<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").
Purchase Payments under the Contracts may be allocated among the Portfolios
of the Separate Account, and/or to one or more of the Fixed Account options
funded through the Company's General Account. Each of the six Portfolios of the
Separate Account described in this prospectus is invested solely in the shares
of one of the following currently available Underlying Funds of Mutual Fund
Variable Annuity Trust:
<TABLE>
<S> <C>
- International Equity - Asset Allocation
- Capital Growth - U.S. Government Income
- Growth and Income - Money Market
</TABLE>
Additional Underlying Funds may be made available in the future.
The Fixed Account options pay fixed rates of interest declared by the
Company for specified Guarantee Periods from the dates amounts are allocated to
the Fixed Account. As of the date of this prospectus, one, three, five, seven
and ten year options were available. Please contact the Company or the financial
representative from whom this prospectus was obtained for information as to
currently available guarantee options. Declared rates will vary from time to
time but will not be less than 3% per annum, and, once established for a
particular allocation, will not change during the course of the Guarantee
Period. However, withdrawals, transfers or annuitizations from the one, three,
five, seven and ten year Fixed Account options prior to the end of the
applicable Guarantee Period(s) will generally result in the imposition of a
Market Value Adjustment (See "Fixed Account Options -- Market Value
Adjustment").
This prospectus concisely sets forth the information a prospective investor
ought to know before investing. PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN
IT FOR YOUR FUTURE REFERENCE. Participants bear the complete investment risk for
all Purchase Payments allocated to the Separate Account. With respect to
allocations to the Fixed Account, Participants also bear the risk that amounts
prematurely withdrawn, transferred or annuitized from the General Account prior
to the end of their respective Guarantee Periods could result in the Participant
receiving less than Purchase Payments so allocated.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE CONTRACTS OFFERED BY THIS PROSPECTUS INVOLVE RISK, INCLUDING LOSS OF
PRINCIPAL, AND ARE NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE CONTRACTS OFFERED BY THIS PROSPECTUS ARE AVAILABLE ONLY IN THE STATE OF
NEW YORK.
This Prospectus is dated December 29, 1997.
<PAGE> 2
ADDITIONAL INFORMATION:
The Company has filed registration statements (the "Registration
Statements") with the Securities and Exchange Commission ("Commission") under
the Securities Act of 1933, as amended, relating to the Contracts offered by
this prospectus. This prospectus has been filed as a part of the Registration
Statements and does not contain all of the information set forth in the
Registration Statements and exhibits thereto, and reference is hereby made to
the Registration Statements and exhibits for further information relating to the
Company, the Separate Account, and the Contracts. The Company is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith files reports and other information with the
Commission. Such reports and other information filed by the Company can be
inspected and copied, and copies can be obtained at the public reference
facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the regional offices in Chicago and New York. The addresses of
these regional offices are as follows: 500 West Madison Street, Chicago,
Illinois 60661, and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material also can be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of the fees prescribed by the rules and regulations of the
Commission at prescribed rates.
A Statement of Additional Information about the variable portion of the
Contracts has been filed with the Commission, as part of the Registration
Statements, and is incorporated herein by reference. The Statement of Additional
Information is available without charge upon written or oral request to the
Company at its Annuity Service Center at the address and telephone number given
on the prior page. The Table of Contents of the Statement of Additional
Information, dated December 29, 1997, appears on page 47 of this prospectus.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
DEFINITIONS.......................................................................... 4
SUMMARY.............................................................................. 7
FEE TABLES........................................................................... 10
EXAMPLES............................................................................. 11
CONDENSED FINANCIAL INFORMATION -- ACCUMULATION UNIT VALUES.......................... 12
PERFORMANCE DATA..................................................................... 12
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT AND THE GENERAL ACCOUNT............. 13
Company......................................................................... 13
Separate Account................................................................ 14
General Account................................................................. 14
SEPARATE ACCOUNT INVESTMENTS......................................................... 15
Underlying Funds................................................................ 15
Voting Rights................................................................... 16
Substitution of Securities...................................................... 16
FIXED ACCOUNT OPTIONS................................................................ 17
Allocations..................................................................... 17
Renewals........................................................................ 17
Market Value Adjustment......................................................... 18
CONTRACT CHARGES..................................................................... 19
Mortality and Expense Risk Charge............................................... 19
Administrative Charges.......................................................... 19
Contract Administration Charge................................................ 19
Transfer Fee.................................................................. 19
Sales Charges................................................................... 20
Withdrawal Charge............................................................. 20
Free Withdrawals........................................................... 20
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......................................................... 22
Summary......................................................................... 22
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....................................... 24
Asset Allocation Rebalancing Program.......................................... 24
Principal Advantage Program................................................... 24
Allocation of Purchase Payments................................................. 25
Transfer During Accumulation Period............................................. 25
Separate Account Accumulation Unit Value........................................ 26
Fixed Account Accumulation Value................................................ 26
Distribution of Contracts....................................................... 26
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>
Other Options................................................................... 31
Transfer During Annuity Period.................................................. 31
Death Benefit During Annuity Period............................................. 31
Annuity Payments................................................................ 31
Initial Monthly Annuity Payment............................................... 31
Subsequent Monthly Payments................................................... 31
ADMINISTRATION....................................................................... 32
TAXES................................................................................ 32
General......................................................................... 32
Withholding Tax on Distributions................................................ 33
Diversification -- Separate Account Investments................................. 33
Multiple Contracts.............................................................. 33
Tax Treatment of Assignments.................................................... 34
Qualified Plans................................................................. 34
Tax Treatment of Withdrawals.................................................... 34
Qualified Plans............................................................... 34
Nonqualified Plans............................................................ 35
ADDITIONAL INFORMATION ABOUT THE COMPANY............................................. 36
Selected Financial Data......................................................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS......................................................................... 37
PROPERTIES........................................................................... 42
DIRECTORS AND EXECUTIVE OFFICERS..................................................... 43
EXECUTIVE COMPENSATION............................................................... 45
Security Ownership of Certain Beneficial Owners and Management.................. 45
STATE REGULATION..................................................................... 46
CUSTODIAN............................................................................ 46
LEGAL PROCEEDINGS.................................................................... 46
REGISTRATION STATEMENTS.............................................................. 46
INDEPENDENT ACCOUNTANTS.............................................................. 47
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT.................................... 47
FINANCIAL STATEMENTS................................................................. 47
APPENDIX A -- WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT........ A-1
</TABLE>
- --------------------------------------------------------------------------------
DEFINITIONS
- --------------------------------------------------------------------------------
The following terms, as used in this prospectus, have the indicated
meanings:
ACCUMULATION PERIOD -- The period between the Certificate Date and the Annuity
Date; the build-up phase under the Contract.
ACCUMULATION UNIT -- A unit of measurement which the Company uses to calculate
Contract Value under the variable portion of the Contracts during the
Accumulation Period.
ANNUITANT -- The natural person on whose life the annuity benefits under a
Certificate are based.
ANNUITIZATION -- The process by which a Participant converts from the
Accumulation Period to the Annuity Period. Upon Annuitization, the Contract is
converted from the build-up phase to the phase during which the Participant or
other payee(s) receive periodic annuity payments.
ANNUITY DATE -- The date on which annuity payments are to begin.
ANNUITY PERIOD -- The period starting on the Annuity Date.
4
<PAGE> 5
ANNUITY UNIT -- A unit of measurement which the Company uses to calculate the
amount of Variable Annuity payments during the Annuity Period.
BENEFICIARY(IES) -- The person(s) designated to receive any benefits under a
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.
CONTRIBUTION YEAR -- With respect to a given Purchase Payment, a year starting
from the date of the Purchase Payment in one calendar year and ending on the day
before the anniversary of such date in the succeeding calendar years. The
Contribution Year in which a Purchase Payment is made is "Contribution Year 1".
CURRENT INTEREST RATE -- The interest rate as declared from time to time by the
Company to be in effect for allocations to the Fixed Account for a specified
Guarantee Period. It is equal to the sum of the subsequent Guarantee Rate and
the excess interest rate, if any, declared by the Company for such allocation.
The subsequent Guarantee Rate will not be less than 3% per annum.
DUE PROOF OF DEATH -- (1) A certified copy of a death certificate; or (2) a
certified copy of a decree of a court of competent jurisdiction as to the
finding of death; or (3) a written statement by a medical doctor who attended
the deceased at the time of death; or (4) any other proof satisfactory to the
Company.
FIXED ACCOUNT -- Contract Values allocated to the Company's General Account
under one or more of the Fixed Account options under the Contract.
FIXED ANNUITY -- A series of payments that are fixed in amount and made during
the Annuity Period to a payee under a 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 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 90th birthday of
the Owner. In the case of Contracts issued in connection with Qualified Plans,
the Code generally requires that a minimum distribution be taken by April 1 of
the calendar year following the calendar year in which the Participant attains
age 70 1/2. Accordingly, the Company may require a Participant in a Qualified
Plan to annuitize prior to such date unless the Participant demonstrates that
the minimum distribution is otherwise being made.
MARKET VALUE ADJUSTMENT -- An adjustment applied to amounts withdrawn,
transferred or annuitized from the one, three, five, seven and ten year Fixed
Account options prior to the end of the applicable Guarantee Period(s).
5
<PAGE> 6
NONQUALIFIED PLAN -- A retirement plan which does not receive favorable tax
treatment under Sections 401, 403(b), 408 or 457 of the Internal Revenue Code.
OWNER -- The person(s) having the privileges of ownership defined in the
Contracts. Except to the extent restricted by the retirement plan pursuant to
which the Contract is issued, the Participant will be the Owner of the
Certificate.
PARTICIPANT -- The person entitled to benefits under a Contract as evidenced by
a Certificate issued to the Participant.
PORTFOLIO -- A subdivision of the Separate Account invested wholly in shares of
one of the investment series of the Trust.
PURCHASE PAYMENTS -- Amounts paid to the Company for the Contract by or on
behalf of a Participant.
QUALIFIED PLAN -- A retirement plan which receives favorable tax treatment under
Sections 401, 403(b), 408 or 457 of the Internal Revenue Code.
SEPARATE ACCOUNT -- A segregated investment account of the Company entitled "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 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.
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 Fixed 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").
WHAT IS THE DIFFERENCE BETWEEN A VARIABLE ANNUITY AND A FIXED ANNUITY?
The Contract has appropriate provisions relating to variable and fixed
accumulation values and variable and fixed annuity payments. A Variable Annuity
and a Fixed Annuity have certain similarities. Both provide that Purchase
Payments, less certain deductions, will be accumulated prior to the Annuity
Date. After the Annuity Date, annuity payments will be made to a designated
payee (normally, the Participant), for the life of the Annuitant or a period
certain or a combination thereof. The Company assumes mortality and expense
risks under the Contracts, for which it receives certain compensation.
The most significant difference between a Variable Annuity and a Fixed
Annuity is that under a Variable Annuity, all investment risk before and after
the Annuity Date is assumed by the Participant or other payee; the amounts of
the annuity payments vary with the investment performance of the Portfolios of
the Separate Account selected by the Participant. Under a Fixed Annuity, in
contrast, the investment risk after the Annuity Date is assumed by the Company
and the amounts of the annuity payments do not vary. In the case of amounts
allocated to the Fixed Account prior to the Annuity Date, the Participant bears
the risks (1) that the Guarantee Rate to be credited on amounts allocated to the
Fixed Account may not exceed the minimum guaranteed rate of 3% for any Guarantee
Period, and (2) that amounts withdrawn, transferred or annuitized from the
three, five, seven and ten year Fixed Account options prior to the end of their
respective Guarantee Periods could result in the Participant's receiving less
than the Purchase Payments so allocated (See "Fixed Account Options -- Market
Value Adjustment").
7
<PAGE> 8
HOW MAY PURCHASE PAYMENTS BE ALLOCATED?
Purchase Payments for the Contracts may be allocated pursuant to
instructions in the application to one or more Portfolios of the Separate
Account, and/or to the Company's General Account under one or more of the Fixed
Account options under the Contracts. The Separate Account invests in shares of
the following Underlying Funds (see "Separate Account Investments"):
<TABLE>
<S> <C>
- - INTERNATIONAL EQUITY - ASSET ALLOCATION
- - CAPITAL GROWTH - U.S. GOVERNMENT INCOME
- - GROWTH AND INCOME - MONEY MARKET
</TABLE>
Purchase Payments allocated to Fixed Account option(s) will earn interest
at the then Current Interest Rate(s) for the selected Guarantee Period(s). (See
"Fixed Account Options").
Prior to the Annuity Date, transfers may be made among the Portfolios
and/or the Fixed Account options. Fifteen transfers per Contract Year are
permitted before a transfer fee will be assessed. A Market Value Adjustment may
also apply, in the case of a transfer from a Fixed Account option. (See
"Purchases, Withdrawals and Contract Value -- Transfer During Accumulation
Period").
MAY WITHDRAWALS BE MADE BEFORE ANNUITIZATION?
Except as explained below, Contract Value may be withdrawn at any time
during the Accumulation Period. In addition to potential losses due to
investment risks, withdrawals may be reduced by a Withdrawal Charge, and a
penalty tax and income tax may apply. Contracts in connection with Qualified
Plans may be subject to additional withdrawal restrictions imposed by the plan.
Earnings under a 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). Alternatively, there is a free withdrawal amount which
applies to the first withdrawal during a Contract Year after the first Contract
Year. (See "Contract Charges -- Sales Charges -- Withdrawal Charge"). Certain
Owners of Nonqualified Plan Contracts and Contracts issued in connection with
Individual Retirement Annuities ("IRAs") may choose to withdraw amounts which in
the aggregate add up to 10% of their Purchase Payments annually pursuant to a
systematic withdrawal program without charge. (See "Purchases, Withdrawals and
Contract Value -- Withdrawals (Redemptions) -- Systematic Withdrawal Program").
Withdrawals are taxable and a 10% federal tax penalty may apply to withdrawals
before age 59 1/2.
Participants should consult their own tax counsel or other tax adviser
regarding any withdrawals or distributions.
CAN I EXAMINE THE CONTRACT?
The Contractholder (or Participant) may return the Contract (or
Certificate, respectively) to the Company within 30 days after it is received by
delivering or mailing it to the Company's Annuity Service Center. If the
Contract or Certificate is returned to the Company, it will be terminated and
the Company will pay the Contractholder or Participant all Purchase Payments
allocated to the Fixed Accounts, plus the value of amounts in the Portfolios of
the Separate Account on the date it is received by the Company. This amount may
be more or less than the Purchase Payment made, thus, the investment risk is
borne by the Participant.
WHAT ARE THE CHARGES AND DEDUCTIONS UNDER A CONTRACT?
A mortality and expense risk charge is assessed daily against the assets of
each Portfolio at an annual rate of 1.25%. A distribution expense charge is
assessed daily against the assets of each Portfolio at an annual rate of 0.15%.
The Contracts also provide for certain deductions and charges, including a
contract administration charge of $30 annually. The Contract permits up to 15
free 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
8
<PAGE> 9
first seven Contribution Years (6%-6%-5%-4%-3%-2%-1%-0%) when a withdrawal is
made. (See "Contract Charges").
DOES THE CONTRACT PAY ANY DEATH BENEFITS?
A death benefit is provided in the event of the death of the Participant
during the Accumulation Period. If the Participant was less than age 70 on the
Certificate Date, the death benefit is equal to the greater of:
(1) the total of Purchase Payments made prior to the death of the
Participant, reduced by any partial withdrawals and partial annuitizations;
or
(2) the Contract Value at the end of the Valuation Period during which
Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company; or
(3) the Contract Value on that anniversary of the Certificate Date
preceding the date of death, increased by any Purchase Payments made since
that anniversary and reduced by any partial withdrawals and partial
annuitizations since that anniversary, which results in the greatest value.
If the Participant was age 70 or older on the Certificate Date, the death
benefit will equal the Contract Value at the end of the Valuation Period during
which Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company.
(See "Description of the Contracts -- Death Benefit").
WHAT ARE THE AVAILABLE ANNUITY OPTIONS UNDER THE CONTRACT?
There are five available annuity options under the Contract. They include
an annuity for life, a joint and survivor annuity, a joint and survivor life
annuity with 120 monthly payments guaranteed, a life annuity with 120 or 240
monthly payments guaranteed and monthly payments for a specified number of
years. The Annuity Date may not be deferred beyond an Owner's 90th birthday. If
a Contractholder does not elect otherwise, monthly annuity payments generally
will be made under the fourth option to provide a life annuity with 120 monthly
payments certain. (See "Annuity Period -- Annuity Options").
DOES THE OWNER HAVE ANY VOTING RIGHTS UNDER THE CONTRACT?
Owners will have the right to vote on matters affecting the Underlying
Funds to the extent that proxies are solicited by the Trust. If the Owner does
not vote, the Company will vote such interests in the same proportion as it
votes shares for which it has received instructions. (See "Separate Account
Investments -- Voting Rights").
9
<PAGE> 10
- --------------------------------------------------------------------------------
FEE TABLES
- --------------------------------------------------------------------------------
OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGE (AS A PERCENTAGE OF PURCHASE PAYMENTS):
<TABLE>
<CAPTION>
CONTRIBUTION YEAR
<S> <C>
One............................................................................................... 6%
Two............................................................................................... 6%
Three............................................................................................. 5%
Four.............................................................................................. 4%
Five.............................................................................................. 3%
Six............................................................................................... 2%
Seven............................................................................................. 1%
Eight and later................................................................................... 0%
ANNUAL CONTRACT ADMINISTRATION CHARGE................................................................... $30
TRANSFER FEE............................................................................................ $25
(applies solely to each transfers in excess of fifteen in a Contract Year)
</TABLE>
- ---------------
The Owner Transaction Expenses apply to the Contract Value allocated to the
Fixed Account, as well as the Separate Account.
