<PAGE> 1
As filed pursuant to Rule 424(b)(3)
under the Securities Act of 1933
Registration No. 33-81474
- --------------------------------------------------------------------------------
VISTA CAPITAL ADVANTAGE
FLEXIBLE PAYMENT DEFERRED
ANNUITY CONTRACTS:
- --------------------------------------------------------------------------------
ISSUED BY
FIRST SUNAMERICA LIFE INSURANCE COMPANY
IN CONNECTION WITH
FS VARIABLE ANNUITY ACCOUNT TWO
CORPORATE OFFICE:
733 THIRD AVENUE, 4TH FLOOR
NEW YORK, NEW YORK 10017
<TABLE>
<S> <C>
CORRESPONDENCE ACCOMPANIED ALL OTHER CORRESPONDENCE,
BY PAYMENTS: ANNUITY SERVICE CENTER:
P.O. BOX 100357 P.O. BOX 54299
PASADENA, CALIFORNIA 91189-0357 LOS ANGELES, CALIFORNIA 90054-0299
TELEPHONE NUMBER: (800) 90-VISTA
</TABLE>
The Contracts offered by this prospectus provide for accumulation of
Contract Values and payment of annuity benefits on a fixed and/or variable
basis. The Contracts are available for both Qualified and Nonqualified Plans
(See "Taxes," page 33).
Purchase Payments under the Contracts may be allocated among the Portfolios
of the Separate Account, and/or to one or more of the Fixed Account options
funded through the Company's General Account. Each of the six Portfolios of the
Separate Account described in this prospectus is invested solely in the shares
of one of the following currently available Underlying Funds of Mutual Fund
Variable Annuity Trust:
- International Equity - Asset Allocation
- Capital Growth - U.S. Treasury Income
- Growth and Income - Money Market
Additional Underlying Funds may be made available in the future.
The Fixed Account options pay fixed rates of interest declared by the
Company for specified Guarantee Periods from the dates amounts are allocated to
the Fixed Account. As of the date of this prospectus, one, three, five, seven
and ten year options were available. Please contact the Company or the financial
representative from whom this prospectus was obtained for information as to
currently available guarantee options. Such declared rates will vary from time
to time but will not be less than 3% per annum, and, once established for a
particular allocation, will not change during the course of the Guarantee
Period. However, withdrawals, transfers or annuitizations from the three, five,
seven and ten year Fixed Account options prior to the end of the applicable
Guarantee Period(s) will generally result in the imposition of a Market Value
Adjustment (See page 17).
This prospectus concisely sets forth the information a prospective investor
ought to know before investing. PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN
IT FOR YOUR FUTURE REFERENCE. Participants bear the complete investment risk for
all Purchase Payments allocated to the Separate Account. With respect to
allocations to the Fixed Account, Participants also bear the risk that amounts
prematurely withdrawn, transferred or annuitized from, the General Account prior
to the end of their respective Guarantee Periods could result in the Participant
receiving less than Purchase Payments so allocated.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE CONTRACTS OFFERED BY THIS PROSPECTUS INVOLVE RISK, INCLUDING LOSS OF
PRINCIPAL, AND ARE NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE CONTRACTS OFFERED BY THIS PROSPECTUS ARE AVAILABLE ONLY IN THE STATE OF
NEW YORK.
This Prospectus is dated December 1, 1995.
<PAGE> 2
ADDITIONAL INFORMATION:
The Company has filed registration statements (the "Registration
Statements") with the Securities and Exchange Commission ("Commission") under
the Securities Act of 1933, as amended, relating to the Contracts offered by
this prospectus. This prospectus has been filed as a part of the Registration
Statements and does not contain all of the information set forth in the
Registration Statements and exhibits thereto, and reference is hereby made to
the Registration Statements and exhibits for further information relating to the
Company, the Separate Account, and the Contracts. The Company is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith files reports and other information with the
Commission. Such reports and other information filed by the Company can be
inspected and copied, and copies can be obtained at the public reference
facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the regional offices in Chicago and New York. The addresses of
these regional offices are as follows: 500 West Madison Street, Chicago,
Illinois 60661, and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material also can be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of the fees prescribed by the rules and regulations of the
Commission.
A Statement of Additional Information about the variable portion of the
Contracts has been filed with the Commission, as part of the Registration
Statements, and is available without charge upon written or oral request to the
Company at its Annuity Service Center at the address and telephone number given
on the prior page. The Table of Contents of the Statement of Additional
Information, dated December 1, 1995, appears on page 49 of this prospectus.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
DEFINITIONS.......................................................................... 4
SUMMARY.............................................................................. 7
FEE TABLES........................................................................... 10
EXAMPLES............................................................................. 11
CONDENSED FINANCIAL INFORMATION -- ACCUMULATION UNIT VALUES.......................... 12
PERFORMANCE DATA..................................................................... 12
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT AND THE GENERAL ACCOUNT............. 13
Company......................................................................... 13
Separate Account................................................................ 13
General Account................................................................. 14
SEPARATE ACCOUNT INVESTMENTS......................................................... 14
Underlying Funds................................................................ 14
Voting Rights................................................................... 16
Substitution of Securities...................................................... 16
FIXED ACCOUNT OPTIONS................................................................ 16
Allocations..................................................................... 16
Renewals........................................................................ 17
Market Value Adjustment......................................................... 17
CONTRACT CHARGES..................................................................... 18
Mortality and Expense Risk Charge............................................... 19
Administrative Charges.......................................................... 19
Contract Administration Charge................................................ 19
Transfer Fee.................................................................. 19
Sales Charges................................................................... 19
Withdrawal Charge............................................................. 19
Distribution Expense Charge................................................... 21
Deduction for Separate Account Income Taxes..................................... 21
Other Expenses.................................................................. 21
Reduction of Charges for Sales to Certain Groups................................ 21
DESCRIPTION OF THE CONTRACTS......................................................... 21
Summary......................................................................... 21
Participant..................................................................... 22
Annuitant....................................................................... 22
Modification of the Contract.................................................... 22
Assignment...................................................................... 22
Death Benefit................................................................... 22
Beneficiary..................................................................... 23
PURCHASES, WITHDRAWALS AND CONTRACT VALUE............................................ 23
Minimum Purchase Payment........................................................ 23
Automatic Payment Plan........................................................ 23
Automatic Dollar Cost Averaging Program....................................... 23
Asset Allocation Rebalancing Program.......................................... 24
Principal Advantage Program................................................... 24
Participant's Account........................................................... 25
Allocation of Purchase Payments................................................. 25
Transfer During Accumulation Period............................................. 25
Separate Account Accumulation Unit Value........................................ 26
Fixed Account Accumulation Value................................................ 26
Distribution of Contracts....................................................... 27
Withdrawals (Redemptions)....................................................... 27
Systematic Withdrawal Program................................................. 28
ERISA Plans................................................................... 28
Deferment of Fixed Account Withdrawal Payments................................ 28
Minimum Contract Value.......................................................... 28
ANNUITY PERIOD....................................................................... 29
Annuity Date.................................................................... 29
Deferment of Payments......................................................... 29
Payments to Participants...................................................... 29
Allocation of Annuity Payments.................................................. 29
Annuity Options................................................................. 29
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
</TABLE>
<TABLE>
<S> <C>
Other Options................................................................... 31
Transfer During Annuity Period.................................................. 31
Death Benefit During Annuity Period............................................. 31
Annuity Payments................................................................ 31
Initial Monthly Annuity Payment............................................... 31
Subsequent Monthly Payments................................................... 32
Annuity Unit Value.............................................................. 32
Net Investment Factor......................................................... 32
ADMINISTRATION....................................................................... 33
TAXES................................................................................ 33
General......................................................................... 33
Withholding Tax on Distributions................................................ 34
Diversification -- Separate Account Investments................................. 34
Multiple Contracts.............................................................. 35
Tax Treatment of Assignments.................................................... 35
Qualified Plans................................................................. 35
Tax Treatment of Withdrawals.................................................... 37
Qualified Plans............................................................... 37
Nonqualified Plans............................................................ 37
ADDITIONAL INFORMATION ABOUT THE COMPANY............................................. 38
Selected Financial Information.................................................. 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 39
Properties...................................................................... 46
Directors and Executive Officers................................................ 46
Executive Compensation.......................................................... 47
Security Ownership of Certain Beneficial Owners and Management.................. 47
STATE REGULATION..................................................................... 48
CUSTODIAN............................................................................ 48
LEGAL PROCEEDINGS.................................................................... 48
REGISTRATION STATEMENTS.............................................................. 49
INDEPENDENT ACCOUNTANTS.............................................................. 49
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT.................................... 49
FINANCIAL STATEMENTS................................................................. 49
APPENDIX A -- WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT........ A-1
</TABLE>
- --------------------------------------------------------------------------------
DEFINITIONS
- --------------------------------------------------------------------------------
The following terms, as used in this prospectus, have the indicated
meanings:
ACCUMULATION PERIOD -- The period between the Certificate Date and the Annuity
Date; the build-up phase under the Contract.
ACCUMULATION UNIT -- A unit of measurement which the Company uses to calculate
Contract Value under the variable portion of the Contracts during the
Accumulation Period.
ANNUITY SERVICE CENTER -- Its address and phone number are: P.O. Box 54299, Los
Angeles, California 90054-0299; (800) 90-VISTA. Correspondence accompanying a
payment should be directed to P.O. Box 100357, Pasadena, California 91189-0357.
The Company will notify Contractholders and Participants of any change in
address or telephone number.
ANNUITANT -- The natural person on whose life the annuity benefits under a
Certificate are based.
ANNUITIZATION -- The process by which a Participant converts from the
Accumulation Period to the Annuity Period. Upon Annuitization, the Contract is
converted from the build-up phase to the phase during which the Participant or
other payee(s) receive periodic annuity payments.
4
<PAGE> 5
ANNUITY DATE -- The date on which annuity payments are to begin.
ANNUITY PERIOD -- The period starting on the Annuity Date.
ANNUITY UNIT -- A unit of measurement which the Company uses to calculate the
amount of Variable Annuity payments.
BENEFICIARY(IES) -- The person(s) designated to receive any benefits under a
Contract upon the death of the Annuitant or the Participant.
CERTIFICATE -- A document that describes and evidences a Participant's rights
under a group Contract.
CERTIFICATE DATE -- The date a Certificate is issued.
CODE -- The Internal Revenue Code of 1986, as amended.
COMPANY -- First SunAmerica Life Insurance Company, a New York company.
CONTRACT(S) -- The Flexible Payment Deferred Annuity Contracts offered by this
prospectus.
CONTRACT VALUE -- The value under a Contract of a Participant's Account, equal
to the sum of the values of the Participant's interest in the Fixed Account and
the Separate Account.
CONTRACT YEAR -- A year starting from the Certificate Date in one calendar year
and ending on the Certificate Date in the succeeding calendar year.
CONTRACTHOLDER -- The person or entity to whom a group Contract has been issued
on behalf of Participants in a particular group.
CONTRIBUTION YEAR -- With respect to a given Purchase Payment, a year starting
from the date of the Purchase Payment in one calendar year and ending on the day
before the anniversary of such date in the succeeding calendar years. The
Contribution Year in which a Purchase Payment is made is "Contribution Year 0";
subsequent Contribution Years are successively numbered beginning with
Contribution Year 1.
CURRENT INTEREST RATE -- The interest rate as declared from time to time by the
Company to be in effect for allocations to the Fixed Account for a specified
Guarantee Period. It is equal to the sum of the subsequent Guarantee Rate and
the excess interest rate, if any, declared by the Company for such allocation.
The subsequent Guarantee Rate will not be less than 3% per annum.
DUE PROOF OF DEATH -- (1) A certified copy of a death certificate; or (2) a
certified copy of a decree of a court of competent jurisdiction as to the
finding of death; or (3) a written statement by a medical doctor who attended
the deceased at the time of death; or (4) any other proof satisfactory to the
Company.
FIXED ACCOUNT -- Contract Values allocated to the Company's General Account
under one or more of the Fixed Account options under the Contract.
FIXED ANNUITY -- A series of payments that are fixed in amount and made during
the Annuity Period to a payee under a Contract.
GENERAL ACCOUNT -- The Company's general investment account which contains all
the assets of the Company, with the exception of the Separate Account and other
segregated asset accounts.
GUARANTEE AMOUNT -- The accumulated value of that portion of a Participant's
Account allocated to the Fixed Account for a Guarantee Period.
GUARANTEE PERIOD -- A period during which an allocation to the Fixed Account
will earn interest at the Current Interest Rate that was in effect for that
period when the allocation was made.
GUARANTEE RATE -- The interest rate in effect for a particular allocation to the
Fixed Account for a specified Guarantee Period.
LATEST ANNUITY DATE -- The first day of the month following the 85th birthday of
the Annuitant. In the case of Contracts issued in connection with Qualified
Plans, the Code generally requires that a
5
<PAGE> 6
minimum distribution be taken by April 1 of the calendar year following the
calendar year in which the Participant attains age 70 1/2. Accordingly, the
Company may require a Participant in a Qualified Plan to annuitize prior to such
date unless the Participant demonstrates that the minimum distribution is
otherwise being made.
MARKET VALUE ADJUSTMENT -- An adjustment applied to amounts withdrawn,
transferred or annuitized from the three, five, seven and ten year Fixed Account
options prior to the end of the applicable Guarantee Period(s).
NONQUALIFIED PLAN -- A retirement plan which does not receive favorable tax
treatment under Sections 401, 403(b), 408 or 457 of the Internal Revenue Code.
OWNER -- The person(s) having the privileges of ownership defined in the
Contracts. Except to the extent restricted by the retirement plan pursuant to
which the Contract is issued, the Participant will be the Owner of the
Certificate.
PARTICIPANT -- The person entitled to benefits under a Contract as evidenced by
a Certificate issued to the Participant.
PARTICIPANT'S ACCOUNT -- An accounting entity maintained by the Company
indicating a Participant's Contract Value under a Certificate.
PORTFOLIO -- A subdivision of the Separate Account invested wholly in shares of
one of the investment series of the Trust.
PURCHASE PAYMENTS -- Amounts paid to the Company for the Contract by or on
behalf of a Participant.
QUALIFIED PLAN -- A retirement plan which receives favorable tax treatment under
Sections 401, 403(b), 408 or 457 of the Internal Revenue Code.
SEPARATE ACCOUNT -- A segregated investment account of the Company entitled "FS
Variable Annuity Account Two."
TRUST -- Mutual Fund Variable Annuity Trust, an open-end management investment
company.
UNDERLYING FUND(S) -- The underlying series of the Trust in which the Portfolios
invest.
VALUATION DATE -- Each day the New York Stock Exchange is open for business.
VALUATION PERIOD -- The period commencing at the close of normal trading on the
New York Stock Exchange ("NYSE") (currently 4:00 p.m. Eastern time) on each
Valuation Date and ending at the close of normal trading on the NYSE on the next
succeeding Valuation Date.
VARIABLE ACCOUNT -- Contract Values allocated to the Company's Separate Account.
VARIABLE ANNUITY -- A series of payments made during the Annuity Period to a
payee under a Contract which vary in amount in accordance with the investment
experience of the Portfolios to which Contract Values have been allocated.
WITHDRAWAL CHARGE -- The contingent deferred sales charge assessed against
certain withdrawals.
WITHDRAWAL VALUE -- Contract Value, minus any Contract Administration Charge,
minus any applicable Withdrawal Charge, and plus or minus any applicable Market
Value Adjustment.
6
<PAGE> 7
- --------------------------------------------------------------------------------
SUMMARY
- --------------------------------------------------------------------------------
This prospectus describes the uses and objectives of the Contracts, their
costs, and the rights and privileges of the Participant and Contractholder, as
applicable. It also contains information about the Company, the Fixed Account,
the Separate Account and its Portfolios, and the Underlying Funds in which the
Portfolios invest. We urge you to read it carefully and retain it and the
prospectus for the Trust for future reference. (The prospectus for the Trust is
attached to and follows this prospectus).
WHAT IS THE CONTRACT?
The Contract offered is a tax deferred annuity which provides fixed
benefits, variable benefits or a combination of both. A Group Contract is issued
to the Contractholder covering all Participants in the group. Each Participant
receives a Certificate which evidences his or her participation under the
Contract. For the purpose of determining benefits under the Contract, a
Participant's Account is established for each Participant. The Owner is the
person entitled to the rights and privileges of ownership under a Certificate.
Except to the extent limited by the retirement plan pursuant to which the
Contract was issued, the Participant is the Owner. In the event the Group
Contract described in this prospectus is not available, a Flexible Payment
Individual Modified Guaranteed and Variable Preferred Annuity Contract
("Individual Contract") may be available instead. The Individual Contract is
substantially similar to the Group Contract except that the Individual Contract
is issued directly to the Owner, rather than to a Contractholder for the benefit
of a Participant. Subject to this difference, the information contained in this
prospectus is applicable to the Individual Contract.
Individuals wishing to purchase a Certificate must complete an application
and provide an initial Purchase Payment which will be sent to the Company at the
address for correspondence accompanied by payments indicated on the cover page
of this prospectus or in such other manner as deemed acceptable to the Company.
The minimum and maximum of Purchase Payments vary depending upon the type of
Contract purchased. (See "Minimum Purchase Payment," page 23).
WHAT IS THE DIFFERENCE BETWEEN A VARIABLE ANNUITY AND A FIXED ANNUITY?
The Contract has appropriate provisions relating to variable and fixed
accumulation values and variable and fixed annuity payments. A Variable Annuity
and a Fixed Annuity have certain similarities. Both provide that Purchase
Payments, less certain deductions, will be accumulated prior to the Annuity
Date. After the Annuity Date, annuity payments will be made to a designated
payee (normally, the Participant), for the life of the Annuitant or a period
certain or a combination thereof. The Company assumes mortality and expense
risks under the Contracts, for which it receives certain compensation.
The most significant difference between a Variable Annuity and a Fixed
Annuity is that under a Variable Annuity, all investment risk before and after
the Annuity Date is assumed by the Participant or other payee; the amounts of
the annuity payments vary with the investment performance of the Portfolios of
the Separate Account selected by the Participant. Under a Fixed Annuity, in
contrast, the investment risk after the Annuity Date is assumed by the Company
and the amounts of the annuity payments do not vary. In the case of amounts
allocated to the Fixed Account prior to the Annuity Date, the Participant bears
the risks (1) that the Guarantee Rate to be credited on amounts allocated to the
Fixed Account may not exceed the minimum Guaranteed Rate of 3% for any Guarantee
Period, and (2) that amounts withdrawn, transferred or annuitized from the
three, five, seven and ten year Fixed Account options prior to the end of their
respective Guarantee Periods could result in the Participant's receiving less
than the Purchase Payments so allocated (See "Fixed Account Options -- Market
Value Adjustment," page 17).
7
<PAGE> 8
HOW MAY PURCHASE PAYMENTS BE ALLOCATED?
Purchase Payments for the Contracts may be allocated pursuant to
instructions in the application to one or more Portfolios of the Separate
Account, and/or to the Company's General Account under one or more of the Fixed
Account options under the Contracts. The Separate Account invests in shares of
the following Underlying Funds (see "Separate Account Investments," page 14):
<TABLE>
<S> <C>
* INTERNATIONAL EQUITY * ASSET ALLOCATION
* CAPITAL GROWTH * U.S. TREASURY INCOME
* GROWTH AND INCOME * MONEY MARKET
</TABLE>
Purchase Payments allocated to Fixed Account option(s) will earn interest
at the then Current Interest Rate(s) for the selected Guarantee Period(s). (See
"Fixed Account Options," page 16).
Prior to the Annuity Date, transfers may be made among the Portfolios
and/or the Fixed Account options. Fifteen transfers per Contract Year are
permitted before a transfer fee will be assessed. A Market Value Adjustment may
also apply, in the case of a transfer from a Fixed Account option. (See
"Purchases, Withdrawals and Contract Value -- Transfer During Accumulation
Period," page 25).
MAY WITHDRAWALS BE MADE BEFORE ANNUITIZATION?
Except as explained below, Contract Value may be withdrawn at any time
during the Accumulation Period. In addition to potential losses due to
investment risks, withdrawals may be reduced by a Withdrawal Charge, and a
penalty tax and income tax may apply. Contracts in connection with Qualified
Plans may be subject to additional withdrawal restrictions imposed by the Plan.
Earnings under a Contract may be withdrawn at any time during such period free
of Withdrawal Charge (although withdrawals from the Fixed Account other than at
the end of the applicable Guarantee Periods are generally subject to a Market
Value Adjustment, page 17). Alternatively, there is a free withdrawal amount
which applies to the first withdrawal during a Contract Year after the first
Contract Year. (See "Contract Charges -- Sales Charges -- Withdrawal Charge,"
page 19). Certain Owners of Nonqualified Plan Contracts and Contracts issued in
connection with Individual Retirement Annuities ("IRAs") may choose to withdraw
amounts which in the aggregate add up to 10% of their Purchase Payments annually
pursuant to a systematic withdrawal program without charge. (See "Purchases,
Withdrawals and Contract Value -- Withdrawals (Redemptions) -- Systematic
Withdrawal Program," page 28.) Withdrawals are taxable and a 10% federal tax
penalty may apply to withdrawals before age 59 1/2.
Participants should consult their own tax counsel or other tax adviser
regarding any withdrawals or distributions.
CAN I EXAMINE THE CONTRACT?
The Contractholder (or Participant) may return the Contract (or
Certificate, respectively) to the Company within 30 days after it is received by
delivering or mailing it to the Company's Annuity Service Center. If the
Contract is returned to the Company, it will be terminated and the Company will
pay the Contractholder or Participant all Purchase Payments allocated to the
Fixed Accounts, plus the value of amounts in the Variable Accounts on the date
it is received by the Company.
