<PAGE> 1
Filed pursuant to Rule 424(b)(3)
of the Securities Act of 1933
File No. 33-85016
[POLARIS PROFILE LOGO]
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 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.
April 1, 1998
================================================================
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 26 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
- "Dogs" of Wall Street 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 .63% to 1.90%.
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>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year 1 2 3 4 5 6 7 8+
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WITHDRAWAL
CHARGE 7% 6% 5% 4% 3% 2% 1% 0%
- -----------------------------------------------------------------------------------------------
</TABLE>
Each year, you are allowed to make 15 transfers without charge. After your first
15 free transfers, a $25 transfer fee will apply to each subsequent transfer.
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 an assumed contract size of $40,000. 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 1.60% .71% 2.31% $ 93 $264
Growth 1.60% .78% 2.38% $ 94 $271
Natural Resources 1.60% .89% 2.49% $ 95 $282
Government and Quality Bond 1.60% .71% 2.31% $ 93 $264
- ----------------------------------------------------------------------------------------------------------------------------
SUNAMERICA SERIES TRUST PORTFOLIO
Emerging Markets* 1.60% 1.90% 3.50% $105 $377
International Diversified Equities 1.60% 1.35% 2.95% $100 $327
Global Equities 1.60% .95% 2.55% $ 96 $288
International Growth and Income* 1.60% 1.60% 3.20% $102 $350
Aggressive Growth* 1.60% .90% 2.50% $ 95 $283
Real Estate* 1.60% 1.25% 2.85% $ 99 $317
Putnam Growth** 1.60% .91% 2.51% $ 95 $284
Growth/Phoenix 1.60% .73% 2.33% $ 94 $266
Alliance Growth 1.60% .65% 2.25% $ 93 $258
"Dogs" of Wall Street* 1.60% .85% 2.45% $ 95 $278
Venture Value 1.60% .79% 2.39% $ 94 $272
Federated Value* 1.60% 1.03% 2.63% $ 97 $296
Growth-Income 1.60% .65% 2.25% $ 93 $258
Utility* 1.60% 1.05% 2.65% $ 97 $298
Asset Allocation 1.60% .68% 2.28% $ 93 $261
Balanced/Phoenix 1.60% .82% 2.42% $ 94 $275
SunAmerica Balanced* 1.60% 1.00% 2.60% $ 96 $293
Worldwide High Income 1.60% 1.10% 2.70% $ 97 $303
High-Yield Bond 1.60% .75% 2.35% $ 94 $268
Corporate Bond 1.60% .91% 2.51% $ 95 $284
Global Bond 1.60% .90% 2.50% $ 95 $283
Cash Management 1.60% .63% 2.23% $ 93 $256
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For these Portfolios, the adviser, SunAmerica Asset Management Corp., has
voluntarily agreed to waive fees or reimburse expenses, if necessary, to keep
operating expenses at or below an established maximum amount. All waivers or
reimbursements may be terminated at any time. For more detailed information,
see the Fee Tables and Examples in the prospectus.
** Formerly named Provident Growth.
================================================================
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 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital Appreciation 23.49% 23.15% 25.38%
Growth 28.36% 23.05% 17.73%
Natural Resources (10.07)% 12.22% 6.90%
Gov't and Quality Bond 7.83% 1.37% 10.44%
- -------------------------------------------------------------------
SUNAMERICA SERIES
TRUST PORTFOLIO
Emerging Markets** (17.81)% -- --
Int'l Diversified
Equities 4.71% 7.58% 10.71%
Global Equities 13.24% 12.35% 11.37%
Int'l Growth and
Income** 3.44% -- --
Aggressive Growth 10.55% 4.32% --
Real Estate** 17.14% -- --
Putnam Growth* 30.41% 18.46% 16.47%
Growth/Phoenix 21.28% 14.10% 21.10%
Alliance Growth 29.40% 27.08% 30.24%
"Dogs" of Wall Street -- -- --
Venture Value 32.20% 22.85% 23.41%
Federated Value 29.38% 7.32% --
Growth-Income 31.84% 22.09% 21.08%
Utility 23.76% 8.25% --
Asset Allocation 19.91% 17.03% 13.75%
Balanced/Phoenix 15.11% 8.20% 14.66%
SunAmerica Balanced 22.52% 9.39% --
Worldwide High Income 13.74% 23.40% 14.90%
High-Yield Bond 12.70% 12.76% 4.28%
Corporate Bond 9.16% 2.88% 9.96%
Global Bond 8.33% 7.56% 9.29%
Cash Management 3.52% 3.31% 2.57%
- -------------------------------------------------------------------
</TABLE>
* Formerly named Provident Growth.
** Inception to November 30, 1997
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 up 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 option 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
[POLARIS LOGO]
PROSPECTUS
APRIL 1, 1998
<TABLE>
<S> <C> <C>
Please read this prospectus carefully FLEXIBLE PAYMENT DEFERRED ANNUITY CONTRACTS
before investing and keep it for issued by
future reference. It contains FIRST SUNAMERICA LIFE INSURANCE COMPANY
important information about the in connection with
Polaris Variable Annuity. FS VARIABLE SEPARATE ACCOUNT
The annuity has 31 investment choices -- 5 fixed investment
To learn more about the annuity options and 26 variable investment portfolios listed below.
offered by this prospectus, you can The 5 fixed investment options include specified periods of
obtain a copy of the Statement of 1, 3, 5, 7 and 10 years. The 26 variable investment
Additional Information ("SAI") dated portfolios are part of Anchor Series Trust or SunAmerica
April 1, 1998. The SAI has been filed Series Trust.
with the Securities and Exchange ANCHOR SERIES TRUST:
Commission ("SEC") and is MANAGED BY WELLINGTON MANAGEMENT COMPANY, LLP
incorporated by reference into this - Capital Appreciation Portfolio
prospectus. The Table of Contents of - Growth Portfolio
the SAI appears on page 30 of this - Natural Resources Portfolio
prospectus. For a free copy of the - Government and Quality Bond Portfolio
SAI, call us at (800) 99NY-SUN or SUNAMERICA SERIES TRUST:
write to us at our Annuity Service MANAGED BY ALLIANCE CAPITAL MANAGEMENT L.P.
Center, P.O. Box 54299, Los Angeles, - Global Equities Portfolio
California 90054-0299. - Alliance Growth Portfolio
- Growth-Income Portfolio
In addition, the SEC maintains a MANAGED BY DAVIS SELECTED ADVISERS, L.P.
website (http://www.sec.gov) that - Venture Value Portfolio
contains the SAI, materials - Real Estate Portfolio
incorporated by reference and other MANAGED BY FEDERATED INVESTORS
information filed electronically with - Federated Value Portfolio
the SEC by First SunAmerica. - Utility Portfolio
- Corporate Bond Portfolio
ANNUITIES INVOLVE RISKS, INCLUDING MANAGED BY GOLDMAN SACHS ASSET MANAGEMENT/
POSSIBLE LOSS OF PRINCIPAL, AND ARE GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL
NOT A DEPOSIT OR OBLIGATION OF, OR - Asset Allocation Portfolio
GUARANTEED OR ENDORSED BY, ANY BANK. - Global Bond Portfolio
THEY ARE NOT FEDERALLY INSURED BY THE MANAGED BY MORGAN STANLEY ASSET MANAGEMENT INC.
FEDERAL DEPOSIT INSURANCE - International Diversified Equities Portfolio
CORPORATION, THE FEDERAL RESERVE - Worldwide High Income Portfolio
BOARD OR ANY OTHER AGENCY. 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
- "Dogs" of Wall Street Portfolio
- SunAmerica Balanced Portfolio
- High-Yield Bond Portfolio
- 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
and Additional Amounts Credited............ 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................................. 27
Directors and Executive Officers........... 28
Executive Compensation..................... 29
Security Ownership of Owners and
Management................................. 29
Regulation................................. 29
Independent Accountants.................... 30
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL
INFORMATION...................................... 30
FINANCIAL STATEMENTS............................. 30
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 per
transfer
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, 1997)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
PORTFOLIO FEE EXPENSES EXPENSES
<S> <C> <C> <C>
=================================================================================================
Capital Appreciation .65% .06% .71%
- -------------------------------------------------------------------------------------------------
Growth .72% .06% .78%
- -------------------------------------------------------------------------------------------------
Natural Resources .75% .14% .89%
- -------------------------------------------------------------------------------------------------
Government and Quality Bond .62% .09% .71%
=================================================================================================
</TABLE>
SUNAMERICA SERIES TRUST
(AS A PERCENTAGE OF AVERAGE NET ASSETS AFTER REIMBURSEMENT OR WAIVER OF EXPENSES
FOR THE TRUST'S FISCAL YEAR ENDED NOVEMBER 30, 1997)
<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% .35% 1.35%
- -------------------------------------------------------------------------------------------------
Global Equities .76% .19% .95%
- -------------------------------------------------------------------------------------------------
International Growth and Income 1.00% .60% 1.60%*
- -------------------------------------------------------------------------------------------------
Aggressive Growth .76% .14% .90%
- -------------------------------------------------------------------------------------------------
Real Estate .80% .45% 1.25%*
- -------------------------------------------------------------------------------------------------
Putnam Growth** .83% .08% .91%
- -------------------------------------------------------------------------------------------------
Growth/Phoenix .65% .08% .73%
- -------------------------------------------------------------------------------------------------
Alliance Growth .59% .06% .65%
- -------------------------------------------------------------------------------------------------
"Dogs" of Wall Street*** .60% .25% .85%*
- -------------------------------------------------------------------------------------------------
Venture Value .74% .05% .79%
- -------------------------------------------------------------------------------------------------
Federated Value .80% .23% 1.03%
- -------------------------------------------------------------------------------------------------
Growth-Income .60% .05% .65%
- -------------------------------------------------------------------------------------------------
Utility .75% .30% 1.05%
- -------------------------------------------------------------------------------------------------
Asset Allocation .61% .07% .68%
- -------------------------------------------------------------------------------------------------
Balanced/Phoenix .68% .14% .82%
- -------------------------------------------------------------------------------------------------
SunAmerica Balanced .74% .26% 1.00%
- -------------------------------------------------------------------------------------------------
Worldwide High Income 1.00% .10% 1.10%
- -------------------------------------------------------------------------------------------------
High-Yield Bond .66% .09% .75%
- -------------------------------------------------------------------------------------------------
Corporate Bond .70% .21% .91%
- -------------------------------------------------------------------------------------------------
Global Bond .72% .18% .90%
- -------------------------------------------------------------------------------------------------
Cash Management .54% .09% .63%
=================================================================================================
</TABLE>
*Annualized.
**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.
***As of the date of this prospectus, the sale of contracts offering the
"Dogs" of Wall Street Portfolio had not begun. The percentages are based
on estimated amounts for the current fiscal year.
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>
====================================================================================================
Capital Appreciation (a) $ 93 (a) $122 (a) $153 (a) $264
(b) $ 23 (b) $ 72 (b) $123 (b) $264
- ----------------------------------------------------------------------------------------------------
Growth (a) $ 94 (a) $124 (a) $157 (a) $271
(b) $ 24 (b) $ 74 (b) $127 (b) $271
- ----------------------------------------------------------------------------------------------------
Natural Resources (a) $ 95 (a) $127 (a) $162 (a) $282
(b) $ 25 (b) $ 77 (b) $132 (b) $282
- ----------------------------------------------------------------------------------------------------
Government and Quality Bond (a) $ 93 (a) $122 (a) $153 (a) $264
(b) $ 23 (b) $ 72 (b) $123 (b) $264
- ----------------------------------------------------------------------------------------------------
Emerging Markets (a) $105 (a) $157 (a) $211 (a) $377
(b) $ 35 (b) $107 (b) $181 (b) $377
- ----------------------------------------------------------------------------------------------------
International Diversified Equities (a) $100 (a) $141 (a) $185 (a) $327
(b) $ 30 (b) $ 91 (b) $155 (b) $327
- ----------------------------------------------------------------------------------------------------
Global Equities (a) $ 96 (a) $129 (a) $165 (a) $288
(b) $ 26 (b) $ 79 (b) $135 (b) $288
- ----------------------------------------------------------------------------------------------------
International Growth and Income (a) $102 (a) $148 (a) $197 (a) $350
(b) $ 32 (b) $ 98 (b) $167 (b) $350
- ----------------------------------------------------------------------------------------------------
Aggressive Growth (a) $ 95 (a) $128 (a) $163 (a) $283
(b) $ 25 (b) $ 78 (b) $133 (b) $283
- ----------------------------------------------------------------------------------------------------
Real Estate (a) $ 99 (a) $138 (a) $180 (a) $317
(b) $ 29 (b) $ 88 (b) $150 (b) $317
- ----------------------------------------------------------------------------------------------------
Putnam Growth (a) $ 95 (a) $128 (a) $163 (a) $284
(b) $ 25 (b) $ 78 (b) $133 (b) $284
- ----------------------------------------------------------------------------------------------------
Growth/Phoenix (a) $ 94 (a) $123 (a) $154 (a) $266
(b) $ 24 (b) $ 73 (b) $124 (b) $266
- ----------------------------------------------------------------------------------------------------
Alliance Growth (a) $ 93 (a) $120 (a) $150 (a) $258
(b) $ 23 (b) $ 70 (b) $120 (b) $258
- ----------------------------------------------------------------------------------------------------
"Dogs" of Wall Street (a) $ 95 (a) $126 (a) $160 (a) $278
(b) $ 25 (b) $ 76 (b) $130 (b) $278
- ----------------------------------------------------------------------------------------------------
Venture Value (a) $ 94 (a) $124 (a) $157 (a) $272
(b) $ 24 (b) $ 74 (b) $127 (b) $272
- ----------------------------------------------------------------------------------------------------
Federated Value (a) $ 97 (a) $132 (a) $169 (a) $296
(b) $ 27 (b) $ 82 (b) $139 (b) $296
- ----------------------------------------------------------------------------------------------------
Growth-Income (a) $ 93 (a) $120 (a) $150 (a) $258
(b) $ 23 (b) $ 70 (b) $120 (b) $258
- ----------------------------------------------------------------------------------------------------
Utility (a) $ 97 (a) $132 (a) $170 (a) $298
(b) $ 27 (b) $ 82 (b) $140 (b) $298
- ----------------------------------------------------------------------------------------------------
Asset Allocation (a) $ 93 (a) $121 (a) $152 (a) $261
(b) $ 23 (b) $ 71 (b) $122 (b) $261
- ----------------------------------------------------------------------------------------------------
Balanced/Phoenix (a) $ 94 (a) $125 (a) $159 (a) $275
(b) $ 24 (b) $ 75 (b) $129 (b) $275
- ----------------------------------------------------------------------------------------------------
SunAmerica Balanced (a) $ 96 (a) $131 (a) $168 (a) $293
(b) $ 26 (b) $ 81 (b) $138 (b) $293
- ----------------------------------------------------------------------------------------------------
Worldwide High Income (a) $ 97 (a) $134 (a) $173 (a) $303
(b) $ 27 (b) $ 84 (b) $143 (b) $303
- ----------------------------------------------------------------------------------------------------
High-Yield Bond (a) $ 94 (a) $123 (a) $155 (a) $268
(b) $ 24 (b) $ 73 (b) $125 (b) $268
- ----------------------------------------------------------------------------------------------------
Corporate Bond (a) $ 95 (a) $128 (a) $163 (a) $284
(b) $ 25 (b) $ 78 (b) $133 (b) $284
- ----------------------------------------------------------------------------------------------------
Global Bond (a) $ 95 (a) $128 (a) $163 (a) $283
(b) $ 25 (b) $ 78 (b) $133 (b) $283
- ----------------------------------------------------------------------------------------------------
Cash Management (a) $ 93 (a) $120 (a) $149 (a) $256
(b) $ 23 (b) $ 70 (b) $119 (b) $256
====================================================================================================
</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: SunAmerica Balanced
(1.00%); "Dogs" of Wall Street (.85%); Aggressive Growth (.90%); Federated
Value (1.03%); 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, the adviser may recoup any waivers or reimbursements
within two years after such waivers or reimbursements are granted, provided
that the Portfolio is able to make such payment and remain in compliance
with the foregoing expense limitations.
