<PAGE> 1
As filed pursuant to Rule 424(b)(3)
of the Securities Act of 1933
File No. 033-85016
[LOGO] POLARIS
A Variable Annuity
P R O F I L E This profile is a summary of some of the
more important points
that you should know and consider before purchasing the
Polaris Variable Annuity. The sections in this profile
May 14, 1997 correspond to sections in the accompanying prospectus which
discuss the topics in more detail. The annuity is more fully
described in the prospectus. Please read the prospectus
carefully.
1. THE POLARIS VARIABLE ANNUITY
The Polaris Variable Annuity is a contract between you and First SunAmerica
Life Insurance Company. It is designed to help you invest on a tax-deferred
basis and meet long-term financial goals, such as retirement funding. Tax
deferral means all your money, including the amount you would otherwise pay
in current income taxes, remains in your contract to generate more earnings.
Your money could grow faster than it would in a comparable taxable
investment.
Polaris offers a diverse selection of money managers and investment options.
You may divide your money among any or all of our 25 variable investment
portfolios and 5 fixed investment options. Your investment is not
guaranteed. The value of your Polaris contract can fluctuate up or down,
based on the performance of the underlying investments you select, and you
may experience a loss.
The variable investment portfolios offer professionally managed investment
choices with goals ranging from capital preservation to aggressive growth.
Your choices for the various investment options are found on the next page.
The contract also offers 5 fixed investment options, for different time
periods and each with a different interest rate that is guaranteed by First
SunAmerica.
Like most annuities, the contract has an Accumulation Phase and an Income
Phase. During the Accumulation Phase, you invest money in your contract.
Your earnings are based on the investment performance of the variable
investment portfolios to which your money is allocated and/or the interest
rate earned on the fixed investment options. You may withdraw money from
your contract during the Accumulation Phase. However, as with other
tax-deferred investments, you will pay taxes on earnings and untaxed
contributions when you withdraw them. An IRS tax penalty may apply if you
make withdrawals before age 59 1/2. During the Income Phase, you will
receive payments from your annuity. Your payments may be fixed in dollar
amount, vary with investment performance or a combination of both, depending
on the annuity income option you select. Among other factors, the amount of
money you are able to accumulate in your contract during the Accumulation
Phase will determine the amount of your payments during the Income Phase.
2. ANNUITY INCOME OPTIONS
You can select from one of five annuity income options:
(1) payments for your lifetime;
(2) payments for your lifetime and your survivor's lifetime;
(3) payments for your lifetime and your survivor's lifetime, but for not
less than 10 years;
(4) payments for your lifetime, but for not less than 10 or 20 years; and
(5) payments for a specified period of 5 to 30 years.
You will also need to decide if you want your payments to fluctuate with
investment performance or remain constant, and the date on which your
payments will begin. Once you begin receiving payments, you cannot change
your annuity option. If your contract is part of a non-qualified retirement
plan (one that is established with after tax dollars), payments during the
Income Phase are considered partly a return of your original investment. The
"original investment" part of each payment is not taxable as income. For
contracts which are part of a qualified retirement plan using before tax
dollars, the entire payment is taxable as income.
3. PURCHASING A POLARIS VARIABLE
ANNUITY CONTRACT
You can buy a contract through your financial representative, who can also
help you complete the proper forms. For Non-qualified contracts, the minimum
initial investment is $5,000 and subsequent amounts of $500 or more may be
added to your contract at any time during the Accumulation Phase. For
Qualified contracts, the minimum initial investment is $2,000 and subsequent
amounts of $250 or more may be added to your contract at any time during the
Accumulation Phase.
<PAGE> 2
4. INVESTMENT OPTIONS
You may allocate money to the following variable investment portfolios of
the Anchor Series Trust and/or the SunAmerica Series Trust:
ANCHOR SERIES TRUST
MANAGED BY WELLINGTON MANAGEMENT COMPANY, LLP
- Capital Appreciation Portfolio
- Growth Portfolio
- Natural Resources Portfolio
- Government and Quality Bond Portfolio
SUNAMERICA SERIES TRUST
MANAGED BY ALLIANCE CAPITAL MANAGEMENT L.P.
- Global Equities Portfolio
- Alliance Growth Portfolio
- Growth-Income Portfolio
MANAGED BY DAVIS SELECTED ADVISERS, L.P.
- Venture Value Portfolio
- Real Estate Portfolio
MANAGED BY FEDERATED INVESTORS
- Federated Value Portfolio
- Utility Portfolio
- Corporate Bond Portfolio
MANAGED BY GOLDMAN SACHS ASSET MANAGEMENT/
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL
- Asset Allocation Portfolio
- Global Bond Portfolio
MANAGED BY MORGAN STANLEY ASSET MANAGEMENT INC.
- International Diversified Equities Portfolio
- Worldwide High Income Portfolio
MANAGED BY PHOENIX INVESTMENT COUNSEL, INC.
- Growth/Phoenix Investment Counsel Portfolio
- Balanced/Phoenix Investment Counsel Portfolio
MANAGED BY PUTNAM INVESTMENT MANAGEMENT, INC.
- Putnam Growth Portfolio
- International Growth and Income Portfolio
- Emerging Markets Portfolio
MANAGED BY SUNAMERICA ASSET MANAGEMENT CORP.
- Aggressive Growth Portfolio
- SunAmerica Balanced Portfolio
- High-Yield Bond Portfolio
- Cash Management Portfolio
You may also allocate money to the 1, 3, 5, 7 and 10 year fixed investment
options. The interest rate may differ from time to time but will never be
less than 3%. Once established, the rate will not change during the selected
period. Your contract value will be adjusted up or down for withdrawals or
transfers from the 3, 5, 7 and 10 year fixed investment options prior to the
end of the selected period.
5. EXPENSES
Each year, we deduct a $30 contract maintenance fee from your contract. This
fee is currently waived if the value of your contract is at least $50,000.
We also deduct insurance charges which equal 1.52% annually of the average
daily value of your contract allocated to the variable portfolios. The
insurance charges include: Mortality and Expense Risk, 1.37%, and
Distribution Expense, .15%.
As with other professionally managed investments, there are also investment
charges imposed on contracts with money allocated to the variable
portfolios, which are estimated to range from .62% to 2.00%.
If you take money out in excess of the amount allowed for in your contract,
you may be assessed a withdrawal charge which is a percentage of the money
you withdraw. The percentage declines with each year the money is in the
contract as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------
YEAR 1 2 3 4 5 6 7 8+
---------------------------------------------------
WITHDRAWAL
CHARGE 7% 6% 5% 4% 3% 2% 1% 0%
---------------------------------------------------
</TABLE>
After your first 15 free transfers, a $25 transfer fee will apply to each
subsequent transfer.
The following chart is designed to help you understand the charges in your
contract. The column "Total Annual Charges" shows the total of the 1.52%
insurance charges, the $30 contract maintenance fee and the investment
charges for each variable portfolio. We converted the contract maintenance
fee to a percentage using the current average contract size of $56,800. The
actual impact of this charge on your contract may differ from this
percentage.
The next two columns show two examples of the charges you would pay under
the contract. The examples assume that you invested $1,000 in a contract
which earns 5% annually and that you withdraw your money: (1) at the end of
year 1, and (2) at the end of year 10.
<PAGE> 3
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL EXPENSES TOTAL EXPENSES
INSURANCE INVESTMENT TOTAL ANNUAL AT END OF AT END OF
ANCHOR SERIES TRUST PORTFOLIO CHARGES CHARGES CHARGES 1 YEAR 10 YEARS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Appreciation 1.57% .75% 2.32% $ 94 $266
Growth 1.57% .81% 2.38% $ 94 $272
Natural Resources 1.57% .94% 2.51% $ 95 $285
Government and Quality Bond 1.57% .71% 2.28% $ 93 $262
- -----------------------------------------------------------------------------------------------------------------
SUNAMERICA SERIES TRUST PORTFOLIO
Emerging Markets 1.57% 2.00% 3.57% $106 $384
International Diversified
Equities 1.57% 1.59% 3.16% $102 $347
Global Equities 1.57% 1.03% 2.60% $ 96 $294
International Growth and
Income 1.57% 1.70% 3.27% $103 $357
Aggressive Growth 1.57% 1.05% 2.62% $ 97 $296
Real Estate 1.57% 1.15% 2.72% $ 98 $305
Putnam Growth* 1.57% .90% 2.47% $ 95 $281
Growth/Phoenix 1.57% .74% 2.31% $ 93 $265
Alliance Growth 1.57% .71% 2.28% $ 93 $262
Venture Value 1.57% .85% 2.42% $ 95 $276
Federated Value 1.57% 1.05% 2.62% $ 97 $296
Growth-Income 1.57% .72% 2.29% $ 93 $263
Utility 1.57% 1.05% 2.62% $ 97 $296
Asset Allocation 1.57% .74% 2.31% $ 93 $265
Balanced/Phoenix 1.57% .84% 2.41% $ 94 $275
SunAmerica Balanced 1.57% 1.00% 2.57% $ 96 $291
Worldwide High Income 1.57% 1.18% 2.75% $ 98 $308
High-Yield Bond 1.57% .77% 2.34% $ 94 $268
Corporate Bond 1.57% .97% 2.54% $ 96 $288
Global Bond 1.57% .89% 2.46% $ 95 $281
Cash Management 1.57% .62% 2.19% $ 92 $253
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Formerly named Provident Growth.
For more detailed information, see the Fee Tables and Examples in the
prospectus.
6. TAXES
Unlike taxable investments where earnings are taxed in the year they are
earned, taxes on amounts earned in a Nonqualified contract (one that is
established with after tax dollars) are deferred until they are withdrawn.
In a Qualified contract (one that is established with before tax dollars
like an IRA), all amounts are taxable when they are withdrawn.
When you begin taking distributions or withdrawals from your contract,
earnings are considered to be taken out first and will be taxed at your
ordinary income rate. You may be subject to a 10% IRS tax penalty for
distributions or withdrawals before age 59 1/2.
7. ACCESS TO YOUR MONEY
Earnings may be withdrawn at any time free of a withdrawal charge. After the
first year, the first withdrawal of the year will be free of a withdrawal
charge if it does not exceed the greater of: (1) earnings in your contract
as of the date you make the withdrawal or (2) 10% of the money you have
invested for at least one year and not yet withdrawn, less any withdrawals
made during the year.
Although amounts withdrawn using the 10% provision may reduce principal for
purposes of calculating amounts available for future withdrawals of
earnings, they do not reduce the amount of money you invested for purposes
of calculating the withdrawal charge if you withdraw your entire contract
value.
Withdrawals in excess of these limits will be assessed a withdrawal charge.
Withdrawals may be made from your contract in the amount of $1,000 or more.
You may request a withdrawal in writing or by establishing systematic
withdrawals. Under systematic withdrawals, the minimum withdrawal amount is
$250.
If you withdraw your entire contract value, you will not receive the benefit
of any free withdrawal amount. After your money has been in the contract for
seven full years, there are no withdrawal charges on that portion of the
money that you have invested for at least seven full years. Of course, you
may have to pay income tax and a 10% IRS tax penalty may apply if you are
under age 59 1/2. Additionally, withdrawal charges are not assessed when a
death benefit is paid.
8. PERFORMANCE
The value of your annuity will fluctuate depending upon the investment
performance of the portfolio(s) you choose.
The following chart shows total returns for each portfolio for the time
periods shown. These numbers reflect the insurance charges, the contract
maintenance fee and the investment charges. Withdrawals charges are not
reflected in the chart. Past performance is not a guarantee of future
results.
<PAGE> 4
<TABLE>
<CAPTION>
- -------------------------------------------------------
ANCHOR SERIES CALENDAR YEAR
TRUST PORTFOLIO 1996 1995
- -------------------------------------------------------
<S> <C> <C>
Capital Appreciation 23.15% 25.38%
Growth 23.05% 17.73%
Natural Resources 12.22% 6.90%
Gov't and Quality
Bond 1.37% 10.44%
- -------------------------------------------------------
SUNAMERICA SERIES
TRUST PORTFOLIO
Emerging Markets -- --
Int'l Diversified
Equities 7.58% 10.71%
Global Equities 12.35% 11.37%
Int'l Growth and
Income -- --
Aggressive Growth 4.32% --
Real Estate -- --
Putnam Growth* 18.46% 16.47%
Growth/Phoenix 14.10% 21.10%
Alliance Growth 27.08% 30.24%
Venture Value 22.85% 23.41%
Federated Value 7.32% --
Growth-Income 22.09% 21.08%
Utility 8.25% --
Asset Allocation 17.03% 13.75%
Balanced/Phoenix 8.20% 14.66%
SunAmerica Balanced 9.39% --
Worldwide High Income 23.40% 14.90%
High-Yield Bond 12.76% 4.28%
Corporate Bond 2.88% 9.96%
Global Bond 7.56% 9.29%
Cash Management 3.31% 2.57%
- -------------------------------------------------------
</TABLE>
* Formerly named Provident Growth.
Inception date for each portfolio varies.
9. DEATH BENEFIT
If you should die during the Accumulation Phase, your beneficiary will
receive a death benefit.
For contracts issued prior to April 28, 1997, the death benefit is the
greater of:
(1) the value of your contract, or
(2) the money you put in less any withdrawals.
After seven years, the death benefit is the greater of (1) or (2) above
or:
(3) the value of your contract on the day before your last contract
anniversary less any withdrawals plus any additional money you put
in since that date, or
(4) the death benefit on the day before your last contract anniversary
less any withdrawals since that anniversary.
For contracts issued on or after April 28, 1997, the death benefit is the
greater of:
(1) the value of your contract
(2) the money you put in less any withdrawals, or
(3) the maximum of the anniversary values prior to your 81st birthday.
The anniversary value is equal to the value of your contract on
each contract anniversary less any withdrawals plus any additional
money you put in since that anniversary.
10. OTHER INFORMATION
FREE LOOK: You may cancel your contract within ten days by mailing it to
our Annuity Service Center. Your contract will be treated as void on the
date we receive it and we will pay you an amount equal to the greater of
the value of your contract or the money you invested.
ASSET ALLOCATION REBALANCING: If selected by you, this program seeks to
keep your investment in line with your goals. We will maintain your
specified allocation mix in the variable investment portfolios and the
1-year fixed investment option by readjusting your money on a calendar
quarter, semiannual or annual basis.
SYSTEMATIC WITHDRAWAL PROGRAM: If selected by you, this program allows you
to receive either monthly, quarterly, semiannual or annual checks during
the Accumulation Phase. Systematic withdrawals may also be electronically
wired to your bank account. Of course, withdrawals may be taxable and a
10% IRS tax penalty may apply if you are under age 59 1/2.
PRINCIPAL ADVANTAGE: If selected by you, this program allows you to obtain
growth potential without any market risk to your principal. We will
guarantee that the portion of your money allocated to the 1, 3, 5, 7 or 10
year fixed investment options will grow to equal your principal investment
when it is allocated in accordance with the program.
DOLLAR COST AVERAGING: If selected by you, this program allows you to
invest gradually in the equity and bond portfolios from any of the
variable investment portfolios or the 1-year fixed investment option.
AUTOMATIC PAYMENT PLAN: You can add to your contract directly from your
bank account with as little as $20 per month.
CONFIRMATIONS AND QUARTERLY STATEMENTS: You will receive a confirmation of
each transaction within your contract. On a quarterly basis, you will
receive a complete statement of your transactions over the past quarter
and a summary of your account values.
11. INQUIRIES
If you have questions about your contract or need to make changes, call
your financial representative or contact us at:
First SunAmerica Life Insurance Company
Annuity Service Center
P.O. Box 54299
Los Angeles, California 90054-0299
Telephone Number: (800) 99NY-SUN
If money accompanies your correspondence, you should direct it to:
First SunAmerica Life Insurance Company
P.O. Box 100357
Pasadena, California 91189-0357
<PAGE> 5
[LOGO] POLARIS
A Variable Annuity
PROSPECTUS
MAY 14, 1997
<TABLE>
<S> <C> <C>
Please read this prospectus FLEXIBLE PAYMENT DEFERRED ANNUITY CONTRACTS
carefully before investing and issued by
keep it for future reference. FIRST SUNAMERICA LIFE INSURANCE COMPANY
It contains important in connection with
information about the Polaris FS VARIABLE SEPARATE ACCOUNT
Variable Annuity. The annuity has 30 investment choices -- 5 fixed investment options
and 25 variable investment portfolios listed below. The 5 fixed
To learn more about the annuity investment options include specified periods of 1, 3, 5, 7 and 10
offered by this prospectus, you years. The 25 variable investment portfolios are part of Anchor Series
can obtain a copy of the Trust or SunAmerica Series Trust.
Statement of Additional ANCHOR SERIES TRUST:
Information ("SAI") dated May MANAGED BY WELLINGTON MANAGEMENT COMPANY, LLP
14, 1997. The SAI has been - Capital Appreciation Portfolio
filed with the Securities and - Growth Portfolio
Exchange Commission ("SEC") and - Natural Resources Portfolio
is incorporated by reference - Government and Quality Bond Portfolio
into this prospectus. The Table SUNAMERICA SERIES TRUST:
of Contents of the SAI appears MANAGED BY ALLIANCE CAPITAL MANAGEMENT L.P.
on page 27 of this prospectus. - Global Equities Portfolio
For a free copy of the SAI, - Alliance Growth Portfolio
call us at (800) 99NY-SUN or - Growth-Income Portfolio
write to us at our Annuity MANAGED BY DAVIS SELECTED ADVISERS, L.P.
Service Center, P.O. Box 54299, - Venture Value Portfolio
Los Angeles, California - Real Estate Portfolio
90054-0299. MANAGED BY FEDERATED INVESTORS
- Federated Value Portfolio
- Utility Portfolio
- Corporate Bond Portfolio
MANAGED BY GOLDMAN SACHS ASSET MANAGEMENT/
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL
- Asset Allocation Portfolio
- Global Bond Portfolio
MANAGED BY MORGAN STANLEY ASSET MANAGEMENT INC.
- International Diversified Equities Portfolio
- Worldwide High Income Portfolio
MANAGED BY PHOENIX INVESTMENT COUNSEL, INC.
- Growth/Phoenix Investment Counsel Portfolio
ANNUITIES INVOLVE RISKS, - Balanced/Phoenix Investment Counsel Portfolio
INCLUDING POSSIBLE LOSS OF MANAGED BY PUTNAM INVESTMENT MANAGEMENT, INC.
PRINCIPAL, AND ARE NOT A - Putnam Growth Portfolio
DEPOSIT OR OBLIGATION OF, OR - International Growth and Income Portfolio
GUARANTEED OR ENDORSED BY, ANY - Emerging Markets Portfolio
BANK. THEY ARE NOT FEDERALLY MANAGED BY SUNAMERICA ASSET MANAGEMENT CORP.
INSURED BY THE FEDERAL DEPOSIT - Aggressive Growth Portfolio
INSURANCE CORPORATION, THE - SunAmerica Balanced Portfolio
FEDERAL RESERVE BOARD OR ANY - High-Yield Bond Portfolio
OTHER AGENCY. - Cash Management Portfolio
</TABLE>
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.
<PAGE> 6
=============================================================
TABLE OF CONTENTS
=============================================================
<TABLE>
<S> <C> <C>
GLOSSARY.......................................... 2
FEE TABLES........................................ 3
Owner Transaction Expenses.................. 3
Annual Separate Account Expenses............ 3
Portfolio Expenses.......................... 3
EXAMPLES.......................................... 4
1. THE POLARIS VARIABLE ANNUITY................ 6
2. ANNUITY INCOME OPTIONS...................... 6
Allocation of Annuity Payments.............. 7
Annuity Payments............................ 7
Transfers During the Income Phase........... 7
Deferment of Payments....................... 7
3. PURCHASING A POLARIS VARIABLE
ANNUITY..................................... 7
Allocation of Purchase Payments............. 7
Accumulation Units.......................... 8
Free Look................................... 8
4. INVESTMENT OPTIONS.......................... 8
Variable Investment Options................. 8
Anchor Series Trust....................... 8
SunAmerica Series Trust................... 8
Fixed Investment Options.................... 9
Market Value Adjustment................... 9
Transfers During the Accumulation Phase..... 9
Dollar Cost Averaging Program............... 10
Asset Allocation Rebalancing Program........ 10
Principal Advantage Program................. 10
Voting Rights............................... 11
Substitution................................ 11
5. EXPENSES.................................... 11
Insurance Charges........................... 11
Mortality and Expense Risk Charge......... 11
Distribution Expense Charge............... 11
Withdrawal Charges.......................... 11
Investment Charges.......................... 12
Contract Maintenance Fee.................... 12
Transfer Fee................................ 12
Income Taxes................................ 12
Reduction or Elimination of Certain Charges 12
6. TAXES....................................... 12
Annuity Contracts in General................ 12
Tax Treatment of Distributions--
Non-qualified Contracts..................... 12
Tax Treatment of Distributions--
Qualified Contracts......................... 13
Diversification............................. 13
7. ACCESS TO YOUR MONEY........................ 13
Systematic Withdrawal Program............... 14
Minimum Contract Value...................... 14
8. PERFORMANCE................................. 14
9. DEATH BENEFIT............................... 14
10. OTHER INFORMATION........................... 15
First SunAmerica............................ 15
The Separate Account........................ 15
The General Account......................... 15
Distribution................................ 15
Administration.............................. 16
Legal Proceedings........................... 16
Custodian................................... 16
Additional Information...................... 16
Selected Financial Information.............. 17
Management Discussion and Analysis.......... 18
Properties.................................. 24
Directors and Executive Officers............ 25
Executive Compensation...................... 26
Security Ownership of Owners and
Management.................................. 26
State Regulation............................ 26
Independent Accountants..................... 26
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL
INFORMATION....................................... 27
FINANCIAL STATEMENTS.............................. 27
APPENDIX A - CONDENSED FINANCIAL INFORMATION......
A-1
APPENDIX B - MARKET VALUE ADJUSTMENT.............. B-1
</TABLE>
=============================================================
GLOSSARY
=============================================================
We have capitalized some of the technical terms used in this prospectus. To help
you understand these terms, we have defined them in this glossary.
ACCUMULATION PHASE - The period during which you invest money in your contract.
ACCUMULATION UNITS - A measurement we use to calculate the value of the variable
portion of your contract during the Accumulation Phase.
ANNUITANT(S) - The person(s) on whose life (lives) we base annuity payments.
ANNUITY DATE - The date on which annuity payments are to begin, as selected by
you.
ANNUITY UNITS - A measurement we use to calculate the amount of annuity payments
you receive from the variable portion of your contract during the Income Phase.
BENEFICIARY (IES) - The person(s) designated to receive any benefits under the
contract if you or the Annuitant dies.
INCOME PHASE - The period during which we make annuity payments to you.
IRS - The Internal Revenue Service.
NON-QUALIFIED (CONTRACT) - A contract purchased with after-tax dollars. In
general, these contracts are not under any pension plan, specially sponsored
program or individual retirement account ("IRA").
PORTFOLIO(S) - The variable investment options available under the contract.
Each Portfolio has its own investment objective and is invested in the
underlying investments of the Anchor Series Trust or the SunAmerica Series
Trust.
PURCHASE PAYMENTS - The money you give us to buy the contract, as well as any
additional money you give us to invest in the contract after you own it.
QUALIFIED (CONTRACT) - A contract purchased with pretax dollars. These contracts
are generally purchased under a pension plan, specially sponsored program or
individual retirement account ("IRA").
TRUSTS - Refers to the Anchor Series Trust and the SunAmerica Series Trust
collectively.
2
<PAGE> 7
================================================================================
FEE TABLES
================================================================================
OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C> <C>
WITHDRAWAL CHARGE (AS A PERCENTAGE OF EACH PURCHASE PAYMENT)
Year 1........... 7% Year 5............... 3%
Year 2........... 6% Year 6............... 2%
Year 3........... 5% Year 7............... 1%
Year 4........... 4% Year 8+.............. 0%
TRANSFER FEE................... No charge for first 15
transfers each year;
thereafter, fee is $25
CONTRACT MAINTENANCE FEE*...... $30
*waived if contract value is $50,000 or more
</TABLE>
ANNUAL SEPARATE ACCOUNT EXPENSES
(AS A PERCENTAGE OF DAILY NET ASSET VALUE)
<TABLE>
<S> <C>
Mortality and Expense Risk Charge............... 1.37%
Distribution Expense Charge..................... 0.15%
-----
TOTAL SEPARATE ACCOUNT EXPENSES............. 1.52%
=====
</TABLE>
PORTFOLIO EXPENSES
ANCHOR SERIES TRUST
(AS A PERCENTAGE OF AVERAGE NET ASSETS FOR THE TRUST'S TWELVE-MONTH PERIOD ENDED
NOVEMBER 30, 1996)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
PORTFOLIO FEE EXPENSES EXPENSES
<S> <C> <C> <C>
====================================================================================================
Capital Appreciation .67% .08% .75%*
----------------------------------------------------------------------------------------------------
Growth .73% .08% .81%*
----------------------------------------------------------------------------------------------------
Natural Resources .75% .19% .94%*
----------------------------------------------------------------------------------------------------
Government and Quality Bond .62% .09% .71%*
====================================================================================================
</TABLE>
SUNAMERICA SERIES TRUST
(AS A PERCENTAGE OF AVERAGE NET ASSETS FOR THE TRUST'S FISCAL YEAR ENDED
NOVEMBER 30, 1996)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
PORTFOLIO FEE EXPENSES EXPENSES
<S> <C> <C> <C>
====================================================================================================
Emerging Markets** 1.25% .65% 1.90%*
----------------------------------------------------------------------------------------------------
International Diversified Equities 1.00% .59% 1.59%
----------------------------------------------------------------------------------------------------
Global Equities .80% .23% 1.03%
----------------------------------------------------------------------------------------------------
International Growth and Income** 1.00% .60% 1.60%
----------------------------------------------------------------------------------------------------
Aggressive Growth .75% .30% 1.05%*
----------------------------------------------------------------------------------------------------
Real Estate** .80% .45% 1.25%
----------------------------------------------------------------------------------------------------
Putnam Growth*** .82% .08% .90%
----------------------------------------------------------------------------------------------------
Growth/Phoenix .66% .08% .74%
----------------------------------------------------------------------------------------------------
Alliance Growth .64% .07% .71%
----------------------------------------------------------------------------------------------------
Venture Value .77% .08% .85%
----------------------------------------------------------------------------------------------------
Federated Value .75% .30% 1.05%*
----------------------------------------------------------------------------------------------------
Growth-Income .64% .08% .72%
----------------------------------------------------------------------------------------------------
Utility .75% .30% 1.05%*
----------------------------------------------------------------------------------------------------
Asset Allocation .65% .09% .74%
----------------------------------------------------------------------------------------------------
Balanced/Phoenix .70% .14% .84%
----------------------------------------------------------------------------------------------------
SunAmerica Balanced .70% .30% 1.00%*
----------------------------------------------------------------------------------------------------
Worldwide High Income 1.00% .18% 1.18%
----------------------------------------------------------------------------------------------------
High-Yield Bond .68% .09% .77%
----------------------------------------------------------------------------------------------------
Corporate Bond .70% .27% .97%
----------------------------------------------------------------------------------------------------
Global Bond .73% .16% .89%
----------------------------------------------------------------------------------------------------
Cash Management .54% .08% .62%
====================================================================================================
</TABLE>
*Annualized
**As of the date of this prospectus, the sale of contracts offering the
Emerging Markets, Real Estate and International Growth and Income
Portfolios had not begun. The percentages are based on estimated amounts
for the current fiscal year.
***As of April 16, 1997, the Provident Growth Portfolio was renamed the
Putnam Growth Portfolio, managed by Putnam Investment Management, Inc.
The expenses shown here are those of the former Provident Growth
Portfolio managed by Provident Investment Counsel.
THE ABOVE PORTFOLIO EXPENSES WERE PROVIDED BY THE TRUSTS. WE HAVE NOT
INDEPENDENTLY VERIFIED THE ACCURACY OF THE INFORMATION.
3
<PAGE> 8
================================================================================
EXAMPLES
================================================================================
You will pay the following expenses on a $1,000 investment in each Portfolio,
assuming a 5% annual return on assets and:
(a) surrender of the contract at the end of the stated time period;
(b) if the contract is not surrendered or annuitized.
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
========================================================================================================
(a)
Capital Appreciation (a) $ 94 (a) $123 (a) $154 $266
(b) $ 24 (b) $ 73 (b) $124 (b) $266
--------------------------------------------------------------------------------------------------------
Growth (a) $ 94 (a) $124 (a) $157 (a) $272
(b) $ 24 (b) $ 74 (b) $127 (b) $272
--------------------------------------------------------------------------------------------------------
Natural Resources (a) $ 95 (a) $128 (a) $164 (a) $285
(b) $ 25 (b) $ 78 (b) $134 (b) $285
--------------------------------------------------------------------------------------------------------
Government and Quality Bond (a) $ 93 (a) $121 (a) $152 (a) $262
(b) $ 23 (b) $ 71 (b) $122 (b) $262
--------------------------------------------------------------------------------------------------------
Emerging Markets (a) $105 (a) $157 (a) $210 (a) $375
(b) $ 35 (b) $107 (b) $180 (b) $375
--------------------------------------------------------------------------------------------------------
International Diversified Equities (a) $102 (a) $148 (a) $196 (a) $347
(b) $ 32 (b) $ 98 (b) $166 (b) $347
--------------------------------------------------------------------------------------------------------
Global Equities (a) $ 96 (a) $131 (a) $168 (a) $294
(b) $ 26 (b) $ 81 (b) $138 (b) $294
--------------------------------------------------------------------------------------------------------
International Growth and Income (a) $102 (a) $148 (a) $196 (a) $348
(b) $ 32 (b) $ 98 (b) $166 (b) $348
--------------------------------------------------------------------------------------------------------
Aggressive Growth (a) $ 97 (a) $132 (a) $169 (a) $296
(b) $ 27 (b) $ 82 (b) $139 (b) $296
--------------------------------------------------------------------------------------------------------
Real Estate (a) $ 99 (a) $137 (a) $179 (a) $315
(b) $ 29 (b) $ 87 (b) $149 (b) $315
--------------------------------------------------------------------------------------------------------
Putnam Growth (a) $ 95 (a) $127 (a) $162 (a) $281
(b) $ 25 (b) $ 77 (b) $132 (b) $281
--------------------------------------------------------------------------------------------------------
Growth/Phoenix (a) $ 93 (a) $122 (a) $154 (a) $265
(b) $ 23 (b) $ 72 (b) $124 (b) $265
--------------------------------------------------------------------------------------------------------
Alliance Growth (a) $ 93 (a) $121 (a) $152 (a) $262
(b) $ 23 (b) $ 71 (b) $122 (b) $262
--------------------------------------------------------------------------------------------------------
Venture Value (a) $ 95 (a) $126 (a) $159 (a) $276
(b) $ 25 (b) $ 76 (b) $129 (b) $276
--------------------------------------------------------------------------------------------------------
Federated Value (a) $ 97 (a) $132 (a) $169 (a) $296
(b) $ 27 (b) $ 82 (b) $139 (b) $296
--------------------------------------------------------------------------------------------------------
Growth-Income (a) $ 93 (a) $122 (a) $153 (a) $263
(b) $ 23 (b) $ 72 (b) $123 (b) $263
--------------------------------------------------------------------------------------------------------
Utility (a) $ 97 (a) $132 (a) $169 (a) $296
(b) $ 27 (b) $ 82 (b) $139 (b) $296
--------------------------------------------------------------------------------------------------------
Asset Allocation (a) $ 93 (a) $122 (a) $154 (a) $265
(b) $ 23 (b) $ 72 (b) $124 (b) $265
--------------------------------------------------------------------------------------------------------
Balanced/Phoenix (a) $ 94 (a) $125 (a) $159 (a) $275
(b) $ 24 (b) $ 75 (b) $129 (b) $275
--------------------------------------------------------------------------------------------------------
SunAmerica Balanced (a) $ 96 (a) $130 (a) $167 (a) $291
(b) $ 26 (b) $ 80 (b) $137 (b) $291
--------------------------------------------------------------------------------------------------------
Worldwide High Income (a) $ 98 (a) $135 (a) $176 (a) $308
(b) $ 28 (b) $ 85 (b) $146 (b) $308
--------------------------------------------------------------------------------------------------------
High-Yield Bond (a) $ 94 (a) $123 (a) $155 (a) $268
(b) $ 24 (b) $ 73 (b) $125 (b) $268
--------------------------------------------------------------------------------------------------------
Corporate Bond (a) $ 96 (a) $129 (a) $165 (a) $288
(b) $ 26 (b) $ 79 (b) $135 (b) $288
--------------------------------------------------------------------------------------------------------
Global Bond (a) $ 95 (a) $127 (a) $161 (a) $281
(b) $ 25 (b) $ 77 (b) $131 (b) $281
--------------------------------------------------------------------------------------------------------
Cash Management (a) $ 92 (a) $119 (a) $148 (a) $253
(b) $ 22 (b) $ 69 (b) $118 (b) $253
========================================================================================================
</TABLE>
4
<PAGE> 9
EXPLANATION OF FEE TABLES AND EXAMPLES
1. The purpose of the Fee Tables is to show you the various expenses you would
incur directly and indirectly by investing in the contract.
2. For certain Portfolios, the adviser, SunAmerica Asset Management Corp., has
voluntarily agreed to waive fees or reimburse certain expenses, if
necessary, to keep annual operating expenses at or below the lesser of the
maximum allowed by any applicable state expense limitations or the following
percentages of each Portfolio's average net assets: Aggressive Growth
(1.05%); Federated Value (1.05%); SunAmerica Balanced (1.00%); Utility
(1.05%); Emerging Markets (1.90%); International Growth and Income (1.60%);
and Real Estate (1.25%). The adviser also may voluntarily waive or reimburse
additional amounts to increase a Portfolio's investment return. All waivers
and/or reimbursements may be terminated at any time. Furthermore, effective
June 3, 1996, the adviser may recoup any waivers or reimbursements within
the following two years, provided that the Portfolio is able to make such
payment and remain in compliance with the foregoing expense limitations.
3. The Examples assume that no transfer fees were imposed. Premium taxes are
not reflected.
4. THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE HISTORICAL ACCUMULATION UNIT VALUES ARE CONTAINED IN
APPENDIX A -- CONDENSED FINANCIAL INFORMATION.
5
<PAGE> 10
==============================================================================
1. THE POLARIS VARIABLE ANNUITY
==============================================================================
An annuity is a contract between you, as the owner, and an insurance company.
The contract provides tax deferral for your earnings, as well as a death benefit
and a guaranteed income in the form of annuity payments beginning on a date you
select. Until you decide to begin receiving annuity payments, your annuity is in
the Accumulation Phase. Once you begin receiving annuity payments, your contract
switches to the Income Phase. If you die during the Accumulation Phase, the
insurance company guarantees a death benefit to your Beneficiary.
The Polaris Variable Annuity Contract is issued by First SunAmerica Life
Insurance Company ("First SunAmerica"), a stock life insurance company organized
under the laws of the state of New York. Its principal business address is 733
Third Avenue, 4th Floor, New York, New York 10017. First SunAmerica conducts
life insurance and annuity business in the state of New York. First SunAmerica
is an indirect wholly owned subsidiary of SunAmerica Inc., a Maryland
corporation.
During the Accumulation Phase, the value of your annuity benefits from tax
deferral. This means your earnings accumulate on a tax-deferred basis until you
take money out of your contract. The Income Phase occurs if you decide to
receive annuity payments. You select the date on which annuity payments are to
begin.
The contract is called a variable annuity because you can choose among 25
variable investment Portfolios. Depending upon market conditions, you can make
or lose money in any of these Portfolios. If you allocate money to the
Portfolios, the amount of money you are able to accumulate in your contract
during the Accumulation Phase depends upon the investment performance of the
Portfolio(s) you select. The amount of the annuity payments you receive during
the Income Phase from the variable portion of your contract also depends upon
the investment performance of the Portfolios you select for the Income Phase.
The contract also contains 5 fixed investment options. Your money will earn
interest at the rate set by First SunAmerica. The interest rate is guaranteed by
First SunAmerica for the time you agree to leave your money in the fixed
investment option. We currently offer fixed investment options for 1, 3, 5, 7
and 10 year periods. If you allocate money to the fixed investment options, the
amount of money you are able to accumulate in your contract during the
Accumulation Phase depends upon the total interest credited to your contract. An
adjustment to your contract will apply to withdrawals or transfers from the 3,
5, 7 and 10 year fixed investment options prior to the end of the selected
period. The amount of annuity payments you receive during the Income Phase from
the fixed portion of your contract will remain level for the entire Income
Phase.
===============================================================================
2. ANNUITY INCOME OPTIONS
===============================================================================
When you switch to the Income Phase, you will receive regular income payments
under the contract. Annuity payments will be made on a monthly basis unless you
request in writing that payments be made on a quarterly, semiannual or annual
basis. You can choose to have your annuity payments sent to you by check or
electronically wired to your bank.
You select the date on which annuity payments are to begin, which must be the
first day of a month and must be at least two years after the date your contract
is issued. We call this the Annuity Date. You may change your Annuity Date at
least seven days prior to the date that your payments are to begin. However,
annuity payments must begin by your 90th birthday. If no Annuity Date is
selected, annuity payments will begin on your 90th birthday. If the Annuity Date
is past your 85th birthday, it is possible that the contract would not be
treated as an annuity and you may incur adverse tax consequences.
The Annuitant is the person on whose life annuity payments are based. You may
change the Annuitant at any time prior to the Annuity Date if you are an
individual designated as the owner of the contract. You may also designate a
second person on whose life annuity payments are based. If the Annuitant dies
before the Annuity Date, you must notify us and designate a new Annuitant.
If you do not choose an annuity income option, annuity payments will be made in
accordance with option 4 (below) for 10 years. If the annuity payments are for
joint lives, then we will make payments in accordance with option 3. We may pay
the annuity in one lump sum if your contract is less than $5,000, if permitted
by state law. Likewise, if your annuity payments would be less than $50 monthly,
we have the right to change the frequency of your payment to be on a quarterly,
semiannual or annual basis so that your annuity payments are at least $50.
Annuity payments will be made to you unless you designate another person to
receive them. In that case, you must notify us in writing at least thirty days
before the Annuity Date. You will remain fully responsible for any taxes related
to the annuity payments.
The contract offers 5 annuity income options. Other annuity income options may
be available in the future.
OPTION 1 - LIFE INCOME
Under this option, we will make annuity payments as long as the Annuitant is
alive. Annuity payments stop when the Annuitant dies.
6
<PAGE> 11
OPTION 2 - JOINT AND SURVIVOR ANNUITY
Under this option, we will make annuity payments as long as the Annuitant and a
designated second person are alive. Upon the death of either person, we will
continue to make annuity payments so long as the survivor is alive. You choose
the amount of the annuity payments to the survivor, which can be equal to 100%,
66.66% or 50% of the full amount. Annuity payments stop upon the death of the
survivor.
OPTION 3 - JOINT AND SURVIVOR LIFE ANNUITY WITH 10 YEARS GUARANTEED
This option is similar to option 2 above, with the additional guarantee that
payments will be made for at least 10 years. If the Annuitant and designated
second person die before all guaranteed payments have been made, the rest will
be made to the Beneficiary.
OPTION 4 - LIFE ANNUITY WITH 10 OR 20 YEARS GUARANTEED
This option is similar to option 1 above, with the additional guarantee that
payments will be made for at least 10 or 20 years, as selected by you. Under
this option, if the Annuitant dies before all guaranteed payments have been
made, the rest will be made to the Beneficiary.
OPTION 5 - INCOME FOR A SPECIFIED PERIOD
Under this option, we will make annuity payments for any period of time from 5
to 30 years, as selected by you. However, the period must be for full 12-month
periods. Under this option, if the Annuitant dies before all guaranteed payments
have been made, the rest will be made to the Beneficiary. This option does not
contain an element of mortality risk. Therefore, you will not get the benefit of
the mortality component of the mortality and expense risk charge if this option
if selected.
ALLOCATION OF ANNUITY PAYMENTS
On the Annuity Date, if your money is invested in the fixed investment options,
your annuity payments will be fixed in amount. If your money is invested in the
variable Portfolios, your annuity payments will vary depending on the investment
performance of the Portfolios. If you have money in the fixed and variable
investment options, your annuity payments will be based on the investment
allocations. You may not convert between fixed and variable payments once
annuity payments begin.
ANNUITY PAYMENTS
If you choose to have any portion of your annuity payments come from the
variable Portfolios, the dollar amount of your payment will depend upon three
things: (1) the value of your contract in the Portfolios on the Annuity Date,
(2) the 3.5% assumed investment rate used in the annuity table for the contract
and (3) the performance of the Portfolios you selected. If the actual
performance exceeds the 3.5% assumed rate, your annuity payments will increase.
Similarly, if the actual rate is less than 3.5%, your annuity payments will
decrease. The SAI contains detailed information and sample calculations.
TRANSFERS DURING THE INCOME PHASE
Transfers are subject to the same limitations as transfers during the
Accumulation Phase. (See "Investment Options -- Transfers During the
Accumulation Phase"). However, you can only make one transfer each month. You
may not transfer money from the fixed investment options to the variable
Portfolios or from the variable Portfolios to the fixed investment options
during the Income Phase. You may transfer money among the variable Portfolios.
DEFERMENT OF PAYMENTS
We may defer making fixed payments for up to six months, or less if required by
state law. Interest will be credited to you during the deferral period.
===============================================================================
3. PURCHASING A POLARIS
VARIABLE ANNUITY
===============================================================================
A Purchase Payment is the money you give us to buy the contract, as well as any
additional money you give us to invest in the contract after you own it. You can
purchase a Non-qualified contract with a minimum initial investment of $5,000
and a Qualified contract with a minimum initial investment of $2,000. The
maximum we accept is $1,000,000 without prior approval. Payments in amounts of
$500 or more may be added to your Non-qualified contract ($250 or more for
Qualified contracts) at any time during the Accumulation Phase. You can make
scheduled subsequent Purchase Payments of $20 or more per month by enrolling in
the Automatic Payment Plan.
We may refuse any Purchase Payment. In general, we will not issue a
Non-qualified contract to anyone who is older than age 80 or a Qualified
contract to anyone who is age 70 1/2 or older unless you can show that the
minimum distributions required by the IRS are being made.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a contract, you will allocate your Purchase Payment to the
variable investment Portfolios and/or the fixed investment options. If you make
additional Purchase Payments, we will allocate them in the same way unless you
tell us otherwise.
7
<PAGE> 12
Once we receive your Purchase Payment and a complete application at our
principal place of business, we will issue your contract and allocate your first
Purchase Payment within two business days. If you do not give us all the
necessary information, we will contact you to obtain it. If we are unable to
complete this process within five business days, we will either send back your
money or get your permission to keep it until we get all the necessary
information.
ACCUMULATION UNITS
The value of the variable portion of your contract will go up or down depending
upon the investment performance of the Portfolio(s) you choose. In order to keep
track of the value of your contract, we use a unit of measure called an
Accumulation Unit, which works like a share of a mutual fund. During the Income
Phase, we call them Annuity Units.
The value of an Accumulation Unit is determined each day that the New York Stock
Exchange ("NYSE") is open. We calculate an Accumulation Unit value for each
Portfolio after the NYSE closes each day. We do this by:
(1) determining the total value of money invested in the particular
Portfolio;
(2) subtracting from that amount any insurance charges and any other
charges such as taxes; and
(3) dividing this amount by the number of outstanding Accumulation Units.
The value of an Accumulation Unit may go up or down from day to day. When you
make a Purchase Payment, we credit your contract with Accumulation Units. The
number of Accumulation Units credited is determined by dividing the amount of
the Purchase Payment allocated to a Portfolio by the value of the Accumulation
Unit for that Portfolio.
EXAMPLE:
We receive a $25,000 Purchase Payment from you on Wednesday. You want the
money to go to the Global Bond Portfolio. We determine that the value of an
Accumulation Unit for the Global Bond Portfolio is $11.10 when the NYSE
closes on Wednesday. We then divide $25,000 by $11.10 and credit your
contract on Wednesday night with 2252.252 Accumulation Units for the Global
Bond Portfolio.
FREE LOOK
If you change your mind about owning this contract, you can cancel it within ten
days after receiving it by mailing it back to our Annuity Service Center at P.O.
Box 54299, Los Angeles, California 90054-0299. You will receive back the greater
of whatever your contract is worth on the day we receive your request or your
Purchase Payment.
===============================================================================
4. INVESTMENT OPTIONS
===============================================================================
VARIABLE INVESTMENT OPTIONS
The contract offers 25 variable investment Portfolios which invest in shares of
the Anchor Series Trust or the SunAmerica Series Trust. These Portfolios are
listed below. Additional Portfolios may be available in the future. SunAmerica
Asset Management Corp., an indirect wholly owned subsidiary of SunAmerica Inc.,
is the investment adviser for both Trusts. The Trusts serve as underlying
investments for other variable contracts sold by First SunAmerica, its
affiliate, Anchor National Life Insurance Company, and other unaffiliated
insurance companies. Neither First SunAmerica nor the Trusts believes offering
shares of the Trusts in this manner will be disadvantageous to you. We will
monitor the Trusts for any conflicts that may arise between contract owners.
Additional information is contained in the prospectuses for the Trusts.
ANCHOR SERIES TRUST
Wellington Management Company, LLP serves as subadviser to the Anchor Series
Trust Portfolios. Anchor Series Trust has Portfolios in addition to those listed
below which are not available for investment under the contract. The 4 available
Portfolios are:
MANAGED BY WELLINGTON MANAGEMENT COMPANY, LLP
- Capital Appreciation Portfolio
- Growth Portfolio
- Natural Resources Portfolio
- Government and Quality Bond Portfolio
SUNAMERICA SERIES TRUST
Various subadvisers provide investment advice for the SunAmerica Series Trust
Portfolios. The 21 Portfolios and the subadvisers are:
MANAGED BY ALLIANCE CAPITAL MANAGEMENT L.P.
- Global Equities Portfolio
- Alliance Growth Portfolio
- Growth-Income Portfolio
MANAGED BY DAVIS SELECTED ADVISERS, L.P.
- Venture Value Portfolio
- Real Estate Portfolio
8
<PAGE> 13
MANAGED BY FEDERATED INVESTORS
- Federated Value Portfolio
- Utility Portfolio
- Corporate Bond Portfolio
MANAGED BY GOLDMAN SACHS ASSET MANAGEMENT/ GOLDMAN SACHS ASSET MANAGEMENT
INTERNATIONAL
- Asset Allocation Portfolio
- Global Bond Portfolio
MANAGED BY MORGAN STANLEY ASSET MANAGEMENT INC.
- International Diversified Equities Portfolio
- Worldwide High Income Portfolio
MANAGED BY PHOENIX INVESTMENT COUNSEL, INC.
- Growth/Phoenix Investment Counsel Portfolio
- Balanced/Phoenix Investment Counsel Portfolio
MANAGED BY PUTNAM INVESTMENT MANAGEMENT, INC.
- Putnam Growth Portfolio
- International Growth and Income Portfolio
- Emerging Markets Portfolio
MANAGED BY SUNAMERICA ASSET MANAGEMENT CORP.
- Aggressive Growth Portfolio
- SunAmerica Balanced Portfolio
- High-Yield Bond Portfolio
- Cash Management Portfolio
YOU SHOULD READ THE PROSPECTUSES FOR THE ANCHOR SERIES TRUST AND THE SUNAMERICA
SERIES TRUST CAREFULLY BEFORE INVESTING. THESE PROSPECTUSES CONTAIN DETAILED
INFORMATION ABOUT THE PORTFOLIOS AND ARE ATTACHED TO THIS PROSPECTUS.
FIXED INVESTMENT OPTIONS
The contract also offers 5 fixed investment options. We currently offer fixed
investment options for 1, 3, 5, 7 and 10 year periods. The fixed investment
options offer interest rates that are guaranteed by First SunAmerica. Interest
rates may differ from time to time due to changes in market conditions but will
not be less than 3%. The interest rates offered for a specified period for new
Purchase Payments may differ from the interest rates offered for money already
in the fixed investment option. Once an interest rate is established, it will
not change during the specified period. The interest rates are set at First
SunAmerica's sole discretion.
If you have money allocated to the 1, 3, 5, 7 or 10 year fixed investment
options, you can renew for another 1, 3, 5, 7 or 10 year period or put your
money into one or more of the variable Portfolios after the end of the specified
period. Unless you specify otherwise before the end of the period, we will keep
your money in the fixed investment option for the same period you previously
selected. You will receive the interest rate then in effect.
MARKET VALUE ADJUSTMENT
NOTE: THE FOLLOWING DISCUSSION APPLIES TO THE 3, 5, 7 AND 10 YEAR FIXED
INVESTMENT OPTIONS ONLY.
If you take your money out of the fixed investment options (whether by
withdrawal, transfer or annuitization) before the end of the specified period,
we will make an adjustment to the value of your contract. This adjustment,
called a "market value adjustment," can increase or decrease the value of your
contract. The market value adjustment reflects the differing interest rate
environments between the time you put your money into the fixed investment
option and the time you take your money out of the fixed investment option.
We calculate the market value adjustment by comparing the interest rate you
received on the money you put into the fixed investment option against the
interest rate we are currently offering to contract owners for the period of
time remaining in the specified period. If we do not offer an interest rate for
that period, the interest rate will be determined by linear interpolation
between interest rates for the two nearest periods that are available.
Generally, if interest rates have dropped between the time you put your money
into the fixed investment option and the time you take it out, there will be a
positive adjustment to the value of your contract. Conversely, if interest rates
have increased between the time you put your money into the fixed investment
option and the time you take it out, there will be a negative adjustment to the
value of your contract.
If the market value adjustment is negative, it will be assessed first against
any money remaining in the fixed investment option and then against the money
you take out of the fixed investment option. If the market value adjustment is
positive, it will be added to the amount you take out of the fixed account.
We will not assess a negative market value adjustment to the value of your
contract for money in the 1-year fixed investment option. The 1-year fixed
investment option is not registered under the Securities Act of 1933 and is not
subject to other provisions of the Investment Company Act of 1940.
Appendix B provides more information about how we calculate the market value
adjustment and gives some examples of the impact of the adjustment.
TRANSFERS DURING THE ACCUMULATION PHASE
You can transfer money among the Portfolios and the fixed investment options by
written request or by telephone. You can make fifteen transfers every year
without charge. We
9
<PAGE> 14
measure a year from the anniversary of the day we issued your contract. If you
make more than 15 transfers in a year, there is a $25 transfer fee for each
transfer thereafter.
The minimum amount you can transfer is $100. You cannot make a partial transfer
if the value of the Portfolio from which the transfer is being made would be
less than $100 after the transfer. Your request for transfer must clearly state
which investment options are involved and the amount. We will accept transfers
by telephone unless you specify otherwise on your contract application. We have
in place procedures to provide reasonable assurance that instructions given to
us by telephone are genuine. Thus, we disclaim all liability for any claim, loss
or expense from any error. If we fail to use such procedures, we may be liable
for any losses due to unauthorized or fraudulent instructions.
We reserve the right to modify, suspend or terminate the transfer provisions at
any time. We also reserve the right to waive the $100 minimum amount for Dollar
Cost Averaging and Asset Allocation Rebalancing.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a set
amount or percentage from one variable Portfolio or the 1-year fixed investment
option to any other variable Portfolio(s). You can also select to transfer the
entire value in a variable Portfolio or the 1-year fixed investment option in a
stated number of transfers. Transfers may be on a monthly, quarterly, semiannual
or annual basis. You can change the amount or frequency at any time by notifying
us in writing. The minimum amount that can be transferred is $100.
By allocating amounts on a regular schedule as opposed to allocating the total
amount at one particular time, you may be less susceptible to the impact of
market fluctuations. However, there is no assurance that you will make a greater
profit. You are still subject to loss in a declining market. Dollar cost
averaging involves continuous investment in securities regardless of fluctuating
price levels. You should consider your financial ability to continue to invest
through periods of fluctuating prices.
Transfers under the program are included as part of your 15 free transfers each
year. We reserve the right to modify, suspend or terminate this program at any
time.
EXAMPLE:
Assume that you want to gradually move $750 each quarter from the Cash
Management Portfolio to the Aggressive Growth Portfolio over six quarters.
You set up dollar cost averaging and purchase Accumulation Units at the
following values:
<TABLE>
<S> <C> <C>
- ---------------------------------------
ACCUMULATION UNITS
QUARTER UNIT PURCHASED
- ---------------------------------------
1 $ 7.50 100
2 $ 5.00 150
3 $10.00 75
4 $ 7.50 100
5 $ 5.00 150
6 $ 7.50 100
- ---------------------------------------
</TABLE>
You paid an average price of only $6.67 per Accumulation Unit over the six
quarters, while the average market price actually was $7.08. By investing
an equal amount of money each month, you automatically buy more
Accumulation Units when the market price is low and fewer Accumulation
Units when the market price is high.
ASSET ALLOCATION REBALANCING PROGRAM
Once your money has been allocated among the investment options, the earnings
may cause the percentage invested in each investment option to differ from your
original allocations. You can direct us to automatically rebalance your contract
to return to your original percentage allocations by selecting our Asset
Allocation Rebalancing Program. Rebalancing may be on a calendar quarter,
semiannual or annual basis. Rebalancing will occur on the last business day of
the month for the period you selected.
Transfers under the program are not counted against your 15 free transfers each
year. We reserve the right to modify, suspend or terminate this program at any
time.
EXAMPLE:
Assume that you want your initial Purchase Payment split between two
Portfolios. You want 50% in the Corporate Bond Portfolio and 50% in the
Growth Portfolio. Over the next calendar quarter, the bond market does very
well while the stock market performs poorly. At the end of the calendar
quarter, the Corporate Bond Portfolio now represents 60% of your holdings
because it has increased in value and the Growth Portfolio represents 40%
of your holdings. If you had chosen quarterly rebalancing, on the last day
of that quarter, we would sell some of your units in the Corporate Bond
Portfolio to bring its holdings back to 50% and use the money to buy more
units in the Growth Portfolio to increase those holdings to 50%.
PRINCIPAL ADVANTAGE PROGRAM
The Principal Advantage Program allows you to allocate Purchase Payments to a
fixed investment option and one or more variable Portfolios without any market
risk to your
10
<PAGE> 15
principal. You decide how much you want to invest and when you would like a
return of your principal. We will calculate how much of your Purchase Payment
needs to be allocated to the 1, 3, 5, 7 or 10 year fixed investment options to
ensure that this money will grow to equal the full amount of your Purchase
Payment by the end of the selected period. The rest of your Purchase Payment may
then be divided among the variable Portfolios where it has the potential to
achieve greater growth.
We reserve the right to modify, suspend or terminate this program at any time.
EXAMPLE:
Assume that you want to allocate a portion of your initial Purchase Payment
of $100,000 to the fixed investment option. You want the amount allocated
to the fixed investment option to grow to $100,000 in 7 years. If the
7-year fixed investment option is offering a 7% interest rate, we will
allocate $62,275 to the 7-year fixed investment option to ensure that this
amount will grow to $100,000 at the end of the 7-year period. The remaining
$37,725 may be allocated among the variable Portfolios, as determined by
you, to provide opportunity for greater growth.
VOTING RIGHTS
First SunAmerica is the legal owner of the Trusts' shares. However, when a
Portfolio solicits proxies in conjunction with a vote of shareholders, we are
required to obtain from you instructions as to how to vote those shares. When we
receive those instructions, we will vote all of the shares we own in proportion
to those instructions. This will also include any shares that we own on our
behalf. Should we determine that we are no longer required to comply with the
above, we will vote the shares in our own right.
SUBSTITUTION
If any of the Portfolios you selected are no longer available, we may be
required to substitute shares of another Portfolio. We will seek prior approval
of the SEC and give you notice before doing this.
===============================================================================
5. EXPENSES
===============================================================================
There are charges and other expenses associated with the contract that will
reduce your investment return. These charges and expenses are described below.
INSURANCE CHARGES
Each day, we make a deduction for our insurance charges. This is done as part of
our calculation of the value of the Accumulation Units during the Accumulation
Phase and the Annuity Units during the Income Phase. The insurance charges
consist of the mortality and expense risk and the distribution expense charge.
MORTALITY AND EXPENSE RISK CHARGE
This charge is equal, on an annual basis, to 1.37% of the daily value of the
contract invested in a Portfolio. This charge is for our obligation to make
annuity payments, to provide the death benefits and for assuming the risk that
the current charges will be insufficient in the future to cover the cost of
administering the contract.
If the charges under the contract are not sufficient, we will bear the loss. We
will not increase this charge. We may use any profits from this charge to pay
for the costs of distributing the contract.
DISTRIBUTION EXPENSE CHARGE
This charge is equal, on an annual basis, to .15% of the daily value of the
contract invested in a Portfolio. This charge is for all expenses associated
with the distribution of the contract. These expenses include preparing the
contract, confirmations and statements, providing sales support, and maintaining
contract records. If this charge is not enough to cover the costs of
distributing the contract, we will bear the loss.
WITHDRAWAL CHARGES
Withdrawals in excess of your free withdrawal amount, as described in more
detail under "Access To Your Money," will be assessed a withdrawal charge. You
will not receive the benefit of any free withdrawal amount if you withdraw your
entire contract value.
We keep track of each Purchase Payment and assess a charge based on the length
of time a Purchase Payment is in your contract before it is withdrawn. After a
Purchase Payment has been in your contract for seven years, no withdrawal
charges are assessed on withdrawals of that Purchase Payment.
The withdrawal charge is assessed as a percentage of the Purchase Payment you
withdraw, which declines each year the Purchase Payment is in the contract as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------
YEAR 1 2 3 4 5 6 7 8+
- ---------------------------------------------------------------------
WITHDRAWAL 7% 6% 5% 4% 3% 2% 1% 0%
CHARGE
- ---------------------------------------------------------------------
</TABLE>
If the withdrawal is for only part of the contract, we will deduct the
withdrawal charge from the remaining value in your contract. For purposes of
calculating the withdrawal charge, we treat withdrawals as coming from the
oldest Purchase Payment first. However, for tax purposes, earnings are
considered withdrawn first.
11
<PAGE> 16
We will not assess a withdrawal charge for money withdrawn to pay a death
benefit or for annuity payments during the Income Phase.
INVESTMENT CHARGES
If you have money allocated to the variable Portfolios, there are deductions
from and expenses paid out of the assets of the various Portfolios. These
investment charges are summarized in the Fee Tables. For more detailed
information, you should refer to the prospectuses for the Anchor Series Trust
and the SunAmerica Series Trust.
CONTRACT MAINTENANCE FEE
During the Accumulation Phase, we will deduct a $30 contract maintenance fee
from your contract on each contract anniversary. This fee is for expenses
incurred to establish and maintain your contract. This fee cannot be increased.
If you make a complete withdrawal from your contract, the entire contract
maintenance fee will be deducted prior to the withdrawal.
We will not deduct the contract maintenance fee if the value of your contract is
$50,000 or more when the deduction is to be made. We may discontinue this
practice at any time.
TRANSFER FEE
You can make 15 free transfers every year. We measure a year from the day we
issue your contract. If you make more than 15 transfers a year, we will deduct a
$25 transfer fee on each subsequent transfer.
INCOME TAXES
Although we do not currently deduct any income taxes borne under your contract,
we reserve the right to do so in the future.
REDUCTION OR ELIMINATION OF CERTAIN CHARGES
We will reduce or eliminate the amount of certain insurance charges when the
contract is sold to groups of individuals under circumstances which reduce its
sales expenses. We will determine the eligibility of such groups by considering
the following factors: (1) the size of the group; (2) the total amount of
Purchase Payments we expect to receive from the group; (3) the nature of the
purchase and the persistency we expect in that group; (4) the purpose of the
purchase and whether that purpose makes it likely that expenses will be reduced;
and (5) any other circumstances which we believe to be relevant in determining
whether reduced sales expenses may be expected.
===============================================================================
6. TAXES
===============================================================================
NOTE: WE HAVE PREPARED THE FOLLOWING INFORMATION ON TAXES AS A GENERAL
DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVICE. YOU ARE CAUTIONED
TO SEEK COMPETENT TAX ADVICE ABOUT YOUR OWN CIRCUMSTANCES. WE DO NOT GUARANTEE
THE TAX STATUS OF THE ANNUITY.
ANNUITY CONTRACTS IN GENERAL
The Internal Revenue Code ("IRC") provides for special rules regarding the tax
treatment of annuity contracts. Generally, you will not be taxed on the earnings
in your annuity contract until you take the money out. Different rules apply
depending on how you take the money out and whether your contract is Qualified
or Non-qualified.
If you do not purchase your contract under a pension plan, specially sponsored
program or an individual retirement account, your contract is referred to as a
Non-qualified contract and receives different tax treatment than a Qualified
contract. In general, your cost basis in a Non-qualified contract is equal to
the Purchase Payments you put into the contract. You have already been taxed on
the cost basis in your contract.
If you purchase your contract under a pension plan, specially sponsored program
or as an individual retirement account, your contract is referred to as a
Qualified contract. Examples of qualified plans are: Individual Retirement
Annuities, Tax-Sheltered Annuities (referred to as 403(b) contracts), H.R. 10
Plans (referred to as Keogh Plans) and pension and profit sharing plans,
including 401(k) plans. Typically you have not paid any tax on the Purchase
Payments used to buy your contract and therefore, you have no cost basis in your
contract.
TAX TREATMENT OF DISTRIBUTIONS --
NON-QUALIFIED CONTRACTS
If you make a withdrawal from a Non-qualified contract, the IRC treats such a
withdrawal as first coming from the earnings and then as coming from your
Purchase Payments. For annuity payments, any portion of each payment that is
considered a return of your Purchase Payment will not be taxed. Withdrawn
earnings are treated as income to you and are taxable. The IRC further provides
for a 10% tax penalty on any earnings that are withdrawn other than in
conjunction with the following circumstances: (1) after reaching age 59 1/2; (2)
by your Beneficiary after you die; (3) after you become disabled (as defined in
the IRC); (4) in a series of substantially equal installments made for your life
or for the joint lives of you and your Beneficiary; (5) under an immediate
12
<PAGE> 17
annuity; or (6) which come from Purchase Payments made prior to August 14, 1982.
TAX TREATMENT OF DISTRIBUTIONS --
QUALIFIED CONTRACTS
Generally, you have not paid any taxes on the Purchase Payments used to buy a
Qualified contract or on any earnings and therefore, any amount you take out as
a withdrawal or as annuity payments will be taxable income. The IRC further
provides for a 10% tax penalty on any withdrawal or annuitization paid to you
other than in conjunction with the following circumstances: (1) after reaching
age 59 1/2; (2) by your Beneficiary after you die; (3) after you become disabled
(as defined in the IRC); (4) in a series of substantially equal installments
made for your life or for the joint lives of you and your Beneficiary; and,
except in the case of an IRA as to the following (5) after you separate from
service after attaining age 55; (6) to the extent such withdrawals do not exceed
limitations set by the IRC for amounts paid during the taxable year for medical
care; and (7) to an alternate payee pursuant to a qualified domestic relations
order.
The IRC limits the withdrawal of Purchase Payments from certain Tax-Sheltered
Annuities. Withdrawals can only be made when an owner: (1) reaches age 59 1/2;
(2) leaves his or her job; (3) dies; (4) becomes disabled (as defined in the
IRC); or (5) in the case of hardship. In the case of hardship, the owner can
only withdraw an amount equal to Purchase Payments and not any earnings.
DIVERSIFICATION
The IRC imposes certain diversification requirements on the underlying
investments for a variable annuity in order to be treated as a variable annuity
for tax purposes. We believe that the variable Portfolios are being managed so
as to comply with these requirements.
The diversification regulations do not provide guidance as to the circumstances
under which you, because of the degree of control you exercise over the
underlying investments, and not First SunAmerica, would be considered the owner
of the shares of the Portfolios. It is unknown to what extent owners are
permitted to select investments, to make transfers among portfolios or the
number and type of portfolios owners may select from. If any guidance is
provided which is considered a new position, then the guidance would generally
be applied prospectively. However, if such guidance is considered not to be a
new position, it may be applied retroactively. This would mean you, as the owner
of the contract, could be treated as the owner of the variable investment
Portfolios. Due to the uncertainty in this area, we reserve the right to modify
the contract in an attempt to maintain favorable tax treatment.
===============================================================================
7. ACCESS TO YOUR MONEY
===============================================================================
Under your contract, money can be accessed in the following ways: (1) by making
a withdrawal, either for a part of the value of your contract or for the entire
value of your contract during the Accumulation Phase; (2) by receiving annuity
payments during the Income Phase; and (3) when a death benefit is paid to your
Beneficiary.
Generally, withdrawals are subject to a withdrawal charge, a market value
adjustment if the money is withdrawn from the 3, 5, 7 or 10 year fixed
investment options and, if you withdraw your entire contract value, a contract
maintenance fee. (See "Expenses" for more complete information).
Your contract provides for a free withdrawal amount. Purchase Payments that are
no longer subject to a withdrawal charge and not previously withdrawn, plus
earnings, may be withdrawn free of a withdrawal charge at any time.
After the first year, the first withdrawal of the year will be free of a
withdrawal charge if it does not exceed the greater of: (1) earnings in your
contract as of the date you make the withdrawal or (2) 10% of the Purchase
Payments you invested for at least one year and not yet withdrawn, less any
withdrawals made during the year.
The portion of a free withdrawal which exceeds the sum of: (1) earnings in the
contract and (2) Purchase Payments 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 under
the 10% provision may reduce principal for purposes of calculating amounts
available for future withdrawals of earnings, they do not reduce the amount you
invested for purposes of calculating the withdrawal charge if you withdraw your
entire contract value. As a result, you will not receive the benefit of any free
withdrawal amounts if you make a complete withdrawal of your contract.
If you make a complete withdrawal, you will receive the value of your contract,
less any applicable fees and charges, as calculated on the day following receipt
by us at our principal place of business of a complete withdrawal request. Your
contract must be submitted as well.
Under most circumstances, partial withdrawals must be for a minimum of $1,000.
We require that the value left in any Portfolio or the fixed investment option
be at least $100 after the withdrawal. Unless you provide us with different
instructions, partial withdrawals will be made pro rata from each Portfolio and
the fixed investment option in which your contract is invested. You must send a
written withdrawal request to us prior to any withdrawal being made.
13
<PAGE> 18
We may be required to suspend or postpone the payment of a withdrawal for any
period of time when: (1) the NYSE is closed (other than a customary weekend and
holiday closings); (2) trading on the NYSE is restricted; (3) an emergency
exists such that disposal of or determination of the value of shares of the
portfolios is not reasonably practicable; (4) the SEC, by order, so permits for
the protection of contract owners.
Additionally, we reserve the right to defer payments for a withdrawal from the
fixed investment option for the period permitted by law but not for more than
six months.
SYSTEMATIC WITHDRAWAL PROGRAM
This program allows you to receive either monthly, quarterly, semiannual or
annual checks during the Accumulation Phase. You can also choose to have
systematic withdrawals electronically wired to your bank account. The minimum
amount of each withdrawal is $250. Withdrawals may be taxable and a 10% IRS tax
penalty may apply if you are under age 59 1/2. There is no charge for
participating in this program.
This program is not available to everyone. Please check with our Annuity Service
Center, which can provide the necessary enrollment forms. We reserve the right
to modify, suspend or terminate this program at any time.
WITHDRAWAL CHARGES, MARKET VALUE ADJUSTMENTS, INCOME TAXES, TAX PENALTIES AND
CERTAIN RESTRICTIONS MAY APPLY TO ANY WITHDRAWAL YOU MAKE.
MINIMUM CONTRACT VALUE
Where permitted by state law, we may terminate your contract if both of the
following occur: (1) your contract is less than $500 as a result of withdrawals
and (2) no Purchase Payments have been made during the past three years. We will
provide you with sixty days written notice and distribute the contract's
remaining value to you.
===============================================================================
8. PERFORMANCE
===============================================================================
From time to time we may advertise the Cash Management Portfolio's yield and
effective yield. In addition, the other variable investment Portfolios may also
advertise total return, gross yield and yield to maturity information. These
figures are based on historical data and are not intended to indicate future
performance.
For periods starting prior to the date the contracts were first offered, the
performance will be derived from the performance of the corresponding portfolios
of the Trusts, modified to reflect Polaris' charges and expenses as if the
contracts had been in existence during the period stated in the advertisement.
Thus, these figures should not be construed to reflect actual historic
performance.
We will calculate total return by determining the percentage change in value of
an Accumulation Unit by dividing the increase (decrease) for that unit by the
value of the Accumulation Unit at the beginning of the period. This performance
number reflects the deduction of any applicable withdrawal charges, insurance
charges, investment charges and the contract maintenance fee. We may also
include in advertisements total return figures which do not reflect the
deduction of the contract maintenance fee and/or the withdrawal charges.
At times First SunAmerica may also advertise the ratings and other information
assigned to it by 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 ("S&P"), and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of our financial strength and performance
in comparison to others in the life/health insurance industry. S&P's and Duff &
Phelps' ratings measure the ability of an insurance company to meet its
obligations under insurance policies it issues and do not measure the ability of
such companies to meet other non-policy obligations.
The performance of each Portfolio may also be measured against unmanaged market
indices, including but not limited to the Dow Jones Industrial Average, the
Standard & Poor's 500, the Russell 1000 Growth Index, the Morgan Stanley Capital
International Europe, Australia, and Far East Index (EAFE) and the Morgan
Stanley Capital International World Index, and may be compared to that of other
variable annuities with similar objectives and policies as reported by
independent rating services such as Morningstar, Inc., Lipper Analytical
Services, Inc. or Variable Annuity Reporting Data Service.
More detailed information on the method used to calculate performance for the
Portfolios is contained in the SAI.
===============================================================================
9. DEATH BENEFIT
===============================================================================
If you should die during the Accumulation Phase of your contract, we will pay a
death benefit to your Beneficiary.
For contracts issued prior to April 28, 1997, the death benefit is the greater
of:
(1) the value of your contract at the time we receive adequate proof of
death, or
(2) total Purchase Payments less any withdrawals.
After your seventh contract anniversary, the death benefit is the greater of (1)
or (2) above or:
(3) the value of your contract on the day before your last contract
anniversary less any withdrawals plus any additional Purchase Payments
since that date, or
14
<PAGE> 19
(4) the death benefit on the day before your last contract anniversary less
any withdrawals since that anniversary.
For contracts issued on or after April 28, 1997, the death benefit is the
greater of:
(1) the value of your contract at the time we receive adequate proof of
death,
(2) total Purchase Payments less any withdrawals, or
(3) the maximum of the anniversary values prior to your 81st birthday. The
anniversary value is equal to the value of your contract on each
contract anniversary less any withdrawals plus any additional Purchase
Payments since that anniversary.
The death benefit is not paid after you switch to the Income Phase. During the
Income Phase, your Beneficiary(ies) will receive any remaining guaranteed
annuity payments in accordance with the annuity option you choose.
You may select the Beneficiary(ies) to receive any amounts payable on death. You
may change the Beneficiary at any time, unless you previously made an
irrevocable Beneficiary designation. A new Beneficiary designation is not
effective until we record the change.
The death benefit is immediately payable under the contract. However, in any
event, the entire death benefit must be paid within five years of the date of
death unless the Beneficiary elects to have it payable in the form of an
annuity. If the Beneficiary elects an annuity option, it must be paid over the
Beneficiary's lifetime or for a period not extending beyond the Beneficiary's
life expectancy. If the Beneficiary is the spouse of the owner, he or she can
elect to continue the contract at the then current value, in which case he or
she will not receive the death benefit.
The death benefit will be paid out when we receive adequate proof of death: (1)
a certified copy of a death certificate; (2) a certified copy of a decree of
court of competent jurisdiction as to the finding of death; (3) a written
statement by a medical doctor who attended the deceased at the time of death; or
(4) any other proof satisfactory to us. We may also require additional
documentation or proof in order for the death benefit to be paid. If the
Beneficiary does not make a specific election within sixty days of our receipt
of such proof of death, the death benefit will be paid in a lump sum.
===============================================================================
10. OTHER INFORMATION
===============================================================================
FIRST SUNAMERICA
First SunAmerica 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 three broker-dealers, offer a full line of financial services, including
fixed and variable annuities, mutual funds, premium finance, broker-dealer and
trust administration services. First SunAmerica is an indirect wholly owned
subsidiary of SunAmerica Inc. First SunAmerica is licensed to do business in the
states of New York, Nebraska and New Mexico.
THE SEPARATE ACCOUNT
First SunAmerica originally established a separate account, FS Variable Separate
Account, under New York law on September 9, 1994. The separate account is
registered with the SEC as a unit investment trust under the Investment Company
Act of 1940.
First SunAmerica owns the assets in the separate account. However, the assets in
the separate account are not chargeable with liabilities arising out of any
other business First SunAmerica may conduct. Income, gains and losses (realized
and unrealized) resulting from the assets in the separate account are credited
to or charged against the separate account without regard to other income, gains
or losses of First SunAmerica.
THE GENERAL ACCOUNT
If you put your money into the fixed investment options, it goes into First
SunAmerica's general account. The general account is made up of all of First
SunAmerica's assets other than assets attributable to a separate account. All of
the assets in the general account are chargeable with the claims of any First
SunAmerica contract owners as well as all creditors. The general account is
invested in assets permitted by state insurance law.
DISTRIBUTION
The contract is sold through registered representatives of broker-dealers.
Commissions are paid to registered representatives for the sale of contracts.
Commissions are not expected to exceed 6.5% of your Purchase Payment. Under some
circumstances, we may pay a persistency bonus in addition to standard
commissions. Usually the standard commission is lower when we pay a persistency
bonus, which is not anticipated to exceed .65% annually. Commissions paid to
registered representatives are not directly deducted from your Purchase Payment.
15
<PAGE> 20
SunAmerica Capital Services, Inc., 733 Third Avenue, 4th Floor, New York, New
York 10017 acts as the distributor of the contracts. SunAmerica Capital
Services, Inc., an affiliate of First SunAmerica, is registered as a broker-
dealer under the Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc.
ADMINISTRATION
We are responsible for all the administrative servicing of your contract. Please
contact First SunAmerica's Annuity Service Center at the telephone number and
address provided in the profile section of this prospectus if you have any
comment, question or service request.
We will send out transaction confirmations and quarterly statements. Please
review these documents carefully and notify us of any inaccuracies immediately.
We will investigate all questions and, to the extent we have made an error, we
will retroactively adjust your contract provided you have notified us within
thirty days of receiving the transaction confirmation or quarterly statement, as
applicable. All other adjustments will be made as of the time we receive notice
of the error.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the separate account. First
SunAmerica and its subsidiaries are engaged in various kinds of routine
litigation which, in management's judgment, are not of material importance to
their respective total assets or material with respect to the separate account.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, serves as the custodian of the assets of the separate account. First
SunAmerica pays State Street Bank for services based on a schedule of fees.
ADDITIONAL INFORMATION
First SunAmerica is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with such requirements, we file
reports and other information with the SEC. Such reports and other information
we file can be inspected and copied. Copies can be obtained at the public
reference facilities of the SEC 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 SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of the fees prescribed by the rules and regulations of the SEC at
prescribed rates.
Registration statements have been filed with the SEC, Washington, D.C., under
the Securities Act of 1933 as amended, relating 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 Reference should be made to such registration statements and exhibits
for further information concerning the separate account, First SunAmerica and
its general account, the Portfolios and the contract.
16
<PAGE> 21
SELECTED FINANCIAL INFORMATION
The following selected financial information of First SunAmerica, insofar as it
relates to each of the fiscal years 1992 - 1996, has been derived from audited
annual financial statements, including the balance sheets at September 30, 1995
and 1996 and the related statements of income and of cash flows for each of the
three years in the period ended September 30, 1996 and the notes thereto
appearing elsewhere herein. The information for the three months ended December
31, 1995 and 1996 has been derived from unaudited financial information also
appearing herein and which, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for the unaudited interim periods.
This information 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 follow this selected information.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net investment income......... $ 2,368 $ 1,161 $ 1,892 $ 2,784 $ 2,798 $ 683 $ 636
Net realized investment gains
(losses).................... 3,489 1,932 445 (1,348) (539) (631) 459
Variable annuity fee income... 40 240 382 412 690 126 292
General and administrative
expenses.................... (1,224) (1,066) (1,040) (1,088) (1,404) (387) (319)
Amortization of deferred
acquisition costs........... (2,356) (220) -- (300) (500) (126) (302)
Other income and expenses..... 561 (342) 58 245 126 (10) 14
-------- -------- -------- -------- -------- -------- --------
PRETAX INCOME (LOSS).......... 2,878 1,705 1,737 705 1,171 (345) 780
Income tax benefit
(expense)................... (1,210) (829) (655) (182) (448) 128 (316)
-------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME
TAXES....................... 1,668 876 1,082 523 723 (217) 464
Cumulative effect of change in
accounting for income
taxes....................... -- -- (725) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS)............. $ 1,668 $ 876 $ 357 $ 523 $ 723 $ (217) $ 464
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
-------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments................... $111,353 $ 85,130 $ 78,928 $121,218 $153,237 $126,575 $172,392
Variable annuity assets....... 8,836 24,695 26,390 32,760 68,901 35,598 85,426
Deferred acquisition costs.... 1,297 2,540 5,651 6,491 12,127 7,036 14,627
Deferred income taxes
receivable.................. 835 1,031 886 -- -- -- --
Other assets.................. 1,527 3,876 2,282 2,688 2,603 2,310 2,956
-------- -------- -------- -------- -------- -------- --------
TOTAL ASSETS.................. $123,848 $117,272 $114,137 $163,157 $236,868 $171,519 $275,401
======== ======== ======== ======== ======== ======== ========
Reserves for fixed annuity
contracts................... $ 59,400 $ 68,228 $ 66,881 $106,332 $140,613 $110,592 $162,771
Variable annuity liabilities.. 8,836 24,695 26,390 32,760 68,901 35,598 85,426
Other reserves, payables and
accrued liabilities......... 34,690 1,220 1,051 2,003 2,784 1,888 1,105
Deferred income taxes......... -- -- -- 244 1,350 885 1,902
Shareholder's equity.......... 20,922 23,129 19,815 21,818 23,220 22,556 24,197
-------- -------- -------- -------- -------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY........ $123,848 $117,272 $114,137 $163,157 $236,868 $171,519 $275,401
======== ======== ======== ======== ======== ======== ========
</TABLE>
17
<PAGE> 22
MANAGEMENT DISCUSSION AND ANALYSIS
Management's discussion and analysis of financial condition and results of
operations of First SunAmerica for the three years in the period ended September
30, 1996 follows. In connection with, and because it desires to take advantage
of, the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995, First SunAmerica cautions readers regarding certain forward-looking
statements contained in the following discussion and elsewhere in this report
and in any other statements made by, or on behalf of, First SunAmerica, whether
or not in future filings with the Securities and Exchange Commission ("SEC").
Forward-looking statements are statements not based on historical information
and which relate to future operations, strategies, financial results, or other
developments. In particular, 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 contained in this report which represent First
SunAmerica's beliefs concerning future or projected levels of sales of First
SunAmerica's products, investment spreads or yields, or the earnings or
profitability of First SunAmerica's activities.
Forward-looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond First SunAmerica's
control and many of which, with respect to future business decisions, are
subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, First SunAmerica.
Whether or not actual results differ materially from forward-looking statements
may depend on numerous foreseeable and unforeseeable events or developments,
some of which may be national in scope, such as general economic conditions and
interest rates, some of which may be related to the insurance industry
generally, such as pricing competition, regulatory developments and industry
consolidation, and others of which may relate to First SunAmerica specifically,
such as credit, volatility and other risks associated with First SunAmerica's
investment portfolio, and other factors. Investors are also directed to consider
other risks and uncertainties discussed in documents filed by First SunAmerica
with the SEC. First SunAmerica disclaims any obligation to update
forward-looking information.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS 1994, 1995 AND 1996
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES totaled
$0.7 million in 1996, compared with $0.5 million in 1995 and $1.1 million in
1994. The cumulative effect of the change in accounting for income taxes
resulting from the 1994 implementation of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," amounted to a nonrecurring
non-cash charge of $0.7 million. Accordingly, net income amounted to $0.4
million in 1994.
PRETAX INCOME totaled $1.2 million in 1996, $0.7 million in 1995 and $1.7
million in 1994. The $0.5 million increase in 1996 over 1995 primarily resulted
from a decline in net realized investment losses, partially offset by increased
general and administrative expenses. The $1.0 million decline in 1995 over 1994
primarily resulted from net realized investment losses incurred, partially
offset by an increase in net investment income.
NET INVESTMENT INCOME, which is the spread between the income earned on invested
assets and the interest paid on fixed annuities and other interest-bearing
liabilities, totaled $2.8 million in each of 1996 and 1995, compared with $1.9
million in 1994. These amounts represent 2.08% on average invested assets
(computed on a daily basis) of $134.5 million in 1996, 2.70% on average invested
assets of $103.2 million in 1995 and 2.24% on average invested assets of $84.5
million in 1994.
Net investment income also includes the effect of income earned on the excess of
average invested assets over average interest-bearing liabilities. This excess
amounted to $13.8 million in 1996, $17.6 million in 1995 and $17.4 million in
1994. The difference between First SunAmerica's yield on average invested assets
and the rate paid on average interest bearing liabilities was 1.47% in 1996,
1.69% in 1995 and 1.13% in 1994.
Investment income and the related yield on average invested assets totaled $10.0
million and 7.40% in 1996, compared with $7.8 million and 7.59% in 1995 and $5.5
million and 6.54% in 1994. Investment income increased primarily as a result of
higher levels of average invested assets, offset in 1996 by a slight 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.
Total interest expense aggregated $7.2 million in 1996, $5.0 million in 1995 and
$3.6 million in 1994. The average rate paid on fixed annuity contracts was 5.93%
in 1996, 5.90% in 1995 and 5.41% in 1994. Fixed annuity contracts averaged
$120.6 million in 1996, $85.5 million in 1995 and $67.2 million in 1994. The
increase in the average rate paid on fixed annuities during 1996 and 1995 from
that
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<PAGE> 23
paid during 1994 primarily resulted from increased average crediting rates on
First SunAmerica's new fixed annuity contracts relative to those issued in 1994
to maintain a generally competitive market rate in a higher interest rate
environment.
The growth in average invested assets since 1994 reflects sales of First
SunAmerica's fixed-rate products (including the fixed accounts of variable
annuity products). Fixed annuity premiums totaled $45.4 million in 1996, $51.7
million in 1995 and $7.8 million in 1994. These premiums include premiums for
the fixed accounts of variable annuities totaling $41.2 million, $2.9 million
and $0.5 million, respectively. The increased premiums for the fixed accounts of
variable annuities in 1996 resulted primarily from greater inflows into the
one-year fixed account of First SunAmerica's Polaris variable annuity product.
NET REALIZED INVESTMENT LOSSES totaled $0.5 million in 1996 and $1.3 million in
1995, compared to net realized investment gains of $0.4 million in 1994. Net
realized investment losses include impairment writedowns of $0.1 million in
1996, which were applied to defaulted bonds. Therefore, net losses from sales of
investments totaled $0.4 million in 1996. There were no impairment writedowns
for 1995 and 1994.
Net losses from sales of investments in 1996 include $0.3 million of net losses
realized on $80.0 million of sales of bonds. Net losses on sales of investments
in 1995 include $1.2 million of net losses realized on $46.3 million of sales of
mortgage-backed securities ("MBSs"). Net gains on sales of investments in 1994
were also related to sales of MBSs. Sales of investments are generally made to
maximize total return.
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $0.7 million
in 1996 and $0.4 million in both 1995 and 1994. The increase in variable annuity
fees in 1996 reflects the growth in average variable annuity assets, principally
due to the receipt of variable annuity premiums and increased market values,
partially offset by surrenders. Variable annuity assets averaged $46.2 million
during 1996, $27.8 million during 1995 and $26.1 million during 1994. Variable
annuity premiums, which exclude premiums allocated to the fixed accounts of
variable annuity products, totaled $28.6 million in 1996, $5.9 million in 1995
and $5.7 million in 1994. The increase in premiums in 1996 was due to the
introduction of two new products during March and December 1995. First
SunAmerica has encountered increased competition in the variable annuity
marketplace during recent years and anticipates that the market will remain
highly competitive for the foreseeable future.
SURRENDER CHARGES on fixed and variable annuities totaled $221,000 in 1996,
$194,000 in 1995 and $367,000 in 1994. Surrender charges generally are assessed
on annuity withdrawals at declining rates during the first five to seven years
of the contract. Withdrawal payments, which include surrenders and lump-sum
annuity benefits, totaled $12.7 million in 1996, $17.7 million in 1995 and $12.9
million in 1994. These payments represent 8.1%, 16.9% and 15.0%, respectively,
of average fixed and variable annuity reserves. Withdrawals include variable
annuity payments from the separate accounts totaling $2.8 million in 1996, $3.6
million in 1995 and $2.4 million in 1994, and represent 6.2%, 12.9% and 9.3%,
respectively, of average variable annuity liabilities. Variable annuity
withdrawal rates declined in 1996 principally as a result of significant growth
in the variable annuity separate accounts, while the increase in 1995 was
primarily due to the maturing of an older block of business. Fixed annuity
surrenders totaled $9.9 million in 1996, $14.1 million in 1995 and $10.5 million
in 1994. Fixed annuity surrenders decreased in 1996 primarily due to unusually
high surrenders in 1995, which resulted from a block of policies coming off
surrender charge restrictions. Management anticipates that withdrawal rates will
stabilize for the foreseeable future at moderately higher levels than the
current rates.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.4 million in 1996, compared with
$1.1 million in 1995 and $1.0 million in 1994. Expenses remain closely
controlled through a company-wide cost containment program and represent
approximately 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS increased to $0.5 million in 1996
from $0.3 million in 1995. There was no amortization in 1994. These increases in
amortization were primarily due to additional fixed and variable annuity sales
and the subsequent amortization of related deferred commissions and other
acquisition costs.
ANNUAL COMMISSIONS represent renewal commissions paid quarterly in arrears to
maintain the persistency of certain of First SunAmerica's annuity contracts.
Annual commissions totaled $19,000 in 1996, $33,000 in 1995 and $30,000 in 1994.
Based on current sales, First SunAmerica estimates that such annual commissions
will increase in future periods.
INCOME TAX EXPENSE totaled $0.4 million in 1996, $0.2 million in 1995 and $0.7
million in 1994, representing effective tax rates of 38% in 1996, 26% in 1995
and 38% in 1994. The lower tax rate in 1995 reflects a prior period state income
tax benefit.
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<PAGE> 24
FINANCIAL CONDITION AND LIQUIDITY AT SEPTEMBER 30, 1996
SHAREHOLDER'S EQUITY increased by $1.4 million to $23.2 million at September 30,
1996 from $21.8 million at September 30, 1995, primarily as a result of the $0.7
million of net income recorded and a $0.7 million reduction of net unrealized
losses on debt and equity securities available for sale charged directly to
shareholder's equity.
TOTAL ASSETS increased by $73.7 million to $236.9 million at September 30, 1996
from $163.2 million at September 30, 1995, principally due to a $36.1 million
increase in the separate accounts for variable annuities and a $32.0 million
increase in invested assets.
INVESTED ASSETS at year end totaled $153.2 million in 1996, compared with $121.2
million in 1995. This $32.0 million increase primarily resulted from sales of
the fixed accounts of variable annuities.
First SunAmerica manages all of its invested assets internally. First
SunAmerica's general investment philosophy is to hold fixed maturity assets for
long-term investment. Thus, it does not have a trading portfolio. Effective
December 1, 1995, pursuant to guidelines issued by the Financial Accounting
Standards Board, First SunAmerica 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 prepayment risk, First SunAmerica's need
for liquidity and other similar factors. Accordingly, First SunAmerica no longer
classifies a portion of its Bond Portfolio as held for investment.
THE BOND PORTFOLIO had an aggregate amortized cost that exceeded its fair value
by $0.5 million at September 30, 1996, compared with $1.5 million at September
30, 1995 (including net unrealized losses of $1.4 million on the portion of the
portfolio that was designated as available for sale at September 30, 1995). The
net decrease in unrealized losses on the Bond Portfolio since September 30, 1995
principally reflects improvement in the fair value of certain segments of the
Bond Portfolio since September 30, 1995 despite the higher relative prevailing
interest rates at September 30, 1996.
All of the Bond Portfolio at September 30, 1996 was rated by Standard & Poor's
Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff and Phelps
Credit Rating Co. ("DCR"), Fitch Investor Service, Inc. ("Fitch") or under
comparable statutory rating guidelines established by the National Association
of Insurance Commissioners ("NAIC") and implemented by either the NAIC or First
SunAmerica. At September 30, 1996, approximately $137.0 million of the Bond
Portfolio (at amortized cost) was rated investment grade by one or more of these
agencies or by First SunAmerica or the NAIC, pursuant to applicable NAIC
guidelines, including $85.5 million of U.S. government/agency securities and
MBSs.
At September 30, 1996, the Bond Portfolio included $9.9 million (fair value,
$10.4 million) of bonds not rated investment grade by S&P, Moody's, DCR, Fitch
or the NAIC. Based on their September 30, 1996 amortized cost, these
non-investment-grade bonds accounted for 4.2% of First SunAmerica's total assets
and 6.4% of invested assets.
Non-investment-grade securities generally provide higher yields and involve
greater risks than investment-grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. First
SunAmerica intends that the proportion of its portfolio in such securities not
exceed current levels, but its policies may change from time to time, including
in connection with any possible acquisition. First SunAmerica had no material
concentrations of non-investment-grade securities at September 30, 1996.
The table on the following page summarizes First SunAmerica's rated bonds by
rating classification as of September 30, 1996.
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<PAGE> 25
<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 ESTIMATED PERCENT OF ESTIMATED
[DCR]/GFITCHH AMORTIZED FAIR NAIC AMORTIZED FAIR AMORTIZED INVESTED FAIR
CATEGORY(1) COST VALUE CATEGORY(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-]
[AAA to A-].......... $113,246 $112,839 1 $ 3,404 $ 3,404 $116,650 75.94% $116,243
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
[BBB+ to BBB-]....... 17,176 16,572 2 3,187 3,178 20,363 13.26 19,750
BB+ to BB-
(Ba1 to Baa3)
[BB+ to BB-]
[BB+ to BB-]......... 1,810 1,974 3 0 0 1,810 1.18 1,974
B+ to B-
(B1 to B3)
[B+ to B-]
[B+ to B-]........... 6,817 7,108 4 1,088 1,176 7,905 5.15 8,284
CCC+ to C
(Caa to C)
[CCC]
[CCC+ to C-]......... 180 150 5 0 0 180 0.12 150
C1 to D
[DD]
[D].................. 0 0 6 0 0 0 0.00 0
-------- -------- ------ ------ -------- --------
Total rated issues..... $139,229 $138,643 $ 7,679 $ 7,758 $146,908 $146,401
======== ======== ====== ====== ======== ========
</TABLE>
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-) indicates
the debt's relative standing within the rating category. A security rated
BBB- or higher is considered investment grade. Moody's rates debt securities
in rating categories ranging from Aaa (the highest) to C (extremely poor
prospects of ever attaining any real investment standing). The number 1, 2
or 3 (with 1 the highest and 3 the lowest) indicates the debt's relative
standing within the rating category. A security rated Baa3 or higher is
considered investment grade. DCR rates debt securities in rating categories
ranging from AAA (the highest) to DD (in payment default). A plus (+) or
minus (-) indicates the debt's relative standing within the rating category.
A security rated BBB- or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moody's, DCR and Fitch ratings
if rated by multiple agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest)
for nondefaulted bonds plus one category, 6, for bonds in or near default.
These six categories correspond with the S&P/Moody's/DCR/Fitch rating groups
listed above, with categories 1 and 2 considered investment grade. A
substantial portion of the assets in the NAIC categories were rated by the
Company pursuant to applicable NAIC rating guidelines.
(3) At amortized cost.
ASSET-LIABILITY MATCHING is utilized by First SunAmerica to minimize the risks
of interest rate fluctuations and disintermediation. First SunAmerica believes
that its fixed-rate liabilities should be backed by a portfolio principally
composed of fixed maturities that generate predictable rates of return. First
SunAmerica does not have a specific target rate of return. Instead, its rates of
return vary over time depending on the current interest rate environment, the
slope of the yield curve, the spread at which fixed maturities are priced over
the yield curve and general competitive conditions within the industry. Its
portfolio strategy is designed to achieve adequate risk-adjusted returns
consistent with its investment objectives of effective asset-liability matching,
liquidity and safety.
First SunAmerica designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its annuity obligations. First SunAmerica seeks to
achieve a predictable spread between what it earns on its assets and what it
pays on its liabilities by investing principally in fixed-rate securities. First
SunAmerica's fixed-rate products incorporate surrender charges or other
limitations on when contracts can be surrendered for cash to encourage
persistency. Approximately 96% of First SunAmerica's fixed annuity reserves had
surrender penalties or other restrictions at September 30, 1996.
As part of its asset-liability matching discipline, First SunAmerica conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view to maintaining a desired investment spread between the
yield on portfolio assets and the rate paid on its reserves under a variety of
possible future interest rate scenarios. At September 30, 1996, the weighted
average life of First SunAmerica's investments was approximately four and
one-fourth years and the duration was approximately two and one-fourth years.
Weighted average life is the average time to receipt of all principal,
incorporating the effects of scheduled amortization and expected prepayments,
weighted by book value. Duration is a common option-
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<PAGE> 26
adjusted measure for the price sensitivity of a fixed-income portfolio to
changes in interest rates. It measures the approximate percentage change in
market value of a portfolio if interest rates change by 100 basis points,
recognizing the changes in portfolio cash flows resulting from embedded options
such as prepayments and bond calls.
First SunAmerica 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 First SunAmerica uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with Reverse Repos is counterparty
risk. First SunAmerica 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 anticipated at the time of their
purchase.
INVESTED ASSETS EVALUATION routinely includes a review by First SunAmerica of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying value of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews for
bonds, management principally considers the adequacy of collateral (if any),
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 (at amortized cost) that are
in default as to the payment of principal or interest, totaled $0.2 million
(fair value, $0.2 million) of bonds and notes at September 30, 1996 and
constituted 0.1% of total invested assets at amortized cost. At September 30,
1995, the defaulted investments totaled $0.7 million (fair value, $0.5 million),
which constituted 0.6% of total invested assets at amortized cost.
SOURCES OF LIQUIDITY are readily available to First SunAmerica in the form of
First SunAmerica'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, 1996, approximately $81.0 million of
First SunAmerica's Bond Portfolio had an aggregate unrealized gain of $1.3
million, while approximately $65.9 million of the Bond Portfolio had an
aggregate unrealized loss of $1.8 million. In addition, First SunAmerica's
investment portfolio currently provides approximately $1.7 million of monthly
cash flow from scheduled principal and interest payments.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, First
SunAmerica'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. First SunAmerica
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 First SunAmerica'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, First SunAmerica's cost of funds would decrease
over time, reflecting lower interest crediting rates on its fixed annuities.
Should increased liquidity be required for withdrawals, First SunAmerica
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.
RESULTS OF OPERATIONS FOR THE FIRST THREE MONTHS OF FISCAL 1997
NET INCOME totaled $0.5 million for the three months ended December 31, 1996
("Fiscal 1997"), compared with a net loss of $0.2 million for the three months
ended December 31, 1995 ("Fiscal 1996").
PRETAX INCOME totaled $0.8 million in Fiscal 1997, compared with a pretax loss
of $0.3 million in Fiscal 1996. This $1.1 million improvement primarily resulted
from an increase in net realized investment gains and variable annuity fees,
which were partially offset by increased amortization of deferred acquisition
costs.
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<PAGE> 27
NET INVESTMENT INCOME totaled $0.6 million in Fiscal 1997, compared with $0.7
million in Fiscal 1996. These amounts represent 1.58% on average invested assets
(computed on a daily basis) of $160.5 million in Fiscal 1997 and 2.19% on
average invested assets of $124.6 million in Fiscal 1996.
The excess of average invested assets over average interest-bearing liabilities
amounted to $10.8 million in Fiscal 1997 and $15.6 million in Fiscal 1996. The
difference between First SunAmerica's yield on average invested assets and the
rate paid on average interest-bearing liabilities was 1.18% in Fiscal 1997 and
1.43% in Fiscal 1996.
Investment income and the related yields on average invested assets totaled $2.9
million or 7.21% in Fiscal 1997 and $2.3 million or 7.50% in Fiscal 1996.
Investment income increased primarily as a result of higher levels of average
invested assets, partially offset by a decline in portfolio yields. Investment
yields were lower in Fiscal 1997 because of a generally declining interest rate
environment since early 1995.
Total interest expense aggregated $2.3 million in Fiscal 1997 and $1.7 million
in Fiscal 1996. The average rate paid on fixed annuity contracts was 6.03% in
Fiscal 1997 and 6.07% in Fiscal 1996. Fixed annuity contracts averaged $149.7
million in Fiscal 1997 and $109.1 million in Fiscal 1996.
The growth in average invested assets in Fiscal 1997 reflects sales of First
SunAmerica's fixed-rate products (including the fixed accounts of variable
annuity products). Since December 31, 1995, fixed annuity premiums have
aggregated $66.0 million. Fixed annuity premiums totaled $25.8 million in Fiscal
1997 and $5.2 million in Fiscal 1996. These premiums include premiums for the
fixed accounts of variable annuities totaling $25.7 million and $1.7 million,
respectively. This increase in premiums for the fixed accounts of variable
annuities resulted primarily from greater inflows into the one-year fixed
account of First SunAmerica's Polaris variable annuity product. First SunAmerica
has observed that many purchasers of its variable annuity contracts allocate new
premiums to the one-year fixed account and concurrently sign up for the option
to dollar cost average into the variable fund. Accordingly, First SunAmerica
anticipates that it will see a large portion of these premiums transferred into
the separate accounts.
NET REALIZED INVESTMENT GAINS totaled $0.5 million in Fiscal 1997, compared with
net realized investment losses of $0.6 million in Fiscal 1996. Such gains and
losses primarily comprise net gains and losses on sales of bonds which were
generally made to maximize total return.
VARIABLE ANNUITY FEES totaled $0.3 million in Fiscal 1997 and $0.1 million in
Fiscal 1996. The increase in variable annuity fees in Fiscal 1997 reflects the
growth in average variable annuity assets, principally due to increased market
values and the receipt of variable annuity premiums, partially offset by
surrenders. Variable annuity assets averaged $77.6 million during Fiscal 1997
and $34.1 million during Fiscal 1996. Variable annuity premiums, which exclude
premiums allocated to the fixed accounts of variable annuity products, have
aggregated $37.7 million since December 31, 1995. Variable annuity premiums
increased to $11.4 million in Fiscal 1997 from $2.3 million in Fiscal 1996. This
increase may be attributed, in part, to a heightened demand for equity
investments, principally as a result of generally improved market performance.
SURRENDER CHARGES on fixed and variable annuities totaled $56,000 in Fiscal 1997
and $30,000 in Fiscal 1996. Withdrawal payments, which include surrenders and
lump-sum annuity benefits, totaled $3.8 million in Fiscal 1997 and $2.2 million
in Fiscal 1996. These payments represent 6.95% and 6.66%, respectively, of the
aggregate of average fixed and variable annuity reserves. Withdrawals include
variable annuity payments from the separate accounts totaling $1.3 million in
Fiscal 1997 and $0.8 million in Fiscal 1996, and represent 6.95% and 9.86%
respectively, of average variable annuity liabilities. Approximately 96% of
First SunAmerica's fixed annuity reserves had surrender penalties or other
restrictions at December 31, 1996. Variable annuity withdrawal rates declined in
Fiscal 1997 principally as a result of significant growth in the variable
annuity separate accounts resulting in a lower average contract age. Management
anticipates that withdrawal rates will gradually increase in the foreseeable
future.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $0.3 million in Fiscal 1997 and $0.4
million in Fiscal 1996. Expenses remain closely controlled through a company-
wide cost containment program and continue to represent approximately 1% of
average total assets on an annualized basis.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $0.3 million in Fiscal 1997
and $0.1 million in Fiscal 1996, and represent for each period, on an annualized
basis, approximately 10% of the balance of deferred acquisition costs at the
beginning of each period. The increase in Fiscal 1997 was primarily due to
additional fixed and variable annuity sales and the subsequent amortization of
related deferred commissions and other acquisition costs.
ANNUAL COMMISSIONS totaled $4,000 in Fiscal 1997 and $2,000 in Fiscal 1996.
Based on current sales, First SunAmerica estimates that such annual commissions
will increase in future periods.
INCOME TAX EXPENSE totaled $0.3 million in Fiscal 1997, compared with an income
tax benefit of $0.1 million in Fiscal 1996, representing effective annualized
tax rates of
23
<PAGE> 28
41% and 37%, respectively. The lower tax rate in Fiscal 1996 reflected higher
state income tax expense.
FINANCIAL CONDITION AND LIQUIDITY AT
DECEMBER 31, 1996
SHAREHOLDER'S EQUITY increased by $1.0 million to $24.2 million at December 31,
1996 from $23.2 million at September 30, 1996, primarily as a result of the $0.5
million of net income recorded in Fiscal 1997 and the $0.3 million net
unrealized gain on debt and equity securities available for sale, a $0.5 million
improvement over the $0.2 million net unrealized loss recorded at September 30,
1996.
TOTAL ASSETS increased by $38.5 million to $275.4 million at December 31, 1996
from $236.9 million at September 30, 1996, principally due to a $19.2 million
increase in invested assets and a $16.5 million increase in the separate
accounts for variable annuities, primarily as a result of sales of First
SunAmerica's Polaris variable annuity product.
INVESTED ASSETS at December 31, 1996 totaled $172.4 million, compared with
$153.2 million at September 30, 1996. This $19.2 million increase primarily
resulted from sales of fixed annuities.
THE BOND PORTFOLIO had an aggregate fair value that exceeded its amortized cost
by $0.6 million at December 31, 1996. At September 30, 1996, the amortized cost
of the Bond Portfolio exceeded its fair value by $0.5 million. The net
unrealized gain on the Bond Portfolio since September 30, 1996 principally
reflects the lower relative prevailing interest rates at December 31, 1996 and
their corresponding effect on the fair value of the Bond Portfolio.
All of the Bond Portfolio at December 31, 1996 was rated by S&P, Moody's, DCR,
Fitch or under comparable statutory rating guidelines established by the NAIC
and implemented by either the NAIC or First SunAmerica. At December 31, 1996,
approximately $161.8 million of the Bond Portfolio (at amortized cost) was rated
investment grade by one or more of these agencies or by First SunAmerica or the
NAIC, pursuant to applicable NAIC guidelines, including $93.9 million of U.S.
government/agency securities and MBSs.
At December 31, 1996, the Bond Portfolio included $8.4 million (fair value, $8.6
million) of bonds not rated investment grade by S&P, Moody's, DCR, Fitch or the
NAIC. Based on their December 31, 1996 amortized cost, these noninvestment-grade
bonds accounted for 3.1% of First SunAmerica's total assets and 4.9% of invested
assets. First SunAmerica had no material concentrations of non-investment-grade
securities at December 31, 1996.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to the
payment of principal or interest, totaled $0.2 million of bonds and notes at
December 31, 1996 (at amortized cost, with a fair value of $0.1 million), and
constituted 0.1% of total invested assets. At September 30, 1996, defaulted
investments totaled $0.2 million and constituted 0.1% of total invested assets.
SOURCES OF LIQUIDITY are readily available to First SunAmerica in the form of
First SunAmerica's existing portfolio of cash and short-term investments,
Reverse Repo capacity on invested assets and, if required, proceeds from
invested asset sales. At December 31, 1996, approximately $100.8 million of
First SunAmerica's Bond Portfolio had an aggregate unrealized gain of $2.0
million, while approximately $69.4 million of the Bond Portfolio had an
aggregate unrealized loss of $1.4 million. In addition, First SunAmerica's
investment portfolio currently provides approximately $1.9 million of monthly
cash flow from scheduled principal and interest payments.
PROPERTIES
First SunAmerica's principal office is leased at 733 Third Avenue, 4th Floor,
New York, New York 10017. Through an affiliate, we also lease office space in
Los Angeles, California and in Torrance, California for certain policy
administration, recordkeeping and data processing functions.
We believe that such properties, including the equipment located in these
properties are suitable and adequate to meet the requirements of its business.
24
<PAGE> 29
DIRECTORS AND EXECUTIVE OFFICERS
First SunAmerica's directors and officers as of February 28, 1997 are listed
below:
<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* 63 Chairman, Chief Executive Officer and 1994 Co-founded SunAmerica Inc. (SAI) in 1957
President of First SunAmerica
Chairman, Chief Executive Officer and 1986
President of SAI
- ----------------------------------------------------------------------------------------------------------------------------------
Joseph M. Tumbler* 48 Executive Vice President of First 1996 President and Chief Executive Officer, 1989-1995
SunAmerica Providian Capital Management
Vice Chairman of SAI 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Jay S. Wintrob* 39 Executive Vice President of First 1991 (Joined SAI in 1987)
SunAmerica
Vice Chairman of SAI 1995
- ----------------------------------------------------------------------------------------------------------------------------------
James R. Belardi* 39 Senior Vice President of First 1992 Vice President and Treasurer (Jointed SAI 1989-1992
SunAmerica in 1986)
Executive Vice President of SAI 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Jana W. Greer* 44 Senior Vice President of First 1991 (Jointed SAI in 1974)
SunAmerica and SAI
- ----------------------------------------------------------------------------------------------------------------------------------
Peter McMillan, 39 Executive Vice President and Chief 1994 Senior Vice President, SunAmerica 1989-1994
III* Investment Officer of SunAmerica Investments, Inc.
Investments, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Scott L. Robinson* 50 Senior Vice President and Treasurer of 1991 (Joined SAI in 1978)
First SunAmerica
Senior Vice President and Controller
of SAI
- ----------------------------------------------------------------------------------------------------------------------------------
James W. Rowan* 34 Senior Vice President of First 1996 Vice President 1993-1995
SunAmerica and SAI Assistant to the Chairman 1992
Senior Vice President, Security Pacific 1986-1992
Corp.
- ----------------------------------------------------------------------------------------------------------------------------------
Lorin M. Fife* 43 Senior Vice President, General Counsel 1994 Vice President and General Counsel - 1994-1995
and Assistant Secretary of First Regulatory Affairs of SAI
SunAmerica
Senior Vice President and General 1995 Vice President and Associate General 1989-1994
Counsel - Regulatory Affairs of SAI Counsel of SAI (Joined SAI in 1989)
- ----------------------------------------------------------------------------------------------------------------------------------
Susan L. Harris* 40 Senior Vice President and Secretary of 1994 Vice President, General Counsel - 1994-1995
First SunAmerica Corporate Affairs and Secretary of SAI
Senior Vice President, General Counsel 1995 Vice President, Associate General Counsel 1989-1994
-Corporate Affairs and Secretary of and Secretary of SAI (Joined SAI in 1985)
SAI
- ----------------------------------------------------------------------------------------------------------------------------------
N. Scott Gillis 43 Senior Vice President and Controller 1994 Vice President and Controller, SunAmerica 1989-1994
of First SunAmerica Life Companies
(Joined SAI in 1985)
- ----------------------------------------------------------------------------------------------------------------------------------
Edwin R. Reoliquio 39 Senior Vice President and Chief 1995 Vice President and Actuary, SunAmerica 1990-1995
Actuary of First SunAmerica Life Companies
- ----------------------------------------------------------------------------------------------------------------------------------
Victor E. Akin 32 Senior Vice President of First 1996 Vice President, SunAmerica Life Companies 1995-1996
SunAmerica
Director, SunAmerica Life Companies 1994-1995
Manager, SunAmerica Life Companies 1993-1994
Actuary, Milliman & Robertson 1992-1993
Consultant, Chalke Inc. 1991-1992
- ----------------------------------------------------------------------------------------------------------------------------------
David W. Ferguson 43 Director 1987 Partner, Davis Polk & Wardwell 1980 to
present
- ----------------------------------------------------------------------------------------------------------------------------------
Thomas A. Harnett 72 Director 1987 Partner, Lane & Mitterdorf, LLP 1989 to
present
- ----------------------------------------------------------------------------------------------------------------------------------
Margery K. Neale 37 Director 1996 Partner, Shereff, Friedman, Hoffman & 1990 to
Goodman, LLP present
- ----------------------------------------------------------------------------------------------------------------------------------
Lester Pollack 63 Director 1987 Chief Executive Officer, Centre Partners, 1986 to
L.P. present
General Partner, Lazard Freres & Co. 1986 to
present
Senior Managing Director, Corporate 1988 to
Partners, L.P. present
- ----------------------------------------------------------------------------------------------------------------------------------
Richard D. Rohr 70 Director 1987 Partner, Bodman, Longley & Dahling 1958 to
present
==================================================================================================================================
</TABLE>
* Also serves as a director.
** Unless otherwise indicated, offices and positions are with SunAmerica Inc.
25
<PAGE> 30
EXECUTIVE COMPENSATION
All of First SunAmerica's executive officers are also employees of SunAmerica
Inc. or its affiliates and do not receive direct compensation from First
SunAmerica. Some of the executive officers also serve as officers of other
companies affiliated with First SunAmerica. We allocated the time each executive
officer spent devoted to his or her duties as an executive officer of First
SunAmerica to determine the executive compensation set forth below for the Chief
Executive Officer and the other four highest compensated executive officers, as
well as the executive officers as a group, for services rendered during 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
NAME OF ALLOCATED
INDIVIDUAL OR CAPACITIES IN CASH
NUMBER IN GROUP WHICH SERVED COMPENSATION
- --------------------------------------------------------------
<S> <C> <C>
Eli Broad Chairman, Chief Executive $ 10,380
Officer and President
Joseph M. Tumbler Executive Vice President 6,488
Jay S. Wintrob Executive Vice President 6,488
James R. Belardi Senior Vice President 2,955
Jana W. Greer Senior Vice President 7,342
All Executive
Officers as a Group
(12) $ 49,731
========
- --------------------------------------------------------------
</TABLE>
SECURITY OWNERSHIP OF OWNERS AND MANAGEMENT
No shares of First SunAmerica are owned by any executive officer or director.
First SunAmerica is an indirect wholly-owned subsidiary of SunAmerica Inc. The
only officer or director that owned more than 1% of the shares of SunAmerica
Inc. is Mr. Eli Broad. At February 28, 1997, Mr. Broad beneficially owned
6,655,176 shares of Common Stock (approximately 5.8% of the class outstanding)
and 9,160,294 shares of Class B Common Stock (approximately 84.4% of the class
outstanding). Of the Common Stock, 715,872 shares represent restricted shares
granted under the First SunAmerica's employee stock plans as to which Mr. Broad
has no investment power; 75,846 are registered in the name of a corporation of
which Mr. Broad is a director and has sole voting and investment power; and
4,150,932 shares represent employee stock options held by Mr. Broad which are or
will become exercisable within the next 60 days and as to which he has no voting
or investment power. Of the Class B Common Stock, 8,456,140 shares are held
directly by Mr. Broad; and 704,154 shares are registered in the name of a
corporation as to which Mr. Broad exercises sole voting and investment power. At
February 28, 1997, all directors and officers as a group beneficially owned
10,344,440 shares of Common Stock (approximately 9.0% of the class outstanding)
and 9,160,294 shares of Class B Common Stock (approximately 84.4% of the class
outstanding).
STATE REGULATION
First SunAmerica is subject to regulation and supervision by the States of New
York, Nebraska and New Mexico and their insurance departments. State Insurance
laws establish supervisory agencies with broad administrative and supervisory
powers related to granting and revoking licenses to transact business,
regulating marketing and other trade practices, operating guaranty associations,
licensing agents, approving policy forms, regulating certain premium rates,
regulating insurance holding company systems, establishing reserve requirements,
prescribing the form and content of required financial statements and reports,
performing financial and other examinations, determining the reasonableness and
adequacy of statutory capital and surplus, regulating the type, valuation and
amount of investments permitted, limiting the amount of dividends that can be
paid and the size of transactions that can be consummated without first
obtaining regulatory approval and other related matters.
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. 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, 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 First SunAmerica is
monitoring developments in this area and the effects any changes would have on
First SunAmerica.
INDEPENDENT ACCOUNTANTS
The financial statements of First SunAmerica as of September 30, 1996 and 1995
and for each of the three years in the period ended September 30, 1996 included
in this prospectus have been included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
26
<PAGE> 31
=============================================================
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
=============================================================
<TABLE>
<S> <C>
Separate Account.............................. 3
General Account............................... 4
Performance Data.............................. 4
Annuity Unit Values........................... 9
Annuity Payments.............................. 10
Taxes......................................... 13
Distribution of Contracts..................... 17
Financial Statements.......................... 17
</TABLE>
============================================================
FINANCIAL STATEMENTS
============================================================
The consolidated financial statements of First SunAmerica which are included in
this prospectus should be considered only as bearing on the ability First
SunAmerica to meet its obligations with respect to amounts allocated to the
fixed investment options and with respect to the death benefit and our
assumption of the mortality and expense risks and the risks that the withdrawal
charge will not be sufficient to cover the cost of distributing the contracts.
They should not be considered as bearing on the investment performance of the
variable Portfolios. The value of the variable Portfolios is affected primarily
by the performance of the underlying investments.
27
<PAGE> 32
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,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," in fiscal 1994.
Price Waterhouse LLP
Los Angeles, California
November 8, 1996
28
<PAGE> 33
FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------- DECEMBER 31,
1995 1996 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investments:
Cash and short-term investments............................ $ 6,382,000 $ 6,707,000 $ 1,628,000
Bonds and notes:
Available for sale, at fair value (amortized cost:
September 1995, $109,217,000; September 1996,
$146,908,000; December 1996, $170,153,000)............ 107,771,000 146,401,000 170,735,000
Held for investment, at amortized cost (fair value:
September 1995, $2,289,000)........................... 2,297,000 -- --
Mortgage loans............................................. 4,733,000 -- --
Common stocks, at fair value (cost: September 1995,
$112,000; September and December 1996, $0).............. 35,000 129,000 29,000
------------ ------------ ------------
Total investments.......................................... 121,218,000 153,237,000 172,392,000
Variable annuity assets...................................... 32,760,000 68,901,000 85,426,000
Receivable from brokers for sales of securities.............. 815,000 -- --
Accrued investment income.................................... 928,000 1,462,000 1,857,000
Deferred acquisition costs................................... 6,491,000 12,127,000 14,627,000
Income taxes currently receivable............................ -- 299,000 259,000
Other assets................................................. 945,000 842,000 840,000
------------ ------------ ------------
TOTAL ASSETS................................................. $163,157,000 $236,868,000 $275,401,000
============ ============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts....................... $106,332,000 $140,613,000 $162,771,000
Payable to brokers for purchases of securities............. -- 1,939,000 52,000
Income taxes currently payable............................. 23,000 -- --
Other liabilities.......................................... 1,980,000 845,000 1,053,000
------------ ------------ ------------
Total reserves, payables and accrued liabilities........... 108,335,000 143,397,000 163,876,000
------------ ------------ ------------
Variable annuity liabilities................................. 32,760,000 68,901,000 85,426,000
------------ ------------ ------------
Deferred income taxes........................................ 244,000 1,350,000 1,902,000
------------ ------------ ------------
Shareholder's equity:
Common Stock............................................... 3,000,000 3,000,000 3,000,000
Additional paid-in capital................................. 14,428,000 14,428,000 14,428,000
Retained earnings.......................................... 5,250,000 5,973,000 6,437,000
Net unrealized losses on debt and equity securities
available for sale...................................... (860,000) (181,000) 332,000
------------ ------------ ------------
Total shareholder's equity................................. 21,818,000 23,220,000 24,197,000
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY................... $163,157,000 $236,868,000 $275,401,000
============ ============ ============
</TABLE>
See accompanying notes
29
<PAGE> 34
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INCOME STATEMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Investment income.................. $ 5,527,000 $ 7,834,000 $ 9,957,000 $ 2,338,000 $ 2,893,000
----------- ----------- ----------- ----------- -----------
Interest expense on:
Fixed annuity contracts.......... (3,635,000) (5,042,000) (7,155,000) (1,655,000) (2,257,000)
Senior indebtedness.............. -- (8,000) (4,000) -- --
----------- ----------- ----------- ----------- -----------
Total interest expense............. (3,635,000) (5,050,000) (7,159,000) (1,655,000) (2,257,000)
----------- ----------- ----------- ----------- -----------
NET INVESTMENT INCOME.............. 1,892,000 2,784,000 2,798,000 683,000 636,000
----------- ----------- ----------- ----------- -----------
NET REALIZED INVESTMENT GAINS
(LOSSES)......................... 445,000 (1,348,000) (539,000) (631,000) 459,000
----------- ----------- ----------- ----------- -----------
VARIABLE ANNUITY FEE INCOME........ 382,000 412,000 690,000 126,000 292,000
----------- ----------- ----------- ----------- -----------
Other income and expenses:
Surrender charges................ 367,000 194,000 221,000 30,000 56,000
General and administrative
expenses...................... (1,040,000) (1,088,000) (1,404,000) (387,000) (319,000)
Amortization of deferred
acquisition costs............. -- (300,000) (500,000) (126,000) (302,000)
Annual commissions............... (30,000) (33,000) (19,000) (2,000) (4,000)
Other, net....................... (279,000) 84,000 (76,000) (38,000) (38,000)
----------- ----------- ----------- ----------- -----------
TOTAL OTHER INCOME AND EXPENSES.... (982,000) (1,143,000) (1,778,000) (523,000) (607,000)
----------- ----------- ----------- ----------- -----------
PRETAX INCOME (LOSS)............... 1,737,000 705,000 1,171,000 (345,000) 780,000
Income tax benefit (expense)....... (655,000) (182,000) (448,000) 128,000 (316,000)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
FOR INCOME TAXES................. 1,082,000 523,000 723,000 (217,000) 464,000
Cumulative effect of change in
accounting for income taxes...... (725,000) -- -- -- --
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS).................. $ 357,000 $ 523,000 $ 723,000 $ (217,000) $ 464,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes
30
<PAGE> 35
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
------------ ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 357,000 $ 523,000 $ 723,000 $ (217,000) $ 464,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to:
Fixed annuity contracts.................... 3,635,000 5,042,000 7,155,000 1,655,000 2,257,000
Net realized investment (gains) losses..... (445,000) 1,348,000 539,000 631,000 (459,000)
Accretion of net discounts on
investments.............................. (24,000) (394,000) (343,000) (127,000) (55,000)
Amortization of goodwill................... 58,000 58,000 58,000 14,000 15,000
Provision for deferred income taxes........ 1,388,000 333,000 740,000 126,000 276,000
Cumulative effect of change in accounting
for income taxes......................... 725,000 -- -- -- --
Change in:
Deferred acquisition costs................... (1,011,000) (2,740,000) (5,736,000) (745,000) (2,700,000)
Income taxes receivable/payable.............. (555,000) (418,000) (322,000) (283,000) 40,000
Other, net..................................... (115,000) (323,000) (254,000) (159,000) (192,000)
------------ ------------- ------------- ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:.................................. 4,013,000 3,429,000 2,560,000 895,000 (354,000)
------------ ------------- ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of:
Bonds and notes.............................. (68,582,000) (125,130,000) (124,681,000) (19,985,000) (32,592,000)
Common stock................................. -- (112,000) -- --
Sales of:
Bonds and notes.............................. 50,708,000 55,553,000 80,440,000 16,359,000 7,227,000
Common stock................................. -- -- -- -- 139,000
Redemptions and maturities of:
Bonds and notes.............................. 5,791,000 21,369,000 11,514,000 2,416,000 608,000
Mortgage loans............................... 31,000 35,000 4,736,000 9,000 --
------------ ------------- ------------- ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES.......... (12,052,000) (48,285,000) (27,991,000) (1,201,000) (24,618,000)
------------ ------------- ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity contracts.... 7,840,000 51,681,000 45,417,000 5,245,000 25,828,000
Net exchanges to (from) the fixed accounts of
variable annuity contracts................... 572,000 (87,000) (4,719,000) (567,000) (2,551,000)
Withdrawal payments on fixed annuity
contracts.................................... (10,504,000) (14,131,000) (9,850,000) (1,387,000) (2,451,000)
Claims and annuity payments on fixed annuity
contracts.................................... (3,194,000) (2,974,000) (3,752,000) (699,000) (932,000)
Net receipts from (repayments of) other
short-term financings........................ (145,000) 1,964,000 (1,340,000) (1,140,000) (1,000)
------------ ------------- ------------- ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES................................... (5,431,000) 36,453,000 25,756,000 1,452,000 19,893,000
------------ ------------- ------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS.................................. (13,470,000) (8,403,000) 325,000 1,146,000 (5,079,000)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF
PERIOD....................................... 28,255,000 14,785,000 6,382,000 6,382,000 6,707,000
------------ ------------- ------------- ------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT END OF
PERIOD....................................... $ 14,785,000 $ 6,382,000 $ 6,707,000 $ 7,528,000 $ 1,628,000
============ ============= ============= ============ ============
Supplemental cash flow information:
Interest paid on indebtedness................ $ -- $ 8,000 $ 4,000 $ -- $ --
============ ============= ============= ============ ============
Net income taxes paid (recovered)............ $ (178,000) $ 254,000 $ 30,000 $ (30,000) $ --
============ ============= ============= ============ ============
</TABLE>
See accompanying notes
31
<PAGE> 36
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
risks. The Company controls its exposure to these risks by, among other things,
closely monitoring and matching the duration of its assets and liabilities,
monitoring and limiting prepayment and extension risk in its portfolio,
maintaining a large percentage of its portfolio in highly liquid securities, and
engaging in a disciplined process of underwriting, reviewing and monitoring
credit risk. The Company also is exposed to market risk, as market volatility
may result in reduced fee income in the case of assets 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 1995 and 1994 amounts have been reclassified to conform
with the 1996 presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the amounts reported in the financial statements and the accompanying notes.
Actual results could differ from those estimates.
The interim financial information is unaudited; however, in the opinion of the
Company, the interim financial information includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
financial condition, results of operations and cash flows.
RECENTLY ISSUED ACCOUNTING STANDARDS: Effective October 1, 1993, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Accordingly, the cumulative effect of this change
in accounting for income taxes was recorded on October 1, 1993 to increase the
liability for Deferred Income Taxes by $725,000.
INVESTMENTS: Cash and short-term investments primarily include cash, commercial
paper, money market investments, repurchase agreements and short-term bank
participations. All such investments are carried at cost plus accrued interest,
which approximates fair value, have maturities of three months or less and are
considered cash equivalents for purposes of reporting cash flows.
Bonds 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 held for investment
(the "Held for Investment Portfolio") are carried at amortized cost. On December
1, 1995, the Company reassessed the appropriateness of classifying a portion of
its portfolio of bonds and notes as held for investment. This reassessment was
made pursuant to the provisions of "Special Report: A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," issued by the Financial Accounting Standards Board in November
1995. As a result of its reassessment, the Company reclassified all of its Held
for Investment Portfolio as available for sale. At December 1, 1995, the
amortized cost of the Held for Investment Portfolio aggregated $2,296,000 and
its fair value was $2,352,000. Upon reclassification, the resulting net
unrealized gain of $56,000 was credited to Net Unrealized Losses on Debt and
Equity Securities Available for Sale in the shareholder's equity section of the
balance sheet.
Bonds and notes are reduced to estimated net realizable value when necessary for
declines in value considered to be other than temporary. Estimates of net
realizable value are subjective and actual realization will be dependent upon
future events.
Mortgage loans are carried at amortized unpaid balances, net of provisions for
estimated losses.
32
<PAGE> 37
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income using the interest method over the contractual lives of the
investments.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and amortized,
with interest, over the estimated lives of the contracts in relation to the
present value of estimated gross profits, which are composed of net interest
income, net realized investment gains and losses, variable annuity fees,
surrender charges and direct administrative expenses. Deferred acquisition costs
consist of commissions and other costs that vary with, and are primarily related
to, the production or acquisition of new business.
As debt and equity securities available for sale are carried at aggregate fair
value, an adjustment is made to deferred acquisition costs equal to the change
in amortization that would have been recorded if such securities had been sold
at their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains or losses on debt and equity securities available for
sale that is credited or charged directly to shareholder's equity. Deferred
Acquisition Costs have been increased by $100,000 at September 30, 1996, and by
$200,000 at September 30, 1995 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities resulting
from the receipt of variable annuity premiums are segregated in separate
accounts. The Company receives administrative fees for managing the funds and
other fees for assuming mortality and certain expense risks. Such fees are
included in Variable Annuity Fee Income in the income statement.
GOODWILL: Goodwill, amounting to $821,000 at September 30, 1996, is amortized by
using the straight-line method over a period of 25 years and is included in
Other Assets in the balance sheet.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity contracts are
accounted for as investment-type contracts in accordance with Statement of
Financial Accounting Standards No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments," and are recorded at accumulated value
(premiums received, plus accrued interest, less withdrawals and assessed fees).
VARIABLE ANNUITY FEE INCOME: Variable annuity fees 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.
3. INVESTMENTS
The amortized cost and estimated fair value of bonds and notes available for
sale and held for investment by major category follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
AT SEPTEMBER 30, 1996:
AVAILABLE FOR SALE:
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>
33
<PAGE> 38
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States Government................ $ 37,693,000 $ 37,759,000
Mortgage-backed securities................................ 60,558,000 60,367,000
Corporate bonds and notes................................. 10,966,000 9,645,000
------------ ------------
Total available for sale.................................. $109,217,000 $107,771,000
============ ============
HELD FOR INVESTMENT:
Securities of the United States Government................ $ 2,297,000 $ 2,289,000
============ ============
</TABLE>
The amortized cost and estimated fair value of bonds and notes available for
sale by contractual maturity, as of September 30, 1996, follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
AVAILABLE FOR SALE:
Due in one year or less................................... $ -- $ --
Due after one year through five years..................... 5,660,000 5,687,000
Due after five years through ten years.................... 35,833,000 35,841,000
Due after ten years....................................... 29,569,000 29,266,000
Mortgage-backed securities................................ 75,846,000 75,607,000
------------ ------------
Total available for sale.................................. $146,908,000 $146,401,000
============ ============
</TABLE>
Actual maturities of bonds and notes will differ from those shown above due to
prepayments and redemptions.
Gross unrealized gains and losses on bonds and notes available for sale and held
for investment by major category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
---------- -----------
<S> <C> <C>
AT SEPTEMBER 30, 1996:
AVAILABLE FOR SALE:
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)
========== ===========
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States Government................... $ 263,000 $ (197,000)
Mortgage-backed securities................................... 257,000 (448,000)
Corporate bonds and notes.................................... 102,000 (1,423,000)
---------- -----------
Total available for sale..................................... $ 622,000 $(2,068,000)
========== ===========
HELD FOR INVESTMENT:
Securities of the United States Government................... $ 22,000 $ (30,000)
========== ===========
</TABLE>
34
<PAGE> 39
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
At September 30, 1996, gross unrealized gains on equity securities aggregated
$129,000 and there were no unrealized losses. At September 30, 1995, gross
unrealized gains aggregated $35,000 and gross unrealized losses on equity
securities aggregated $112,000.
Gross realized investment gains and losses on sales of all types of investments
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
BONDS AND NOTES AVAILABLE FOR SALE:
Realized gains................................................. $ 1,039,000 $ 423,000 $ 644,000
Realized losses................................................ (1,295,000) (1,771,000) (199,000)
EQUITIES:
Realized losses................................................ (112,000) -- --
IMPAIRMENT WRITEDOWNS............................................ (171,000) -- --
----------- ----------- ----------
Total net realized investment gains/losses..................... $ (539,000) $(1,348,000) $ 445,000
=========== =========== ==========
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Short-term investments........................................... $ 390,000 $ 1,045,000 $ 685,000
Bonds and notes.................................................. 9,186,000 6,291,000 4,341,000
Mortgage loans................................................... 381,000 498,000 501,000
----------- ----------- -----------
Total investment income........................................ $ 9,957,000 $ 7,834,000 $5,527,000
=========== =========== ===========
</TABLE>
Expenses incurred to manage the investment portfolio amounted to $121,000 for
the year ended September 30, 1996, $125,000 for the year ended September 30,
1995, and $102,000 for the year ended September 30, 1994 and are included in
General and Administrative Expenses in the income statement.
The carrying values of investments in any one entity or its affiliates exceeding
10% of the Company's shareholder's equity at September 30, 1996 are as follows:
<TABLE>
<S> <C>
Bonds and notes:
Lockheed Martin Corp. ...................................................... $4,063,000
Nabisco Inc. ............................................................... 3,901,000
PacificCorp................................................................. 3,021,000
==========
</TABLE>
At September 30, 1996, bonds and notes included $9,895,000 (fair value,
$10,408,000) of bonds and notes not rated investment grade either Standard &
Poor's Corporation, Moody's Investors Service, Duff and Phelps Credit Rating
Co., Fitch Investor Service, Inc. or under National Association of Insurance
Commissioners' guidelines. The Company had no material concentrations of
non-investment-grade assets at September 30, 1996.
At September 30, 1996, the amortized cost of investments in default as to the
payment of principal or interest was $180,000 and the fair value was $150,000,
all of which are unsecured non-investment-grade bonds.
At September 30, 1996, $408,000 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
35
<PAGE> 40
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
assets (including equity investments) and liabilities or the value of
anticipated future business. The Company does not plan to sell most of its
assets or settle most of its liabilities at these estimated fair values.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Selling expenses and potential taxes are not
included. The estimated fair value amounts were determined using available
market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND SHORT-TERM INVESTMENTS: Carrying value is considered to be a reasonable
estimate of fair value.
BONDS AND NOTES: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
MORTGAGE LOANS: Fair values are primarily determined by discounting future cash
flows to the present at current market rates, using expected prepayment rates.
VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the market value
of the underlying securities.
RECEIVABLE FROM (PAYABLE TO) BROKERS FOR SALES (PURCHASES) OF SECURITIES: Such
obligations represent net transactions of a short-term nature for which the
carrying value is considered a reasonable estimate of fair value.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are assigned a
fair value equal to current net surrender value. Annuitized contracts are valued
based on the present value of future cash flows at current pricing rates.
VARIABLE ANNUITY LIABILITIES: 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, 1996 and 1995, compared with their respective carrying values, are as
follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
------------- -------------
<S> <C> <C>
1996:
ASSETS:
Cash and short-term investments........................................... $ 6,707,000 $ 6,707,000
Bonds and notes........................................................... 146,401,000 146,401,000
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>
36
<PAGE> 41
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
------------ ------------
<S> <C> <C>
</TABLE>
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<S> <C> <C>
1995:
ASSETS:
Cash and short-term investments........................................... $ 6,382,000 $ 6,382,000
Bonds and notes........................................................... 110,068,000 110,060,000
Mortgage loans............................................................ 4,733,000 4,733,000
Receivable from brokers for sales of securities........................... 815,000 815,000
Variable annuity assets................................................... 32,760,000 32,760,000
LIABILITIES:
Reserves for fixed annuity contracts...................................... 106,332,000 102,782,000
Variable annuity liabilities.............................................. 32,760,000 31,740,000
============ ============
</TABLE>
5. CONTINGENT LIABILITIES
From time to time, the Company is involved in various kinds of litigation common
to its business. When the Company becomes involved in litigation, cases are
typically in various stages of development and, based on reports of counsel,
management believes that provisions made for potential losses relating to such
litigation would be adequate and any further liabilities and costs would 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, 1996, 1995 and 1994, 300 shares are outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
RETAINED EARNINGS:
Beginning balance.............................................. $5,250,000 $ 4,727,000 $ 4,370,000
Net income..................................................... 723,000 523,000 357,000
---------- ----------- -----------
Ending balance................................................. $5,973,000 $ 5,250,000 $ 4,727,000
========== =========== ===========
NET UNREALIZED LOSSES ON DEBT AND EQUITY SECURITIES AVAILABLE FOR
SALE:
Beginning balance.............................................. $ (860,000) $(2,340,000) $ 1,331,000
Change in net unrealized gains/losses on debt securities
available for sale.......................................... 939,000 4,254,000 (7,621,000)
Change in net unrealized gains/losses on equity securities
available for sale.......................................... 206,000 (77,000) (118,000)
Change in adjustment to deferred acquisition costs............. (100,000) (1,900,000) 2,100,000
Tax effect of net changes...................................... (366,000) (797,000) 1,968,000
---------- ----------- -----------
Ending balance................................................. $ (181,000) $ (860,000) $(2,340,000)
========== =========== ===========
</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 1996,
1995 or 1994.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1996 was $191,000. The statutory net loss for the year ended
December 31, 1995 was
37
<PAGE> 42
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
6. SHAREHOLDER'S EQUITY (CONTINUED)
$2,083,000 and the statutory net gain for the year ended December 31, 1994 was
$726,000. The Company's statutory capital and surplus was $13,975,000 at
September 30, 1996, $13,862,000 at December 31, 1995 and $16,122,000 at December
31, 1994.
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>
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
========= ========== ==========
1994:
Currently payable................................................... $ 121,000 $ (854,000) $ (733,000)
Deferred............................................................ 65,000 1,323,000 1,388,000
--------- ---------- ----------
Total income tax expense.................................. $ 186,000 $ 469,000 $ 655,000
========= ========== ==========
</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,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Amount computed at statutory rate...................................... $410,000 $247,000 $608,000
Increases (decreases) resulting from:
Amortization of differences between book and tax bases of net assets
acquired.......................................................... 20,000 20,000 10,000
State income taxes, net of federal tax benefit....................... 25,000 (86,000) 36,000
Other, net........................................................... (7,000) 1,000 1,000
-------- -------- --------
Total income tax expense..................................... $448,000 $182,000 $655,000
======== ======== ========
</TABLE>
38
<PAGE> 43
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,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments................................................................... $ 225,000 $ 142,000
Deferred acquisition costs.................................................... 3,902,000 1,703,000
Other liabilities............................................................. 84,000 66,000
----------- -----------
Total deferred tax liabilities................................................ 4,211,000 1,911,000
----------- -----------
DEFERRED TAX ASSETS:
Contractholder reserves....................................................... (2,582,000) (1,125,000)
State income taxes............................................................ (79,000) (79,000)
Net unrealized losses on certain debt and equity securities................... (97,000) (463,000)
Other assets.................................................................. (103,000) --
----------- -----------
Total deferred tax assets..................................................... (2,861,000) (1,667,000)
----------- -----------
Deferred income taxes......................................................... $ 1,350,000 $ 244,000
=========== ===========
</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 44.1%, 14.8% and 26.5% of premiums in 1996, 1995 and
1994, respectively. Commissions paid to these broker-dealers totaled $2,646,000
in 1996, $761,000 in 1995, and $326,000 in 1994.
The Company paid occupancy and office services expenses to Royal Alliance
Associates, Inc. totaling $15,000 for the year ended September 30, 1996,
$113,000 for the year ended September 30, 1995 and $122,000 for the year ended
September 30, 1994.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, Inc., whose
purpose is to provide services to the SunAmerica companies. Amounts paid for
such services totaled $2,097,000 for the year ended September 30, 1996, $722,000
for the year ended September 30, 1995 and $706,000 for the year ended September
30, 1994.
39
<PAGE> 44
================================================================================
APPENDIX A - CONDENSED FINANCIAL INFORMATION
================================================================================
<TABLE>
<CAPTION>
INCEPTION TO FISCAL YEAR
PORTFOLIOS 11/30/95 11/30/96
===============================================================================================
<S> <C> <C>
Capital Appreciation (Inception Date - 4/6/95)
Beginning AUV................................................ $11.35 $14.19
End AUV...................................................... $14.19 $17.63
End #AUs..................................................... 52,583 242,433
-----------------------------------------------------------------------------------------------
Growth (Inception Date - 4/6/95)
Beginning AUV................................................ $11.02 $12.95
End AUV...................................................... $12.95 $16.32
End #AUs..................................................... 15,156 104,264
-----------------------------------------------------------------------------------------------
Natural Resources (Inception Date - 5/30/95)
Beginning AUV................................................ $10.17 $10.78
End AUV...................................................... $10.78 $12.13
End #AUs..................................................... 5,306 62,002
-----------------------------------------------------------------------------------------------
Government and Quality Bond (Inception Date - 5/3/95)
Beginning AUV................................................ $10.55 $11.51
End AUV...................................................... $11.51 $11.94
End #AUs..................................................... 37,576 127,538
-----------------------------------------------------------------------------------------------
Aggressive Growth (Inception Date - 6/3/96)
Beginning AUV................................................ -- $10.00
End AUV...................................................... -- $10.29
End #AUs..................................................... -- 160,390
-----------------------------------------------------------------------------------------------
International Diversified Equities (Inception Date - 4/12/95)
Beginning AUV................................................ $9.45 $10.07
End AUV...................................................... $10.07 $11.39
End #AUs..................................................... 58,058 355,952
-----------------------------------------------------------------------------------------------
Global Equities (Inception Date - 5/22/95)
Beginning AUV................................................ $11.99 $13.01
End AUV...................................................... $13.01 $15.15
End #AUs..................................................... 26,604 117,488
-----------------------------------------------------------------------------------------------
Putnam Growth* (Inception Date - 4/6/95)
Beginning AUV................................................ $10.36 $12.60
End AUV...................................................... $12.60 $14.88
End #AUs..................................................... 31,960 114,619
-----------------------------------------------------------------------------------------------
Growth/Phoenix Investment Counsel (Inception Date - 4/6/95)
Beginning AUV................................................ $10.61 $12.81
End AUV...................................................... $12.81 $14.94
End #AUs..................................................... 22,973 94,650
-----------------------------------------------------------------------------------------------
Alliance Growth (Inception Date - 4/6/95)
Beginning AUV................................................ $11.52 $15.44
End AUV...................................................... $15.44 $19.46
End #AUs..................................................... 52,943 322,225
-----------------------------------------------------------------------------------------------
Venture Value (Inception Date - 4/6/95)
Beginning AUV................................................ $10.84 $13.29
End AUV...................................................... $13.29 $16.68
End #AUs..................................................... 113,664 605,579
-----------------------------------------------------------------------------------------------
* Formerly named Provident Growth.
</TABLE>
A-1
<PAGE> 45
<TABLE>
<CAPTION>
INCEPTION TO FISCAL YEAR
PORTFOLIOS 11/30/95 11/30/96
===============================================================================================
<S> <C> <C>
Federated Value (Inception Date - 6/3/96)
Beginning AUV................................................ -- $10.00
End AUV...................................................... -- $11.00
End #AUs..................................................... -- 69,098
-----------------------------------------------------------------------------------------------
Growth-Income (Inception Date - 4/12/95)
Beginning AUV................................................ $11.15 $13.32
End AUV...................................................... $13.32 $16.70
End #AUs..................................................... 45,266 259,344
-----------------------------------------------------------------------------------------------
Utility (Inception Date - 6/3/96)
Beginning AUV................................................ -- $10.00
End AUV...................................................... -- $10.67
End #AUs..................................................... -- 20,721
-----------------------------------------------------------------------------------------------
Asset Allocation (Inception Date - 4/24/95)
Beginning AUV................................................ $11.29 $12.64
End AUV...................................................... $12.64 $14.97
End #AUs..................................................... 60,824 264,208
-----------------------------------------------------------------------------------------------
Balanced/Phoenix Investment Counsel (Inception Date - 5/8/95)
Beginning AUV................................................ $10.90 $12.33
End AUV...................................................... $12.33 $13.82
End #AUs..................................................... 41,654 157,110
-----------------------------------------------------------------------------------------------
SunAmerica Balanced (Inception Date - 6/3/96)
Beginning AUV................................................ -- $10.00
End AUV...................................................... -- $11.04
End #AUs..................................................... -- 72,909
-----------------------------------------------------------------------------------------------
Worldwide High Income (Inception Date - 5/2/95)
Beginning AUV................................................ $10.16 $11.36
End AUV...................................................... $11.36 $14.20
End #AUs..................................................... 21,556 124,728
-----------------------------------------------------------------------------------------------
High-Yield Bond (Inception Date - 5/8/95)
Beginning AUV................................................ $11.18 $11.48
End AUV...................................................... $11.48 $12.99
End #AUs..................................................... 40,706 220,725
-----------------------------------------------------------------------------------------------
Corporate Bond (Inception Date - 4/12/95)
Beginning AUV................................................ $10.21 $11.10
End AUV...................................................... $11.10 $11.65
End #AUs..................................................... 5,375 48,161
-----------------------------------------------------------------------------------------------
Global Bond (Inception Date - 5/2/95)
Beginning AUV................................................ $10.37 $11.20
End AUV...................................................... $11.20 $12.25
End #AUs..................................................... 12,162 52,993
-----------------------------------------------------------------------------------------------
Cash Management (Inception Date - 4/27/95)
Beginning AUV................................................ $10.44 $10.67
End AUV...................................................... $10.67 $11.04
End #AUs..................................................... 59,731 52,729
</TABLE>
================================================================================
AUV - Accumulation Unit Value
AU - Accumulation Units
AS OF THE DATE OF THIS PROSPECTUS, THE SALE OF CONTRACTS OFFERING THE EMERGING
MARKETS, REAL ESTATE AND INTERNATIONAL GROWTH AND INCOME PORTFOLIOS HAD NOT
BEGUN. THEREFORE, NO CONDENSED FINANCIAL INFORMATION IS PRESENTED
HERE FOR THESE PORTFOLIOS.
A-2
<PAGE> 46
================================================================================
APPENDIX B - MARKET VALUE ADJUSTMENT
================================================================================
The market value adjustment reflects the impact that changing interest rates
have on the value of money invested at a fixed interest rate. The longer the
period of time remaining in the term you initially agreed to leave your money in
the fixed investment option, the greater the impact of changing interest rates.
The impact of the market value adjustment can 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 interest rate you are earning on the money invested in the fixed
investment option;
J is the interest rate then currently available for the period of time
equal to the number of years remaining in the term you initially agreed
to leave your money in the fixed investment option rounded up to the
next full year; and
N is the number of full months remaining in the term you initially agreed
to leave your money in the fixed investment option.
EXAMPLES OF THE MARKET VALUE ADJUSTMENT
The examples below assume the following:
(1) You made an initial Purchase Payment of $10,000 and allocated it to the
10-year fixed investment option at a rate of 7%;
(2) You make a partial withdrawal of $4,000 when 3 1/2 years (42 months)
remain in the 10-year term you initially agreed to leave your money in
the fixed investment option (N=42);
(3) The value of your contract on the date you make the withdrawal is
$16,297.02 which reflects the deduction of all applicable fees and
charges; and
(4) You have not made any other transfers, additional Purchase Payments, or
withdrawals.
No withdrawal charges are reflected because your Purchase Payment has been in
the contract for seven full years. If a withdrawal charge applies, it is
deducted before the market value adjustment.
NEGATIVE ADJUSTMENT
Assume that on the date of withdrawal, the interest rate in effect for new
Purchase Payments in the 3-year fixed investment option is 7.5% and the 5-year
fixed investment option is 8.5%. By linear interpolation, the interest rate for
the remaining 4 years (3 1/2 years rounded up to the next full year) in the
contract is calculated to be 8%.
(N/12)
The market value adjustment factor is = [(1+I)/(1+J+0.0025)] - 1
(42/12)
= [(1.07)/(1.08+0.0025)] - 1
(3.5)
= (0.988453) - 1
= 0.960164 - 1
= - 0.039836
The requested withdrawal amount is multiplied by the market value adjustment
factor to determine the market value adjustment:
$4,000 X (- 0.039836) = -$159.34
$159.34 represents the market value adjustment that will be deducted from the
money remaining in the 10-year fixed investment option.
POSITIVE ADJUSTMENT
Assume that on the date of withdrawal, the interest rate in effect for a new
Purchase Payments in the 3-year fixed investment option is 5.5% and the 5-year
fixed investment option is 6.5%. By linear interpolation, the interest rate for
the remaining 4 years (3 1/2 years rounded up to the next full year) in the
contract is calculated to be 6%.
(N/12)
The market value adjustment factor is = [(1+I/(1+J+0.0025)] - 1
(42/12)
= [(1.07)/(1.06+0.0025)] - 1
(3.5)
= (1.007059) - 1
= 1.024925 - 1
= + 0.024925
The requested withdrawal amount is multiplied by the market value adjustment
factor to determine the market value adjustment:
$4,000 x (+0.024925) = +$99.70
$99.70 represents the market value adjustment that would be added to your
withdrawal.
B-1
<PAGE> 47
- --------------------------------------------------------------------------------
Please forward a copy (without charge) of the Polaris Variable Annuity
Statement of Additional Information to:
(Please print or type and fill in all information.)
----------------------------------------------------------------
Name
----------------------------------------------------------------
Address
----------------------------------------------------------------
City/State/Zip
Date: Signed:
---------- ----------------------------------------
Return to: First SunAmerica Life Insurance Company, Annuity Service Center,
P.O. Box 54299, Los Angeles, California 90054-0299.
- --------------------------------------------------------------------------------