WHAT ARE THE CHARGES AND DEDUCTIONS UNDER A CONTRACT?
A mortality and expense risk charge is assessed daily against the assets of
each Portfolio at an annual rate of 1.25%. A distribution expense charge is
assessed daily against the assets of each Portfolio at an annual rate of 0.15%.
The Contracts also provide for certain deductions and charges, including a
contract administration charge of $30 annually, which is guaranteed not to
increase and which under certain circumstances may be waived. The Contract
permits up to 15 free transfers each Contract Year, after which point a $25
transfer fee is applicable to each subsequent transfer. Additionally, a
Withdrawal Charge may be assessed against the Contract Value during the first
seven
8
<PAGE> 9
Contribution Years (6%-6%-5%-4%-3%-2%-1%-0%) when a withdrawal is made. (See
"Contract Charges," page 18.)
DOES THE CONTRACT PAY ANY DEATH BENEFITS?
A Death Benefit is provided in the event of the death of the Participant
during the Accumulation Period. If the Participant was less than age 70 on the
Certificate Date, the Death Benefit is equal to the greater of:
(1) the total of Purchase Payments made prior to the death of the
Participant, reduced by any partial withdrawals and partial annuitizations;
or
(2) the Contract Value upon receipt of Due Proof of Death; or
(3) the Contract Value on that anniversary of the Certificate Date
preceding the date of death, increased by any Purchase Payments made since
that anniversary and reduced by any partial withdrawals and partial
annuitizations since that anniversary, which results in the greatest value.
If the Participant was age 70 or older on the Certificate Date, the Death
Benefit will equal the Contract Value at the end of the Valuation Period during
which Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company.
(See "Description of the Contracts -- Death Benefit," page 22.)
WHAT ARE THE AVAILABLE ANNUITY OPTIONS UNDER THE CONTRACT?
There are five available annuity options under the Contract. They include
an annuity for life, a joint and survivor annuity, a joint and survivor life
annuity with 120 monthly payments guaranteed, a life annuity with 120 or 240
monthly payments guaranteed and monthly payments for a specified number of
years. The Annuity Date may not be deferred beyond an Owner's 85th birthday. If
a Contractholder does not elect otherwise, monthly annuity payments generally
will be made under the fourth option to provide a life annuity with 120 monthly
payments certain. (See "Annuity Period -- Annuity Options," page 29.)
DOES THE OWNER HAVE ANY VOTING RIGHTS UNDER THE CONTRACT?
Owners will have the right to vote on matters affecting the Underlying
Funds to the extent that proxies are solicited by the Trust. If the Owner does
not vote, the Company will vote such interests in the same proportion as it
votes shares for which it has received instructions. (See "Separate Account
Investments -- Voting Rights," page 16.)
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<PAGE> 10
- --------------------------------------------------------------------------------
FEE TABLES
- --------------------------------------------------------------------------------
OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGE (AS A PERCENTAGE OF PURCHASE PAYMENTS):
<TABLE>
<CAPTION>
CONTRIBUTION YEAR
<S> <C>
Zero.............................................................................................. 6%
One............................................................................................... 6%
Two............................................................................................... 5%
Three............................................................................................. 4%
Four.............................................................................................. 3%
Five.............................................................................................. 2%
Six............................................................................................... 1%
Seven and later................................................................................... 0%
ANNUAL CONTRACT ADMINISTRATION CHARGE................................................................... $30
TRANSFER FEE............................................................................................ $25
(applies solely to transfers in excess of fifteen in a Contract Year)
</TABLE>
- ---------------
The Owner Transaction Expenses apply to the Contract Value allocated to the
Fixed Account, as well as the Separate Account.
- --------------------------------------------------------------------------------
ANNUAL SEPARATE ACCOUNT EXPENSES
(AS A PERCENTAGE OF DAILY NET ASSET VALUE)
<TABLE>
<S> <C>
MORTALITY RISK CHARGE................................................................................. 0.90%
EXPENSE RISK CHARGE................................................................................... 0.35%
DISTRIBUTION EXPENSE CHARGE........................................................................... 0.15%
------
TOTAL EXPENSE CHARGE............................................................................ 1.40%
=====
</TABLE>
- ---------------
ANNUAL TRUST EXPENSES*
(AS A PERCENTAGE OF AVERAGE NET ASSETS FOR THE PERIOD
MARCH 1, 1995 (INCEPTION DATE) TO AUGUST 31, 1995):
<TABLE>
<CAPTION>
TOTAL ANNUAL
ADVISORY FEE ADMINISTRATION FEE OTHER EXPENSES EXPENSES
------------ ------------------ -------------- ------------
<S> <C> <C> <C> <C>
International Equity................................ .80% .20% .10% 1.10%
Capital Growth...................................... .60% .20% .10% .90%
Growth and Income................................... .60% .20% .10% .90%
Asset Allocation.................................... .55% .20% .10% .85%
U.S. Treasury Income................................ .50% .20% .10% .80%
Money Market........................................ .25% .20% .10% .55%
</TABLE>
- ---------------
*During the period for which fund expenses are reported, the investment adviser
waived a portion of fees and assumed a portion of expenses for the Portfolio.
If all fees and expenses had been incurred by the Portfolios, the ratio of
expenses to average net assets for each Portfolio would have been as follows:
International Equity 2.90%; Capital Growth 1.80%; Growth and Income 1.80%;
Asset Allocation 1.65%; U.S. Treasury Income 1.55%; and Money Market 1.21%.
10
<PAGE> 11
-------------------------------------------------------------------------------
EXAMPLES
-------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
IF YOU SURRENDER YOUR CONTRACT IF YOU DO NOT SURRENDER YOUR
AT THE END OF THE APPLICABLE CONTRACT: You would pay the
TIME PERIOD: You would pay the following expenses on a $1,000
following expenses on a $1,000 investment, assuming a 5% an-
investment, assuming a 5% nual return on assets:
annual return on assets:
1 Year 3 Years 1 Year 3 Years
International Equity $86 $130 $26 $80
Capital Growth $84 $124 $24 $74
Growth and Income $84 $124 $24 $74
Asset Allocation $84 $123 $24 $73
U.S. Treasury Income $83 $121 $23 $71
Money Market $81 $114 $21 $64
</TABLE>
- ---------------
1. The purpose of the foregoing table and examples is to assist an investor in
understanding the various costs and expenses that he or she will bear
directly or indirectly by investing in the Separate Account. The Owner
Transaction Expenses at the beginning of the table are applicable to Contract
Value allocated to the Fixed Account as well as to the Separate Account.
However, the balance of the fee tables, and the Examples, apply only to
investments in the Separate Account. The table reflects expenses of the
Separate Account as well as the Underlying Funds. For additional information
see "Contract Charges," beginning on page 18 of this prospectus; see also the
sections relating to management of the Underlying Funds in the Trust
prospectus. The examples do not illustrate the tax consequences of
surrendering a Contract.
2. The examples assume that there were no transactions which would result in the
imposition of the transfer fee. The amount of the transfer fee is $25, except
that the first 15 transfers per Contract Year are not subject to a fee. (See
"Administrative Charges -- Transfer Fee," page 19). Transfers from the Fixed
Account may be subject to a Market Value Adjustment even if they are not
subject to a transfer fee.
3. For purposes of the amounts reported in the Examples, the contract
administration charge is reflected by applying a percentage equivalent
charge, obtained by dividing the total amount of such charges anticipated to
be collected during the year by the total estimated average net assets of the
Portfolios and the Fixed Account attributable to the Contracts.
4. NEITHER THE FEE TABLES NOR THE EXAMPLES ARE REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
11
<PAGE> 12
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
- --------------------------------------------------------------------------------
AS OF THE DATE OF THIS PROSPECTUS, THE SALE OF CONTRACTS HAD NOT COMMENCED, AND
THE PORTFOLIOS HAD NO ASSETS. THEREFORE, NO CONDENSED FINANCIAL INFORMATION WITH
RESPECT TO THE SEPARATE ACCOUNT IS PRESENTED IN THE PROSPECTUS.
- --------------------------------------------------------------------------------
PERFORMANCE DATA
- --------------------------------------------------------------------------------
From time to time the Separate Account may advertise the Money Market
Portfolio's "yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Money Market Portfolio refers to the net income generated for a
Contract funded by an investment in the Portfolio (which invests in shares of
the Money Market Portfolio of the Trust) over a seven-day period (which period
will be stated in the advertisement). This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Portfolio is assumed to be reinvested
at the end of each seven-day period. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. Neither the yield nor the effective yield takes into consideration
the effect of any capital changes that might have occurred during the seven-day
period, nor do they reflect the impact of premium taxes or any Withdrawal
Charges. The impact of other recurring charges on both yield figures is,
however, reflected in them to the same extent it would affect the yield (or
effective yield) for a Contract of average size.
In addition, the Separate Account may advertise "total return" data for its
other Portfolios. Like the yield figures described above, total return figures
are based on historical data and are not intended to indicate future
performance. The "total return" is a computed rate of return that, when
compounded annually over a stated period of time and applied to a hypothetical
initial investment in a Portfolio made at the beginning of the period, will
produce the same Contract Value at the end of the period that the hypothetical
investment would have produced over the same period (assuming a complete
redemption of the Contract at the end of the period). Recurring Contract charges
are reflected in the total return figures in the same manner as they are
reflected in the yield data for Contracts funded through the Money Market
Portfolio. The effect of applicable Withdrawal Charges due to the assumed
redemption will be reflected in the return figures, but may be omitted in
additional return figures given for comparison.
The Separate Account may also advertise an annualized 30-day (or one month)
yield figure for Portfolios other than the Money Market Portfolio. These yield
figures are based upon the actual performance of the Portfolio over a 30-day (or
one month) period ending on a date specified in the advertisement. Like the
total return data described above, the 30-day (or one month) yield data will
reflect the effect of all recurring Contract charges (but will not reflect any
Withdrawal Charges or premium taxes). The yield figure is derived from net
investment gain (or loss) over the period expressed as a fraction of the
investment's value at the end of the period.
For a more complete description of Contract charges, see "Contract
Charges," beginning on page 18. More detailed information on the computation of
advertised performance data for the Separate Account is contained in the
Statement of Additional Information.
12
<PAGE> 13
- --------------------------------------------------------------------------------
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT
AND THE GENERAL ACCOUNT
- --------------------------------------------------------------------------------
COMPANY
The Company is a stock life insurance company organized under the laws of
the state of New York in December 1978. Its legal domicile and principal
business address is 733 Third Avenue, New York, New York 10017. The Company is a
wholly-owned subsidiary of SunAmerica Life Insurance Company, an Arizona
corporation, which is wholly-owned by SunAmerica Inc.
The Company and its affiliates, SunAmerica Life Insurance Company, Anchor
National Life Insurance Company, SunAmerica Asset Management Corp. and Resources
Trust Company, offer a full line of financial services, including fixed and
variable annuities, mutual funds and trust administration services. As of June
30, 1995 the Company had approximately $155.8 million in assets while SunAmerica
Inc., the Company's ultimate parent, together with its subsidiaries, held
approximately $27.0 billion of assets, consisting of over $16.2 billion of
assets owned, approximately $2.1 billion of assets managed in mutual funds and
private accounts, and approximately $8.7 billion under custody in retirement
trust accounts.
The Company may from time to time publish in advertisements, sales
literature and reports to Owners, the ratings and other information assigned to
it by A.M. Best Company ("A.M. Best"). A.M. Best's ratings reflect its current
opinion on the relative financial strength and operating performance of an
insurance company in comparison to the norms of the life/health insurance
industry. Its ratings do not apply to the Separate Account. However, the
contractual obligations under the Contracts are general corporate obligations of
the Company.
The Company is admitted to conduct life insurance and annuity business in
the state of New York. The Contracts offered by this prospectus are issued by
the Company and will be funded in the Separate Account as well as the Company's
General Account.
For more detailed information about the Company, see "Additional
Information About the Company," page 38.
SEPARATE ACCOUNT
FS Variable Annuity Account Two was originally established by the Company
on May 24, 1994, pursuant to the provisions of New York law, as a segregated
asset account of the Company. The Separate Account meets the definition of a
"separate account" under the federal securities laws and is registered with the
Securities and Exchange Commission as a unit investment trust under the
Investment Company Act of 1940. This registration does not involve supervision
of the management of the Separate Account or the Company by the Securities and
Exchange Commission.
The assets of the Separate Account are the property of the Company.
However, the assets of the Separate Account, equal to its reserves and other
contract liabilities, are not chargeable with liabilities arising out of any
other business the Company may conduct.
Income, gains, and losses, whether or not realized, from assets allocated
to the Separate Account are credited to or charged against the Separate Account
without regard to other income, gains, or losses of the Company.
The Separate Account is divided into Portfolios, with the assets of each
Portfolio invested in the shares of one of the Underlying Funds. The Company
does not guarantee the investment performance of the Separate Account, its
Portfolios or the Underlying Funds. Values allocated to the Separate Account and
the amount of Variable Annuity payments will vary with the values of shares of
the Underlying Funds, and are also reduced by Contract charges.
The basic objective of a Variable Annuity contract is to provide Variable
Annuity payments which will be to some degree responsive to changes in the
economic environment, including inflationary
13
<PAGE> 14
forces and changes in rates of return available from various types of
investments. The Contract is designed to seek to accomplish this objective by
providing that Variable Annuity payments will reflect the investment performance
of the Separate Account with respect to amounts allocated to it both before and
after the Annuity Date. Since the Separate Account is always fully invested in
shares of the Underlying Funds, its investment performance reflects the
investment performance of those entities. The values of such shares held by the
Separate Account fluctuate and are subject to the risks of changing economic
conditions as well as the risk inherent in the ability of the Underlying Funds'
managements to make necessary changes in their portfolios to anticipate changes
in economic conditions. Therefore, the Participant bears the entire investment
risk that the basic objectives of the Contract may not be realized, and that the
adverse effects of inflation may not be lessened. There can be no assurance that
the aggregate amount of Variable Annuity payments will equal or exceed the
Purchase Payments made with respect to a particular Participant's Account for
the reasons described above, or because of the premature death of an Annuitant.
Another important feature of the Contract related to its basic objective is
the Company's promise that the dollar amount of Variable Annuity payments made
during the lifetime of the Annuitant will not be adversely affected by the
actual mortality experience of the Company or by the actual expenses incurred by
the Company in excess of expense deductions provided for in the Contract
(although the Company does not guarantee the amounts of the Variable Annuity
payments).
GENERAL ACCOUNT
The General Account is made up of all of the general assets of the Company
other than those allocated to the Separate Account or any other segregated asset
account of the Company. A Purchase Payment may be allocated to one or more
Guarantee Periods available in connection with the General Account, as elected
by the Participant at the time the Purchase Payment is made. In addition, all or
part of the Participant's Contract Value may be transferred to Guarantee Periods
available under the Contract as described under "Purchases, Withdrawals and
Contract Value -- Transfer During Accumulation Period," page 25, and "Annuity
Period -- Transfer During Annuity Period," page 31. Assets supporting amounts
allocated to Guarantee Periods become part of the Company's General Account
assets and are available to fund the claims of all classes of customers of the
Company, as well as all classes of its creditors. Accordingly, all of the
Company's assets held in the General Account will be available to fund the
Company's obligations under the Contracts as well as such other claims.
The Company will invest the assets of the General Account in the manner
chosen by the Company and allowed by applicable state laws regarding the nature
and quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT INVESTMENTS
- --------------------------------------------------------------------------------
UNDERLYING FUNDS
Each of the Portfolios of the Separate Account invests in the shares of one
of the following Underlying Funds, which are investment series of Mutual Fund
Variable Annuity Trust, an open-end management investment company registered
under the Investment Company Act of 1940:
* INTERNATIONAL EQUITY * ASSET ALLOCATION
* CAPITAL GROWTH * U.S. TREASURY INCOME
* GROWTH AND INCOME * MONEY MARKET
The Chase Manhattan Bank, N.A. ("Chase" or the "Adviser") is the investment
adviser, administrator and custodian for each of the Underlying Funds. Its
headquarters are at One Chase Manhattan Plaza, New York, New York 10081. As
investment adviser to the Underlying Funds, Chase
14
<PAGE> 15
makes investment decisions subject to such policies as the Board of Trustees of
the Trust may determine. As administrator of the Underlying Funds, Chase
provides certain services including coordinating relationships with independent
contractors and agents; preparing for signature by officers and filing of
certain documents; preparing financial statements; arranging for the maintenance
of books and records; and providing office facilities. Certain of these services
have been delegated to Vista Broker-Dealer Services, Inc. ("VBDS"), 125 West
55th Street, New York, New York 10019, which serves as sub-administrator to the
Underlying Funds. As custodian for the Underlying Funds, Chase's
responsibilities include safeguarding and controlling the Underlying Funds' cash
and securities, handling the receipt and delivery of securities, determining
income and collecting interest on investments, maintaining books of original
entry and other required books and accounts, and calculating daily net asset
values.
The Underlying Funds and their investment objectives are as follows:
INTERNATIONAL EQUITY PORTFOLIO seeks to provide a total return on assets
from long-term growth of capital and from income principally through a broad
portfolio of marketable equity securities of established foreign companies
organized in countries other than the United States and companies participating
in foreign economies with prospects for growth.
CAPITAL GROWTH PORTFOLIO seeks to provide long-term capital growth
primarily through diversified holdings (i.e., at least 80% of its assets under
normal circumstances) in common stocks. The Portfolio will invest all of its
assets in stocks of issuers (including foreign issuers) with small to medium
capitalizations. The Adviser intends to utilize both quantitative and
fundamental research to identify undervalued stocks with a catalyst for positive
change. Dividend income, if any, is a consideration incidental to the
Portfolio's investment objective of growth of capital. This investment policy
involves the risks that the issues identified by the Adviser will not appreciate
or appreciate as significantly as projected.
GROWTH AND INCOME PORTFOLIO seeks to provide long-term capital appreciation
and to provide dividend income primarily through a broad portfolio (i.e., at
least 80% of its assets under normal circumstances) of common stocks. The
Portfolio will invest its assets in stocks of issuers (including foreign
issuers) ranging from small to medium to large capitalizations. For the most
part, the Adviser will pursue a "contrary opinion" investment approach,
selecting common stocks that are currently out of favor with investors in the
stock market. These securities are usually characterized by a relatively low
price/earnings ratio (using normalized earnings), a low ratio of market price to
book value, or underlying asset values that the Adviser believes are not fully
reflected in the current market price. The Adviser believes that the risk
involved in this policy will be moderated somewhat by the anticipated dividend
returns on the stocks to be held by the Portfolio.
ASSET ALLOCATION PORTFOLIO seeks to provide maximum total return through a
combination of long-term growth of capital and current income by investing in a
diversified portfolio of equity and debt securities, including common stocks,
convertible securities and government and corporate fixed-income obligations.
Under normal market conditions, between 35%-70% of the Portfolio's total assets
will be invested in common stocks and other equity investments and at least 25%
of the Portfolio's assets will be invested in fixed-income senior securities,
defined for this purpose to include non-convertible corporate debt securities
and preferred stock, and government obligations. The Adviser considers both the
opportunity for gain and the risk of loss in making investments, and may alter
the relative percentages of assets invested in equity and fixed income
securities from time to time, depending on the judgment of the Adviser as to
general market and economic conditions, trends and yields and interest rates and
changes in fiscal and monetary policies.
U.S. TREASURY INCOME PORTFOLIO seeks to provide monthly dividends as well
as to protect the value of an investor's investment (i.e., to preserve
principal) by investing at least 65% of its assets in debt obligations that are
backed by the "full faith and credit" of the U.S. government as well as by using
futures contracts on fixed income securities or indexes of fixed income
securities and options on such futures contracts for the purpose of protecting
(i.e., "hedging") the value of its portfolio. Neither the United States nor any
of its agencies insures or guarantees the market value of shares of this
Portfolio.
15
<PAGE> 16
MONEY MARKET PORTFOLIO seeks to provide maximum current income consistent
with preservation of capital and maintenance of liquidity through investments in
U.S. dollar denominated commercial paper, obligations of foreign governments,
obligations guaranteed by U.S. banks, and securities issued by the U.S.
government or its agencies.
DETAILED INFORMATION ABOUT THE UNDERLYING FUNDS IS CONTAINED IN THE
ACCOMPANYING CURRENT PROSPECTUS OF THE TRUST. AN INVESTOR SHOULD CAREFULLY
REVIEW THAT PROSPECTUS BEFORE ALLOCATING AMOUNTS TO BE INVESTED IN THE
PORTFOLIOS OF THE SEPARATE ACCOUNT.
There is no assurance that the investment objective of any of the
Underlying Funds will be met. Participants bear the complete investment risk for
Purchase Payments allocated to a Portfolio. Contract Values will fluctuate in
accordance with the investment performance of the Portfolio(s) to which Purchase
Payments are allocated, and in accordance with the imposition of the fees and
charges assessed under the Contracts. Shares of the Underlying Funds are, and
will be, issued and redeemed only in connection with investments in, and
payments under, the Contracts.
VOTING RIGHTS
To the extent required by applicable law, the Company will vote the shares
of the Underlying Funds held in the Separate Account at meetings of the
shareholders of the Trust in accordance with instructions received from persons
having the voting interest in the corresponding Portfolios. The Company will
vote shares for which it has not received instructions in the same proportion as
it votes shares for which it has received instructions. The Trust does not hold
regular meetings of shareholders.
The number of shares which a person has a right to vote will be determined
as of a date to be chosen by the Trust not more than 60 days prior to the
meeting of the Underlying Fund's shareholders. Voting instructions will be
solicited by written communication in advance of such meeting. Except as may be
limited by the terms of the retirement plan pursuant to which the Contract was
issued, the person having such voting rights will be the Participant before the
Annuity Date; thereafter the payee entitled to receive payments under the
Certificate.