- --------------------------------------------------------------------------------
ANNUAL SEPARATE ACCOUNT EXPENSES
(AS A PERCENTAGE OF DAILY NET ASSET VALUE)
<TABLE>
<S> <C>
MORTALITY RISK CHARGE................................................................................. 0.90%
EXPENSE RISK CHARGE................................................................................... 0.35%
DISTRIBUTION EXPENSE CHARGE........................................................................... 0.15%
------
TOTAL EXPENSE CHARGE............................................................................ 1.40%
=====
</TABLE>
ANNUAL TRUST EXPENSES*
(AS A PERCENTAGE OF AVERAGE NET ASSETS FOR THE TRUST'S
FISCAL YEAR ENDED AUGUST 31, 1997):
<TABLE>
<CAPTION>
ADVISORY FEE ADMINISTRATION FEE TOTAL ANNUAL
(AFTER WAIVER OF FEE) (AFTER WAIVER OF FEE) OTHER EXPENSES EXPENSES
--------------------- --------------------- -------------- ------------
<S> <C> <C> <C> <C>
International Equity....................... 0.00% 0.00% 1.11% 1.11%
Capital Growth............................. 0.00% 0.00% .90% .90%
Growth and Income.......................... 0.00% 0.00% .90% .90%
Asset Allocation........................... 0.00% 0.00% .85% .85%
U.S. Government Income..................... 0.00% 0.00% .80% .80%
Money Market............................... 0.00% 0.00% .55% .55%
</TABLE>
- ---------------
*Reflects current waiver arrangements to maintain Total Annual Expenses at the
levels indicated above. Absent such waivers, the Advisory Fee for the
International Equity, Capital Growth, Growth and Income, Asset Allocation, U.S.
Government Income and Money Market Portfolios would be 0.80%, 0.60%, 0.60%,
0.55%, 0.50% and 0.25%, respectively, and Total Annual Expenses for the
International Equity, Capital Growth, Growth and Income, Asset Allocation, U.S.
Government Income and Money Market Portfolios would be 2.99%, 1.70%, 1.70%,
2.03%, 1.50% and 1.48%, respectively.
THE ABOVE EXPENSES FOR THE UNDERLYING FUNDS WERE PROVIDED BY THE TRUST. NEITHER
THE COMPANY NOR THE SEPARATE ACCOUNT HAVE INDEPENDENTLY VERIFIED THE ACCURACY OF
SUCH INFORMATION.
10
<PAGE> 11
- --------------------------------------------------------------------------------
EXAMPLES
- --------------------------------------------------------------------------------
An Owner would pay the following expenses on a $1,000 investment in each
indicated Portfolio assuming 5% annual return on assets, and:
(a) the Contract was surrendered at the end of the applicable time period
(b) the Contract was not surrendered at the end of the applicable time
period
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
International Equity......................... (a) $ 86 $ 130 $ 167 $292
(b) $ 26 $ 80 $ 137 $292
Capital Growth............................... (a) $ 84 $ 124 $ 157 $271
(b) $ 24 $ 74 $ 127 $271
Growth and Income............................ (a) $ 84 $ 124 $ 157 $271
(b) $ 24 $ 74 $ 127 $271
Asset Allocation............................. (a) $ 84 $ 123 $ 154 $266
(b) $ 24 $ 73 $ 124 $266
U.S. Government Income....................... (a) $ 83 $ 121 $ 152 $261
(b) $ 23 $ 71 $ 122 $261
Money Market................................. (a) $ 81 $ 114 $ 139 $235
(b) $ 21 $ 64 $ 109 $235
</TABLE>
- ---------------
1. The purpose of the foregoing table and examples is to assist an investor in
understanding the various costs and expenses that he or she will bear
directly or indirectly by investing in the Separate Account. The Owner
Transaction Expenses shown under "Fee Tables" are applicable to Contract
Value allocated to the Fixed Account as well as to the Separate Account.
However, the balance of the fee tables, and the Examples, apply only to
investments in the Separate Account. The table reflects expenses of the
Separate Account as well as the Underlying Funds. For additional information
see "Contract Charges"; see also the sections relating to management of the
Underlying Funds in the Trust prospectus. The examples do not illustrate the
tax consequences of surrendering a Contract.
2. The examples assume that there were no transactions which would result in the
imposition of the transfer fee. The amount of the transfer fee is $25, except
that the first 15 transfers per Contract Year are not subject to a fee. (See
"Administrative Charges -- Transfer Fee"). Transfers from the Fixed Account
may be subject to a Market Value Adjustment even if they are not subject to a
transfer fee.
3. For purposes of the amounts reported in the Examples, the contract
administration charge is reflected by applying a percentage equivalent
charge, obtained by dividing the total amount of such charges anticipated to
be collected during the year by the total estimated average net assets of the
Portfolios and the Fixed Account attributable to the Contracts.
4. NEITHER THE FEE TABLES NOR THE EXAMPLES ARE REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
11
<PAGE> 12
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCEPTION TO FISCAL YEAR
PORTFOLIOS 8/31/96 8/31/97
- ------------------------------------------------------------- ------------ -----------
<S> <C> <C>
International Equity*
Beginning AUV........................................... $10.91 $10.92
Ending AUV.............................................. $10.92 $11.67
Ending # AUs............................................ 40,791 98,431
Capital Growth**
Beginning AUV........................................... $12.26 $13.95
Ending AUV.............................................. $13.95 $17.51
Ending # AUs............................................ 71,885 216,078
Growth and Income**
Beginning AUV........................................... $12.02 $13.07
Ending AUV.............................................. $13.07 $17.47
Ending # AUs............................................ 134,402 362,810
Asset Allocation*
Beginning AUV........................................... $11.42 $12.00
Ending AUV.............................................. $12.00 $14.49
Ending # AUs............................................ 50,868 109,177
U.S. Government Income*
Beginning AUV........................................... $11.08 $10.79
Ending AUV.............................................. $10.79 $11.50
Ending # AUs............................................ 20,140 54,714
Money Market*
Beginning AUV........................................... $10.02 $10.47
Ending AUV.............................................. $10.47 $10.84
Ending # AUs............................................ 48,304 61,233
</TABLE>
- ---------------
AUV - Accumulation Unit Value
AU - Accumulation Units
* Inception Date is December 22, 1995
** Inception Date is December 6, 1995
- --------------------------------------------------------------------------------
PERFORMANCE DATA
- --------------------------------------------------------------------------------
From time to time the Separate Account may advertise the Money Market
Portfolio's "yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Money Market Portfolio refers to the net income generated for a
Contract funded by an investment in the Portfolio (which invests in shares of
the Money Market Portfolio of the Trust) over a seven-day period (which period
will be stated in the advertisement). This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Portfolio is assumed to be reinvested
at the end of each seven-day period. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. Neither the yield nor the effective yield takes into consideration
the effect of any capital changes that might have occurred during the seven-day
period, nor do they reflect the
12
<PAGE> 13
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.
More detailed information on the computation of advertised performance data
for the Separate Account is contained in the Statement of Additional
Information.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT
AND THE GENERAL ACCOUNT
- --------------------------------------------------------------------------------
COMPANY
The Company is a stock life insurance company 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
an indirect wholly-owned subsidiary of SunAmerica Inc., a Maryland corporation.
The Company and its affiliates, SunAmerica Life Insurance Company, Anchor
National Life Insurance Company, CalFarm Life Insurance Company, SunAmerica
Asset Management Corp., Imperial Premium Finance, Inc., Resources Trust Company
and four broker-dealers, offer a full line of financial services, including
fixed and variable annuities, mutual funds, premium finance, broker-dealer and
trust administration services. As of September 30, 1997 the Company owned $382.9
million in assets while SunAmerica Inc., the Company's ultimate parent, together
with its subsidiaries, held $51.98 billion of assets, consisting of $35.64
billion of assets on its balance sheet, $2.59 billion of assets managed in
mutual funds and private accounts, and $13.75 billion under custody in
retirement trust accounts.
The Company may from time to time publish in advertisements, sales
literature and reports to Owners, the ratings and other information assigned to
it by one or more independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("Standard & Poor's"), and Duff & Phelps. A.M. Best's
and Moody's ratings reflect their current opinion on the relative financial
strength and operating performance of an insurance company in comparison to the
norms of the life/health insurance industry. Standard & Poor's and Duff & Phelps
provide ratings which measure the claims-paying ability of insurance companies.
These ratings are opinions of an operating insurance com-
13
<PAGE> 14
pany's financial capacity to meet the obligations of its insurance policies in
accordance with their terms. Claims-paying ability ratings do not refer to an
insurer's ability to meet non-policy obligations (i.e., debt/commercial paper).
These ratings do not apply to the Separate Account. However, the contractual
obligations under the Contracts are general corporate obligations of the
Company.
The Company is admitted to conduct life insurance and annuity business in
the states of New York, Nebraska and New Mexico. The Contracts offered by this
prospectus are issued by the Company and will be funded in the Separate Account
as well as the Company's General Account.
For more detailed information about the Company, see "Additional
Information About the Company".
SEPARATE ACCOUNT
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 Commission.
The assets of the Separate Account are the property of the Company.
However, the assets of the Separate Account, equal to its reserves and other
contract liabilities, are not chargeable with liabilities arising out of any
other business the Company may conduct.
Income, gains, and losses, whether or not realized, from assets allocated
to the Separate Account are credited to or charged against the Separate Account
without regard to other income, gains, or losses of the Company.
The Separate Account is divided into Portfolios, with the assets of each
Portfolio invested in the shares of one of the Underlying Funds. The Company
does not guarantee the investment performance of the Separate Account, its
Portfolios or the Underlying Funds. Values allocated to the Separate Account and
the amount of Variable Annuity payments will vary with the values of shares of
the Underlying Funds, and are also reduced by Contract charges.
GENERAL ACCOUNT
The General Account is made up of all of the general assets of the Company
other than those allocated to the Separate Account or any other segregated asset
account of the Company. A Purchase Payment may be allocated to one or more
Guarantee Periods of one, three, five, seven and ten years available through the
General Account. In addition, all or part of the Participant's Contract Value
may be transferred to Guarantee Periods available under the Contract as
described under "Purchases, Withdrawals and Contract Value -- Transfer During
Accumulation Period" and "Annuity Period -- Transfer During Annuity Period".
Assets supporting amounts allocated to Guarantee Periods become part of the
Company's General Account assets and are available to fund the claims of all
classes of customers of the Company, as well as all classes of its creditors.
Accordingly, all of the Company's assets held in the General Account will be
available to fund the Company's obligations under the Contracts as well as other
such claims.
The Company will invest the assets of the General Account in the manner
chosen by the Company and allowed by applicable state laws regarding the nature
and quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
14
<PAGE> 15
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT INVESTMENTS
- --------------------------------------------------------------------------------
UNDERLYING FUNDS
Each of the Portfolios of the Separate Account invests in the shares of one
of the following Underlying Funds, which are investment series of Mutual Fund
Variable Annuity Trust, an open-end management investment company registered
under the Investment Company Act of 1940:
<TABLE>
<S> <C>
- INTERNATIONAL EQUITY - ASSET ALLOCATION
- CAPITAL GROWTH - U.S. GOVERNMENT INCOME
- GROWTH AND INCOME - MONEY MARKET
</TABLE>
The Chase Manhattan Bank ("Chase" or the "Adviser") is the investment
adviser, administrator and custodian for each of the Underlying Funds. Chase
Asset Management, Inc. ("CAM") is the investment subadviser to each of the
Portfolios except the International Equity Portfolio. Chase Asset Management
(London) Limited, an English corporation ("CAM London") is the investment
subadviser to the International Equity Portfolio. As investment adviser to the
Underlying Funds, Chase makes investment decisions subject to such policies as
the Board of Trustees of the Trust may determine. As administrator of the
Underlying Funds, Chase provides certain services including coordinating
relationships with independent contractors and agents; preparing for signature
by officers and filing of certain documents; preparing financial statements;
arranging for the maintenance of books and records; and providing office
facilities. Certain of these services have been delegated to Vista Fund
Distributors, Inc. ("VFD") which serves as sub-administrator to the Underlying
Funds. As custodian for the Underlying Funds, Chase's responsibilities include
safeguarding and controlling the Underlying Funds' cash and securities, handling
the receipt and delivery of securities, determining income and collecting
interest on investments, maintaining books of original entry and other required
books and accounts, and calculating daily net asset values.
The Underlying Funds and their investment objectives are as follows:
INTERNATIONAL EQUITY PORTFOLIO seeks to provide a total return on assets
from long-term growth of capital and from income principally through a broad
portfolio of marketable equity securities of established foreign companies
organized in countries other than the United States and foreign subsidiaries of
U.S. companies participating in foreign companies.
CAPITAL GROWTH PORTFOLIO seeks to provide long-term capital growth
primarily through diversified holdings (i.e., at least 80% of its assets under
normal circumstances) in common stocks. The Portfolio will seek to invest its
assets in stocks of issuers (including foreign issuers) with small to medium
capitalizations. The Adviser intends to utilize both quantitative and
fundamental research to identify undervalued stocks with a catalyst for positive
change. Dividend income, if any, is a consideration incidental to the
Portfolio's investment objective of growth of capital. This investment policy
involves the risks that the issues identified by the Adviser will not appreciate
or appreciate as significantly as projected.
GROWTH AND INCOME PORTFOLIO seeks to provide long-term capital appreciation
and to provide dividend income primarily through a broad portfolio (i.e., at
least 80% of its assets under normal circumstances) of common stocks. In
addition, the Portfolio may invest up to 20% of its total assets in convertible
securities. The Adviser intends to utilize both quantitative and fundamental
research to identify undervalued stocks with a catalyst for positive change. The
Adviser believes that the risk involved in seeking capital appreciation will be
moderated somewhat by the anticipated dividend returns on the stocks to be held
by the Portfolio.
ASSET ALLOCATION PORTFOLIO seeks to provide maximum total return through a
combination of long-term growth of capital and current income by investing in a
diversified portfolio of equity and debt securities, including common stocks,
convertible securities and government and corporate fixed-income obligations.
Under normal market conditions, between 35%-70% of the Portfolio's total assets
will be invested in common stocks and other equity investments and at least
15
<PAGE> 16
25% of the Portfolio's assets will be invested in fixed-income senior
securities, defined for this purpose to include non-convertible corporate debt
securities and government obligations. The Adviser considers both the
opportunity for gain and the risk of loss in making investments, and may alter
the relative percentages of assets invested in equity and fixed income
securities from time to time, depending on the judgment of the Adviser as to
general market and economic conditions, trends and yields and interest rates and
changes in fiscal and monetary policies.
U.S. GOVERNMENT INCOME PORTFOLIO seeks to provide monthly dividends as well
as to protect the value of an investor's investment (i.e., to preserve
principal) by investing at least 65% of its assets in U.S. Treasury obligations,
obligations issued or guaranteed by U.S. government agencies or
instrumentalities if such are backed by the "full faith and credit" of the U.S.
Treasury and securities issued or guaranteed as to principal or interest by the
U.S. government or by agencies or instrumentalities thereof. Neither the United
States nor any of its agencies insures or guarantees the market value of shares
of this Portfolio.
MONEY MARKET PORTFOLIO seeks to provide maximum current income consistent
with preservation of capital and maintenance of liquidity through investments in
U.S. dollar denominated commercial paper, obligations of foreign governments,
obligations issued or guaranteed by U.S. banks, securities issued by the U.S.
government, its agencies or its instrumentalities and repurchase agreements.
There is no assurance that the investment objective of any of the
Underlying Funds will be met. Participants bear the complete investment risk for
Purchase Payments allocated to a Portfolio. Contract Values will fluctuate in
accordance with the investment performance of the Portfolio(s) to which Purchase
Payments are allocated, and in accordance with the imposition of the fees and
charges assessed under the Contracts.
DETAILED INFORMATION ABOUT THE UNDERLYING FUNDS IS CONTAINED IN THE
ACCOMPANYING CURRENT PROSPECTUS OF THE TRUST. AN INVESTOR SHOULD CAREFULLY
REVIEW THAT PROSPECTUS BEFORE ALLOCATING AMOUNTS TO BE INVESTED IN THE
PORTFOLIOS OF THE SEPARATE ACCOUNT.
VOTING RIGHTS
To the extent required by applicable law, the Company will vote the shares
of the Underlying Funds held in the Separate Account at meetings of the
shareholders of the Trust in accordance with instructions received from persons
having the voting interest in the corresponding Portfolios. The Company will
vote shares for which it has not received instructions in the same proportion as
it votes shares for which it has received instructions. The Trust does not hold
regular meetings of shareholders.
The number of shares which a person has a right to vote will be determined
as of a date to be chosen by the Trust not more than 60 days prior to the
meeting of the Underlying Fund's shareholders. Voting instructions will be
solicited by written communication in advance of such meeting. Except as may be
limited by the terms of the retirement plan pursuant to which the Contract was
issued, the person having such voting rights will be the Participant before the
Annuity Date; thereafter the payee entitled to receive payments under the
Certificate.
SUBSTITUTION OF SECURITIES
If the shares of any of the Underlying Funds should no longer be available
for investment by the Separate Account or if, in the judgment of the Company's
Board of Directors, further investment in the shares of an Underlying Fund is no
longer appropriate in view of the purposes of the Contract, the Company may
substitute shares of another mutual fund (or series thereof) for Underlying Fund
shares already purchased and/or to be purchased in the future by Purchase
Payments under the Contract. No such substitution of securities may take place
without prior approval of the Commission and under such requirements as the
Commission may impose.