3. Absent fee waivers or reimbursement of expenses by the adviser, you would
have incurred the following expenses during the last fiscal year: Utility
(1.24%); Emerging Markets (2.60%); International Growth and Income (2.02%);
and Real Estate (1.36%).
4. The Examples assume that no transfer fees were imposed. Although premium
taxes may apply in certain states, they are not reflected.
5. 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 26
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 the Annuitant's 90th birthday. If no Annuity Date
is selected, annuity payments will begin on the Annuitant's 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 a month,
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 during the Income Phase. You may transfer money among the variable
Portfolios or among the fixed investment options.
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 over age 85 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 26 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 22 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
- "Dogs" of Wall Street 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.
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.
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 3, 5, 7 or 10 year fixed investment option
(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.
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 15 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. Transfers under Dollar Cost Averaging are included as part
of your 15 free transfers each year. However, transfers under Asset Allocation
Rebalancing are not counted against your 15 free transfers each year.
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 investing
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 percentage 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 AND ADDITIONAL AMOUNTS CREDITED
We may reduce or eliminate the amount of certain insurance charges, credit
additional amounts or grant bonus guaranteed interest rates 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.
In addition, we may waive or reduce the contract maintenance fee, credit
additional amounts or grant bonus guaranteed interest rates in connection with
contracts sold to employees, employees of affiliates, registered
representatives, employees of broker-dealers which have a current selling
agreement with us ("Eligible Individuals") and immediate family members of all
Eligible Individuals when purchased directly through SunAmerica Capital
Services, Inc. Such reductions or waivers may be withdrawn or modified by us.
Commissions may be waived or reduced with respect to contracts established for
the personal accounts of Eligible Individuals.
=============================================================
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 ("IRAs"), Roth IRAs, Tax-Sheltered Annuities (referred to as 403(b)
contracts), H.R. 10 Plans (referred to as Keogh Plans) and pension and profit
sharing plans, including 401(k) plans. Typically you have not paid any tax on
the Purchase Payments used to buy your contract and therefore, you have no cost
basis in your contract.
TAX TREATMENT OF DISTRIBUTIONS --
NON-QUALIFIED CONTRACTS
If you make a withdrawal from a Non-qualified contract, the IRC treats such a
withdrawal as first coming from the earnings and then as coming from your
Purchase Payments. For annuity payments, any portion of each payment that is
considered a return of your Purchase
12
<PAGE> 17
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 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; (5) to
the extent such withdrawals do not exceed limitations set by the IRC for amounts
paid during the taxable year for medical care; (6) to fund higher education
expenses (as defined in the IRC); (7) to fund certain first-time home purchase
expenses; and, except in the case of an IRA: (8) when you separate from service
after attaining age 55; and (9) 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 were both no longer subject to the
withdrawal charge schedule and are 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
13
<PAGE> 18
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.
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.
More detailed information on the method used to calculate performance for the
Portfolios is contained in the SAI.
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 ranking agencies such as Morningstar, Inc., Lipper Analytical
Services, Inc. or Variable Annuity Research & Data Service ("VARDS").
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 ratings also do not
relate to the performance of the Portfolios.
=============================================================
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.
14
<PAGE> 19
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
(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 up 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. 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 is a stock life insurance company organized under the laws of
the state of New York on December 5, 1978. First SunAmerica is an indirect
wholly owned subsidiary of SunAmerica Inc., a Maryland corporation. First
SunAmerica is licensed to do business in the states of New York, Nebraska and
New Mexico.
First SunAmerica and its affiliates, SunAmerica Life Insurance Company, Anchor
National Life Insurance Company, CalAmerica Life Insurance Company, SunAmerica
National Life Insurance Company, SunAmerica Asset Management Corp., Imperial
Premium Finance, Inc., Resources Trust Company and four broker-dealers,
specialize in retirement savings and investment products and services, including
fixed and variable annuities, mutual funds, premium finance, broker-dealer and
trust administration services.
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 7% 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
15
<PAGE> 20
bonus, which is not anticipated to exceed .65% annually. Commissions paid to
registered representatives are not directly deducted from your Purchase Payment.
Furthermore, we may, from time to time, pay or allow additional promotional
incentives, in the form of cash or other compensation. In some instances, these
additional incentives may be offered only to certain broker-dealers that sell or
are expected to sell, during specified time periods, certain minimum amounts of
the contract, or other contracts offered by us.
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.
First SunAmerica relies significantly on computer systems and applications in
its daily operations. Many of these systems and applications are not presently
year 2000 compliant. First SunAmerica's business, financial condition and
results of operations could be materially and adversely affected by the failure
of First SunAmerica's systems and applications (and those operated by third
parties interfacing with First SunAmerica's systems and applications) to
properly operate or manage dates beyond the year 1999. First SunAmerica has a
coordinated plan to repair or replace these noncompliant systems and to obtain
similar assurances from third parties interfacing with First SunAmerica's
systems and applications and expects to significantly complete its plan by the
end of calendar year 1998, leaving 1999 for testing.
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.
The SEC also maintains a website (http://www.sec.gov) that contains the SAI,
materials incorporated by reference and other information filed electronically
with the SEC by First SunAmerica.
16
<PAGE> 21
SELECTED FINANCIAL INFORMATION
The following selected financial information of First SunAmerica Life Insurance
Company, insofar as it relates to each of the fiscal years 1993 - 1997, has been
derived from audited annual financial statements, including the balance sheets
at September 30, 1996 and 1997 and the related statements of income and of cash
flows for each of the three years in the period ended September 30, 1997 and the
notes thereto appearing elsewhere herein. The information for the three months
ended December 31, 1996 and 1997 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 statement 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,
------------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net investment income........................ $ 1,161 $ 1,892 $ 2,784 $ 2,798 $ 19,205 $ 636 $ 8,547
Net realized investment gains (losses)....... 1,932 445 (1,348) (539) 5,020 459 2,075
Fee income................................... 284 749 606 911 3,521 348 1,653
General and administrative expenses.......... (1,408) (1,319) (1,004) (1,480) (3,222) (357) (944)
Amortization of deferred acquisition costs... (220) -- (300) (500) (10,386) (302) (4,026)
Annual commissions........................... (44) (30) (33) (19) (195) (4) (112)
-------- -------- -------- -------- ---------- -------- ----------
PRETAX INCOME................................ 1,705 1,737 705 1,171 13,943 780 7,193
Income tax expense........................... (829) (655) (182) (448) (5,090) (316) (2,919)
-------- -------- -------- -------- ---------- -------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES................ 876 1,082 523 723 8,853 464 4,274
Cumulative effect of change in accounting for
income taxes............................... -- (725) -- -- -- -- --
-------- -------- -------- -------- ---------- -------- ----------
NET INCOME................................... $ 876 $ 357 $ 523 $ 723 $ 8,853 $ 464 $ 4,274
======== ======== ======== ======== ========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments.................................. $ 85,130 $ 78,928 $121,218 $153,237 $1,690,232 $172,392 $1,617,007
Variable annuity assets...................... 24,695 26,390 32,760 68,901 171,475 85,426 194,892
Deferred acquisition costs................... 2,540 5,651 6,491 12,127 96,516 14,627 93,087
Deferred income taxes receivable............. 1,031 886 -- -- -- -- --
Other assets................................. 3,876 2,282 2,688 2,603 26,267 2,956 21,224
-------- -------- -------- -------- ---------- -------- ----------
TOTAL ASSETS................................. $117,272 $114,137 $163,157 $236,868 $1,984,490 $275,401 $1,926,210
======== ======== ======== ======== ========== ======== ==========
Reserves for fixed annuity contracts......... $ 68,228 $ 66,881 $106,332 $140,613 $1,556,656 $162,771 $1,534,514
Variable annuity liabilities................. 24,695 26,390 32,760 68,901 171,475 85,426 194,892
Other reserves, payables and accrued
liabilities................................ 1,220 1,051 2,003 2,784 83,297 1,105 18,328
Deferred income taxes........................ -- -- 244 1,350 4,984 1,902 5,878
Shareholder's equity......................... 23,129 19,815 21,818 23,220 168,078 24,197 172,598
-------- -------- -------- -------- ---------- -------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY... $117,272 $114,137 $163,157 $236,868 $1,984,490 $275,401 $1,926,210
======== ======== ======== ======== ========== ======== ==========
</TABLE>
17
<PAGE> 22
MANAGEMENT DISCUSSION AND ANALYSIS
Management's discussion and analysis of financial condition and results of
operations of First SunAmerica Life Insurance Company ("First SunAmerica") for
the three years in the period ended September 30, 1997 follows. In connection
with the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995, First SunAmerica cautions readers regarding certain forward-
looking statements contained 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 (the "SEC"). Forward-looking statements are
statements not based on historical information and which relate to future
operations, strategies, financial results, or other developments. Statements
using verbs such as "expect," "anticipate," "believe" or words of similar import
generally involve forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent First SunAmerica's
beliefs concerning future levels of sales and redemptions of First SunAmerica's
products, investment spreads and yields, or the earnings and profitability of
First SunAmerica's activities.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond First SunAmerica's
control and many of which are subject to change. These uncertainties and
contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, First
SunAmerica. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to First SunAmerica specifically, such
as credit, volatility and other risks associated with First SunAmerica's
investment portfolio. 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 1995, 1996 AND 1997
NET INCOME totaled $8.9 million in 1997, compared with $0.7 million in 1996 and
$0.5 million in 1995. On March 31, 1997, SunAmerica Life Insurance Company, the
direct parent of First SunAmerica, completed the acquisition of all of the
outstanding stock of John Alden Life Insurance Company of New York ("JANY"). On
October 31, 1997, JANY was merged with and into First SunAmerica ("the JANY
merger"). On the date of acquisition, JANY had assets having an aggregate fair
value of $1.54 billion, composed primarily of invested assets totaling $1.40
billion. Liabilities assumed in this acquisition totaled $1.41 billion,
including $1.36 billion of fixed annuity reserves. An amount equal to the excess
of the purchase price over the fair value of the net assets acquired, amounting
to $103.7 million at September 30, 1997, is included in Deferred Acquisition
Costs in the balance sheet. The parent accounted for the acquisition by using
the purchase method of accounting and all purchase accounting adjustments were
pushed down to the accounts of JANY. First SunAmerica has accounted for the JANY
merger by using the pooling method from the date of acquisition. Accordingly,
the income statement includes the operating results of JANY only for the period
from April 1, 1997 through September 30, 1997. Consequently, operating results
for the fiscal years 1997, 1996 and 1995 are not comparable. On a pro forma
basis, using the historical operating results of JANY and assuming the merger
had been consummated on October 1, 1994, the beginning of the earliest period
presented, net income would have been $12.4 million in 1997, $6.7 million in
1996 and $5.0 million in 1995.
PRETAX INCOME totaled $13.9 million in 1997, $1.2 million in 1996 and $0.7
million in 1995. This $12.7 million improvement in 1997 over 1996 primarily
resulted from increased net investment income and net realized investment gains,
partially offset by increased amortization of deferred acquisition costs, which
were primarily related to the operations of JANY. The $0.5 million improvement
in 1996 over 1995 primarily resulted from a decline in net realized investment
losses, partially offset by increased general and administrative expenses.
NET INVESTMENT INCOME, which is the spread between the income earned on invested
assets and the interest paid on fixed annuities, totaled $19.2 million in 1997
and $2.8 million in each of 1996 and 1995. These amounts equal 2.24% on average
invested assets (computed on a daily basis) of $887.4 million in 1997, 2.08% on
average invested assets of $134.5 million in 1996 and 2.70% on average invested
assets of $103.2 million in 1995. On a pro forma basis, assuming the merger had
been consummated on October 1, 1994, net investment income on related average
invested assets would have been 2.05% in 1997, 1.83% in 1996 and 1.24% in 1995.
Net investment spreads include the effect of income earned on the excess of
average invested assets over average interest-bearing liabilities. This excess
amounted to $34.8 million in 1997, $13.8 million in 1996 and $17.6 million in
1995. The difference between First
18
<PAGE> 23
SunAmerica's yield on average invested assets and the rate paid on average
interest-bearing liabilities (the "Spread Difference") was 2.12% in 1997, 1.47%
in 1996 and 1.69% in 1995. On a pro forma basis, assuming the merger had been
consummated on October 1, 1994, the Spread Difference would have been 1.91% in
1997, 1.67% in 1996 and 1.12% in 1995.
Investment income (and the related yields on average invested assets) totaled
$65.6 million (7.41%) in 1997, compared with $10.0 million (7.40%) in 1996 and
$7.8 million (7.59%) in 1995. Investment income in 1997 increased primarily as a
result of higher levels of average invested assets resulting from the merger of
JANY with First SunAmerica. The higher yield in 1995 reflected the effects of
both higher short-term interest rates and extension fee income earned on certain
bonds. On a pro forma basis, assuming the merger had been consummated on October
1, 1994, the yields on related average invested assets would have been 7.37% in
1997, 7.41% in 1996 and 7.28% in 1995.
Total interest expense equaled $46.4 million in 1997, $7.2 million in 1996 and
$5.0 million in 1995. The average rate paid on fixed annuity contracts was 5.28%
in 1997, 5.93% in 1996 and 5.90% in 1995. Interest expense in 1997 increased
primarily as a result of the higher levels of average fixed annuity reserves
resulting from the JANY merger. Fixed annuity contracts averaged $1.54 billion
during 1997, compared with $120.6 million during 1996 and $85.5 million during
1995. On a pro forma basis, assuming the merger had been consummated on October
1, 1994, the average rate paid on all interest-bearing liabilities would have
been 5.45% in 1997, 5.74% in 1996 and 6.16% in 1995.
GROWTH IN AVERAGE INVESTED ASSETS since 1995 primarily reflects the impact of
the merger of JANY with and into First SunAmerica. As part of the merger on
October 31, 1997, invested assets increased by $1.50 billion. Average invested
assets also increased as a result of the sales of First SunAmerica's fixed-rate
products, consisting of fixed annuity premiums (including those for the fixed
accounts of variable annuity products). Fixed annuity premiums totaled $131.7
million in 1997, compared with $45.4 million in 1996 and $51.7 million in 1995.
These premiums include premiums for the fixed accounts of variable annuities
totaling $68.9 million, $41.2 million and $2.9 million, respectively, which have
increased primarily because of increased sales of First SunAmerica's Polaris
product and greater inflows into the one-year fixed account of that product.
First SunAmerica has observed that many purchasers of its variable annuity
contracts allocate new premiums to the one-year fixed account and concurrently
elect the option to dollar cost average into one or more variable funds.
Accordingly, First SunAmerica anticipates that it will see a large portion of
these premiums transferred into the variable funds.
NET REALIZED INVESTMENT GAINS totaled $5.0 million in 1997, compared to $0.5
million of losses in 1996 and $1.3 million of losses in 1995. Net realized
investment gains in 1997 include impairment writedowns of $0.1 million. Net
realized investment losses in 1996 include impairment writedowns of $0.1
million. Therefore, net gains from sales of investments totaled $5.1 million in
1997 and net losses from sales of investments totaled $0.4 million in 1996.
There were no impairment writedowns in 1995.
First SunAmerica sold invested assets, principally bonds and notes, aggregating
$734.2 million, $80.0 million and $57.7 million in 1997, 1996 and 1995,
respectively. Sales of investments result from the active management of First
SunAmerica's investment portfolio. Because sales of investments are made in both
rising and falling interest rate environments, net gains and losses from sales
of investments fluctuate from period to period, and represent 0.32%, 0.27% and
1.31% of average invested assets for 1997, 1996 and 1995, respectively. Active
portfolio management involves the ongoing evaluation of assets sectors,
individual securities within the investment portfolio and the reallocation of
investments from sectors that are perceived to be relatively overvalued to
sectors that are perceived to be relatively undervalued. The intent of First
SunAmerica's active portfolio management is to maximize total returns on the
investment portfolio, taking into account credit and interest-rate risk.
VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $1.7 million
in 1997, $0.7 million in 1996 and $0.4 million in 1995. These increased fees
reflect growth in average variable annuity assets, principally due to the
receipt of variable annuity premiums, increased market values and net exchanges
into the separate accounts from the fixed accounts of variable annuity
contracts, partially offset by surrenders. Variable annuity assets averaged
$111.8 million during 1997, $46.2 million during 1996 and $27.8 million during
1995. Variable annuity premiums, which exclude premiums allocated to the fixed
accounts of variable annuity products, totaled $56.3 million in 1997, $28.6
million in 1996 and $5.9 million in 1995. Sales of variable annuity products
(which include premiums allocated to the fixed accounts) ("Variable Annuity
Product Sales") amounted to $125.2 million, $69.8 million and $8.8 million in
1997, 1996 and 1995, respectively. Increases in Variable Annuity Product Sales
are due, in part, to market share gains through enhanced distribution efforts
and growing consumer demand for flexible retirement savings products that offer
a variety of equity, fixed income and guaranteed fixed account investment
choices. 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
19
<PAGE> 24
future. Also, recent administration budget proposals include the proposed
taxation of exchanges involving variable annuity contracts and reallocation
within variable annuity contracts and certain other proposals relating to
annuities (see "Regulation").
SURRENDER CHARGES on fixed and variable annuities totaled $1.8 million in 1997,
compared with $221,000 in 1996 and $194,000 in 1995. Increased surrender charges
in 1997 reflect the JANY merger. Surrender charges generally are assessed on
annuity withdrawals at declining rates during the first seven years of an
annuity contract. Withdrawal payments, which include surrenders and lump-sum
annuity benefits, totaled $93.5 million (including $72.9 million attributable to
the merger) in 1997, compared with $12.7 million in 1996 and $17.7 million in
1995. These payments represent 9.87% (10.80% of average fixed annuity reserves
associated with the merger), 8.06% and 16.93%, respectively, of average fixed
and variable annuity reserves. Withdrawals include variable annuity withdrawals
from the separate accounts totaling $5.3 million in 1997, $2.8 million in 1996
and $3.6 million in 1995. Higher withdrawal payments in 1997 are due to the
significant growth in First SunAmerica's annuity reserves. Higher withdrawals in
1995 compared to 1996 are due to policies coming off surrender charge
restrictions. Management anticipates that withdrawal rates will gradually
increase in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $3.2 million in 1997, compared with
$1.5 million in 1996 and $1.0 million in 1995. General and administrative
expenses remain closely controlled through a company-wide cost containment
program and continue to represent less than 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $10.4 million in 1997,
compared with $0.5 million in 1996 and $0.3 million in 1995. The increase in
amortization primarily reflects the amortization of the deferred acquisition
costs attributable to the JANY merger, which aggregated $9.2 million in 1997.
Amortization has also increased during the three-year period due to additional
fixed and variable annuity sales and the subsequent amortization of related
deferred commissions and other direct selling costs.
ANNUAL COMMISSIONS represent renewal commissions, including those paid quarterly
in arrears to maintain the persistency of certain of First SunAmerica's annuity
contracts. Annual commissions totaled $195,000 in 1997, $19,000 in 1996 and
$33,000 in 1995. The increase in 1997 is primarily attributable to the annuity
contracts acquired in the merger. Based on current sales, First SunAmerica
estimates that such annual commissions will increase in future periods.
INCOME TAX EXPENSE totaled $5.1 million in 1997, compared with $0.4 million in
1996 and $0.2 million in 1995, representing effective tax rates of 37% in 1997,
38% in 1996 and 26% in 1995. The differing tax rates for 1996 and 1995 reflect
changes in state income tax expense.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased to $168.1 million at September 30, 1997 from
$23.2 million at September 30, 1996, primarily due to $130.0 million of
additional paid-in capital resulting from the JANY merger. Shareholder's equity
also increased due to $8.9 million of net income recorded in 1997 and $5.8
million of net unrealized gains on debt and equity securities available for sale
(credited directly to shareholder's equity), versus $0.2 million of net
unrealized losses on such securities recorded at September 30, 1996.
INVESTED ASSETS at year end totaled $1.69 billion in 1997, compared with $153.2
million at year-end 1996. This increase primarily resulted from the JANY merger
(with related invested assets aggregating $1.50 billion at the date of the
merger). Sales of fixed annuities also contributed to this increase in invested
assets.
The Company manages most of its invested assets internally. The Company's
general investment philosophy is to hold fixed-rate assets for long-term
investment. Thus, it does not have a trading portfolio. However, First
SunAmerica has determined that all of its portfolio of bonds and notes (the
"Bond Portfolio") is available to be sold in response to changes in market
interest rates, changes in relative value of asset sectors and individual
securities, changes in prepayment risk, changes in the credit quality outlook
for certain securities, First SunAmerica's need for liquidity and other similar
factors.
THE BOND PORTFOLIO, which comprises 88% of First SunAmerica's total investment
portfolio (at amortized cost), had an aggregate fair value that exceeded its
amortized cost by $40.1 million at September 30, 1997. At September 30, 1996,
the amortized cost exceeded the fair value of the Bond Portfolio by $0.5
million. The net unrealized gains on the Bond Portfolio since September 30, 1996
reflect the increased size of the Portfolio and the lower prevailing interest
rates at September 30, 1997 compared to those at September 30, 1996.
At September 30, 1997, the Bond Portfolio (at amortized cost) included $1.43
billion of bonds rated by Standard & Poor's Corporation ("S&P"), Moody's
Investors Service ("Moody's"), Duff & Phelps Credit Rating Co. ("DCR"), Fitch
Investors Service, L.P. ("Fitch") or the National Association of Insurance
Commissioners ("NAIC"), and $29.0 million of bonds rated by First SunAmerica
pursuant to statutory ratings guidelines established by the NAIC. At September
30, 1997, approximately $1.37 billion of the
20
<PAGE> 25
Bond Portfolio was investment grade, including $522.8 million of U.S.
government/agency securities and mortgage-backed securities ("MBSs").
At September 30, 1997, the Bond Portfolio included $91.1 million (at amortized
cost with a fair value of $94.4 million) of bonds that were not investment
grade. Based on their September 30, 1997 amortized cost, these
non-investment-grade bonds accounted for 4.6% of First SunAmerica's total assets
and 5.5% of its invested assets.
Non-investment-grade securities generally provide higher yields and involve
greater risks than investment-grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. The
Company had no material concentrations of non-investment-grade securities at
September 30, 1997. The following table summarizes First SunAmerica's rated
bonds by rating classification as of September 30, 1997.
21
<PAGE> 26
RATED BONDS BY RATING CLASSIFICATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
ISSUES NOT RATED BY S&P/MOODY'S/
ISSUES RATED BY S&P/MOODY'S/DCR/FITCH DCR/FITCH, BY NAIC CATEGORY TOTAL
--------------------------------------------------- ------------------------------------- ------------------------
S&P/(MOODY'S)/ ESTIMATED NAIC ESTIMATED PERCENT OF
[DCR]/[FITCH] AMORTIZED FAIR CATEGORY AMORTIZED FAIR AMORTIZED INVESTED
CATEGORY(1) COST VALUE (2) COST VALUE COST ASSETS(3)
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA to A-
(Aaa to A3)
[AAA to A-]
[AAA to A-]............ $ 935,704 $ 961,799 1 $173,912 $178,004 $1,109,616 67.25%
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
[BBB+ to BBB-]......... 237,140 243,009 2 21,226 22,021 258,366 15.66
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
[BB+ to BB-]........... 993 1,022 3 0 0 993 0.06
B+ to B-
(B1 to B3)
[B+ to B- ]
[B+ to B- ]............ 88,148 91,398 4 1,989 2,000 90,137 5.46
CCC+ to C
(Caa to C)
[CCC]
[CCC+ to C-]........... 0 0 5 0 0 0 0.00
C1 to D
[DD]
[D].................... 0 0 6 0 0 0 0.00
---------- ---------- -------- -------- ----------
Total rated issues....... $1,261,985 $1,297,228 $197,127 $202,025 $1,459,112
========== ========== ======== ======== ==========
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --- ----------------
TOTAL
----------
ESTIMATED
FAIR
VALUE
----------
<S> <C> <C>
$1,139,803
265,030
1,022
93,398
0
0
----------
$1,499,253
==========
- -------------------------
</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. The NAIC
categories include $29.0 million (at amortized cost) of assets that were
rated by First SunAmerica pursuant to applicable NAIC rating guidelines.
(3) At amortized cost.
SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio and
their amortized cost aggregated $144.2 million at September 30, 1997. Secured
Loans are senior to subordinated debt and equity, and are secured by assets of
the issuer. At September 30, 1997, Secured Loans consisted of loans to 65
borrowers spanning 20 industries, with 20% of these assets (at amortized cost)
concentrated in utilities, 17% concentrated in financial institutions and 11%
concentrated in aerospace-defense. No other industry constituted more than 10%
of these assets.