SUBSTITUTION OF SECURITIES
If the shares of any of the Underlying Funds should no longer be available
for investment by the Separate Account or if, in the judgment of the Company's
Board of Directors, further investment in the shares of an Underlying Fund is no
longer appropriate in view of the purposes of the Contract, the Company may
substitute shares of another mutual fund (or series thereof) for Underlying Fund
shares already purchased and/or to be purchased in the future by Purchase
Payments under the Contract. No such substitution of securities may take place
without prior approval of the Commission and under such requirements as the
Commission may impose.
- --------------------------------------------------------------------------------
FIXED ACCOUNT OPTIONS
- --------------------------------------------------------------------------------
ALLOCATIONS
Purchase Payments may also be allocated, and Contract Values in the
Separate Account transferred, to one or more of the fixed accumulation options
available through the Company's General Account. Amounts thus applied will earn
interest for one or more of the available Guarantee Periods selected by the
Owner, at Guarantee Rates based on the Current Interest Rates set by the Company
for such Guarantee Periods in effect at the time the amounts are thus applied.
Current Interest Rates may change from time to time due to changes in market
conditions or other factors. However, the Guarantee Rate in effect at the time
one of these options is selected will not change for the remainder of the
Guarantee Period. THE COMPANY'S OBLIGATION TO PAY INTEREST AT THE GUARANTEE RATE
IS NOT AFFECTED BY THE PERFORMANCE OF THE COMPANY'S GENERAL ACCOUNT INVESTMENTS.
16
<PAGE> 17
Guarantee Periods are currently available for periods of one, three, five,
seven and ten years. An Owner may elect to allocate Purchase Payments to one or
more of those Guarantee Periods. Each such allocation (to the extent not
withdrawn, transferred or annuitized prior to the end of the Guarantee Period),
will earn interest, credited daily, at the annual effective Guarantee Rate
established for the Guarantee Period at the time the allocation is made. The
Guarantee Rate is based on the Current Interest Rate in effect at the time the
allocation is made. The Current Interest Rate applicable to renewals for new
Guarantee Periods of amounts already allocated to the Fixed Account, or to
transfers from the Separate Account to the Fixed Account may differ from the
Current Interest Rates applicable to Purchase Payments. The Current Interest
Rates are set at the sole discretion of the Company. OWNERS BEAR THE RISK THAT
CURRENT INTEREST RATES AVAILABLE AT FUTURE TIMES MAY BE MORE OR LESS THAN THOSE
CURRENTLY OR INITIALLY AVAILABLE. THEY ALSO BEAR THE RISK THAT SUCH RATES MAY
NOT EXCEED THE GUARANTEED MINIMUM RATE OF 3%.
RENEWALS
Within 30 days after the end of a Guarantee Period, amounts accumulated
during that Guarantee Period may be reallocated to the Fixed Account for a new
Guarantee Period of the same or of a different duration. If the new Guarantee
Period is of the same duration, the amounts will receive the Current Interest
Rate in effect for that duration as of the last day of the previous Guarantee
Period and the new Guarantee Period will begin the next following business day.
If the new Guarantee Period is of a different duration and the election is
received after the expiration of the Guarantee Period, the amounts will receive
the Current Interest Rate described in the previous sentence until such time as
the election is received (at which time interest will be credited at the Current
Interest Rate then in effect for the new selected Guarantee Period). In that
case, the new Guarantee Period will begin on the day that the reallocation is
made. Also, during such 30-day period, those amounts may be withdrawn,
transferred or annuitized without application of the Market Value Adjustment.
(See below.) However, any such amounts withdrawn may nevertheless be subject to
the Withdrawal Charge.
At the end of a Guarantee Period, the Company will, unless the Participant
has effectively elected otherwise, assume reallocation for the same period,
unless the new period would expire after the Annuity Date (or, if none has been
selected, the Latest Annuity Date). In the latter case, the Company will choose
the longest available Guarantee Period that will not extend beyond such date. If
the renewal occurs within one year prior to that date, interest will be credited
to such Annuity Date at the then Current Interest Rate for a one-year Guarantee
Period.
MARKET VALUE ADJUSTMENT
Other than as described below, if Contract Value is withdrawn, transferred
or, prior to the Annuity Date, annuitized from the Fixed Account under one of
the Fixed Account options described above prior to the expiration of the
Guarantee Period (other than withdrawals for the purpose of paying the Death
Benefit upon the death of the Participant, withdrawals from the one year Fixed
Account option under the Automatic Dollar Cost Averaging Program or Asset
Allocation Rebalancing Program, or withdrawals made to pay Contract fees or
charges), the amounts thus withdrawn, transferred or annuitized are subject to a
Market Value Adjustment ("MVA"). The MVA reflects the impact that changing
interest rates have on the value of money invested at a fixed interest rate,
such as a Guarantee Rate. The MVA may be either positive or negative, and is
computed by multiplying the amount withdrawn, transferred or annuitized by the
following factor:
[(1 + I)/(1 + J + 0.0025)]N/12 -1
17
<PAGE> 18
where
I is the Guarantee Rate in effect;
J is the Current Interest Rate available for a period equal to the number
of years remaining in the Guarantee Period at the time of withdrawal,
transfer or annuitization (fractional years are rounded up to the next
full year); and
N is the number of full months remaining in the Guarantee Period at the
time the withdrawal, transfer or annuitization request is processed.
In general, whether the MVA will operate to increase or decrease the
Contract Value upon withdrawal, transfer or annuitization is determined by
comparing the Guarantee Rate in effect for that allocation to the Current
Interest Rate (as of the date of the transaction) that would apply for a
Guarantee Period equal to the number of full or fractional years remaining in
the Guarantee Period as of that date. (For purposes of determining the MVA, if
the Company does not offer a Guarantee Period of that duration, the applicable
Current Interest Rate will be determined by linear interpolation between Current
Interest Rates for the nearest two Guarantee Periods that are available). If the
Current Interest Rate thus determined plus one-quarter of one percent is greater
than the Guarantee Rate, the MVA will be negative and Contract Value will be
decreased. Similarly, if the Current Interest Rate plus one-quarter of one
percent is less than the Guarantee Rate, Contract Value will be increased. If
the Current Interest Rate is exactly one-quarter of one percent less than the
Guarantee Rate, the MVA will be zero and Contract Value will not be affected by
the MVA.
The impact of the MVA is more significant the greater the time remaining in
the Guarantee Period at the time of withdrawal, transfer or annuitization. If
the MVA is negative, it will be assessed first against any remaining value
allocated to the Fixed Account under the affected option; any remaining
unsatisfied MVA charge will be applied against the proceeds of the withdrawal,
transfer or annuitization. If the MVA is positive, it will be credited to the
amount withdrawn, transferred or annuitized. Some examples of how the MVA is
computed and its impact on Contract Value appear in Appendix A.
The Company will waive any negative MVA under any Contract for amounts
allocated to the one year Fixed Account option, including any negative MVA for
withdrawals under the Automatic Dollar Cost Averaging Program and the Asset
Allocation Rebalancing Program. (See "Purchases, Withdrawals and Contract
Values -- Automatic Dollar Cost Averaging Program" and "Purchases, Withdrawals
and Contract Values -- Asset Allocation Rebalancing Program," pages 23-24).
That portion of the Contracts relating to allocations to the one year Fixed
Account option is not registered under the Securities Act of 1933 (the "Act")
and is therefore not subject to the provisions of the Act. The Fixed Account
options, including the one year Fixed Account, are not subject to the provisions
of the Investment Company Act of 1940.
- --------------------------------------------------------------------------------
CONTRACT CHARGES
- --------------------------------------------------------------------------------
As is more fully described below, charges under the Contract offered by
this prospectus are assessed in three ways: (1) as deductions for administrative
expenses; (2) as charges against the assets of the Separate Account for the
assumption of mortality and expense risks and as distribution expense charges;
and (3) as Withdrawal Charges (contingent deferred sales charges). In addition,
certain deductions are made from the assets of the Underlying Funds for
investment advisory, administrative, custodial and other fees and expenses;
those fees and expenses are described in the prospectus for the Trust.
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<PAGE> 19
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a Mortality and Expense Risk Charge from each Portfolio
during each Valuation Period. The aggregate Mortality and Expense Risk Charge is
equal, on an annual basis, to 1.25% of the net asset value of each Portfolio
(approximately .90% is for mortality risks and approximately 0.35% is for
expense risks). The mortality risks assumed by the Company arise from its
contractual obligations: (1) to make annuity payments after the Annuity Date for
the life of the Annuitant(s); (2) to waive the Withdrawal Charge in the event of
the death of the Participant; and (3) to provide a death benefit prior to the
Annuity Date. The Mortality and Expense Risk Charge is assessed during both the
Accumulation Period and the Annuity Period; however, it is not applied to
Contract Values allocated to the Fixed Account.
The expense risk assumed by the Company is that the costs of administering
the Contracts and the Separate Account will exceed the amount received from the
Contract Administration Charge. (See "Administrative Charges" below). The
expense risk charge is guaranteed by the Company and cannot be increased.
ADMINISTRATIVE CHARGES
CONTRACT ADMINISTRATION CHARGE
An annual Contract Administration Charge of $30 is charged against each
Certificate. The amount of this charge is guaranteed and cannot be increased by
the Company. This charge reimburses the Company for expenses incurred in
establishing and maintaining records relating to a Contract. The Contract
Administration Charge will be assessed on each anniversary of the Certificate
Date that occurs on or prior to the Annuity Date. In the event that a total
surrender of Contract Value is made, the Charge will be assessed as of the date
of surrender without proration. This Charge is not assessed during the Annuity
Period.
The total Contract Administration Charge is allocated between the
Portfolios and the Fixed Account in proportion to the respective Contract Values
similarly allocated. The Contract Administration Charge is at cost with no
margin included for profit.
TRANSFER FEE
In general, a transfer fee of $25 is assessed on each transaction effecting
transfer(s) from Portfolio(s) to other Portfolio(s), from Portfolio(s) to the
Fixed Account, from the Fixed Account to Portfolio(s), and from one Guarantee
Period to another within the Fixed Account prior to the end of a Guarantee
Period. However, the first fifteen such transactions effecting transfer(s) in
any Contract Year are permitted without the imposition of the transfer fee,
which will be assessed on the sixteenth and each subsequent transaction within
the Contract Year.
This fee will be deducted from Contract Values which remain in the
Portfolio(s) (or, where applicable, the Fixed Account) from which the transfer
was made. If such remaining Contract Value is insufficient to pay the transfer
fee, then the fee will be deducted from transferred Contract Values. The
transfer fee is at cost with no margin included for profit.
SALES CHARGES
WITHDRAWAL CHARGE
Federal tax law places a number of constraints on withdrawals from annuity
contracts. Subject to those limitations, the Contract Value may be withdrawn at
any time during the Accumulation Period. Owners should consult their own tax
counsel or other tax advisers regarding any withdrawals. (See "Taxes -- Tax
Treatment of Withdrawals," page 37.)
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<PAGE> 20
A contingent deferred sales charge, which is referred to as the Withdrawal
Charge, may be imposed upon certain withdrawals. Withdrawal Charges will vary in
amount depending upon the Contribution Year of the purchase payment at the time
of withdrawal in accordance with the Withdrawal Charge table shown below.
WITHDRAWAL CHARGE TABLE
<TABLE>
<CAPTION>
APPLICABLE WITHDRAWAL
CONTRIBUTION YEAR CHARGE PERCENTAGE
----------------- ---------------------
<S> <C>
Zero................................................... 6%
One.................................................... 6%
Two.................................................... 5%
Three.................................................. 4%
Four................................................... 3%
Five................................................... 2%
Six.................................................... 1%
Seven and later........................................ 0%
</TABLE>
The Withdrawal Charge is deducted from remaining Contract Value so that the
actual reduction in Contract Value as a result of the withdrawal will be greater
than the withdrawal amount requested and paid. For purposes of determining the
Withdrawal Charge, withdrawals will be allocated first to investment income, if
any (which may generally be withdrawn free of Withdrawal Charge), and then to
Purchase Payments on a first-in, first-out basis so that all withdrawals are
allocated to Purchase Payments to which the lowest (if any) Withdrawal Charge
applies.
Purchase Payments that are no longer subject to the Withdrawal Charge (and
not previously withdrawn), and earnings in the Participant's Account, may be
withdrawn free of Withdrawal Charges at any time.
In addition, for the first withdrawal during a Contract Year after the
first Contract Year, no Withdrawal Charge is applied to that part of the
withdrawal which does not exceed the greater of (a) earnings in the
Participant's Account or (b) the Free Corridor. The Free Corridor is equal to
10% of Purchase Payments made more than one year prior to the date of withdrawal
that remain subject to the Withdrawal Charge and that have not previously been
withdrawn. The portion of a free withdrawal which exceeds the sum of earnings in
the Participant's Account and premiums which are both no longer subject to a
Withdrawal Charge and not yet withdrawn, is assumed to be a withdrawal against
future earnings. Although amounts withdrawn free of a Withdrawal Charge reduce
principal in a Participant's Account, they do not reduce Purchase Payments for
purposes of calculating the Withdrawal Charge. As a result, a Participant will
not receive the benefit of a free withdrawal in a full surrender.
If the withdrawal request does not specify from which Portfolio(s) or
Guarantee Amount(s) the withdrawal is to be made, the request will be processed
by reducing the Contract Values in each category in proportion to their
allocations. Therefore, FAILURE TO SPECIFY AN ALLOCATION MAY RESULT IN THE
IMPOSITION OF A MARKET VALUE ADJUSTMENT IN CASES WHERE AMOUNTS ARE ALLOCATED TO
THE FIXED ACCOUNT.
For examples of how the Withdrawal Charge is applied, see Appendix A.
The Company will waive the Withdrawal Charge on any withdrawal necessary to
satisfy the minimum distribution requirements of the Code or upon payment of a
Death Benefit. Where legally permitted, the Withdrawal Charge may be eliminated
when a Contract is issued to an officer, director or employee of the Company or
its affiliates.
The amounts obtained from the Withdrawal Charge will be used to pay sales
commissions and other promotional or distribution expenses associated with the
marketing of the Contracts. To the extent that the Withdrawal Charge is
insufficient to cover all sales commissions and other promotional or
distribution expenses, the Company may use any of its corporate assets,
including potential profit which may arise from the Mortality and Expense Risk
Charge and the Distribution Expense Charge, to make up any difference.
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DISTRIBUTION EXPENSE CHARGE
The Company deducts a Distribution Expense Charge from each Portfolio
during each Valuation Period which is equal, on an annual basis, to 0.15% of the
net asset value of each Portfolio. This charge is designed to compensate the
Company for assuming the risk that the cost of distributing the Contracts will
exceed the revenues from the Withdrawal Charge (a contingent deferred sales
charge). The Commission considers the Distribution Expense Charge to constitute
a sales charge for purposes of the Investment Company Act of 1940. In no event
will this charge be increased. Moreover, the sum of all Withdrawal Charges
described above and the Distribution Expense Charges assessed will at no time
exceed 9% of all Purchase Payments previously made. The Distribution Expense
Charge is assessed during both the Accumulation Period and the Annuity Period;
however, it is not applied to Contract Values allocated to the Fixed Account.
DEDUCTION FOR SEPARATE ACCOUNT INCOME TAXES
While the Company is not currently maintaining a provision for taxes, the
Company has reserved the right to establish such a provision for taxes in the
future if it determines, in its sole discretion, that it will incur a tax as a
result of the operation of the Separate Account. The Company will deduct for any
taxes incurred by it as a result of the operation of the Separate Account
whether or not there was a provision for taxes and whether or not it was
sufficient. (See "Taxes," page 33.)
OTHER EXPENSES
The charges and expenses applicable to the various Underlying Funds are
borne indirectly by Participants having Contract Values allocated to the
Portfolios that invest in the respective Underlying Funds. For a summary of
current estimates of those charges and expenses, see "Fee Tables," page 10. For
more detailed information about those charges and expenses, please refer to the
prospectus for the Trust.
REDUCTION OF CHARGES FOR SALES TO CERTAIN GROUPS
The Company may reduce the sales and administrative charges on Contracts
sold to certain groups of individuals, or to a trustee, employer or other entity
representing a group, where it is expected that such sales will result in
savings of sales or administrative expenses. The Company determines the
eligibility of groups for such reduced charges, and the amount of such
reductions for particular groups, by considering the following factors: (1) the
size of the group; (2) the total amount of Purchase Payments expected to be
received from the group; (3) the nature of the group for which the Contracts are
purchased, and the persistency expected in that group; (4) the purpose for which
the Contracts are purchased and whether that purpose makes it likely that
expenses will be reduced; and (5) any other circumstances which the Company
believes to be relevant to determining whether reduced sales or administrative
expenses may be expected. None of the reductions in charges for group sales is
contractually guaranteed. Such reductions may be withdrawn or modified by the
Company on a uniform basis. The Company's reductions in charges for group sales
will not be unfairly discriminatory to the interests of any Owners.
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DESCRIPTION OF THE CONTRACTS
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SUMMARY
The Contracts provide for the accumulation of Contract Values during the
Accumulation Period. See "Purchases, Withdrawals and Contract Value," beginning
at page 23. Upon Annuitization, benefits are payable under the Contracts in the
form of an annuity, either for the life of the Annuitant or for a fixed number
of years. (See "Annuity Period -- Annuity Options," page 29.)
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PARTICIPANT
The Participant is the person normally entitled to exercise all rights of
ownership under the Contracts. The Participant is also the person entitled to
receive benefits under the Contract, although the Participant may, subject to
limitations in the case of Qualified Plans, designate an alternative payee.
ANNUITANT
The Annuitant is the person on whose life annuity payments under a
Certificate depend. The Participant may change the designated Annuitant at any
time prior to the Annuity Date. In the case of a Certificate issued in
connection with a plan qualified under Section 403(b) or 408 of the Code, the
Participant is the Annuitant. The Participant may also designate a second person
on whose life, together with that of the Annuitant, annuity payments depend. In
the case of Qualified Plans, the designated second person is generally required
to be the Participant's spouse if the Participant is married. In the event an
Annuitant dies prior to the Annuity Date, the Participant must notify the
Company and designate a new Annuitant. The Participant must attest to the
Annuitant being alive before the Company will annuitize a Contract.
MODIFICATION OF THE CONTRACT
Only the Company's President, a Vice President or Secretary may approve a
change or waive any provisions of the Contract. Any change or waiver must be in
writing. No agent has the authority to change or waive the provisions of the
Contract.
The Company reserves the right to change the terms of the Contract as may
be necessary to comply with changes in applicable law.
ASSIGNMENT
Contracts issued pursuant to Nonqualified Plans that are not subject to
Title 1 of the Employee Retirement Income Security Act of 1974 ("ERISA") may be
assigned by the Owner at any time during the lifetime of the Annuitant prior to
the Annuity Date. The Company will not be bound by any assignment until written
notice is received by the Company at its Annuity Service Center. The Company is
not responsible for the validity, tax or other legal consequences of any
assignment. An assignment will not affect any payments the Company may make or
actions it may take before it receives notice of the assignment.
If the Contract is issued pursuant to a Qualified Plan (or a Nonqualified
Plan that is subject to Title 1 of ERISA), it may not be assigned, pledged or
otherwise transferred except under such conditions as may be allowed under
applicable law.
BECAUSE AN ASSIGNMENT MAY BE A TAXABLE EVENT, CONTRACT OWNERS SHOULD
CONSULT COMPETENT TAX ADVISERS SHOULD THEY WISH TO ASSIGN THEIR CONTRACTS.
DEATH BENEFIT
If the Participant dies during the Accumulation Period, a Death Benefit
will be payable to the Beneficiary upon receipt by the Company of Due Proof of
Death of the Participant. The Death Benefit will be reduced by premium taxes
incurred by the Company, if any. Provided the Beneficiary provides a written
election to the Company within 60 days of the Company's receipt of Due Proof of
Death of the Participant, the Beneficiary may alternatively elect to (i) receive
the Death Benefit in a lump sum payment, (ii) receive the Death Benefit in the
form of one of the annuity options (over the life of the Beneficiary or over a
period not extending beyond the life expectancy of the Beneficiary), with
payments commencing within one year of the Participant's death, (iii) elect to
continue the Contract and receive the entire Contract Value (adjusted for any
applicable Withdrawal Charge and Market Value Adjustment) within 5 years after
the Participant's death, or (iv) if the Participant was the Beneficiary's
spouse, elect to continue the Certificate in force. If no option is selected
within 60 days of
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the Company's receipt of Due Proof of Death of the Owner, the Company will pay
the Death Benefit in a single lump sum to the Beneficiary.
If the Participant was less than age 70 at the Certificate Date, the Death
Benefit is equal to the greater of:
(1) the total dollar amount of Purchase Payments made prior to the
death of the Participant, reduced by any partial withdrawals and partial
annuitizations; or
(2) the Contract Value at the end of the Valuation Period during which
Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company, at its Annuity Service Center; or
(3) the Contract Value on that anniversary of the Certificate Date
preceding the date of death, increased by the dollar amount of any Purchase
Payments made since that anniversary and reduced by the dollar amount of
any partial withdrawals and partial annuitizations since that anniversary,
which results in the greatest value.
If the Participant was age 70 or more at the Certificate Date, the Death
Benefit will equal the Contract Value at the end of the Valuation Period during
which Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company, at its Annuity Service Center.