16
<PAGE> 17
- --------------------------------------------------------------------------------
FIXED ACCOUNT OPTIONS
- --------------------------------------------------------------------------------
ALLOCATIONS
Purchase Payments may also be allocated, and Contract Values in the
Separate Account transferred, to one or more of the fixed options available
through the Company's General Account. Amounts thus applied will earn interest
for one or more of the available Guarantee Periods selected by the Owner, at
Guarantee Rates based on the Current Interest Rates set by the Company for such
Guarantee Periods. Current Interest Rates may change from time to time due to
changes in market conditions or other factors. However, the Guarantee Rate in
effect at the time one of these options is selected will not change for the
remainder of the Guarantee Period. THE COMPANY'S OBLIGATION TO PAY INTEREST AT
THE GUARANTEE RATE IS NOT AFFECTED BY THE PERFORMANCE OF THE COMPANY'S GENERAL
ACCOUNT INVESTMENTS.
Guarantee Periods are currently available for periods of one, three, five,
seven and ten years. An Owner may elect to allocate Purchase Payments to one or
more of those Guarantee Periods. Each such allocation (to the extent not
withdrawn, transferred or annuitized prior to the end of the Guarantee Period),
will earn interest, credited daily, at the annual effective Guarantee Rate
established for the Guarantee Period at the time the allocation is made. The
Guarantee Rate is based on the Current Interest Rate in effect at the time the
allocation is made. The Current Interest Rate applicable to renewals for new
Guarantee Periods of amounts already allocated to the Fixed Account, or to
transfers from the Separate Account to the Fixed Account, may differ from the
Current Interest Rates applicable to Purchase Payments. The Current Interest
Rates are set at the sole discretion of the Company. OWNERS BEAR THE RISK THAT
CURRENT INTEREST RATES AVAILABLE AT FUTURE TIMES MAY BE MORE OR LESS THAN THOSE
CURRENTLY OR INITIALLY AVAILABLE. THEY ALSO BEAR THE RISK THAT SUCH RATES MAY
NOT EXCEED THE GUARANTEED MINIMUM RATE OF 3%.
RENEWALS
Within 30 days after the end of a Guarantee Period, amounts accumulated
during that Guarantee Period may be reallocated to the Fixed Account for a new
Guarantee Period of the same or of a different duration. If the new Guarantee
Period is of the same duration, the amounts will receive the Current Interest
Rate in effect for that duration as of the last day of the previous Guarantee
Period and the new Guarantee Period will begin the next following business day.
If the new Guarantee Period is of a different duration and the election is
received after the expiration of the Guarantee Period, the amounts will receive
the Current Interest Rate described in the previous sentence until such time as
the election is received (at which time interest will be credited at the Current
Interest Rate then in effect for the new selected Guarantee Period). In that
case, the new Guarantee Period will begin on the day that the reallocation is
made. Also, during such 30-day period, those amounts may be withdrawn,
transferred or annuitized without application of the Market Value Adjustment
(See below). However, any such amounts withdrawn may nevertheless be subject to
the Withdrawal Charge.
At the end of a Guarantee Period, the Company will, unless the Participant
has elected otherwise, assume reallocation for the same period, unless the new
period would expire after the Annuity Date (or, if none has been selected, the
Latest Annuity Date). In the latter case, the Company will choose the longest
available Guarantee Period that will not extend beyond such date. If the renewal
occurs within one year prior to that date, interest will be credited to such
Annuity Date at the then Current Interest Rate for a one-year Guarantee Period.
17
<PAGE> 18
MARKET VALUE ADJUSTMENT
Contract Value withdrawn, transferred or, prior to the Annuity Date,
annuitized from the Fixed Account under the one, three, five, seven and ten year
Fixed Account options described above prior to the expiration of the Guarantee
Period (other than withdrawals for the purpose of paying the death benefit upon
the death of the Participant, withdrawals from the one year Fixed Account option
under the Automatic Dollar Cost Averaging Program or Asset Allocation
Rebalancing Program or withdrawals made to pay Contract fees or charges), may be
subject to a Market Value Adjustment ("MVA"). The MVA reflects the impact that
changing interest rates have on the value of money invested at a fixed interest
rate, such as a Guarantee Rate. The MVA may be either positive or negative, and
is computed by multiplying the amount withdrawn, transferred or annuitized by
the following factor:
N/12
[(1 + I)/(1 + J + 0.0025)] -1
where
I is the Guarantee Rate in effect;
J is the Current Interest Rate available for a period equal to the number
of years remaining in the Guarantee Period at the time of withdrawal,
transfer or annuitization (fractional years are rounded up to the next
full year); and
N is the number of full months remaining in the Guarantee Period at the
time the withdrawal, transfer or annuitization request is processed.
In general, whether the MVA will operate to increase or decrease the
Contract Value upon withdrawal, transfer or annuitization is determined by
comparing the Guarantee Rate in effect for that allocation to the Current
Interest Rate (as of the date of the transaction) that would apply for a
Guarantee Period equal to the number of years remaining in the Guarantee Period
as of that date. (For purposes of determining the MVA, if the Company does not
offer a Guarantee Period of that duration, the applicable Current Interest Rate
will be determined by linear interpolation between Current Interest Rates for
the nearest two Guarantee Periods that are available). If the Current Interest
Rate thus determined plus one-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, the 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 for amounts allocated to the one
year Fixed Account option. That portion of the Contracts relating to allocations
to the one year Fixed Account option is not registered under the Securities Act
of 1933 (the "Act") and is therefore not subject to the provisions of the Act.
The Fixed Account options, including the one year Fixed Account, are not subject
to the provisions of the Investment Company Act of 1940.
18
<PAGE> 19
- --------------------------------------------------------------------------------
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 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.
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a Mortality and Expense Risk Charge from each Portfolio
during each Valuation Period. The aggregate Mortality and Expense Risk Charge is
equal, on an annual basis, to 1.25% of the net asset value of each Portfolio
(approximately .90% is for mortality risks and approximately 0.35% is for
expense risks). The Mortality and Expense Risk Charge is assessed during both
the Accumulation Period and the Annuity Period; however, it is not applied to
Contract Values allocated to the Fixed Account. The mortality risks assumed by
the Company arise from its contractual obligations: (1) to make annuity payments
after the Annuity Date for the life of the Annuitant(s); (2) to waive the
Withdrawal Charge in the event of the death of the Participant; and (3) to
provide a death benefit prior to the Annuity Date.
The expense risk assumed by the Company is that the costs of administering
the Contracts and the Separate Account will exceed the amount received from the
Contract Administration Charge. (See "Administrative Charges"). The expense risk
charge is guaranteed by the Company and cannot be increased.
ADMINISTRATIVE CHARGES
CONTRACT ADMINISTRATION CHARGE
An annual Contract Administration Charge of $30 is charged against each
Certificate. The amount of this charge is guaranteed and cannot be increased by
the Company. This charge reimburses the Company for expenses incurred in
establishing and maintaining records relating to a Contract. The Contract
Administration Charge will be assessed on each anniversary of the Certificate
Date that occurs on or prior to the Annuity Date. In the event that a total
surrender of Contract Value is made, the Charge will be assessed as of the date
of surrender without proration. This Charge is not assessed during the Annuity
Period.
The total Contract Administration Charge is allocated between the
Portfolios and the Fixed Account in proportion to the respective Contract Values
similarly allocated. The Contract Administration Charge is at cost with no
margin included for profit.
TRANSFER FEE
In general, a transfer fee of $25 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.
19
<PAGE> 20
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").
A contingent deferred sales charge, which is referred to as the Withdrawal
Charge, may be imposed upon certain withdrawals. Withdrawal Charges will vary in
amount depending upon the Contribution Year of the purchase payment at the time
of withdrawal in accordance with the Withdrawal Charge table shown below.
WITHDRAWAL CHARGE TABLE
<TABLE>
<CAPTION>
APPLICABLE WITHDRAWAL
CONTRIBUTION YEAR CHARGE PERCENTAGE
------------------------------------------------------- ---------------------
<S> <C>
One.................................................... 6%
Two.................................................... 6%
Three.................................................. 5%
Four................................................... 4%
Five................................................... 3%
Six.................................................... 2%
Seven.................................................. 1%
Eight and later........................................ 0%
</TABLE>
The Withdrawal Charge is deducted from remaining Contract Value so that the
actual reduction in Contract Value as a result of the withdrawal will be greater
than the withdrawal amount requested and paid. For purposes of determining the
Withdrawal Charge, withdrawals will be allocated first to investment income, if
any (which may generally be withdrawn free of Withdrawal Charge), and then to
Purchase Payments on a first-in, first-out basis so that all withdrawals are
allocated to Purchase Payments to which the lowest (if any) Withdrawal Charge
applies.
If the withdrawal request does not specify from which Portfolio(s) or
Guarantee Amount(s) the withdrawal is to be made, the request will be processed
by reducing the Contract Values in each category in proportion to their
allocations. Therefore, FAILURE TO SPECIFY AN ALLOCATION MAY RESULT IN THE
IMPOSITION OF A MARKET VALUE ADJUSTMENT IN CASES WHERE AMOUNTS ARE ALLOCATED TO
THE FIXED ACCOUNT.
For examples of how the Withdrawal Charge is applied, see Appendix A.
The amounts obtained from the Withdrawal Charge will be used to pay sales
commissions and other promotional or distribution expenses associated with the
marketing of the Contracts. To the extent that the Withdrawal Charge is
insufficient to cover all sales commissions and other promotional or
distribution expenses, the Company may use any of its corporate assets,
including potential profit which may arise from the Mortality and Expense Risk
Charge and the Distribution Expense Charge, to make up any difference.
FREE WITHDRAWALS
Purchase Payments that are no longer subject to the Withdrawal Charge (and
not previously withdrawn), plus earnings in the Participant's account, may be
withdrawn free of Withdrawal Charges at any time.
In addition, for the first withdrawal during a Contract Year after the
first Contract Year, no Withdrawal Charge is applied to that part of the
withdrawal which does not exceed the greater of (a) earnings in the Contract or
(b) 10% of Purchase Payments made more than one year prior to the date of
withdrawal that remain subject to the Withdrawal Charge and that have not
previously been withdrawn. Participants may take their 10% free withdrawal of
Purchase Payments (or an amount up to 10%) pursuant to the Systematic Withdrawal
Program. (See "Purchases, Withdrawals and
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Contract Value -- Withdrawals (Redemptions) -- Systematic Withdrawal Program").
The portion of a free withdrawal which exceeds the sum of earnings in a
Participant's account and premiums which are both no longer subject to a
Withdrawal Charge and not yet withdrawn, is assumed to be a withdrawal against
future earnings. Although amounts withdrawn free of a Withdrawal Charge reduce
principal in a Contract for purposes of calculating amounts available for future
withdrawal of earnings, they do not reduce Purchase Payments for purposes of
calculating the Withdrawal Charge. As a result, a Participant will not receive
the benefit of a free withdrawal in a full surrender.
The Company will waive the Withdrawal Charge on any withdrawal necessary to
satisfy the minimum distribution requirements of the Code or upon payment of a
death benefit. Where legally permitted, the Withdrawal Charge may be eliminated
when a Contract is issued to an officer, director or employee of the Company or
its affiliates.
DISTRIBUTION EXPENSE CHARGE
The Company deducts a Distribution Expense Charge from each Portfolio
during each Valuation Period which is equal, on an annual basis, to 0.15% of the
net asset value of each Portfolio. This charge is designed to compensate the
Company for assuming the risk that the cost of distributing the Contracts will
exceed the revenues from the Withdrawal Charge. The Commission considers the
Distribution Expense Charge to constitute a sales charge for purposes of the
Investment Company Act of 1940. In no event will this charge be increased.
Moreover, the sum of all Withdrawal Charges described above and the Distribution
Expense Charges assessed will at no time exceed 9% of all Purchase Payments
previously made. The Distribution Expense Charge is assessed during both the
Accumulation Period and the Annuity Period; however, it is not applied to
Contract Values allocated to the Fixed Account.
DEDUCTION FOR SEPARATE ACCOUNT INCOME TAXES
While the Company is not currently maintaining a provision for taxes, the
Company has reserved the right to establish such a provision for taxes in the
future if it determines, in its sole discretion, that it will incur a tax as a
result of the operation of the Separate Account. The Company will deduct for any
taxes incurred by it as a result of the operation of the Separate Account
whether or not there was a provision for taxes and whether or not it was
sufficient. (See "Taxes").
OTHER EXPENSES
The charges and expenses applicable to the various Underlying Funds are
borne indirectly by Participants having Contract Values allocated to the
Portfolios that invest in the respective Underlying Funds. For a summary of
current estimates of those charges and expenses, see "Fee Tables". For more
detailed information about those charges and expenses, please refer to the
prospectus for the Trust.
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"). Upon
Annuitization, benefits are payable under the Contracts in the form of an
annuity, either for the life of the Annuitant or for a fixed number of years.
(See "Annuity Period -- Annuity Options").
PARTICIPANT
The Participant is the person normally entitled to exercise all rights of
ownership under the Contracts. The Participant is also the person entitled to
receive benefits under the Contract, although the Participant may, subject to
limitations in the case of Qualified Plans, designate an alternative payee.
ANNUITANT
The Annuitant is the person on whose life annuity payments under a
Certificate depend. The Participant may change the designated Annuitant at any
time prior to the Annuity Date. In the case of a Certificate issued in
connection with a plan qualified under Section 403(b) or 408 of the Code, the
Participant is the Annuitant. The Participant may also designate a second person
on whose life, together with that of the Annuitant, annuity payments depend. In
the case of Qualified Plans, the designated second person is generally required
to be the Participant's spouse if the Participant is married. In the event an
Annuitant dies prior to the Annuity Date, the Participant must notify the
Company and designate a new Annuitant. The Participant must attest to the
Annuitant being alive before the Company will annuitize a Contract.
MODIFICATION OF THE CONTRACT
Only the Company's President, a Vice President or Secretary may approve a
change or waive any provisions of the Contract. Any change or waiver must be in
writing. No agent has the authority to change or waive the provisions of the
Contract.
The Company reserves the right to change the terms of the Contract as may
be necessary to comply with changes in applicable law.
ASSIGNMENT
Contracts issued pursuant to Nonqualified Plans that are not subject to
Title 1 of the Employee Retirement Income Security Act of 1974 ("ERISA") may be
assigned by the Owner at any time during the lifetime of the Annuitant prior to
the Annuity Date. The Company will not be bound by any assignment until written
notice is received by the Company at its Annuity Service Center. The Company is
not responsible for the validity, tax or other legal consequences of any
assignment. An assignment will not affect any payments the Company may make or
actions it may take before it receives notice of the assignment.
If the Contract is issued pursuant to a Qualified Plan (or a Nonqualified
Plan that is subject to Title 1 of ERISA), it may not be assigned, pledged or
otherwise transferred except under such conditions as may be allowed under
applicable law.
BECAUSE AN ASSIGNMENT MAY BE A TAXABLE EVENT, CONTRACT OWNERS SHOULD
CONSULT COMPETENT TAX ADVISERS SHOULD THEY WISH TO ASSIGN THEIR CONTRACTS.
DEATH BENEFIT
If the Participant dies during the Accumulation Period, a death benefit
will be payable to the Beneficiary upon receipt by the Company of Due Proof of
Death of the Participant. Provided the
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Beneficiary provides a written election to the Company within 60 days of the
Company's receipt of Due Proof of Death of the Participant, the Beneficiary may
alternatively elect to (i) receive the death benefit in a lump sum payment, (ii)
receive the death benefit in the form of one of the annuity options (over the
life of the Beneficiary or over a period not extending beyond the life
expectancy of the Beneficiary), with payments commencing within one year of the
Participant's death, (iii) elect to continue the Contract and receive the entire
Contract Value (adjusted for any applicable Withdrawal Charge and Market Value
Adjustment) within 5 years after the Participant's death, or (iv) if the
Participant was the Beneficiary's spouse, elect to continue the Certificate in
force. If no option is selected within 60 days of the Company's receipt of Due
Proof of Death of the Participant, the Company will pay the death benefit in a
single lump sum to the Beneficiary.
If the Participant was less than age 70 at the Certificate Date, the death
benefit is equal to the greater of:
(1) the total dollar amount of Purchase Payments made prior to the
death of the Participant, reduced by any partial withdrawals and partial
annuitizations; or
(2) the Contract Value at the end of the Valuation Period during which
Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company, at its Annuity Service Center; or
(3) the Contract Value on that anniversary of the Certificate Date
preceding the date of death, increased by the dollar amount of any Purchase
Payments made since that anniversary and reduced by the dollar amount of
any partial withdrawals and partial annuitizations since that anniversary,
which results in the greatest value.
If the Participant was age 70 or more at the Certificate Date, the death
benefit will equal the Contract Value at the end of the Valuation Period during
which Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company, at its Annuity Service Center.
BENEFICIARY
The Participant may designate the Beneficiary(ies) to receive any amount
payable on death. The original Beneficiary(ies) will be named in the
application. Unless an irrevocable Beneficiary(ies) designation was previously
filed, the Participant may change the Beneficiary(ies) prior to the Annuity Date
by written request delivered to the Company at its Annuity Service Center or by
completing a Change of Beneficiary Form provided by the Company. Any change will
take effect when recorded by the Company. The Company is not liable for any
payment made or action taken before it records the change.
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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 $1,000,000. The minimum initial
Purchase Payment for Contracts issued pursuant to a Qualified Plan is $2,000 and
the maximum is $1,000,000. Subsequent Purchase Payments for either a
Nonqualified Plan or Qualified Plan may be made in amounts of $250 or more ($100
or more if made in connection with an Automatic Payment Plan). The Company
reserves the right to refuse any Purchase Payment at any time. Generally, the
Company will not issue a Certificate under a Nonqualified Plan to a Participant
who is age 85 or older or under a Qualified Plan to a Participant who is age
70 1/2 or older.
AUTOMATIC PAYMENT PLAN
Owners utilizing automatic bank drafts through the Company's Automatic
Payment Plan may make scheduled subsequent Purchase Payments of $100 or more per
month. An enrollment form for this program is available through the Company's
Annuity Service Center.