While the trading market for First SunAmerica's privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled First SunAmerica to improve its
investment yield. As a result of restrictive financial covenants, these Secured
Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of loss
upon default for these Secured Loans is mitigated by such financial covenants
and the collateral values underlying the Secured Loans. The Company's Secured
Loans are rated by S&P, Moody's, DCR, Fitch, the NAIC or by First SunAmerica,
pursuant to comparable statutory ratings guidelines established by the NAIC.
MORTGAGE LOANS aggregated $131.1 million at September 30, 1997 and consisted of
123 commercial first mortgage loans with an average loan balance of
approximately $1.1 million, collateralized by properties located in 29 states.
Approximately 58% of this portfolio was retail, 21% was office, 9% was
industrial, 9% was multifamily residential and 3% was other types. At September
30, 1997, approximately 13% and 12% of this portfolio were secured by properties
located in Florida and New York, respectively, and no more than 10% of this
portfolio was secured by properties located in any other single state. At
September 30, 1997, there were no mortgage loans with outstanding balances of
$10 million or more. Approximately 12.3% of the mortgage loan portfolio
consisted of loans with balloon payments due
22
<PAGE> 27
before October 1, 2001. During 1997, 1996 and 1995, loans delinquent by more
than 90 days, foreclosed loans and restructured loans have not been significant
in relation to the total mortgage loan portfolio.
At September 30, 1997, all mortgage loans were seasoned loans underwritten to
First SunAmerica's standards and purchased at or near par from other financial
institutions. Such loans generally have higher average interest rates than loans
that could be originated today.
ASSET-LIABILITY MATCHING is utilized by First SunAmerica to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed-rate investments that generate predictable rates of return. The Company
does not have a specific target rate of return. Instead, its rates of return
vary over time depending on the current interest rate environment, the slope of
the yield curve, the spread at which fixed rate investments are priced over the
yield curve, and general economic conditions. Its portfolio strategy is
constructed with a view to achieve adequate risk-adjusted returns consistent
with its investment objectives of effective asset-liability matching, liquidity
and safety. The Company's fixed-rate products incorporate surrender charges or
other restrictions in order to encourage persistency. Approximately 96% of First
SunAmerica's fixed annuity reserves had surrender penalties or other
restrictions at September 30, 1997.
As part of its asset-liability matching discipline, First SunAmerica conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, First SunAmerica can measure the potential gain or
loss in fair value of its interest-rate sensitive instruments and seek to
protect its economic value and achieve a predictable spread between what it
earns on its invested assets and what it pays on its liabilities by designing
its fixed-rate products and conducting its investment operations to closely
match the duration of the fixed-rate assets to that of its fixed-rate
liabilities. The Company's fixed-rate assets include: cash and short-term
investments; bonds and notes; and mortgage loans. At September 30, 1997, these
assets had an aggregate fair value of $1.69 billion with a duration of 4.0. At
September 30, 1997, First SunAmerica's fixed annuity liabilities had an
aggregate fair value (determined by discounting future contractual cash flows by
related market rates of interest) of $1.49 billion with a duration of 3.3. The
Company's potential exposure due to a relative 10% increase in interest rates
prevalent at September 30, 1997 is a loss of approximately $9.2 million in fair
value of its fixed-rate assets that is not offset by an increase in the fair
value of its fixed-rate liabilities. Because First SunAmerica actively manages
its assets and liabilities and has strategies in place to minimize its exposure
to loss as interest rate changes occur, it expects that actual losses would be
less than the estimated potential loss.
Duration is a common option-adjusted measure for the price sensitivity of a
fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points, recognizing the changes in cash flows
resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that First
SunAmerica will continue to utilize its existing strategies of pricing its fixed
annuity products, allocating its available cash flow amongst its various
investment portfolio sectors and maintaining sufficient levels of liquidity.
Because the calculation of duration involves estimation and incorporates
assumptions, potential changes in portfolio value indicated by the portfolio's
duration will likely be different from the actual changes experienced under
given interest rate scenarios, and the differences may be material.
The Company also seeks to provide liquidity from time to time by using reverse
repurchase agreements ("Reverse Repos") and by investing in MBSs. It also seeks
to enhance its spread income by using Reverse Repos. Reverse Repos involve a
sale of securities and an agreement to repurchase the same securities at a later
date at an agreed upon price and are generally over-collateralized. MBSs are
generally investment-grade securities collateralized by large pools of mortgage
loans. MBSs generally pay principal and interest monthly. The amount of
principal and interest payments may fluctuate as a result of prepayments of the
underlying mortgage loans.
There are risks associated with some of the techniques First SunAmerica uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with First SunAmerica's Reverse Repos
is counterparty risk. The Company believes, however, that the counterparties to
its Reverse Repos are financially responsible and that the counterparty risk
associated with those transactions is minimal. The primary risk associated with
MBSs is that a changing interest rate environment might cause prepayment of the
underlying obligations at speeds slower or faster than anticipated at the time
of their purchase. As part of its decision to purchase an MBS, First SunAmerica
assesses the risk of prepayment by analyzing the security's projected
performance over an array of interest-rate scenarios. Once an MBS is purchased,
First SunAmerica monitors its actual prepayment experience monthly to reassess
the relative attractiveness of the security with the intent to maximize total
return.
INVESTED ASSETS EVALUATION routinely includes a review by First SunAmerica of
its portfolio of debt securities.
23
<PAGE> 28
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying values of such investments at
least quarterly to determine whether specific investments should be placed on a
nonaccrual basis and to determine declines in value that may be other than
temporary. In making these reviews for bonds, management principally considers
the adequacy of any collateral, compliance with contractual covenants, the
borrower's recent financial performance, news reports and other externally
generated information concerning the creditor's affairs. In the case of publicly
traded bonds, management also considers market value quotations, if available.
For mortgage loans, management generally considers information concerning the
mortgaged property and, among other things, factors impacting the current and
expected payment status of the loan and, if available, the current fair value of
the underlying collateral.
The carrying values of bonds that are determined to have declines in value that
are other than temporary are reduced to net realizable value and no further
accruals of interest are made. The valuation allowances on mortgage loans are
based on losses expected by management to be realized on transfers of mortgage
loans to real estate, on the disposition and settlement of mortgage loans and on
mortgage loans that management believes may not be collectible in full. Accrual
of interest is suspended when principal and interest payments on mortgage loans
are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to the
payment of principal or interest, totaled $2.3 million at September 30, 1997 (at
amortized cost after impairment writedowns, with a fair value of $2.3 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 September 30, 1997, approximately $1.40 billion of
First SunAmerica's Bond Portfolio had an aggregate unrealized gain of $40.7
million, while approximately $57.3 million of the Bond Portfolio had an
aggregate unrealized loss of $0.5 million. In addition, First SunAmerica's
investment portfolio currently provides approximately $14.8 million of monthly
cash flow from scheduled principal and interest payments. Historically, cash
flows from operations and from the sale of First SunAmerica's annuity products
have been sufficient in amount to satisfy First SunAmerica's liquidity needs.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, 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. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on 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.
The Company relies significantly on computer systems and applications in its
daily operations. Many of these systems are not presently year 2000 compliant.
The Company's business, financial condition and results of operations could be
materially and adversely affected by the failure of First SunAmerica's systems
and applications (and those operated by third parties interfacing with First
SunAmerica's systems and applications) to properly operate or manage dates
beyond the year 1999. The Company's Parent has a coordinated plan to repair or
replace these noncompliant systems, and to obtain similar assurances from third
parties interfacing with First SunAmerica's systems and applications, and
expects to significantly complete its plan by the end of the calendar year 1998.
The cost of these changes will be substantially borne by First SunAmerica's
affiliates and will not have a material impact on First SunAmerica's results of
operations.
RESULTS OF OPERATIONS FOR THE FIRST THREE MONTHS OF FISCAL 1998
NET INCOME totaled $4.3 million for the three months ended December 31, 1997
("the First Quarter 1998"), compared with net income of $0.5 million for the
three months ended December 31, 1996 ("the First Quarter 1997"). On a pro forma
basis, using the historical operating results of JANY and assuming the merger
had been consummated on October 1, 1996, the beginning of the prior-year period
discussed herein, net income would have been $2.5 million for the First Quarter
1997.
PRETAX INCOME totaled $7.2 million in the First Quarter 1998, compared with
pretax income of $0.8 million in the First Quarter 1997. This $6.4 million
improvement primarily resulted from increased net investment income, net
realized investment gains and variable annuity fees,
24
<PAGE> 29
partially offset by increased amortization of deferred acquisition costs, which
are primarily related to the operations of JANY.
NET INVESTMENT INCOME increased to $8.5 million in the First Quarter 1998 from
$0.6 million in the First Quarter 1997. These amounts equal 2.17% on average
invested assets (computed on a daily basis) of $1.58 billion in the First
Quarter 1998 and 1.58% on average invested assets of $160.5 million in the First
Quarter 1997. As a result of the merger, net investment income as a percent of
average invested assets has increased. On a pro forma basis, assuming the merger
had been consummated on October 1, 1996, net investment income on related
average invested assets would have totaled $7.7 million, representing 1.96% on
pro forma average invested assets of $1.56 billion, for the First Quarter 1997.
The excess of average invested assets over average interest-bearing liabilities
amounted to $30.9 million in the First Quarter 1998 and $10.8 million in the
First Quarter 1997. The Spread Difference was 2.06% in the First Quarter 1998
and 1.18% in the First Quarter 1997. On a pro forma basis, assuming the merger
had been consummated on October 1, 1996, the Spread Difference would have been
1.78% for the First Quarter 1997.
Investment income (and the related yields on average invested assets) totaled
$29.9 million (7.57%) in the First Quarter 1998, compared with $2.9 million
(7.21%) in the First Quarter 1997. Investment income increased primarily because
of the higher levels of average invested assets resulting from the merger of
JANY with First SunAmerica. On a pro forma basis, assuming the merger had been
consummated on October 1, 1996, investment income would have been $28.8 million
(7.37%) for the First Quarter 1997. Investment yields were higher in the First
Quarter 1998 because a reapportionment of the portfolio resulted in the
acquisition of higher-yielding bonds.
Total interest expense equaled $21.3 million in the First Quarter 1998 and $2.3
million in the First Quarter 1997. The average rate paid on all interest-bearing
liabilities was 5.51% in the First Quarter 1998 and 6.03% in the First Quarter
1997. Interest-bearing liabilities averaged $1.55 billion in the First Quarter
1998 and $149.7 million in the First Quarter 1997. On a pro forma basis,
assuming the merger had been consummated on October 1, 1996, the average rate
paid on interest-bearing liabilities would have been 5.59% for the First Quarter
1997.
NET REALIZED INVESTMENT GAINS totaled $2.1 million in the First Quarter 1998,
compared with $0.5 million in the First Quarter 1997. There were no impairment
writedowns in the First Quarters of 1998 and 1997.
The Company sold invested assets, principally bonds and notes, aggregating
$228.3 million and $7.4 million in the First Quarter 1998 and the First Quarter
1997, respectively. Sales of investments result from the active management of
First SunAmerica's investment portfolio. Because sales of investments are made
in both rising and falling interest rate environments, net gains and losses from
sales of investments fluctuate from period to period, and represent 0.13% and
0.29% of average invested assets for the First Quarter 1998 and the First
Quarter 1997, respectively.
VARIABLE ANNUITY FEES totaled $0.7 million in the First Quarter 1998 and $0.3
million in the First Quarter 1997. These increased fees reflect growth in
average variable annuity assets, principally due to the receipt of variable
annuity premiums, increased market values and net exchanges into the separate
accounts from the fixed accounts of variable annuity contracts, partially offset
by surrenders. Variable annuity assets averaged $180.9 million during the First
Quarter 1998 and $77.6 million during the First Quarter 1997. Variable Annuity
Product Sales amounted to $23.6 million in the First Quarter 1998 and $37.1
million in the First Quarter 1997. The decline in Variable Annuity Product Sales
may be attributed to more restrictive fixed-rate promotions in the First Quarter
1998 than in the First Quarter 1997.
SURRENDER CHARGES on fixed and variable annuities totaled $1.0 million in the
First Quarter 1998, compared with $56,000 in the First Quarter 1997. Withdrawal
payments totaled $57.7 million (including $51.5 million attributable to the
merger) in the First Quarter 1998 and $3.8 million in the First Quarter 1997.
These payments represent 13.6% (15.3% of average fixed annuity reserves
associated with the merger) and 7.0%, respectively, of the aggregate of average
fixed and variable annuity reserves. Withdrawals include variable annuity
payments from the separate accounts totaling $2.0 million in the First Quarter
1998 and $1.3 million in the First Quarter 1997, and represent 4.4% and 7.0%,
respectively, of average variable annuity liabilities. Approximately 92% of
First SunAmerica's fixed annuity reserves had surrender penalties or other
restrictions at December 31, 1997. Management anticipates that withdrawal rates
will gradually increase in the foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $0.9 million in the First Quarter
1998 and $0.4 million in the First Quarter 1997. Expenses remain closely
controlled through a company-wide cost containment program and continue to
represent less than 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $4.0 million in the First
Quarter 1998, compared with $0.3 million in the First Quarter 1997. The increase
in amortization primarily reflects the amortization of the deferred acquisition
costs attributable to the merger, which aggregated $3.5 million. Amortization
has also increased due to additional fixed and variable annuity sales and the
25
<PAGE> 30
subsequent amortization of related deferred commissions and other direct selling
costs.
ANNUAL COMMISSIONS totaled $112,000 in the First Quarter 1998 and $4,000 in the
First Quarter 1997. This increase is primarily attributable to the annuity
contracts acquired in the merger. Based on current sales, First SunAmerica
estimates that such annual commissions will increase in future periods.