BENEFICIARY
The Owner may designate the Beneficiary(ies) to receive any amount payable
on death. The original Beneficiary(ies) will be named in the application. Unless
an irrevocable Beneficiary(ies) designation was previously filed, the
Participant may change the Beneficiary(ies) prior to the Annuity Date by written
request delivered to the Company at its Annuity Service Center or by completing
a Change of Beneficiary Form provided by the Company. Any change will take
effect when recorded by the Company. The Company is not liable for any payment
made or action taken before it records the change.
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PURCHASES, WITHDRAWALS AND CONTRACT VALUE
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MINIMUM PURCHASE PAYMENT
The minimum initial Purchase Payment for Contracts issued pursuant to a
Nonqualified Plan is $5,000 and the maximum is $500,000. The minimum initial
Purchase Payment for Contracts issued pursuant to a Qualified Plan is $2,000 and
the maximum is $500,000. Minimum subsequent Purchase Payments for either a
Nonqualified Plan or Qualified Plan may be made in amounts of $250 or more ($100
or more if made in connection with an Automatic Payment Plan). The Company
reserves the right to refuse any Purchase Payment at any time. Generally, the
Company will not issue a Certificate under a Nonqualified Plan to a Participant
who is age 85 or older or under a Qualified Plan to a Owner who is age 70 1/2 or
older.
AUTOMATIC PAYMENT PLAN
Owners utilizing automatic bank drafts through the Company's Automatic
Payment Plan may make scheduled subsequent Purchase Payments of $100 or more per
month. An enrollment form for this program is available through the Company's
Annuity Service Center.
AUTOMATIC DOLLAR COST AVERAGING PROGRAM
Owners who wish to purchase units of the Portfolios over a period of time
may be able to do so through the Automatic Dollar Cost Averaging ("DCA")
Program. Under this DCA Program, the Owner may authorize the automatic transfer
of a fixed dollar amount ($100 minimum) of his or her choice at regular
intervals from a source account to one or more of the Portfolios (other than the
source account) at the unit values determined on the dates of the transfers.
Currently, all variable Portfolios and the one-year Fixed Account options are
available as source accounts. However, the Owner must elect to have the
transfers exclusively from one source account. The intervals between
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transfers may be monthly, quarterly, semiannually or annually, at the option of
the Owner. The theory of dollar cost averaging is that, if purchases are made at
fluctuating prices, this will have the effect of reducing the aggregate average
cost per unit to less than the average of the unit prices on the same purchase
dates. However, participation in the DCA Program does not assure the Owner of a
greater profit from his or her purchases under the DCA Program; nor will it
prevent or necessarily alleviate losses in a declining market.
Another option under the DCA Program is the periodic transfer of a selected
percentage of the value of the source account to one of the Portfolios (other
than the source account). A third option is to transfer the entire Contract
Value in the source account in a stated number of transfers as selected by the
Participant. Although the various options under the DCA Program will allow
transfers to be made either from the variable Portfolios or the one-year Fixed
Account option, the Owner must elect to have the transfers made exclusively from
one of these source accounts.
An Owner may elect to increase, decrease or change the frequency or amount
of Purchase Payments under a DCA Program. The application and any Purchase
Payments should be sent to the Company at its Annuity Service Center. The
Company reserves the right to modify, suspend and terminate the DCA Program at
any time.
ASSET ALLOCATION REBALANCING PROGRAM
Owners may participate in the Asset Allocation Rebalancing ("AAR") Program
pursuant to which Owners authorize the Company to automatically transfer their
Contract Value on a periodic basis to maintain a particular percentage
allocation among the Portfolios or the one year Fixed Account option as selected
by the Owner. The Contract Value allocated to each Portfolio will grow or
decline at different rates depending on the investment experience of the
Portfolio, and Asset Allocation Rebalancing automatically reallocates the
Contract Value in the Portfolios and the Fixed Account option to the allocation
selected by the Owner. As with dollar cost averaging, one theory behind this
type of reallocation is that it may help an Owner purchase Accumulation Units
low and sell Accumulation Units high. However, participation in AAR does not
assure the Owner of a greater profit from his or her purchases under the
program; nor will it prevent or necessarily alleviate losses in a declining
market.
An Owner may select that rebalancing occur on a calendar quarter,
semiannual or annual basis and currently all Portfolios and the one year Fixed
Account option are the available investment options under AAR. Contract Value
reallocation will occur on the last business day before the selected period
ends. If an Owner elects to participate in AAR, the entire Contract Value
(excluding any portion allocated to the 3, 5, 7 and 10 year Fixed Account
option) must be included in the program. Amounts transferred under AAR are not
counted against the 15 free transfers per Contract Year or subject to any
transfer charge or negative MVA. Owners may participate in AAR by completing an
Asset Allocation Rebalancing Authorization Form or by calling the Company at its
Annuity Service Center. On the application or form, as appropriate, the Owner
must select the Portfolios or one year Fixed Account option, the percentage of
Contract Value to be allocated to each under the program, and the frequency of
rebalancing. Owners may modify their allocations or terminate participation in
the program by completing an Asset Allocation Rebalancing Form and indicating
the appropriate instructions. The Company reserves the right to modify, suspend,
or terminate AAR at any time.
PRINCIPAL ADVANTAGE PROGRAM
Owners may participate in the Principal Advantage Program. Under the
Principal Advantage Program, the Owner's Purchase Payment is divided between one
or more of the Fixed Account options and one or more of the Portfolios. While
the Owner selects the Fixed Account options and the Portfolio(s), the Principal
Advantage Program determines the portion of Purchase Payments allocated to each.
When determined in accordance with the Principal Advantage Program, the portion
allocated to the Fixed Account option(s) will be guaranteed by the Company to
grow to equal the full amount of the Purchase Payment over an established period
of time. The remaining portion of
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Purchase Payment is then invested in the Portfolios, where it has the potential
to achieve greater growth.
An Owner may elect to participate in the Principal Advantage Program (1) at
the time of initial purchase, by completing the instructions on the Vista
Capital Advantage application or (2) at the time of a subsequent purchase or
reallocation of existing Contract Value, by contacting the Company or the
financial representative from whom this Prospectus was obtained. The Company
reserves the right to modify, suspend or terminate the Principal Advantage
Program at any time.
PARTICIPANT'S ACCOUNT
The Company will establish a Participant's Account for each Participant
under a Contract and will maintain the Participant's Account during the
Accumulation Period. The Contract Value of a Participant's Account for any
Valuation Period is equal to the sum of the variable accumulation value, if any,
plus the fixed accumulation value, if any, of the Participant's Account for that
Valuation Period.
ALLOCATION OF PURCHASE PAYMENTS
Purchase Payments are allocated to the Fixed Account and/or the
Portfolio(s) selected by the Participant. Participants making initial Purchase
Payments should specify their allocations on the application for a Contract. If
the application is in good order, the Company will apply the initial Purchase
Payment to the Fixed Account and/or the Portfolio(s), as selected, and credit
the Contract with Accumulation Units within two business days of receipt at the
Company's Annuity Service Center. The number of Accumulation Units in a
Portfolio attributable to a Purchase Payment is determined by dividing that
portion of the Purchase Payment which is allocated to the Portfolio by that
Portfolio's Accumulation Unit value as of the end of the Valuation Period when
the allocation occurs.
IF THE APPLICATION DOES NOT SPECIFY AN ALLOCATION, THE APPLICATION IS NOT
IN GOOD ORDER. If the application for a Contract or Certificate is not in good
order for this or any other reason, the Company will attempt to rectify it
within five business days of its receipt at the Company's Annuity Service
Center. The Company will credit the initial Purchase Payment within two business
days after the application has been rectified. Unless the prospective Owner
consents otherwise, the application and the initial Purchase Payment will be
returned if the application cannot be put in good order within five business
days of such receipt.
Just like Participants making initial Purchase Payments, Participants
making subsequent Purchase Payments should specify how they want their payments
allocated. OTHERWISE, THE COMPANY WILL AUTOMATICALLY PROCESS THE PURCHASE
PAYMENT BASED ON THE PREVIOUS ALLOCATION.
TRANSFER DURING ACCUMULATION PERIOD
During the Accumulation Period, the Participant, or his or her designated
agent, may transfer Contract Values among Portfolios and/or the Fixed Account,
by written request or by telephone authorization pursuant to a duly executed
Telephone Transfer Authorization Form delivered to the Company at its Annuity
Service Center, if applicable law permits. The Company has in place procedures
which are designed to provide reasonable assurance that telephone authorizations
are genuine, including tape recording of telephone communications and requesting
identifying information. Accordingly, the Company and its affiliates disclaim
all liability for any claim, loss or expense resulting from any alleged error or
mistake in connection with a telephone transfer which was not properly
authorized by the Participant. However, if the Company fails to employ
reasonable procedures to ensure that all telephone transfers are properly
authorized, the Company may be held liable for such losses. The Company reserves
the right to modify or discontinue at any time and without notice the use of
telephone transfers and acceptance of transfer instructions from someone
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other than the Owner. Telephone calls authorizing transfers must be completed by
4:00 p.m. Eastern time on a Valuation Date in order to be effected at the price
determined on such date. Transfer authorizations, whether written or telephone,
which are received after 4:00 p.m. Eastern time will be processed as of the next
Valuation Date.
A transfer fee may be assessed (See "Contract Charges -- Administrative
Charges -- Transfer Fee," page 19).
This transfer privilege may be suspended, modified or terminated at any
time without notice.
The minimum partial transfer amount is $100. Also, no partial transfer may
be made if the value of the Participant's interest in the Portfolio from which a
transfer is being made (or the remaining Guarantee Amount, where applicable)
would be less than $100 after the transfer. These dollar amounts are subject to
change at the Company's option. The Company may waive the minimum partial
transfer amount in connection with preauthorized automatic transfer programs.
Both prior to and after the Annuity Date, Contract Values may be
transferred from the Separate Account to the Fixed Account. Any amounts
allocated or transferred to the Fixed Account may, however, be transferred from
the Fixed Account to the Separate Account only prior to the Annuity Date.
Transfers may be made within the Fixed Account prior to the expiration date
of one or more Guarantee Periods, by electing to have the respective Guarantee
Amount(s) applied to newly established Guarantee Periods. Such transfers are
counted against the 15 transfer allowance on free transfers. In addition, such
transfers are generally subject to a Market Value Adjustment.
SEPARATE ACCOUNT ACCUMULATION UNIT VALUE
Accumulation Unit value is determined Monday through Friday on each day
that the New York Stock Exchange is open for business.
A separate Accumulation Unit value is determined for each Portfolio. If the
Company elects or is required to assess a charge for taxes, a separate
Accumulation Unit value may be calculated for Contracts issued in connection
with Nonqualified and Qualified Plans, respectively, within each account.
The Accumulation Unit value for each Portfolio will vary with the price of
a share in the Underlying Fund and in accordance with the Mortality and Expense
Risk Charge, Distribution Expense Charge, and any provision for taxes.
Assessments of Withdrawal Charges, transfer fees and Contract Administration
Charges are made separately for each Certificate. They are effected by
redemption of Accumulation Units and do not affect Accumulation Unit value.
The Accumulation Unit value of a Portfolio for any Valuation Period is
calculated by subtracting (2) from (1) and dividing the result by (3) where:
(1) is the total value at the end of the Valuation Period of the
assets attributable to the Accumulation Units of the Portfolio minus
liabilities;
(2) is the cumulative unpaid charge for the assumption of mortality
and expense risks and for the distribution expense; and
(3) is the number of Accumulation Units outstanding at the end of the
Valuation Period.
FIXED ACCOUNT ACCUMULATION VALUE
The accumulation value of the fixed portion of a Participant's Account, if
any, at any Valuation Date is equal to the sum of the values of all Guarantee
Amounts credited to the Participant's Account up to and including that date.
Each Guarantee Amount reflects interest accumulated to the Valuation Date at the
applicable Guarantee Rate, compounded annually.
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DISTRIBUTION OF CONTRACTS
Contracts are sold by registered representatives of broker-dealers who are
licensed insurance agents of the Company, either individually or through an
incorporated insurance agency. Commissions on initial Purchase Payments paid to
registered representatives may vary, but are not anticipated to exceed 6.25% of
any Purchase Payment (including any promotional sales incentives). All such
commissions, incentives and bonuses are paid by the Company.
Vista Broker-Dealer Services, Inc. ("VBDS"), located at 125 West 55th
Street, New York, New York, 10019, serves as distributor of the Contracts. VBDS
is registered as a broker-dealer under the Securities Exchange Act of 1934, as
amended, and is a member of the National Association of Securities Dealers, Inc.
VBDS is not affiliated with the Company or the Adviser to the Trust.
WITHDRAWALS (REDEMPTIONS)
Except as explained below, an Owner may redeem a Certificate for all or a
portion of its Contract Value during the Accumulation Period. Withdrawal Charges
may be applicable, however, which would reduce the Contract Value upon
redemption. A Market Value Adjustment may also be applied, in the case of
redemptions from the Fixed Account, which would also affect Contract Value. (See
"Contract Charges -- Sales Charges -- Withdrawal Charge" and "Fixed Account
Options -- Market Value Adjustment" on pages 19 and 17, respectively, for
additional information.)
Withdrawals and distributions from Contracts issued in connection with
certain Qualified Plans may be subject to a mandatory 20% withholding
requirement. (See "Taxes -- Withholding Tax on Distributions," page 34.)
Withdrawals of amounts attributable to contributions made pursuant to a
salary reduction agreement (in accordance with Section 403(b)(11) of the Code)
are limited to circumstances only: when the Participant attains age 59 1/2,
separates from service, dies, becomes disabled (within the meaning of Section
72(m)(7) of the Code), or in the case of hardship. Withdrawals for hardship are
restricted to the portion of the Contract Value which represents contributions
made by the Participant and does not include any investment results. These
limitations on withdrawals apply to: (1) salary reduction contributions made
after December 31, 1988; (2) income attributable to such contributions; and (3)
income attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect rollovers or exchanges between certain Qualified
Plans. Tax penalties may also apply. While the foregoing limitations only apply
to certain Contracts issued in connection with Section 403(b) Qualified Plans,
all Participants should seek competent tax advice regarding any withdrawals or
distributions. (See "Taxes," beginning at page 33.)
Except in connection with a Systematic Withdrawal Program, described below,
the minimum partial withdrawal amount is $1,000, or, if less, the Participant's
entire interest in the Portfolio from which a withdrawal is requested (or the
Fixed Account, where applicable). The Participant's interest in the Portfolio
from which the withdrawal is requested (or the remaining Guarantee Amount) must
be at least $100 after the withdrawal is completed if anything is left in that
Portfolio (or Fixed Account allocation).
A written withdrawal request or Systematic Withdrawal Program enrollment
form, as the case may be, must be sent to the Company at its Annuity Service
Center. The required program form will not be in good order unless it includes
the Participant's Tax I.D. Number (e.g., Social Security Number) and provides
instructions regarding withholding of income taxes. The Company provides the
required forms.
If the request is for total withdrawal, the Certificate (or Contract), or a
Lost Certificate (or Contract) Affidavit (which may be obtained by calling the
Company at its Annuity Service Center), must be submitted as well. The
Withdrawal Value is determined on the basis of the Contract Values next computed
following receipt of a request in proper order. The Withdrawal Value will
normally be paid within seven days after the day a proper request is received by
the Company. However, the Company may suspend the right of withdrawal from the
Separate Account or delay payment for such
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withdrawal more than seven days: (1) during any period when the New York Stock
Exchange ("NYSE") is closed (other than customary weekend and holiday closings);
(2) when trading on the NYSE is restricted or an emergency exists as determined
by the Commission so that disposal of the Separate Account's investments or
determination of Accumulation Unit value is not reasonably practicable; or (3)
for such other periods as the Commission, by order, may permit for protection of
Owners.
SYSTEMATIC WITHDRAWAL PROGRAM
Certain Participants of Nonqualified Plan Contracts and Contracts issued in
connection with IRAs may choose to withdraw amounts which in the aggregate add
up to a maximum of 10% of their Purchase Payments annually pursuant to a
Systematic Withdrawal Program without charge. Withdrawals are taxable and a 10%
federal tax penalty may apply to withdrawals before age 59 1/2. In addition,
withdrawals from the Fixed Account prior to the end of their respective
Guarantee Periods are generally subject to a Market Value Adjustment. (See
"Fixed Account Options -- Market Value Adjustment," page 17.) Systematic
withdrawals will not be limited to 10% of Purchase Payments once the Withdrawal
Charge is no longer applicable. Participants must complete an enrollment form
which describes the program and send it to the Company at its Annuity Service
Center. Participation in the Systematic Withdrawal Program may be elected at the
time the Contract is issued or on any date thereafter, prior to the Annuity
Date. Depending on fluctuations in the net asset value of the Portfolios,
systematic withdrawals may reduce or even exhaust Contract Value. The minimum
systematic withdrawal amount is $250 per withdrawal. The Company reserves the
right to modify, suspend or terminate the Systematic Withdrawal Program at any
time.
ERISA PLANS
Spousal consent may be required when a married Participant seeks a
distribution from a Contract that has been issued in connection with a Qualified
Plan (or a Nonqualified Plan that is subject to Title 1 of ERISA). Participants
should obtain competent advice.
DEFERMENT OF FIXED ACCOUNT WITHDRAWAL PAYMENTS
In the case of withdrawals from the Fixed Account, the Company may defer
making payment for a period of up to six months (or the period permitted by
applicable state insurance law, if less) from the date the Company receives
notice of such withdrawal request. Only under highly unusual circumstances will
the Company defer a withdrawal payment from the Fixed Account for more than 7
days, and if the Company defers payment for more than 7 days, it will pay
interest of at least 3% per annum on the amount deferred. While all the
circumstances under which the Company could defer payment upon withdrawal may
not be foreseeable at this time, such circumstances could include, for example,
a time of unusually high surrender rate among Owners, accompanied by a radical
shift in interest rates. If the Company intends to withhold payment for more
than 7 days, it will notify affected Owners in writing.
MINIMUM CONTRACT VALUE
If the Contract Value is less than $500 and no Purchase Payments have been
made during the previous three full calendar years, the Company reserves the
right, after 60 days written notice to the Participant, to terminate the
Contract and distribute its Withdrawal Value to the Participant. This privilege
will be exercised only if the Contract Value has been reduced to less than $500
as a result of withdrawals, and state law permits. In no instance shall such
termination occur if the value has fallen below $500 due to either decline in
Accumulation Unit value or the imposition of fees and charges.
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ANNUITY PERIOD
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ANNUITY DATE
The Participant selects an Annuity Date (the date on which annuity payments
are to begin) at the time of application. The Annuity Date must always be the
first day of a calendar month and must be at least two years after the Issue
Date, but in any event will be no later than the Latest Annuity Date. Annuity
payments will begin no later than the Latest Annuity Date. If no Annuity Date is
selected, the Annuity Date will be the Latest Annuity Date. The Participant may
change the Annuity Date at any time at least seven days prior to the Annuity
Date then indicated on the Company's records by written notice to the Company at
its Annuity Service Center.
DEFERMENT OF PAYMENTS
The Company may defer making Fixed Annuity payments for a period of up to
six months or such lesser time as state law may permit. Interest, subject to
state law requirements, will be credited during the deferral period. For a
discussion of the circumstances under which the Company could defer these
payments, please refer to "Purchases, Withdrawals and Contract
Value -- Deferment of Fixed Account Withdrawal Payments," page 28.
PAYMENTS TO PARTICIPANT
The Company will make annuity payments to the Participant, unless the
Participant designates an alternate payee. Such designation must be made in
writing to the Company's Annuity Service Center and must be received more than
30 days before the Annuity Date.
ALLOCATION OF ANNUITY PAYMENTS
If all of the Contract Value on the Annuity Date is allocated to the Fixed
Account, the Annuity will be paid as a Fixed Annuity. If all of the Contract
Value on that date is allocated to the Separate Account, the Annuity will be
paid as a Variable Annuity. If the Contract Value on that date is allocated to
both the Fixed Account and the Separate Account, the Annuity will be paid as a
combination of a Fixed Annuity and a Variable Annuity to reflect the allocation
between the Portfolios and the Fixed Account. Variable Annuity payments will
reflect the investment performance of the Portfolios. The Participant(s) may, by
written notice to the Company, convert Variable Annuity payments to Fixed
Annuity payments. However, Fixed Annuity payments may not be converted to
Variable Annuity payments.
ANNUITY OPTIONS
The Participant, or any Beneficiary who is so entitled, may elect to
receive a lump sum at the end of the Accumulation Period. However, a lump sum
distribution may be deemed to be a withdrawal, and at least a portion of it may
be subject to federal income tax. (See "Taxes -- Tax Treatment of Withdrawals,"
page 37.) Alternatively, any of the annuity options listed below may be elected.
The Participant may elect an annuity option or change an annuity option at any
time prior to the Annuity Date.
If no other annuity option is elected, monthly annuity payments will be
made in accordance with annuity option 4 below, a life annuity with a 120-month
period certain (annuity option 3 in the case where payments are to be made for
the joint lives of the Annuitant and a designated second person and for the life
of the survivor). Annuity payments will be made in monthly, quarterly,
semiannual or annual installments as selected by the Owner. However, if the
amount available to apply under an annuity option is less than $5,000, the
Company has the right to pay the annuity in one lump sum. In addition, if the
first payment provided would be less than $50, the Company shall have the right
to
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require the frequency of payments be at quarterly, semiannual or annual
intervals so as to result in an initial payment of at least $50.
NO WITHDRAWALS OF CONTRACT VALUE ARE PERMITTED DURING THE ANNUITY PERIOD
FOR ANY ANNUITY OPTION IN WHICH PAYMENTS ARE BASED ON A PERSON'S LIFE.
The following annuity options are generally available under the Contract.