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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 option are
available as source accounts. However, the Owner must elect to have the
transfers made exclusively from one source account. The intervals between
transfers may be monthly, quarterly, semiannually or annually, at the option of
the Owner. The theory of dollar cost averaging is that, if purchases are made at
fluctuating prices, this will have the effect of reducing the aggregate average
cost per unit to less than the average of the unit prices on the same purchase
dates. However, participation in the DCA Program does not assure the Owner of a
greater profit from his or her purchases under the DCA Program; nor will it
prevent or necessarily alleviate losses in a declining market.
Another option under the DCA Program is the periodic transfer of a selected
percentage of the value of the source account to one of the Portfolios (other
than the source account). A third option is to transfer the entire Contract
Value in the source account in a stated number of transfers as selected by the
Participant.
An Owner may elect to increase, decrease or change the frequency or amount
of Purchase Payments under a DCA Program. The application and any Purchase
Payments should be sent to the Company at its Annuity Service Center. The
Company reserves the right to modify, suspend and terminate the DCA Program at
any time.
ASSET ALLOCATION REBALANCING PROGRAM
Owners may participate in the Asset Allocation Rebalancing ("AAR") Program
pursuant to which Owners authorize the Company to automatically transfer their
Contract Value on a periodic basis to maintain a particular percentage
allocation among the Portfolios or the one year Fixed Account option as selected
by the Owner. Since the Contract Value allocated to each Portfolio will grow or
decline at different rates depending on the investment experience of the
Portfolio, and AAR automatically reallocates the Contract Value in the
Portfolios and the Fixed Account option to the allocation selected by the Owner.
One theory behind this type of reallocation is that it may help an Owner
purchase Accumulation Units low and sell Accumulation Units high. However,
participation in AAR does not assure the Owner of a greater profit from his or
her purchases under the program nor will it prevent or necessarily alleviate
losses in a declining market.
An Owner may select that rebalancing occur on a calendar quarter,
semiannual or annual basis. Contract Value reallocation will occur on the last
business day before the selected period ends. If an Owner elects to participate
in AAR, the entire Contract Value must be included in the program, except for
allocations to the three, five, seven and ten year Fixed Account options.
Amounts transferred under AAR are not counted against the 15 free transfers per
Contract Year or subject to any transfer charge or MVA. Owners may participate
in AAR by completing an Asset Allocation Rebalancing Authorization Form or by
calling the Company at its Annuity Service Center. On the application or form,
as appropriate, the Owner must select the Portfolios or one year Fixed Account
option, the percentage of Contract Value to be allocated to each under the
program, and the frequency of rebalancing. Owners may modify their allocations
or terminate participation in the program by completing an Asset Allocation
Rebalancing Form and indicating the appropriate instructions. The Company
reserves the right to modify, suspend, or terminate AAR at any time.
PRINCIPAL ADVANTAGE PROGRAM
Owners may participate in the Principal Advantage Program pursuant to which
the Owner's Purchase Payment is divided between one or more of the Fixed Account
options and one or more of the Portfolios. While the Owner selects the Fixed
Account options and the Portfolio(s), the Principal
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Advantage Program determines the portion of Purchase Payments allocated to each.
When determined in accordance with the Principal Advantage Program, the portion
allocated to the Fixed Account option(s) will be guaranteed by the Company to
grow to equal the full amount of the Purchase Payment over an established period
of time. The remaining portion of Purchase Payment is then invested in the
Portfolios, where it has the potential to achieve greater growth.
An Owner may elect to participate in the Principal Advantage Program (1) at
the time of initial purchase, by completing the instructions on the Vista
Capital Advantage application and requesting it in the "Special Instructions"
section of the application or (2) at the time of a subsequent purchase or
reallocation of the existing Contract Value, by contacting the Company or the
financial representative from whom this prospectus was obtained. The Company
reserves the right to modify, suspend or terminate the Principal Advantage
Program at any time.
ALLOCATION OF PURCHASE PAYMENTS
Purchase Payments are allocated to the Fixed Account and/or the
Portfolio(s) selected by the Participant. Participants making initial Purchase
Payments should specify their allocations on the application for a Contract. If
the application is in good order, the Company will apply the initial Purchase
Payment to the Fixed Account and/or the Portfolio(s), as selected, and credit
the Contract with Accumulation Units within two business days of receipt at the
Company's principal place of business. The number of Accumulation Units in a
Portfolio attributable to a Purchase Payment is determined by dividing that
portion of the Purchase Payment which is allocated to the Portfolio by that
Portfolio's Accumulation Unit value as of the end of the Valuation Period when
the allocation occurs.
IF THE APPLICATION DOES NOT SPECIFY AN ALLOCATION, THE APPLICATION IS NOT
IN GOOD ORDER. If the application for a Contract or Certificate is not in good
order for this or any other reason, the Company will attempt to rectify it
within five business days of its receipt at the Company's principal place of
business. The Company will credit the initial Purchase Payment within two
business days after the application has been rectified. Unless the prospective
Owner consents otherwise, the application and the initial Purchase Payment will
be returned if the application cannot be put in good order within five business
days of such receipt.
Just like Participants making initial Purchase Payments, Participants
making subsequent Purchase Payments should specify how they want their payments
allocated. OTHERWISE, THE COMPANY WILL AUTOMATICALLY PROCESS THE PURCHASE
PAYMENT BASED ON THE PREVIOUS ALLOCATION.
TRANSFER DURING ACCUMULATION PERIOD
During the Accumulation Period, the Participant, or his or her designated
agent, may transfer Contract Values among Portfolios and/or the Fixed Account.
Participants may authorize telephone transfers by written request delivered to
the Company at its Annuity Service Center, if applicable law permits. The
Company has in place procedures which are designed to provide reasonable
assurance that telephone authorizations are genuine, including tape recording of
telephone communications and requesting identifying information. Accordingly,
the Company and its affiliates disclaim all liability for any claim, loss or
expense resulting from any alleged error or mistake in connection with a
telephone transfer which was not properly authorized by the Participant.
However, if the Company fails to employ reasonable procedures to ensure that all
telephone transfers are properly authorized, the Company may be held liable for
such losses. Telephone calls authorizing transfers must be completed by 4:00
p.m. Eastern time on a Valuation Date in order to be effected at the price
determined on such date. Transfer authorizations which are received after 4:00
p.m. Eastern time will be processed as of the next Valuation Date. The Company
reserves the right to modify or discontinue at any time and without notice the
use of telephone transfers and acceptance of transfer instructions from someone
other than the Participant.
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The minimum partial transfer amount is $100. Also, no partial transfer may
be made if the value of the Participant's interest in the Portfolio from which a
transfer is being made (or the remaining Guarantee Amount, where applicable)
would be less than $100 after the transfer. These dollar amounts are subject to
change at the Company's option. The Company may waive the minimum partial
transfer amount in connection with preauthorized automatic transfer programs.
Both prior to and after the Annuity Date, Contract Values may be
transferred from the Separate Account to the Fixed Account. Any amounts
allocated or transferred to the Fixed Account may, however, be transferred from
the Fixed Account to the Separate Account only prior to the Annuity Date.
Transfers may be made within the Fixed Account prior to the expiration date
of one or more Guarantee Periods, by electing to have the respective Guarantee
Amount(s) applied to newly established Guarantee Periods. Such transfers are
counted against the 15 transfer allowance on free transfers. In addition, such
transfers are generally subject to a Market Value Adjustment.
SEPARATE ACCOUNT ACCUMULATION UNIT VALUE
On each day that the New York Stock Exchange is open for business, a
separate Accumulation Unit value is determined for each Portfolio. If the
Company elects or is required to assess a charge for taxes, a separate
Accumulation Unit value may be calculated for Contracts issued in connection
with Nonqualified and Qualified Plans, respectively, within each account.
The Accumulation Unit value for each Portfolio will vary with the price of
a share in the Underlying Fund and in accordance with the Mortality and Expense
Risk Charge, Distribution Expense Charge, and any provision for taxes.
Assessments of Withdrawal Charges, transfer fees and Contract Administration
Charges are made separately for each Certificate. They are effected by
redemption of Accumulation Units and do not affect Accumulation Unit value.
The Accumulation Unit value of a Portfolio for any Valuation Period is
calculated by subtracting (2) from (1) and dividing the result by (3) where:
(1) is the total value at the end of the Valuation Period of the
assets attributable to the Accumulation Units of the Portfolio minus
liabilities;
(2) is the cumulative unpaid charge for the assumption of mortality
and expense risks and for the distribution expense; and
(3) is the number of Accumulation Units outstanding at the end of the
Valuation Period.
FIXED ACCOUNT ACCUMULATION VALUE
The accumulation value of the fixed portion of a Participant's account at
any Valuation Date is equal to the sum of the values of all amounts allocated to
the Fixed Account that have been credited to the Participant's account up to and
including that date. Each amount reflects interest accumulated to the Valuation
Date at the applicable Guarantee Rate, compounded annually, less withdrawals.
DISTRIBUTION OF CONTRACTS
Contracts are sold by registered representatives of broker-dealers who are
licensed insurance agents of the Company, either individually or through an
incorporated insurance agency. Commissions on initial Purchase Payments paid to
registered representatives may vary, but are not anticipated to exceed 6.50% of
any Purchase Payment (including any promotional sales incentives). In addition,
under certain circumstances and in exchange for lower initial commission,
certain sellers of the Contracts may be paid persistency bonuses which will take
into account, among other things, the length of time Purchase Payments have been
held under a Contract, and Contract Values. A persistency bonus is not
anticipated to exceed 1.00%, on an annual basis, of the Contract Values
considered in connection with the bonus. All such commissions, incentives and
bonuses are paid by the Company.
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Vista Fund Distributors, Inc. ("VFD"), located at 101 Park Avenue, New
York, New York, 10178, serves as distributor of the Contracts. VFD is registered
as a broker-dealer under the Securities Exchange Act of 1934, as amended, and is
a member of the National Association of Securities Dealers, Inc. VFD is not
affiliated with the Company or the Adviser to the Trust.
WITHDRAWALS (REDEMPTIONS)
Except as explained below, an Owner may redeem a Certificate for all or a
portion of its Contract Value during the Accumulation Period. Withdrawal Charges
may be applicable, however, which would reduce the Contract Value upon
redemption. A Market Value Adjustment may also be applied, in the case of
redemptions from the Fixed Account, which would also affect Contract Value. (See
"Contract Charges -- Sales Charges -- Withdrawal Charge" and "Fixed Account
Options -- Market Value Adjustment").
Withdrawals and distributions from Contracts issued in connection with
certain Qualified Plans may be subject to a mandatory 20% withholding
requirement. (See "Taxes -- Withholding Tax on Distributions").
Withdrawals of amounts attributable to contributions made pursuant to a
salary reduction agreement (in accordance with Section 403(b)(11) of the Code)
are limited to circumstances only: when the Participant attains age 59 1/2,
separates from service, dies, becomes disabled (within the meaning of Section
72(m)(7) of the Code), or in the case of hardship. Withdrawals for hardship are
restricted to the portion of the Contract Value which represents contributions
made by the Participant and does not include any investment results. These
limitations on withdrawals apply to: (1) salary reduction contributions made
after December 31, 1988; (2) income attributable to such contributions; and (3)
income attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect rollovers or exchanges between certain Qualified
Plans. Tax penalties may also apply. While the foregoing limitations only apply
to certain Contracts issued in connection with Section 403(b) Qualified Plans,
all Participants should seek competent tax advice regarding any withdrawals or
distributions. (See "Taxes").
Except in connection with a Systematic Withdrawal Program, described below,
the minimum partial withdrawal amount is $1,000, or, if less, the Participant's
entire interest in the Portfolio or Fixed Account option from which a withdrawal
is requested. The Participant's interest in the Portfolio or Fixed Account
option from which the withdrawal is requested must be at least $100 after the
withdrawal is completed if anything is left in that Portfolio or Fixed Account
allocation.
A written withdrawal request or Systematic Withdrawal Program enrollment
form, as the case may be, must be sent to the Company at its Annuity Service
Center. The required program form will not be in good order unless it includes
the Participant's Tax I.D. Number (e.g., Social Security Number) and provides
instructions regarding withholding of income taxes. The Company provides the
required forms.
If the request is for total withdrawal, the Certificate (or Contract), or a
Lost Certificate Affidavit (which may be obtained by calling the Company at its
Annuity Service Center), must be submitted as well. The withdrawal value is
determined on the basis of the Contract Values next computed following receipt
of a request in proper order. The withdrawal value will normally be paid within
seven days after the day a proper request is received by the Company. However,
the Company may suspend the right of withdrawal from the Separate Account or
delay payment for such withdrawal more than seven days: (1) during any period
when the New York Stock Exchange ("NYSE") is closed (other than customary
weekend and holiday closings); (2) when trading on the NYSE is restricted or an
emergency exists as determined by the Commission so that disposal of the
Separate Account's investments or determination of Accumulation Unit value is
not reasonably practicable; or (3) for such other periods as the Commission, by
order, may permit for protection of Owners.
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SYSTEMATIC WITHDRAWAL PROGRAM
Certain Participants of Nonqualified Plan Contracts and Contracts issued in
connection with IRAs may choose to withdraw amounts which in the aggregate add
up to a maximum of 10% of their Purchase Payments annually without charge
pursuant to a Systematic Withdrawal Program. Systematic withdrawals will not be
limited to 10% of Purchase Payments once the Withdrawal Charge is no longer
applicable. Total withdrawals not subject to a Withdrawal Charge, including
systematic withdrawals, cannot exceed the free withdrawal amount described under
"Contract Charges -- Sales Charges -- Free Withdrawal." Withdrawals are taxable
and a 10% federal tax penalty may apply to withdrawals before age 59 1/2. In
addition, withdrawals from the Fixed Account prior to the end of their
respective Guarantee Periods are generally subject to a Market Value Adjustment.
(See "Fixed Account Options -- Market Value Adjustment").
Participation in the Systematic Withdrawal Program may be elected at the
time the Certificate is issued or on any date prior to the Annuity Date. Amounts
withdrawn under the Systematic Withdrawal Program may be electronically wired to
the Participant's financial institution by completing the instructions on the
Electronic Fund Transfer Form or by written request delivered to the Company at
its Annuity Service Center. A voided check (for checking accounts), the account
number and bank ABA number must accompany all requests. Electronic transfers may
also be requested on the Systematic Withdrawal Request Form. Depending on
fluctuations in the net asset value of the Portfolios, systematic withdrawals
may reduce or even exhaust Contract Value. The minimum systematic withdrawal
amount is $250 per withdrawal. Participants must complete an enrollment form and
send it to the Company at its Annuity Service Center. The Company reserves the
right to modify, suspend or terminate the Systematic Withdrawal Program and the
availability of electronic fund transfers at any time.
ERISA PLANS
Spousal consent may be required when a married Participant seeks a
distribution from a Contract that has been issued in connection with a Qualified
Plan (or a Nonqualified Plan that is subject to Title 1 of ERISA). Participants
should obtain competent advice.
DEFERMENT OF FIXED ACCOUNT WITHDRAWAL PAYMENTS
In the case of withdrawals or annuity payments from the Fixed Account, the
Company may defer making payment for a period of up to six months (or the period
permitted by applicable state insurance law, if less) from the date the Company
receives notice of such withdrawal request. Only under highly unusual
circumstances will the Company defer a withdrawal payment from the Fixed Account
for more than 7 days, and if the Company defers payment for more than 7 days, it
will pay interest of at least 3% per annum on the amount deferred. While all the
circumstances under which the Company could defer payment upon withdrawal may
not be foreseeable at this time, such circumstances could include, for example,
a time of unusually high surrender rate among Owners, accompanied by a radical
shift in interest rates. If the Company intends to withhold payment for more
than 7 days, it will notify affected Owners in writing.
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 at the time of application. The
Annuity Date must always be the first day of a calendar month and must be at
least two years after the Certificate Date, but in any event will be no later
than the Latest Annuity Date. Annuity payments will begin no later than the
Latest Annuity Date. If no Annuity Date is selected, the Annuity Date will be
the Latest Annuity Date. The Participant may change the Annuity Date at any time
at least seven days prior to the Annuity Date then indicated on the Company's
records by written notice to the Company at its Annuity Service Center.
DEFERMENT OF PAYMENTS
The Company may defer making Fixed Annuity payments for a period of up to
six months or such lesser time as state law may permit. Interest, subject to
state law requirements, will be credited during the deferral period. For a
discussion of the circumstances under which the Company could defer these
payments, please refer to "Purchases, Withdrawals and Contract
Value -- Deferment of Fixed Account Withdrawal Payments".
PAYMENTS TO PARTICIPANT
The Company will make annuity payments to the Participant, unless the
Participant designates an alternate payee. Such designation must be made in
writing to the Company's Annuity Service Center and must be received more than
30 days before the Annuity Date.
ALLOCATION OF ANNUITY PAYMENTS
If all of the Contract Value on the Annuity Date is allocated to the Fixed
Account, the annuity will be paid as a Fixed Annuity. If all of the Contract
Value on that date is allocated to the Separate Account, the annuity will be
paid as a Variable Annuity. If the Contract Value on that date is allocated to
both the Fixed Account and the Separate Account, the Annuity will be paid as a
combination of a Fixed Annuity and a Variable Annuity to reflect the allocation
between the Portfolios and the Fixed Account. Variable Annuity payments will
reflect the investment performance of the Portfolios. The Participant(s) may, by
written notice to the Company, convert Variable Annuity payments to Fixed
Annuity payments. However, Fixed Annuity payments may not be converted to
Variable Annuity payments.
ANNUITY OPTIONS
The Participant, or any Beneficiary who is so entitled, may elect to
receive a lump sum at the end of the Accumulation Period. However, a lump sum
distribution may be deemed to be a withdrawal, and at least a portion of it may
be subject to federal income tax. (See "Taxes -- Tax Treatment of Withdrawals").