INCOME TAX EXPENSE totaled $2.9 million in the First Quarter 1998, compared with
$0.3 million in the First Quarter 1997, representing effective annualized tax
rates of 41% in both periods.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 1997
SHAREHOLDER'S EQUITY increased 2.7% to $172.6 million at December 31, 1997 from
$168.1 million at September 30, 1997, primarily due to the $4.3 million of net
income recorded in the First Quarter 1998 and the $0.2 million increase in net
unrealized gains on debt and equity securities available for sale.
TOTAL ASSETS decreased by 2.9% to $1.93 billion at December 31, 1997 from $1.98
billion at September 30, 1997, principally due to a $73.2 million decrease in
invested assets, partially offset by a $23.4 million increase in variable
annuity assets.
INVESTED ASSETS at December 31, 1997 totaled $1.62 billion, compared with $1.69
billion at September 30, 1997. This 4.3% decrease primarily resulted from the
$34.8 million payment to Bankers Life Insurance Company in connection with the
sale of JANY's life and accident and health business and from a $22.1 million
decline in the reserve for fixed annuities.
THE BOND PORTFOLIO, which comprises 87% of First SunAmerica's total investment
portfolio (at amortized cost), had an aggregate fair value that exceeded its
amortized cost by $39.4 million at December 31, 1997. At September 30, 1997, the
fair value of the Bond Portfolio exceeded its amortized cost by $40.1 million.
At December 31, 1997, the Bond Portfolio (at amortized cost) included $1.34
billion of bonds rated by S&P, Moody's, DCR, Fitch or under comparable statutory
rating guidelines established by the NAIC, and $28.1 million of bonds rated by
First SunAmerica pursuant to statutory ratings guidelines established by the
NAIC. At December 31, 1997, approximately $1.28 billion of the Bond Portfolio
(at amortized cost) was investment grade, including $484.0 million of U.S.
government/agency securities and MBSs.
At December 31, 1997, the Bond Portfolio included $93.0 million (at amortized
cost with a fair value of $95.7 million) of bonds that were not rated investment
grade. Based on their December 31, 1997 amortized cost, these
non-investment-grade bonds accounted for 4.8% of First SunAmerica's total assets
and 5.9% of invested assets. The Company had no material concentrations of
non-investment-grade securities at December 31, 1997.
SECURED LOANS are included in the Bond Portfolio and their amortized cost
aggregated $131.4 million at December 31, 1997. At December 31, 1997, Secured
Loans consisted of $118.6 million of publicly traded securities and $12.8
million of privately traded securities. These secured loans are composed of
loans to 66 borrowers spanning 19 industries, with 19% of these assets (at
amortized cost) concentrated in utilities, 13% concentrated in financial
institutions, 12% concentrated in aerospace-defense and 11% concentrated in
technology. No other industry constituted more than 8% of these assets.
MORTGAGE LOANS aggregated $130.0 million at December 31, 1997 and consisted of
123 commercial first mortgage loans with an average loan balance of
approximately $1.1 million, collateralized by properties located in 29 states.
Approximately 57.6% of this portfolio was retail, 21.1% was office, 9.5% was
industrial and 11.8% was other types. At December 31, 1997, approximately 13%
and 12% of this portfolio were secured by properties located in Florida and New
York, respectively, and no more than 10% of this portfolio was secured by
properties located in any other single state. At December 31, 1997, there were
no mortgage loans with outstanding balances of $10 million or more, and
approximately 14.2% of the mortgage loan portfolio consisted of loans with
balloon payments due before January 1, 2001. During the three months ended
December 31, 1997, loans delinquent by more than 90 days, foreclosed loans and
restructured loans have not been significant in relation to the total mortgage
loan portfolio.
At December 31, 1997, all mortgage loans were seasoned loans underwritten to
First SunAmerica's standards and purchased at or near par from other financial
institutions.
At December 31, 1997, First SunAmerica's fixed-rate assets had an aggregate fair
value of $1.62 billion with a duration of 3.9. At December 31, 1997, First
SunAmerica's fixed annuity liabilities had an aggregate fair value (determined
by discounting future contractual cash flows by related market rates of
interest) of $1.47 billion with a duration of 3.4. The Company's potential
exposure due to a relative 10% increase in interest rates prevalent at December
31, 1997 is a loss of approximately $7.9 million in fair value of its fixed-rate
assets that is not offset by an increase in the fair value of its fixed-rate
liabilities. Because First SunAmerica actively manages its assets and
liabilities and has strategies in place to maintain its exposure to loss as
interest rate changes occur, it expects
26
<PAGE> 31
that actual losses would be less than the estimated potential loss.
DEFAULTED INVESTMENTS, comprising all investments that are in default as to the
payment of principal or interest, totaled $2.3 million at December 31, 1997 and
September 30, 1997 (at amortized cost, with a fair value of $2.3 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, 1997, approximately $1.30 billion of First
SunAmerica's Bond Portfolio had an aggregate unrealized gain of $44.2 million,
while approximately $67.2 million of the Bond Portfolio had an aggregate
unrealized loss of $4.8 million. In addition, First SunAmerica's investment
portfolio currently provides approximately $15.1 million of monthly cash flow
from scheduled principal and interest payments.
PROPERTIES
First SunAmerica's executive offices and its principal office are in leased
premises at 733 Third Avenue, New York, New York 10017. First SunAmerica,
through an affiliate, also leases office space in Los Angeles, Woodland Hills
and Torrance, California.
First SunAmerica believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of its business.
27
<PAGE> 32
DIRECTORS AND EXECUTIVE OFFICERS
First SunAmerica's directors and officers as of February 28, 1998 are listed
below:
<TABLE>
<CAPTION>
OTHER POSITIONS AND
YEAR OTHER BUSINESS
PRESENT ASSUMED EXPERIENCE WITHIN
NAME AGE POSITION(S) POSITION(S) LAST FIVE YEARS**
==============================================================================================================================
<S> <C> <C> <C> <C>
Eli Broad* 64 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
- ------------------------------------------------------------------------------------------------------------------------------
Jay S. Wintrob* 40 Executive Vice President of First 1991 (Joined SAI in 1987)
SunAmerica
Vice Chairman of SAI 1995
- ------------------------------------------------------------------------------------------------------------------------------
James R. Belardi* 40 Senior Vice President of First 1992 Vice President and Treasurer (Jointed SAI in
SunAmerica 1986)
Executive Vice President of SAI 1995
- ------------------------------------------------------------------------------------------------------------------------------
Jana W. Greer* 45 Senior Vice President of First 1991 (Jointed SAI in 1974)
SunAmerica and SAI
- ------------------------------------------------------------------------------------------------------------------------------
Peter McMillan, 40 Executive Vice President and Chief 1994 Senior Vice President, SunAmerica Investments,
III* Investment Officer of SunAmerica Inc.
Investments, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
Scott L. Robinson* 51 Senior Vice President and Treasurer 1991 (Joined SAI in 1978)
of First SunAmerica
Senior Vice President and Controller
of SAI
- ------------------------------------------------------------------------------------------------------------------------------
James W. Rowan* 35 Senior Vice President of First 1996 Vice President
SunAmerica and SAI Assistant to the Chairman
Senior Vice President, Security Pacific Corp.
- ------------------------------------------------------------------------------------------------------------------------------
Lorin M. Fife* 44 Senior Vice President, General 1994 Vice President and General Counsel - Regulatory
Counsel and Assistant Secretary of Affairs of SAI
First SunAmerica
Senior Vice President and General 1995 Vice President and Associate General Counsel of
Counsel - Regulatory Affairs of SAI SAI (Joined SAI in 1989)
- ------------------------------------------------------------------------------------------------------------------------------
Susan L. Harris* 41 Senior Vice President and Secretary 1994 Vice President, General Counsel - Corporate
of First SunAmerica Affairs and Secretary of SAI
Senior Vice President, General 1995 Vice President, Associate General Counsel and
Counsel - Corporate Affairs and Secretary of SAI (Joined SAI in 1985)
Secretary of SAI
- ------------------------------------------------------------------------------------------------------------------------------
N. Scott Gillis 44 Senior Vice President and Controller 1994 Vice President and Controller, SunAmerica Life
of First SunAmerica Companies
Vice President of SAI 1997 (Joined SAI in 1985)
- ------------------------------------------------------------------------------------------------------------------------------
Edwin R. Reoliquio 40 Senior Vice President and Chief 1995 Vice President and Actuary, SunAmerica Life
Actuary of First SunAmerica Companies
- ------------------------------------------------------------------------------------------------------------------------------
Victor E. Akin 33 Senior Vice President of First 1996 Vice President, SunAmerica Life Companies
SunAmerica
Director, SunAmerica Life Companies
Manager, SunAmerica Life Companies
Actuary, Milliman & Robertson
Consultant, Chalke Inc.
- ------------------------------------------------------------------------------------------------------------------------------
Scott H. Richland 35 Vice President 1994 Vice President and Treasurer of SAI
Senior Vice President of SAI 1997 Vice President and Asst. Treasurer of SAI
Asst. Treasurer of SAI
Director, SunAmerica Investments, Inc.
(Joined SAI in 1990)
- ------------------------------------------------------------------------------------------------------------------------------
David W. Ferguson 44 Director 1987 Partner, Davis Polk & Wardwell
- ------------------------------------------------------------------------------------------------------------------------------
Thomas A. Harnett 73 Director 1987 Partner, Lane & Mitterdorf, LLP
- ------------------------------------------------------------------------------------------------------------------------------
Margery K. Neale 38 Director 1996 Partner, Shereff, Friedman, Hoffman & Goodman,
LLP
- ------------------------------------------------------------------------------------------------------------------------------
Lester Pollack 64 Director 1987 Chief Executive Officer, Centre Partners, L.P.
General Partner, Lazard Freres & Co.
Senior Managing Director, Corporate Partners,
L.P.
- ------------------------------------------------------------------------------------------------------------------------------
Richard D. Rohr 71 Director 1987 Partner, Bodman, Longley & Dahling
==============================================================================================================================
<CAPTION>
NAME FROM-TO
- ------------------------------
- ----------------------------------------
<S> <C>
Eli Broad*
- --------------------------------------------------
Jay S. Wintrob*
- ------------------------------------------------------------
James R. Belardi* 1989-1992
- ----------------------------------------------------------------------
Jana W. Greer*
- --------------------------------------------------------------------------------
Peter McMillan, 1989-1994
III*
- ------------------------------------------------------------------------------------------
Scott L. Robinson*
- ----------------------------------------------------------------------------------------------------
James W. Rowan* 1993-1995
1992
1986-1992
- --------------------------------------------------------------------------------------------------------------
Lorin M. Fife* 1994-1995
1989-1994
- ------------------------------------------------------------------------------------------------------------------------
Susan L. Harris* 1994-1995
1989-1994
- ------------------------------------------------------------------------------------------------------------------------------
N. Scott Gillis 1989-1994
- ------------------------------------------------------------------------------------------------------------------------------
Edwin R. Reoliquio 1990-1995
- ------------------------------------------------------------------------------------------------------------------------------
Victor E. Akin 1995-1996
1994-1995
1993-1994
1992-1993
1991-1992
- ------------------------------------------------------------------------------------------------------------------------------
Scott H. Richland 1995-1997
1994-1995
1993-1994
1990-1993
- ------------------------------------------------------------------------------------------------------------------------------
David W. Ferguson 1980 to
present
- ------------------------------------------------------------------------------------------------------------------------------
Thomas A. Harnett 1989 to
present
- ------------------------------------------------------------------------------------------------------------------------------
Margery K. Neale 1990 to
present
- ------------------------------------------------------------------------------------------------------------------------------
Lester Pollack 1986 to
present
1986 to
present
1988 to
present
- ------------------------------------------------------------------------------------------------------------------------------
Richard D. Rohr 1958 to
present
==============================================================================================================================
</TABLE>
* Also serves as a director.
** Unless otherwise indicated, offices and positions are with SunAmerica Inc.
28
<PAGE> 33
EXECUTIVE COMPENSATION
All of the executive officers of First SunAmerica also serve as employees of
SunAmerica Inc. or its affiliates and receive no compensation directly from
First SunAmerica. Some of the officers also serve as officers of other companies
affiliated with First SunAmerica. Allocations have been made as to each
individual's time devoted to his or her duties as an executive officer of First
SunAmerica.
The following table shows the cash compensation paid or earned, based on these
allocations, to the chief executive officer and top four executive officers of
First SunAmerica whose allocated compensation exceeds $100,000 and to all
executive officers of First SunAmerica as a group for services rendered in all
capacities in First SunAmerica during 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
NAME OF
INDIVIDUAL ALLOCATED
OR NUMBER CAPACITIES IN CASH
IN GROUP WHICH SERVED COMPENSATION
- ------------------------------------------------------------
<S> <C> <C>
Eli Broad Chairman, Chief Executive $ 8,700
Officer and President
Joseph M. Tumbler Executive Vice President 5,438
Jay S. Wintrob Executive Vice President 5,438
James R. Belardi Senior Vice President 2,538
Jana Waring Greer Senior Vice President 4,812
All Executive
Officers as a
Group (14) $46,308
- ------------------------------------------------------------
</TABLE>
Directors of First SunAmerica who are also employees of SunAmerica Inc. or its
affiliates receive no compensation in addition to their compensation as
employees of SunAmerica Inc. or its affiliates.
SECURITY OWNERSHIP OF OWNERS AND MANAGEMENT
No shares of First SunAmerica owned by any executive officer or director. First
SunAmerica is an indirect wholly-owned subsidiary of SunAmerica Inc. Except for
Mr. Eli Broad, Chairman and Chief Executive Officer of SunAmerica Inc., the
percentage of shares of SunAmerica Inc. beneficially owned by any director does
not exceed one percent of the class outstanding. At February 28, 1998, Mr. Broad
was the beneficial owner of 10,705,879 shares of Common Stock (5.7% of the class
outstanding) and 13,740,441 shares of Class B Common Stock (84.4% of the class
outstanding). Of the Common Stock, 1,063,773 shares represent restricted shares
granted under SunAmerica Inc.'s employee stock plans as to which Mr. Broad has
no investment power; 113,769 shares are registered in the name of a corporation
of which Mr. Broad is a director and has sole voting and dispositive powers,
97,704 shares are held by a foundation of which Mr. Broad is a director and
shares voting and dispositive powers; 6,949,512 shares represent employee stock
options held by Mr. Broad which are or will become exercisable on or before May
15, 1998 and as to which he has no voting or investment power. Of the Class B
Stock, 12,684,210 shares are held directly by Mr. Broad; and 1,056,231 shares
are registered in the name of a corporation as to which Mr. Broad exercises sole
voting and dispositive powers. At February 28, 1998, all directors and officers
as a group beneficially owned 14,108,892 shares of Common Stock (7.5% of the
class outstanding) and 13,740,441 shares of Class B Common Stock (84.4% of the
class outstanding).
REGULATION
First SunAmerica is subject to regulation and supervision by the insurance
regulatory agencies of the States of New York, New Mexico and Nebraska, the
states in which First SunAmerica is authorized to transact business. State
insurance laws establish supervisory agencies with broad administrative and
supervisory powers. Principal among these powers are granting and revoking
licenses to transact business, regulating marketing and other trade practices,
operating guaranty associations, licensing agents, approving policy forms,
regulating certain premium rates, regulating insurance holding company systems,
establishing reserve requirements, prescribing the form and content of required
financial statements and reports, performing financial, market conduct and other
examinations, determining the reasonableness and adequacy of statutory capital
and surplus, defining acceptable accounting principles regulating the type,
valuation and amount of investments permitted, and limiting the amount of
dividends that can be paid and the size of transactions that can be consummated
without first obtaining regulatory approval.
During the last decade, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation that changes, and in many
cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies or allowing combinations between insurance companies, banks and other
entities. In recent years, the NAIC has approved and recommended to the states
for adoption and implementation several regulatory initiatives designed to
reduce the risk of insurance company insolvencies and market conduct violations.
These initiatives include investment reserve requirements, risk-based capital
standards, codification of insurance accounting principles, new investment
standards and restrictions on an insurance company's ability to pay dividends to
its stockholders. The
29
<PAGE> 34
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.
From time to time, Federal initiatives are proposed that could affect First
SunAmerica's businesses. Such initiatives include employee benefit plan
regulations and tax law changes affecting the taxation of insurance companies
and the tax treatment of insurance products. Recent administration budget
proposals include the proposed taxation of exchanges involving variable annuity
contracts and reallocations within variable annuity contracts and certain other
proposals relating to annuities. First SunAmerica believes these proposals have
a small likelihood of being enacted, because they would discourage retirement
savings and there is strong popular and industry opposition to them. Other
proposals made in recent years to limit the tax deferral of annuities have not
been enacted. First SunAmerica believes that certain of the proposals, if
implemented, would have an adverse effect on First SunAmerica's ability to sell
variable annuities, and, consequently, on its results of operations. However,
First SunAmerica would not expect this to materially impact earnings in the near
term because First SunAmerica believes that adoption of the administration
proposals, however unlikely, would reduce annuity surrenders on the existing
block of variable annuity contracts and the ongoing earnings potential arising
from that block would offset the near-term economic impact of the potential
decrease in sales.
INDEPENDENT ACCOUNTANTS
The financial statements of First SunAmerica as of September 30, 1997 and 1996
and for each of the three years in the period ended September 30, 1997 included
in this prospectus have been 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.
=============================================================
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
=============================================================
<TABLE>
<S> <C>
Separate Account.............................. 3
General Account............................... 4
Performance Data.............................. 4
Annuity Payments.............................. 9
Annuity Unit Values........................... 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.
30
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First SunAmerica Life Insurance Company
In our opinion, the accompanying balance sheet and the related income statement
and statement of cash flows present fairly, in all material respects, the
financial position of First SunAmerica Life Insurance Company (the "Company") at
September 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2, the financial statements for the year ended September
30, 1997 have been restated to reflect the merger of John Alden Life Insurance
Company of New York ("JANY") with and into the Company. The merger was accounted
for similar to a pooling of interest. The income statement includes the
operating results of JANY only for the period from April 1, 1997 (the date of
acquisition of JANY by SunAmerica Life Insurance Company, the direct parent of
the Company) through September 30, 1997. We have audited the adjustments that
were applied to restate the 1997 financial statements. In our opinion, such
adjustments are appropriate and have been properly applied to the 1997 financial
statements.
Price Waterhouse LLP
Los Angeles, California
March 25, 1998
31
<PAGE> 36
FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investments:
Cash and short-term investments...................... $ 6,707,000 $ 50,585,000 $ 71,060,000
Bonds and notes available for sale, at fair value
(amortized cost: September 1996, $146,908,000;
September 1997, $1,459,112,000; December 1997,
$1,368,509,000)................................... 146,401,000 1,499,253,000 1,407,942,000
Mortgage loans....................................... -- 131,117,000 130,023,000
Other invested assets................................ 129,000 9,277,000 7,982,000
------------ -------------- --------------
Total investments.................................... 153,237,000 1,690,232,000 1,617,007,000
Variable annuity assets................................ 68,901,000 171,475,000 194,892,000
Accrued investment income.............................. 1,462,000 22,243,000 19,524,000
Deferred acquisition costs............................. 12,127,000 96,516,000 93,087,000
Income taxes currently receivable...................... 299,000 -- --
Other assets........................................... 842,000 4,024,000 1,700,000
------------ -------------- --------------
TOTAL ASSETS........................................... $236,868,000 $1,984,490,000 $1,926,210,000
============ ============== ==============
</TABLE>
<TABLE>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C> <C>
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts................. $140,613,000 $1,556,656,000 $1,534,514,000
Payable to brokers for purchases of securities....... 1,939,000 12,460,000 --
Income taxes currently payable....................... -- 2,236,000 4,395,000
Other liabilities.................................... 845,000 68,601,000 13,933,000
------------ -------------- --------------
Total reserves, payables and accrued liabilities..... 143,397,000 1,639,953,000 1,552,842,000
------------ -------------- --------------
Variable annuity liabilities........................... 68,901,000 171,475,000 194,892,000
------------ -------------- --------------
Deferred income taxes.................................. 1,350,000 4,984,000 5,878,000
------------ -------------- --------------
Shareholder's equity:
Common Stock......................................... 3,000,000 3,000,000 3,000,000
Additional paid-in capital........................... 14,428,000 144,428,000 144,428,000
Retained earnings.................................... 5,973,000 14,826,000 19,099,000
Net unrealized gains (losses) on debt and equity
securities available for sale..................... (181,000) 5,824,000 6,071,000
------------ -------------- --------------
Total shareholder's equity........................... 23,220,000 168,078,000 172,598,000
------------ -------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............. $236,868,000 $1,984,490,000 $1,926,210,000
============ ============== ==============
</TABLE>
(See accompanying notes)
32
<PAGE> 37
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INCOME STATEMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
---------------------------------------- --------------------------
1995 1996 1997 1996 1997
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Investment income................... $ 7,834,000 $ 9,957,000 $ 65,559,000 $ 2,893,000 $ 29,882,000
Interest expense on:
Fixed annuity contracts........... (5,042,000) (7,155,000) (45,765,000) (2,257,000) (21,307,000)
Senior indebtedness............... (8,000) (4,000) (589,000) -- (28,000)
----------- ----------- ------------ ----------- ------------
TOTAL INTEREST EXPENSE.............. (5,050,000) (7,159,000) (46,354,000) (2,257,000) (21,335,000)
----------- ----------- ------------ ----------- ------------
NET INVESTMENT INCOME............... 2,784,000 2,798,000 19,205,000 636,000 8,547,000
----------- ----------- ------------ ----------- ------------
NET REALIZED INVESTMENT GAINS
(LOSSES).......................... (1,348,000) (539,000) 5,020,000 459,000 2,075,000
----------- ----------- ------------ ----------- ------------
Fee Income:
Variable annuity fees............. 412,000 690,000 1,712,000 292,000 699,000
Surrender charges................. 194,000 221,000 1,809,000 56,000 954,000
----------- ----------- ------------ ----------- ------------
TOTAL FEE INCOME.................... 606,000 911,000 3,521,000 348,000 1,653,000
----------- ----------- ------------ ----------- ------------
GENERAL AND ADMINISTRATIVE
EXPENSES.......................... (1,004,000) (1,480,000) (3,222,000) (357,000) (944,000)
----------- ----------- ------------ ----------- ------------
AMORTIZATION OF DEFERRED ACQUISITION
COSTS............................. (300,000) (500,000) (10,386,000) (302,000) (4,026,000)
----------- ----------- ------------ ----------- ------------
ANNUAL COMMISSIONS.................. (33,000) (19,000) (195,000) (4,000) (112,000)
----------- ----------- ------------ ----------- ------------
PRETAX INCOME....................... 705,000 1,171,000 13,943,000 780,000 7,193,000
Income tax expense.................. (182,000) (448,000) (5,090,000) (316,000) (2,919,000)
----------- ----------- ------------ ----------- ------------
NET INCOME.......................... $ 523,000 $ 723,000 $ 8,853,0000 $ 464,000 $ 4,274,000
=========== =========== ============ =========== ============
</TABLE>
See accompanying notes
33
<PAGE> 38
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------------------- ----------------------------
1995 1996 1997 1996 1997
------------- ------------- --------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 523,000 $ 723,000 $ 8,853,000 $ 464,000 $ 4,274,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts.......... 5,042,000 7,155,000 45,765,000 2,257,000 21,307,000
Net realized investment (gains)
losses............................. 1,348,000 539,000 (5,020,000) (459,000) (2,075,000)
Accretion of net discounts on
investments........................ (394,000) (343,000) (1,070,000) (55,000) (543,000)
Amortization of goodwill.............. 58,000 58,000 58,000 15,000 14,000
Provision for deferred income taxes... 333,000 740,000 401,000 276,000 761,000
Change in:
Deferred acquisition costs................ (2,740,000) (5,736,000) (4,215,000) (2,700,000) (471,000)
Income taxes receivable/payable........... (418,000) (322,000) 2,535,000 40,000 2,159,000
Other, net.................................. (323,000) (254,000) (7,059,000) (192,000) 4,701,000
------------- ------------- --------------- ------------ -------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:............................... 3,429,000 2,560,000 40,248,000 (354,000) 30,127,000
------------- ------------- --------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds and notes......................... (125,130,000) (124,681,000) (2,013,314,000) (32,592,000) (173,754,000)
Common stock............................ (112,000) -- -- -- (11,000)
Sales of:
Bonds and notes......................... 55,553,000 80,440,000 650,841,000 7,227,000 230,398,000
Mortgage loans.......................... -- -- 88,371,000 -- --
Common stock............................ -- -- 140,000 139,000 --
Redemptions and maturities of:
Bonds and notes......................... 21,369,000 11,514,000 1,142,900,000 608,000 23,953,000
Mortgage loans.......................... 35,000 4,736,000 13,520,000 -- 1,258,000
------------- ------------- --------------- ------------ -------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES................................ (48,285,000) (27,991,000) (117,542,000) (24,618,000) 81,844,000
------------- ------------- --------------- ------------ -------------
</TABLE>
See accompanying notes
34
<PAGE> 39
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------------------- ----------------------------
1995 1996 1997 1996 1997
------------- ------------- --------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity
contracts............................... $ 51,681,000 $ 45,417,000 $ 131,711,000 $ 25,828,000 $ 30,790,000
Net exchanges from the fixed accounts of
variable annuity contracts.............. (87,000) (4,719,000) (22,346,000) (2,551,000) (11,632,000)
Withdrawal payments on fixed annuity
contracts............................... (14,131,000) (9,850,000) (88,229,000) (2,451,000) (55,669,000)
Claims and annuity payments on fixed
annuity contracts....................... (2,974,000) (3,752,000) (13,774,000) (932,000) (6,925,000)
Capital contributions..................... -- -- 5,000,000 -- --
Net receipts from (repayments of) other
short-term financings................... 1,964,000 (1,340,000) 23,429,000 (1,000) (13,284,000)
Cession of non-annuity product lines...... -- -- -- -- (34,776,000)
------------- ------------- --------------- ------------ -------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES................................ 36,453,000 25,756,000 35,791,000 19,893,000 (91,496,000)
------------- ------------- --------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS.................... (8,403,000) 325,000 (41,503,000) (5,079,000) 20,475,000
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING
OF PERIOD................................. 14,785,000 6,382,000 6,707,000 6,707,000 50,585,000
------------- ------------- --------------- ------------ -------------
CASH AND SHORT-TERM INVESTMENTS OF MERGED
ENTITY AT DATE OF MERGER.................. -- -- 85,381,000 -- --
CASH AND SHORT-TERM INVESTMENTS AT END OF
PERIOD.................................... $ 6,382,000 $ 6,707,000 $ 50,585,000 $ 1,628,000 71,060,000
============= ============= =============== ============ =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness........... $ 8,000 $ 4,000 $ 589,000 $ -- $ 28,000
============= ============= =============== ============ =============
Net income taxes paid................... $ 254,000 $ 30,000 $ 2,154,000 $ -- $ 1,000
============= ============= =============== ============ =============
</TABLE>
See accompanying notes
35
<PAGE> 40
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
First SunAmerica Life Insurance Company (The "Company") is a New York- domiciled
life insurance company engaged primarily in the business of writing fixed and
variable annuity contracts in the state of New York.
The operations of the Company are influenced by many factors, including general
economic conditions, monetary and fiscal policies of the federal government, and
policies of state and other regulatory authorities. The level of sales of the
Company's financial products is influenced by many factors, including general
market rates of interest; strengths, weaknesses and volatility of equity
markets; and terms and conditions of competing financial products. The Company
is exposed to the typical risks normally associated with a portfolio of
fixed-income securities, namely interest rate, option, liquidity and credit
risk. The Company controls its exposure to these risks by, among other things,
closely monitoring and matching the duration of its assets and liabilities,
monitoring and limiting prepayment and extension risk in its portfolio,
maintaining a large percentage of its portfolio in highly liquid securities, and
engaging in a disciplined process of underwriting, reviewing and monitoring
credit risk. The Company also is exposed to market risk, as market volatility
may result in reduced fee income in the case of assets held in separate
accounts.
2. MERGER
On March 31, 1997, SunAmerica Life Insurance Company, the direct parent of the
Company, completed the acquisition of all of the outstanding stock of John Alden
Life Insurance Company of New York ("JANY"). On October 31, 1997, JANY was
merged with and into the Company. On the date of acquisition, JANY had assets
having an aggregate fair value of $1,536,179,000, composed primarily of invested
assets totaling $1,403,807,000. Liabilities assumed in this acquisition totaled
$1,411,179,000, including $1,363,764,000 of fixed annuity reserves. An amount
equal to the excess of the purchase price over the fair value of the net assets
acquired, amounting to $103,695,000 at September 30, 1997, is included in
Deferred Acquisition Costs in the balance sheet. The parent accounted for the
acquisition by using the purchase method of accounting and all purchase
accounting adjustments were pushed down to the accounts of JANY. The Company has
accounted for the JANY merger by using the pooling method from the date of
acquisition. Accordingly, the income statement includes the operating results of
JANY only for the period from April 1, 1997 through September 30, 1997. On a pro
forma basis, assuming the acquisition and merger had occurred on October 1,
1994, the beginning of the earliest period presented, revenues (net investment
income, net realized investment losses and fee income) would have been
$40,891,000, $29,768,000 and $18,508,000, and net income would have been
$12,434,000, $6,710,000 and $5,038,000 for the years ended September 30, 1997,
1996 and 1995, respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been prepared
in accordance with generally accepted accounting principles and include the
accounts of the Company, an indirect wholly owned subsidiary of SunAmerica Inc.
(the "Parent"). Certain prior period amounts have been reclassified to conform
with the 1997 presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the amounts reported in the financial statements and the accompanying notes.
Actual results could differ from those estimates.
INVESTMENTS: Cash and short-term investments primarily include cash, commercial
paper, money market investments, repurchase agreements and short-term bank
participations. All such investments are carried at cost plus accrued interest,
which approximates fair value, have maturities of three months or less and are
considered cash equivalents for purposes of reporting cash flows.
Bonds and notes available for sale and common stocks are carried at aggregate
fair value and changes in unrealized gains or losses, net of tax, are credited
or charged directly to shareholder's equity. Bonds and notes are reduced to
estimated net realizable value when necessary for declines in value considered
to be other than temporary. Estimates of net realizable value are subjective and
actual realization will be dependent upon future events.
Mortgage loans are carried at amortized unpaid balances, net of provisions for
estimated losses. Other invested assets include real estate, which is carried at
the lower of cost or fair value, and policy loans, which are carried at unpaid
balances.
36
<PAGE> 41
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. 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, in relation to the incidence of estimated gross profits to be
realized over the estimated lives of the annuity contracts. Estimated gross
profits are composed of net interest income, net realized investment gains and
losses, variable annuity fees, surrender charges and direct administrative
expenses. Deferred acquisition costs consist of commissions and other costs that
vary with, and are primarily related to, the production or acquisition of new
business.
As debt and equity securities available for sale are carried at aggregate fair
value, an adjustment is made to deferred acquisition costs equal to the change
in amortization that would have been recorded if such securities had been sold
at their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains or losses on debt and equity securities available for
sale that is credited or charged directly to shareholder's equity. Deferred
Acquisition Costs have been decreased by $31,200,000 at September 30, 1997 and
increased by $100,000 at September 30, 1996 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities resulting
from the receipt of variable annuity premiums are segregated in separate
accounts. The Company receives fees for assuming mortality and certain expense
risks. Such fees are included in Variable Annuity Fees in the income statement.
GOODWILL: Goodwill, amounting to $763,000 at September 30, 1997, is amortized by
using the straight-line method over a period of 25 years and is included in
Other Assets in the balance sheet. Goodwill is evaluated for impairment when
events or changes in economic conditions indicate that the carrying amount may
not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity contracts are
accounted for as investment-type contracts in accordance with Statement of
Financial Accounting Standards No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments," and are recorded at accumulated value
(premiums received, plus accrued interest, less withdrawals and assessed fees).
FEE INCOME: Variable annuity fees and surrender charges are recorded in income
as earned.
INCOME TAXES: The Company is included in the consolidated federal income tax
return of the Parent and files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Income taxes have been
calculated as if the Company filed a separate return. The Company will file a
separate tax return for the operations of JANY for the six months ended
September 30, 1997. 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.
37
<PAGE> 42
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENTS
The amortized cost and estimated fair value of bonds and notes available for
sale by major category follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
<S> <C> <C>
AT SEPTEMBER 30, 1997:
Securities of the United States Government............... $ 36,083,000 $ 36,950,000
Mortgage-backed securities............................... 487,585,000 501,683,000
Securities of public utilities........................... 50,855,000 53,018,000
Corporate bonds and notes................................ 754,322,000 775,073,000
Other debt securities.................................... 130,267,000 132,529,000
-------------- --------------
Total available for sale................................. $1,459,112,000 $1,499,253,000
============== ==============
AT SEPTEMBER 30, 1996:
Securities of the United States Government............... $ 9,631,000 $ 9,562,000
Mortgage-backed securities............................... 75,846,000 75,607,000
Securities of public utilities........................... 1,032,000 971,000
Corporate bonds and notes................................ 41,545,000 41,722,000
Other debt securities.................................... 18,854,000 18,539,000
-------------- --------------
Total available for sale................................. $ 146,908,000 $ 146,401,000
============== ==============
</TABLE>
The amortized cost and estimated fair value of bonds and notes available for
sale by contractual maturity, as of September 30, 1997, follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less.................................... $ 1,054,000 $ 1,056,000
Due after one year through five years...................... 251,938,000 256,383,000
Due after five years through ten years..................... 556,697,000 574,199,000
Due after ten years........................................ 161,838,000 165,932,000
Mortgage-backed securities................................. 487,585,000 501,683,000
-------------- --------------
Total available for sale................................... $1,459,112,000 $1,499,253,000
============== ==============
</TABLE>
Actual maturities of bonds and notes will differ from those shown above due to
prepayments and redemptions.
38
<PAGE> 43
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENTS (CONTINUED)
Gross unrealized gains and losses on bonds and notes available for sale by major
category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
----------- -----------
<S> <C> <C>
AT SEPTEMBER 30, 1997:
Securities of the United States Government................ $ 867,000 $ --
Mortgage-backed securities................................ 14,177,000 (78,000)
Securities of public utilities............................ 2,163,000 --
Corporate bonds and notes................................. 21,181,000 (430,000)
Other debt securities..................................... 2,269,000 (8,000)
----------- -----------
Total available for sale.................................. $40,657,000 $ (516,000)
=========== ===========
AT SEPTEMBER 30, 1996:
Securities of the United States
Government................................................ $ 55,000 $ (124,000)
Mortgage-backed securities................................ 515,000 (754,000)
Securities of public utilities............................ -- (61,000)
Corporate bonds and notes................................. 749,000 (572,000)
Other debt securities..................................... 3,000 (318,000)
----------- -----------
Total available for sale $ 1,322,000 $(1,829,000)
=========== ===========
</TABLE>
At September 30, 1997, gross unrealized gains on equity securities available for
sale aggregated $19,000 and there were no unrealized losses. At September 30,
1996, gross unrealized gains on equity securities available for sale aggregated
$129,000 and there were no unrealized losses.
Gross realized investment gains and losses on sales of investments are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
BONDS AND NOTES:
Realized gains............................................ $6,441,000 $1,039,000 $ 423,000
Realized losses........................................... (1,466,000) (1,295,000) (1,771,000)
COMMON STOCKS:
Realized gains/losses..................................... 140,000 (112,000) --
MORTGAGE LOANS:
Realized gains/losses..................................... (15,000) -- --
IMPAIRMENT WRITEDOWNS....................................... (80,000) (171,000) --
---------- ---------- -----------
Total net realized investment gains/losses................ $5,020,000 $ (539,000) $(1,348,000)
========== ========== ===========
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Short-term investments...................................... $ 1,334,000 $ 390,000 $1,045,000
Bonds and notes............................................. 56,253,000 9,186,000 6,291,000
Mortgage loans.............................................. 7,714,000 381,000 498,000
Other invested assets....................................... 258,000 -- --
----------- ---------- ----------
Total investment income................................... $65,559,000 $9,957,000 $7,834,000
=========== ========== ==========
</TABLE>
39
<PAGE> 44
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENTS (CONTINUED)
Expenses incurred to manage the investment portfolio amounted to $387,000 for
the year ended September 30, 1997, $121,000 for the year ended September 30,
1996, and $125,000 for the year ended September 30, 1995 and are included in
General and Administrative Expenses in the income statement.
At September 30, 1997, no investment exceeded 10% of the Company's shareholder's
equity.
At September 30, 1997, bonds and notes included $91,130,000 (fair value of
$94,420,000) of bonds and notes not rated investment grade. The Company had no
material concentrations of non-investment-grade assets at September 30, 1997.
At September 30, 1997, mortgage loans were collateralized by properties located
in 29 states, with loans totaling approximately 13% of the aggregate carrying
value of the portfolio secured by properties located in Florida and
approximately 12% by properties located in New York. No more than 10% of the
portfolio was secured by properties in any other single state.
At September 30, 1997, the amortized cost of investments in default as to the
payment of principal or interest was $2,259,000, all of which were mortgage
loans. Such nonperforming investments had an estimated fair value equal to their
carrying value.
At September 30, 1997, $25,529,000 of bonds, at amortized cost, were on deposit
with regulatory authorities in accordance with statutory requirements.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to reasonable
estimates of the fair value of only the Company's financial instruments. The
disclosures do not address the value of the Company's recognized and
unrecognized nonfinancial assets 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.
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.
PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such obligations represent net
transactions of a short-term nature for which the carrying value is considered a
reasonable estimate of fair value.
VARIABLE ANNUITY LIABILITIES: Fair values of contracts in the accumulation phase
are based on net surrender values. Fair values of contracts in the payout phase
are based on the present value of future cash flows at assumed investment rates.
40
<PAGE> 45
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at September
30, 1997 and 1996, compared with their respective carrying values, are as
follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------------- --------------
<S> <C> <C>
1997:
ASSETS:
Cash and short-term investments........................... $ 50,585,000 $ 50,585,000
Bonds and notes........................................... 1,499,253,000 1,499,253,000
Mortgage loans............................................ 131,117,000 136,648,000
Variable annuity assets................................... 171,475,000 171,475,000
LIABILITIES:
Reserves for fixed annuity contracts...................... 1,556,656,000 1,486,551,000
Payable to brokers for purchases of securities............ 12,460,000 12,460,000
Variable annuity liabilities.............................. 171,475,000 163,045,000
============== ==============
1996:
ASSETS:
Cash and short-term investments........................... $ 6,707,000 $ 6,707,000
Bonds and notes........................................... 146,401,000 146,401,000
Common stocks............................................. 129,000 129,000
Variable annuity assets................................... 68,901,000 68,901,000
LIABILITIES:
Reserves for fixed annuity contracts...................... 140,613,000 134,479,000
Payable to brokers for purchases of securities............ 1,939,000 1,939,000
Variable annuity liabilities.............................. 68,901,000 65,546,000
============== ==============
</TABLE>
6. CONTINGENT LIABILITIES
The Company is involved in various kinds of litigation common to its business.
These cases are in various stages of development and, based on reports of
counsel, management believes that provisions made for potential losses relating
to such litigation are adequate and any further liabilities and costs will not
have a material adverse impact upon the Company's financial position or results
of operations.