Each is available in the form of either a Fixed Annuity or a Variable Annuity
(or a combination of both Fixed and Variable Annuity). However, there may be
restrictions in the retirement plan pursuant to which a Contract has been
purchased.
OPTION 1 -- LIFE INCOME
An annuity payable monthly during the lifetime of the Annuitant. Under this
option, no further payments are payable after the death of the Annuitant and
there is no provision for a death benefit payable to the Beneficiary. Therefore,
it is possible under option 1 for the payee to receive only one monthly annuity
payment under the Contract.
OPTION 2 -- JOINT AND SURVIVOR ANNUITY
An annuity payable monthly while both the Annuitant and a designated second
person are living. Upon the death of either person, the monthly income payable
will continue during the lifetime of the survivor at either the full amount
previously payable or as a percentage (either one-half or two-thirds) of the
full amount, as chosen by the Owner at the time of election of this option.
Annuity payments terminate automatically and immediately upon the death of
the surviving person without regard to the number or total amount of payments
received.
There is no minimum number of guaranteed payments and it is possible to
have only one annuity payment if both the Annuitant and the designated second
person die before the due date of the second payment.
OPTION 3 -- JOINT AND SURVIVOR LIFE ANNUITY --
120 MONTHLY PAYMENTS GUARANTEED
This option is similar to option 2, above, but with the additional
guarantee that payments will be made for not fewer than 120 monthly periods. If
the surviving Annuitant dies before all such payments have been made, the
balance of the guaranteed number of payments will be made to the Beneficiary.
OPTION 4 -- LIFE ANNUITY WITH 120 OR 240 MONTHLY
PAYMENTS GUARANTEED
An annuity payable monthly during the lifetime of the Annuitant, with the
guarantee that if, at the death of the Annuitant, payments have been made for
fewer than the guaranteed 120 or 240 monthly periods, as elected by the Owner,
the balance of the guaranteed number of payments will be made to the
Beneficiary.
OPTION 5 -- INCOME FOR A SPECIFIED PERIOD
Under this option, a payee can elect an annuity payable monthly for any
period of years from 3 to 30. This election must be made for full 12 month
periods. In the event the payee dies before the specified number of payments has
been made, the Beneficiary may elect to continue receiving the scheduled
payments or may alternatively elect to receive the discounted present value of
any remaining guaranteed payments as a lump sum.
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The value of an Annuity Unit, regardless of the option chosen, takes into
account the Mortality and Expense Risk Charge. (See "Contract
Charges -- Mortality and Expense Risk Charge," page 19.) Since option 5, Income
for a Specified Period, does not contain an element of mortality risk, the payee
is not getting the benefit of the Mortality Risk Charge if option 5 is selected
on a variable basis.
OTHER OPTIONS
At the sole discretion of the Company, other annuity options may be made
available. However, to the extent that Withdrawal Charges would otherwise apply
to a withdrawal or termination, the identical Withdrawal Charge may apply with
respect to any additional options.
With respect to Contracts issued under Sections 401, 403(b) or 408 of the
Internal Revenue Code, any payments will be made only to the Owner and/or the
Owner's spouse.
TRANSFER DURING ANNUITY PERIOD
During the Annuity Period, the Owner may transfer the Contract Value to the
Fixed Account and/or among Portfolios. Such transfers are subject to the same
limitations and conditions as are prescribed for transfers during the
Accumulation Period, page 25, except that, in addition, no transfers may be made
from the Fixed Account to the Separate Account during the Annuity Period.
Transfers from the Separate Account to the Fixed Account are effected by
crediting the Fixed Account with the actuarial present value of future annuity
payments to be made, assuming that all such payments would be equal to a
subsequent Variable Annuity payment as computed on the effective date of the
transfer, in the manner described below under "Annuity Payments."
DEATH BENEFIT DURING ANNUITY PERIOD
If the Annuitant dies after the Annuity Date while the Contract is in
force, the death proceeds, if any, will depend upon the annuity option in effect
at the time of the Annuitant's death. If the Annuitant dies after the Annuity
Date and before the entire interest in the Contract has been distributed, the
remaining interest, if any, as provided for in the option elected, will be
distributed at least as rapidly as under the method of distribution in effect at
the Annuitant's death.
ANNUITY PAYMENTS
INITIAL MONTHLY ANNUITY PAYMENT
The initial annuity payment is determined by taking the Contract Value,
less any premium tax, less any Market Value Adjustment that may apply in the
case of a premature annuitization of certain Guarantee Amounts, and then
applying it to the annuity table specified in the Contract (or, if more
favorable to the payee, the annuity tables in effect as of the Annuity Date for
similar immediate annuity contracts issued by the Company). Those tables are
based on a set amount per $1,000 of proceeds applied. The appropriate rate must
be determined by the sex (except where, as in the case of certain Qualified
Plans and other employer-sponsored retirement plans, such classification is not
permitted) and age of the Annuitant and designated second person, if any.
The dollars applied are then divided by 1,000 and the result multiplied by
the appropriate annuity factor appearing in the table to compute the amount of
the first monthly annuity payment. In the case of a Variable Annuity, that
amount is divided by the value of an Annuity Unit as of the Annuity Date to
establish the number of Annuity Units representing each Variable Annuity
payment. The number of Annuity Units determined for the first Variable Annuity
payment remains constant for the second and subsequent monthly Variable Annuity
payments, assuming that no reallocation of Contract Values is made.
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<PAGE> 32
SUBSEQUENT MONTHLY PAYMENTS
For a Fixed Annuity, the amount of the second and each subsequent monthly
annuity payment is the same as that determined above for the first monthly
payment.
The amount of the second and each subsequent monthly Variable Annuity
payment is determined by multiplying the number of Annuity Units, as determined
in connection with the determination of the initial monthly annuity payment,
above, by the annuity unit value, below, as of the Valuation Period ending on
the Valuation Date next preceding the date on which each annuity payment is due.
ANNUITY UNIT VALUE
The value of an Annuity Unit is determined independently for each
Portfolio, but was initially set at $10.00.
The annuity tables contained in the Contract are based on a 3.5% per annum
assumed investment rate. If the actual net investment rate experienced by a
Portfolio exceeds 3.5%, Variable Annuity payment derived from allocations to
that Portfolio will increase over time. Conversely, if the actual rate is less
than 3.5%, Variable Annuity payments will decrease over time. If the net
investment rate equals 3.5%, the Variable Annuity payments will remain constant.
If a higher assumed investment rate had been used, the initial monthly payment
would be higher, but the actual net investment rate would also have to be higher
in order for annuity payments to increase (or not to decrease).
The payee receives the value of a fixed number of Annuity Units each month.
The value of a fixed number of Annuity Units will reflect the investment
performance of the Portfolios elected, and the amount of each annuity payment
will vary accordingly.
For each Portfolio, 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. The result is then
multiplied by a second factor which offsets the effect of the assumed net
investment rate of 3.5% per annum which is assumed in the annuity tables
contained in the Contract. The Net Investment Factor is described below. More
detailed information on the computation of Annuity Unit Values is contained in
the Statement of Additional Information.
NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the net investment
performance of a Portfolio from one Valuation Date to the next. The Net
Investment Factor may be greater or less than or equal to one; therefore, the
value of an Annuity Unit may increase, decrease or remain the same.
The Net Investment Factor for any Portfolio for any Valuation Period is
determined by dividing (a) by (b) and then subtracting (c) from the result
where:
(a) is the net result of:
(1) the net asset value of an Underlying Fund share held in the
Portfolio determined as of the Valuation Date at the end of the
Valuation Period, plus
(2) the per share amount of any dividend or other distribution
declared by the Underlying Fund if the "ex-dividend" date occurs during
the Valuation Period, plus or minus
(3) a per share credit or charge with respect to any taxes paid or
reserved for by the Company during the Valuation Period which are
determined by the Company to be attributable to the operation of the
Portfolio (no federal income taxes are applicable under present law);
(b) is the net asset value of the Underlying Fund share held in the
Portfolio determined as of the Valuation Date at the end of the preceding
Valuation Period; and
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(c) is the asset charge factor determined by the Company for the
Valuation Period to reflect the charges for assuming the mortality and
expense risks and the distribution expenses.
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ADMINISTRATION
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The Company has primary responsibility for all administration of the
Contracts and the Separate Account. The mailing address of the Company's Annuity
Service Center is P.O. Box 54299, Los Angeles, California 90054-0299, and its
telephone number is (800) 90-VISTA.
The administrative services provided include, but are not limited to:
issuance of the Contracts; maintenance of Participant records; Participant
services; calculation of unit values; and preparation of Participant reports.
Contract statements and transaction confirmations are mailed to
Participants at least quarterly. Participants should read their statements and
confirmations carefully and verify their accuracy. Questions about periodic
statements should be communicated to the Company promptly. The Company will
investigate all complaints and make any necessary adjustments retroactively,
provided that it has received notice of a potential error within 30 days after
the date of the questioned statement. If the Company has not received notice of
a potential error within this time, any adjustment shall be made as of the date
that the Annuity Service Center receives notice of the potential error.
The Company will also provide Participants with such additional periodic
and other reports, information and prospectuses as may be required by federal
securities laws.
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TAXES
- --------------------------------------------------------------------------------
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING
OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE
COMPANY CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE
MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS.
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended (the "Code")
governs taxation of annuities in general. A Participant is not taxed on
increases in the value of a Contract until distribution occurs, either in the
form of a non-annuity distribution or as annuity payments under the annuity
option elected. For a lump sum payment received as a total surrender (total
redemption), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For a payment received as a withdrawal (partial
redemption), federal tax liability is determined on a last-in, first-out basis,
meaning taxable income is withdrawn before the cost basis of the Contract is
withdrawn. For Contracts issued in connection with Nonqualified Plans, the cost
basis is generally the Purchase Payments, while for Contracts issued in
connection with Qualified Plans there may be no cost basis. The taxable portion
of the lump sum payment is taxed at ordinary income tax rates. Tax penalties may
also apply.
For annuity payments, the taxable portion is determined by a formula which
establishes the ratio that the cost basis of the Contract bears to the total
value of annuity payments for the term of the
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<PAGE> 34
annuity Contract. The taxable portion is taxed at ordinary income tax rates.
Participants, Annuitants and Beneficiaries under the Contracts should seek
competent financial advice about the tax consequences of distributions under the
retirement plan under which the Contracts are purchased.
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity from
the Company and its operations form a part of the Company.
WITHHOLDING TAX ON DISTRIBUTIONS
The Code generally requires the Company (or, in some cases, a plan
administrator) to withhold tax on the taxable portion of any distribution or
withdrawal from a Contract. For "eligible rollover distributions" from Contracts
issued under certain types of Qualified Plans, 20% of the distribution must be
withheld, unless the payee elects to have the distribution "rolled over" to
another eligible plan in a direct "trustee to trustee" transfer. This
requirement is mandatory and cannot be waived by the Participant. Withholding on
other types of distributions can be waived.
An "eligible rollover distribution" is the estimated taxable portion of any
amount received by a covered employee from a plan qualified under Section 401(a)
or 403(a) of the Code, or from a tax-sheltered annuity qualified under Section
403(b) of the Code (other than (1) annuity payments for the life (or life
expectancy) of the employee, or joint lives (or joint life expectancies) of the
employee and his or her designated beneficiary, or for a specified period of ten
years or more; and (2) distributions required to be made under the Code).
Failure to "roll over" the entire amount of an eligible rollover distribution
(including an amount equal to the 20% portion of the distribution that was
withheld) could have adverse tax consequences, including the imposition of a
penalty tax on premature withdrawals, described later in this section.
Withdrawals or distributions from a Contract other than eligible rollover
distributions are also subject to withholding on the estimated taxable portion
of the distribution, but the Participant may elect in such cases to waive the
withholding requirement. If not waived, withholding is imposed (1) for periodic
payments, at the rate that would be imposed if the payments were wages, or (2)
for other distributions, at the rate of 10%. If no withholding exemption
certificate is in effect for the payee, the rate under (1) above is computed by
treating the payee as a married individual claiming 3 withholding exemptions.
DIVERSIFICATION -- SEPARATE ACCOUNT INVESTMENTS
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified, in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the Contract as
an annuity contract would result in imposition of federal income tax to the
Participant with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contracts 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
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<PAGE> 35
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."
The Company intends that each of the Underlying Funds will be managed by
its investment adviser in such a manner as to comply with these diversification
requirements.
MULTIPLE CONTRACTS
Multiple annuity contracts which are issued within a calendar year to the
same contract owner by one company 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. Owners should consult a tax adviser prior to purchasing more than one
annuity contract in any calendar year.
TAX TREATMENT OF ASSIGNMENTS
An assignment of a Contract may have tax consequences, and may also be
prohibited by ERISA in some circumstances. Owners should therefore consult
competent legal advisers should they wish to assign their Contracts.
QUALIFIED PLANS
The Contracts offered by this Prospectus are designed to be suitable for
use under various types of Qualified Plans. Taxation of Participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Participants, Annuitants and Beneficiaries are cautioned that
benefits under a Qualified Plan may be subject to the terms and conditions of
the plan, regardless of the terms and conditions of the contracts issued
pursuant to the plan.
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 or Certificate issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available and described in
this Prospectus. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals -- Qualified Plans," below.)
(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. (See "Tax Treatment of Withdrawals -- Qualified Plans," below.)
Purchasers of Contracts or Certificates
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<PAGE> 36
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, educational and
scientific organizations described in Section 501(c)(3) of the Code. These
qualifying employers may make contributions to the Contracts for the
benefit of their employees. Such contributions are not 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. (See "Tax Treatment of
Withdrawals -- Qualified Plans," below.) Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment.
(C) INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute
to an individual retirement program known as an "Individual Retirement
Annuity" ("IRA"). Under applicable limitations, certain amounts may be
contributed to an IRA which will be deductible from the individual's gross
income. These IRAs are subject to limitations on eligibility,
contributions, transferability and distributions. (See "Tax Treatment of
Withdrawals -- Qualified Plans," below.) 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 or Certificates to be
qualified as IRAs should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
(D) 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. (See "Tax Treatment of
Withdrawals -- Qualified Plans," below.) 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.
(E) 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.
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TAX TREATMENT OF WITHDRAWALS
QUALIFIED PLANS
Section 72(t) of the Code imposes a 10% penalty tax on the taxable portion
of any early distribution from qualified retirement plans, including contracts
issued and qualified under Code Sections 401 (H.R. 10 and Corporate Pension and
Profit Sharing Plans), 403(b) (Tax-Sheltered Annuities) and 408(b) (IRAs).
The tax penalty will not apply to the following distributions: (1) if
distribution is made on or after the date on which the Owner or Annuitant (as
applicable) reaches age 59 1/2; (2) distributions following the death or
disability of the Owner or Annuitant (as applicable) (for this purpose
"disability" is defined in Section 72(m)(7) of the Code); (3) distributions that
are part of substantially equal periodic payments made not less frequently than
annually for the life (or life expectancy) of the Owner or Annuitant (as
applicable) or the joint lives (or joint life expectancies) of such Owner or
Annuitant (as applicable) and his or her designated beneficiary; (4)
distributions to an Owner or Annuitant (as applicable) who has separated from
service after he or she has attained age 55; (5) distributions made to the Owner
or Annuitant (as applicable) to the extent such distributions do not exceed the
amount allowable as a deduction under Code Section 213 to the Owner or Annuitant
(as applicable) for amounts paid during the taxable year for medical care; and
(6) distributions made to an alternate payee pursuant to a qualified domestic
relations order.
The exceptions stated in items (4), (5) and (6) above do not apply in the
case of an IRA.
Limitations imposed by the Code on withdrawals from tax-sheltered annuities
are described above under "Purchases, Withdrawals and Contract
Value -- Withdrawals (Redemptions)," page 27.
The taxable portion of a withdrawal or distribution from Contracts issued
under certain types of plans may, under some circumstances, be "rolled over"
into another eligible plan so as to continue to defer income tax on the taxable
portion. Effective January 1, 1993, such treatment is available for any
"eligible rollover distribution" made by certain types of plans (as described
above under "Taxes -- Withholding Tax on Distributions," page 33) that is
transferred within 60 days of receipt into a plan qualified under section 401(a)
or 403(a) of the Code, a tax-sheltered annuity, an IRA, or an individual
retirement account described in section 408(a) of the Code. Plans making such
eligible rollover distributions are also required, with some exceptions
specified in the Code, to provide for a direct "trustee to trustee" transfer of
the distribution to the transferee plan designated by the recipient.
Amounts received from IRAs may also be rolled over into other IRAs,
individual retirements accounts or certain other plans, subject to limitations
set forth in the Code.
NONQUALIFIED PLANS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate Purchase
Payments made, any amount withdrawn not in form of an annuity payment will be
treated as coming first from the earnings and then, only after the income
portion is exhausted, as coming from the principal. Withdrawn earnings are
includible in a taxpayer's gross income. Section 72 further provides that a 10%
penalty will apply to the income portion of any premature distribution. The
penalty is not imposed on amounts received: (1) after the taxpayer reaches
59 1/2; (2) upon the death of the Owner or Annuitant (as applicable); (3) if the
taxpayer is totally disabled; (4) in a series of substantially equal periodic
payments made for the life of the taxpayer or for the joint lives of the
taxpayer and his or her designated Beneficiary; (5) under an immediate annuity;
or (6) which are allocable to purchase payments made prior to August 14, 1982.
The above information applies to Contracts issued pursuant to Section 457
of the Code, but does not apply to other Qualified Plan Contracts. Separate tax
withdrawal penalties and restrictions apply to Qualified Plan Contracts.
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ADDITIONAL INFORMATION ABOUT THE COMPANY
- --------------------------------------------------------------------------------
SELECTED FINANCIAL INFORMATION (IN THOUSANDS)
The following selected financial information of First SunAmerica Life
Insurance Company, insofar as it relates to each of the fiscal years 1990-1994,
has been derived from audited annual financial statements, including the balance
sheets at September 30, 1993 and 1994 and the related statements of income and
of cash flows for each of the three years in the period ended September 30, 1994
and the notes thereto appearing elsewhere herein. The information as of and for
the nine months ended June 30, 1994 and 1995 has been derived from unaudited
financial information which, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the unaudited interim periods.
This information should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations beginning on page
39 and the financial statements and notes thereto included in this prospectus
beginning on page 51.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
------------------------------------------------------ --------------------
1990 1991 1992 1993 1994 1994 1995
------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net investment income.................. $ 1,808 $ 2,155 $ 2,368 $ 1,161 $ 1,892 $ 1,325 $ 2,140
Net realized investment gains
(losses)............................. -- 944 3,489 1,932 445 365 (1,199)
Variable annuity fee income............ -- -- 40 240 382 283 292
General and administrative expenses.... (935) (973) (1,224) (1,066) (1,040) (719) (829)
Amortization of deferred acquisition
costs................................ (45) (538) (2,356) (220) -- (225) (225)
Other income and expenses.............. (21) (582) 561 (342) 58 (83) 123
------- ------- -------- -------- -------- -------- --------
PRETAX INCOME.......................... 807 1,006 2,878 1,705 1,737 946 302
Income tax expense..................... (196) (431) (1,210) (829) (655) (293) (94)
------- ------- -------- -------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR INCOME
TAXES................................ 611 575 1,668 876 1,082 653 208
Cumulative effect of change in
accounting for income taxes.......... -- -- -- -- (725) (725) --
------- ------- -------- -------- -------- -------- --------
NET INCOME (LOSS)...................... $ 611 $ 575 $ 1,668 $ 876 $ 357 $ (72) $ 208
======= ======= ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
------------------------------------------------------ --------------------
1990 1991 1992 1993 1994 1994 1995
------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments............................ $52,898 $68,379 $111,353 $ 85,130 $ 78,928 $ 79,847 $117,337
Variable annuity assets................ -- -- 8,836 24,695 26,390 25,789 29,431
Deferred acquisition costs............. 2,000 2,664 1,297 2,540 5,651 3,270 6,562
Deferred income taxes receivable....... -- -- 835 1,031 886 1,301 --
Other assets........................... 2,392 2,166 1,527 3,876 2,282 2,697 2,442
------- ------- -------- -------- -------- -------- --------
TOTAL ASSETS........................... $57,290 $73,209 $123,848 $117,272 $114,137 $112,904 $155,772
======= ======= ======== ======== ======== ======== ========
Reserves for fixed annuity contracts... $37,743 $53,058 $ 59,400 $ 68,228 $ 66,881 $ 67,522 $103,251
Variable annuity liabilities........... -- -- 8,836 24,695 26,390 25,789 29,431
Other reserves, payables and accrued
liabilities.......................... 33 442 34,690 1,220 1,051 1,392 360
Deferred income taxes.................. 835 455 -- -- -- -- 855
Shareholder's equity................... 18,679 19,254 20,922 23,129 19,815 18,201 21,875
------- ------- -------- -------- -------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY............................... $57,290 $73,209 $123,848 $117,272 $114,137 $112,904 $155,772
======= ======= ======== ======== ======== ======== ========
</TABLE>
38
<PAGE> 39
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following is management's discussion and analysis of financial
condition and results of operations of First SunAmerica Life Insurance Company
(the "Company") for the three years in the period ended September 30, 1994.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS 1992, 1993 AND 1994
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $1.1 million in 1994, compared with $0.9 million in 1993 and $1.7
million in 1992. The cumulative effect of the change in accounting for income
taxes resulting from the implementation of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," amounted to a nonrecurring
non-cash charge of $0.7 million in 1994. Accordingly, net income amounted to
$0.4 million in 1994.