Alternatively, any of the annuity options listed below may be elected. The
Participant may elect an annuity option or change an annuity option at any time
prior to the Annuity Date.
Annuity payments will be monthly, unless the Owner requests annuity
payments to be at quarterly, semiannual or annual intervals. If no other annuity
option is elected, monthly annuity payments will be made in accordance with
annuity option 4 below, a life annuity with a 120-month period certain (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). 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 require the frequency of payments be at quarterly, semiannual or annual
intervals so as to result in an initial payment of at least $50.
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<PAGE> 30
Participants may elect to have annuity payments electronically wired to his
or her financial institution by completing the instructions on the Electronic
Fund Transfer Form or by written request delivered to the Company at its Annuity
Service Center. A voided check (for checking accounts), the account number and
bank ABA number must accompany all requests. Electronic transfers may also be
requested on the Annuity Option Selection Form. The Company reserves the right
to modify, suspend or terminate the availability of electronic fund transfers
for annuity payments at any time.
NO WITHDRAWALS OF CONTRACT VALUE ARE PERMITTED DURING THE ANNUITY PERIOD
FOR ANY ANNUITY OPTION IN WHICH PAYMENTS ARE BASED ON A PERSON'S LIFE.
The following annuity options are generally available under the Contract.
Each is available in the form of either a Fixed Annuity or a Variable Annuity
(or a combination of both Fixed and Variable Annuity). However, there may be
restrictions in the retirement plan pursuant to which a Contract has been
purchased.
OPTION 1 -- LIFE INCOME
An annuity payable monthly during the lifetime of the Annuitant. Under this
option, no further payments are payable after the death of the Annuitant and
there is no provision for a death benefit payable to the Beneficiary. Therefore,
it is possible under option 1 for the payee to receive only one monthly annuity
payment under the Contract.
OPTION 2 -- JOINT AND SURVIVOR ANNUITY
An annuity payable monthly while both the Annuitant and a designated second
person are living. Upon the death of either person, the monthly income payable
will continue during the lifetime of the survivor at either the full amount
previously payable or as a percentage (either one-half or two-thirds) of the
full amount, as chosen by the 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
30
<PAGE> 31
scheduled payments or may alternatively elect to receive the discounted present
value of any remaining guaranteed payments as a lump sum.
The value of an Annuity Unit, regardless of the option chosen, takes into
account the Mortality and Expense Risk Charge. (See "Contract
Charges -- Mortality and Expense Risk Charge"). Since option 5 does not contain
an element of mortality risk, the payee is not getting the benefit of the
Mortality and Expense Risk Charge if option 5 is selected on a variable basis.
OTHER OPTIONS
At the sole discretion of the Company, other annuity options may be made
available. However, to the extent that Withdrawal Charges would otherwise apply
to a withdrawal or termination, the identical Withdrawal Charge may apply with
respect to any additional options.
With respect to Contracts issued under Sections 401, 403(b) or 408 of the
Internal Revenue Code, any payments will be made only to the Participant and/or
the Participant's spouse.
TRANSFER DURING ANNUITY PERIOD
During the Annuity Period, the Owner may transfer the Contract Value to the
Fixed Account and/or among Portfolios. Such transfers are subject to the same
limitations and conditions as are prescribed for transfers during the
Accumulation Period, except that, in addition, no transfers may be made from the
Fixed Account to the Separate Account during the Annuity Period.
DEATH BENEFIT DURING ANNUITY PERIOD
If the Annuitant dies after the Annuity Date while the Contract is in
force, the death proceeds, if any, will depend upon the annuity option in effect
at the time of the Annuitant's death. If the Annuitant dies after the Annuity
Date and before the entire interest in the Contract has been distributed, the
remaining interest, if any, as provided for in the option elected, will be
distributed at least as rapidly as under the method of distribution in effect at
the Annuitant's death.
ANNUITY PAYMENTS
INITIAL MONTHLY ANNUITY PAYMENT
The initial annuity payment is determined by taking the Contract Value,
less any premium tax, less any Market Value Adjustment that may apply in the
case of a premature annuitization, and applying it to the annuity table
specified in the Contract (or, if more favorable to the payee, the annuity
tables in effect as of the Annuity Date for similar immediate annuity contracts
issued by the Company). Those tables are based on a set amount per $1,000 of
proceeds applied. The appropriate rate must be determined by the sex (except
where, as in the case of certain Qualified Plans and other employer-sponsored
retirement plans, such classification is not permitted) and age of the Annuitant
and designated second person, if any.
The dollars applied are then divided by 1,000 and the result multiplied by
the appropriate annuity factor appearing in the table to compute the amount of
the first monthly annuity payment. In the case of a Variable Annuity, that
amount is divided by the value of an Annuity Unit as of the Annuity Date to
establish the number of Annuity Units representing each Variable Annuity
payment. The number of Annuity Units determined for the first Variable Annuity
payment remains constant for the second and subsequent monthly Variable Annuity
payments, assuming that no reallocation of Contract Values is made.
SUBSEQUENT MONTHLY PAYMENTS
For a Fixed Annuity, the amount of the second and each subsequent monthly
annuity payment is the same as that determined above for the first monthly
payment.
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<PAGE> 32
The amount of the second and each subsequent monthly Variable Annuity
payment is determined by multiplying the number of Annuity Units, as determined
in connection with the calculation of the initial monthly annuity payment,
above, by the annuity unit value, below, as of the Valuation Period next
preceding the date on which each annuity payment is due.
- --------------------------------------------------------------------------------
ADMINISTRATION
- --------------------------------------------------------------------------------
The Company has primary responsibility for all administration of the
Contracts and the Separate Account. The mailing address of the Company's Annuity
Service Center is P.O. Box 54299, Los Angeles, California 90054-0299, and its
telephone number is (800) 90-VISTA.
The administrative services provided include, but are not limited to:
issuance of the Contracts; maintenance of Participant records; Participant
services; calculation of unit values; and preparation of Participant reports.
Contract statements and transaction confirmations are mailed to
Participants at least quarterly. Participants should read their statements and
confirmations carefully and verify their accuracy. Questions about periodic
statements should be communicated to the Company promptly. The Company will
investigate all complaints and make any necessary adjustments retroactively,
provided that it has received notice of a potential error within 30 days after
the date of the questioned statement. If the Company has not received notice of
a potential error within this time, any adjustment shall be made as of the date
that the Annuity Service Center receives notice of the potential error.
The Company will also provide Participants with such additional periodic
and other reports, information and prospectuses as may be required by federal
securities laws.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING
OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE
COMPANY CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE
MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS.
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended (the "Code")
governs taxation of annuities in general. A Participant is not taxed on
increases in the value of a Contract until distribution occurs, either in the
form of a non-annuity distribution or as annuity payments under the annuity
option elected. For a lump sum payment received as a total surrender (total
redemption), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For a payment received as a withdrawal (partial
redemption), federal tax liability is determined on a last-in, first-out basis,
meaning taxable income is withdrawn before the cost basis of the Contract is
withdrawn. For Contracts issued in connection with Nonqualified Plans, the cost
basis is generally the Purchase Payments, while for Contracts issued in
connection with Qualified Plans there may be no cost basis. The taxable portion
of the lump sum payment is taxed at ordinary income tax rates. Tax penalties may
also apply.
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<PAGE> 33
For annuity payments, the taxable portion is determined by a formula which
establishes the ratio that the cost basis of the Contract bears to the total
value of annuity payments for the term of the annuity Contract. The taxable
portion is taxed at ordinary income tax rates. Participants, Annuitants and
Beneficiaries under the Contracts should seek competent financial advice about
the tax consequences of distributions under the retirement plan under which the
Contracts are purchased.
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity from
the Company and its operations form a part of the Company.
WITHHOLDING TAX ON DISTRIBUTIONS
The Code generally requires the Company (or, in some cases, a plan
administrator) to withhold tax on the taxable portion of any distribution or
withdrawal from a Contract. For "eligible rollover distributions" from Contracts
issued under certain types of Qualified Plans, 20% of the distribution must be
withheld, unless the payee elects to have the distribution "rolled over" to
another eligible plan in a direct "trustee to trustee" transfer. This
requirement is mandatory and cannot be waived by the Participant. Withholding on
other types of distributions can be waived.
An "eligible rollover distribution" is the estimated taxable portion of any
amount received by a covered employee from a plan qualified under Section 401(a)
or 403(a) of the Code, or from a tax-sheltered annuity qualified under Section
403(b) of the Code (other than (1) annuity payments for the life (or life
expectancy) of the employee, or joint lives (or joint life expectancies) of the
employee and his or her designated beneficiary, or for a specified period of ten
years or more; and (2) distributions required to be made under the Code).
Failure to "roll over" the entire amount of an eligible rollover distribution
(including an amount equal to the 20% portion of the distribution that was
withheld) could have adverse tax consequences, including the imposition of a
penalty tax on premature withdrawals, described later in this section.
Withdrawals or distributions from a Contract other than eligible rollover
distributions are also subject to withholding on the estimated taxable portion
of the distribution, but the Participant may elect in such cases to waive the
withholding requirement. If not waived, withholding is imposed (1) for periodic
payments, at the rate that would be imposed if the payments were wages, or (2)
for other distributions, at the rate of 10%. If no withholding exemption
certificate is in effect for the payee, the rate under (1) above is computed by
treating the payee as a married individual claiming 3 withholding exemptions.
DIVERSIFICATION -- SEPARATE ACCOUNT INVESTMENTS
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified, in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the Contract as
an annuity contract would result in imposition of federal income tax to the
Participant with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract.
The Company expects that each of the Underlying Funds will be managed by
its investment adviser in such a manner as to comply with these diversification
requirements.
MULTIPLE CONTRACTS
Multiple annuity contracts which are issued within a calendar year to the
same contract owner by one company are treated as one annuity contract for
purposes of determining the tax consequences of any distribution. Such treatment
may result in adverse tax consequences including more rapid taxation of the
distributed amounts from such multiple contracts. The Company believes that
Congress intended to affect the purchase of multiple deferred annuity contracts
which may have been
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<PAGE> 34
purchased to avoid withdrawal income tax treatment. Owners should consult a tax
adviser prior to purchasing more than one annuity contract in any calendar year.
TAX TREATMENT OF ASSIGNMENTS
An assignment of a Contract may have tax consequences, and may also be
prohibited by ERISA in some circumstances. Owners should therefore consult
competent legal advisers should they wish to assign their Contracts.
QUALIFIED PLANS
The Contracts offered by this Prospectus are designed to be suitable for
use under various types of Qualified Plans. Taxation of Participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Participants, Annuitants and Beneficiaries are cautioned that
benefits under a Qualified Plan may be subject to the terms and conditions of
the plan, regardless of the terms and conditions of the contracts issued
pursuant to the plan.
General descriptions of the types of Qualified Plans with which the
Contracts may be used are contained in the Statement of Additional Information.
Such descriptions are not exhaustive and are for general information purposes
only. The tax rules regarding Qualified Plans are very complex and will have
differing applications depending on individual facts and circumstances. Each
purchaser should obtain competent tax advice prior to purchasing a Contract or
Certificate issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available and described in
this Prospectus. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals -- Qualified Plans").
TAX TREATMENT OF WITHDRAWALS
QUALIFIED PLANS
Section 72(t) of the Code imposes a 10% penalty tax on the taxable portion
of any early distribution from qualified retirement plans, including contracts
issued and qualified under Code Sections 401 Corporate and Self-Employed Pension
and Profit Sharing Plans), 403(b) (Tax-Sheltered Annuities) and 408(b) (IRAs).
The tax penalty will not apply to the following distributions: (1) if
distribution is made on or after the date on which the Owner or Annuitant (as
applicable) reaches age 59 1/2; (2) distributions following the death or
disability of the Owner or Annuitant (as applicable) (for this purpose
"disability" is defined in Section 72(m)(7) of the Code); (3) distributions that
are part of substantially equal periodic payments made not less frequently than
annually for the life (or life expectancy) of the Owner or Annuitant (as
applicable) or the joint lives (or joint life expectancies) of such Owner or
Annuitant (as applicable) and his or her designated beneficiary; (4)
distributions to an Owner or Annuitant (as applicable) who has separated from
service after he or she has attained age 55; (5) distributions made to the Owner
or Annuitant (as applicable) to the extent such distributions do not exceed the
amount allowable as a deduction under Code Section 213 to the Owner or Annuitant
(as applicable) for amounts paid during the taxable year for medical care; and
(6) distributions made to an alternate payee pursuant to a qualified domestic
relations order.
The exceptions stated in items (4), (5) and (6) above do not apply in the
case of an IRA.
Limitations imposed by the Code on withdrawals from tax-sheltered annuities
are described above under "Purchases, Withdrawals and Contract
Value -- Withdrawals (Redemptions)".
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<PAGE> 35
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 retirement accounts or certain other plans, subject to limitations
set forth in the Code.
NONQUALIFIED PLANS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate Purchase
Payments made, any amount withdrawn not in form of an annuity payment will be
treated as coming first from the earnings and then, only after the income
portion is exhausted, as coming from the principal. Withdrawn earnings are
includible in a taxpayer's gross income. Section 72 further provides that a 10%
penalty will apply to the income portion of any premature distribution. The
penalty is not imposed on amounts received: (1) after the taxpayer reaches
59 1/2; (2) upon the death of the Owner or Annuitant (as applicable); (3) if the
taxpayer is totally disabled; (4) in a series of substantially equal periodic
payments made for the life of the taxpayer or for the joint lives of the
taxpayer and his or her designated Beneficiary; (5) under an immediate annuity;
or (6) which are allocable to purchase payments made prior to August 14, 1982.
The above information applies to Contracts issued pursuant to Section 457
of the Code, but does not apply to other Qualified Plan Contracts. Separate tax
withdrawal penalties and restrictions apply to Qualified Plan Contracts.
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- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE COMPANY
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
The following selected financial data of the Company should be read in
conjunction with the financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are included elsewhere herein. Certain items have been reclassified to
conform to the current year's presentation.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net investment income............ $ 2,692 $ 2,798 $ 2,784 $ 1,892 $ 1,161
Net realized investment gains
(losses)....................... 360 (539) (1,348) 445 1,932
Fee income....................... 2,016 911 606 749 284
General and administrative
expenses....................... (1,842) (1,480) (1,004) (1,319) (1,408)
Amortization of deferred
acquisition costs.............. (1,158) (500) (300) -- (220)
Annual commissions............... (18) (19) (33) (30) (44)
-------- -------- -------- -------- --------
Pretax income.................... 2,050 1,171 705 1,737 1,705
Income tax expense............... (927) (448) (182) (655) (829)
-------- -------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR
INCOME TAXES................... 1,123 723 523 1,082 876
Cumulative effect of change in
accounting for income taxes.... -- -- -- (725) --
-------- -------- -------- -------- --------
NET INCOME....................... $ 1,123 $ 723 $ 523 $ 357 $ 876
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments...................... $190,241 $153,237 $121,218 $ 78,928 $ 85,130
Variable annuity assets.......... 171,475 68,901 32,760 26,390 24,695
Deferred acquisition costs....... 18,094 12,127 6,491 5,651 2,540
Deferred income taxes............ -- -- -- 886 1,031
Other assets..................... 3,040 2,603 2,688 2,282 3,876
-------- -------- -------- -------- --------
TOTAL ASSETS..................... $382,850 $236,868 $163,157 $114,137 $117,272
Reserves for fixed annuity
contracts...................... $180,805 $140,613 $106,332 $ 66,881 $ 68,228
Variable annuity liabilities..... 171,475 68,901 32,760 26,390 24,695
Other reserves, payables and
accrued liabilities......... 3,272 2,784 2,003 1,051 1,220
Deferred income taxes............ 1,836 1,350 244 -- --
Shareholder's equity............. 25,462 23,220 21,818 19,815 23,129
-------- -------- -------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY........... $382,850 $236,868 $163,157 $114,137 $117,272
======== ======== ======== ======== ========
</TABLE>
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<PAGE> 37
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations of First SunAmerica Life Insurance Company (the "Company") for the
three years in the period ended September 30, 1997 follows. In connection with
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as
"expect," "anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and uncertainties
discussed in documents filed by the Company with the SEC. The Company disclaims
any obligation to update forward-looking information.
RESULTS OF OPERATIONS
NET INCOME totaled $1.1 million in 1997, compared with $0.7 million in 1996
and $0.5 million in 1995.
PRETAX INCOME totaled $2.1 million in 1997, $1.2 million in 1996 and $0.7
million in 1995. The 75.0% improvement in 1997 over 1996 primarily resulted from
net realized investment gains of $0.4 million, compared to net realized
investment losses of $0.5 million in 1996. Pretax income was also favorably
impacted by an increase in fee income, partially offset by increased
amortization of deferred acquisition costs and increased general and
administrative expenses. The 66.1% improvement in 1996 over 1995 primarily
resulted from a decline in net realized investment losses, partially offset by
increased general and administrative expenses.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities, totaled $2.7 million
in 1997 and $2.8 million in each of 1996 and 1995. These amounts equal 1.52% on
average invested assets (computed on a daily basis) of $176.9 million in 1997,
2.08% on average invested assets of $134.5 million in 1996 and 2.70% on average
invested assets of $103.2 million in 1995.
Net investment spreads include the effect of income earned on the excess of
average invested assets over average interest-bearing liabilities. This excess
amounted to $8.0 million in 1997, $13.8 million in 1996 and $17.6 million in
1995. The difference between the Company's yield on average invested assets and
the rate paid on average interestbearing liabilities (the "Spread Difference")
was 1.25% in 1997, 1.47% in 1996 and 1.69% in 1995.
