an income option, it must be
paid over the Beneficiary's lifetime or for a period not extending beyond the
Beneficiary's life expectancy. Payments must begin within one year of the date
of your death. If a Beneficiary does not elect a specific form of pay out within
60 days of our receipt of proof of death, we pay a lump sum death benefit to the
Beneficiary.
If the Beneficiary is the spouse of a deceased owner, he or she can elect
to continue the contract at the then current value. If the Beneficiary/spouse
continues the contract, we do not pay a death benefit to him or her.
- --------------------------------------------------------------------------------
PURCHASES, WITHDRAWALS AND CONTRACT VALUE
- --------------------------------------------------------------------------------
PURCHASE PAYMENTS
A Purchase Payment is the money you give us to buy a contract. Any
additional money you give us to invest in the contract after purchase is a
subsequent Purchase Payment.
This chart shows the minimum initial and subsequent Purchase Payments
permitted under your contract. These amounts depend upon whether your contract
is Qualified or Non-qualified for tax purposes. SEE TAXES, PAGE 24.
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------
MINIMUM
MINIMUM INITIAL SUBSEQUENT
PURCHASE PAYMENT PURCHASE PAYMENT
- --------------------------------------------------------------------
Qualified $100 $100
- --------------------------------------------------------------------
Non-Qualified $1,000 $500
- --------------------------------------------------------------------
</TABLE>
Prior Company approval is required to accept Purchase Payments greater than
$1,000,000. Also, the optional automatic payment plan allows you to make
subsequent Purchase Payments of as little as $25.00.
We may refuse any Purchase Payment. In general, First SunAmerica will not
issue a Qualified contract to anyone who is age 70 1/2 or older, unless it is
shown that the minimum distribution required by the IRS is being made. In
addition, we may not issue a contract to anyone over age 80.
AUTOMATIC DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging ("DCA") program allows you to invest gradually in
the Variable Portfolios. Under the program you systematically transfer certain
amounts of portfolio value from the Money Market Portfolio, Government and
Quality Bond Portfolio or the 1-year fixed account option (source accounts) to
any other Variable Portfolio. Transfers from the Money Market Portfolio or
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<PAGE> 17
the Government and Quality Bond Portfolio may be monthly, quarterly,
semiannually or annually. You may change the frequency at any time by notifying
us by telephone or in writing. Funds in the Money Market Portfolio and the
Government and Quality Bond Portfolio may be transferred as a set dollar amount
or as a percentage of portfolio value.
Transfers from the fixed account option must be made on a percentage basis,
and may not exceed 8% of the value of the fixed account in any contract year.
Transfers from the fixed account may only be made quarterly. The minimum
transfer amount under the DCA program is $100, regardless of the source account.
You may not participate in the DCA program and the systematic withdrawal program
at the same time.
The DCA program is designed to lessen the impact of market fluctuations on
your investment. However, we cannot ensure that you will make a profit. When you
elect the DCA program, you are continuously investing in securities regardless
of fluctuating price levels. You should consider your tolerance for investing
through periods of fluctuating price levels.
We reserve the right to modify, suspend or terminate this program at any
time.
EXAMPLE:
Assume that you want to gradually move $750 each quarter from the Money
Market Portfolio to the Growth and Income Portfolio over six quarters. You
set up dollar cost averaging and purchase Accumulation Units at the
following hypothetical values:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
ACCUMULATION UNITS
QUARTER UNIT VALUE PURCHASED
- -----------------------------------------------------------
<S> <C> <C>
1 $ 7.50 100
2 $ 5.00 150
3 $10.00 75
4 $ 7.50 100
5 $ 5.00 150
6 $ 7.50 100
- -----------------------------------------------------------
</TABLE>
In this example, you paid an average price of only $6.67 per Accumulation
Unit over six quarters, while the average market price actually was $7.08.
By investing an equal amount of money each month, you automatically buy
more Accumulation Units when the market price is low and fewer Accumulation
Units when the market price is high. This example is for illustrative
purposes only.
ALLOCATION OF PURCHASE PAYMENTS
We invest your Purchase Payments in the fixed and variable investment
options according to your instructions. If we receive a Purchase Payment without
allocation instructions, we invest the money according to your last allocation
instructions. SEE VARIABLE PORTFOLIO OPTIONS, PAGE 11 AND FIXED ACCOUNT OPTION,
PAGE 12.
In order to issue your contract, we must receive your completed
application, Purchase Payment allocation instructions and any other required
paperwork at our principal place of business. We allocate your initial purchase
payment within two days of receiving it. If we do not have complete information
necessary to issue your contract, we will contact you. If we do not have the
information necessary to issue your contract within 5 business days we will:
- Send your money back to you, or;
- Ask your permission to keep your money until we get the information
necessary to issue the contract.
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<PAGE> 18
ACCUMULATION UNITS
When you allocate a Purchase Payment to the Variable Portfolios, we credit
your contract with Accumulation Units of the separate account based upon AUV
next determined after receipt. We determine the number of Accumulation Units
credited by dividing the Purchase Payment by the Accumulation Unit value for the
specific Variable Portfolio. The value of an Accumulation Unit will go up and
down based on the performance of the Variable Portfolios.
We calculate the value of an Accumulation Unit each day that the New York
Stock Exchange ("NYSE") is open as follows:
1. We determine the total value of money invested in a particular Variable
Portfolio;
2. We subtract from that amount all applicable contract charges; and
3. We divide this amount by the number of outstanding Accumulation Units.
We determine the number of Accumulation Units credited to your contract by
dividing the Purchase Payment by the Accumulation Unit value for the specific
Variable Portfolio.
EXAMPLE:
We receive a $25,000 Purchase Payment from you on Wednesday. You allocate
the money to the Multi-Asset Portfolio. The value of an Accumulation Unit
for the Multi-Asset Portfolio is $11.10 when the NYSE closes on Wednesday.
Your Purchase Payment of $25,000 is then divided by $11.10 and we credit
your contract on Wednesday night with 2252.52 Accumulation Units of the
Multi-Asset Portfolio.
Performance of the Variable Portfolios and the charges and expenses under
your contract affect Accumulation Unit values. These factors cause the value of
your contract to go up and down.
FREE LOOK
You may cancel your contract within ten days after receiving it. First
SunAmerica calls this a "free look." To cancel, you must mail the contract along
with your free look request to the Annuity Service Center at P.O. Box 54299, Los
Angeles, California 90054-0299. We will refund the value of your contract on the
day we receive your request. The amount refunded to you may be more or less than
the amount you originally invested. All contracts issued as an IRA require the
full return of Purchase Payments upon a free look.
TRANSFERS DURING THE ACCUMULATION PHASE
During the Accumulation Phase you may transfer funds between the Variable
Portfolios and/or the fixed account option. You must transfer at least $500. If
less than $500 will remain in any Variable Portfolio after a transfer, that
amount must be transferred as well. Transfers from the fixed account option may
only be made once each contract year and must be requested during the 30-day
period following the end of the applicable 1-year guarantee period.
You may request transfers of your account value between the Variable
Portfolios and/or the fixed account option in writing or by telephone. We
currently allow 15 free transfers per contract per year. A charge of $25 for
each additional transfer in any contract year applies after the first 15
transfers. We may also assess a $25 fee if you move all your money from a
Variable Portfolio to another Variable Portfolio within 30 days of the contract
issue date. Transfers resulting from your participation in the DCA program count
against your 15 free transfers per contract year.
We accept transfer requests by telephone unless you specify not to on your
contract application. Additionally, in the future you may be able to execute
transfers or other financial transactions over the internet. When receiving
instructions over the telephone, we follow appropriate procedures to provide
reasonable assurance that the transactions executed are genuine. Thus, we are
not responsible for any claim, loss or expense from any error resulting from
instructions received over the telephone.
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<PAGE> 19
Upon implementation of internet account transfers we will have appropriate
procedures in place to provide reasonable assurance that the transactions
executed are genuine. Thus, First SunAmerica would not be responsible for any
claim, loss or expense from any error resulting from instructions received over
the internet. If we fail to follow any procedures, we may be liable for any
losses due to unauthorized or fraudulent instructions.
We may limit the number of transfers in any contract year or refuse any
transfer request for you or others invested in the contract if we believe that:
- Excessive trading or a specific transfer request or group transfer
requests may have a detrimental effect on unit values or the share prices
of the underlying Variable Portfolios; or
- The underlying Variable Portfolios inform us that they need to restrict
the purchase or redemption of the shares because of excessive trading or
because a specific transfer or group of transfers is deemed to have a
detrimental effect on share prices of affected underlying Variable
Portfolios.
Where permitted by law, we may accept your authorization for a third party
to make transfers for you subject to certain rules. We reserve the right to
suspend or cancel such acceptance at any time and will notify you accordingly.
Additionally, we may restrict the investment options available for transfers
during any period in which such third party acts for you. We will notify such
third party beforehand regarding any restrictions. However, we will not enforce
these restrictions if we are satisfied that:
- such third party has been appointed by a court of competent jurisdiction
to act on your behalf; or
- such third party is a trustee/fiduciary for you or appointed by you to
act on your behalf for all your financial affairs.
We may provide administrative or other support services to independent
third parties you authorize to make transfers on your behalf. We do not
currently charge extra for providing these support services. This includes, but
is not limited to, transfers between investment options in accordance with
market timing strategies. Such independent third parties may or may not be
appointed with us for the sale of annuities. However, WE DO NOT ENGAGE ANY THIRD
PARTIES TO OFFER INVESTMENT ALLOCATION SERVICES OF ANY TYPE. WE TAKE NO
RESPONSIBILITY FOR THE INVESTMENT ALLOCATION AND TRANSFERS TRANSACTED ON YOUR
BEHALF BY SUCH THIRD PARTIES OR FOR ANY INVESTMENT ALLOCATION RECOMMENDATIONS
MADE BY SUCH PARTIES.
For information regarding transfers during the Income Phase, SEE INCOME
PHASE, TRANSFERS DURING THE INCOME PHASE, PAGE 22.
We reserve the right to modify, suspend, waive or terminate these transfer
provisions at any time.
DISTRIBUTION OF CONTRACTS
Registered representatives of broker-dealers sell the contract. First
SunAmerica pays commissions to these representatives for the sale of the
contracts. We do not expect the total commissions to exceed 5% of your Purchase
Payments. We may also pay a bonus to representatives for contracts which stay
active for a particular period of time, in addition to standard commissions. We
do not deduct commissions paid to registered representatives directly from your
Purchase Payments. No underwriting fees are paid in connection with the
distribution of the contract.
From time to time, we may pay or allow additional promotional incentives in
the form of cash or other compensation. We reserve the right to offer these
additional incentives only to certain broker-dealers that sell or are expected
to sell, certain minimum amounts of the contract, or other contracts offered by
us. Promotional incentives may change at any time.
SunAmerica Capital Services, Inc., 733 Third Avenue, 4th Floor, New York,
New York 10017 distributes the contracts. SunAmerica Capital Services is an
affiliate of First SunAmerica, is registered
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<PAGE> 20
as a broker-dealer under the Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc.
WITHDRAWALS
You can access money in your contract in two ways:
- by making a partial or total withdrawal, and/or;
- by receiving income payments during the Income Phase. (SEE INCOME PHASE,
PAGE 21.)
Generally, we deduct a withdrawal charge applicable to any total or partial
withdrawal. If you withdraw your entire contract value, a deduction for the
contract maintenance fee also occurs. (SEE CONTRACT CHARGES, WITHDRAWAL CHARGE,
PAGE 13.)
Under most circumstances, the partial withdrawal minimum is $500. We
require that the value left in any investment option be at least $500 after the
withdrawal. You must send a written withdrawal request. Unless you provide
different instructions, partial withdrawals will be made pro rata from each
Variable Portfolio and the fixed account option in which your contract is
invested.
Under certain Qualified plans, access to the money in your contract may be
restricted. Additionally, withdrawals made prior to age 59 1/2 may result in a
10% IRS penalty tax. (SEE TAXES ON PAGE 24.)
We may be required to suspend or postpone the payment of a withdrawal for
any period of time when: (1) the NYSE is closed (other than customary weekend
and holiday closings); (2) trading with the NYSE is restricted; (3) an emergency
exists such that disposal of or determination of the value of shares of the
Variable Portfolios is not reasonably practicable; (4) the SEC, by order, so
permits for the protection of contract owners.
Additionally, we reserve the right to defer payments for a withdrawal from
the fixed account option. Such deferrals are limited to no longer than six
months.
SYSTEMATIC WITHDRAWAL PROGRAM
During the Accumulation Phase, you may elect to receive periodic income
payments under the systematic withdrawal program. Under the program, you may
choose to take monthly, quarterly, semiannual or annual payments from your
contract. Electronic transfer of these funds to your bank account is available.
The minimum amount of each withdrawal is $250. You may systematically withdraw
up to 10% of your total Purchase Payments each contract year. There must be at
least $500 remaining in each Variable Portfolio after a withdrawal from your
contract at all times. Withdrawals may be subject to a withdrawal charge and
taxation, and a 10% IRS penalty tax may apply if you are under age 59 1/2. There
is no additional charge for participating in this program.
The program is not available to everyone. Please check with our Annuity
Service Center, which can provide the necessary enrollment forms. First
SunAmerica reserves the right to modify, suspend or terminate this program at
any time.