PRETAX INCOME totaled $1.7 million in both 1994 and 1993 and $2.9 million
in 1992. The $1.2 million decrease from 1992 to 1993 primarily resulted from
lower net investment income and a decline in net realized investment gains,
partially offset by decreased amortization of deferred acquisition costs.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities, totaled $1.9 million
in 1994, $1.2 million in 1993 and $2.4 million in 1992. These amounts represent
net investment spreads of 2.24% on average invested assets (computed on a daily
basis) of $84.5 million in 1994, 1.40% on average invested assets of $82.7
million in 1993 and 3.20% on average invested assets of $73.9 million in 1992.
The increase in net investment income from 1993 to 1994 resulted from higher
levels of average invested assets, an increase in the portfolio yield and
reductions in interest rates paid on fixed annuities. The decrease in net
investment income from 1992 to 1993 primarily resulted from declines in yield on
average invested assets, partially offset by reductions in interest rates paid
on fixed annuities.
Investment income totaled $5.5 million in 1994, $5.1 million in 1993 and
$6.5 million in 1992. The $0.4 million increase in 1994 resulted primarily from
an increase in overall portfolio yield as the Company reduced its average level
of lower-yielding short-term investments. The $1.4 million decrease in
investment income in 1993 from that recorded in 1992 resulted primarily from a
decline in yield as the Company reallocated funds from higher-yielding mortgage
loans to lower-yielding short-term investments. The yield on average invested
assets totaled 6.54% in 1994, 6.17% in 1993 and 8.76% in 1992. These yields are
computed without considering net realized investment gains. If net realized
investment gains were included in the computation, the yields would be 7.06% in
1994, 8.51% in 1993 and 13.48% in 1992. There can be no assurance that the
Company will achieve similar yields in future periods.
Fixed annuity interest expense aggregated $3.6 million in 1994, $3.9
million in 1993 and $4.1 million in 1992. The average rate paid on fixed
annuities fell to 5.41% in 1994 from 6.15% in 1993 and 7.28% in 1992. These
declines in rates were primarily due to a decline in prevailing interest rates
that began during the latter half of fiscal 1992 and continued into the first
half of fiscal 1994. This was reflected in a corresponding decline in the
average crediting rate on annuity contracts, the majority of which reprice
annually as interest rate guarantees are renewed. Average fixed annuity
contracts increased to $67.2 million in 1994, from $64.1 million in 1993, and
$56.4 million in 1992.
NET REALIZED INVESTMENT GAINS totaled $0.4 million in 1994, $1.9 million in
1993 and $3.5 million in 1992, and are related to sales of bonds and
mortgage-backed securities made to maximize total return.
39
<PAGE> 40
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $382,000 in
1994, $240,000 in 1993 and $40,000 in 1992. Variable annuity fees have increased
over the last three years principally due to asset growth from the receipt of
variable annuity premiums and, during 1993, from increased market values.
Variable annuity assets averaged $26.1 million during 1994, $16.5 million during
1993 and $2.8 million during 1992. Variable annuity premiums, which exclude
premiums allocated to the fixed accounts of variable annuity products, totaled
$5.7 million in 1994, $14.5 million in 1993 and $8.9 million in 1992. The
decline in variable annuity premiums from 1993 to 1994 was principally due to a
rising demand for fixed-rate investment options, including the fixed accounts of
variable annuities, as prevailing interest rates increased during the latter
half of the 1994 fiscal year. The Company has encountered increased competition
in the variable annuity marketplace in 1994 and anticipates that the market will
remain highly competitive for the foreseeable future.
SURRENDER CHARGES on fixed and variable annuities totaled $367,000 in 1994,
compared with $44,000 in 1993 and $27,000 in 1992. Surrender charges generally
are assessed on annuity withdrawals at declining rates during the first five to
seven years of the contract. Withdrawal payments, which include surrenders and
lump-sum annuity benefits, totaled $12.9 million in 1994, $2.9 million in 1993
and $2.3 million in 1992. Respectively, these payments represent withdrawal
rates of 15.04%, 3.85% and 4.15% on average fixed and variable annuity reserves.
Withdrawals include variable annuity payments from the separate accounts
totaling $2.4 million in 1994, $0.4 million in 1993 and $0.2 million in 1992.
Variable annuity surrenders increased during 1994 due to a declining equities
market and increased competition in the marketplace. In addition, fixed annuity
surrenders increased from the unusually low rates of prior years to more normal
levels during 1994, due to anticipated higher surrenders as the fixed annuity
block has aged. Management anticipates that withdrawal rates will remain
reasonably stable for the foreseeable future and the Company's investment
portfolio has been structured to provide sufficient liquidity for anticipated
withdrawals.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.0 million in 1994, compared
with $1.1 million in 1993 and $1.2 million in 1992, and represent 0.9%, 0.9% and
1.2% of average total assets for fiscal years 1994, 1993 and 1992, respectively.
General and administrative expenses remain closely controlled through a
company-wide cost containment program.
AMORTIZATION OF DEFERRED ACQUISITION COSTS decreased during the three-year
period, primarily due to the declines in net realized investment gains which are
included in gross profits for purposes of computing amortization. There was no
amortization in 1994, $0.2 million in 1993 and $2.4 million in 1992.
INCOME TAX EXPENSE totaled $0.7 million in 1994, $0.8 million in 1993 and
$1.2 million in 1992, representing effective tax rates of 38% in 1994, 49% in
1993 and 42% in 1992. The higher tax rate in 1993 reflects the payment of state
income taxes relating to net realized investment gains recorded in 1992.
FINANCIAL CONDITION AND LIQUIDITY AT SEPTEMBER 30, 1994
SHAREHOLDER'S EQUITY decreased by $3.3 million to $19.8 million at
September 30, 1994 from $23.1 million at September 30, 1993 as a result of a
$3.7 million decline in net unrealized gains and losses on debt and equity
securities available for sale, partially offset by net income of $0.4 million
realized during 1994.
TOTAL ASSETS decreased by $3.2 million to $114.1 million at September 30,
1994 from $117.3 million at September 30, 1993 principally due to a decrease in
invested assets, partially offset by increases in variable annuity assets and
deferred acquisition costs.
INVESTED ASSETS at year-end totaled $78.9 million in 1994, compared with
$85.1 million in 1993. The Company managed all of these investments internally.
Invested assets declined by $6.2 million during 1994, primarily due to a $7.6
million increase in net unrealized losses on debt and equity securities
available for sale charged directly to shareholder's equity.
40
<PAGE> 41
The Company's general investment philosophy is to hold fixed maturity
assets for long-term investment. Thus, it does not have a trading portfolio.
Effective September 30, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and, accordingly, began to carry its portfolio of bonds and
notes that is available for sale (the "Available for Sale Portfolio") at
estimated fair value. The remaining portion of its portfolio of bonds and notes
is held for investment and is carried at amortized cost.
BONDS AND NOTES, including those held for investment and the Available for
Sale Portfolio (the "Bond Portfolio"), at September 30, 1994, had an aggregate
amortized cost that exceeded its fair value by $5.9 million (including net
unrealized losses of $5.7 million on the Available for Sale Portfolio). The fair
value of the Bond Portfolio was $2.0 million above its aggregate amortized cost
at September 30, 1993 (including net unrealized gains of $1.9 million on the
Available for Sale Portfolio). The unrealized losses on the Bond Portfolio at
September 30, 1994 principally resulted from increases in prevailing interest
rates since September 30, 1993 and the corresponding effect on the Bond
Portfolio.
The entire Bond Portfolio at September 30, 1994 was rated by Standard and
Poor's Corporation ("S&P"), Moody's Investor Service ("Moody's") or under
comparable statutory rating guidelines established by the National Association
of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the
Company. At September 30, 1994, approximately $57.0 million (at amortized cost)
was rated investment grade by one or both of these agencies or under the NAIC
guidelines, including $56.0 million of U.S. government/agency securities and
mortgage-backed securities ("MBSs").
At September 30, 1994, the Bond Portfolio included $8.0 million (fair
value, $6.8 million) of bonds not rated investment grade by S&P, Moody's or the
NAIC. Based on their September 30, 1994 amortized cost, these bonds accounted
for 6.9% of the Company's total assets and 9.5% of invested assets.
Non-investment grade securities generally provide higher yields and involve
greater risks than investment grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment grade issuers. In addition, the trading market for these
securities is usually more limited than for investment grade securities. The
Company intends that its holdings of such securities not exceed current levels,
but its policies may change from time to time, including in connection with any
possible acquisition. The Company had no material concentrations of
non-investment grade securities at September 30, 1994.
The table on the following page summarizes the Company's rated bonds by
rating classification as of September 30, 1994.
41
<PAGE> 42
RATED BONDS BY RATING CLASSIFICATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUES NOT RATED BY S&P (MOODY'S)
BY NAIC CATEGORY TOTAL
ISSUES RATED BY S&P (MOODY'S) ----------------------------------- ---------------------------------
- ----------------------------------------- NAIC PERCENT OF
S&P (MOODY'S) AMORTIZED ESTIMATED CATEGORY AMORTIZED ESTIMATED AMORTIZED INVESTED ESTIMATED
CATEGORY(1) COST FAIR VALUE (2) COST FAIR VALUE COST ASSETS(3) FAIR VALUE
- ------------------- --------- ---------- -------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3)...... $47,707 $ 43,751 1 $ 3,964 $3,796 $51,671 61.06% $ 47,547
BBB+ to BBB-
(Baa1 to Baa3)... 1,235 1,232 2 4,127 3,619 5,362 6.34 4,851
BB+ to BB-
(Ba1 to Ba3)..... 810 810 3 0 0 810 0.96 810
B+ to B-
(B1 to B3)....... 5,299 4,535 4 1,938 1,440 7,237 8.55 5,975
CCC+ to C
(Caa to C)..... 0 0 5 0 0 0 0 0
D.................. 0 0 6 0 0 0 0 0
------- ------- ------ ------ ------- -------
Total rated
issues........... $55,051 $ 50,328 $10,029 $8,855 $65,080 $ 59,183
======= ======= ====== ====== ======= =======
</TABLE>
- ------------------------
(1) S&P rates debt securities in eleven rating categories, from AAA (the
highest) to D (in payment default). A plus(+) or minus(-) indicates the
debt's relative standing within the rating category. A security rated BBB-
or higher is considered investment grade. Moody's rates debt securities in
nine rating categories, from Aaa (the highest) to C (extremely poor
prospects of attaining real investment standing). The number 1, 2 or 3 (with
1 the highest and 3 the lowest) indicates the debt's relative standing
within the rating category. A security rated Baa or higher is considered
investment grade. Issues are categorized based on the higher of the S&P or
Moody's rating if rated by both agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest)
for nondefaulted bonds plus one category, 6, for bonds in or near default.
These six categories correspond with the S&P(Moody's) rating groups listed
above, with categories 1 and 2 considered investment grade. A substantial
portion of the assets in the NAIC categories were rated by the Company based
on its implementation of NAIC rating guidelines.
(3) At amortized cost.
MORTGAGE LOANS aggregated $4.8 million at September 30, 1994 and consisted
of 2 first mortgage loans with an average loan balance of approximately $2.4
million, collateralized by properties located in California. Both of these loans
were multifamily residential loans to the same borrower. At the time of their
purchase by the Company, these mortgage loans had loan-to-value ratios of 75% or
less. At September 30, 1994, neither loan was delinquent. No mortgage loans were
foreclosed upon during fiscal years 1994, 1993 or 1992.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed maturities that generate predictable rates of return. The Company does
not have a specific target rate of return. Instead, its rates of return vary
over time depending on the current interest rate environment, the slope of the
yield curve, the spread at which fixed maturities are priced over the yield
curve and general competitive conditions within the industry. Its portfolio
strategy is designed to achieve adequate risk-adjusted returns consistent with
its investment objectives of effective asset-liability matching, liquidity and
safety.
The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its annuity obligations. The Company seeks to achieve a
predictable spread between what it earns on its assets and what it pays on its
liabilities by investing principally in fixed maturities. The Company's
fixed-rate products incorporate surrender charges or other limitations on when
contracts can be surrendered for cash to encourage persistency and discourage
withdrawals. Approximately 93% of the Company's fixed annuity reserves had
surrender penalties or other restrictions at September 30, 1994.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view to maintaining a desired investment spread between the
yield on
42
<PAGE> 43
portfolio assets and the rate paid on its reserves under a variety of possible
future interest rate scenarios. The cash flow obtained from MBSs helps to
maintain the anticipated spread, while providing desired liquidity. At September
30, 1994, the weighted average life of the Company's investments was
approximately four-and-one-fourth years and the portfolio had a duration of
approximately three-and-one-half years. Weighted average life is defined as the
average time to receipt of all principal, incorporating the effects of scheduled
amortization and expected prepayments, weighted by book value. Duration is a
common measure for the price sensitivity of a fixed-income security or portfolio
to changes in interest rates. It is the weighted average time to receipt of all
expected cash flows, both principal and interest, including the effects of
scheduled amortization and expected prepayments, in which the weight attached to
each year of receipt is the proportion of the present value of cash to be
received during that year to the total present value of the portfolio.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying value of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews for
bonds, management principally considers the adequacy of collateral, compliance
with contractual covenants, the borrower's recent financial performance, news
reports and other externally generated information concerning the creditor's
affairs. In the case of publicly traded bonds, management also considers market
value quotations, if available. For mortgage loans, management generally
considers information concerning the mortgaged property and, among other things,
factors impacting the current and expected payment status of the loan and, if
available, the current fair value of the underlying collateral.
The carrying values of bonds that are determined to have declines in value
that are other than temporary are reduced to net realizable value and no further
accruals of interest are made. If needed, mortgage loan writedowns would be
based on losses expected by management to be realized on transfers of mortgage
loans to real estate, on the disposition and settlement of mortgage loans and on
mortgage loans that management believes may not be collectible in full. Accrual
of interest is suspended when principal and interest payments on mortgage loans
are past due more than 90 days.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
existing cash and short-term investments, reverse repurchase agreements
("Reverse Repo") capacity on invested assets and, if required, proceeds from
invested asset sales. At September 30, 1994, approximately $3.3 million of the
Company's Bond Portfolio had an aggregate unrealized gain of $46,000, while
approximately $61.8 million had an aggregate unrealized loss of $5.9 million. In
addition, the Company's investment portfolio also currently provides
approximately $0.9 million of monthly cash flow from scheduled principal and
interest payments.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market rate.
Management would seek to place new funds in investments which were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding
the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease
over time, reflecting lower interest crediting rates on its fixed annuities.
Should increased liquidity be required for withdrawals, the Company believes
that a significant portion of its investments could be sold without adverse
consequences in light of the general strengthening that would be expected in the
bond market.
43
<PAGE> 44
RESULTS OF OPERATIONS FOR THE FIRST NINE MONTHS OF FISCAL 1995
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $0.2 million for the first nine months of 1995 ("Fiscal 1995"), compared
with $0.7 million for the first nine months of 1994 ("Fiscal 1994"). The
cumulative effect of the change in accounting for income taxes resulting from
the implementation of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," amounted to a nonrecurring non-cash charge of
$0.7 million in the first quarter of the 1994 fiscal year. Accordingly, net loss
amounted to $0.1 million in Fiscal 1994.
PRETAX INCOME totaled $0.3 million in Fiscal 1995, compared with $0.9
million in Fiscal 1994. This decrease primarily resulted from an increase in net
realized investment losses, partially offset by an increase in net investment
income.
NET INVESTMENT INCOME increased to $2.1 million in Fiscal 1995 from $1.3
million in Fiscal 1994. These amounts represent net investment spreads of 2.93%
on average invested assets (computed on a daily basis) of $97.4 million in
Fiscal 1995 and 2.09% on average invested assets of $84.5 million in Fiscal
1994. The increase in net investment income resulted from higher levels of
average invested assets and an increase in the portfolio yield, offset slightly
by an increase in the average rate paid on fixed annuities.
Investment income totaled $5.6 million in Fiscal 1995, compared with $4.1
million in Fiscal 1994. This $1.5 million increase resulted from increased
yields on higher levels of average invested assets. The yield on average
invested assets rose to 7.66% in Fiscal 1995, from 6.41% in Fiscal 1994. These
yields are computed without considering net realized investment gains and
losses. If net realized investment gains and losses were included in the
computation, the yields would be 6.02% in Fiscal 1995 and 6.98% in Fiscal 1994.
There can be no assurance that the Company will achieve similar yields in future
periods.
Investment yield has increased as the net cash provided by the Company's
operating and financing activities, as well as the cash flows from redemptions
and maturities of invested assets, have been invested in higher-yielding
securities due to higher average prevailing interest rates relative to the
comparable 1994 periods.
Total interest expense aggregated $3.5 million in Fiscal 1995, compared
with $2.7 million in Fiscal 1994. Total interest expense increased primarily
because of higher levels of average fixed annuity contracts in force. Average
fixed annuity contracts totaled $79.3 million in Fiscal 1995, compared with
$67.2 million in Fiscal 1994. Total interest expense also increased because of
an increase in the average rate paid on fixed annuity contracts to 5.80% in
Fiscal 1995 from 5.43% in Fiscal 1994. The increase in the average rate paid on
fixed annuities primarily resulted from the Company increasing its average
crediting rate on new fixed annuity contracts relative to those issued in the
comparable 1994 periods to maintain a generally competitive market rate.
NET REALIZED INVESTMENT LOSSES totaled $1.2 million in Fiscal 1995,
compared with net realized gains of $0.4 million in Fiscal 1994. Net realized
investment losses in 1995 include $0.9 million of net losses realized on $36.8
million of sales of MBSs made to maximize total return. Net gains in 1994 are
also associated with sales of MBSs made to maximize total return.
VARIABLE ANNUITY FEES totaled $0.3 million in both Fiscal 1995 and Fiscal
1994. Variable annuity assets averaged $26.6 million during Fiscal 1995,
compared with $25.9 million during Fiscal 1994. Variable annuity premiums, which
exclude premiums allocated to the fixed accounts of variable annuity products,
aggregated $2.9 million since June 30, 1994. Variable annuity premiums declined
to $2.3 million in Fiscal 1995 from $5.1 million in Fiscal 1994.
SURRENDER CHARGES on fixed and variable annuities totaled $0.1 million in
Fiscal 1995 and $0.2 million in Fiscal 1994. Withdrawal payments, which include
surrenders and lump-sum annuity benefits, totaled $14.0 million in Fiscal 1995
and $7.9 million in Fiscal 1994, and respectively represent 19.1% and 12.2% of
average fixed and variable annuity reserves. Withdrawals include variable
annuity payments from the separate accounts totaling $1.7 million in Fiscal 1995
and
44
<PAGE> 45
$1.9 million in Fiscal 1994. Variable annuity surrenders have decreased
primarily in response to improved market conditions, offset somewhat by
declining surrender charge restrictions, as the policies age, and increased
competition in the marketplace. In addition, fixed annuity surrenders have
increased in Fiscal 1995 due to a large block of policies coming off surrender
charge restrictions. Management anticipates that withdrawal rates will remain
relatively stable for the foreseeable future and the Company's investment
portfolio has been structured to provide sufficient liquidity for anticipated
withdrawals.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $0.8 million in Fiscal 1995,
compared with $0.7 million in Fiscal 1994. General and administrative expenses
remain closely controlled through a company-wide cost containment program, and
represent approximately 1% of average total assets.
INCOME TAX EXPENSE totaled $0.1 million in Fiscal 1995, compared with $0.3
million in Fiscal 1994, representing effective tax rates of 31% in both 1995 and
1994.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased by $2.1 million to $21.9 million at June 30,
1995 from $19.8 million at September 30, 1994. This increase primarily reflects
a $1.9 million reduction of net unrealized losses on debt and equity securities
available for sale charged directly to shareholder's equity and net income of
$0.2 million recorded in Fiscal 1995.
TOTAL ASSETS increased by $41.7 million to $155.8 million at June 30, 1995
from $114.1 million at September 30, 1994, principally due to a $38.4 million
increase in invested assets and a $3.0 million increase in the separate account
for variable annuities.
INVESTED ASSETS at June 30, 1995 totaled $117.3 million, compared with
$78.9 million at September 30, 1994. This increase primarily resulted from
increased sales of fixed annuities and a $4.3 million decrease in net unrealized
losses on debt and equity securities available for sale. Sales of fixed
annuities totaled $47.5 million at June 30, 1995.
The Bond Portfolio at June 30, 1995 had an aggregate amortized cost that
exceeded its fair value by $1.5 million (consisting entirely of net unrealized
losses on the Available for Sale Portfolio). The aggregate amortized cost of the
Bond Portfolio was $5.9 million above its fair value at September 30, 1994
(including net unrealized losses of $5.7 million on the Available for Sale
Portfolio). The decrease in net unrealized losses on the Bond Portfolio since
September 30, 1994 principally resulted from a decrease in prevailing long-term
interest rates and the corresponding effect on the fair value of the Bond
Portfolio.
The entire Bond Portfolio at June 30, 1995 was rated by S&P, Moody's or
under comparable statutory rating guidelines established by the NAIC and
implemented by either the NAIC or the Company. At June 30, 1995, approximately
$93.1 million (at amortized cost) was rated investment grade by one or both of
these agencies or under the NAIC guidelines, including $92.2 million of U.S.
government/agency securities and MBSs.
At June 30, 1995, the Bond Portfolio included $10.5 million (fair value,
$9.6 million) of bonds not rated investment grade by S&P, Moody's or the NAIC.
No securities are rated below CCC+ for S&P, Caa for Moody's or Category 4 for
the NAIC. Based on their June 30, 1995 amortized cost, these noninvestment grade
bonds accounted for 6.7% of the Company's total assets and 8.8% of invested
assets.