41
<PAGE> 46
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
7. SHAREHOLDER'S EQUITY
The Company is authorized to issue 300 shares of its $10,000 par value Common
Stock. At September 30, 1997 and 1996, 300 shares were outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balance......................................... $ 14,428,000 $14,428,000 $14,428,000
Additional paid-in capital acquired as a result of the
merger with JANY....................................... 125,000,000 -- --
Capital contributions received............................ 5,000,000 -- --
------------ ----------- -----------
Ending balance............................................ $144,428,000 $14,428,000 $14,428,000
============ =========== ===========
RETAINED EARNINGS:
Beginning balance......................................... $ 5,973,000 $ 5,250,000 $ 4,727,000
Net income................................................ 8,853,000 723,000 523,000
------------ ----------- -----------
Ending balance............................................ $ 14,826,000 $ 5,973,000 $ 5,250,000
============ =========== ===========
NET UNREALIZED GAINS/LOSSES ON DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE:
Beginning balance......................................... $ (181,000) $ (860,000) $(2,340,000)
Change in net unrealized gains/losses on debt securities
available for sale..................................... 40,648,000 939,000 4,254,000
Change in net unrealized gains/losses on equity securities
available for sale..................................... (110,000) 206,000 (77,000)
Change in adjustment to deferred acquisition costs........ (31,300,000) (100,000) (1,900,000)
Tax effect of net changes................................. (3,233,000) (366,000) (797,000)
------------ ----------- -----------
Ending balance............................................ $ 5,824,000 $ (181,000) $ (860,000)
============ =========== ===========
</TABLE>
For a life insurance company domiciled in the State of New York, no dividend may
be distributed to any shareholder unless notice of the domestic insurer's
intention to declare such dividend and the amount have been filed with the
Superintendent of Insurance not less than 30 days in advance of such proposed
declaration, or if the Superintendent disapproves the distribution of the
dividend within the 30-day period. No dividends were paid in fiscal years 1997,
1996 or 1995.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1997 was $6,336,000. The statutory net loss for the year ended
December 31, 1996 was $450,000 and the statutory net loss for the year ended
December 31, 1995 was $2,083,000. The Company's statutory capital and surplus
was $79,169,000 at September 30, 1997, $13,126,000 at December 31, 1996 and
$13,862,000 at December 31, 1995.
42
<PAGE> 47
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES
The components of the provisions for income taxes on pretax income consist of
the following:
<TABLE>
<CAPTION>
NET REALIZED
INVESTMENT
GAINS (LOSSES) OPERATIONS TOTAL
-------------- ---------- ----------
<S> <C> <C> <C>
1997:
Currently payable........................................... $1,790,000 $2,899,000 $4,689,000
Deferred.................................................... (11,000) 412,000 401,000
---------- ---------- ----------
Total income tax expense.......................... $1,779,000 $3,311,000 $5,090,000
========== ========== ==========
1996:
Currently payable $ (121,000) $ (171,000) $ (292,000)
Deferred (105,000) 845,000 740,000
---------- ---------- ----------
Total income tax expense $ (226,000) $ 674,000 $ 448,000
========== ========== ==========
1995:
Currently payable........................................... $ (592,000) $ 441,000 $ (151,000)
Deferred.................................................... (28,000) 361,000 333,000
---------- ---------- ----------
Total income tax expense.......................... $ (620,000) $ 802,000 $ 182,000
========== ========== ==========
</TABLE>
Income taxes computed at the United States federal income tax rate of 35% and
income taxes provided differ as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Amount computed at statutory rate........................... $4,880,000 $410,000 $247,000
Increases (decreases) resulting from:
Amortization of differences between book and tax bases of
net assets acquired.................................... 20,000 20,000 20,000
State income taxes, net of federal tax benefit............ 200,000 25,000 (86,000)
Other, net................................................ (10,000) (7,000) 1,000
---------- -------- --------
Total income tax expense.......................... $5,090,000 $448,000 $182,000
========== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The significant
components of the liability for Deferred Income Taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments................................................. $ 891,000 $ 225,000
Deferred acquisition costs.................................. 30,144,000 3,902,000
Net unrealized gains on debt and equity securities available
for sale.................................................. 3,136,000 --
Other liabilities........................................... 125,000 84,000
------------ -----------
Total deferred tax liabilities.............................. 34,296,000 4,211,000
------------ -----------
DEFERRED TAX ASSETS:
Contractholder reserves..................................... (26,202,000) (2,582,000)
State income taxes.......................................... (80,000) (79,000)
Net unrealized losses on debt and equity securities
available for sale........................................ -- (97,000)
Other assets................................................ (3,030,000) (103,000)
------------ -----------
Total deferred tax assets................................... (29,312,000) (2,861,000)
------------ -----------
Deferred income taxes....................................... $ 4,984,000 $ 1,350,000
============ ===========
</TABLE>
43
<PAGE> 48
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
9. 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 38.9%, 57.9% and 31.2% of premiums in 1997, 1996 and
1995, respectively. Commissions paid to these broker-dealers totaled $4,486,000
in 1997, $2,646,000 in 1996, and $761,000 in 1995. No single unaffiliated
broker-dealer was responsible for more than 9% of total sales in the years ended
September 30, 1997, 1996, and 1995.
The Company paid occupancy and office services expenses to Royal Alliance
Associates, Inc. totaling $15,000 for the year ended September 30, 1996 and
$113,000 for the year ended September 30, 1995. The Company paid no such charges
in the year ended September 30, 1997.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, Inc., whose
purpose is to provide services to the SunAmerica companies. Amounts paid for
such services totaled $2,454,000 for the year ended September 30, 1997,
$2,097,000 for the year ended September 30, 1996 and $722,000 for the year ended
September 30, 1995. Such amounts are included in General and Administrative
Expenses in the income statement.
44
<PAGE> 49
================================================================================
APPENDIX A - CONDENSED FINANCIAL INFORMATION
================================================================================
<TABLE>
<CAPTION>
INCEPTION TO FISCAL YEAR FISCAL YEAR
PORTFOLIOS 11/30/95 11/30/96 11/30/97
===============================================================================================
<S> <C> <C> <C>
Capital Appreciation (Inception Date - 4/6/95)
Beginning AUV.................................... $11.35 $14.19 $17.63
End AUV.......................................... $14.19 $17.63 $21.26
End #AUs......................................... 52,583 242,433 510,291
- -----------------------------------------------------------------------------------------------
Growth (Inception Date - 4/6/95)
Beginning AUV.................................... $11.02 $12.95 $16.32
End AUV.......................................... $12.95 $16.32 $20.31
End #AUs......................................... 15,156 104,264 196,539
- -----------------------------------------------------------------------------------------------
Natural Resources (Inception Date - 5/30/95)
Beginning AUV.................................... $10.17 $10.78 $12.13
End AUV.......................................... $10.78 $12.13 $11.14
End #AUs......................................... 5,306 62,002 112,509
- -----------------------------------------------------------------------------------------------
Government and Quality Bond (Inception Date -
5/3/95)
Beginning AUV.................................... $10.55 $11.51 $11.94
End AUV.......................................... $11.51 $11.94 $12.65
End #AUs......................................... 37,576 127,538 190,449
- -----------------------------------------------------------------------------------------------
International Growth and Income (Inception Date -
6/9/97)
Beginning AUV.................................... -- -- $10.00
End AUV.......................................... -- -- $10.33
End #AUs......................................... -- -- 86,248
- -----------------------------------------------------------------------------------------------
Aggressive Growth (Inception Date - 6/3/96)
Beginning AUV.................................... -- $10.00 $10.29
End AUV.......................................... -- $10.29 $11.51
End #AUs......................................... -- 160,390 478,003
- -----------------------------------------------------------------------------------------------
International Diversified Equities (Inception Date
- 4/12/95)
Beginning AUV.................................... $9.45 $10.07 $11.39
End AUV.......................................... $10.07 $11.39 $11.62
End #AUs......................................... 58,058 355,952 753,010
- -----------------------------------------------------------------------------------------------
Global Equities (Inception Date - 5/22/95)
Beginning AUV.................................... $11.99 $13.01 $15.15
End AUV.......................................... $13.01 $15.15 $16.90
End #AUs......................................... 26,604 117,488 310,271
- -----------------------------------------------------------------------------------------------
Emerging Markets (Inception Date - 6/12/97)
Beginning AUV.................................... -- -- $10.00
End AUV.......................................... -- -- $7.97
End #AUs......................................... -- -- 85,313
- -----------------------------------------------------------------------------------------------
Putnam Growth* (Inception Date - 4/6/95)
Beginning AUV.................................... $10.36 $12.60 $14.88
End AUV.......................................... $12.60 $14.88 $18.47
End #AUs......................................... 31,960 114,619 231,883
- -----------------------------------------------------------------------------------------------
Real Estate (Inception Date - 6/2/97)
Beginning AUV.................................... -- -- $10.00
End AUV.......................................... -- -- $11.44
End #AUs......................................... -- -- 56,379
- -----------------------------------------------------------------------------------------------
Growth/Phoenix Investment Counsel (Inception Date -
4/6/95)
Beginning AUV.................................... $10.61 $12.81 $14.94
End AUV.......................................... $12.81 $14.94 $17.63
End #AUs......................................... 22,973 94,650 154,635
- -----------------------------------------------------------------------------------------------
Alliance Growth (Inception Date - 4/6/95)
Beginning AUV.................................... $11.52 $15.44 $19.46
End AUV.......................................... $15.44 $19.46 $24.51
End #AUs......................................... 52,943 322,225 679,444
- -----------------------------------------------------------------------------------------------
* Formerly named Provident Growth.
</TABLE>
A-1
<PAGE> 50
<TABLE>
<CAPTION>
INCEPTION TO FISCAL YEAR FISCAL YEAR
PORTFOLIOS 11/30/95 11/30/96 11/30/97
===============================================================================================
<S> <C> <C> <C>
Venture Value (Inception Date - 4/6/95)
Beginning AUV.................................... $10.84 $13.29 $16.68
End AUV.......................................... $13.29 $16.68 $21.30
End #AUs......................................... 113,664 605,579 1,424,342
- -----------------------------------------------------------------------------------------------
Federated Value (Inception Date - 6/3/96)
Beginning AUV.................................... -- $10.00 $11.00
End AUV.......................................... -- $11.00 $13.62
End #AUs......................................... -- 69,098 218,504
- -----------------------------------------------------------------------------------------------
Growth-Income (Inception Date - 4/12/95)
Beginning AUV.................................... $11.15 $13.32 $16.70
End AUV.......................................... $13.32 $16.70 $21.41
End #AUs......................................... 45,266 259,344 614,307
- -----------------------------------------------------------------------------------------------
Utility (Inception Date - 6/3/96)
Beginning AUV.................................... -- $10.00 $10.67
End AUV.......................................... -- $10.67 $12.74
End #AUs......................................... -- 20,721 59,907
- -----------------------------------------------------------------------------------------------
Asset Allocation (Inception Date - 4/24/95)
Beginning AUV.................................... $11.29 $12.64 $14.97
End AUV.......................................... $12.64 $14.97 $17.98
End #AUs......................................... 60,824 264,208 581,922
- -----------------------------------------------------------------------------------------------
Balanced/Phoenix Investment Counsel (Inception Date
- 5/8/95)
Beginning AUV.................................... $10.90 $12.33 $13.82
End AUV.......................................... $12.33 $13.82 $15.45
End #AUs......................................... 41,654 157,110 230,784
- -----------------------------------------------------------------------------------------------
SunAmerica Balanced (Inception Date - 6/3/96)
Beginning AUV.................................... -- $10.00 $11.04
End AUV.......................................... -- $11.04 $13.22
End #AUs......................................... -- 72,909 240,556
- -----------------------------------------------------------------------------------------------
Worldwide High Income (Inception Date - 5/2/95)
Beginning AUV.................................... $10.16 $11.36 $14.20
End AUV.......................................... $11.36 $14.20 $15.98
End #AUs......................................... 21,556 124,728 399,865
- -----------------------------------------------------------------------------------------------
High-Yield Bond (Inception Date - 5/8/95)
Beginning AUV.................................... $11.18 $11.48 $12.99
End AUV.......................................... $11.48 $12.99 $14.66
End #AUs......................................... 40,706 220,725 547,787
- -----------------------------------------------------------------------------------------------
Corporate Bond (Inception Date - 4/12/95)
Beginning AUV.................................... $10.21 $11.10 $11.65
End AUV.......................................... $11.10 $11.65 $12.54
End #AUs......................................... 5,375 48,161 120,997
- -----------------------------------------------------------------------------------------------
Global Bond (Inception Date - 5/2/95)
Beginning AUV.................................... $10.37 $11.20 $12.25
End AUV.......................................... $11.20 $12.25 $13.08
End #AUs......................................... 12,162 52,993 148,602
- -----------------------------------------------------------------------------------------------
Cash Management (Inception Date - 4/27/95)
Beginning AUV.................................... $10.44 $10.67 $11.04
End AUV.......................................... $10.67 $11.04 $11.43
End #AUs......................................... 59,731 52,729 231,674
</TABLE>
================================================================================
AUV - Accumulation Unit Value
AU - Accumulation Units
AS OF THE DATE OF THIS PROSPECTUS, THE SALE OF CONTRACTS OFFERING THE
"DOGS" OF WALL STREET PORTFOLIO HAD NOT BEGUN. THEREFORE, NO CONDENSED
FINANCIAL INFORMATION FOR THIS PORTFOLIO IS PRESENTED HERE.
A-2
<PAGE> 51
================================================================================
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:
[(1+I/(1+J+0.0025)](N/12) - 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 1 1/2 years (18 months)
remain in the 10-year term you initially agreed to leave your money in
the fixed investment option (N=18); and
(3) 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. The market value adjustment is
assessed on the amount withdrawn less any withdrawal charge.
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%.
The market value adjustment factor is = [(1+I)/(1+J+0.0025)](N/12) - 1
= [(1.07)/(1.08+0.0025)](18/12) - 1
= (0.988453)(1.5) - 1
= 0.982729 - 1
= - 0.017271
The requested withdrawal amount is multiplied by the market value adjustment
factor to determine the market value adjustment:
$4,000 X (- 0.017271) = -$69.08
$69.08 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%.
The market value adjustment factor is = [(1+I/(1+J+0.0025)](N/12) - 1
= [(1.07)/(1.06+0.0025)](18/12) - 1
= (1.007059)(1.5) - 1
= 1.010607 - 1
= +0.010607
The requested withdrawal amount is multiplied by the market value adjustment
factor to determine the market value adjustment:
$4,000 x (+0.010607) = +$42.43
$42.43 represents the market value adjustment that would be added to your
withdrawal.
B-1
<PAGE> 52
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