MINIMUM CONTRACT VALUE
Where permitted by state law, we may terminate your contract if both of the
following occur: (1) your contract is less than $500 as a result of withdrawals;
and (2) you have not made any Purchase Payments during the past three years. We
will provide you with sixty days written notice. At the end of the notice
period, we will distribute the contract value to you.
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<PAGE> 21
- --------------------------------------------------------------------------------
INCOME PHASE
- --------------------------------------------------------------------------------
ANNUITY DATE
During the Income Phase, we use the money accumulated in your contract to
make regular income payments to you. You may switch to the Income Phase any time
after the first full month of your contract. You select the month and year in
which you want income payments to begin. The first day of that month is the
Annuity Date. You may change your Annuity Date, so long as you do so at least
seven days before the income payments are scheduled to begin. Once you begin
receiving income payments, you cannot change your income option. Except as
discussed under Option 3 below, once you begin receiving income payments, you
cannot otherwise access your money through a withdrawal or surrender.
Income payments must begin on or before the Annuitant's 85th birthday. If
you named joint Annuitants on your contract, the income payments may not be
later than the first day of the month following the 85th birthday of the younger
Annuitant. If you do not choose an Annuity Date, your income payments will
automatically begin on this date.
If the Annuity Date is past your 85th birthday, your contract could lose
its status as an annuity under Federal tax laws. This may cause you to incur
adverse tax consequences.
In addition, most Qualified contracts require you to take minimum
distributions after you reach age 70 1/2. (SEE TAXES, PAGE 24.)
INCOME OPTIONS
Currently, this contract offers three income options. If you elect to
receive income payments but do not select an option, your income payments will
be made monthly and in accordance with option 1 for a period of 10 years.
We base our calculation of income payments on the life of the Annuitant and
the annuity rates set forth in your contract. As the contract owner, you may
change the Annuitant at any time prior to the Annuity Date. You must notify us
if the Annuitant dies before the Annuity Date and designate a new Annuitant.
OPTION 1 -- LIFE ANNUITY WITH 10 OR 20 YEARS GUARANTEED
This option provides income payments for the longer of (1) the life of the
Annuitant or (2) 10 or 20 years, depending on the number of years you select.
Under this option, we guarantee that income payments will be made for at least
10 or 20 years. If the Annuitant dies before all guaranteed income payments are
made, the remaining income payments go to the Beneficiary under your contract.
OPTION 2 -- JOINT AND SURVIVOR LIFE ANNUITY
This option provides income payments for the life of the Annuitant and for
the life of another designated person. Upon the death of either person, we will
continue to make income payments during the lifetime of the survivor. Income
payments stop whenever the survivor dies.
OPTION 3 -- INCOME FOR A SPECIFIED PERIOD
This option provides income payments for a guaranteed period ranging from 5
to 30 years. If the Annuitant dies before all of the guaranteed income payments
are made, the remaining income payments will be made to the Beneficiary under
your contract. Additionally, if variable income payments are elected under this
option, you (or the Beneficiary under the contract if the Annuitant dies prior
to all guaranteed payments being made) may redeem the contract value after the
Annuity Date. The amount available upon such redemption will be the discounted
present value of any remaining guaranteed payments.
The value of an Annuity Unit, regardless of the option chosen, takes into
account the Mortality and Expense Risk Charge. Since Option 3 does not contain
an element of mortality risk, no benefit is derived from this charge.
Please read the SAI for a more detailed discussion of the income options.
21
<PAGE> 22
You can choose income payments that are fixed, variable or both. If at the
date when income payments begin you are invested in the Variable Portfolios
only, your income payments will be variable. If your money is only in the fixed
account at that time, your income payments will be fixed in amount. Further, if
you are invested in both the fixed and variable investment options when payments
begin your payments will be fixed and variable. If income payments are fixed,
First SunAmerica guarantees the amount of each payment. If the income payments
are variable, the amount is not guaranteed. You may send us a written request to
convert variable income payments to fixed income payments. However, you may not
convert fixed income payments to variable income payments.
We make income payments on a monthly basis. You instruct us to send you a
check or to have the payments directly deposited into your bank account. If
state law allows, we distribute annuities with a contract value of $2,000 or
less in a lump sum. Also, if the selected income option results in income
payments of less than $20 per payment, the frequency of your payments may be
decreased, state law allowing.
If you are invested in the Variable Portfolios after the Annuity Date your
income payments vary depending on four things:
- for life options, your age when payments begin, and;
- the value of your contract in the Variable Portfolios on the Annuity
Date, and;
- the 5% assumed investment rate used in the annuity table for the
contract, and;
- the performance of the Variable Portfolios in which you are invested
during the time you receive income payments.
If you are invested in both the fixed account options and the Variable
Portfolios after the Annuity Date, the allocation of funds between the fixed and
variable options also impacts the amount of your income payments.
TRANSFERS DURING THE INCOME PHASE
During the Income Phase, you may transfer funds to the fixed account and/or
among the Variable Portfolios. Transfers during the Income Phase are subject to
the following limitations:
(1) You may not transfer funds to a Variable Portfolio during the first
year your contract is in the Income Phase. After the first year, you
may only make one transfer per Variable Portfolio during each contract
year.
(2) When you make a transfer, you must transfer the entire value of a
Variable Portfolio.
(3) Your transfer request must be in writing. We must receive your transfer
request during the 45 days preceding your contract anniversary. Amounts
are transferred at the next Annuity Unit value calculation date.
(4) You may not transfer funds from the fixed account option. However,
amounts may be transferred from the Variable Portfolios to the fixed
account option.
(5) We reserve the right to modify, suspend or terminate this transfer
privilege at any time.
DEFERMENT OF PAYMENTS
We may defer making fixed income payments for up to six months, or less if
required by law. Interest is credited to you during the deferral period.
- --------------------------------------------------------------------------------
ADMINISTRATION
- --------------------------------------------------------------------------------
We are responsible for the administrative servicing of your contract.
Please contact our Annuity Service Center at 1-800-99-NYSUN, if you have any
comment, question or service request.
22
<PAGE> 23
We send out transaction confirmations and quarterly statements. It is your
responsibility to review these documents carefully and notify us of any
inaccuracies immediately. We investigate all inquiries. To the extent that we
believe we made an error, we retroactively adjust your contract, provided you
notify us within 30 days of receiving the transaction confirmation or quarterly
statement. Any other adjustments we deem warranted are made as of the time we
receive notice of the error.
We rely significantly on computer systems and applications in our daily
operations. Many of our systems are not presently year 2000 compliant, which
means that because they have historically used only two digits to identify the
year in a date, they will fail to distinguish dates in the "2000s" from dates in
the "1900s." The Company's business, financial condition and results of
operations could be materially and adversely affected by the failure of our
systems and applications (and those operated by third parties interfacing with
our systems and applications) to properly operate or manage these dates.
The Company has a coordinated plan to repair or replace these noncompliant
systems and to obtain similar assurances from third parties interfacing with our
systems and applications. Both phases of the project are progressing according
to plan and we expect to substantially complete them by the end of calendar
1998. We will test both the repaired and replacement systems during calendar
1999. The cost of these changes will be substantially borne by First
SunAmerica's affiliates and will not have a material impact on First
SunAmerica's results of operations.
In addition, we distributed a year 2000 questionnaire to our significant
suppliers, distributors, financial institutions, lessors and others we do
business with to evaluate their year 2000 compliance plans and state of
readiness and to determine how our systems and applications may be affected by
their failure to solve their own year 2000 issues. To date, however, we have
only received preliminary feedback from such parties and have not independently
confirmed any information received from other parties with respect to the year
2000 issues. Therefore, we cannot assure that such other parties will complete
their year 2000 conversions in a timely fashion or will not suffer a year 2000
business disruption that may adversely affect our financial condition and
results of operations.
Because we expect to complete our year 2000 conversion prior to any
potential disruption to our business, we have not developed a comprehensive year
2000 contingency plan. The Company closely monitors the progression of its plan
for compliance, and if necessary, would devote additional resources to assure
the timely completion of its year 2000 plan. If we determine that our business
is at material risk of disruption due to the year 2000 issue or anticipate that
our year 2000 conversion will not be completed in a timely fashion, we will work
to enhance our contingency plans.
The above statements are forward-looking. The costs of our year 2000
conversion, the date which we have set to complete such conversion and the
possible risks associated with the year 2000 issue are based on our current
estimates and are subject to various uncertainties that could cause actual
results to differ materially from our expectations. Such uncertainties include,
among others, our success in identifying systems and applications that are not
year 2000 compliant, the nature and amount of programming required to upgrade or
replace each of the affected systems and applications, the availability of
qualified personnel, consultants and other resources, and the success of the
year 2000 conversion efforts of others.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
NOTE: WE PREPARED THE FOLLOWING INFORMATION ON TAXES AS A GENERAL
DISCUSSION OF THE SUBJECT. IT IS NOT TAX ADVICE. WE CAUTION YOU TO SEEK
COMPETENT TAX ADVICE ABOUT YOUR OWN CIRCUMSTANCES. WE DO NOT GUARANTEE THE TAX
STATUS OF YOUR ANNUITY. TAX LAWS CONSTANTLY CHANGE, THEREFORE WE CANNOT
GUARANTEE THAT THE INFORMATION CONTAINED HEREIN IS COMPLETE AND/OR ACCURATE.
23
<PAGE> 24
ANNUITY CONTRACTS IN GENERAL
The Internal Revenue Code ("IRC") provides for special rules regarding the
tax treatment of annuity contracts. Generally, taxes on the earnings in your
annuity contract are deferred until you take the money out. Qualified retirement
investments automatically provide tax deferral regardless of whether the
underlying contract is an annuity. Different rules apply depending on how you
take the money out and whether your contract is Qualified or Non-qualified.
If you do not purchase your contract under a pension plan, a specially
sponsored employer program or an IRA, your contract is referred to as a
Non-qualified contract. A Non-qualified contract receives different tax
treatment than a Qualified contract. In general, your cost basis in a Non-
qualified contract is equal to the Purchase Payments you put into the contract.
You have already been taxed on the cost basis in your contract.
If you purchase your contract under a pension plan, a specially sponsored
employer program or as an individual retirement account, your contract is
referred to as a Qualified contract. Examples of qualified plans are: IRAs, Roth
IRAs, Tax-Sheltered Annuities (referred to as 403(b) contracts), H.R. 10 Plans
(referred to as Keogh Plans) and pension and profit sharing plans, including
401(k) plans. Typically you have not paid any tax on the Purchase Payments used
to buy your contract and therefore, you have no cost basis in your contract.
TAX TREATMENT OF DISTRIBUTIONS -- NON-QUALIFIED CONTRACTS
If you make a withdrawal from a Non-qualified contract, the IRC treats such
a withdrawal as first coming from the earnings and then as coming from your
Purchase Payments. For income payments, any portion of each payment that is
considered a return of your Purchase Payment will not be taxed. Withdrawn
earnings are treated as income to you and are taxable. The IRC provides for a
10% penalty tax on any earnings that are withdrawn other than in conjunction
with the following circumstances: (1) after reaching age 59 1/2; (2) when paid
to your Beneficiary after you die; (3) after you become disabled (as defined in
the IRC); (4) when paid in a series of substantially equal installments made for
your life or for the joint lives of you and you Beneficiary; (5) under an
immediate annuity; or (6) which come from Purchase Payments made prior to August
14, 1982.
TAX TREATMENT OF DISTRIBUTIONS -- QUALIFIED CONTRACTS
Generally, you have not paid any taxes on the Purchase Payments used to buy
a Qualified contract. Any amount of money you take out as a withdrawal or as
income payments is taxable income. The IRC further provides for a 10% penalty
tax on any withdrawal or income payment paid to you other than in conjunction
with the following circumstances: (1) after reaching age 59 1/2; (2) when paid
to your Beneficiary after you die; (3) after you become disabled (as defined in
the IRC); (4) when paid in a series of substantially equal installments made for
your life or for the joint lives of you and your Beneficiary; (5) to the extent
such withdrawals do not exceed limitations set by the IRC for amounts paid
during the taxable year for medical care; (6) to fund higher education expenses
(as defined in IRC); (7) to fund certain first-time home purchase expenses; and,
except in the case of an IRA; (8) when you separate from service after attaining
age 55; and (9) when paid to an alternate payee pursuant to a qualified domestic
relations order.
The IRC limits the withdrawal of Purchase Payments from certain
Tax-Sheltered Annuities. Withdrawals can only be made when an owner: (1) reaches
age 59 1/2; (2) leaves his or her job; (3) dies; (4) becomes disabled (as
defined in the IRC); or (5) experiences hardship (as defined in the IRC). In the
case of hardship, the owner can only withdraw Purchase Payments.
MINIMUM DISTRIBUTIONS
Generally, the IRS requires that you begin taking annual distributions from
Qualified annuity contracts by April 1 of the calendar year following the later
of (1) the calendar year in which you attain age 70 1/2 or (2) the calendar year
in which you retire. Failure to satisfy the minimum distribution requirement may
result in a tax penalty. You should consult your tax advisor.