SOURCES OF LIQUIDITY continue to be readily available to the Company in the
form of existing cash and short-term investments, Reverse Repo capacity on
invested assets and, if required, proceeds from invested asset sales. At June
30, 1995, approximately $62.9 million of the Company's Bond Portfolio had an
aggregate unrealized gain of $0.8 million, while approximately $40.7 million had
an aggregate unrealized loss of $2.3 million. In addition, the Company's
investment portfolio also currently provides approximately $1.5 million of
monthly cash flow from scheduled principal and interest payments.
45
<PAGE> 46
- --------------------------------------------------------------------------------
PROPERTIES
- --------------------------------------------------------------------------------
The Company's principal office is in leased premises at 733 Third Avenue,
4th Floor New York, New York 10017. The Company, through an affiliate, also
leases office space in Los Angeles, California and Torrance, California which is
utilized for certain policy administration, recordkeeping and data processing
functions.
The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of its business.
- --------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
The directors and executive officers of First SunAmerica Life Insurance
Company (the "Company") as of June 30, 1995 are listed below, together with
information as to their ages, dates of election and principal business
occupation during the last five years (if other than their present business
occupation).
<TABLE>
<CAPTION>
OTHER POSITIONS AND
YEAR OTHER BUSINESS
ASSUMED EXPERIENCE WITHIN
NAME AGE PRESENT POSITION(S) POSITION(S) LAST FIVE YEARS** FROM-TO
- ---------------------- ---- ---------------------------------- ----------- ------------------------ ---------
<S> <C> <C> <C> <C> <C>
Eli Broad* 62 Chairman, Chief Executive Officer 1994 Cofounded SunAmerica
and President of the Company Inc. ("SAI") in 1957
Chairman, Chief Executive Officer 1986
and President of SAI
Jay S. Wintrob* 38 Executive Vice President of the 1991 Senior Vice President 1989-1991
Company and SAI (Joined SAI in 1987)
James R. Belardi* 38 Senior Vice President of the 1992 Vice President and 1989-1992
Company and Senior Vice President Treasurer
and Treasurer of SAI (Joined SAI in 1986)
Jana W. Greer* 43 Senior Vice President of the 1994 Vice President 1981-1991
Company and SAI (Joined SAI in 1974)
Peter McMillan, III* 38 Executive Vice President and Chief 1994 Senior Vice President, 1989-1994
Investment Officer of SunAmerica SunAmerica Investments,
Investments, Inc. Inc.
Gary W. Krat* 48 Senior Vice President of the 1992 Chairman, Royal Alliance 1991 to
Company and SAI Associates, Inc. present
Chief Executive Officer, 1990 to
Royal Alliance present
Associates, Inc.
President, Integrated 1986-1990
Resources Equity Corp.
Scott L. Robinson* 49 Senior Vice President and 1991 Vice President and 1986-1991
Treasurer of the Company, Senior Controller
Vice (Joined SAI in 1978)
President and Controller of SAI
Lorin M. Fife* 42 Senior Vice President and General 1994 Vice President and 1989-1994
Counsel of the Company and Vice Associate General
President, General Counsel -- Counsel
Regulatory Affairs of SAI (Joined SAI in 1989)
Susan L. Harris* 38 Senior Vice President and 1994 Vice President, 1989-1994
Secretary of the Company and Vice Associate General
President, General Counsel and Secretary
Counsel -- Corporate Affairs and (Joined SAI in 1985)
Secretary of SAI
N. Scott Gillis 42 Senior Vice President and 1994 Vice President and 1989-1994
Controller of the Company Controller, SunAmerica
Life Companies
(Joined SAI in 1985)
Edwin R. Reoliquio 38 Senior Vice President and Actuary 1995 Vice President and 1990-1995
of the Company Actuary, SunAmerica
Life Companies
Marc H. Gamsin 39 Director Partner, O'Melveny & 1979 to
Myers present
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
OTHER POSITIONS AND
YEAR OTHER BUSINESS
ASSUMED EXPERIENCE WITHIN
NAME AGE PRESENT POSITION(S) POSITION(S) LAST FIVE YEARS** FROM-TO
- ---------------------- ---- ---------------------------------- ----------- ------------------------ ---------
<S> <C> <C> <C> <C> <C>
David W. Ferguson 42 Director Partner, Davis Polk & 1980 to
Wardwell present
Thomas A. Harnett 71 Director Partner, Lane & 1989 to
Mitterdorf present
Lester Pollack 62 Director Chief Executive Officer, 1986 to
Centre Partners, L.P. present
General Partner, Lazard 1986 to
Freres & Co. present
Senior Managing 1988 to
Director, Corporate present
Partners, L.P.
Richard D. Rohr 69 Director Partner, Bodman, Longley 1958 to
& Dahling present
</TABLE>
- ---------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
All of the executive officers of the Company also serve as employees of
SunAmerica Inc. or its affiliates and receive no compensation directly from the
Company. Some of the officers also serve as officers of other companies
affiliated with the Company. Allocations have been made as to each individual's
time devoted to his or her duties as an executive officer of the Company.
Based on these allocations, the following table shows the compensation
related to the five executive officers of the Company who received the highest
allocated compensation during 1994.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL OR ALLOCATED CASH
NUMBER IN GROUP CAPACITIES IN WHICH SERVED COMPENSATION
- ------------------------- ----------------------------------------------- --------------
<S> <C> <C>
Eli Broad................ Chairman, Chief Executive Officer and President 11,538
William Palmer........... Former Vice President 124,333
Gary W. Krat............. Senior Vice President 37,500
Clark P. Manning, Jr..... Former Senior Vice President and Actuary 16,917
N. Scott Gillis.......... Senior Vice President and Controller 8,904
</TABLE>
Directors of the Company who are also employees of SunAmerica Inc. or its
affiliates receive no compensation in addition to their compensation as
employees of SunAmerica Inc. or its affiliates.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No shares of the Company are owned by any executive officer or director.
The Company is an indirect wholly-owned subsidiary of SunAmerica Inc. Except for
Mr. Broad, the percentage of shares of SunAmerica Inc. beneficially owned by any
director does not exceed one percent of the class outstanding. At August 31,
1995, Mr. Broad was the beneficial owner of 1,162,024 shares of Common Stock
(approximately 3.9% of the class outstanding) and 5,914,212 shares of Class B
Common Stock (approximately 86.7% of the class outstanding). Of the Common
Stock, 93,084 shares represent restricted shares granted under the Company's
employee stock plans as to which Mr. Broad has no investment power; 337,500
shares are held by a trust formed by Mr. Broad of which he is a beneficiary; and
692,900 shares represent employee stock options held by Mr. Broad and as to
which he has no voting or investment power. Of the Class B Stock, 562,500 shares
are held by a trust formed by Mr. Broad of which he is a beneficiary; 21,712
shares are held by a foundation of which Mr. Broad is a director and as to which
he has shared voting and investment power; and 1,935,000 shares are registered
in the name of a corporation as to which Mr. Broad exercises voting and
investment power. At August 31, 1995, all directors and officers as a group
beneficially owned 2,141,818 shares of
47
<PAGE> 48
Common Stock (approximately 7.2% of the class outstanding and 5,914,212 shares
of Class B Common Stock (approximately 86.7% of the class outstanding).
- --------------------------------------------------------------------------------
STATE REGULATION
- --------------------------------------------------------------------------------
The Company is subject to regulation and supervision by the State of New
York and the Insurance Commission of the State of New York. Insurance laws
establish supervisory agencies with broad administrative and supervisory powers
related to granting and revoking licenses to transact business, regulating
marketing and other trade practices, operating guaranty associations, licensing
agents, approving policy forms, regulating certain premium rates, regulating
insurance holding company systems, establishing reserve requirements,
prescribing the form and content of required financial statements and reports,
performing financial and other examinations, determining the reasonableness and
adequacy of statutory capital and surplus, regulating the type and amount of
investments permitted, limiting the amount of dividends that can be paid without
first obtaining regulatory approval and other related matters.
In recent years, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation that changes, and in many
cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies. The NAIC has recently approved and recommended to the states for
adoption and implementation several regulatory initiatives designed to reduce
the risk of insurance company insolvencies. These initiatives include new
investment reserve requirements, risk-based capital standards and restrictions
on an insurance company's ability to pay dividends to its stockholders. The NAIC
is also currently developing model laws to govern insurance company investments.
Current proposals are still being debated and the Company is monitoring
developments in this area and the effects any change would have on the Company.
- --------------------------------------------------------------------------------
CUSTODIAN
- --------------------------------------------------------------------------------
Chase Manhattan Bank, N.A., One Chase Manhattan Plaza, New York, New York
10081, serves as the custodian of the assets of the Separate Account.
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are no pending legal proceedings affecting the Separate Account. The
Company and its subsidiaries are engaged in various kinds of routine litigation
which, in management's judgment, is not of material importance to their
respective total assets or material with respect to the Separate Account.
48
<PAGE> 49
- --------------------------------------------------------------------------------
REGISTRATION STATEMENTS
- --------------------------------------------------------------------------------
Registration statements have been filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 as amended, with
respect to the Contracts offered by this prospectus. This prospectus does not
contain all the information set forth in the registration statements and the
exhibits filed as part of the registration statements, to all of which reference
is hereby made for further information concerning the Separate Account, the
General Account, the Company, the Underlying Funds, the Contract and the
Certificates. Statements found in this prospectus as to the terms of the
Contracts, the Certificates and other legal instruments are summaries, and
reference is made to such instruments as filed.
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
The financial statements of First SunAmerica Life Insurance Company as of
September 30, 1994 and 1993 and for each of the three years in the period ended
September 30, 1994 included in this Prospectus have been so included in reliance
on the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
Additional information concerning the operations of the Separate Account is
contained in a Statement of Additional Information, which is available without
charge upon written request addressed to the Company at its Annuity Service
Center P.O. Box 54299, Los Angeles, California 90054-0299 or (800)90-VISTA. The
contents of the Statement of Additional Information are tabulated below.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Data...................................................................... 3
Annuity Unit Values; Annuity Payments................................................. 5
Distribution of Contracts............................................................. 7
Financial Statements.................................................................. 7
</TABLE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements of the Company which are included in this
prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the General Account
and with respect to the death benefit and the Company's assumption of the
mortality and expense risks and the risk that the Withdrawal Charge will be
insufficient to cover the cost of distributing the Contracts. They should not be
considered as bearing on the investment performance of the Underlying Fund
shares held in the Portfolios of the Separate Account. The value of the
interests of Owners, Participants, Annuitants, payees and Beneficiaries under
the variable portion of the Contracts is affected primarily by the investment
results of the Underlying Funds.
49
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS
November 9, 1994
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 at September
30, 1994 and 1993, and the results of its operations and its cash flows for each
of the three years in the period ended September 30, 1994, 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 5, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," in fiscal 1994.
50
<PAGE> 51
FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1993 1994 1995
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investments:
Cash and short-term investments............. $ 28,255,000 $ 14,785,000 $ 10,316,000
Bonds and notes:
Available for sale, at fair value
(amortized cost: September 1993,
$47,741,000; September 1994,
$61,766,000; June 1995,
$101,321,000).......................... 49,662,000 56,066,000 99,877,000
Held for investment, at amortized cost
(fair value: September 1993,
$2,421,000; September 1994, $3,117,000;
June 1995, $2,288,000)................. 2,306,000 3,314,000 2,298,000
Mortgage loans.............................. 4,789,000 4,763,000 4,741,000
Common stocks, at fair value (amortized
cost: September 1993, $0; June 1995,
$112,000)................................ 118,000 -- 105,000
------------ ------------ ------------
Total investments........................... 85,130,000 78,928,000 117,337,000
Variable annuity assets....................... 24,695,000 26,390,000 29,431,000
Accrued investment income..................... 360,000 717,000 1,011,000
Receivable from brokers for sales of
securities.................................. 2,486,000 -- --
Deferred acquisition costs.................... 2,540,000 5,651,000 6,562,000
Income taxes currently receivable............. -- -- 476,000
Deferred income taxes......................... 1,031,000 886,000 --
Other assets.................................. 1,030,000 1,565,000 955,000
------------ ------------ ------------
TOTAL ASSETS.................................. $117,272,000 $114,137,000 $155,772,000
============ ============ ============
LIABILITIES AND SHAREHOLDER'S
EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts........ $ 68,228,000 $ 66,881,000 $103,251,000
Income taxes currently payable.............. 996,000 441,000 --
Other liabilities........................... 224,000 610,000 360,000
------------ ------------ ------------
Total reserves, payables and accrued
liabilities.............................. 69,448,000 67,932,000 103,611,000
------------ ------------ ------------
Variable annuity liabilities.................. 24,695,000 26,390,000 29,431,000
------------ ------------ ------------
Deferred income taxes......................... -- -- 855,000
------------ ------------ ------------
Shareholder's equity:
Common Stock................................ 3,000,000 3,000,000 3,000,000
Additional paid-in capital.................. 14,428,000 14,428,000 14,428,000
Retained earnings........................... 4,370,000 4,727,000 4,935,000
Net unrealized gains (losses) on debt and
equity securities available for sale..... 1,331,000 (2,340,000) (488,000)
------------ ------------ ------------
Total shareholder's equity.................. 23,129,000 19,815,000 21,875,000
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.... $117,272,000 $114,137,000 $155,772,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<PAGE> 52
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INCOME STATEMENT
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
--------------------------------------- -------------------------
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Investment income........... $ 6,472,000 $ 5,101,000 $ 5,527,000 $ 4,062,000 $ 5,598,000
----------- ----------- ----------- ----------- -----------
Interest expense on:
Fixed annuity contracts... (4,104,000) (3,940,000) (3,635,000) (2,737,000) (3,450,000)
Senior indebtedness....... -- -- -- -- (8,000)
----------- ----------- ----------- ----------- -----------
Total interest expense...... (4,104,000) (3,940,000) (3,635,000) (2,737,000) (3,458,000)
----------- ----------- ----------- ----------- -----------
NET INVESTMENT INCOME....... 2,368,000 1,161,000 1,892,000 1,325,000 2,140,000
----------- ----------- ----------- ----------- -----------
NET REALIZED INVESTMENT
GAINS (LOSSES)............ 3,489,000 1,932,000 445,000 365,000 (1,199,000)
----------- ----------- ----------- ----------- -----------
VARIABLE ANNUITY FEE
INCOME.................... 40,000 240,000 382,000 283,000 292,000
----------- ----------- ----------- ----------- -----------
Other income and expenses:
Surrender charges......... 27,000 44,000 367,000 213,000 140,000
General and administrative
expenses............... (1,224,000) (1,066,000) (1,040,000) (719,000) (829,000)
Amortization of deferred
acquisition costs...... (2,356,000) (220,000) -- (225,000) (225,000)
Other, net................ 534,000 (386,000) (309,000) (296,000) (17,000)
----------- ----------- ----------- ----------- -----------
TOTAL OTHER INCOME AND
EXPENSES.................. (3,019,000) (1,628,000) (982,000) (1,027,000) (931,000)
----------- ----------- ----------- ----------- -----------
PRETAX INCOME............... 2,878,000 1,705,000 1,737,000 946,000 302,000
Income tax expense.......... (1,210,000) (829,000) (655,000) (293,000) (94,000)
----------- ----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME
TAXES..................... 1,668,000 876,000 1,082,000 653,000 208,000
Cumulative effect of change
in accounting for income
taxes..................... -- -- (725,000) (725,000) --
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)........... $ 1,668,000 $ 876,000 $ 357,000 $ (72,000) $ 208,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
52
<PAGE> 53
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
--------------------------------------- --------------------------
1992 1993 1994 1994 1995
----------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ 1,668,000 $ 876,000 $ 357,000 $ (72,000) $ 208,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Interest credited to fixed annuity contracts.... 4,104,000 3,940,000 3,635,000 2,737,000 3,450,000
Net realized investment (gains) losses.......... (3,489,000) (1,932,000) (445,000) (365,000) 1,199,000
Accretion of net discounts on investments....... (55,000) (55,000) (24,000) (8,000) (255,000)
Amortization of goodwill........................ 58,000 58,000 58,000 43,000 43,000
Provision for deferred income taxes............. (1,290,000) (904,000) 1,388,000 112,000 744,000
Cumulative effect of change in accounting for
income taxes.................................. -- -- 725,000 725,000 --
Change in:
Deferred acquisition costs...................... 1,367,000 (1,243,000) (1,011,000) (514,000) (2,311,000)
Other assets.................................... 35,000 (4,000) (20,000) (20,000) (6,000)
Income taxes receivable/payable................. 999,000 387,000 (555,000) 153,000 (917,000)
Other liabilities............................... 158,000 (237,000) (42,000) 49,000 66,000
Other, net........................................ (626,000) 532,000 (53,000) (41,000) (294,000)
----------- ------------ ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 2,929,000 1,418,000 4,013,000 2,799,000 1,927,000
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds and notes available for sale.............. -- (95,150,000) (67,563,000) (62,797,000) (97,306,000)
Bonds and notes held for investment............. -- -- (1,019,000) (1,019,000) --
Other bonds and notes........................... (70,715,000) (2,052,000) -- -- --
Common Stock.................................... -- -- -- -- (112,000)
Sales of:
Bonds and notes available for sale.............. -- 60,544,000 50,708,000 50,515,000 45,228,000
Other bonds and notes........................... 82,392,000 -- -- -- --
Mortgage loans.................................. -- 16,159,000 -- -- --
Redemptions and maturities of:
Bonds and notes available for sale.............. -- 1,583,000 5,791,000 1,776,000 11,578,000
Bonds and notes held for investment............. -- -- -- -- 1,013,000
Other bonds and notes........................... 23,450,000 -- -- -- --
Mortgage loans.................................. 70,000 35,000 31,000 24,000 26,000
----------- ------------ ------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES.. 35,197,000 (18,881,000) (12,052,000) (11,501,000) (39,573,000)
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity contracts..... 7,107,000 9,105,000 7,840,000 4,452,000 47,457,000
Net exchanges to the fixed accounts of variable
annuity contracts............................. 47,000 81,000 572,000 225,000 125,000
Withdrawal payments on fixed annuity
contracts..................................... (2,089,000) (2,475,000) (10,504,000) (6,008,000) (12,309,000)
Claims and annuity payments on fixed annuity
contracts..................................... (2,045,000) (2,272,000) (3,194,000) (2,408,000) (2,353,000)
Net receipts from (repayments of) other
short-term financings......................... (111,000) (27,000) (145,000) (30,000) 257,000
----------- ------------ ------------ ------------ ------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES............................ 2,909,000 4,412,000 (5,431,000) (3,769,000) 33,177,000
----------- ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS..................................... 41,035,000 (13,051,000) (13,470,000) (12,471,000) (4,469,000)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF
PERIOD.......................................... 271,000 41,306,000 28,255,000 28,255,000 14,785,000
----------- ------------ ------------ ------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD................................... $41,306,000 $ 28,255,000 $ 14,785,000 $ 15,784,000 $ 10,316,000
=========== ============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (recovered)................... $ 1,503,000 $ 1,149,000 $ (178,000) $ 28,000 $ 267,000
=========== ============ ============ ============ ============
Interest paid on indebtedness................... $ -- $ -- $ -- $ -- $ 8,000
=========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE> 54
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: First SunAmerica Life Insurance Company (the "Company") is a
wholly-owned subsidiary of SunAmerica Life Insurance Company (formerly known as
Sun Life Insurance Company of America) ("SunAmerica Life"), which in turn is a
wholly-owned subsidiary of SunAmerica Inc. Certain items have been reclassified
to conform to the current year's presentation.
The interim financial information is unaudited; however, in the opinion of
the Company, the interim information includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
for the interim periods.
INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, repurchase agreements and short-term bank participations. All
such investments are carried at cost plus accrued interest, which approximates
fair value, have maturities of twelve months or less and are considered cash
equivalents for purposes of reporting cash flows. Bonds and notes available for
sale and common stocks are carried at aggregate market value and changes in
unrealized gains or losses, net of tax, are credited or charged directly to
shareholder's equity. It is management's intent, and the Company has the
ability, to hold the remainder of bonds and notes until maturity, and,
therefore, these investments are carried at amortized cost. Bonds and notes,
whether available for sale or held for investment, 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 dependant upon future events. Mortgage loans are carried at
amortized unpaid balances, net of provisions for estimated losses. Realized
gains and losses on the sale of investments are recognized in operations at the
date of sale and are determined using the specific cost identification method.
Premiums and discounts on investments are amortized to investment income using
the interest method over the contractual lives of the investments.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, over the estimated lives of the contracts in relation
to the present value of estimated gross profits, which are composed of net
interest income, net realized investment gains and losses, surrender charges and
direct administrative expenses. Deferred acquisition costs consist of
commissions and other costs which 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 unrealized net gains or losses on debt and equity securities available for
sale that is credited or charged directly to shareholder's equity. At September
30, 1994, deferred acquisition costs have been increased by $2,100,000 for this
adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities
resulting from the receipt of variable annuity premiums are segregated in a
separate account. The Company receives fees for assuming mortality and certain
expense risks. Such fees are included in Variable Annuity Fee Income in the
income statement.
GOODWILL: Goodwill, amounting to $937,000 at September 30, 1994, is
amortized by using the straight-line method over a period of 25 years and is
included in Other Assets in the balance sheet.
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 are recognized as earned on a daily
basis.