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<PAGE> 38
Investment income (and the related yields on average invested assets)
totaled $12.8 million (7.22%) in 1997, compared with $10.0 million (7.40%) in
1996 and $7.8 million (7.59%) in 1995. Investment income increased primarily as
a result of higher levels of average invested assets, partially offset by a
decline in portfolio yields. The higher yield in 1995 reflected the effects of
both higher short-term interest rates and extension fee income earned on certain
bonds. Decreasing investment yields since 1995 were primarily due to a generally
declining interest rate environment.
Total interest expense equalled $10.1 million in 1997, $7.2 million in 1996
and $5.0 million in 1995. The average rate paid on fixed annuity contracts was
5.97% in 1997, 5.93% in 1996 and 5.90% in 1995. Fixed annuity contracts averaged
$168.9 million during 1997, compared with $120.6 million during 1996 and $85.5
million during 1995.
GROWTH IN AVERAGE INVESTED ASSETS since 1995 primarily reflects the sales
of the Company's fixed-rate products, consisting of fixed annuity premiums
(including those for the fixed accounts of variable annuity products). Fixed
annuity premiums totaled $70.8 million in 1997, compared with $45.4 million in
1996 and $51.7 million in 1995. These premiums include premiums for the fixed
accounts of variable annuities totaling $68.9 million, $41.2 million and $2.9
million, respectively, which have increased primarily because of increased sales
of the Company's Polaris product and greater inflows into the one-year fixed
account of that product. The Company has observed that many purchasers of its
variable annuity contracts allocate new premiums to the one-year fixed account
and concurrently elect the option to dollar cost average into one or more
variable funds. Accordingly, the Company anticipates that it will see a large
portion of these premiums transferred into the variable funds.
NET REALIZED INVESTMENT GAINS/LOSSES totaled $0.4 million of gains in 1997,
compared to $0.5 million of losses in 1996 and $1.3 million of losses in 1995.
Net realized investment losses include impairment writedowns of $0.1 million in
both 1997 and 1996. Therefore, net gains from sales of investments totaled $0.5
million in 1997 and net losses from sales of investments totaled $0.4 million in
1996. There were no impairment writedowns in 1995.
The Company sold invested assets, principally bonds and notes, aggregating
$48.7 million, $80.0 million and $57.7 million in 1997, 1996 and 1995,
respectively. Sales of investments result from the active management of the
Company's investment portfolio. Because sales of investments are made in both
rising and falling interest rate environments, net gains and losses from sales
of investments fluctuate from period to period, and represent 0.25%, 0.27% and
1.31% of average invested assets for 1997, 1996 and 1995, respectively. Active
portfolio management involves the ongoing evaluation of assets sectors,
individual securities within the investment portfolio and the reallocation of
investments from sectors that are perceived to be relatively overvalued to
sectors that are perceived to be relatively undervalued. The intent of the
Company's active portfolio management is to maximize total returns on the
investment portfolio, taking into account credit and interest-rate risk.
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $1.7 million
in 1997, $0.7 million in 1996 and $0.4 million in 1995. These increased fees
reflect growth in average variable annuity assets, principally due to the
receipt of variable annuity premiums, increased market values and net exchanges
into the separate accounts from the fixed accounts of variable annuity
contracts, partially offset by surrenders. Variable annuity assets averaged
$111.8 million during 1997, $46.2 million during 1996 and $27.8 million during
1995. Variable annuity premiums, which exclude premiums allocated to the fixed
accounts of variable annuity products, totaled $56.3 million in 1997, $28.6
million in 1996 and $5.9 million in 1995. Sales of variable annuity products
(which include premiums allocated to the fixed accounts) ("Variable Annuity
Product Sales") amounted to $125.2 million, $69.8 million and $8.8 million in
1997, 1996 and 1995, respectively. Increases in Variable Annuity Product Sales
are due, in part, to market share gains through enhanced distribution efforts
and growing consumer demand for flexible retirement savings products that offer
a variety of equity, fixed income and guaranteed fixed account investment
choices. The Company has encountered increased competition in the variable
annuity
38
<PAGE> 39
marketplace during recent years and anticipates that the market will remain
highly competitive for the foreseeable future.
SURRENDER CHARGES on fixed and variable annuities totaled $304,000 in 1997,
compared with $221,000 in 1996 and $194,000 in 1995. Surrender charges generally
are assessed on annuity withdrawals at declining rates during the first seven
years of an annuity contract. Withdrawal payments, which include surrenders and
lump-sum annuity benefits, totaled $20.6 million in 1997, compared with $12.7
million in 1996 and $17.7 million in 1995. These payments represent 7.58%, 8.06%
and 16.93%, respectively, of average fixed and variable annuity reserves.
Withdrawals include variable annuity withdrawals from the separate accounts
totaling $5.3 million in 1997, $2.8 million in 1996 and $3.6 million in 1995.
Higher withdrawal payments in 1997 are due to the significant growth in the
Company's annuity reserves. Higher withdrawals in 1995 compared to 1996 are due
to policies coming off surrender charge restrictions. Management anticipates
that withdrawal rates will gradually increase in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.8 million in 1997, compared
with $1.5 million in 1996 and $1.0 million in 1995. General and administrative
expenses remain closely controlled through a company-wide cost containment
program and continue to represent less than 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $1.2 million in 1997,
compared with $0.5 million in 1996 and $0.3 million in 1995. The increases in
amortization during the three-year period were primarily due to additional fixed
and variable annuity sales and the subsequent amortization of related deferred
commissions and other direct selling costs.
ANNUAL COMMISSIONS represent renewal commissions paid quarterly in arrears
to maintain the persistency of certain of the Company's annuity contracts.
Annual commissions totaled $18,000 in 1997, $19,000 in 1996 and $33,000 in 1995.
Based on current sales, the Company estimates that such annual commissions will
increase in future periods.
INCOME TAX EXPENSE totaled $0.9 million in 1997, compared with $0.4 million
in 1996 and $0.2 million in 1995, representing effective tax rates of 45% in
1997, 38% in 1996 and 26% in 1995. The differing tax rates for the three year
period reflect changes in state income tax expense.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased 9.7% to $25.5 million at September 30, 1997
from $23.2 million at September 30, 1996, primarily due to $1.1 million of net
income recorded in 1997 and $0.9 million of net unrealized gains on debt and
equity securities available for sale (credited directly to shareholder's
equity), versus $0.2 million of net unrealized losses on such securities
recorded at September 30, 1996.
INVESTED ASSETS at year end totaled $190.2 million in 1997, compared with
$153.2 million at year-end 1996. This 24.1% increase primarily resulted from
sales of fixed annuities.
The Company manages most of its invested assets internally. The Company's
general investment philosophy is to hold fixed-rate assets for long-term
investment. Thus, it does not have a trading portfolio. However, the Company has
determined that all of its portfolio of bonds and notes (the "Bond Portfolio")
is available to be sold in response to changes in market interest rates, changes
in relative value of asset sectors and individual securities, changes in
prepayment risk, changes in the credit quality outlook for certain securities,
the Company's need for liquidity and other similar factors.
THE BOND PORTFOLIO, which comprises 99% of the Company's total investment
portfolio (at amortized cost), had an aggregate fair value that exceeded its
amortized cost by $3.8 million at September 30, 1997. At September 30, 1996, the
amortized cost exceeded the fair value of the Bond Portfolio by $0.5 million.
The net unrealized gains on the Bond Portfolio since September 30, 1996
principally reflect the lower prevailing interest rates at September 30, 1997
and the corresponding effect on the fair value of the Bond Portfolio.
39
<PAGE> 40
At September 30, 1997, the Bond Portfolio (at amortized cost) included
$179.8 million of bonds rated by Standard & Poor's Corporation ("S&P"), Moody's
Investors Service ("Moody's"), Duff & Phelps Credit Rating Co. ("DCR"), Fitch
Investors Service, L.P. ("Fitch") or the National Association of Insurance
Commissioners ("NAIC"), and $4.9 million of bonds rated by the Company pursuant
to statutory ratings guidelines established by the NAIC. At September 30, 1997,
approximately $171.6 million of the Bond Portfolio was investment grade,
including $79.6 million of U.S. government/agency securities and mortgage-backed
securities ("MBSs").
At September 30, 1997, the Bond Portfolio included $13.1 million (at
amortized cost with a fair value of $14.0 million) of bonds that were not
investment grade. Based on their September 30, 1997 amortized cost, these
noninvestment-grade bonds accounted for 3.4% of the Company's total assets and
7.0% of its invested assets.
Non-investment-grade securities generally provide higher yields and involve
greater risks than investment-grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. The
Company had no material concentrations of non-investment-grade securities at
September 30, 1997. The following table summarizes the Company's rated bonds by
rating classification as of September 30, 1997.
RATED BONDS BY RATING CLASSIFICATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUES NOT RATED BY S&P/MOODY'S/
ISSUES RATED BY S&P/MOODY'S/DCR/FITCH DCR/FITCH, BY NAIC CATEGORY TOTAL
- ------------------------------------------------ ----------------------------------- ------------------------------------
S&P/(MOODY'S)/ ESTIMATED NAIC ESTIMATED PERCENT OF ESTIMATED
[DCR]/GFITCHH AMORTIZED FAIR CATEGORY AMORTIZED FAIR AMORTIZED INVESTED FAIR
CATEGORY(1) COST VALUE (2) COST VALUE COST ASSETS(3) VALUE
- ---------------------- --------- --------- -------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA to A-
(Aaa to A3)
[AAA to A-]
GAAA to A-H......... $117,169 $119,254 1 $10,891 $10,983 $128,060 68.70% $130,237
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
GBBB+ to BBB-H...... 37,101 37,544 2 6,466 6,783 43,567 23.37 44,327
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
GBB+ to BB-H........ 993 1,022 3 0 0 993 0.53 1,022
B+ to B-
(B1 to B3)
[B+ to B-]
GB+ to B-H.......... 12,089 12,947 4 0 0 12,089 6.49 12,947
CCC+ to C
(Caa to C)
[CCC]
GCCC+ to C-H........ 0 0 5 0 0 0 0.00 0
C1 to D
[DD]
GDH................. 0 0 6 0 0 0 0.00 0
-------- -------- ------- ------- -------- --------
Total rated issues.... $167,352 $170,767 $17,357 $17,766 $184,709 $188,533
======== ======== ======= ======= ======== ========
</TABLE>
- ---------------
Footnotes to the table of Rated Bonds by Rating Classification
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-) indicates
the debt's relative standing within the rating category. A security rated
BBB- or higher is considered investment grade. Moody's rates debt securities
in rating categories ranging from Aaa (the highest) to C (extremely poor
prospects of ever attaining any real investment standing). The number 1, 2
or 3 (with 1 the highest and 3 the lowest) indicates the debt's relative
standing within the rating category. A security rated Baa3 or higher is
considered investment grade. DCR rates debt securities in rating categories
ranging from AAA (the highest) to DD (in payment default). A plus (+) or
minus (-) indicates the debt's relative standing within the rating category.
A security rated BBB-or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moody's, DCR and Fitch ratings
if rated by multiple agencies.
40
<PAGE> 41
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest)
for nondefaulted bonds plus one category, 6, for bonds in or near default.
These six categories correspond with the S&P/Moody's/DCR/Fitch rating groups
listed above, with categories 1 and 2 considered investment grade. The NAIC
categories include $4.9 million (at amortized cost) of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines.
(3) At amortized cost.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed-rate investments that generate predictable rates of return. The Company
does not have a specific target rate of return. Instead, its rates of return
vary over time depending on the current interest rate environment, the slope of
the yield curve, the spread at which fixed rate investments are priced over the
yield curve, and general economic conditions. Its portfolio strategy is
constructed with a view to achieve adequate risk-adjusted returns consistent
with its investment objectives of effective asset-liability matching, liquidity
and safety. The Company's fixed-rate products incorporate surrender charges or
other restrictions in order to encourage persistency. Approximately 93% of the
Company's fixed annuity reserves had surrender penalties or other restrictions
at September 30, 1997.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
of the fixed-rate assets to that of its fixed-rate liabilities. The Company's
fixed-rate assets include cash and short-term investments, and bonds and notes.
At September 30, 1997, these assets had an aggregate fair value of $190.2
million with a duration of 3.3. At September 30, 1997, the Company's fixed
annuity liabilities had an aggregate fair value (determined by discounting
future contractual cash flows by related market rates of interest) of $171.8
million with a duration of 3.6. The Company's potential exposure due to a
relative 10% increase in interest rates prevalent at September 30, 1997 is
immaterial.
Duration is a common option-adjusted measure for the price sensitivity of a
fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the Company
will continue to utilize its existing strategies of pricing its fixed annuity
products, allocating its available cash flow amongst its various investment
portfolio sectors and maintaining sufficient levels of liquidity. Because the
calculation of duration involves estimation and incorporates assumptions,
potential changes in portfolio value indicated by the portfolio's duration will
likely be different from the actual changes experienced under given interest
rate scenarios, and the differences may be material.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos") and by investing in MBSs. It
also seeks to enhance its spread income by using Reverse Repos. Reverse Repos
involve a sale of securities and an agreement to repurchase the same securities
at a later date at an agreed upon price and are generally over-collateralized.
MBSs are generally investment-grade securities collateralized by large pools of
mortgage loans. MBSs generally pay principal and interest monthly. The amount of
principal and interest payments may fluctuate as a result of prepayments of the
underlying mortgage loans.
There are risks associated with some of the techniques the Company uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Company's Reverse Repos is
counterparty risk. The Company believes, however, that the counterparties to its
Reverse Repos are financially responsible and that the counterparty risk
associated with those transactions is minimal. The primary risk associated with
MBSs is that a changing interest rate environment might cause prepayment of the
underlying obligations at speeds slower or faster than
41
<PAGE> 42
anticipated at the time of their purchase. As part of its decision to purchase
an MBS, the Company assesses the risk of prepayment by analyzing the security's
projected performance over an array of interest-rate scenarios. Once an MBS is
purchased, the Company monitors its actual prepayment experience monthly to
reassess the relative attractiveness of the security with the intent to maximize
total return.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying values of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews for
bonds, management principally considers the adequacy of any collateral,
compliance with contractual covenants, the borrower's recent financial
performance, news reports and other externally generated information concerning
the creditor's affairs. In the case of publicly traded bonds, management also
considers market value quotations, if available. 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.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to
the payment of principal or interest, were $0.2 million at September 30, 1996
and constituted 0.1% of total invested assets. There were no defaulted
investments at September 30, 1997.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Company's existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. At September 30, 1997, approximately $163.3 million of the Company's Bond
Portfolio had an aggregate unrealized gain of $4.0 million, while approximately
$21.4 million of the Bond Portfolio had an aggregate unrealized loss of $0.2
million. In addition, the Company's investment portfolio currently provides
approximately $1.9 million of monthly cash flow from scheduled principal and
interest payments. Historically, cash flows from operations and from the sale of
the Company's annuity products have been sufficient in amount to satisfy the
Company's liquidity needs.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding
the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease
over time, reflecting lower interest crediting rates on its fixed annuities.
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.
- --------------------------------------------------------------------------------
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, Woodland Hills and Torrance, California.
The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of the Company's
business.
42
<PAGE> 43
- --------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
The directors and principal officers of First SunAmerica Life Insurance
Company (the "Company") as of December 22, 1997 are listed below, together with
information as to their ages, dates of election and principal business
occupation during the last five years (if other than their present business
occupation).
<TABLE>
<CAPTION>
OTHER POSITIONS AND
YEAR OTHER BUSINESS
PRESENT ASSUMED EXPERIENCE WITHIN
NAME AGE POSITION(S) POSITION(S) LAST FIVE YEARS** FROM-TO
- ---------------------- --- ----------------------- ---------- ----------------------- ----------
<S> <C> <C> <C> <C> <C>
Eli Broad* 64 Chairman, Chief 1987
Executive Officer and 1994 Cofounded SAI in 1957
President of the
Company
Chairman, Chief 1976
Executive Officer and 1978
President of SunAmerica
Investments, Inc.
("SAI")
Joseph M. Tumbler* 48 Executive Vice 1996 President and Chief 1989-1995
President of the Executive Officer,
Company Providian Capital
Vice Chairman of SAI 1995 Management
Jay S. Wintrob* 40 Executive Vice 1991 (Joined SAI in 1987)
President of the
Company
Vice Chairman of SAI 1995
James R. Belardi* 40 Senior Vice President 1992 Vice President and 1989-1992
of the Company Treasurer
Executive Vice 1995 (Joined SAI in 1986)
President of SAI
Jana Waring Greer* 45 Senior Vice President 1991 (Joined SAI in 1974)
of the Company and SAI
Peter McMillan, III* 40 Executive Vice 1994 Senior Vice President, 1989-1994
President and Chief SunAmerica Investments,
Investment Officer of Inc.
SunAmerica Investments,
Inc.
Scott L. Robinson* 51 Senior Vice President 1991 (Joined SAI in 1978)
and Treasurer of the
Company
Senior Vice President
and Controller of SAI
James W. Rowan* 35 Senior Vice 1996 Vice President 1993-1995
President Assistant to the 1992
of the Company Chairman
Senior Vice 1995 Senior Vice President, 1986-1992
President of SAI Security Pacific Corp.