24
<PAGE> 25
DIVERSIFICATION
The IRC imposes certain diversification requirements on the underlying
investments for a variable annuity. We believe that the manager of the
underlying Variable Portfolios monitors the Variable Portfolios so as to comply
with these requirements. To be treated as a variable annuity for tax purposes,
the underlying investments must meet these requirements.
The diversification regulations do not provide guidance as to the
circumstances under which you, because of the degree of control you exercise
over the underlying investments, and not First SunAmerica, would be considered
the owner of the shares of the Variable Portfolios. It is unknown to what extent
owners are permitted to select investments, to make transfers among Variable
Portfolios or the number and type of Variable Portfolios owners may select from.
If any guidance is provided which is considered a new position, then the
guidance would generally be applied prospectively. However, if such guidance is
considered not to be a new position, it may be applied retroactively. This would
mean you, as the owner of the contract, could be treated as the owner of the
underlying Variable Portfolios. Due to the uncertainty in this area, we reserve
the right to modify the contract in an attempt to maintain favorable tax
treatment.
- --------------------------------------------------------------------------------
CUSTODIAN
- --------------------------------------------------------------------------------
State Street Bank and Trust Company, 255 Franklin Street, Boston,
Massachusetts 02110, serves as the custodian of the assets of the separate
account. First SunAmerica pays State Street Bank for services provided, based on
a schedule of fees.
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are no pending legal proceedings affecting the separate account.
First SunAmerica and its subsidiaries engage in various kinds of routine
litigation. In management's opinion, these matters are not of material
importance to their respective total assets nor are they material with respect
to the separate account.
- --------------------------------------------------------------------------------
REGISTRATION STATEMENTS
- --------------------------------------------------------------------------------
First SunAmerica is subject to the informational requirements of the
Securities and Exchange Act of 1934 (as amended). It files reports and other
information with the SEC to meet those requirements. You can inspect and copy
this information at SEC public facilities at the following locations:
WASHINGTON, DISTRICT OF COLUMBIA
450 Fifth Street, N.W., Room 1024
Washington, D.C. 20549
CHICAGO, ILLINOIS
500 West Madison Street
Chicago, IL 60661
NEW YORK, NEW YORK
7 World Trade Center, 13th Fl.
New York, NY 10048
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<PAGE> 26
To obtain copies by mail contact the Washington, D.C. location. After you
pay the fees as prescribed by the rules and regulations of the SEC, the required
documents are mailed.
Registration statements under the Securities Act of 1933, as amended,
related to the contracts offered by this prospectus are on file with the SEC.
This prospectus does not contain all of the information contained in the
registrations statement and its exhibits. For further information regarding the
separate account, First SunAmerica and its general account, the Variable
Portfolios and the contract, please refer to the registration statement and its
exhibits.
The SEC also maintains a website (http://www.sec.gov) that contains the
SAI, materials incorporated by reference and other information filed
electronically with the SEC by First SunAmerica.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
Additional information concerning the operations of the separate account is
contained in a Statement of Additional Information ("SAI"), which is available
without charge upon written request addressed to us at our Annuity Service
Center, P.O. Box 54299, Los Angeles, California 90054-0299 or by calling (800)
99-NYSUN. The contents of the SAI are tabulated below.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPANY..................................................... 1
INDEPENDENT ACCOUNTANTS..................................... 1
DISTRIBUTORS................................................ 1
PERFORMANCE DATA............................................ 2
Money Market Portfolio.................................... 2
Other Variable Portfolios................................. 3
INCOME PAYMENTS............................................. 4
Annuity Unit Value........................................ 4
Amount of Income Payments................................. 4
Subsequent Monthly Income Payments........................ 5
TAXES....................................................... 5
FINANCIAL STATEMENTS........................................ 9
</TABLE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Financial statements of the separate account appear in the SAI. Financial
information regarding the fixed account is reported in First SunAmerica's
financial statements, which are also included in the SAI. A copy of the SAI may
be obtained by contacting First SunAmerica, c/o its Annuity Service Center.
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<PAGE> 27
Please forward a copy (without charge) of the Statement of Additional
Information concerning ICAP II
Variable Annuity Contracts issued by First SunAmerica Life Insurance Company to:
(Please print or type and fill in all information.)
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
City/State/Zip
- ------------------------------------------------------------------------------
Date: ________________________ Signed: _____________________________________
Return to: First SunAmerica Life Insurance Company, Annuity Service Center, P.O.
Box 54299, Los Angeles, California 90054-0299.
<PAGE> 28
As filed pursuant to Rule 497
under the Securities Act of 1933
Registration No. 33-39888
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED
VARIABLE ANNUITY CONTRACTS
ISSUED BY
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION
SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE INDIVIDUAL FLEXIBLE
PREMIUM DEFERRED VARIABLE ANNUITY CONTRACTS WHICH ARE REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE
INVESTOR OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS DATED
FEBRUARY 1, 1999, AS IT MAY BE SUPPLEMENTED, CALL OR WRITE THE COMPANY C/O ITS
ANNUITY SERVICE CENTER, P.O. BOX 54299, LOS ANGELES, CALIFORNIA
90054-0299, 1-800-99-NYSUN.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED
JANUARY 29, 1999
<PAGE> 29
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
----
<S> <C>
Company........................................................... 1
Independent Accountants........................................... 1
Distributors...................................................... 1
Performance Data.................................................. 1
Money Market Division.......................................... 2
Other Divisions................................................ 3
Income Payments................................................... 4
Annuity Unit Value............................................. 4
Amount of Income Payments...................................... 5
Subsequent Monthly Income Payments............................. 5
Taxes............................................................. 5
Financial Statements.............................................. 9
</TABLE>
<PAGE> 30
COMPANY
Information regarding First SunAmerica Life Insurance Company (the
"Company") and its ownership is contained in the Prospectus.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of September 30, 1998 and
1997 and for each of the three years in the period ended September 30, 1998 are
presented in this Statement of Additional Information. The 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 as of December 31, 1997 and for each of the two years in
the period ended December 31, 1997, also are included in this Statement of
Additional Information.
PricewaterhouseCoopers 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 PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
DISTRIBUTOR
The Contracts are sold by licensed insurance agents, where the Contracts
may be lawfully sold, who are registered representatives of broker-dealers which
are registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
The offering is on a continuous basis.
Effective January 28, 1994, the Contracts are offered through the
distributor for the Separate Account, SunAmerica Capital Services, Inc., 733
Third Avenue, 4th Floor, New York, New York 10017, which is an indirect wholly
owned subsidiary of SunAmerica Inc. Prior to this time, Royal Alliance
Associates, Inc. and SunAmerica Securities, Inc., both affiliates of SunAmerica
Capital Services, Inc. and located at 733 Third Avenue, 4th Floor, New York, New
York 10017 and 2201 East Camelback Road, Phoenix, Arizona 85016, respectively,
served as co-distributors of the Contracts. Royal Alliance Associates, Inc. and
SunAmerica Capital Services, Inc. are each an indirect, wholly-owned subsidiary
of SunAmerica Inc.
For the year ended December 31, 1996, the aggregate amount of
underwriting commissions paid by the Company to SunAmerica Capital Services,
Inc. was $19,219, of which $1,872 was retained by them. For the year ended
December 31, 1997, the aggregate amount of underwriting commissions paid by the
Company to SunAmerica Capital Services, Inc. was $39,126, of which $4,230 was
retained by them. For the year end December 31, 1998, the aggregate amount of
underwriting commissions paid be the Company to SunAmerica Capital Services,
Inc. was $13,044, of which $1,304 was retained by them.
1
<PAGE> 31
PERFORMANCE DATA
Performance data for the various Divisions of the Separate Account are
determined in the manner described on the following page.
Money Market Division
The annualized current yield and the effective yield for the Money
Market Division for the seven day period ended December 31, 1998 were 3.0% and
3.05%, 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-CMF)/(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
CMF= an allocated portion of the $30 annual Contract Maintenance
Fee, prorated for 7 days.
The change in the value of an Accumulation Unit during the 7 day period
reflects the income received, minus any expenses accrued, during such 7 day
period. The Contract Maintenance Fee is first allocated among the Divisions and
the General Account so that each Division's allocated portion of the Fee is
proportional to the percentage of the number of Contract Owners' accounts that
have money allocated to that Division. The portion of the Fee allocable to the
Money Market Division 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 Money
Market Division. 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 Money Market Division 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 Money Market Division. The effective yield, like
the current yield, 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:
Effective Yield = [(Base Period Return+1)365/7 -1].
2
<PAGE> 32
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 transfer fees or Withdrawal or Annuity Charges.
The yields quoted should not be considered a representation of the yield
of the Money Market Division 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 Money Market Division 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
Money Market Division and for providing a basis for comparison with other
investment alternatives. However, the Money Market Division's yield fluctuates,
unlike bank deposits or other investments that typically pay a fixed yield for a
stated period of time.
Other Divisions
Divisions of the Separate Account other than the Money Market Division
compute their performance data as "total return." The total returns of the
various Divisions over the last one, five and ten year periods, and since their
inception, are shown below, both with and without an assumed complete redemption
at the end of the period.
TOTAL ANNUAL RETURN (IN PERCENT) FOR PERIODS ENDING ON 12/31/98:
(RETURN WITH/WITHOUT REDEMPTION)
<TABLE>
<CAPTION>
INCEPTION SINCE
DIVISION DATE 1 YEAR 5 YEARS 10 YEARS** INCEPTION
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Foreign Securities 9/23/91 3.96/8.96 4.15/4.30 N/A 3.62
Capital Appreciation 9/23/91 15.45/20.45 18.13/18.23 N/A 20.36
Growth 9/23/91 22.10/27.10 18.59/18.68 N/A 16.02
Natural Resources 9/23/91 (23.74)/(18.74) (1.27)/(1.08) N/A 3.39
Growth and Income* 9/23/91 23.24/28.24 14.41/14.51 N/A 15.85
Strategic Multi-Asset 9/23/91 8.52/13.52 10.83/10.95 N/A 10.56
Multi-Asset 9/23/91 17.67/22.67 14.33/14.44 N/A 12.83
High Yield 9/23/91 (10.90)/(5.90) 4.44/4.59 N/A 7.71
Fixed Income 9/23/91 1.31/6.31 5.17/5.32 N/A 5.99
Gov't & Quality Bond 9/23/91 2.51/7.51 5.62/5.77 N/A 6.42
</TABLE>
- -------------
The total return figures are based on historical data and are not intended to
indicate future performance.
* Formerly the Convertible Securities Division.
** For periods starting prior to September 23, 1991, the date the Contracts were
first offered the public, the total return data is and will be initially derived
from the performance of the corresponding Portfolios of the Trust, modified to
reflect the same charges and expenses as if the Division had been in existence
since the inception date of each respective Portfolio. Thus, such performance
figures should not be construed to be actual historic performance of the
Separate Account. Rather, they are intended to indicate the historic performance
of the Trust, adjusted to provide direct comparability to the performance of the
Division since it was first offered to the public. The Trust has served since
its inception as an underlying investment medium for separate accounts of other
insurance companies having the same fee and charge schedules as those of the
Separate Account.
These figures show the total return hypothetically experienced by
Contracts funded through the various Divisions of the Account over the time
period shown.
3
<PAGE> 33
Total return for a Division 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 Division 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. The total rate of return (T) is computed so that it satisfies the
formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
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 reflect the effects 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
Money Market Division, 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 figures given in
the table above for each Division and time period. Because the impact of
Contract Maintenance Fee on a particular Contract Owner's account would
generally have differed from that assumed in the computation, due to differences
between most actual allocations and the assumed one, 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 Money Market Division yield figures, total return figures are
derived from historical data and are not intended to be a projection of future
performance.
INCOME PAYMENTS
Annuity Unit Value
The value of an Annuity Unit is determined independently for each
Separate Account Division.
For each Division, the value of an Annuity Unit for any Valuation Period
is determined by multiplying the Annuity Unit value for the immediately
preceding Valuation Period by the net investment factor for the Valuation Period
for which the Annuity Unit Value is being calculated and multiplying the result
by an interest factor which offsets the effect of the investment earnings rate
of five percent (5%) per annum that is assumed in the annuity table contained in
the Contract.
The net investment factor for each Division for a Valuation Period is
determined by dividing (a) by (b) and subtracting (c) from the result where: (a)
is the value of an Accumulation Unit from the applicable Division as of the end
of the current Valuation Period; (b) is the value of an Accumulation Unit for
the applicable Division as of the end of the immediately preceding Valuation
Period; and (c) is a factor representing the daily charge for mortality and
expense risks and administration of 1.40% per
4
<PAGE> 34
annum.
Amount of Income Payments
The initial income payment is determined by applying the Contract Value,
less any Annuity Charge (if annuity option 3 is elected), to the annuity table
specified in the Contract. Those tables are based on a set amount per $1,000 of
proceeds applied. The appropriate rate must be determined by the sex and
adjusted age of the Annuitant and joint Annuitant, if any. The adjusted age is
determined from the actual age to the nearest birthday at the Annuity Date
according to the table below. The Adjusted Age Table is used to correct for
population mortality improvements over time.
ADJUSTED AGE TABLE
<TABLE>
<CAPTION>
ADJUSTMENT ADJUSTMENT
CALENDAR TO ACTUAL CALENDAR TO ACTUAL
YEAR OF BIRTH AGE YEAR OF BIRTH AGE
- ------------- ---------- ------------- ----------
<S> <C> <C> <C>
1899-1905 +6 1946-1951 -1
1906-1911 +5 1952-1958 -2
1912-1918 +4 1959-1965 -3
1919-1925 +3 1966-1972 -4
1926-1932 +2 1973-1979 -5
1933-1938 +1 1980-1985 -6
1939-1945 0 1986-1992 -7
</TABLE>
The dollars applied are then divided by 1,000 and multiplied by the
appropriate annuity factor to indicate the amount of the first income payment.
That amount is divided by the value of an Annuity Unit as of the Annuity Date to
establish the number of Annuity Units representing each income payment. The
number of Annuity Units determined for the first income payment remains constant
for the second and subsequent monthly payments.
Subsequent Monthly Income Payments
The amount of the second and subsequent income payments is determined by
multiplying the number of Annuity Units by the Annuity Unit value as of the
Valuation Period next preceding the date on which each income payment is due.
The dollar amount of the first income payment determined as above is divided by
the value of an Annuity Unit as of the Annuity Date to establish the number of
Annuity Units representing each income payment. The number of Annuity Units
determined for the first income payment remains constant for the second and
subsequent monthly payments.
TAXES
General
Section 72 of the Internal Revenue Code of 1986, as amended (the "Code")
governs taxation of annuities in general. An owner is not taxed on increases in
the value of a contract until distribution occurs, either in the form of a
non-annuity distribution or as income payments under the income option elected.
For a lump sum payment
5
<PAGE> 35
received as a total surrender (total redemption), the recipient is taxed on the
portion of the payment that exceeds the cost basis of the contract. For a
payment received as a withdrawal (partial redemption), federal tax liability is
determined on a last-in, first-out basis, meaning taxable income is withdrawn
before the cost basis of the contract is withdrawn. For contracts issued in
connection with Non-qualified plans, the cost basis is generally the Purchase
Payments, while for contracts issued in connection with Qualified plans there
may be no cost basis. The taxable portion of the lump sum payment is taxed at
ordinary income tax rates. Tax penalties may also apply.
For income payments, the taxable portion is determined by a formula
which establishes the ratio that the cost basis of the contract bears to the
total value of income payments for the term of the annuity contract. The taxable
portion is taxed at ordinary income tax rates. Contract Owners, Annuitants and
Beneficiaries under the contracts should seek competent financial advice about
the tax consequences of distributions under the retirement plan under which the
contracts are purchased.
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the separate account is not a separate entity from
the Company and its operations form a part of the Company.
Withholding Tax on Distributions
The Code generally requires the Company (or, in some cases, a plan
administrator) to withhold tax on the taxable portion of any distribution or
withdrawal from a contract. For "eligible rollover distributions" from contracts
issued under certain types of Qualified plans, 20% of the distribution must be
withheld, unless the payee elects to have the distribution "rolled over" to
another eligible plan in a direct "trustee to trustee" transfer. This
requirement is mandatory and cannot be waived by the 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 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.
Diversification - Separate Account Investments
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified, in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the contract as
an annuity contract would result in imposition of federal income tax to the
owner with respect to
6
<PAGE> 36
earnings allocable to the contract prior to the receipt of any payments under
the contract. The Code contains a safe harbor provision which provides that
annuity contracts, such as your contract, meet the diversification requirements
if, as of the close of each calendar quarter, the underlying assets meet the
diversification standards for a regulated investment company, and no more than
55% of the total assets consist of cash, cash items, U.S. government securities
and securities of other regulated investment companies.
The Treasury Department has issued regulations which establish
diversification requirements for the investment portfolios underlying variable
contracts such as the contracts. The regulations amplify the diversification
requirements for variable contracts set forth in the Code and provide an
alternative to the safe harbor provision described above. Under the regulations
an investment portfolio will be deemed adequately diversified if (1) no more
than 55% of the value of the total assets of the portfolio is represented by any
one investment; (2) no more than 70% of the value of the total assets of the
portfolio is represented by any two investments; (3) no more than 80% of the
value of the total assets of the portfolio is represented by any three
investments; and (4) no more than 90% of the value of the total assets of the
portfolio is represented by any four investments. For purposes of determining
whether or not the diversification standards imposed on the underlying assets of
variable contracts by Section 817(h) of the Code have been met, "each United
States government agency or instrumentality shall be treated as a separate
issuer."
Multiple Contracts
Multiple annuity contracts which are issued within a calendar year to
the same contract owner by one company or its affiliates are treated as one
annuity contract for purposes of determining the tax consequences of any
distribution. Such treatment may result in adverse tax consequences including
more rapid taxation of the distributed amounts from such multiple contracts. The
Company believes that Congress intended to affect the purchase of multiple
deferred annuity contracts which may have been purchased to avoid withdrawal
income tax treatment. Contract Owners should consult a tax adviser prior to
purchasing more than one annuity contract in any calendar year.
Tax Treatment of Assignments
An assignment of a contract may have tax consequences, and may also be
prohibited by ERISA in some circumstances. Contract Owners should therefore
consult competent legal advisers should they wish to assign their contracts.
Qualified Plans
The contracts offered by this prospectus are designed to be suitable for
use under various types of Qualified plans. Taxation of owners in each Qualified
plan varies with the type of plan and terms and conditions of each specific
plan. Contract Owners, Annuitants and Beneficiaries are cautioned that benefits
under a Qualified plan may be subject to the terms and conditions of the plan,
regardless of the terms and conditions of the contracts issued pursuant to the
plan.
Following are general descriptions of the types of Qualified plans with
which the contracts may be used. Such descriptions are not exhaustive and are
for general information purposes only. The tax rules regarding Qualified plans
are very complex and will have differing applications depending on individual
facts and circumstances. Each purchaser should obtain competent tax advice prior
to purchasing a contract issued under a Qualified plan.
7
<PAGE> 37
Contracts issued pursuant to Qualified plans include special provisions
restricting contract provisions that may otherwise be available and described in
this prospectus. Generally, contracts issued pursuant to Qualified plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified contracts.
(a) H.R. 10 Plans
Section 401 of the Code permits self-employed individuals to
establish Qualified plans for themselves and their employees, commonly
referred to as "H.R. 10" or "Keogh" Plans. Contributions made to the
plan for the benefit of the employees will not be included in the gross
income of the employees until distributed from the plan. The tax
consequences to owners may vary depending upon the particular plan
design. However, the Code places limitations and restrictions on all
plans on such items as: amounts of allowable contributions; form, manner
and timing of distributions; vesting and nonforfeitability of interests;
nondiscrimination in eligibility and participation; and the tax
treatment of distributions, withdrawals and surrenders. Purchasers of
contracts for use with an H.R. 10 Plan should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
(b) Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of
"tax-sheltered annuities" by public schools and certain charitable,
education and scientific organizations described in Section 501(c)(3) of
the Code. These qualifying employers may make contributions to the
contracts for the benefit of their employees. Such contributions are not
includible in the gross income of the employee until the employee
receives distributions from the contract. The amount of contributions to
the tax-sheltered annuity is limited to certain maximums imposed by the
Code. Furthermore, the Code sets forth additional restrictions governing
such items as transferability, distributions, nondiscrimination and
withdrawals. Any employee should obtain competent tax advice as to the
tax treatment and suitability of such an investment.
(c) Individual Retirement Accounts
Section 408(b) of the Code permits eligible individuals to
contribute to an individual retirement program known as an "Individual
Retirement Account" ("IRA"). Under applicable limitations, certain
amounts may be contributed to an IRA which will be deductible from the
individual's gross income. These IRAs are subject to limitations on
eligibility, contributions, transferability and distributions. Sales of
contracts for use with IRAs are subject to special requirements imposed
by the Code, including the requirement that certain informational
disclosure be given to persons desiring to establish an IRA. Purchasers
of contracts to be qualified as IRAs should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
(d) Roth IRAs
Section 408(a) of the Code permits an individual to contribute
to an individual retirement program called a Roth IRA. Unlike
contributions to a regular IRA under Section 408(b) of the Code,
contributions to a Roth IRA are not made on a tax-deferred basis, but
distributions are tax-free if certain requirements are satisfied. Like
regular IRAs, Roth IRAs are subject to limitations on the amount that
may be contributed, those who may be eligible and the time when
distributions may commence without tax penalty. Certain persons may be
eligible to convert a regular IRA into a Roth IRA, and the taxes on the
resulting income
8
<PAGE> 38
may be spread over four years if the conversion occurs before January 1,
1999. If and when the contracts are made available for use with Roth
IRAs, they may be subject to special requirements imposed by the
Internal Revenue Service ("IRS"). Purchasers of the contracts for this
purpose will be provided with such supplementary information as may be
required by the IRS or other appropriate agency.
(e) Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit corporate
employers to establish various types of retirement plans for employees.
These retirement plans may permit the purchase of the contracts to
provide benefits under the plan. Contributions to the plan for the
benefit of employees will not be includible in the gross income of the
employee until distributed from the plan. The tax consequences to owners
may vary depending upon the particular plan design. However, the Code
places limitations on all plans on such items as amount of allowable
contributions; form, manner and timing of distributions; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. Purchasers of contracts for use with corporate pension or
profit sharing plans should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
(f) Deferred Compensation Plans - Section 457
Under Section 457 of the Code, governmental and certain other
tax-exempt employers may establish, for the benefit of their employees,
deferred compensation plans which may invest in annuity contracts. The
Code, as in the case of Qualified plans, establishes limitations and
restrictions on eligibility, contributions and distributions. Under
these plans, contributions made for the benefit of the employees will
not be includible in the employees' gross income until distributed from
the plan. However, under a 457 plan all the plan assets shall remain
solely the property of the employer, subject only to the claims of the
employer's general creditors until such time as made available to an
owner or a Beneficiary.
FINANCIAL STATEMENTS
The financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts. The financial statements of the Separate
Account are also included in this Statement of Additional Information.
9
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First SunAmerica Life Insurance Company
In our opinion, the accompanying balance sheet and the related income
statement and statement of cash flows present fairly, in all material respects,
the financial position of First SunAmerica Life Insurance Company (the
"Company") at September 30, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1998, 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 financial statements for the year ended
September 30, 1997 have been restated to reflect the merger of John Alden Life
Insurance Company of New York ("JANY") with and into the Company. The merger was
accounted for similar to a pooling of interests. The income statement for that
year includes the operating results of JANY'S for the period from April 1, 1997
(the date of acquisition of JANY by SunAmerica Life Insurance Company, the
direct parent of the Company) through September 30, 1997. We have audited the
adjustments that were applied to restate the 1997 financial statements. In our
opinion, such adjustments are appropriate and have been properly applied to the
1997 financial statements.
PricewaterhouseCoopers LLP
Los Angeles, California
November 9, 1998
<PAGE> 40
FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
INVESTMENTS:
Cash and short-term investments.......................... $ 55,679,000 $ 50,585,000
Bonds and notes available for sale at fair value
(amortized cost: 1998, $1,262,703,000; 1997,
$1,459,112,000)....................................... 1,303,872,000 1,499,253,000
Mortgage loans........................................... 187,906,000 131,117,000
Other invested assets.................................... 6,859,000 9,277,000
-------------- --------------
Total investments........................................ 1,554,316,000 1,690,232,000
Variable annuity assets held in separate accounts.......... 271,865,000 171,475,000
Accrued investment income.................................. 19,853,000 22,243,000
Deferred acquisition costs................................. 87,074,000 96,516,000
Receivable from brokers for sales of securities............ 6,601,000 --
Other assets............................................... 2,451,000 4,024,000
-------------- --------------
TOTAL ASSETS............................................... $1,942,160,000 $1,984,490,000
============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts..................... $1,460,856,000 $1,556,656,000
Payable to brokers for purchases of securities........... -- 12,460,000
Income taxes currently payable........................... 10,177,000 2,236,000
Other liabilities........................................ 7,836,000 68,601,000
-------------- --------------
Total reserves, payables and accrued liabilities......... 1,478,869,000 1,639,953,000
-------------- --------------
Variable annuity liabilities related to separate
accounts................................................. 271,865,000 171,475,000
-------------- --------------
Deferred income taxes...................................... 5,371,000 4,984,000
-------------- --------------
Shareholder's equity:
Common Stock............................................. 3,000,000 3,000,000
Additional paid-in capital............................... 144,428,000 144,428,000
Retained earnings........................................ 31,361,000 14,826,000
Net unrealized gains on bonds and notes available for
sale.................................................. 7,266,000 5,824,000
-------------- --------------
Total shareholder's equity............................... 186,055,000 168,078,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY................. $1,942,160,000 $1,984,490,000
============== ==============
</TABLE>
See accompanying notes.