54
<PAGE> 55
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS
The amortized cost and estimated fair value of bonds and notes available
for sale and held for investment by major category follow:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
AT SEPTEMBER 30, 1994:
AVAILABLE FOR SALE:
Securities of the United States government.................... $39,775,000 $36,398,000
Mortgage-backed securities.................................... 13,943,000 12,883,000
Corporate bonds and notes..................................... 8,048,000 6,785,000
----------- -----------
Total available for sale................................... $61,766,000 $56,066,000
=========== ===========
HELD FOR INVESTMENT:
Securities of the United States government.................... $ 2,301,000 $ 2,102,000
Corporate bonds and notes..................................... 1,013,000 1,015,000
----------- -----------
Total held for investment.................................. $ 3,314,000 $ 3,117,000
=========== ===========
AT SEPTEMBER 30, 1993:
AVAILABLE FOR SALE:
Securities of the United States government.................... $27,757,000 $28,998,000
Mortgage-backed securities.................................... 19,984,000 20,664,000
----------- -----------
Total available for sale................................... $47,741,000 $49,662,000
=========== ===========
HELD FOR INVESTMENT:
Securities of the United States government.................... $ 2,306,000 $ 2,421,000
=========== ===========
</TABLE>
The amortized cost and estimated fair value of bonds and notes available
for sale and held for investment by contractual maturity follow:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
AT SEPTEMBER 30, 1994:
AVAILABLE FOR SALE:
Due in one year or less....................................... $ -- $ --
Due after one year through five years......................... -- --
Due after five years through ten years........................ 8,048,000 6,785,000
Due after ten years........................................... 39,775,000 36,398,000
Mortgage-backed securities.................................... 13,943,000 12,883,000
----------- -----------
Total available for sale................................... $61,766,000 $56,066,000
=========== ===========
HELD FOR INVESTMENT:
Due in one year or less....................................... $ -- $ --
Due after one year through five years......................... 1,013,000 1,015,000
Due after five years through ten years........................ 2,301,000 2,102,000
Due after ten years........................................... -- --
Mortgage-backed securities.................................... -- --
----------- -----------
Total held for investment.................................. $ 3,314,000 $ 3,117,000
=========== ===========
</TABLE>
55
<PAGE> 56
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
Actual maturities of bonds and notes will differ from those shown above
because of prepayments and redemptions.
Gross unrealized gains and losses on bonds and notes available for sale and
held for investment by major category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
---------- -----------
<S> <C> <C>
AT SEPTEMBER 30, 1994:
AVAILABLE FOR SALE:
Securities of the United States government..................... $ -- $(3,377,000)
Mortgage-backed securities..................................... -- (1,060,000)
Corporate bonds and notes...................................... 36,000 (1,299,000)
---------- -----------
Total available for sale............................... $ 36,000 $(5,736,000)
========== ===========
HELD FOR INVESTMENT:
Securities of the United States government..................... $ 8,000 $ (207,000)
Corporate bonds and notes...................................... 2,000 --
---------- -----------
Total held for investment.............................. $ 10,000 $ (207,000)
========== ===========
AT SEPTEMBER 30, 1993:
AVAILABLE FOR SALE:
Securities of the United States government..................... $1,241,000 $ --
Mortgage-backed securities..................................... 680,000 --
---------- -----------
Total available for sale............................... $1,921,000 $ --
========== ===========
HELD FOR INVESTMENT:
Securities of the United States government..................... $ 115,000 $ --
========== ===========
</TABLE>
At September 30, 1993, gross unrealized gains on equity securities
aggregated $118,000.
Gross realized investment gains and losses on sales of all types of
investments are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------
1994 1993 1992
-------- ---------- ----------
<S> <C> <C> <C>
Bonds and notes:
Available for sale:
Realized gains...................................... $644,000 $2,157,000 $ --
Realized losses..................................... (199,000) (225,000) --
Other bonds and notes:
Realized gains...................................... -- -- 3,594,000
Realized losses..................................... -- -- (105,000)
-------- ---------- ----------
Total net realized investment gains......... $445,000 $1,932,000 $3,489,000
======== ========== ==========
</TABLE>
56
<PAGE> 57
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Short-term investments............................... $ 685,000 $1,120,000 $ 899,000
Bonds and notes...................................... 4,341,000 3,220,000 3,355,000
Mortgage loans....................................... 501,000 761,000 2,218,000
---------- ---------- ----------
Total investment income.................... $5,527,000 $5,101,000 $6,472,000
========== ========== ==========
</TABLE>
Expenses incurred to manage the investment portfolio amounted to $102,000
for the year ended September 30, 1994, $84,000 for the year ended September 30,
1993, and $69,000 for the year ended September 30, 1992, and are included in
General and Administrative Expenses in the income statement.
The carrying values of investments in any one entity or its affiliates
exceeding 10% of the Company's shareholder's equity are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994
-------------
<S> <C>
Short-term investments:
Great Western Bank Commercial Paper......................................... $ 3,993,000
Columbia HCA Commercial Paper............................................... 3,986,000
Lehman Treasury Fund........................................................ 2,996,000
Consumer Portfolio Services Senior Secured Loan............................. 2,000,000
Mortgage loans:
Hyman & Rose Shulman Family Trust........................................... 4,763,000
============
</TABLE>
At September 30, 1994, bonds and notes included $8,047,000 (at amortized
cost, with fair value of $6,785,000) of investments not rated investment grade
by either Standard & Poor's Corporation, Moody's Investors Service or under
National Association of Insurance Commissioners' guidelines. The Company had no
material concentrations of noninvestment grade assets at September 30, 1994.
At September 30, 1994, there are no investments in default as to the
payment of principal or interest.
At September 30, 1994, $257,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory requirements.
3. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to the
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 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
57
<PAGE> 58
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
an estimated fair value. Accordingly, the estimates may not be indicative of the
amounts the financial instruments could be exchanged for in a current or future
market transaction.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND SHORT-TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS 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 and further discounting for current market factors.
VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the market
value of the underlying securities.
RECEIVABLE FROM BROKERS FOR SALES OF SECURITIES: Such assets 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 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: 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.
58
<PAGE> 59
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at
September 1994 and 1993, compared with their respective carrying values are as
follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
----------- -----------
<S> <C> <C>
1994:
Assets:
Cash and short-term investments............................... $14,785,000 $14,785,000
Bonds and notes............................................... 59,380,000 59,183,000
Mortgage loans................................................ 4,763,000 4,763,000
Variable annuity assets....................................... 26,390,000 26,390,000
Liabilities:
Reserves for fixed annuity contracts.......................... 66,881,000 64,626,000
Variable annuity liabilities.................................. 26,390,000 25,476,000
=========== ===========
1993:
Assets:
Cash and short-term investments............................... $28,255,000 $28,255,000
Bonds and notes............................................... 51,968,000 52,083,000
Mortgage loans................................................ 4,789,000 4,789,000
Variable annuity assets....................................... 24,695,000 24,695,000
Receivable from brokers for sales of securities............... 2,486,000 2,486,000
Liabilities:
Reserves for fixed annuity contracts.......................... 68,228,000 65,897,000
Variable annuity liabilities.................................. 24,695,000 23,612,000
=========== ===========
</TABLE>
4. SHAREHOLDER'S EQUITY
The Company is authorized to issue 300 shares of its $10,000 par value
Common Stock. At September 30, 1994, 1993 and 1992, 300 shares are outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1994 1993 1992
----------- ---------- ----------
<S> <C> <C> <C>
RETAINED EARNINGS:
Beginning balance................................ $ 4,370,000 $3,494,000 $1,826,000
Net income....................................... 357,000 876,000 1,668,000
----------- ---------- ----------
Ending balance................................... $ 4,727,000 $4,370,000 $3,494,000
=========== ========== ==========
NET UNREALIZED INVESTMENT GAINS (LOSSES):
Beginning balance................................ 1,331,000 -- --
Excess of market value over amortized cost on
debt and equity securities available for
sale.......................................... -- 2,039,000 --
Change in net unrealized gains (losses) on debt
and equity securities available for sale...... (7,739,000) -- --
Adjustment to deferred acquisition costs........... 2,100,000 -- --
Tax effect of net change........................... 1,968,000 (708,000)
----------- ---------- ----------
Ending balance................................... $(2,340,000) $1,331,000 $ --
=========== ========== ==========
</TABLE>
59
<PAGE> 60
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SHAREHOLDER'S EQUITY (CONTINUED)
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, nor if the Superintendent disapproves the distribution of
the dividend within the 30-day period. No dividends were paid in fiscal years
1994, 1993 or 1992.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1994 was $814,000. The statutory net loss for the year ended
December 31, 1993 was $597,000 and for the year ended December 31, 1992
statutory net income was $325,000. The Company's statutory capital and surplus
was $16,231,000 at September 30, 1994, $15,623,000 at December 31, 1993 and
$16,496,000 at December 31, 1992.
5. INCOME TAXES
The components of the provisions for income taxes on pretax income consist
of the following:
<TABLE>
<CAPTION>
NET
REALIZED
INVESTMENT
GAINS OPERATIONS TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
1994:
Currently payable................................. $ 121,000 $ (854,000) $ (733,000)
Deferred.......................................... 65,000 1,323,000 1,388,000
---------- ----------- -----------
Total income tax expense................ $ 186,000 $ 469,000 $ 655,000
========== =========== ===========
1993:
Currently payable................................. $1,091,000 $ 642,000 $ 1,733,000
Deferred.......................................... (46,000) (858,000) (904,000)
---------- ----------- -----------
Total income tax expense................ $1,045,000 $ (216,000) $ 829,000
========== =========== ===========
1992:
Currently payable................................. $1,407,000 $ 1,093,000 $ 2,500,000
Deferred.......................................... -- (1,290,000) (1,290,000)
---------- ----------- -----------
Total income tax expense................ $1,407,000 $ (197,000) $ 1,210,000
========== =========== ===========
</TABLE>
Income taxes computed at the United States federal income tax rate of 35%
for 1994, 34.75% for 1993 and 34% for 1992 and income taxes provided differ as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1994 1993 1992
-------- -------- ----------
<S> <C> <C> <C>
Amount computed at statutory rate....................... $608,000 $592,000 $ 978,000
Increases (decreases) resulting from:
Amortization of differences between book and tax bases
of net assets acquired............................. 10,000 (20,000) (19,000)
State income taxes, net of federal tax benefit........ 36,000 250,000 238,000
Other, net............................................ 1,000 7,000 13,000
-------- -------- ----------
Total income tax expense................................ $655,000 $829,000 $1,210,000
======== ======== ==========
</TABLE>
60
<PAGE> 61
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Effective October 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Accordingly, the cumulative effect of this change in accounting for income taxes
was recorded during the quarter ended December 31, 1993 to decrease the asset
for deferred income taxes by $725,000. Also in accordance with the new
pronouncement, the Company reclassified deferred tax liabilities associated with
unrealized gains on certain debt and equity securities credited directly to
shareholder's equity, which liabilities previously had been netted against the
carrying values of the related securities, to the asset for deferred income
taxes, decreasing that asset by $708,000 at September 30, 1993.
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 asset for deferred income taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1994 1993
------------- -------------
<S> <C> <C>
Deferred tax assets:
Contractholder reserves..................................... $ 659,000 $ 691,000
State income taxes.......................................... 79,000 79,000
Deferred income............................................. -- 975,000
Net unrealized losses on certain debt and equity
securities............................................... 1,260,000 --
----------- -----------
Total deferred tax assets................................... 1,998,000 1,745,000
----------- -----------
Deferred tax liabilities:
Investments................................................. (45,000) (20,000)
Deferred acquisition costs.................................. (1,026,000) (710,000)
Net unrealized gains on certain debt and equity
securities............................................... -- (708,000)
Other....................................................... (41,000) (1,000)
----------- -----------
Total deferred tax liabilities.............................. (1,112,000) (1,439,000)
----------- -----------
Net deferred tax asset (pro forma at September 30, 1993)...... 886,000 306,000
Cumulative effect of change in accounting for income taxes
recorded in the first quarter 1994.......................... -- 725,000
----------- -----------
Deferred income taxes, per balance sheet...................... $ 886,000 $ 1,031,000
=========== ===========
</TABLE>
6. RELATED PARTY MATTERS
The Company pays commissions to two affiliated companies, Royal Alliance
Associates, Inc. ("Royal") and SunAmerica Securities, Inc. ("SAS"). These
broker-dealers represent a significant portion of the Company's business. During
the year ended September 30, 1994, commissions paid to Royal and SAS totaled
$249,000 and $77,000, respectively, and during the year ended September 30,
1993, such commission payments totaled $640,000 and $93,000, respectively.
Commissions paid to Royal totaled $361,000 during 1992. No commissions were paid
to SAS in 1992. During 1992, the Company began sharing office space and expenses
with Royal. Occupancy and office services expenses paid to Royal totaled
$122,000 for the year ended September 30, 1994, $135,000 for the year ended
September 30, 1993 and $110,000 for the year ended September 30, 1992.
61
<PAGE> 62
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY MATTERS (CONTINUED)
The Company purchases administrative, investment management, accounting,
data processing and programming services from SunAmerica Financial, Inc., whose
purpose is to provide services to the SunAmerica companies. Amounts paid for
such services totaled $706,000 for the year ended September 30, 1994, $586,000
for the year ended September 30, 1993 and $501,000 for the year ended September
30, 1992.
During the year ended September 30, 1993, the Company sold to SunAmerica
Life two mortgage loans for cash equal to their aggregate book value of
$16,547,000.
62
<PAGE> 63
APPENDIX A
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1 -- SEPARATE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
SEPARATE ACCOUNT)
These examples assume the following:
(1) The Initial Purchase Payment was $10,000, allocated solely to one
Portfolio;
(2) The date of full surrender or partial withdrawal occurs during the
2nd Contribution Year;
(3) The Owner's Contract Value at the time of surrender or withdrawal
is $12,000; and
(4) No other Purchase Payments or previous partial withdrawals have
been made.
EXAMPLE A -- FULL SURRENDER:
(1) Earnings in the Portfolio ($12,000 - $10,000 = $2,000) are not
subject to the Withdrawal Charge.
(2) The balance of the full surrender ($12,000 - $2,000 = $10,000) is
subject to the Withdrawal Charge applicable during the 2nd Contribution
Year (5%, from the Withdrawal Charge Table on page 20).
(3) The amount of the Withdrawal Charge is .05 X $10,000 = $500.
(4) The amount of the full surrender is $12,000 - $500 = $11,500.
EXAMPLE B -- PARTIAL WITHDRAWAL (IN THE AMOUNT OF $3,000):
(1) For the same reason as given in Step 1 of Example A, above, $2,000
can be withdrawn free of the Withdrawal Charge.
(2) Although 10% of the Purchase Payment is available without
imposition of a Withdrawal Charge (.10 X $10,000 = $1,000), this free
withdrawal amount is, like the Withdrawal Charge, applied first to
earnings. Since the earnings exceed the free withdrawal amount, only the
earnings can be withdrawn free of the scheduled Withdrawal Charge.
(3) The balance of the requested partial withdrawal
($3,000 - $2,000 = $1,000) is subject to the Withdrawal Charge applicable
during the 2nd Contribution Year (5%).
(4) The amount of the Withdrawal Charge is equal to the amount
required to complete the partial withdrawal ($3,000 - $2,000 = $1,000)
divided by (1 - .05) = 0.95, less the amount required to complete the
partial withdrawal.
Withdrawal Charge = ($1,000/0.95) - $1,000
= $52.63
In this example, in order for the Owner to receive the amount requested
($3,000), a gross withdrawal of $3,052.63 must be processed with $52.63
representing the Withdrawal Charge calculated above.
Examples C and D assume the following:
(1) The Initial Purchase Payment was $20,000, allocated solely to one
Portfolio;
(2) The full surrender or partial withdrawal occurs during the 2nd
Contribution Year;
A-1
<PAGE> 64
(3) The Owner's Contract Value at the time of surrender or withdrawal
is $21,500; and
(4) No other Purchase Payments or partial withdrawals have been made.
EXAMPLE C -- PARTIAL WITHDRAWAL (IN THE MAXIMUM AMOUNT AVAILABLE WITHOUT
WITHDRAWAL CHARGE):
(1) Earnings in the Portfolio ($21,500 - $20,000 = $1,500) are not
subject to the Withdrawal Charge.
(2) An Additional Free Withdrawal of 10% of the Purchase Payments less
earnings (.10 X $20,000 - $1,500 = $500) is also available free of the
Withdrawal Charge, so that
(3) The maximum partial withdrawal without Withdrawal Charge is the
sum of the Earnings and the Additional Free Withdrawal
($1,500 + $500 = $2,000).
EXAMPLE D -- FULL SURRENDER IMMEDIATELY FOLLOWING THE PARTIAL WITHDRAWAL IN
EXAMPLE C:
(1) The Owner's Contract Value after the partial withdrawal in Example
C is $21,500 - $2,000 = $19,500.
(2) The Purchase Payment amount for calculating the Withdrawal Charge
is the original $20,000 (Additional Free Withdrawal amounts do not reduce
the Purchase Payment amount for purposes of calculating the Withdrawal
Charge).
(3) The amount of the Withdrawal Charge is .05 X $20,000 = $1,000.
(4) The amount of the full surrender is $19,500 - $1,000 = $18,500.
PART 2 -- GENERAL ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The Market Value Adjustment Factor appearing on page 17 of the prospectus
and reproduced here for convenience is:
[(1 + I)/(1 + J + 0.0025)]N/12 -1
where
I is the Guarantee Rate in effect;
J is the Current Interest Rate available for a period equal to the
number of years remaining in the Guarantee Period at the time of
withdrawal, transfer or annuitization (fractional years are rounded up
to the next full year); and
N is the number of full months remaining in the Guarantee Period at the
time the withdrawal, transfer or annuitization request is processed.
These examples assume the following:
(1) An initial Purchase Payment of $10,000 was made and allocated to a
ten year Guarantee Period with a Guarantee Rate of 7% (.07);
(2) a partial withdrawal of $4,000 is requested 2 1/2 years (30
months) from the expiration date (i.e., N = 30);
(3) the accumulated value attributable to the Purchase Payment (i.e.,
the Guarantee Amount) on the date of withdrawal is $16,341.78 at each
anniversary; and
(4) no transfers, additional Purchase Payments, or other withdrawals
have been made.
The Guarantee Amount of $16,341.78 reflects deductions for Contract
Administration Charges at each anniversary. Since the withdrawal is effected in
the Purchase Payment's 7th Contribution Year, no Withdrawal Charge is applicable
(See the table on page 20 of the prospectus).
A-2
<PAGE> 65
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of withdrawal, the Current Interest Rate for a
new Guarantee Period of 3 years (2 1/2 years rounded up to the next full
year) is 8%:
The MVA factor = [(1 + I)/(1 + J + .0025)]N/12 -1
= [(1.07)/(1.08 + .0025)](30/12) -1
= (0.988453)2.5 -1
= 0.971381 -1
= -0.028619
The requested withdrawal amount is multiplied by the MVA factor to
determine the MVA:
MVA = $4,000 X (-0.028619) = -$114.48
$114.48 represents the MVA that will be deducted from the remaining
accumulated value.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of withdrawal, the Current Interest Rate for a
new Guarantee Period of 3 years is 6%:
The MVA factor = [(1 + I)/(1 + J + .0025)]N/12 -1
= [(1.07)/(1.06 +.0025)](30/12) -1
= (1.007059)2.5 -1
= 1.017741-1
= +0.017741
The requested withdrawal amount is multiplied by the MVA factor to
determine the MVA:
$4,000 X 0.017741 = +$70.96
$70.96 represents the MVA that would be added to the amount withdrawn.
PART 3 -- GENERAL ACCOUNT -- EXAMPLE OF FULL WITHDRAWAL WITH MVA AND WITHDRAWAL
CHARGE
Assume the same facts as in Part 2, above, except that under assumption (2)
a complete withdrawal is requested with 4 1/2 years (54 months) remaining in the
Guarantee Period (i.e., N = 54). The Guarantee Amount on the date of withdrawal
is $14,329.65 (after reduction of the Contract Administration Charge of $30,
since the withdrawal is not on a Contract anniversary). As was the case with the
Examples in Part 1, above, the earnings may be withdrawn free of Withdrawal
Charge, leaving the initial Purchase Payment of $10,000 subject to the Charge.
The applicable Withdrawal Charge, from the table on page 20 of the prospectus,
is 2% or $200.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of withdrawal the Current Interest Rate for a
new Guarantee Period of 5 years is 8%:
The MVA factor = [(1 + I)/(1 + J + .0025)]N/12 -1
= [(1.07)/(1.08 + .0025)](54/12) -1
= (0.988453)4.5 -1
= 0.949077-1
= -0.050923
A-3
<PAGE> 66
The Withdrawal Charge of $200 is applied first; the MVA factor is
applied against the remaining Guarantee Amount:
MVA = ($14,329.65 - $200) X (-0.050923) = -$719.52
The net amount available upon withdrawal is the Guarantee Amount
reduced by the Withdrawal Charge, the MVA and the Contract Administration
Charge:
$14,329.65 - $200 - $719.52 - $30 = $13,380.13
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of withdrawal the Current Interest Rate for a
new Guarantee Period of 5 years is 6%:
The MVA factor = [(1 + I)/(1 + J + .0025)]N/12 - 1
= [(1.07)/(1.06 + .0025)](54/12) - 1
= (1.007059)4.5 - 1
= 1.032159 - 1
= +0.032159
The MVA is:
($14,329.65 - $200) X (+0.032159) = +$454.40
And the net amount available upon surrender is:
$14,329.65 - $200 + $454.40 - $30 = $14,554.05
A-4
<PAGE> 67
<TABLE>
<S> <C> <C>
- ------------------------------
- ------------------------------
- ------------------------------ Stamp
</TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
P.O. BOX 54299
LOS ANGELES, CALIFORNIA 90054-0299
<PAGE> 68
Please forward a copy, without charge, of the Statement of Additional
Information concerning the Vista Capital Advantage to:
(Please print or type and fill in all information.)
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
City/State/Zip
- ------------------------------------------------------------------------------
Date: Signed:
-------------------------- -------------------------------------