Lorin M. Fife* 44 Senior Vice President, 1994 Vice President and 1994-1995
General Counsel and General Counsel-
Assistant Regulatory Affairs of
Secretary of the SAI 1989-1994
Company 1995 Vice President and
Senior Vice President Associate General
and General Counsel- Counsel of SAI
Regulatory Affairs of (Joined SAI in 1989)
SAI
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
OTHER POSITIONS AND
YEAR OTHER BUSINESS
PRESENT ASSUMED EXPERIENCE WITHIN
NAME AGE POSITION(S) POSITION(S) LAST FIVE YEARS** FROM-TO
- ---------------------- --- ----------------------- ---------- ----------------------- ----------
<S> <C> <C> <C> <C> <C>
Susan L. Harris* 40 Senior Vice President 1994 Vice President, General 1994-1995
and Secretary of the Counsel-Corporate
Company 1995 Affairs and Secretary 1989-1994
Senior Vice President of SAI
and General Counsel- Vice President,
Corporate Affairs and Associate General
Secretary of SAI Counsel and Secretary
of SAI (Joined SAI in
1985)
N. Scott Gillis 44 Senior Vice President 1994 Vice President and 1989-1994
and Controller of the Controller, SunAmerica
Company Life Companies (SLC)
Vice President of SAI 1997 (Joined SAI in 1985)
Edwin R. Reoliquio 40 Senior Vice President 1995 Vice President and 1990-1995
and Chief Actuary of Actuary, SLC
the Company
Victor E. Akin 33 Senior Vice President 1996 Vice President, SLC 1995-1996
of the Company Director, Product
Development, SLC
Manager, Business 1994-1995
Development SLC
Actuary, Milliman and 1993-1994
Robertson
Consultant, Chalke Inc. 1992-1993
1991-1992
Scott H. Richland 35 Vice President 1994 Vice President and 1995-1997
Senior Vice 1997 Treasurer of SAI
President and Vice President and 1994-1995
Treasurer of SAI Asst. Treasurer of SAI 1993-1994
Director, SunAmerica 1990-1993
Investments, Inc.
(Joined SAI in 1990)
David W. Ferguson 44 Director 1987 Partner, Davis Polk & 1980 to
Wardwell present
Thomas A. Harnett 73 Director 1987 Partner, Lane & 1989 to
Mitterdorf, LLP present
Margery K. Neale 38 Director 1996 Partner, Shereff, 1990 to
Friedman, Hoffman & present
Goodman, LLP
Lester Pollack 64 Director 1987 Chief Executive 1986 to
Officer, Centre present
Partners, L.P.
General Partner, Lazard 1986 to
Freres & Co. present
Senior Managing 1988 to
Director, Corporate present
Advisors, L.P.
Richard D. Rohr 71 Director 1987 Partner, Bodman, 1958 to
Longley & Dahling present
</TABLE>
- ---------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
44
<PAGE> 45
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
All of the executive officers of the Company also serve as employees of
SunAmerica Inc. or its affiliates and receive no compensation directly from the
Company. Some of the officers also serve as officers of other companies
affiliated with the Company. Allocations have been made as to each individual's
time devoted to his or her duties as an executive officer of the Company.
The following table shows the cash compensation paid or earned, based on
these allocations, to the chief executive officer and top four executive
officers of the Company whose allocated compensation exceeds $100,000 and to all
executive officers of the Company as a group for services rendered in all
capacities in the Company during 1997:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL OR CAPACITIES IN ALLOCATED CASH
NUMBER IN GROUP WHICH SERVED COMPENSATION
- ---------------------------------------- ---------------------------------- --------------
<S> <C> <C>
Eli Broad Chairman, Chief Executive Officer $ 8,700
and President
Joseph M. Tumbler Executive Vice President 5,438
Jay S. Wintrob Executive Vice President 5,438
James R. Belardi Senior Vice President 2,538
Jana Waring Greer Senior Vice President 4,812
All Executive Officers as a Group(14) $ 46,308
============
</TABLE>
Directors of the Company who are also employees of SunAmerica Inc. or its
affiliates receive no compensation in addition to their compensation as
employees of SunAmerica Inc. or its affiliates.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No shares of the Company are owned by any executive officer or director.
The Company is an indirect wholly-owned subsidiary of SunAmerica Inc. Except for
Mr. Broad, the percentage of shares of SunAmerica Inc. beneficially owned by any
director does not exceed one percent of the class outstanding. At December 15,
1997, Mr. Broad was the beneficial owner of 10,706,006 shares of Common Stock
(5.68% of the class outstanding) and 13,740,441 shares of Class B Common Stock
(84.40% of the class outstanding). Of the Common Stock, 1,063,773 shares
represent restricted shares granted under the Company's employee stock plans as
to which Mr. Broad has no investment power; and 6,949,512 shares represent
employee stock options held by Mr. Broad which are or will become exercisable on
or before February 15, 1998 and as to which he has no voting or investment
power. Of the Class B Stock, 12,684,210 shares are held directly by Mr. Broad
and 1,056,231 shares are registered in the name of a corporation as to which Mr.
Broad exercises sole voting and dispositive powers. At December 15, 1997, all
directors and officers as a group beneficially owned 14,338,041 shares of Common
Stock (7.64% of the class outstanding) and 13,740,441 shares of Class B Common
Stock (84.40% of the class outstanding). All share numbers reflect a 3-for-2
Stock split paid in the form of a stock dividend on August 29, 1997 to holders
of record on August 20, 1997.
45
<PAGE> 46
- --------------------------------------------------------------------------------
STATE REGULATION
- --------------------------------------------------------------------------------
The Company is subject to regulation and supervision by the insurance
regulatory agencies of the States of New York, New Mexico and Nebraska, the
states in which the Company is authorized to transact business. State insurance
laws establish supervisory agencies with broad administrative and supervisory
powers. Principal among these powers are granting and revoking licenses to
transact business, regulating marketing and other trade practices, operating
guaranty associations, licensing agents, approving policy forms, regulating
certain premium rates, regulating insurance holding company systems,
establishing reserve requirements, prescribing the form and content of required
financial statements and reports, performing financial, market conduct and other
examinations, determining the reasonableness and adequacy of statutory capital
and surplus, defining acceptable accounting principles, regulating the type,
valuation and amount of investments permitted, and limiting the amount of
dividends that can be paid and the size of transactions that can be consummated
without first obtaining regulatory approval.
During the last decade, the insurance regulatory framework has been placed
under increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation that changes, and in many
cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies or allowing combinations between insurance companies, banks and other
entities. In recent years, the NAIC has approved and recommended to the states
for adoption and implementation several regulatory initiatives designed to
reduce the risk of insurance company insolvencies and market conduct violations.
These initiatives include investment reserve requirements, risk-based capital
standards, codification of insurance accounting principles, new investment
standards and restrictions on an insurance company's ability to pay dividends to
its stockholders. The NAIC is also currently developing model laws relating to
product design and illustrations for annuity products. Current proposals are
still being debated and the Company is monitoring developments in this area and
the effects any changes would have on the Company.
- --------------------------------------------------------------------------------
CUSTODIAN
- --------------------------------------------------------------------------------
Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, serves as
the custodian of the assets of the Separate Account.
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The Company is involved in various kinds of litigation common to its
business. These cases are in various stages of development and, based on reports
of counsel, management believes that provisions made for potential losses
relating to such litigation are adequate and any further liabilities and costs
will not have a material adverse impact upon the Company's financial position or
results of operations.
- --------------------------------------------------------------------------------
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
46
<PAGE> 47
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, 1997 and 1996 and for each of the three years in the period ended
September 30, 1997 included in this Prospectus have been so included in reliance
on the reports of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
Additional information concerning the operations of the Separate Account is
contained in a Statement of Additional Information, which is available without
charge upon written request addressed to the Company at its Annuity Service
Center P.O. Box 54299, Los Angeles, California 90054-0299 or by calling
(800)90-VISTA. The contents of the Statement of Additional Information are
tabulated below.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Data...................................................................... 3
Annuity Payments...................................................................... 5
Annuity Unit Values................................................................... 6
Qualified Plans....................................................................... 9
Distribution of Contracts............................................................. 10
Financial Statements.................................................................. 10
</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.
47
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First SunAmerica Life Insurance Company
In our opinion, the accompanying balance sheet and the related income
statement and statement of cash flows present fairly, in all material respects,
the financial position of First SunAmerica Life Insurance Company at September
30, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Los Angeles, California
November 7, 1997
48
<PAGE> 49
FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments............................. $ 1,689,000 $ 6,707,000
Bonds and notes:
Available for sale, at fair value (amortized cost: 1997,
$184,709,000; 1996, $146,908,000)...................... 188,533,000 146,401,000
Common stocks, at fair value (cost: 1997 and 1996, $0)...... 19,000 129,000
------------ ------------
Total investments........................................... 190,241,000 153,237,000
Variable annuity assets....................................... 171,475,000 68,901,000
Accrued investment income..................................... 2,179,000 1,462,000
Deferred acquisition costs.................................... 18,094,000 12,127,000
Income taxes currently receivable............................. -- 299,000
Other assets.................................................. 861,000 842,000
------------ ------------
TOTAL ASSETS.................................................. $382,850,000 $236,868,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts........................ $180,805,000 $140,613,000
Payable to brokers for purchases of securities.............. 1,010,000 1,939,000
Income taxes currently payable.............................. 540,000 --
Other liabilities........................................... 1,722,000 845,000
------------ ------------
Total reserves, payables and accrued liabilities............ 184,077,000 143,397,000
------------ ------------
Variable annuity liabilities.................................. 171,475,000 68,901,000
------------ ------------
Deferred income taxes......................................... 1,836,000 1,350,000
------------ ------------
Shareholder's equity:
Common Stock................................................ 3,000,000 3,000,000
Additional paid-in capital.................................. 14,428,000 14,428,000
Retained earnings........................................... 7,096,000 5,973,000
Net unrealized gains (losses) on debt and equity
securities available for sale.......................... 938,000 (181,000)
------------ ------------
Total shareholder's equity.................................. 25,462,000 23,220,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................... $382,850,000 $236,868,000
============ ============
</TABLE>
See accompanying notes.
49
<PAGE> 50
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INCOME STATEMENT
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Investment income............................... $ 12,781,000 $ 9,957,000 $ 7,834,000
------------ ----------- -----------
Interest expense on:
Fixed annuity contracts....................... (10,089,000) (7,155,000) (5,042,000)
Senior indebtedness........................... -- (4,000) (8,000)
------------ ----------- -----------
Total interest expense........................ (10,089,000) (7,159,000) (5,050,000)
------------ ----------- -----------
NET INVESTMENT INCOME........................... 2,692,000 2,798,000 2,784,000
------------ ----------- -----------
NET REALIZED INVESTMENT GAINS (LOSSES).......... 360,000 (539,000) (1,348,000)
------------ ----------- -----------
Fee income:
Variable annuity fees......................... 1,712,000 690,000 412,000
Surrender charges............................. 304,000 221,000 194,000
------------ ----------- -----------
TOTAL FEE INCOME................................ 2,016,000 911,000 606,000
------------ ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES............. (1,842,000) (1,480,000) (1,004,000)
------------ ----------- -----------
AMORTIZATION OF DEFERRED ACQUISITION COSTS...... (1,158,000) (500,000) (300,000)
------------ ----------- -----------
ANNUAL COMMISSIONS.............................. (18,000) (19,000) (33,000)
------------ ----------- -----------
PRETAX INCOME................................... 2,050,000 1,171,000 705,000
------------ ----------- -----------
Income tax expense.............................. (927,000) (448,000) (182,000)
------------ ----------- -----------
NET INCOME...................................... $ 1,123,000 $ 723,000 $ 523,000
============ =========== ===========
</TABLE>
See accompanying notes.
50
<PAGE> 51
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 1,123,000 $ 723,000 $ 523,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to fixed annuity
contracts................................ 10,089,000 7,155,000 5,042,000
Net realized investment (gains) losses...... (360,000) 539,000 1,348,000
Accretion of net discounts on investments... (97,000) (343,000) (394,000)
Amortization of goodwill.................... 57,000 58,000 58,000
Provision for deferred income taxes......... (116,000) 740,000 333,000
Change in:
Deferred acquisition costs.................. (8,467,000) (5,736,000) (2,740,000)
Income taxes receivable/payable............. 839,000 (322,000) (418,000)
Other, net.................................... (382,000) (254,000) (323,000)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... 2,686,000 2,560,000 3,429,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds and notes............................. (101,287,000) (124,681,000) (125,130,000)
Common stock................................ -- -- (112,000)
Sales of:
Bonds and notes............................. 49,018,000 80,440,000 55,553,000
Common stock................................ 140,000 -- --
Redemptions and maturities of:
Bonds and notes............................. 13,856,000 11,514,000 21,369,000
Mortgage loans.............................. -- 4,736,000 35,000
------------- ------------- -------------
NET CASH USED BY INVESTING ACTIVITIES......... (38,273,000) (27,991,000) (48,285,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity contracts... $ 70,812,000 $ 45,417,000 $ 51,681,000
Net exchanges from the fixed accounts of
variable annuity contracts.................. (22,346,000) (4,719,000) (87,000)
Withdrawal payments on fixed annuity
contracts................................... (15,310,000) (9,850,000) (14,131,000)
Claims and annuity payments on fixed annuity
contracts................................... (3,176,000) (3,752,000) (2,974,000)
Net receipts from (repayments of) other short-
term financings............................. 589,000 (1,340,000) 1,964,000
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES..... 30,569,000 25,756,000 36,453,000
------------- ------------- -------------
NET INCREASE/(DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS................................. (5,018,000) 325,000 (8,403,000)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING
OF PERIOD................................... 6,707,000 6,382,000 14,785,000
------------- ------------- -------------
CASH AND SHORT-TERM INVESTMENTS AT END OF
PERIOD...................................... $ 1,689,000 $ 6,707,000 $ 6,382,000
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness............... $ -- $ 4,000 $ 8,000
============= ============= =============
Net income taxes paid....................... $ 203,000 $ 30,000 $ 254,000
============= ============= =============
</TABLE>
See accompanying notes.
51
<PAGE> 52
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
First SunAmerica Life Insurance Company (The "Company") is a New
York-domiciled life insurance company engaged primarily in the business of
writing fixed and variable annuity contracts in the state of New York.
The operations of the Company are influenced by many factors, including
general economic conditions, monetary and fiscal policies of the federal
government, and policies of state and other regulatory authorities. The level of
sales of the Company's financial products is influenced by many factors,
including general market rates of interest; strengths, weaknesses and volatility
of equity markets; and terms and conditions of competing financial products. The
Company is exposed to the typical risks normally associated with a portfolio of
fixed-income securities, namely interest rate, option, liquidity and credit
risk. The Company controls its exposure to these risks by, among other things,
closely monitoring and matching the duration of its assets and liabilities,
monitoring and limiting prepayment and extension risk in its portfolio,
maintaining a large percentage of its portfolio in highly liquid securities, and
engaging in a disciplined process of underwriting, reviewing and monitoring
credit risk. The Company also is exposed to market risk, as market volatility
may result in reduced fee income in the case of assets held in separate
accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles and include
the accounts of the Company, an indirect wholly owned subsidiary of SunAmerica
Inc. (the "Parent"). Certain prior period amounts have been reclassified to
conform with the 1997 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and short-term
bank participations. All such investments are carried at cost plus accrued
interest, which approximates fair value, have maturities of three months or less
and are considered cash equivalents for purposes of reporting cash flows.
Bonds and notes available for sale and common stocks are carried at
aggregate fair value and changes in unrealized gains or losses, net of tax, are
credited or charged directly to shareholder's equity. Bonds and notes are
reduced to estimated net realizable value when necessary for declines in value
considered to be other than temporary. Estimates of net realizable value are
subjective and actual realization will be dependent upon future events.
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, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net interest income, net realized
investment gains and losses, variable annuity fees, surrender charges and direct
administrative expenses. Deferred acquisition costs consist of commissions and
other costs that vary with, and are primarily related to, the production or
acquisition of new business.
52
<PAGE> 53
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As debt and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to deferred acquisition costs equal to the
change in amortization that would have been recorded if such securities had been
sold at their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains or losses on debt and equity securities available for
sale that is credited or charged directly to shareholder's equity. Deferred
Acquisition Costs have been decreased by $2,400,000 at September 30, 1997 and
increased by $100,000 at September 30, 1996 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities
resulting from the receipt of variable annuity premiums are segregated in
separate accounts. The Company receives fees for assuming mortality and certain
expense risks. Such fees are included in Variable Annuity Fees in the income
statement.
GOODWILL: Goodwill, amounting to $763,000 at September 30, 1997, is
amortized by using the straight-line method over a period of 25 years and is
included in Other Assets in the balance sheet. Goodwill is evaluated for
impairment when events or changes in economic conditions indicate that the
carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts are accounted for as investmenttype contracts in accordance with
Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments," and are recorded at accumulated value
(premiums received, plus accrued interest, less withdrawals and assessed fees).
FEE INCOME: Variable annuity fees and surrender charges are recorded in
income as earned.
INCOME TAXES: The Company is included in the consolidated federal income
tax return of the Parent and files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Income taxes have been
calculated as if the Company filed a separate return. Deferred income tax assets
and liabilities are recognized based on the difference between financial
statement carrying amounts and income tax bases of assets and liabilities using
enacted income tax rates and laws.
53
<PAGE> 54
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS
The amortized cost and estimated fair value of bonds and notes available
for sale by major category follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
AT SEPTEMBER 30, 1997:
Securities of the United States
Government.............................. $ 11,073,000 $ 11,224,000
Mortgage-backed securities................. 69,355,000 70,677,000
Securities of public utilities............. 4,426,000 4,496,000
Corporate bonds and notes.................. 78,372,000 80,405,000
Other debt securities...................... 21,483,000 21,731,000
------------ ------------
Total available for sale................... $184,709,000 $188,533,000
============ ============
AT SEPTEMBER 30, 1996:
Securities of the United States
Government.............................. $ 9,631,000 $ 9,562,000
Mortgage-backed securities................. 75,846,000 75,607,000
Securities of public utilities............. 1,032,000 971,000
Corporate bonds and notes.................. 41,545,000 41,722,000
Other debt securities...................... 18,854,000 18,539,000
------------ ------------
Total available for sale................... $146,908,000 $146,401,000
============ ============
</TABLE>
The amortized cost and estimated fair value of bonds and notes available
for sale by contractual maturity, as of September 30, 1997, follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
Due in one year or less...................... $ 250,000 $ 251,000
Due after one year through five years........ 23,461,000 23,749,000
Due after five years through ten years....... 54,161,000 55,688,000
Due after ten years.......................... 37,482,000 38,168,000
Mortgage-backed securities................... 69,355,000 70,677,000
------------ ------------
Total available for sale..................... $184,709,000 $188,533,000
============ ============
</TABLE>
Actual maturities of bonds and notes will differ from those shown above due
to prepayments and redemptions.