<PAGE> 41
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INCOME STATEMENT
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Investment income.............................. $117,496,000 $ 65,559,000 $ 9,957,000
------------ ------------ -----------
Interest expense on:
Fixed annuity contracts...................... (80,624,000) (45,765,000) (7,155,000)
Senior indebtedness.......................... (109,000) (589,000) (4,000)
------------ ------------ -----------
Total interest expense......................... (80,733,000) (46,354,000) (7,159,000)
------------ ------------ -----------
NET INVESTMENT INCOME.......................... 36,763,000 19,205,000 2,798,000
------------ ------------ -----------
NET REALIZED INVESTMENT GAINS (LOSSES)......... 4,690,000 5,020,000 (539,000)
------------ ------------ -----------
Fee income:
Variable annuity fees........................ 3,607,000 1,712,000 690,000
Surrender charges............................ 4,350,000 1,809,000 221,000
------------ ------------ -----------
TOTAL FEE INCOME............................... 7,957,000 3,521,000 911,000
------------ ------------ -----------
GENERAL AND ADMINISTRATIVE EXPENSES............ (3,301,000) (3,222,000) (1,480,000)
------------ ------------ -----------
AMORTIZATION OF DEFERRED ACQUISITION COSTS..... (17,120,000) (10,386,000) (500,000)
------------ ------------ -----------
ANNUAL COMMISSIONS............................. (348,000) (195,000) (19,000)
------------ ------------ -----------
PRETAX INCOME.................................. 28,641,000 13,943,000 1,171,000
Income tax expense............................. (12,106,000) (5,090,000) (448,000)
------------ ------------ -----------
NET INCOME..................................... $ 16,535,000 $ 8,853,000 $ 723,000
============ ============ ===========
</TABLE>
See accompanying notes.
<PAGE> 42
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 16,535,000 $ 8,853,000 $ 723,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Interest credited to fixed annuity contracts............ 80,624,000 45,765,000 7,155,000
Net realized investment (gains) losses.................. (4,690,000) (5,020,000) 539,000
Accretion of net discounts on investments............... (1,985,000) (1,070,000) (343,000)
Amortization of goodwill................................ 58,000 58,000 58,000
Provision for deferred income taxes..................... (389,000) 401,000 740,000
Change in:
Deferred acquisition costs.............................. 5,642,000 (4,215,000) (5,736,000)
Income taxes receivable/payable......................... 7,941,000 2,535,000 (322,000)
Other, net................................................ 8,472,000 (2,289,000) (254,000)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 112,208,000 45,018,000 2,560,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds and notes......................................... (761,591,000) (833,174,000) (124,681,000)
Mortgage loans.......................................... (82,256,000) -- --
Other investments, excluding short-term investments..... (11,000) -- --
Sales of:
Bonds and notes......................................... 864,763,000 561,887,000 80,440,000
Mortgage loans.......................................... -- 88,371,000 --
Other investments, excluding short-term investments..... 494,000 140,000 --
Redemptions and maturities of:
Bonds and notes......................................... 81,254,000 51,600,000 11,514,000
Mortgage loans.......................................... 24,501,000 13,535,000 4,736,000
Other investments, excluding short-term investments..... -- 99,000 --
------------- ------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ 127,154,000 (117,542,000) (27,991,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity contracts............... $ 130,851,000 $ 131,711,000 $ 45,417,000
Net exchanges from the fixed accounts of variable annuity
contracts............................................... (47,852,000) (22,346,000) (4,719,000)
Withdrawal payments on fixed annuity contracts............ (221,629,000) (88,229,000) (9,850,000)
Claims and annuity payments on fixed annuity contracts.... (36,892,000) (13,774,000) (3,752,000)
Capital contributions received............................ -- 5,000,000 --
Net receipts from (repayments of) other short-term
financings.............................................. (23,970,000) 18,659,000 (1,340,000)
Cession of non-annuity product lines...................... (34,776,000) -- --
------------- ------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ (234,268,000) 31,021,000 25,756,000
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS............................................... 5,094,000 (41,503,000) 325,000
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD...... 50,585,000 6,707,000 6,382,000
CASH AND SHORT-TERM INVESTMENTS OF MERGED ENTITY AT DATE OF
MERGER.................................................... -- 85,381,000 --
------------- ------------- -------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD............ $ 55,679,000 $ 50,585,000 $ 6,707,000
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness............................. $ 109,000 $ 589,000 $ 4,000
============= ============= =============
Net income taxes paid..................................... $ 5,439,000 $ 2,154,000 $ 30,000
============= ============= =============
</TABLE>
See accompanying notes.
<PAGE> 43
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
First SunAmerica Life Insurance Company (The "Company") is a wholly-owned
indirect subsidiary of SunAmerica Inc. (the "Parent"). The Company is a New
York-domiciled life insurance company engaged primarily in the business of
selling and administering fixed and variable annuity contracts in the state of
New York.
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, strengths, weakness and volatility
of equity markets, and terms and conditions of competing financial products. The
Company is exposed to the typical risks normally associated with a portfolio of
fixed-income securities, namely interest rate, option, liquidity and credit
risk. The Company controls its exposure to these risks by, among other things,
closely monitoring and matching the duration of its assets and liabilities,
monitoring and limiting prepayment and extension risk in its portfolio,
maintaining a large percentage of its portfolio in highly liquid securities, and
engaging in a disciplined process of underwriting, reviewing and monitoring
credit risk. The Company also is exposed to market risk, as market volatility
may result in reduced fee income in the case of assets held in separate
accounts.
2. BUSINESS COMBINATION
On March 31, 1997, SunAmerica Life Insurance Company, the direct parent of
the Company, completed the acquisition of all of the outstanding stock of John
Alden Life Insurance Company of New York ("JANY"). On October 31, 1997, JANY was
merged with and into the Company. On the date of acquisition, JANY had assets
having an aggregate fair value of $1,536,179,000, composed primarily of invested
assets totaling $1,403,807,000. Liabilities assumed in this acquisition totaled
$1,411,179,000, including $1,363,764,000 of fixed annuity reserves. An amount
equal to the excess of the purchase price over the fair value of the net assets
required, amounting to $103,695,000 at September 30, 1997, is included in
Deferred Acquisition Costs on the balance sheet. The acquisition was accounted
for by using the purchase method of accounting and the merger by using the
pooling method from the date of acquisition. The balance sheet at September 30,
1997 and the income statement and statement of cash flows for the year ended
September 30, 1997 have been restated from those originally contained in the
September 30, 1997 Annual Report on Form 10-K to include the assets and
liabilities of JANY and the results of JANY's operations and cash flows for the
six-month period from April 1, 1997 through September 30, 1997. On a pro forma
(unaudited) basis, assuming the acquisition and merger had occurred on October
1, 1995, the beginning of the earliest period presented herein, revenues (net
investment income, net realized investment losses and fee income) would have
been $40,891,000 and $29,768,000 and net income would have been $12,434,000 and
$6,710,000 for the years ended September 30, 1997 and 1996, respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles. Certain
prior period amounts have been reclassified to conform with the 1998
presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and short-term
bank participations. All such
<PAGE> 44
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and notes available for sale 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 and notes 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. Other invested assets include real estate, which is
carried at the lower of cost or fair value, policy loans, which are carried at
unpaid balances, and common stock, which is carried at fair value.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined by using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income by using the interest method over the contractual lives of the
investments.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net interest income, net realized
investment gains and losses, variable annuity fees, surrender charges and direct
administrative expenses. Deferred acquisition costs consist of commissions and
other costs that vary with, and are primarily related to, the production or
acquisition of new business.
As debt and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to deferred acquisition costs equal to the
change in amortization that would have been recorded if such securities had been
sold at their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains or losses on debt and equity securities available for
sale that is credited or charged directly to shareholder's equity. Deferred
Acquisition Costs have been decreased by $30,000,000 at September 30, 1998 and
$31,200,000 at September 30, 1997 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 $705,000 at September 30, 1998, is
amortized by using the straight-line method over a period of 25 years and is
included in Other Assets in the balance sheet. Goodwill is evaluated for
impairment when events or changes in economic conditions indicate that the
carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts 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 surrender charges are recorded in
income as earned.
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
<PAGE> 45
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting comprehensive income and its components in a
full set of general purpose financial statements. SFAS 130 is effective for the
Company as of October 1, 1998 and is not included in these financial statements.
Implementation of SFAS 130 will not have an impact on the Company's results of
operations, financial condition or liquidity.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. SFAS 133 is effective for the Company as of October 1, 1999 and is
not included in these financial statements. The Company has not completed its
analysis of the effect of SFAS 133, but management believes that it will not
have a material impact on the Company's results of operations, financial
condition or liquidity.
<PAGE> 46
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
The amortized cost and estimated fair value of bonds and notes available
for sale by major category follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
<S> <C> <C>
AT SEPTEMBER 30, 1998:
Securities of the United States Government....... $ 518,000 $ 549,000
Mortgage-backed securities....................... 454,934,000 472,557,000
Securities of public utilities................... 81,525,000 84,711,000
Corporate bonds and notes........................ 658,674,000 677,717,000
Other debt securities............................ 67,052,000 68,338,000
-------------- --------------
Total.................................... $1,262,703,000 $1,303,872,000
============== ==============
AT SEPTEMBER 30, 1997:
Securities of the United States Government....... $ 36,083,000 $ 36,950,000
Mortgage-backed securities....................... 487,585,000 501,683,000
Securities of public utilities................... 50,855,000 53,018,000
Corporate bonds and notes........................ 754,322,000 775,073,000
Other debt securities............................ 130,267,000 132,529,000
-------------- --------------
Total.................................... $1,459,112,000 $1,499,253,000
============== ==============
</TABLE>
The amortized cost and estimated fair value of bonds and notes available
for sale by contractual maturity, as of September 30, 1998, follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less.......................... $ 8,342,000 $ 8,377,000
Due after one year through five years............ 257,156,000 268,154,000
Due after five years through ten years........... 430,780,000 440,068,000
Due after ten years.............................. 111,491,000 114,716,000
Mortgage-backed securities....................... 454,934,000 472,557,000
-------------- --------------
Total.................................... $1,262,703,000 $1,303,872,000
============== ==============
</TABLE>
Actual maturities of bonds and notes will differ from those shown above due
to prepayments and redemptions.
<PAGE> 47
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
Gross unrealized gains and losses on bonds and notes available for sale by
major category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
----------- ------------
<S> <C> <C>
AT SEPTEMBER 30, 1998:
Securities of the United States Government............. $ 31,000 $ --
Mortgage-backed securities............................. 17,733,000 (110,000)
Securities of public utilities......................... 3,562,000 (376,000)
Corporate bonds and notes.............................. 30,219,000 (11,176,000)
Other debt securities.................................. 1,297,000 (11,000)
----------- ------------
Total.......................................... $52,842,000 $(11,673,000)
=========== ============
AT SEPTEMBER 30, 1997:
Securities of the United States Government............. $ 867,000 $ --
Mortgage-backed securities............................. 14,176,000 (78,000)
Securities of public utilities......................... 2,163,000 --
Corporate bonds and notes.............................. 21,181,000 (430,000)
Other debt securities.................................. 2,270,000 (8,000)
----------- ------------
Total.......................................... $40,657,000 $ (516,000)
=========== ============
</TABLE>
Gross unrealized gains on equity securities available for sale aggregated
$9,000 and $19,000 at September 30, 1998 and 1997, respectively. There were no
unrealized losses at September 30, 1998 and 1997.
Gross realized investment gains and losses on sales of investments are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
BONDS AND NOTES:
Realized gains........................... $13,067,000 $6,441,000 $1,039,000
Realized losses.......................... (7,509,000) (1,466,000) (1,295,000)
MORTGAGE LOANS:
Realized losses.......................... (289,000) (15,000) --
OTHER INVESTMENTS:
Realized gains........................... 22,000 140,000 --
Realized losses.......................... (209,000) -- (112,000)
IMPAIRMENT WRITEDOWNS...................... (392,000) (80,000) (171,000)
----------- ---------- ----------
Total net realized investment
gains (losses)................. $ 4,690,000 $5,020,000 $ (539,000)
=========== ========== ==========
</TABLE>
<PAGE> 48
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Short-term investments................... $ 2,340,000 $ 1,334,000 $ 390,000
Bonds and notes.......................... 100,808,000 56,253,000 9,186,000
Mortgage loans........................... 13,901,000 7,714,000 381,000
Other invested assets.................... 447,000 258,000 --
------------ ----------- ----------
Total investment income........ $117,496,000 $65,559,000 $9,957,000
============ =========== ==========
</TABLE>
Expenses incurred to manage the investment portfolio amounted to $814,000
for the year ended September 30, 1998, $387,000 for the year ended September 30,
1997, and $121,000 for the year ended September 30, 1996, and are included in
General and Administrative Expenses in the income statement.
The carrying value of investments in any one entity or its affiliates
exceeding 10% of the Company's shareholder's equity at September 30, 1998 is as
follows:
<TABLE>
<S> <C>
Bonds and notes:
Mellon Bank NA............................... $24,484,000
===========
</TABLE>
At September 30, 1998, mortgage loans were collateralized by properties
located in 34 states and the District of Columbia, with loans totaling
approximately 16% of the aggregate carrying value of the portfolio secured by
properties located in New York, approximately 15% by properties located in
California, and approximately 10% by properties located in Michigan. No more
than 8% of the portfolio was secured by properties in any other single state.
At September 30, 1998, bonds and notes included $97,045,000 of bonds and
notes not rated investment grade. The Company had no material concentrations of
non-investment-grade assets at September 30, 1998.
At September 30, 1998, the carrying value of investments in default as to
the payment of principal or interest was $1,167,000 all of which were mortgage
loans. Such nonperforming investments had an estimated fair value equal to their
carrying value.
At September 30, 1998, $518,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory requirements.
5. 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) 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.
<PAGE> 49
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 AND NOTES: 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 HELD IN SEPARATE ACCOUNTS: Variable annuity assets
are carried at the market value of the underlying securities.
RECEIVABLE FROM (PAYABLE TO) BROKERS FOR SALES (PURCHASES) OF
SECURITIES: Such obligations represent net transactions of a short-term nature
for which the carrying value is considered a reasonable estimate of fair value.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts 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.
VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: 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.
<PAGE> 50
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at
September 30, 1998 and 1997, compared with their respective carrying values, are
as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------------- --------------
<S> <C> <C>
1998:
ASSETS:
Cash and short-term investments.................. $ 55,679,000 $ 55,679,000
Bonds and notes.................................. 1,303,872,000 1,303,872,000
Mortgage loans................................... 187,906,000 194,471,000
Variable annuity assets held in separate
accounts...................................... 271,865,000 271,865,000
Receivable from brokers for sales of
securities.................................... 6,601,000 6,601,000
LIABILITIES:
Reserves for fixed annuity contracts............. 1,460,856,000 1,406,853,000
Variable annuity liabilities related to separate
accounts...................................... 271,865,000 256,623,000
============== ==============
1997:
ASSETS:
Cash and short-term investments.................. $ 50,585,000 $ 50,585,000
Bonds and notes.................................. 1,499,253,000 1,499,253,000
Mortgage loans................................... 131,117,000 136,648,000
Variable annuity assets held in separate
accounts...................................... 171,475,000 171,475,000
LIABILITIES:
Reserves for fixed annuity contracts............. 1,556,656,000 1,486,551,000
Payable to brokers for purchases of securities... 12,460,000 12,460,000
Variable annuity liabilities related to separate
accounts...................................... 171,475,000 163,045,000
============== ==============
</TABLE>
6. CONTINGENT LIABILITIES
The Company is involved in various kinds of litigation common to its
business. These cases are in various stages of development and, based on reports
of counsel, management believes that provisions made for potential losses
relating to such litigation are adequate and any further liabilities and costs
will not have a material adverse impact upon the Company's financial position or
results of operations.
7. SHAREHOLDER'S EQUITY
The Company is authorized to issue 300 shares of its $10,000 par value
Common Stock. At September 30, 1998 and 1997, 300 shares were outstanding.
<PAGE> 51
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDER'S EQUITY (CONTINUED)
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balance.................... $144,428,000 $ 14,428,000 $14,428,000
Additional paid-in capital acquired
as a result of the merger with
JANY.............................. -- 125,000,000 --
Capital contributions received....... -- 5,000,000 --
------------ ------------ -----------
Ending balance.................. $144,428,000 $144,428,000 $14,428,000
============ ============ ===========
RETAINED EARNINGS:
Beginning balance.................... $ 14,826,000 $ 5,973,000 $ 5,250,000
Net income........................... 16,535,000 8,853,000 723,000
------------ ------------ -----------
Ending balance....................... $ 31,361,000 $ 14,826,000 $ 5,973,000
============ ============ ===========
NET UNREALIZED GAINS (LOSSES) ON BONDS
AND NOTES
AVAILABLE FOR SALE:
Beginning balance............... $ 5,824,000 $ (181,000) $ (860,000)
Change in net unrealized gains
(losses) on bonds and notes
available for sale........... 1,018,000 40,538,000 1,145,000
Change in adjustment to deferred
acquisition costs............ 1,200,000 (31,300,000) (100,000)
Tax effect of net changes....... (776,000) (3,233,000) (366,000)
------------ ------------ -----------
Ending balance.................. $ 7,266,000 $ 5,824,000 $ (181,000)
============ ============ ===========
</TABLE>
For a life insurance company domiciled in the State of New York, no
dividend may be distributed to any shareholder unless notice of the domestic
insurer's intention to declare such dividend and the amount have been filed with
the Superintendent of Insurance not less than 30 days in advance of such
proposed declaration, or if the Superintendent disapproves the distribution of
the dividend within the 30-day period. No dividends were paid in fiscal years
1998, 1997 or 1996.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1998 was $15,170,000. The statutory net income for the year ended
December 31, 1997 was $18,390,000 and the statutory net income for the year
ended December 31, 1996 was $9,989,000. The Company's statutory capital and
surplus was $94,239,000 at September 30, 1998, $83,861,000 at December 31, 1997
and $77,929,000 at December 31, 1996.
<PAGE> 52
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The components of the provisions for income taxes on pretax income consist
of the following:
<TABLE>
<CAPTION>
NET REALIZED
INVESTMENT
GAINS (LOSSES) OPERATIONS TOTAL
-------------- ---------- -----------
<S> <C> <C> <C>
1998:
Currently payable........................... $2,711,000 $9,784,000 $12,495,000
Deferred.................................... (515,000) 126,000 (389,000)
---------- ---------- -----------
Total income tax expense............ $2,196,000 $9,910,000 $12,106,000
========== ========== ===========
1997:
Currently payable........................... $1,790,000 $2,899,000 $ 4,689,000
Deferred.................................... (11,000) 412,000 401,000
---------- ---------- -----------
Total income tax expense............ $1,779,000 $3,311,000 $ 5,090,000
========== ========== ===========
1996:
Currently payable........................... $ (121,000) $ (171,000) $ (292,000)
Deferred.................................... (105,000) 845,000 740,000
---------- ---------- -----------
Total income tax expense............ $ (226,000) $ 674,000 $ 448,000
========== ========== ===========
</TABLE>
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,
-----------------------------------
1998 1997 1996
----------- ---------- --------
<S> <C> <C> <C>
Amount computed at statutory rate................ $10,024,000 $4,880,000 $410,000
Increases (decreases) resulting from:
Amortization of differences between book and
tax bases of net assets acquired............ 20,000 20,000 20,000
State income taxes, net of federal tax
benefit..................................... 2,042,000 200,000 25,000
Other, net..................................... 20,000 (10,000) (7,000)
----------- ---------- --------
Total income tax expense............... $12,106,000 $5,090,000 $448,000
=========== ========== ========
</TABLE>
<PAGE> 53
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO 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,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments........................................... $ 1,782,000 $ 891,000
Deferred acquisition costs............................ 29,505,000 30,144,000
Net unrealized gains on debt and equity securities
available for sale.................................. 3,912,000 3,136,000
Other liabilities..................................... 46,000 125,000
------------ ------------
Total deferred tax liabilities.............. 35,245,000 34,296,000
------------ ------------
DEFERRED TAX ASSETS:
Contractholder reserves............................... (18,535,000) (26,202,000)
State income taxes.................................... (79,000) (80,000)
Other assets.......................................... (11,260,000) (3,030,000)
------------ ------------
Total deferred tax assets........................ (29,874,000) (29,312,000)
------------ ------------
Deferred income taxes............................ $ 5,371,000 $ 4,984,000
============ ============
</TABLE>
9. RELATED-PARTY MATTERS
The Company pays commissions to six affiliated companies, SunAmerica
Securities, Inc., Advantage Capital Corp., Financial Services Corp., Sentra
Securities Corp., Spelman & Co. Inc. and Royal Alliance Associates, Inc.
Commissions paid to these broker-dealers totaled $3,855,000 in 1998, $4,486,000
in 1997, and $2,646,000 in 1996. These broker-dealers represent a significant
portion of the Company's business, amounting to 33.0%, 38.9% and 57.9% of
premiums in 1998, 1997 and 1996, respectively. No single unaffiliated
broker-dealer was responsible for more than 22% of total premiums in each of the
years ended September 30, 1998, 1997, and 1996.
The Company paid occupancy and office services expenses to Royal Alliance
Associates, Inc. totaling $15,000 for the year ended September 30, 1996. The
Company paid no such charges in the years ended September 30, 1998 and 1997.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, whose purpose
is to provide services to the Company and its affiliates. Amounts paid for such
services totaled $3,877,000 for the year ended September 30, 1998, $2,454,000
for the year ended September 30, 1997 and $2,097,000 for the year ended
September 30, 1996. The marketing component of such costs during these periods
amounted to $1,877,000, $1,223,000 and $1,082,000, respectively, and are
deferred and amortized as part of Deferred Acquisition Costs. The other
components of these costs are included in General and Administrative Expenses in
the income statement.
During the year ended September 30, 1998, the Company sold bonds to the
Parent for cash equal to their current market value, which aggregated
$2,155,000. The Company recorded a net gain of $83,000 on the transactions.
<PAGE> 54
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS
On July 15, 1998, Anchor National Life Insurance Company, an affiliate of
the Company, entered into a definitive agreement to acquire the individual life
business and the individual and group annuity business of MBL Life Assurance
Corporation ("MBL Life") via a 100% coinsurance transaction for approximately
$130,000,000 in cash. The transaction will include approximately $2,000,000,000
of universal life reserves and $3,000,000,000 of fixed annuity reserves. The
affiliate plans to reinsure a large portion of the mortality risk associated
with the acquired block of universal life business. Completion of this
acquisition is expected by the end of calendar year 1998 and is subject to
customary conditions and required approvals. Included in this block of business
is approximately $250,000,000 of individual life business and $500,000,000 of
group annuity business whose contract owners are residents of New York State
(the "New York Business"). Approximately six months subsequent to completion of
the transaction, the New York Business will be acquired by the Company via an
assumption reinsurance agreement between the Company and MBL Life, which will
supersede the coinsurance agreement. The $130,000,000 purchase price will be
allocated between the Company and its affiliate based on their respective
assumed life insurance reserves.
On August 20, 1998, the Company's Parent announced that it has entered into
a definite agreement to merge with and into American International Group, Inc.
("AIG"). Under the terms of the agreement, each share of the Parent's common
stock (including Nontransferable Class B Common Stock) will be exchanged for
.855 shares of AIG's common stock. The transaction will be treated as a pooling
of interests for accounting purposes and will be a tax-free reorganization. The
transaction was approved by both the Parent's and AIG's shareholders on November
18, 1998, and, subject to various regulatory approvals, will be completed in
late 1998 or early 1999.
<PAGE> 55
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1997
19
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS
February 26, 1998
To the Board of Directors of First SunAmerica Life Insurance Company and
the Contractholders of its separate account, Variable Annuity Account One
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 Annuity Account One, a separate account of First
SunAmerica Life Insurance Company (the "Separate Account") at December 31,
1997, the results of their operations for the year then ended, and the
changes in their net assets for the two years 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 December
31, 1997 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
20
<PAGE> 57
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS
December 31, 1997
<TABLE>
<CAPTION>
Foreign Capital Natural Growth and
Securities Appreciation Growth Resources Income
Portfolio Portfolio Portfolio Portfolio Portfolio
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in Anchor Series Trust,
at market value $ 700,644 $3,599,700 $3,408,953 $ 203,051 $ 965,748
Liabilities 0 0 0 0 0
------------------------------------------------------------------------------
Net Assets $ 700,644 $3,599,700 $3,408,953 $ 203,051 $ 965,748
==============================================================================
Accumulation units outstanding 49,753 82,226 63,077 11,485 33,513
==============================================================================
Unit value of accumulation units $ 14.08 $ 43.78 $ 54.05 $ 17.68 $ 28.81
==============================================================================
Strategic
Multi-Asset Multi-Asset
Portfolio Portfolio
---------- ----------
<S> <C> <C>
Assets:
Investments in Anchor Series Trust,
at market value $ 476,353 $3,207,590
Liabilities 0 0
---------------------------
Net Assets $ 476,353 $3,207,590
===========================
Accumulation units outstanding 20,329 118,421
===========================
Unit value of accumulation units $ 23.43 $ 27.09
===========================
</TABLE>
See accompanying notes to financial statements.
21
<PAGE> 58
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS
December 31, 1997
(Continued)
<TABLE>
<CAPTION>
Government and Money
High Yield Target '98 Fixed Income Quality Bond Market
Portfolio Portfolio Portfolio Portfolio Portfolio TOTAL
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments in Anchor Series Trust,
at market value $ 631,034 $ 334,408 $ 211,753 $ 1,563,158 $ 97,747 $15,400,139
Liabilities 0 0 0 0 0 0
---------------------------------------------------------------------------------
Net Assets $ 631,034 $ 334,408 $ 211,753 $ 1,563,158 $ 97,747 $15,400,139
=================================================================================
Accumulation units outstanding 24,819 16,834 7,626 53,619 5,430
===================================================================
Unit value of accumulation units $ 25.42 $ 19.86 $ 27.76 $ 29.16 $ 18.00
===================================================================
</TABLE>
See accompanying notes to financial statements.
22
<PAGE> 59
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Market Value Market
Variable Accounts Shares Per Share Value Cost
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign Securities Portfolio 61,449 $ 11.40 $ 700,644 $ 672,535
Capital Appreciation Portfolio 111,744 32.21 3,599,700 2,423,003
Growth Portfolio 126,052 27.04 3,408,953 2,653,634
Natural Resources Portfolio 14,080 14.42 203,051 209,738
Growth and Income Portfolio 56,348 17.14 965,748 759,105
Strategic Multi-Asset Portfolio 42,224 11.28 476,353 515,587
Multi-Asset Portfolio 237,225 13.52 3,207,590 3,117,544
High Yield Portfolio 75,338 8.38 631,034 639,407
Target '98 Portfolio 30,200 11.07 334,408 385,462
Fixed Income Portfolio 15,944 13.28 211,753 220,975
Government and Quality Bond Portfolio 111,950 13.96 1,563,158 1,558,685
Money Market Portfolio 97,747 1.00 97,747 97,747
--------------------------------
$15,400,139 $13,253,422
================================
</TABLE>
See accompanying notes to financial statements.
23
<PAGE> 60
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
December 31, 1997
<TABLE>
<CAPTION>
Foreign Capital Natural
Securities Appreciation Growth Resources
Portfolio Portfolio Portfolio Portfolio
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Dividends and capital gains distributions $ 97,107 $ 311,107 $ 370,117 $ 21,218
-----------------------------------------------------------
Total investment income 97,107 311,107 370,117 21,218
-----------------------------------------------------------
Expenses:
Mortality risk charge (8,867) (32,939) (34,038) (3,224)
Expense risk charge (3,449) (12,810) (13,237) (1,254)
Administrative expense charge (1,478) (5,490) (5,673) (537)
-----------------------------------------------------------
Total expenses (13,794) (51,239) (52,948) (5,015)
-----------------------------------------------------------
Net investment income 83,313 259,868 317,169 16,203
-----------------------------------------------------------
Net realized gains (losses) from securities transactions:
Proceeds from shares sold 539,758 1,061,375 1,765,933 216,235
Cost of shares sold (448,578) (732,135) (1,377,951) (195,035)
-----------------------------------------------------------
Net realized gains (losses) from securities transactions 91,180 329,240 387,982 21,200
-----------------------------------------------------------
Net unrealized appreciation (depreciation) of investments:
Beginning of period 206,720 994,434 493,812 54,649
End of period 28,109 1,176,697 755,319 (6,687)
-----------------------------------------------------------
Change in net unrealized appreciation/depreciation
of investments (178,611) 182,263 261,507 (61,336)
-----------------------------------------------------------
Increase (decrease) in net assets from operations $ (4,118) $ 771,371 $ 966,658 $ (23,933)
===========================================================
Growth and Strategic
Income Multi-Asset Multi-Asset
Portfolio Portfolio Portfolio
-------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends and capital gains distributions $ 17,458 $ 109,883 $ 543,009
-------------------------------------------
Total investment income 17,458 109,883 543,009
-------------------------------------------
Expenses:
Mortality risk charge (9,394) (5,714) (32,189)
Expense risk charge (3,654) (2,223) (12,518)
Administrative expense charge (1,566) (953) (5,365)
-------------------------------------------
Total expenses (14,614) (8,890) (50,072)
-------------------------------------------
Net investment income 2,844 100,993 492,937
-------------------------------------------
Net realized gains (losses) from securities transactions:
Proceeds from shares sold 571,707 340,871 1,507,846
Cost of shares sold (474,001) (337,990) (1,386,690)
-------------------------------------------
Net realized gains (losses) from securities transactions 97,706 2,881 121,156
-------------------------------------------
Net unrealized appreciation (depreciation) of investments:
Beginning of period 49,205 (15,105) 51,994
End of period 206,643 (39,234) 90,046
-------------------------------------------
Change in net unrealized appreciation/depreciation
of investments 157,438 (24,129) 38,052
-------------------------------------------
Increase (decrease) in net assets from operations $ 257,988 $ 79,745 $ 652,145
===========================================
</TABLE>
See accompanying notes to financial statements.
24
<PAGE> 61
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
December 31, 1997
(Continued)
<TABLE>
<CAPTION>
Government and
High Yield Target '98 Fixed Income Quality Bond
Portfolio Portfolio Portfolio Portfolio
--------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Dividends and capital gains distributions $ 77,336 $ 38,198 $ 20,929 $ 119,641
--------------------------------------------------------
Total investment income 77,336 38,198 20,929 119,641
--------------------------------------------------------
Expenses:
Mortality risk charge (7,413) (4,043) (2,727) (17,527)
Expense risk charge (2,883) (1,573) (1,060) (6,816)
Administrative expense charge (1,236) (674) (454) (2,921)
--------------------------------------------------------
Total expenses (11,532) (6,290) (4,241) (27,264)
--------------------------------------------------------
Net investment income 65,804 31,908 16,688 92,377
--------------------------------------------------------
Net realized gains (losses) from securities transactions:
Proceeds from shares sold 470,444 296,353 234,100 1,207,096
Cost of shares sold (466,297) (328,983) (241,898) (1,215,593)
--------------------------------------------------------
Net realized gains (losses) from securities transactions 4,147 (32,630) (7,798) (8,497)
--------------------------------------------------------
Net unrealized appreciation (depreciation) of investments:
Beginning of period (15,997) (68,067) (20,710) (48,323)
End of period (8,373) (51,054) (9,222) 4,473
--------------------------------------------------------
Change in net unrealized appreciation/depreciation
of investments 7,624 17,013 11,488 52,796
--------------------------------------------------------
Increase (decrease) in net assets from operations $ 77,575 $ 16,291 $ 20,378 $ 136,676
========================================================
Money
Market
Portfolio TOTAL
--------------------------
<S> <C> <C>
Investment income:
Dividends and capital gains distributions $ 8,772 $ 1,734,775
--------------------------
Total investment income 8,772 1,734,775
Expenses:
Mortality risk charge (1,575) (159,650)
Expense risk charge (612) (62,089)
Administrative expense charge (262) (26,609)
--------------------------
Total expenses (2,449) (248,348)
--------------------------
Net investment income 6,323 1,486,427
--------------------------
Net realized gains (losses) from securities transactions:
Proceeds from shares sold 349,225 8,560,943
Cost of shares sold (349,225) (7,554,376)
--------------------------
Net realized gains (losses) from securities transactions 0 1,006,567
--------------------------
Net unrealized appreciation (depreciation) of investments:
Beginning of period 0 1,682,612
End of period 0 2,146,717
--------------------------
Change in net unrealized appreciation/depreciation
of investments 0 464,105
--------------------------
Increase (decrease) in net assets from operations $ 6,323 $ 2,957,099
==========================
</TABLE>
See accompanying notes to financial statements.
25
<PAGE> 62
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
December 31, 1997
<TABLE>
<CAPTION>
Foreign Capital Natural
Securities Appreciation Growth Resources
Portfolio Portfolio Portfolio Portfolio
--------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 83,313 $ 259,868 $ 317,169 $ 16,203
Net realized gains (losses) from securities transactions 91,180 329,240 387,982 21,200
Change in net unrealized appreciation/depreciation
of investments (178,611) 182,263 261,507 (61,336)
--------------------------------------------------------
Increase (decrease) in net assets from operations (4,118) 771,371 966,658 (23,933)
--------------------------------------------------------
From capital transactions:
Net proceeds from units sold 21,594 37,788 24,945 22,187
Cost of units redeemed (456,770) (994,374) (1,646,641) (208,478)
Net transfers (35,194) 18,897 (50,802) (484)
--------------------------------------------------------
Decrease in net assets from capital transactions (470,370) (937,689) (1,672,498) (186,775)
--------------------------------------------------------
Decrease in net assets (474,488) (166,318) (705,840) (210,708)
Net assets at beginning of period 1,175,132 3,766,018 4,114,793 413,759
--------------------------------------------------------
Net assets at end of period $ 700,644 $ 3,599,700 $ 3,408,953 $ 203,051
--------------------------------------------------------
ANALYSIS OF INCREASE (DECREASE) IN UNITS
OUTSTANDING:
Units sold 1,230 896 554 918
Units redeemed (30,472) (25,616) (34,186) (10,499)
Units transferred (2,481) 525 (1,193) (30)
--------------------------------------------------------
Decrease in units outstanding (31,723) (24,195) (34,825) (9,611)
Beginning units 81,476 106,421 97,902 21,096
--------------------------------------------------------
Ending units 49,753 82,226 63,077 11,485
========================================================
Growth and Strategic
Income Multi-Asset Multi-Asset
Portfolio Portfolio Portfolio
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 2,844 $ 100,993 $ 492,937
Net realized gains (losses) from securities transactions 97,706 2,881 121,156
Change in net unrealized appreciation/depreciation
of investments 157,438 (24,129) 38,052
-----------------------------------------
Increase (decrease) in net assets from operations 257,988 79,745 652,145
-----------------------------------------
From capital transactions:
Net proceeds from units sold 21,682 5,131 37,603
Cost of units redeemed (515,426) (280,149) (1,343,829)
Net transfers 77,290 (44,579) (28,503)
-----------------------------------------
Decrease in net assets from capital transactions (416,454) (319,597) (1,334,729)
-----------------------------------------
Decrease in net assets (158,466) (239,852) (682,584)
Net assets at beginning of period 1,124,214 716,205 3,890,174
-----------------------------------------
Net assets at end of period $ 965,748 $ 476,353 $ 3,207,590
-----------------------------------------
ANALYSIS OF INCREASE (DECREASE) IN UNITS
OUTSTANDING:
Units sold 895 200 1,482
Units redeemed (19,691) (12,420) (53,436)
Units transferred 2,769 (1,903) (1,191)
-----------------------------------------
Decrease in units outstanding (16,027) (14,123) (53,145)
Beginning units 49,540 34,452 171,566
-----------------------------------------
Ending units 33,513 20,329 118,421
=========================================
</TABLE>
See accompanying notes to financial statements.
26
<PAGE> 63
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
December 31, 1997
(Continued)
<TABLE>
<CAPTION>
Government and
High Yield Target '98 Fixed Income Quality Bond
Portfolio Portfolio Portfolio Portfolio
---------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 65,804 $ 31,908 $ 16,688 $ 92,377
Net realized gains (losses) from securities transactions 4,147 (32,630) (7,798) (8,497)
Change in net unrealized appreciation/depreciation
of investments 7,624 17,013 11,488 52,796
---------------------------------------------------------
Increase (decrease) in net assets from operations 77,575 16,291 20,378 136,676
---------------------------------------------------------
From capital transactions:
Net proceeds from units sold 3,450 13,771 6,918 4,916
Cost of units redeemed (437,856) (275,058) (222,809) (1,067,926)
Net transfers (1,756) 4,365 (7,557) 52,170
---------------------------------------------------------
Decrease in net assets from capital transactions (436,162) (256,922) (223,448) (1,010,840)
---------------------------------------------------------
Decrease in net assets (358,587) (240,631) (203,070) (874,164)
Net assets at beginning of period 989,621 575,039 414,823 2,437,322
---------------------------------------------------------
Net assets at end of period $ 631,034 $ 334,408 $ 211,753 $ 1,563,158
=========================================================
ANALYSIS OF INCREASE (DECREASE) IN UNITS
OUTSTANDING:
Units sold 157 706 258 215
Units redeemed (17,968) (14,138) (8,468) (38,742)
Units transferred (77) 230 (283) 1,833
---------------------------------------------------------
Decrease in units outstanding (17,888) (13,202) (8,493) (36,694)
Beginning units 42,707 30,036 16,119 90,313
---------------------------------------------------------
Ending units 24,819 16,834 7,626 53,619
=========================================================
Money
Market
Portfolio TOTAL
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 6,323 $ 1,486,427
Net realized gains (losses) from securities transactions 0 1,006,567
Change in net unrealized appreciation/depreciation
of investments 0 464,105
---------------------------
Increase (decrease) in net assets from operations 6,323 2,957,099
---------------------------
From capital transactions:
Net proceeds from units sold 0 199,985
Cost of units redeemed (155,164) (7,604,480)
Net transfers 36,647 20,494
---------------------------
Decrease in net assets from capital transactions (118,517) (7,384,001)
---------------------------
Decrease in net assets (112,194) (4,426,902)
Net assets at beginning of period 209,941 19,827,041
---------------------------
Net assets at end of period $ 97,747 $ 15,400,139
---------------------------
ANALYSIS OF INCREASE (DECREASE) IN UNITS
OUTSTANDING:
Units sold 0
Units redeemed (8,803)
Units transferred 2,143
------------
Decrease in units outstanding (6,660)
Beginning units 12,090
------------
Ending units 5,430
------------
</TABLE>
See accompanying notes to financial statements.
27
<PAGE> 64
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
December 31, 1996
<TABLE>
<CAPTION>
Foreign Capital Natural Growth and
Securities Appreciation Growth Resources Income
Portfolio Portfolio Portfolio Portfolio Portfolio
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 441 $ 91,119 $ 128,542 $ 3,223 $ 48,621
Net realized gains (losses) from securities transactions 122,180 437,980 90,902 17,873 349
Change in net unrealized appreciation/depreciation
of investments 18,953 275,905 703,773 22,822 149,402
-------------------------------------------------------------------
Increase (decrease) in net assets from operations 141,574 805,004 923,217 43,918 198,372
-------------------------------------------------------------------
From capital transactions:
Net proceeds from units sold 72,656 40,997 82,593 31,742 19,997
Cost of units redeemed (785,878) (1,582,302) (1,906,002) (124,789) (344,238)
Net transfers 33,284 725,436 23,348 61,808 117,567
-------------------------------------------------------------------
Decrease in net assets from capital transactions (679,938) (815,869) (1,800,061) (31,239) (206,674)
-------------------------------------------------------------------
Increase (decrease) in net assets (538,364) (10,865) (876,844) 12,679 (8,302)
Net assets at beginning of period 1,713,496 3,776,883 4,991,637 401,080 1,132,516
-------------------------------------------------------------------
Net assets at end of period $ 1,175,132 $ 3,766,018 $ 4,114,793 $ 413,759 $ 1,124,214
===================================================================
ANALYSIS OF INCREASE (DECREASE) IN UNITS
OUTSTANDING:
Units sold 5,285 1,221 2,340 1,647 938
Units redeemed (56,705) (48,122) (51,274) (6,689) (16,332)
Units transferred 2,371 21,634 352 3,133 5,814
-------------------------------------------------------------------
Decrease in units outstanding (49,049) (25,267) (48,582) (1,909) (9,580)
Beginning units 130,525 131,688 146,484 23,005 59,120
-------------------------------------------------------------------
Ending units 81,476 106,421 97,902 21,096 49,540
===================================================================
Strategic
Multi-Asset Multi-Asset
Portfolio Portfolio
-------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 81,824 $ 338,574
Net realized gains (losses) from securities transactions (23,508) 6,175
Change in net unrealized appreciation/depreciation
of investments 66,004 137,058
-------------------------
Increase (decrease) in net assets from operations 124,320 481,807
-------------------------
From capital transactions:
Net proceeds from units sold 38,541 53,194
Cost of units redeemed (518,547) (1,599,522)
Net transfers 46,676 78,687
-------------------------
Decrease in net assets from capital transactions (433,330) (1,467,641)
-------------------------
Increase (decrease) in net assets (309,010) (985,834)
Net assets at beginning of period 1,025,215 4,876,008
-------------------------
Net assets at end of period $ 716,205 $ 3,890,174
-------------------------
ANALYSIS OF INCREASE (DECREASE) IN UNITS
OUTSTANDING:
Units sold 2,013 2,654
Units redeemed (25,718) (76,228)
Units transferred 2,302 3,690
-------------------------
Decrease in units outstanding (21,403) (69,884)
Beginning units 55,855 241,450
-------------------------
Ending units 34,452 171,566
=========================
</TABLE>
See accompanying notes to financial statements.
28
<PAGE> 65
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
December 31, 1996
(Continued)
<TABLE>
<CAPTION>
Government and
High Yield Target '98 Fixed Income Quality Bond
Portfolio Portfolio Portfolio Portfolio
---------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 99,980 $ 64,570 $ 31,202 $ 137,117
Net realized gains (losses) from securities transactions (11,840) (48,191) (26,302) (16,838)
Change in net unrealized appreciation/depreciation
of investments 27,120 (837) (14,150) (110,945)
---------------------------------------------------------
Increase (decrease) in net assets from operations 115,260 15,542 (9,250) 9,334
---------------------------------------------------------
From capital transactions:
Net proceeds from units sold 5,521 1,644 11,333 9,313
Cost of units redeemed (626,641) (671,884) (414,860) (1,267,417)
Net transfers 129,591 79,032 (92,348) (252,913)
---------------------------------------------------------
Decrease in net assets from capital transactions (491,529) (591,208) (495,875) (1,511,017)
---------------------------------------------------------
Increase (decrease) in net assets (376,269) (575,666) (505,125) (1,501,683)
Net assets at beginning of period 1,365,890 1,150,705 919,948 3,939,005
---------------------------------------------------------
Net assets at end of period $ 989,621 $ 575,039 $ 414,823 $ 2,437,322
=========================================================
ANALYSIS OF INCREASE (DECREASE) IN UNITS
OUTSTANDING:
Units sold 311 61 429 323
Units redeemed (28,513) (35,739) (16,587) (48,405)
Units transferred 5,979 4,250 (3,847) (9,706)
---------------------------------------------------------
Decrease in units outstanding (22,223) (31,428) (20,005) (57,788)
Beginning units 64,930 61,464 36,124 148,101
---------------------------------------------------------
Ending units 42,707 30,036 16,119 90,313
=========================================================
Money
Market
Portfolio TOTAL
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 12,562 $ 1,037,775
Net realized gains (losses) from securities transactions 0 548,780
Change in net unrealized appreciation/depreciation
of investments 0 1,275,105
---------------------------
Increase (decrease) in net assets from operations 12,562 2,861,660
---------------------------
From capital transactions:
Net proceeds from units sold 167 367,698
Cost of units redeemed (198,089) (10,040,169)
Net transfers (95,011) 855,157
---------------------------
Decrease in net assets from capital transactions (292,933) (8,817,314)
---------------------------
Increase (decrease) in net assets (280,371) (5,955,654)
Net assets at beginning of period 490,312 25,782,695
---------------------------
Net assets at end of period $ 209,941 $ 19,827,041
---------------------------
ANALYSIS OF INCREASE (DECREASE) IN UNITS
OUTSTANDING:
Units sold 30
Units redeemed (11,580)
Units transferred (5,601)
------------
Decrease in units outstanding (17,151)
Beginning units 29,241
------------
Ending units 12,090
============
</TABLE>
See accompanying notes to financial statements.
29
<PAGE> 66
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Variable Annuity Account One of First SunAmerica Life Insurance Company
(the "Separate Account") is a segregated investment account of First
SunAmerica 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 twelve variable portfolios (the
"Variable Accounts"). Each of the Variable Accounts is invested solely
in the shares of a designated portfolio of the Anchor Series Trust (the
"Trust"). The Trust is a diversified, open-end, affiliated investment
company, which retains an investment advisor to assist in the
investment activities of the Trust. 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.
The financial statements include balances allocated by the
contractholder to the twelve Variable Accounts and do not include
balances allocated to the General Account.
The investment objectives and policies of the twelve portfolios of the
Trust are summarized below:
The FOREIGN SECURITIES PORTFOLIO seeks long-term capital appreciation.
This portfolio invests primarily in a diversified group of equity
securities issued by foreign companies and primarily denominated in
foreign currencies.
The CAPITAL APPRECIATION PORTFOLIO seeks long-term capital
appreciation. This portfolio invests in growth equity securities which
are widely diversified by industry and company and may engage in
transactions involving stock index futures and options thereon as a
hedge against changes in market conditions.
The GROWTH PORTFOLIO seeks capital appreciation. This portfolio invests
in growth equity securities and may engage in transactions involving
stock index futures and options thereon as a hedge against changes in
market conditions.
30
<PAGE> 67
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The NATURAL RESOURCES PORTFOLIO seeks a total return in excess of the
U.S. rate of inflation as represented by the Consumer Price Index. This
portfolio invests primarily in equity securities of U.S. or foreign
companies which are expected to provide favorable returns in periods of
rising inflation.
The GROWTH AND INCOME PORTFOLIO seeks to provide high current income
and long-term capital appreciation. This portfolio invests primarily in
securities that provide the potential for growth and offer income, such
as dividend-paying stocks and securities convertible into common stock.
This portfolio may also engage in transactions involving stock index
futures and options thereon as a hedge against changes in market
conditions.
The STRATEGIC MULTI-ASSET PORTFOLIO seeks high long-term total
investment return. This portfolio invests in growth equity securities,
aggressive growth equity securities, investment grade bonds,
high-yield, high-risk bonds, international equity securities and money
market instruments. This portfolio may also engage in transactions
involving stock index futures contracts and options thereon, and
transactions involving the future delivery of fixed-income securities
("Financial Futures Contracts") and options thereon as a hedge against
changes in market conditions.
The MULTI-ASSET PORTFOLIO seeks long-term total investment return
consistent with moderate investment risk. This portfolio invests in
growth equity securities, convertible securities, investment grade
fixed-income securities and money market securities. This portfolio may
also engage in transactions involving stock index futures contracts and
options thereon, and Financial Futures Contracts and options thereon as
a hedge against changes in market conditions.
The HIGH YIELD PORTFOLIO seeks high current income. A secondary
investment objective is capital appreciation. This portfolio invests at
least 65% of its assets in high-yielding, high-risk, income-producing
corporate bonds, which generally carry ratings lower than those
assigned to investment grade bonds by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"), or which are
unrated. This portfolio may also engage in transactions involving
Financial Futures Contracts and options thereon as a hedge against
changes in market conditions.
31
<PAGE> 68
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The TARGET '98 PORTFOLIO seeks a predictable compounded investment
return for the specified time period, consistent with preservation of
capital. This portfolio invests primarily in zero coupon securities and
current, interest-bearing, investment grade debt obligations which are
issued by the U.S. Government, its agencies and instrumentalities, and
both domestic and foreign corporations. These investments will
generally mature no later than November 15, 1998. Accordingly,
effective January 1, 1998, no purchase payments or transfers into this
portfolio are being accepted.
The FIXED INCOME PORTFOLIO seeks a high level of current income
consistent with preservation of capital. This portfolio invests
primarily in investment grade, fixed-income securities and may engage
in Financial Futures Contracts and options thereon as a hedge against
changes in market conditions.
The GOVERNMENT AND QUALITY BOND PORTFOLIO seeks relatively high current
income, liquidity and security of principal. This portfolio invests in
obligations issued, guaranteed or insured by the U.S. Government, its
agencies or instrumentalities and in corporate debt securities rated Aa
or better by Moody's or AA or better by S&P.
The MONEY MARKET PORTFOLIO seeks current income consistent with
stability of principal through investment in a diversified portfolio of
money market instruments maturing in 397 days or less. The portfolio
will maintain a dollar-weighted average portfolio maturity of not more
than 90 days.
Purchases and sales of shares of the portfolios of the Trust 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 Trust 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.
32
<PAGE> 69
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA 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:
WITHDRAWAL 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 is equal to 10% of aggregate purchase
payments that remain subject to the withdrawal charge and that have not
previously been withdrawn. Should a withdrawal exceed the free
withdrawal amount, a withdrawal charge, in certain circumstances, is
imposed and paid to the Company.
Withdrawal charges vary in amount depending upon the number of years
since the purchase payment being withdrawn was made. 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 the
oldest purchase payments first so that all withdrawals are allocated to
purchase payments to which the lowest (if any) withdrawal charge
applies.
Any amount withdrawn which exceeds a free withdrawal may be subject to
a withdrawal charge in accordance with the withdrawal charge table
shown below:
<TABLE>
<CAPTION>
Years since Purchase Applicable Withdrawal
Payment Charge Percentage
-------------------- ---------------------
<S> <C>
First 5%
Second 4%
Third 3%
Fourth 2%
Fifth 1%
Sixth and beyond 0%
</TABLE>
33
<PAGE> 70
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. CHARGES AND DEDUCTIONS (continued)
ANNUITY CHARGE: Contractholders may elect a lump sum payment or one of
three annuity options. Option 1 provides a life income with
installments guaranteed, Option 2 provides a joint and survivor
annuity, and Option 3 provides income for a specified period. No
annuity charge is assessed if Option 1 or Option 2 is elected. If a
contractholder elects Option 3, an annuity charge equal to the
withdrawal charge if the contract were surrendered may be applied. No
annuity charge will be assessed if Option 3 is elected by a beneficiary
under the death benefit.
RECORDS MAINTENANCE CHARGE: An annual records maintenance 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 records maintenance charge will be assessed on each
anniversary of the issue date of the contract. 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 per transaction is assessed on each
transfer of funds in excess of fifteen transactions within a contract
year or if a transfer is made within 30 days of the issue date of the
contract.
MORTALITY AND EXPENSE RISK CHARGE: The Company deducts mortality and
expense risk charges, which total to an annual rate of 1.25% of the net
asset value of each portfolio, 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, to waive the
withdrawal charge in the event of the death of the annuitant and to
provide a death benefit if the annuitant dies prior to the date annuity
payments begin. 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 records maintenance charge and
the administrative expense charge. Both of the charges are guaranteed
by the Company and cannot be increased.
34
<PAGE> 71
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. CHARGES AND DEDUCTIONS (continued)
ADMINISTRATIVE EXPENSE CHARGE: The Company deducts an administrative
expense charge at an annual rate of 0.15% of the net asset value of
each portfolio, computed on a daily basis. The administrative expense
charge is designed to cover those expenses which exceed the revenues
from the records maintenance charge.
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.
3. INVESTMENT IN ANCHOR SERIES TRUST
The aggregate cost of the Trust's shares acquired and the aggregate
proceeds from shares sold during the year ended December 31, 1997
consist of the following:
<TABLE>
<CAPTION>
Cost of Shares Proceeds from
Variable Accounts Acquired Shares Sold
----------------- ---------------------------------
<S> <C> <C>
Foreign Securities Portfolio $ 152,701 $ 539,758
Capital Appreciation Portfolio 383,555 1,061,375
Growth Portfolio 410,603 1,765,933
Natural Resources Portfolio 45,664 216,235
Growth and Income Portfolio 158,096 571,707
Strategic Multi-Asset Portfolio 122,266 340,871
Multi-Asset Portfolio 666,053 1,507,846
High Yield Portfolio 100,086 470,444
Target '98 Portfolio 71,339 296,353
Fixed Income Portfolio 27,341 234,100
Government and Quality Bond
Portfolio 288,634 1,207,096
Money Market Portfolio 237,030 349,225
========== ==========
</TABLE>
35
<PAGE> 72
VARIABLE ANNUITY ACCOUNT ONE
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
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.
36