54
<PAGE> 55
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Gross unrealized gains and losses on bonds and notes available for sale by
major category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
---------- -----------
<S> <C> <C>
AT SEPTEMBER 30, 1997:
Securities of the United States Government..... $ 151,000 $ --
Mortgage-backed securities..................... 1,393,000 (71,000)
Securities of public utilities................. 70,000 --
Corporate bonds and notes...................... 2,132,000 (99,000)
Other debt securities.......................... 256,000 (8,000)
---------- -----------
Total available for sale....................... $4,002,000 $ (178,000)
========== ===========
AT SEPTEMBER 30, 1996:
Securities of the United States Government..... $ 55,000 $ (124,000)
Mortgage-backed securities..................... 515,000 (754,000)
Securities of public utilities................. -- (61,000)
Corporate bonds and notes...................... 749,000 (572,000)
Other debt securities.......................... 3,000 (318,000)
---------- -----------
Total available for sale....................... $1,322,000 $(1,829,000)
========== ===========
</TABLE>
At September 30, 1997, gross unrealized gains on equity securities
available for sale aggregated $19,000 and there were no unrealized losses. At
September 30, 1996, gross unrealized gains on equity securities available for
sale aggregated $129,000 and there were no unrealized losses.
Gross realized investment gains and losses on sales of investments are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
BONDS AND NOTES:
Realized gains..................................... $ 1,163,000 $ 1,039,000 $ 423,000
Realized losses.................................... (863,000) (1,295,000) (1,771,000)
COMMON STOCKS:
Realized gains/losses.............................. 140,000 (112,000) --
IMPAIRMENT WRITEDOWNS................................ (80,000) (171,000) --
----------- ---------- ----------
Total net realized investment gains/losses......... $ 360,000 $ (539,000) $(1,348,000)
=========== ========== ==========
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Short-term investments................................. $ 234,000 $ 390,000 $1,045,000
Bonds and notes........................................ 12,547,000.. 9,186,000 6,291,000
Mortgage loans......................................... -- ....... 381,000 498,000
----------- ---------- ----------
Total investment income.............................. $12,781,000 $9,957,000 $7,834,000
=========== ========== ==========
</TABLE>
Expenses incurred to manage the investment portfolio amounted to $99,000
for the year ended September 30, 1997, $121,000 for the year ended September 30,
1996, and $125,000 for the year ended September 30, 1995 and are included in
General and Administrative Expenses in the income statement.
55
<PAGE> 56
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
The carrying values of investments in any one entity or its affiliates
exceeding 10% of the Company's shareholder's equity at September 30, 1997 are as
follows:
<TABLE>
<S> <C>
Bonds and notes:
Lockheed Martin Corp.......................................... $4,078,000
Nabisco Inc................................................... 4,061,000
PacificCorp................................................... 3,033,000
==========
</TABLE>
At September 30, 1997, bonds and notes included $13,082,000 (fair value of
$13,969,000) of bonds and notes not rated investment grade. The Company had no
material concentrations of non-investment-grade assets at September 30, 1997.
At September 30, 1997, there were no investments in default as to the
payment of principal or interest.
At September 30, 1997, $518,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory requirements.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to reasonable
estimates of the fair value of only the Company's financial instruments. The
disclosures do not address the value of the Company's recognized and
unrecognized nonfinancial assets and liabilities or the value of anticipated
future business. The Company does not plan to sell most of its assets or settle
most of its liabilities at these estimated fair values.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Selling expenses and potential taxes
are not included. The estimated fair value amounts were determined using
available market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND SHORT-TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS AND NOTES: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the market
value of the underlying securities.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are
assigned a fair value equal to current net surrender value. Annuitized contracts
are valued based on the present value of future cash flows at current pricing
rates.
56
<PAGE> 57
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such obligations represent
net transactions of a short-term nature for which the carrying value is
considered a reasonable estimate of fair value.
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.
The estimated fair values of the Company's financial instruments at
September 30, 1997 and 1996, compared with their respective carrying values, are
as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
------------ ------------
<S> <C> <C>
1997:
ASSETS:
Cash and short-term investments............................. $ 1,689,000 $ 1,689,000
Bonds and notes............................................. 188,533,000 188,533,000
Common stocks............................................... 19,000 19,000
Variable annuity assets..................................... 171,475,000 171,475,000
LIABILITIES:
Reserves for fixed annuity contracts........................ 180,805,000 171,809,000
Payable to brokers for purchases of securities.............. 1,010,000 1,010,000
Variable annuity liabilities................................ 171,475,000 163,045,000
============ ============
1996:
ASSETS:
Cash and short-term investments............................. $ 6,707,000 $ 6,707,000
Bonds and notes............................................. 146,401,000 146,401,000
Common stocks............................................... 129,000 129,000
Variable annuity assets..................................... 68,901,000 68,901,000
LIABILITIES:
Reserves for fixed annuity contracts........................ 140,613,000 134,479,000
Payable to brokers for purchases of securities.............. 1,939,000 1,939,000
Variable annuity liabilities................................ 68,901,000 65,546,000
============ ============
</TABLE>
5. CONTINGENT LIABILITIES
The Company is involved in various kinds of litigation common to its
business. These cases are in various stages of development and, based on reports
of counsel, management believes that provisions made for potential losses
relating to such litigation are adequate and any further liabilities and costs
will not have a material adverse impact upon the Company's financial position or
results of operations.
6. SHAREHOLDER'S EQUITY
The Company is authorized to issue 300 shares of its $10,000 par value
Common Stock. At September 30, 1997 and 1996, 300 shares were outstanding.
57
<PAGE> 58
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
6. SHAREHOLDER'S EQUITY (CONTINUED)
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
RETAINED EARNINGS:
Beginning balance................................ $5,973,000 $5,250,000 $ 4,727,000
Net income....................................... 1,123,000 723,000 523,000
---------- ---------- -----------
Ending balance................................... $7,096,000 $5,973,000 $ 5,250,000
========== ========== ===========
NET UNREALIZED GAINS/LOSSES ON DEBT AND EQUITY
SECURITIES AVAILABLE FOR SALE:
Beginning balance............................. $ (181,000) $ (860,000) $(2,340,000)
Change in net unrealized gains/losses on debt
securities available for sale............... 4,331,000 939,000 4,254,000
Change in net unrealized gains/losses on
equity securities available for sale........ (110,000) 206,000 (77,000)
Change in adjustment to deferred acquisition
costs....................................... (2,500,000) (100,000) (1,900,000)
Tax effect of net changes..................... (602,000) (366,000) (797,000)
---------- ---------- -----------
Ending balance................................... $ 938,000 $ (181,000) $ (860,000)
========== ========== ===========
</TABLE>
For a life insurance company domiciled in the State of New York, no
dividend may be distributed to any shareholder unless notice of the domestic
insurer's intention to declare such dividend and the amount have been filed with
the Superintendent of Insurance not less than 30 days in advance of such
proposed declaration, or if the Superintendent disapproves the distribution of
the dividend within the 30-day period. No dividends were paid in fiscal years
1997, 1996 or 1995.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1997 was $7,000. The statutory net loss for the year ended
December 31, 1996 was $450,000 and the statutory net loss for the year ended
December 31, 1995 was $2,083,000. The Company's statutory capital and surplus
was $12,696,000 at September 30, 1997, $13,126,000 at December 31, 1996 and
$13,862,000 at December 31, 1995.
58
<PAGE> 59
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
7. INCOME TAXES
The components of the provisions for income taxes on pretax income consist
of the following:
<TABLE>
<CAPTION>
NET REALIZED
INVESTMENT
GAINS (LOSSES) OPERATIONS TOTAL
-------------- ---------- ----------
<S> <C> <C> <C>
1997:
Currently payable...................................... $ 88,000 $ 955,000 $1,043,000
Deferred............................................... 60,000 (176,000) (116,000)
--------- --------- ---------
Total income tax expense............................... $ 148,000 $ 779,000 $ 927,000
========= ========= =========
1996:
Currently payable...................................... $ (121,000) $ (171,000) $ (292,000)
Deferred............................................... (105,000) 845,000 740,000
--------- --------- ---------
Total income tax expense............................... $ (226,000) $ 674,000 $ 448,000
========= ========= =========
1995:
Currently payable...................................... $ (592,000) $ 441,000 $ (151,000)
Deferred............................................... (28,000) 361,000 333,000
--------- --------- ---------
Total income tax expense............................... $ (620,000) $ 802,000 $ 182,000
========= ========= =========
</TABLE>
Income taxes computed at the United States federal income tax rate of 35%
and income taxes provided differ as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
-------------- ---------- ----------
<S> <C> <C> <C>
Amount computed at statutory rate...................... $ 718,000 $ 410,000 $ 247,000
Increases (decreases) resulting from:
Amortization of differences between book and tax
bases of net assets acquired...................... 20,000 20,000 20,000
State income taxes, net of federal tax benefit....... 200,000 25,000 (86,000)
Other, net........................................... (11,000) (7,000) 1,000
--------- --------- ---------
Total income tax expense............................... $ 927,000 $ 448,000 $ 182,000
========= ========= =========
</TABLE>
59
<PAGE> 60
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The significant
components of the liability for Deferred Income Taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments..................................................... $ 153,000 $ 225,000
Deferred acquisition costs...................................... 6,191,000 3,902,000
Net unrealized gains on debt and equity securities available for
sale.......................................................... 505,000 --
Other liabilities............................................... 75,000 84,000
----------- -----------
Total deferred tax liabilities........................ 6,924,000 4,211,000
----------- -----------
DEFERRED TAX ASSETS:
Contractholder reserves......................................... (4,898,000) (2,582,000)
State income taxes.............................................. (79,000) (79,000)
Net unrealized losses on debt and equity securities available
for sale...................................................... -- (97,000)
Other assets.................................................... (111,000) (103,000)
----------- -----------
Total deferred tax assets............................. (5,088,000) (2,861,000)
----------- -----------
Deferred income taxes........................................... $ 1,836,000 $ 1,350,000
=========== ===========
</TABLE>
8. RELATED PARTY MATTERS
The Company pays commissions to three affiliated companies, SunAmerica
Securities, Inc., Advantage Capital Corp. and Royal Alliance Associates, Inc.
These broker-dealers represent a significant portion of the Company's business,
amounting to approximately 57.1%, 57.9% and 31.2% of premiums in 1997, 1996 and
1995, respectively. Commissions paid to these broker-dealers totaled $4,486,000
in 1997, $2,646,000 in 1996, and $761,000 in 1995. No single unaffiliated
broker-dealer was responsible for more than 13% of total sales in the years
ended September 30, 1997, 1996, and 1995.
The Company paid occupancy and office services expenses to Royal Alliance
Associates, Inc. totaling $15,000 for the year ended September 30, 1996 and
$113,000 for the year ended September 30, 1995. The Company paid no such charges
in the year ended September 30, 1997.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, Inc., whose
purpose is to provide services to the SunAmerica companies. Amounts paid for
such services totaled $2,454,000 for the year ended September 30, 1997,
$2,097,000 for the year ended September 30, 1996 and $722,000 for the year ended
September 30, 1995. Such amounts are included in General and Administrative
Expenses in the Income Statement.
9. SUBSEQUENT EVENTS
On October 31, 1997, the Company merged with John Alden Life Insurance
Company of New York, an affiliate, which had approximately $1,375,000,000 of
annuity reserves at September 30, 1997.
60
<PAGE> 61
APPENDIX A
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1 -- SEPARATE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
SEPARATE ACCOUNT)
These examples assume the following:
(1) The Initial Purchase Payment was $10,000, allocated solely to one
Portfolio;
(2) The date of full surrender or partial withdrawal occurs during the
3rd Contribution Year;
(3) The Owner's Contract Value at the time of surrender or withdrawal
is $12,000; and
(4) No other Purchase Payments or previous partial withdrawals have
been made.
EXAMPLE A -- FULL SURRENDER:
(1) Earnings in the Portfolio ($12,000 - $10,000 = $2,000) are not
subject to the Withdrawal Charge.
(2) The balance of the full surrender ($12,000 - $2,000 = $10,000) is
subject to a 5% Withdrawal Charge applicable during the 3rd Contribution
Year.
(3) The amount of the Withdrawal Charge is .05 X $10,000 = $500.
(4) The Contract Administration Charge is deducted from the full
surrender amount. The amount of the full surrender is
$12,000 - $500 - $30 = $11,470.
EXAMPLE B -- PARTIAL WITHDRAWAL (IN THE AMOUNT OF $3,000):
(1) For the same reasons as given in Steps 1 and 2 of Example A,
above, $2,000 can be withdrawn free of the Withdrawal Charge.
(2) Although 10% of the Purchase Payment is available without
imposition of a Withdrawal Charge (.10 X $10,000 = $1,000), this free
withdrawal amount is, like the Withdrawal Charge, applied first to
earnings. Since the earnings exceed the free withdrawal amount, only the
earnings can be withdrawn free of the scheduled Withdrawal Charge.
(3) The balance of the requested partial withdrawal
($3,000 - $2,000 = $1,000) is subject to the Withdrawal Charge applicable
during the 3rd Contribution Year (5%).
(4) The amount of the Withdrawal Charge is equal to the amount
required to complete the partial withdrawal ($3,000 - $2,000 = $1,000)
divided by (1 - .05) = 0.95, less the amount required to complete the
partial withdrawal.
Withdrawal Charge = ($1,000/0.95) - $1,000
= $52.63
In this example, in order for the Owner to receive the amount requested
($3,000), a gross withdrawal of $3,052.63 must be processed with $52.63
representing the Withdrawal Charge calculated above.
Examples C and D assume the following:
(1) The Initial Purchase Payment was $20,000, allocated solely to one
Portfolio;
(2) The full surrender or partial withdrawal occurs during the 3rd
Contribution Year;
A-1
<PAGE> 62
(3) The Owner's Contract Value at the time of surrender or withdrawal
is $21,500; and
(4) No other Purchase Payments or partial withdrawals have been made.
EXAMPLE C -- PARTIAL WITHDRAWAL (IN THE MAXIMUM AMOUNT AVAILABLE WITHOUT
WITHDRAWAL CHARGE):
(1) Earnings in the Portfolio ($21,500 - $20,000 = $1,500) are not
subject to the Withdrawal Charge.
(2) An Additional Free Withdrawal of 10% of the Purchase Payments less
earnings (.10 X $20,000 - $1,500 = $500) is also available free of the
Withdrawal Charge, so that
(3) The maximum partial withdrawal without Withdrawal Charge is the
sum of the Earnings and the Additional Free Withdrawal
($1,500 + $500 = $2,000).
EXAMPLE D -- FULL SURRENDER IMMEDIATELY FOLLOWING THE PARTIAL WITHDRAWAL IN
EXAMPLE C:
(1) The Owner's Contract Value after the partial withdrawal in Example
C is $21,500 - $2,000 = $19,500.
(2) The Purchase Payment amount for calculating the Withdrawal Charge
is the original $20,000 (Additional Free Withdrawal amounts do not reduce
the Purchase Payment amount for purposes of calculating the Withdrawal
Charge).
(3) The amount of the Withdrawal Charge is .05 X $20,000 = $1,000.
(4) The Contract Administration Charge is deducted from the full
surrender amount. The amount of the full surrender is
$19,500 - $1,000 - $30 = $18,470.
PART 2 -- GENERAL ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The Market Value Adjustment Factor is reproduced here for convenience:
N/12
[(1 + I)/(1 + J + 0.0025)] -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; and
(4) no transfers, additional Purchase Payments, or other withdrawals
have been made.
A-2
<PAGE> 63
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 8th Contribution Year, no Withdrawal Charge is
applicable.
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%:
N/12
The MVA factor = [(1 + I)/(1 + J + .0025)] -1
(30/12)
= [(1.07)/(1.08 + .0025)] -1
2.5
= (0.988453) -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%:
N/12
The MVA factor = [(1 + I)/(1 + J + .0025)] -1
(30/12)
= [(1.07)/(1.06 +.0025)] -1
2.5
= (1.007059) -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. As was the case with the Examples in Part 1, above, the earnings
may be withdrawn free of Withdrawal Charge, leaving the initial Purchase Payment
of $10,000 subject to the Charge. The applicable Withdrawal Charge is 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%:
N/12
The MVA factor = [(1 + I)/(1 + J + .0025)] -1
(54/12)
= [(1.07)/(1.08 + .0025)] -1
4.5
= (0.988453) -1
= 0.949077-1
= -0.050923
A-3
<PAGE> 64
The Withdrawal Charge of $200 is applied first; the MVA factor is
applied against the remaining Guarantee Amount:
MVA = ($14,329.65 - $200 - $30) X (-0.050923) = -$718.00
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 - $718.00 - $30 = $13,381.65
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%:
N/12
The MVA factor = [(1 + I)/(1 + J + .0025)] - 1
(54/12)
= [(1.07)/(1.06 + .0025)] - 1
4.5
= (1.007059) - 1
= 1.032159 - 1
= +0.032159
The MVA is:
($14,329.65 - $200 - $30) X (+0.032159) = +$453.44
And the net amount available upon surrender is:
$14,329.65 - $200 + $453.44 - $30 = $14,553.09
A-4
<PAGE> 65
<TABLE>
<S> <C> <C>
==============================
- ------------------------------ Stamp
</TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
P.O. BOX 54299
LOS ANGELES, CALIFORNIA 90054-0299
<PAGE> 66
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:
