<PAGE> 1
As filed pursuant to Rule 424(b)(3)
under the Securities Act of 1933
Registration No. 33-81474
VISTA CAPITAL ADVANTAGE
PROSPECTUS
DECEMBER 29, 1998
FLEXIBLE PAYMENT DEFERRED ANNUITY CONTRACTS
ISSUED BY
FIRST SUNAMERICA LIFE INSURANCE COMPANY
IN CONNECTION WITH
FS VARIABLE ANNUITY ACCOUNT TWO
The annuity has 11 investment choices - 5 fixed account options and 6
variable investment portfolios listed below. The 5 fixed account options include
market value adjustment fixed accounts for specified periods of 1, 3, 5, 7 and
10 years. Each of the 6 variable investment portfolios invest solely in the
shares of one of the following currently available underlying Funds of Mutual
Fund Variable Annuity Trust:
<TABLE>
<S> <C>
- International Equity - Asset Allocation
- Capital Growth - U.S. Government Income
- Growth and Income - Money Market
</TABLE>
Additional underlying funds may be made available in the future.
Please read this prospectus carefully before investing and keep it for
future reference. It contains important information about the Vista Variable
Annuity.
To learn more about the annuity offered by this prospectus, obtain a
copy of the Statement of Additional Information ("SAI") dated December 29, 1998.
The SAI is on file with the Securities and Exchange Commission ("SEC") and is
incorporated by reference into this prospectus. The Table of Contents of the SAI
appears on page 41 of this prospectus. For a free copy of the SAI, call us at
(800) 90-VISTA or write to us at our Annuity Service Center, P.O. Box 54299, Los
Angeles, California 90054-0299.
In addition, the SEC maintains a website (http://www.sec.gov) that
contains the SAI, materials incorporated by reference and other information
filed electronically with the SEC by First SunAmerica.
ANNUITIES INVOLVING RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
ANNUITIES ARE NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK. THEY ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC, NOR
HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS CRIMINAL.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ITEM ----
<S> <C>
DEFINITIONS................................................. 3
SUMMARY..................................................... 4
FEE TABLES.................................................. 7
EXAMPLES.................................................... 8
CONDENSED FINANCIAL INFORMATION -- ACCUMULATION UNIT
VALUES.................................................... 9
PERFORMANCE DATA............................................ 9
DESCRIPTION OF FIRST SUNAMERICA, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT....................................... 10
First SunAmerica Life Insurance Company................ 10
Separate Account....................................... 11
General Account........................................ 11
VARIABLE PORTFOLIO OPTIONS.................................. 11
Voting Rights.......................................... 12
Substitution of Securities............................. 12
FIXED ACCOUNT OPTIONS....................................... 12
Allocations............................................ 12
Market Value Adjustment ("MVA")........................ 13
CONTRACT CHARGES............................................ 13
Insurance Charges...................................... 13
Withdrawal Charges..................................... 13
Investment Charges..................................... 14
Contract Maintenance Fee............................... 14
Transfer Fee........................................... 14
Income Taxes........................................... 14
Reduction or Elimination of Charges and Expenses, and
Additional Amounts Credited........................... 14
Free Withdrawal Amount................................. 15
DESCRIPTION OF THE CONTRACTS................................ 15
Summary................................................ 15
Ownership.............................................. 15
Annuitant.............................................. 15
Modification of the Contract........................... 15
Assignment............................................. 16
Death Benefit.......................................... 16
PURCHASES, WITHDRAWALS AND CONTRACT VALUE................... 17
Purchase Payments...................................... 17
Automatic Dollar Cost Averaging Program................ 17
Asset Allocation Rebalancing........................... 18
Principal Advantage Program............................ 18
Allocation of Purchase Payments........................ 19
Accumulation Units..................................... 19
Free Look.............................................. 20
Transfer During the Accumulation Phase................. 20
Distribution of Contracts.............................. 21
Withdrawals............................................ 21
Systematic Withdrawal Program.......................... 21
Minimum Contract Value................................. 22
INCOME PHASE................................................ 22
Annuity Date........................................... 22
Income Options......................................... 22
Transfers During the Income Phase...................... 23
Deferment of Payments.................................. 24
ADMINISTRATION.............................................. 24
TAXES....................................................... 24
Annuity Contracts in General........................... 25
Tax Treatment of Distributions -- Non-Qualified
Contracts............................................. 25
Tax Treatment of Distributions -- Qualified
Contracts............................................. 25
Minimum Distributions.................................. 25
Diversification........................................ 26
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
ADDITIONAL INFORMATION ABOUT THE COMPANY.................... 27
Selected Consolidated Financial Data................... 27
PROPERTIES.................................................. 36
DIRECTORS AND EXECUTIVE OFFICERS............................ 36
EXECUTIVE COMPENSATION...................................... 38
Security Ownership of Certain Beneficial Owners and
Management............................................ 38
REGULATION.................................................. 38
CUSTODIAN................................................... 39
LEGAL PROCEEDINGS........................................... 39
REGISTRATION STATEMENTS..................................... 40
INDEPENDENT ACCOUNTANTS..................................... 40
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT........... 41
FINANCIAL STATEMENTS........................................ 41
APPENDIX A -- Market Value Adjustment ("MVA")............... A-1
APPENDIX B -- Withdrawals and Withdrawal Charges............ B-1
</TABLE>
- --------------------------------------------------------------------------------
DEFINITIONS
- --------------------------------------------------------------------------------
The following terms, as used in this prospectus, have the indicated
meanings:
ACCUMULATION PHASE -- The period during which you invest money in your contract.
ACCUMULATION UNIT -- A unit of measurement which we use to calculate the value
of the variable portion of your contract during the Accumulation Phase.
ANNUITANT(S) -- The person(s) on whose life (lives) we base income payments.
ANNUITY DATE -- The date on which income payments begin, as selected by you.
ANNUITY UNIT(S) -- A measurement we use to calculate the amount of income
payments you receive from the variable portion of your contract during the
Income Phase.
BENEFICIARY -- The person designated to receive any benefits under the contract
if you or the Annuitant dies.
INCOME PHASE -- The period during which we make income payments to you.
IRS -- The Internal Revenue Service.
NON-QUALIFIED (CONTRACT) -- A contract purchased with after-tax dollars. In
general, these contracts are not under any pension plan, specially sponsored
program or individual retirement account ("IRA").
PURCHASE PAYMENTS -- The money you give us to buy the contract, as well as any
additional money you give us to invest in the contract after you own it.
QUALIFIED (CONTRACT) -- A contract purchased with pre-tax dollars. These
contracts are generally purchased under a pension plan, specially sponsored
program or IRA.
TRUST -- Mutual Fund Variable Annuity Trust, an open-end management investment
company.
UNDERLYING FUND(S) -- The underlying series of the Trust in which the Variable
Portfolios invest.
VARIABLE PORTFOLIO(S) -- The variable investment options available under the
contract. Each Variable Portfolio has its own investment objective and is
invested in the underlying investments of the Trust.
3
<PAGE> 4
- --------------------------------------------------------------------------------
SUMMARY
- --------------------------------------------------------------------------------
This summary sets forth some of the more important points that you should
know and consider before purchasing the Vista Variable Annuity. The remainder of
the prospectus discusses the topics in more detail. We urge you to read it
carefully and retain it, and the prospectus for the Trust, for future reference.
WHAT IS AN ANNUITY CONTRACT?
An annuity is a contract between you and an insurance company. You are the
owner of the contract. The contract provides three main benefits:
- Tax Deferral: This means that you do not pay taxes on your earnings from
the annuity until you withdraw them.
- Death Benefit: If you die during the Accumulation Phase, the insurance
company pays a death benefit to your Beneficiary.
- Guaranteed Income: If elected, you receive a stream of income for your
lifetime, or another available period you select.
The Vista Variable Annuity is a contract between you and First SunAmerica
(the Company, Us, We). It is designed to help you invest on a tax deferred basis
and meet long-term financial goals, such as retirement funding.
Like most annuities, this contract has an Accumulation Phase and an Income
Phase. During the Accumulation Phase, you invest money in your contract. Your
earnings are based on the investment performance of the Variable Portfolios you
allocate money to and/or the interest rate earned on fixed account options.
During the Income Phase, you will receive income payments from your annuity.
Your payments may be fixed in dollar amount, may vary with investment
performance of the Variable Portfolios or be a combination of both. Among other
factors, the amount of money you are able to accumulate in your contract during
the Accumulation Phase will determine the amount of your payments during the
Income Phase.
WHAT IS THE DIFFERENCE BETWEEN A VARIABLE ANNUITY AND A FIXED ANNUITY?
A fixed annuity earns interest at a fixed rate guaranteed by the insurance
company. A variable annuity typically provides a fixed account option but also
provides Variable Portfolios. The Variable Portfolios are similar to a mutual
fund, but are only available through the purchase of an annuity. Most
significantly, you as the contract owner bear the entire investment risk with
respect to any Purchase Payments allocated to the Variable Portfolios of an
annuity. This means that the value of your contract will go up and down,
depending on the performance of the Variable Portfolios.
Vista Variable Annuity is a variable annuity with five fixed account
options and six Variable Portfolios.
WHAT ARE THE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT?
You may allocate money to the following Variable Portfolios of the Trust:
<TABLE>
<S> <C>
- International Equity - Asset Allocation
- Capital Growth - U.S. Government Income
- Growth and Income - Money Market
</TABLE>
You may also allocate money to the fixed account options for periods of 1,
3, 5, 7 and 10 years. We call these time periods guarantee periods. First
SunAmerica guarantees the interest rate credited to money in a fixed account
option. The interest rate offered for different guarantee periods may differ
4
<PAGE> 5
from time to time, but we will never credit less than a 3% annual effective
rate. Additionally, if you allocate money to a fixed account option and withdraw
all or part of it prior to the end of the guarantee period, you may incur an
adjustment to the value of your contract called a market value adjustment (a
"MVA"). A MVA can decrease or increase the value of your contract.
During the Accumulation Phase, you may transfer among the Variable
Portfolios and/or the fixed account options. Fifteen free transfers are
permitted per contract year. After that, we assess a transfer fee. A MVA may
also apply in the case of a transfer from a fixed account option.
HOW MAY I ACCESS MY MONEY?
During the Accumulation Phase, earnings may be withdrawn at any time
without incurring a withdrawal charge. After the first contract year, your first
withdrawal each contract year will be free of a withdrawal charge if it does not
exceed the greater of: (1) earnings in your contract or (2) 10% of your Purchase
Payments still subject to a withdrawal charge which have been in your contract
for at least a year and not previously withdrawn. You will not get the benefit
of a free withdrawal amount upon a full surrender of your contract.
Withdrawals in excess of these limits may be assessed a withdrawal charge.
Generally, withdrawals may be made from your contract in the amount of $1,000 or
more. You may request withdrawals in writing or by establishing systematic
withdrawals. Under systematic withdrawals, the minimum withdrawal amount is
$250.
There are no withdrawal charges on that portion of your money invested for
seven years or more. Of course, upon a withdrawal you may have to pay income
tax. A 10% IRS penalty tax may also apply if you are under age 59 1/2.
Additionally, we do not assess withdrawal charges upon payment of a death
benefit or when you switch to the Income Phase.
CAN I EXAMINE THE CONTRACT?
You may cancel your contract within thirty days of your receipt of the
contract (or longer if required by state law) by mailing it to our Annuity
Service Center. Your contract will be treated as void on the date we receive it
and we will refund an amount equal to the contract value (unless otherwise
required by state law). Its value may be more or less than the money you
initially invested.
WHAT ARE THE CHARGES AND DEDUCTIONS UNDER A CONTRACT?
Each year, we deduct a $30 contract maintenance fee from your contract. We
also deduct insurance charges which equal 1.40% annually of the average daily
value of your contract allocated to the Variable Portfolios. The insurance
charges include: mortality and expense risk, 1.25%, and distribution expense,
.15%.
As with other professionally managed investments, there are also investment
charges imposed on contracts with money allocated to the Variable Portfolios,
which are estimated to range from .55% to 1.10%.
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 Purchase
Payments you withdraw. The percentage declines with each year the money is in
the contract as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
YEAR 1 2 3 4 5 6 7 8+
- ---------------------------------------------------------------------------------------------
WITHDRAWAL
CHARGE 6% 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.
5
<PAGE> 6
WHAT IS THE DEATH BENEFIT UNDER THE CONTRACT?
If you die during the Accumulation Phase of your contract, your Beneficiary
will receive a death benefit.
If you were less than age 70 when your contract was issued, the death
benefit is the greater of:
1. the value of your contract at the time we receive satisfactory proof of
death; or
2. total Purchase Payments less any withdrawals (and any fees or charges
applicable to such withdrawals); or
3. the maximum anniversary value on any contract anniversary preceding your
death. The anniversary value equals the value of your contract on a
contract anniversary plus any Purchase Payments and less any withdrawals
(and any fees or charges applicable to such withdrawals) since that
contract anniversary.
If you were age 70 or older when your contract was issued, the death
benefit will equal the value of your contract at the time we receive
satisfactory proof of death.
WHAT ARE THE AVAILABLE INCOME OPTIONS UNDER THE CONTRACT?
You can select from one of five 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 3 to 30 years.
You will also need to decide when your income payments begin and if you
want your income payments to fluctuate with investment performance or remain
constant. Once you begin receiving income payments, you cannot change your
income option.
If your contract is part of a Non-qualified retirement plan (one that is
established with after-tax dollars), payments during the Income Phase are
considered partly a return of your original investment. The "original
investment" part of each payment is not taxable as income. For contracts which
are part of a Qualified retirement plan using before-tax dollars, the entire
payment is taxable as income.
6
<PAGE> 7
- --------------------------------------------------------------------------------
FEE TABLES
- --------------------------------------------------------------------------------
OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGE (AS A PERCENTAGE OF PURCHASE PAYMENTS):
<TABLE>
<CAPTION>
YEAR
<S> <C>
One.................................................. 6%
Two.................................................. 6%
Three................................................ 5%
Four................................................. 4%
Five................................................. 3%
Six.................................................. 2%
Seven................................................ 1%
Eight and later...................................... 0%
ANNUAL CONTRACT MAINTENANCE FEE............................. $30
TRANSFER FEE................................................ $25
(no transfer fee applies to the first 15 transfers in a
contract year)
</TABLE>
- --------------------------------------------------------------------------------
ANNUAL SEPARATE ACCOUNT EXPENSES
(AS A PERCENTAGE OF DAILY NET ASSET VALUE)
<TABLE>
<S> <C>
MORTALITY RISK CHARGE....................................... 0.90%
EXPENSE RISK CHARGE......................................... 0.35%
DISTRIBUTION EXPENSE CHARGE................................. 0.15%
----
TOTAL EXPENSE CHARGE................................. 1.40%
====
</TABLE>
- ---------------
ANNUAL TRUST EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS AFTER REIMBURSEMENT OR WAIVER OF EXPENSES
FOR THE TRUST'S
FISCAL YEAR ENDED AUGUST 31, 1998):
<TABLE>
<CAPTION>
ADVISORY FEE ADMINISTRATION FEE TOTAL ANNUAL
(AFTER WAIVER OF FEE) (AFTER WAIVER OF FEE) OTHER EXPENSES EXPENSES*
--------------------- --------------------- -------------- ------------
<S> <C> <C> <C> <C>
International Equity............. 0.00% 0.00% 1.10% 1.10%
Capital Growth................... 0.00% 0.00% .90% .90%
Growth and Income................ 0.00% 0.00% .90% .90%
Asset Allocation................. 0.00% 0.00% .85% .85%
U.S. Government Income........... 0.00% 0.00% .80% .80%
Money Market..................... 0.00% 0.00% .55% .55%
</TABLE>
* Absent fee waivers or reimbursement of expenses by the adviser, you would have
incurred the following expenses during the last fiscal year: International
Equity 3.05%; Capital Growth 1.7%; Growth and Income 1.7%; Asset Allocation
1.81%; U.S. Government Income 1.99%; and Money Market 2.24%.
THE ABOVE EXPENSES WERE PROVIDED BY THE TRUST. THE COMPANY HAS NOT VERIFIED THE
ACCURACY OF THE INFORMATION.
7
<PAGE> 8
- --------------------------------------------------------------------------------
EXAMPLES
- --------------------------------------------------------------------------------
You will pay the following expenses on a $1,000 investment in each Variable
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 is annuitized.*
<TABLE>
<CAPTION>
TIME PERIODS
----------------------------------------
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
International Equity......................... (a) $86 $130 $166 $289
(b) $26 $ 80 $136 $289
Capital Growth............................... (a) $84 $124 $156 $269
(b) $24 $ 74 $126 $269
Growth and Income............................ (a) $84 $124 $156 $269
(b) $24 $ 74 $126 $269
Asset Allocation............................. (a) $83 $122 $154 $264
(b) $23 $ 72 $124 $264
U.S. Government Income....................... (a) $83 $121 $151 $259
(b) $23 $ 71 $121 $259
Money Market................................. (a) $80 $113 $138 $234
(b) $20 $ 63 $108 $234
</TABLE>
- ---------------
* We do not currently assess a surrender charge upon annuitization.
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 the Underlying Funds the adviser, The Chase Manhattan Bank, has
voluntarily agreed to waive fees or reimburse certain expenses, to keep
annual operating expenses at the levels indicated under "Annual Trust
Expenses" on the prior page. The adviser also may voluntarily waive or
reimburse additional amounts to increase an Underlying Fund'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
Underlying Fund is able to make such payment and remain in compliance with
the foregoing expense limitations.
3. The Examples assume that no transfer fees were imposed. The contracts only
sold in the state of New York, which does not assess premium taxes.
Accordingly, premium taxes are not reflected.
4. THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
8
<PAGE> 9
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCEPTION TO FISCAL YEAR FISCAL YEAR
PORTFOLIOS 8/31/96 8/31/97 8/31/98
---------- ------------ ----------- -----------
<S> <C> <C> <C>
International Equity
Beginning AUV...................................... $ 10.91 $ 10.92 $ 11.67
Ending AUV......................................... $ 10.92 $ 11.67 $ 11.22
Ending Number of AUs............................... 40,791 98,431 149,618
Capital Growth
Beginning AUV...................................... $ 12.26 $ 13.95 $ 17.51
Ending AUV......................................... $ 13.95 $ 17.51 $ 14.43
Ending Number of AUs............................... 71,885 216,078 329,146
Growth and Income
Beginning AUV...................................... $ 12.02 $ 13.07 $ 17.47
Ending AUV......................................... $ 13.07 $ 17.47 $ 16.29
Ending Number of AUs............................... 134,402 362,810 598,820
Asset Allocation
Beginning AUV...................................... $ 11.42 $ 12.00 $ 14.49
Ending AUV......................................... $ 12.00 $ 14.49 $ 14.30
Ending Number of AUs............................... 50,868 109,177 201,112
U.S. Government Income
Beginning AUV...................................... $ 11.08 $ 10.79 $ 11.50
Ending AUV......................................... $ 10.79 $ 11.50 $ 12.61
Ending Number of AUs............................... 20,140 54,714 205,110
Money Market
Beginning AUV...................................... $ 10.02 $ 10.47 $ 10.84
Ending AUV......................................... $ 10.47 $ 10.84 $ 11.22
Ending Number of AUs............................... 48,304 61,233 43,125
</TABLE>
- ---------------
AUV -- Accumulation Unit Value
AU -- Accumulation Units
- --------------------------------------------------------------------------------
PERFORMANCE DATA
- --------------------------------------------------------------------------------
We advertise the Money Market Portfolio's "yield" and "effective yield."
Both figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Money Market Portfolio refers to the net
income generated for a contract funded by an investment in the Money Market
Portfolio over a seven-day period. This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Money Market Portfolio is assumed to
be reinvested at the end of each seven-day period. The "effective yield" will be
slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment. Neither the yield nor the effective yield takes into
consideration the effect of any capital changes that might have occurred during
the seven-day period, nor do they reflect the impact of premium taxes or any
withdrawal charges. The impact of other recurring charges on both yield figures
is, however, reflected in them to the same extent it would affect the yield (or
effective yield) for a contract of average size.
9
<PAGE> 10
In addition, the separate account may advertise "total return" data for its
other Variable Portfolios. Like the yield figures described above, total return
figures are based on historical data and are not intended to indicate future
performance. The "total return" is a computed rate of return that, when
compounded annually over a stated period of time and applied to a hypothetical
initial investment in a Variable Portfolio made at the beginning of the period,
will produce the same contract value at the end of the period that the
hypothetical investment would have produced over the same period (assuming a
complete redemption of the contract at the end of the period). Recurring
contract charges are reflected in the total return figures in the same manner as
they are reflected in the yield data for contracts funded through the Money
Market Portfolio. The effect of applicable withdrawal charges due to the assumed
redemption will be reflected in the return figures, but may be omitted in
additional return figures given for comparison.
The separate account may also advertise an annualized 30-day (or one month)
yield figure for Variable Portfolios other than the Money Market Portfolio.
These yield figures are based upon the actual performance of the Variable
Portfolio over a 30-day (or one month) period ending on a date specified in the
advertisement. Like the total return data described above, the 30-day (or one
month) yield data will reflect the effect of all recurring contract charges (but
will not reflect any withdrawal charges or premium taxes). The yield figure is
derived from net investment gain (or loss) over the period expressed as a
fraction of the investment's value at the end of the period.
More detailed information on the computation of advertised performance data
for the separate account is contained in the SAI.
- --------------------------------------------------------------------------------
DESCRIPTION OF FIRST SUNAMERICA, THE SEPARATE ACCOUNT
AND THE GENERAL ACCOUNT
- --------------------------------------------------------------------------------
FIRST SUNAMERICA LIFE INSURANCE COMPANY
First SunAmerica is a stock life insurance company organized under the laws
of the state of New York in December 1978. Its principal place of business is
733 Third Avenue, New York, New York 10017.
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 six broker-dealers,
specialize in retirement savings and investment products and services. Business
focuses include fixed and variable annuities, mutual funds, premium finance,
broker-dealer services and trust administration services. As of September 30,
1998, First SunAmerica owned $1.9 billion in assets while SunAmerica Inc., the
Company's ultimate parent, together with its subsidiaries, held $55 billion of
assets, consisting of $39 billion of assets on its balance sheet, $3 billion of
assets managed in mutual funds and private accounts, and $13 billion under
custody in retirement trust accounts.
First SunAmerica may advertise the rating and other information assigned to
it by independent industry ratings organizations. Some of those organizations
are A.M. Best Company ("A.M. Best"), Moody's Investor's Service ("Moody's"),
Standard & Poor's Insurance Rating Services ("S&P"), and Duff & Phelps. A.M.
Best's and Moody's ratings reflect their current opinion of First SunAmerica's
financial strength and performance in comparison to others in the life and
health insurance industry. S&P's and Duff & Phelps' ratings measure the ability
of an insurance company to meet its obligations under insurance policies it
issues. These two ratings do not measure the insurer's ability to meet
non-policy obligations. These ratings do not relate to the performance of the
Variable Portfolios.
10
<PAGE> 11
SEPARATE ACCOUNT
First SunAmerica originally established FS Variable Annuity Account Two
(the "separate account") on May 24, 1994. The separate account is registered
with the SEC as a unit investment trust under the Investment Company Act of
1940, as amended. First SunAmerica owns the assets of the separate account.
However, the assets in the separate account are not chargeable with liabilities
arising out of any other business conducted by First SunAmerica. Income, gains,
and losses (realized and unrealized), resulting from assets in the separate
account are credited to or charged against the separate account without regard
to other income, gains, or losses of First SunAmerica.
GENERAL ACCOUNT
Money allocated to the fixed account options goes into First SunAmerica's
general account. The general account consists of all of First SunAmerica's
assets other than assets attributable to a separate account. All of the assets
in the general account are chargeable with the claims of any First SunAmerica
contract holders as well as all of its creditors. The general account funds are
invested as permitted under state insurance laws.
- --------------------------------------------------------------------------------
VARIABLE PORTFOLIO OPTIONS
- --------------------------------------------------------------------------------
The contract currently offers six variable investment Variable Portfolios.
These Variable Portfolios invest in shares of the Trust. These Variable
Portfolios operate similarly to a mutual fund but are only available through the
purchase of this annuity contract. The Underlying Funds are:
<TABLE>
<S> <C>
- INTERNATIONAL EQUITY - ASSET ALLOCATION
- CAPITAL GROWTH - U.S. GOVERNMENT INCOME
- GROWTH AND INCOME - MONEY MARKET
</TABLE>
The Chase Manhattan Bank ("Chase" or the "Adviser") acts as investment
adviser, administrator and custodian for the Trust. Chase Asset Management, Inc.
("CAM") is the investment subadviser to each of the Variable Portfolios except
the International Equity Portfolio. Chase Asset Management (London) Limited, an
English corporation ("CAM London") is the investment subadviser to the
International Equity Portfolio. As investment adviser to the Underlying Funds,
Chase makes investment decisions subject to policies set by the Board of
Trustees of the Trust. As administrator of the Underlying Funds, Chase provides
certain services including coordinating relationships with independent
contractors and agents; preparing and filing of certain documents; preparing
financial statements; arranging for the maintenance of books and records; and
providing office facilities. Certain of these services have been delegated to
Vista Fund Distributors, Inc. ("VFD") which serves as sub-administrator to the
Underlying Funds. As custodian for the Underlying Funds, Chase's
responsibilities include safeguarding and controlling the Underlying Funds' cash
and securities, handling the receipt and delivery of securities, determining
income and collecting interest on investments, maintaining books of original
entry and other required books and accounts, and calculating daily net asset
values.
The Underlying Funds' investment objectives are as follows:
INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation and
income by investing primarily in a portfolio of marketable equity securities of
issuers located throughout the world.
CAPITAL GROWTH PORTFOLIO seeks long-term capital appreciation. This
Variable Portfolio invests primarily in common stocks which are widely
diversified by industry and company.
GROWTH AND INCOME PORTFOLIO seeks growth of capital and income by investing
primarily in common stocks and other securities which demonstrate the potential
for appreciation and/or dividends.
11
<PAGE> 12
ASSET ALLOCATION PORTFOLIO seeks high total return (including income and
capital gains) by investing in a diversified portfolio of equity and debt
securities, including common stocks, convertible securities and government and
corporate fixed-income obligations. The Adviser considers both the opportunity
for gain and the risk of loss in making investments, and may alter the
percentages of assets invested in equity and fixed income securities, depending
on the judgment of the Adviser as to general market and economic conditions,
trends and yields and interest rates and changes in fiscal and monetary
policies.
U.S. GOVERNMENT INCOME PORTFOLIO seeks relatively high current income,
liquidity and security of principal. This Variable Portfolio invests in
obligations issued, guaranteed or insured by the U.S. Government, its agencies
or instrumentalities. Neither the United States nor any of its agencies insures
or guarantees the market value of shares of this Variable Portfolio.
MONEY MARKET PORTFOLIO seeks high current income while preserving capital
by investing in a diversified selection of money market investments.
There is no assurance that the investment objective of any of the
Underlying Funds will be met. You bear the complete investment risk for Purchase
Payments allocated to a Variable Portfolio. Contract values will fluctuate in
accordance with the investment performance of the Variable Portfolio(s).
Additionally, contract fees and charges reduce investment return.
YOU SHOULD READ THE PROSPECTUS FOR THE TRUST CAREFULLY. THE PROSPECTUS
CONTAINS DETAILED INFORMATION ABOUT THE UNDERLYING FUNDS, INCLUDING MORE
DETAILED INFORMATION ABOUT EACH UNDERLYING FUNDS' INVESTMENT OBJECTIVE AND RISK
FACTORS.
VOTING RIGHTS
First SunAmerica is the legal owner of the Trust's shares. However, when an
Underlying Fund solicits proxies in conjunction with a vote of shareholders, we
must obtain your instructions on how to vote those shares. We vote all of the
shares we own in proportion to your instructions. Should we determine that we
are no longer required to comply with these rules, we will vote the shares in
our own right.
SUBSTITUTION OF SECURITIES
If Underlying Funds become unavailable for investment, we may be required
to substitute shares of another Underlying Fund. We will seek prior approval of
the SEC and give you notice before substituting shares.
- --------------------------------------------------------------------------------
FIXED ACCOUNT OPTIONS
- --------------------------------------------------------------------------------
ALLOCATIONS
The contract also offers fixed account options for periods of 1, 3, 5, 7 or
10 years. We call these time periods guarantee periods. All of these fixed
account options pay interest at rates set and guaranteed by First SunAmerica.
Interest rates may differ from time to time and are set at our sole discretion.
We will never credit less than a 3% annual effective rate to any of the fixed
account options. The interest rate offered for new Purchase Payments may differ
from interest rates offered for subsequent Purchase Payments and money already
in the fixed account options. In addition, different guarantee periods offer
different interest rates. Once established, the rates for specified payments do
not change during the specified period.
When a guarantee period ends, you may leave your money in the same
guarantee period. You may also reallocate your money to another fixed account
option or to the Variable Portfolios. If you want to reallocate your money you
must contact us within 30 days after the end of the current guarantee
12
<PAGE> 13
period and instruct us how to reallocate the money. If we do not hear from you,
we will keep your money in the same guarantee period where it will earn the
renewal interest rate applicable at that time.
MARKET VALUE ADJUSTMENT ("MVA")
If you take money out of the fixed account options before the end of the
guarantee period, we make an adjustment to your contract (the "MVA"). The MVA
reflects any difference in the interest rate environment between the time you
place your money in the fixed account option and the time when you withdraw that
money. This adjustment can increase or decrease your contract value. You have 30
days after the end of each guarantee period to reallocate your funds without
incurring any MVA.
We calculate the MVA by doing a comparison between current rates and the
rate being credited to you in the fixed account option. For the current rate we
use a rate being offered by us for a guarantee period that is equal to the time
remaining in the guarantee period from which you seek withdrawal. If we are not
currently offering a guarantee period for that period of time, we determine an
applicable rate by using a formula to arrive at a number between the interest
rates currently offered for the two closest periods available.
Generally, if interest rates drop between the time you put your money into
the fixed account options and the time you take it out, we credit a positive
adjustment to your contract. Conversely, if interest rates increase during the
same period, we post a negative adjustment to your contract.
Where the MVA is negative, we deduct the adjustment from any money
remaining in the fixed account option. If there is not enough money in the fixed
account option to meet the negative deduction, we deduct the remainder from your
withdrawal. Where the MVA is positive, we add the adjustment to your withdrawal
amount.
APPENDIX A shows how to calculate the MVA.
- --------------------------------------------------------------------------------
CONTRACT CHARGES
- --------------------------------------------------------------------------------
There are charges and expenses associated with your contract. These charges
and expenses reduce your investment return. We will not increase the contract
maintenance fee or the insurance and withdrawal charges under your contract.
However, the investment charges under your contract may increase or decrease.
INSURANCE CHARGES
The amount of this charge is 1.40% annually, of the value of your contract
invested in the Variable Portfolios. We deduct the charge daily.
The insurance charge compensates us for the mortality and expense risks and
the costs of contract distribution we assume. If these charges do not cover all
expenses, we will pay the difference. Likewise, if these charges exceed our
expenses, we will keep the difference.
WITHDRAWAL CHARGES
The contract provides a free withdrawal amount every year. (SEE CONTRACT
CHARGES, FREE WITHDRAWAL AMOUNT, PAGE 15.) Additionally, earnings in your
contract may be withdrawn free of withdrawal charges. If you take money out in
excess of the free withdrawal amount, you may incur a withdrawal charge.
We apply a withdrawal charge against each Purchase Payment you put into the
contract. After a Purchase Payment has been in the contract for seven complete
years, no withdrawal charge applies.
13
<PAGE> 14
The withdrawal charge equals a percentage of the Purchase Payment you take out
of the contract. The withdrawal charge percentage declines each year a Purchase
Payment is in the contract, as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR 1 2 3 4 5 6 7 8
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WITHDRAWAL CHARGE 6% 6% 5% 4% 3% 2% 1% 0%
- ------------------------------------------------------------------------------------------------------
</TABLE>
When calculating the withdrawal charge, we treat withdrawals as coming
first from the Purchase Payments that have been in your contract the longest.
However, for tax purposes, your withdrawals are considered earnings first, then
Purchase Payments.
Whenever possible, we deduct the withdrawal charge from the money remaining
in your contract. If you withdraw all of your contract value, applicable
withdrawal charges are deducted from the amount withdrawn.
We do not assess a withdrawal charge for money withdrawn to pay a death
benefit or to begin the Income Phase of your contract. Withdrawals made prior to
age 59 1/2 may result in a 10% IRS penalty tax. SEE TAXES, PAGE 24.
APPENDIX B provides more information on withdrawals and the withdrawal
charge.
INVESTMENT CHARGES
Charges are deducted from the Underlying Funds for the advisory and other
expenses of the Underlying Funds. THE FEE TABLES LOCATED AT PAGE 7 illustrate
these charges and expenses. For more detailed information on these investment
charges, refer to the attached prospectus for the Trust.
CONTRACT MAINTENANCE FEE
During the Accumulation Phase, we subtract a contract maintenance fee from
your account once per contract year. This charge compensates us for the cost of
contract administration. We deduct the $30 contract maintenance fee from your
account value on your contract anniversary. If you withdraw your entire contract
value, the fee is deducted from that withdrawal.
TRANSFER FEE
The contract currently provides for 15 free transfers between investment
options each contract year. After that, a charge of $25 applies to each
additional transfer in any one contract year. SEE TRANSFERS DURING THE
ACCUMULATION PHASE, PAGE 20.
INCOME TAXES
We do not currently deduct income taxes from your contract. We reserve the
right to do so in the future.
REDUCTION OR ELIMINATION OF CHARGES AND EXPENSES, AND ADDITIONAL AMOUNTS
CREDITED
Sometimes sales of the contracts to groups of similarly situated
individuals may lower our administrative and/or sales expenses. We reserve the
right to reduce or waive certain charges and expenses when this type of sale
occurs. In addition, we may also credit additional interest to policies sold to
such groups. We determine which groups are eligible for such treatment. Some of
the criteria used to make a determination are: size of the group; amount of
expected Purchase Payments; relationship existing between us and prospective
purchaser; nature of the purchase; length of time a group of contracts is
expected to remain active; purpose of the purchase and whether that purpose
increases the likelihood that our expenses will be reduced; and/or any other
factors that we believe indicate that administrative and/or sales expenses may
be reduced.
14
<PAGE> 15
We may make such a determination regarding sales to our employees, our
affiliates' employees and employees of currently contracted broker-dealers, our
registered representatives and immediate family members of all of those
described.
We reserve the right to change or modify any such determination or the
treatment applied to a particular group, at any time.
FREE WITHDRAWAL AMOUNT
Your contract provides for a free withdrawal amount. Purchase Payments that
are no longer subject to a withdrawal charge and not previously withdrawn, plus
earnings, may be withdrawn without penalty.
After the first full contract year, the contract provides for a free
withdrawal amount on your first withdrawal of the contract year. The free
withdrawal amount is the greater of (1) earnings in your contract and (2) 10% of
your total Purchase Payments invested for at least one year and not yet
withdrawn. Total Purchase Payments are equal to your total Purchase Payments
invested in the contract less any Purchase Payments withdrawn upon which a
surrender charge was paid and the amount of the surrender charge. Additionally,
once a Purchase Payment is no longer subject to withdrawal charges, it is no
longer included when determining total Purchase Payments.
Upon a full surrender of your contract, to the extent you previously
withdraw Purchase Payments free of a withdrawal charge under the free withdrawal
provision, we will recoup the full withdrawal charge on such amounts, as if that
money was still invested in the contract on the date of surrender.
We will waive the withdrawal charge upon payment of a death benefit. Where
legally permitted, the withdrawal charge may be eliminated when a contract is
issued to an officer, director or employee of the Company or its affiliates.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE CONTRACTS
- --------------------------------------------------------------------------------
SUMMARY
This contract works in two stages, the Accumulation Phase and the Income
Phase. Your contract is in the Accumulation Phase while you make payments into
the contract. The Income Phase begins when you request that we begin making
payments to you out of the money accumulated in your contract.
OWNERSHIP
The Vista Variable Annuity is a Flexible Payment Deferred Annuity Contract.
The contract holder is the person entitled to exercise all rights of ownership
under the contract.
ANNUITANT
The annuitant is the person on whose life we base income payments. You may
change the Annuitant at any time before the Annuity Date. You may also designate
a second person on whose life, together with the annuitant, income payments
depend. If the annuitant dies before the Annuity Date, you must notify us and
select a new annuitant.
MODIFICATION OF THE CONTRACT
Only the Company's President, a Vice President or Secretary may approve a
change or waive a provision of the contract. Any change or waiver must be in
writing. We reserve the right to modify the terms of the contract as necessary
to comply with changes in applicable law.
15
<PAGE> 16
ASSIGNMENT
Contracts issued pursuant to Non-qualified plans that are not subject to
Title 1 of the Employee Retirement Income Security Act of 1974 ("ERISA") may be
assigned by the owner at any time during the lifetime of the Annuitant prior to
the Annuity Date. We will not be bound by any assignment until written notice is
received by us at our Annuity Service Center. We are not responsible for the
validity, tax or other legal consequences of any assignment. An assignment will
not affect any payments we may make or actions we may take before we receive
notice of the assignment.
If the contract is issued pursuant to a Qualified plan (or a Non-qualified
plan that is subject to Title 1 of ERISA), it may not be assigned, pledged or
otherwise transferred except under such conditions as may be allowed under
applicable law.
BECAUSE AN ASSIGNMENT MAY BE A TAXABLE EVENT, YOU SHOULD CONSULT A
COMPETENT TAX ADVISER SHOULD YOU WISH TO ASSIGN YOUR CONTRACT.
DEATH BENEFIT
If you die during the Accumulation Phase of your contract, we pay a death
benefit to your Beneficiary.
If you were less than age 70 when your contract was issued, the death
benefit is equal to the greater of:
1. the value of your contract at the time we receive satisfactory proof of
death; or
2. total Purchase Payments less any withdrawals (and any fees or charges
applicable to such withdrawals); or
3. the maximum anniversary value on any contract anniversary preceding your
death. The anniversary value equals the value of your contract on a
contract anniversary plus any Purchase Payments and less any withdrawals
(and any fees or charges applicable to such withdrawals) since that
contract anniversary.
If you were age 70 or older when your contract was issued, the death
benefit will equal the value of your contract at the time we receive
satisfactory proof of death.
We do not pay the death benefit if you die after you switch to the Income
Phase. However, if you die during the Income Phase, your Beneficiary receives
any remaining guaranteed income payments in accordance with the income option
you selected. (SEE INCOME PHASE, INCOME OPTIONS, PAGE 22.)
You name your Beneficiary. You may change the Beneficiary at any time,
unless you previously made an irrevocable Beneficiary designation.
We pay the death benefit when we receive satisfactory proof of death. We
consider the following satisfactory proof of death:
1. a certified copy of the death certificate; or
2. a certified copy of a decree of a court of competent jurisdiction as to
the finding of death; or
3. a written statement by a medical doctor who attended the deceased at the
time of death; or
4. any other proof satisfactory to us.
We may require additional proof before we pay the death benefit.
The death benefit payment must begin immediately upon receipt of all
necessary documents. In any event, the death benefit must be paid within 5 years
of the date of death unless the Beneficiary elects to have it payable in the
form of an income option. If the Beneficiary elects an income option, it must be
paid over the Beneficiary's lifetime or for a period not extending beyond the
Beneficiary's life
16
<PAGE> 17
expectancy. Payments must begin within one year of the date of your death. If a
Beneficiary does not elect a specific form of pay out within 60 days of our
receipt of proof of death, we pay a lump sum death benefit to the Beneficiary.
If the Beneficiary is the spouse of a deceased owner, he or she can elect
to continue the contract at the then current value. If the Beneficiary/spouse
continues the contract, we do not pay a death benefit to him or her.
- --------------------------------------------------------------------------------
PURCHASES, WITHDRAWALS AND CONTRACT VALUE
- --------------------------------------------------------------------------------
PURCHASE PAYMENTS
A Purchase Payment is the money you give us to buy a contract. Any
additional money you give us to invest in the contract after purchase is a
subsequent Purchase Payment.
This chart shows the minimum initial and subsequent Purchase Payments
permitted under your contract. These amounts depend upon whether your contract
is Qualified or Non-qualified for tax purposes. SEE TAXES, PAGE 24.
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------
MINIMUM
MINIMUM INITIAL SUBSEQUENT
PURCHASE PAYMENT PURCHASE PAYMENT
- --------------------------------------------------------------------
Qualified $2,000 $250
- --------------------------------------------------------------------
Non-Qualified $5,000 $250
- --------------------------------------------------------------------
</TABLE>
Prior Company approval is required to accept Purchase Payments greater than
$1,000,000. Also, the optional automatic payment plan allows you to make
subsequent Purchase Payments of as little as $100.00.
We may refuse any Purchase Payment. In general, First SunAmerica will not
issue a Qualified contract to anyone who is age 70 1/2 or older, unless it is
shown that the minimum distribution required by the IRS is being made. In
addition, we may not issue a contract to anyone over age 85.
AUTOMATIC DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging ("DCA") program allows you to invest gradually in
the Variable Portfolios. Under the program you systematically transfer a set
dollar amount or percentage of portfolio value from the Money Market Portfolio,
U.S. Government Income Portfolio or the 1-year fixed account option (source
accounts) to any other Variable Portfolio. Transfers may be monthly, quarterly,
semiannually or annually. You may change the frequency at any time by notifying
us in writing. The minimum transfer amount under the DCA program is $100,
regardless of the source account.
The DCA program is designed to lessen the impact of market fluctuations on
your investment. However, we cannot ensure that you will make a profit. When you
elect the DCA program, you are continuously investing in securities regardless
of fluctuating price levels. You should consider your tolerance for investing
through periods of fluctuating price levels.
We reserve the right to modify, suspend or terminate this program at any
time.
17
<PAGE> 18
EXAMPLE:
Assume that you want to gradually move $750 each quarter from the Money
Market Portfolio to the Growth and Income Portfolio over six quarters. You
set up dollar cost averaging and purchase Accumulation Units at the
following hypothetical values:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
ACCUMULATION UNITS
QUARTER UNIT VALUE PURCHASED
- -----------------------------------------------------------
<S> <C> <C>
1 $ 7.50 100
2 $ 5.00 150
3 $10.00 75
4 $ 7.50 100
5 $ 5.00 150
6 $ 7.50 100
- -----------------------------------------------------------
</TABLE>
In this example, you paid an average price of only $6.67 per Accumulation
Unit over six quarters, while the average market price actually was $7.08.
By investing an equal amount of money each month, you automatically buy
more Accumulation Units when the market price is low and fewer Accumulation
Units when the market price is high. This example is for illustrative
purposes only.
ASSET ALLOCATION REBALANCING
Earnings in your contract may cause the percentage of your investment in
each investment option to differ from your original allocations. The automatic
asset rebalancing program addresses this situation. At your election, we
periodically rebalance your investments to return your allocations to their
original percentages.
Asset rebalancing may involve shifting a portion of your money out of an
investment option with a higher return into an investment option with a lower
return. You request quarterly, semiannual or annual rebalancing. Transfers made
as a result of rebalancing do not count against your 15 free transfers for the
contract 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
Variable Portfolios. You want 50% in the U.S. Government Income Portfolio
and 50% in the Capital Growth Portfolio. Over the next calendar quarter,
the U.S. Government Income Portfolio outperforms the Capital Growth
Portfolio. At the end of the calendar quarter, the U.S. Government Income
Portfolio now represents 60% of your holdings because it has increased in
value and the Capital Growth Portfolio represents 40% of your holdings. If
you had chosen quarterly rebalancing, on the last day of that quarter,
First SunAmerica would sell some of your units in the U.S. Government
Income Portfolio to bring its holdings back to 50% and use the money to buy
more units in the Capital Growth Portfolio to increase those holdings to
50%.
PRINCIPAL ADVANTAGE PROGRAM
The principal advantage program allows you to invest in one or more
Variable Portfolios without putting your principal at direct risk. The program
accomplishes this by allocating your investment strategically between the fixed
investment options and Variable Portfolios. You decide how much you want to
invest and approximately when you want a return of principal. First SunAmerica
calculates how much of your Purchase Payment needs to be allocated to the
particular fixed investment option to ensure that it grows to an amount equal to
your total principal invested under this program. The remaining principal is
invested in the Variable Portfolio(s) of your choice.
First SunAmerica reserves the right to modify, suspend or terminate this
program at any time.
18
<PAGE> 19
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 5% interest rate, First
SunAmerica allocates $71,068 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 $28,932 may be allocated among the Variable
Portfolios, as determined by you, to provide opportunity for greater
growth.
ALLOCATION OF PURCHASE PAYMENTS
We invest your Purchase Payments in the fixed and variable investment
options according to your instructions. If we receive a Purchase Payment without
allocation instructions, we invest the money according to your last allocation
instructions. SEE VARIABLE PORTFOLIO OPTIONS, PAGE 11 AND FIXED ACCOUNT OPTIONS,
PAGE 12.
In order to issue your contract, we must receive your completed
application, Purchase Payment allocation instructions and any other required
paperwork at our principal place of business. We allocate your initial purchase
payment within two days of receiving it. If we do not have complete information
necessary to issue your contract, we will contact you. If we do not have the
information necessary to issue your contract within 5 business days we will:
- Send your money back to you, or;
- Ask your permission to keep your money until we get the information
necessary to issue the contract.
ACCUMULATION UNITS
When you allocate a Purchase Payment to the Variable Portfolios, we credit
your contract with Accumulation Units of the separate account. We determine the
number of Accumulation Units credited by dividing the Purchase Payment by the
Accumulation Unit value for the specific Variable Portfolio. The value of an
Accumulation Unit will go up and down based on the performance of the Variable
Portfolios.
We calculate the value of an Accumulation Unit each day that the New York
Stock Exchange ("NYSE") is open as follows:
1. We determine the total value of money invested in a particular Variable
Portfolio;
2. We subtract from that amount all applicable contract charges; and
3. We divide this amount by the number of outstanding Accumulation Units.
We determine the number of Accumulation Units credited to your contract by
dividing the Purchase Payment by the Accumulation Unit value for the specific
Variable Portfolio.
EXAMPLE:
We receive a $25,000 Purchase Payment from you on Wednesday. You allocate
the money to the Asset Allocation Portfolio. The value of an Accumulation
Unit for the Asset Allocation Portfolio is $11.10 when the NYSE closes on
Wednesday. Your Purchase Payment of $25,000 is then divided by $11.10 and
we credit your contract on Wednesday night with 2252.52 Accumulation Units
of the Asset Allocation Portfolio.
Performance of the Variable Portfolios and the charges and expenses under
your contract affect Accumulation Unit values. These factors cause the value of
your contract to go up and down.
19
<PAGE> 20
FREE LOOK
You may cancel your contract within thirty days after receiving it and we
will refund the greater of Premium Payments or contract value. First SunAmerica
calls this a "free look." To cancel, you must mail the contract along with your
free look request to the Annuity Service Center at P.O. Box 54299, Los Angeles,
California 90054-0299. We will refund the value of your contract on the day we
receive your request.
TRANSFER DURING THE ACCUMULATION PHASE
During the Accumulation Phase you may transfer funds between the Variable
Portfolios and/or the fixed account options. You must transfer at least $100. If
less than $100 will remain in any Variable Portfolio after a transfer, that
amount must be transferred as well.
You may request transfers of your account value between the Variable
Portfolios and/or the fixed account options in writing or by telephone. We
currently allow 15 free transfers per contract per year. A charge of $25 for
each additional transfer in any contract year applies after the first 15
transfers. Transfers resulting from your participation in the DCA program count
against your 15 free transfers per contract year. However, transfers resulting
from your participation in the automatic asset rebalancing program do not count
against your 15 free transfers.
We accept transfer requests by telephone unless you specify not to on your
contract application. Additionally, in the future you may be able to execute
transfers or other financial transactions over the internet. When receiving
instructions over the telephone, we follow appropriate procedures to provide
reasonable assurance that the transactions executed are genuine. Thus, we are
not responsible for any claim, loss or expense from any error resulting from
instructions received over the telephone.
Upon implementation of internet account transfers we will have appropriate
procedures in place to provide reasonable assurance that the transactions
executed are genuine. Thus, First SunAmerica would not be responsible for any
claim, loss or expense from any error resulting from instructions received over
the internet. If we fail to follow any procedures, we may be liable for any
losses due to unauthorized or fraudulent instructions.
We may limit the number of transfers in any contract year or refuse any
transfer request for you or others invested in the contract if we believe that:
- Excessive trading or a specific transfer request or group transfer
requests may have a detrimental effect on unit values or the share prices
of the Underlying Funds; or
- The Underlying Funds inform us that they need to restrict the purchase or
redemption of the shares because of excessive trading or because a
specific transfer or group of transfers is deemed to have a detrimental
effect on share prices of affected Underlying Funds.
Where permitted by law, we may accept your authorization for a third party
to make transfers for you subject to certain rules. We reserve the right to
suspend or cancel such acceptance at any time and will notify you accordingly.
Additionally, we may restrict the investment options available for transfers
during any period in which such third party acts for you. We will notify such
third party beforehand regarding any restrictions. However, we will not enforce
these restrictions if we are satisfied that:
- such third party has been appointed by a court of competent jurisdiction
to act on your behalf; or
- such third party is a trustee/fiduciary for you or appointed by you to
act on your behalf for all your financial affairs.
We may provide administrative or other support services to independent
third parties you authorize to make transfers on your behalf. We do not
currently charge extra for providing these support services. This includes, but
is not limited to, transfers between investment options in accordance with
market timing strategies. Such independent third parties may or may not be
20
<PAGE> 21
appointed with us for the sale of annuities. However, WE DO NOT ENGAGE ANY THIRD
PARTIES TO OFFER INVESTMENT ALLOCATION SERVICES OF ANY TYPE. WE TAKE NO
RESPONSIBILITY FOR THE INVESTMENT ALLOCATION AND TRANSFERS TRANSACTED ON YOUR
BEHALF BY SUCH THIRD PARTIES OR FOR ANY INVESTMENT ALLOCATION RECOMMENDATIONS
MADE BY SUCH PARTIES.
For information regarding transfers during the Income Phase, SEE INCOME
PHASE, TRANSFERS DURING THE INCOME PHASE, PAGE 23.
We reserve the right to modify, suspend, waive or terminate these transfer
provisions at any time.
DISTRIBUTION OF CONTRACTS
Registered representatives of broker-dealers sell the contract. First
SunAmerica pays commissions to these representatives for the sale of the
contracts. We do not expect the total commissions to exceed 6.5% of your
Purchase Payments. We may also pay a bonus to representatives for contracts
which stay active for a particular period of time, in addition to standard
commissions. We do not deduct commissions paid to registered representatives
directly from your Purchase Payments.
From time to time, we may pay or allow additional promotional incentives in
the form of cash or other compensation. We reserve the right to offer these
additional incentives only to certain broker-dealers that sell or are expected
to sell, certain minimum amounts of the contract, or other contracts offered by
us. Promotional incentives may change at any time.
Vista Fund Distributors, Inc. ("VFD"), located at 101 Park Avenue, New
York, New York, 10178, serves as distributor of the Contracts. VFD is registered
as a broker-dealer under the Securities Exchange Act of 1934, as amended, and is
a member of the National Association of Securities Dealers, Inc. VFD is not
affiliated with First SunAmerica or the Adviser to the Trust. No underwriting
fees are paid in connection with the distribution of these contracts.
WITHDRAWALS
You can access money in your contract in two ways:
- by making a partial or total withdrawal, and/or;
- by receiving income payments during the Income Phase. (SEE INCOME PHASE,
PAGE 22.)
Generally, we deduct a withdrawal charge applicable to any total or partial
withdrawal and a MVA against withdrawals from the 3, 5, 7 or 10 year fixed
account options. If you withdraw your entire contract value, a deduction for the
contract maintenance fee also occurs. (SEE CONTRACT CHARGES, WITHDRAWAL CHARGE,
PAGE 13.)
Under most circumstances, the partial withdrawal minimum is $1,000. We
require that the value left in any investment option be at least $100 after the
withdrawal. You must send a written withdrawal request. Unless you provide
different instructions, partial withdrawals will be made pro rata from each
Variable Portfolio and the fixed account option in which your contract is
invested.
Under certain Qualified plans, access to the money in your contract may be
restricted. Additionally, withdrawals made prior to age 59 1/2 may result in a
10% IRS penalty tax. (SEE TAXES ON PAGE 24.)
We may be required to suspend or postpone the payment of a withdrawal for
any period of time when: (1) the NYSE is closed (other than customary weekend
and holiday closings); (2) trading with the NYSE is restricted; (3) an emergency
exists such that disposal of or determination of the value of shares of the
Variable Portfolios is not reasonably practicable; (4) the SEC, by order, so
permits for the protection of contract owners.
Additionally, we reserve the right to defer payments for a withdrawal from
a fixed account option. Such deferrals are limited to no longer than six months.
SYSTEMATIC WITHDRAWAL PROGRAM
During the Accumulation Phase, you may elect to receive periodic income
payments under the systematic withdrawal program. Under the program, you may
choose to take monthly, quarterly,
21
<PAGE> 22
semiannual or annual payments from your contract. Electronic transfer of these
funds to your bank account is available. The minimum amount of each withdrawal
is $250. There must be at least $100 remaining in each Variable Portfolio after
a withdrawal from your contract at all times. Withdrawals may be subject to a
withdrawal charge, a MVA and taxation, and a 10% IRS penalty tax may apply if
you are under age 59 1/2. There is no additional charge for participating in
this program.
The program is not available to everyone. Please check with our Annuity
Service Center, which can provide the necessary enrollment forms. First
SunAmerica reserves the right to modify, suspend or terminate this program at
any time.
MINIMUM CONTRACT VALUE
Where permitted by state law, we may terminate your contract if both of the
following occur: (1) your contract is less than $500 as a result of withdrawals;
and (2) you have not made any Purchase Payments during the past three years. We
will provide you with sixty days written notice. At the end of the notice
period, we will distribute the contract value to you.
- --------------------------------------------------------------------------------
INCOME PHASE
- --------------------------------------------------------------------------------
ANNUITY DATE
During the Income Phase, we use the money accumulated in your contract to
make regular income payments to you. You may switch to the Income Phase any time
after your 2nd contract anniversary. You select the month and year in which you
want income payments to begin. The first day of that month is the Annuity Date.
You may change your Annuity Date, so long as you do so at least seven days
before the income payments are scheduled to begin. Once you begin receiving
income payments, you cannot change your income option.
Income payments must begin on or before your 90th birthday or on your tenth
contract anniversary, whichever occurs later. If you do not choose an Annuity
Date, your income payments will automatically begin on this date. Certain states
may require your income payments to start earlier.
If the Annuity Date is past your 85th birthday, your contract could lose
its status as an annuity under Federal tax laws. This may cause you to incur
adverse tax consequences.
In addition, most Qualified contracts require you to take minimum
distributions after you reach age 70 1/2. (SEE TAXES, PAGE 24.)
INCOME OPTIONS
Currently, this contract offers five income options. If you elect to
receive income payments but do not select an option, your income payments will
be made in accordance with option 4 for a period of 10 years. For income
payments based on joint lives, we pay according to option 3.
We base our calculation of income payments on the life of the Annuitant and
the annuity rates set forth in your contract. As the contract owner, you may
change the Annuitant at any time prior to the Annuity Date. You must notify us
if the Annuitant dies before the Annuity Date and designate a new Annuitant.
OPTION 1 -- LIFE INCOME ANNUITY
This option provides income payments for the life of the Annuitant. Income
payments stop when the Annuitant dies.
22
<PAGE> 23
OPTION 2 -- JOINT AND SURVIVOR LIFE ANNUITY
This option provides income payments for the life of the Annuitant and for
the life of another designated person. Upon the death of either person, we will
continue to make income payments during the lifetime of the survivor. Income
payments stop whenever the survivor dies.
OPTION 3 -- JOINT AND SURVIVOR LIFE ANNUITY WITH 10 YEARS GUARANTEED
This option is similar to option 2 above, with an additional guarantee of
payments for at least 10 years. If the Annuitant and the survivor die before all
of the guaranteed income payments have been made, the remaining payments are
made to the Beneficiary under your contract.
OPTION 4 -- LIFE ANNUITY WITH 10 OR 20 YEARS GUARANTEED
This option is similar to option 1 above. In addition, this option provides
a guarantee that income payments will be made for at least 10 or 20 years. You
select the number of years. If the Annuitant dies before all guaranteed income
payments are made, the remaining income payments go to the Beneficiary under
your contract.
OPTION 5 -- INCOME FOR A SPECIFIED PERIOD
This option provides income payments for a guaranteed period ranging from 3
to 30 years. If the Annuitant dies before all of the guaranteed income payments
are made, the remaining income payments will be made to the Beneficiary under
your contract.
Please read the SAI for a more detailed discussion of the income options.
You can choose income payments that are fixed, variable or both. If at the
date when income payments begin you are invested in the Variable Portfolios
only, your income payments will be variable. If your money is only in fixed
accounts at that time, your income payments will be fixed in amount. Further, if
you are invested in both the fixed and variable investment options when payments
begin your payments will be fixed and variable. If income payments are fixed,
First SunAmerica guarantees the amount of each payment. If the income payments
are variable, the amount is not guaranteed.
We make income payments on a monthly, quarterly, semiannual or annual
basis. You instruct us to send you a check or to have the payments directly
deposited into your bank account. If state law allows, we distribute annuities
with a contract value of $5,000 or less in a lump sum. Also, if the selected
income option results in income payments of less than $50 per payment, the
frequency of your payments may be decreased, state law allowing.
If you are invested in the Variable Portfolios after the Annuity Date your
income payments vary depending on four things:
- for life options, your age when payments begin, and;
- the value of your contract in the Variable Portfolios on the Annuity
Date, and;
- the 3.5% assumed investment rate used in the annuity table for the
contract, and;
- the performance of the Variable Portfolios in which you are invested
during the time you receive income payments.
If you are invested in both the fixed account options and the Variable
Portfolios after the Annuity Date, the allocation of funds between the fixed and
variable options also impacts the amount of your income payments.
TRANSFERS DURING THE INCOME PHASE
During the Income Phase, one transfer per month is permitted between the
Variable Portfolios. No other transfers are allowed during the Income Phase.
23
<PAGE> 24
DEFERMENT OF PAYMENTS
We may defer making fixed income payments for up to six months, or less if
required by law. Interest is credited to you during the deferral period.
- --------------------------------------------------------------------------------
ADMINISTRATION
- --------------------------------------------------------------------------------
We are responsible for the administrative servicing of your contract.
Please contact our Annuity Service Center at 1-800-90-VISTA, if you have any
comment, question or service request.
We send out transaction confirmations and quarterly statements. It is your
responsibility to review these documents carefully and notify us of any
inaccuracies immediately. We investigate all inquiries. To the extent that we
believe we made an error, we retroactively adjust your contract, provided you
notify us within 30 days of receiving the transaction confirmation or quarterly
statement. Any other adjustments we deem warranted are made as of the time we
receive notice of the error.
We rely significantly on computer systems and applications in our daily
operations. Many of our systems are not presently year 2000 compliant, which
means that because they have historically used only two digits to identify the
year in a date, they will fail to distinguish dates in the "2000s" from dates in
the "1900s." First SunAmerica's business, financial condition and results of
operations could be materially and adversely affected by the failure of our
systems and applications (and those operated by third parties interfacing with
our systems and applications) to properly operate or manage dates beyond the
year 1999.
First SunAmerica's parent has a coordinated plan to repair or replace these
noncompliant systems and to obtain similar assurances from third parties
interfacing with our systems and applications. Both phases of the project are
progressing according to plan and we expect to substantially complete them by
the end of calendar 1998. We will test both the repaired and replacement systems
during calendar 1999. The cost of these changes will be substantially borne by
First SunAmerica's affiliates and will not have a material impact on First
SunAmerica's results of operations.
In addition, we distributed a year 2000 questionnaire to our significant
suppliers, distributors, financial institutions, lessors and others we do
business with to evaluate their year 2000 compliance plans and state of
readiness and to determine how our systems and applications may be affected by
their failure to solve their own year 2000 issues. To date, however, we have
only received preliminary feedback from such parties and have not independently
confirmed any information received from other parties with respect to the year
2000 issues. Therefore, we cannot assure that such other parties will complete
their year 2000 conversions in a timely fashion or will not suffer a year 2000
business disruption that may adversely affect our financial condition and
results of operations.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
NOTE: WE PREPARED THE FOLLOWING INFORMATION ON TAXES AS A GENERAL
DISCUSSION OF THE SUBJECT. IT IS NOT TAX ADVICE. WE CAUTION YOU TO SEEK
COMPETENT TAX ADVICE ABOUT YOUR OWN CIRCUMSTANCES. WE DO NOT GUARANTEE THE TAX
STATUS OF YOUR ANNUITY. TAX LAWS CONSTANTLY CHANGE, THEREFORE WE CANNOT
GUARANTEE THAT THE INFORMATION CONTAINED HEREIN IS COMPLETE AND/OR ACCURATE.
24
<PAGE> 25
ANNUITY CONTRACTS IN GENERAL
The Internal Revenue Code ("IRC") provides for special rules regarding the
tax treatment of annuity contracts. Generally, taxes on the earnings in your
annuity contract are deferred until you take the money out. Qualified retirement
investments automatically provide tax deferral regardless of whether the
underlying contract is an annuity. Different rules apply depending on how you
take the money out and whether your contract is Qualified or Non-qualified.
If you do not purchase your contract under a pension plan, a specially
sponsored employer program or an IRA, your contract is referred to as a
Non-qualified contract. A Non-qualified contract receives different tax
treatment than a Qualified contract. In general, your cost basis in a Non-
qualified contract is equal to the Purchase Payments you put into the contract.
You have already been taxed on the cost basis in your contract.
If you purchase your contract under a pension plan, a specially sponsored
employer program or as an individual retirement account, your contract is
referred to as a Qualified contract. Examples of qualified plans are: IRAs, Roth
IRAs, Tax-Sheltered Annuities (referred to as 403(b) contracts), H.R. 10 Plans
(referred to as Keogh Plans) and pension and profit sharing plans, including
401(k) plans. Typically you have not paid any tax on the Purchase Payments used
to buy your contract and therefore, you have no cost basis in your contract.
TAX TREATMENT OF DISTRIBUTIONS -- NON-QUALIFIED CONTRACTS
If you make a withdrawal from a Non-qualified contract, the IRC treats such
a withdrawal as first coming from the earnings and then as coming from your
Purchase Payments. For income payments, any portion of each payment that is
considered a return of your Purchase Payment will not be taxed. Withdrawn
earnings are treated as income to you and are taxable. The IRC provides for a
10% penalty tax on any earnings that are withdrawn other than in conjunction
with the following circumstances: (1) after reaching age 59 1/2; (2) when paid
to your Beneficiary after you die; (3) after you become disabled (as defined in
the IRC); (4) when paid in a series of substantially equal installments made for
your life or for the joint lives of you and you Beneficiary; (5) under an
immediate annuity; or (6) which come from Purchase Payments made prior to August
14, 1982.
TAX TREATMENT OF DISTRIBUTIONS -- QUALIFIED CONTRACTS
Generally, you have not paid any taxes on the Purchase Payments used to buy
a Qualified contract. Any amount of money you take out as a withdrawal or as
income payments is taxable income. The IRC further provides for a 10% penalty
tax on any withdrawal or income payment paid to you other than in conjunction
with the following circumstances: (1) after reaching age 59 1/2; (2) when paid
to your Beneficiary after you die; (3) after you become disabled (as defined in
the IRC); (4) when paid in a series of substantially equal installments made for
your life or for the joint lives of you and your Beneficiary; (5) to the extent
such withdrawals do not exceed limitations set by the IRC for amounts paid
during the taxable year for medical care; (6) to fund higher education expenses
(as defined in IRC); (7) to fund certain first-time home purchase expenses; and,
except in the case of an IRA; (8) when you separate from service after attaining
age 55; and (9) when paid to an alternate payee pursuant to a qualified domestic
relations order.
The IRC limits the withdrawal of Purchase Payments from certain
Tax-Sheltered Annuities. Withdrawals can only be made when an owner: (1) reaches
age 59 1/2; (2) leaves his or her job; (3) dies; (4) becomes disabled (as
defined in the IRC); or (5) experiences hardship (as defined in the IRC). In the
case of hardship, the owner can only withdraw Purchase Payments.
MINIMUM DISTRIBUTIONS
If you have a Qualified contract, distributions must begin by April 1 of
the calendar year following the later of (1) the calendar year in which you
attain age 70 1/2 or (2) the calendar year in which you retire.
25
<PAGE> 26
DIVERSIFICATION
The IRC imposes certain diversification requirements on the underlying
investments for a variable annuity. We believe that each underlying Variable
Portfolios' management monitors the Variable Portfolios so as to comply with
these requirements. To be treated as a variable annuity for tax purposes, the
underlying investments must meet these requirements.
The diversification regulations do not provide guidance as to the
circumstances under which you, because of the degree of control you exercise
over the underlying investments, and not First SunAmerica, would be considered
the owner of the shares of the Variable Portfolios. It is unknown to what extent
owners are permitted to select investments, to make transfers among Variable
Portfolios or the number and type of Variable Portfolios owners may select from.
If any guidance is provided which is considered a new position, then the
guidance would generally be applied prospectively. However, if such guidance is
considered not to be a new position, it may be applied retroactively. This would
mean you, as the owner of the contract, could be treated as the owner of the
underlying Variable Portfolios. Due to the uncertainty in this area, we reserve
the right to modify the contract in an attempt to maintain favorable tax
treatment.
26
<PAGE> 27
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE COMPANY
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data of the Company should be read in
conjunction with the consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, both of which are included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net investment income................. $ 36,763 $ 19,205 $ 2,798 $ 2,784 $ 1,892
Net realized investment gains
(losses)............................ 4,690 5,020 (539) (1,348) 445
Fee income............................ 7,957 3,521 911 606 749
General and administrative expenses... (3,301) (3,222) (1,480) (1,004) (1,319)
Amortization of deferred acquisition
costs............................... (17,120) (10,386) (500) (300) --
Annual commissions.................... (348) (195) (19) (33) (30)
---------- ---------- -------- -------- --------
Pretax income......................... 28,641 13,943 1,171 705 1,737
Income tax expense.................... (12,106) (5,090) (448) (182) (655)
---------- ---------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR INCOME
TAXES............................... 16,535 8,853 723 523 1,082
Cumulative effect of change in
accounting for income taxes......... -- -- -- -- (725)
---------- ---------- -------- -------- --------
NET INCOME............................ $ 16,535 $ 8,853 $ 723 $ 523 $ 357
========== ========== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments........................... $1,554,316 $1,690,232 $153,237 $121,218 $ 78,928
Variable annuity assets held in
separate accounts................... 271,865 171,475 68,901 32,760 26,390
Deferred acquisition costs............ 87,074 96,516 12,127 6,491 5,651
Deferred income taxes................. -- -- -- -- 886
Other assets.......................... 28,905 26,267 2,603 2,688 2,282
---------- ---------- -------- -------- --------
Total Assets................ $1,942,160 $1,984,490 $236,868 $163,157 $114,137
========== ========== ======== ======== ========
Reserves for fixed annuity
contracts........................... $1,460,856 $1,556,656 $140,613 $106,332 $ 66,881
Variable annuity liabilities related
to separate accounts................ 271,865 171,475 68,901 32,760 26,390
Other reserves, payables and accrued
liabilities......................... 18,013 83,297 2,784 2,003 1,051
Deferred income taxes................. 5,371 4,984 1,350 244 --
Shareholder's equity.................. 186,055 168,078 23,220 21,818 19,815
---------- ---------- -------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY.............................. $1,942,160 $1,984,490 $236,868 $163,157 $114,137
========== ========== ======== ======== ========
</TABLE>
27
<PAGE> 28
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations of First SunAmerica Life Insurance Company (the "Company") for the
three years in the period ended September 30, 1998 follows. In connection with
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as
"expect," "anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and uncertainties
discussed in documents filed by the Company with the SEC. The Company disclaims
any obligation to update forward-looking information.
RESULTS OF OPERATIONS
NET INCOME totaled $16.5 million in 1998, compared with $8.9 million in
1997 and $0.7 million in 1996. On October 31, 1997, John Alden Life Insurance
Company of New York ("JANY") was merged with and into the Company. JANY was
acquired by SunAmerica Life Insurance Company, the Company's parent, on March
31, 1997 in a transaction accounted for under the purchase method of accounting.
Therefore, the results of operations include those of JANY only from the date of
acquisition. The income statement for 1998 includes the results of JANY's
operations for the full period, and the income statement for 1997 includes
JANY's operating results only for the period of April 1, 1997 through September
30, 1997. Consequently, operating results for the fiscal years 1998, 1997 and
1996 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, 1995,
the beginning of the earliest period presented, net income would have been $12.4
million in 1997 and $6.7 million in 1996.
PRETAX INCOME totaled $28.6 million in 1998, $13.9 million in 1997 and $1.2
million in 1996 and reflect the merger with JANY. The improvement in 1998 over
1997 and the improvement in 1997 over 1996 resulted primarily from increased net
investment income and fee income, partially offset by increased amortization of
deferred acquisition costs. The improvement in 1997 over 1996 was also due to an
increase in net realized investment gains, 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 and other
interest-bearing liabilities, increased to $36.8 million in 1998 from $19.2
million in 1997 and $2.8 million in 1996. These amounts equal 2.37% on average
invested assets (computed on a daily basis) of $1.55 billion in 1998, 2.16% on
average invested assets of $887.4 million in 1997 and 2.08% on average invested
assets of $134.5 million in 1996. On a pro
28
<PAGE> 29
forma basis, assuming the merger had been consummated on October 1, 1995, net
investment income on related average invested assets would have been 2.05% in
1997 and 1.83% in 1996.
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 $47.3 million in 1998, $21.4 million in 1997 and $13.8 million in
1996. The difference between the Company's yield on average invested assets and
the rate paid on average interest-bearing liabilities (the "Spread Difference")
was 2.20% in 1998, 2.04% in 1997 and 1.47% in 1996. On a pro forma basis,
assuming the merger had been consummated on October 1, 1995, the Spread
Difference would have been 1.91% in 1997 and 1.67% in 1996.
Investment income (and the related yields on average invested assets)
totaled $117.5 million (7.56%) in 1998, compared with $65.6 million (7.39%) in
1997 and $10.0 million (7.40%) in 1996. The invested assets associated with the
merger included high-grade corporate, government and government/agency bonds and
cash and short-term investments, all of which are generally lower yielding than
a significant portion of the invested assets that comprise the remainder of the
Company's portfolio. On a pro forma basis, assuming the merger had been
consummated on October 1, 1995, the yield on related average invested assets
would have been 7.37% in 1997 and 7.41% in 1996. Thus, the increased yield in
1998, when compared to the pro forma 1997 and 1996 yields, reflect a partial
reallocation of the lower-yielding invested assets into generally
higher-yielding asset classes in which the Company has historically invested a
portion of its portfolio.
Total interest expense totaled $80.7 million in 1998, $46.4 million in 1997
and $7.2 million in 1996. The average rate paid on all interest-bearing
liabilities was 5.36% in 1998, 5.35% in 1997 and 5.93% in 1996. Interest-bearing
liabilities averaged $1.51 billion during 1998, $866.0 million during 1997 and
$120.6 million during 1996. On a pro forma basis, assuming the merger had been
consummated on October 1, 1995, the average rate paid on all interest-bearing
liabilities would have been 5.45% in 1997 and 5.47% in 1996.
GROWTH IN AVERAGE INVESTED ASSETS in 1998 over 1997 primarily reflects the
impact of the merger. The Company acquired $1.40 billion of invested assets
associated with the merger on March 31, 1997.
Average invested assets also increased as a result of sales of the
Company's fixed-rate products (including those for the fixed accounts of
variable annuity products). Fixed annuity premiums totaled $130.9 million in
1998, compared with $131.7 million in 1997 and $45.4 million in 1996. These
amounts represent 8%, 9%, and 43% of the fixed annuity reserve balance at the
beginning of the respective periods. On a pro-forma basis, assuming the merger
had been consummated on October 1, 1995, fixed annuity premiums would have
represented 14% of fixed annuity reserves for 1997 and 1996. These premiums
include premiums for the fixed accounts of variable annuities totaling $77.3
million, $68.9 million and $41.2 million, in 1998, 1997 and 1996, respectively.
NET REALIZED INVESTMENT GAINS totaled $4.7 million in 1998, compared to
$5.0 million in 1997 and $0.5 million of losses in 1996. Net realized investment
gains and losses include impairment writedowns of $0.4 million in 1998, $0.1
million in 1997 and $0.2 million in 1996. Therefore, net gains from sales and
redemptions of investments totaled $5.1 million in 1998 and 1997, and net losses
from sales of investments totaled $0.3 million in 1996.
The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $985.1 million, $634.8 million and $80.0 million in 1998, 1997 and
1996, respectively. Sales of investments result from the active management of
the Company's investment portfolio. Because redemptions of investments are
generally involuntary and sales of investments are made in both rising and
falling interest rate environments, net gains and losses from sales and
redemptions of investments fluctuate from period to period, and represent 0.33%,
0.57% and 0.27% of average invested assets for 1998, 1997 and 1996,
respectively. Active portfolio management involves the ongoing evaluation of
asset sectors, individual securities within the investment portfolio and the
reallocation of investments
29
<PAGE> 30
from sectors that are perceived to be relatively overvalued to sectors that are
perceived to be relatively undervalued. The intent of the Company's active
portfolio management is to maximize total returns on the investment portfolio,
taking into account credit, option, liquidity 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 $3.6 million
in 1998, $1.7 million in 1997 and $0.7 million in 1996. These increased fees
reflect growth in average variable annuity assets, due to increased market
values, the receipt of variable annuity premiums and net exchanges into the
separate accounts from the fixed accounts of variable annuity contracts,
partially offset by surrenders. Variable annuity fees represent 1.5% of average
variable annuity assets for each of 1998, 1997 and 1996. Variable annuity assets
averaged $234.1 million during 1998, $111.8 million during 1997 and $46.2
million during 1996. Variable annuity premiums, which exclude premiums allocated
to the fixed accounts of variable annuity products, aggregated $80.2 million in
1998, $56.3 million in 1997 and $28.6 million in 1996. These amounts represent
47%, 82% and 87% of variable annuity reserves at the beginning of the respective
periods.
Sales of variable annuity products (which include premiums allocated to the
fixed accounts) ("Variable Annuity Product Sales") amounted to $157.5 million,
$125.2 million and $69.8 million in 1998, 1997 and 1996, respectively, and
primarily reflect sales of the Company's flagship variable annuity, Polaris.
Polaris is a multimanager variable annuity that offers investors a choice of 26
variable funds and 7 guaranteed fixed-rate funds. 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. In recent weeks, subsequent to the Company's fiscal
year end, sales of variable annuities have slowed as investors paused to
re-evaluate their investment decisions in light of volatile markets. The Company
believes that fluctuating market conditions increase the value of financial
planning services and make the flexibility and security of variable annuities
even more attractive.
The Company has encountered increased competition in the variable annuity
marketplace during recent years and anticipates that the market will remain
highly competitive for the foreseeable future. Also, from time to time, Federal
initiatives are proposed which could affect the taxation of variable annuities
and annuities generally.
SURRENDER CHARGES on fixed and variable annuities totaled $4.4 million
(including $3.9 million attributable to the merger) in 1998, $1.8 million
(including $1.5 million attributable to the merger) in 1997 and $0.2 million in
1996. 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 $234.4
million (including $198.3 million attributable to the merger) in 1998, compared
with $93.5 million (including $72.9 million attributable to the merger) in 1997
and $12.7 million in 1996. These payments represent 14.0% (15.5% of average
fixed annuity reserves associated with the merger), 9.9% and 8.1%, respectively,
of average fixed and variable annuity reserves. Withdrawals include variable
annuity withdrawals from the separate accounts totaling $12.8 million (5.5% of
average variable annuity reserves), $5.3 million (4.8% of average variable
annuity reserves) and $2.8 million (6.2% of average variable annuity reserves)
in 1998, 1997 and 1996, respectively. Consistent with the assumptions used in
connection with the merger, management anticipates that the level of withdrawal
payments will continue to reflect higher relative withdrawal rates in the near
future because of higher surrenders on the acquired annuity business.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $3.3 million in 1998, compared
with $3.2 million in 1997 and $1.5 million in 1996. 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 $17.1 million in 1998,
compared with $10.4 million in 1997 and $0.5 million in 1996. The increases in
amortization primarily reflect the
30
<PAGE> 31
amortization of the deferred acquisition costs attributable to the merger, which
aggregated $15.7 million in 1998 and $9.2 million in 1997. Amortization has also
increased due to additional fixed and variable annuity sales and the subsequent
amortization of related deferred commissions and other direct selling costs.
ANNUAL COMMISSIONS represent renewal commissions paid quarterly in arrears
to maintain the persistency of certain of the Company's fixed and variable
annuity contracts. Annual commissions totaled $348,000 in 1998, $195,000 in 1997
and $19,000 in 1996. These increases are primarily attributable to the fixed
annuity contracts acquired in the merger. Based on current sales, the Company
estimates that such annual commissions will increase in future periods.
INCOME TAX EXPENSE totaled $12.1 million in 1998, compared with $5.1
million in 1997 and $0.4 million in 1996, representing effective tax rates of
42% in 1998, 37% in 1997 and 38% in 1996. The increase in the tax rate for 1998
is due to an increase in state income taxes.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased 10.7% to $186.1 million at September 30,
1998 from $168.1 million at September 30, 1997, due to $16.5 million of net
income recorded in 1998 and a $1.4 million increase in net unrealized gains on
bonds and notes available for sale.
INVESTED ASSETS at September 30, 1998 totaled $1.55 billion, compared with
$1.69 billion at September 30, 1997. The Company manages most of its invested
assets internally. The Company's general investment philosophy is to hold
fixed-rate assets for long-term investment. Thus, it does not have a trading
portfolio. However, the Company has determined that all of its portfolio of
bonds and notes (the "Bond Portfolio") is available to be sold in response to
changes in market interest rates, changes in relative value of asset sectors and
individual securities, changes in prepayment risk, changes in the credit quality
outlook for certain securities, and the Company's need for liquidity and other
similar factors.
THE BOND PORTFOLIO, which constitutes 84% of the Company's total investment
portfolio, had an aggregate fair value that exceeded its amortized cost by $41.2
million at September 30, 1998, compared with an excess of $40.1 million at
September 30, 1997.
At September 30, 1998, the Bond Portfolio included $1.26 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 $43.9 million of bonds rated by the Company pursuant to statutory ratings
guidelines established by the NAIC. At September 30, 1998, approximately $1.21
billion of the Bond Portfolio was investment grade, including $473.1 million of
U.S. government/agency securities and mortgage-backed securities ("MBSs").
At September 30, 1998, the Bond Portfolio included $97.0 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
5.0% of the Company's total assets and 6.2% 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, 1998.
The table on the following page summarizes the Company's rated bonds by
rating classification as of September 30, 1998.
31
<PAGE> 32
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 ESTIMATED PERCENT OF
[DCR]/[FITCH] AMORTIZED FAIR CATEGORY AMORTIZED FAIR AMORTIZED FAIR INVESTED
CATEGORY(1) COST VALUE (2) COST VALUE COST VALUE ASSETS
-------------- ---------- ---------- -------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA to A-
(Aaa to A3)
[AAA to A-]
[AAA to A-]............ $ 799,118 $ 836,749 1 $126,037 $131,370 $ 925,155 $ 968,118 62.29%
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
[BBB+ to BBB-]......... 198,754 206,663 2 31,288 32,046 230,042 238,709 15.36
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
[BB+ to BB-]........... 2,493 2,125 3 2,386 2,342 4,879 4,467 0.29
B+ to B-
(B1 to B3)
[B+ to B-]
[B+ to B-]............. 93,809 84,775 4 5,568 4,850 99,377 89,625 5.77
CCC+ to C
(Caa to C)
[CCC]
[CCC+ to C-]........... 250 215 5 3,000 2,738 3,250 2,953 0.19
CI to D
[DD]
[D].................... -- -- 6 -- -- -- -- --
---------- ---------- -------- -------- ---------- ----------
TOTAL RATED
ISSUES................. $1,094,424 $1,130,527 $168,279 $173,346 $1,262,703 $1,303,872
========== ========== ======== ======== ========== ==========
</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 $43.9 million of assets that were rated by the
Company pursuant to applicable NAIC rating guidelines.
Senior secured loans ("Secured Loans") are included in the Bond Portfolio
and aggregated $77.6 million at September 30, 1998. Secured Loans are senior to
subordinated debt and equity, and are secured by assets of the issuer. At
September 30, 1998, Secured Loans consisted of $58.2 million of publicly traded
securities and $19.4 million of privately traded securities. These Secured Loans
are composed of loans to 59 borrowers spanning 16 industries, with 30% of these
assets concentrated in utilities, 11% concentrated in air transportation and 10%
concentrated in business services. No other industry constituted more than 8% of
these assets.
While the trading market for the Company's privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled
32
<PAGE> 33
the Company 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 the Company, pursuant to comparable statutory ratings guidelines
established by the NAIC.
MORTGAGE LOANS aggregated $187.9 million at September 30, 1998 and
consisted of 183 commercial first mortgage loans with an average loan balance of
approximately $1.0 million, collateralized by properties located in 28 states.
Approximately 36% of this portfolio was retail, 26% was office, 15% was
industrial, 13% was multifamily residential and 10% was other types. At
September 30, 1998, approximately 16%, 15% and 10% of this portfolio was secured
by properties located in New York, California and Michigan, respectively, and no
more than 8% of this portfolio was secured by properties located in any other
single state. At September 30, 1998, there was one mortgage loan with an
outstanding balance of $10 million or more, which represented approximately 6%
of the portfolio. At September 30, 1998, approximately 31% of the mortgage loan
portfolio consisted of loans with balloon payments due before October 1, 2001.
During 1998, 1997 and 1996, 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, 1998, approximately 60% of the mortgage loans were
seasoned loans underwritten to the Company'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. The balance of the
mortgage loan portfolio has been originated by the Company under strict
underwriting standards. Commercial mortgage loans on properties such as offices,
hotels and shopping centers generally represent a higher level of risk than do
mortgage loans secured by multifamily residences. This greater risk is due to
several factors, including the larger size of such loans and the more immediate
effects of general economic conditions on these commercial property types.
However, due to the seasoned nature of the Company's mortgage loan portfolio and
its strict underwriting standards, the Company believes that it has prudently
managed the risk attributable to its mortgage loan portfolio while maintaining
attractive yields.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed-rate investments that generate predictable rates of return. The Company
does not have a specific target rate of return. Instead, its rates of return
vary over time depending on the current interest rate environment, the slope of
the yield curve, the spread at which fixed rate investments are priced over the
yield curve, and general economic conditions. Its portfolio strategy is
constructed with a view to achieve adequate risk-adjusted returns consistent
with its investment objectives of effective asset-liability matching, liquidity
and safety. The Company's fixed-rate products incorporate surrender charges or
other restrictions in order to encourage persistency. Approximately 90% of the
Company's fixed annuity reserves had surrender penalties or other restrictions
at September 30, 1998.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect its
economic value and achieve a predictable spread between what it earns on its
invested assets and what it pays on its liabilities by designing its fixed-rate
products and conducting its investment operations to closely match the duration
of the fixed-rate assets to that of its fixed-rate liabilities. The Company's
fixed-rate assets include: cash and short-term investments; bonds and notes; and
mortgage loans. At September 30, 1998, these assets had an aggregate fair value
of $1.55 billion with a duration of 4.1. At September 30, 1998, the Company's
fixed annuity liabilities had an aggregate fair value (determined by discounting
future contractual cash flows by related market rates of interest) of $1.32
billion with a duration of 3.5. The Company's potential exposure due to a
relative 10% increase in interest rates
33
<PAGE> 34
from their September 30, 1998 levels is a loss of $7.3 million in fair value of
its fixed-rate assets that is not offset by a decrease in the fair value of its
fixed-rate liabilities. Because the Company 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 the Company
will continue to utilize its existing strategies of pricing its fixed annuity
products, allocating its available cash flow amongst its various investment
portfolio sectors and maintaining sufficient levels of liquidity. Because the
calculation of duration involves estimation and incorporates assumptions,
potential changes in portfolio value indicated by the portfolio's duration will
likely be different from the actual changes experienced under given interest
rate scenarios, and the differences may be material.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos") and by investing in MBSs. It
also seeks to enhance its spread income by using Reverse Repos. Reverse Repos
involve a sale of securities and an agreement to repurchase the same securities
at a later date at an agreed upon price and are generally over-collateralized.
MBSs are generally investment-grade securities collateralized by large pools of
mortgage loans. MBSs generally pay principal and interest monthly. The amount of
principal and interest payments may fluctuate as a result of prepayments of the
underlying mortgage loans.
There are risks associated with some of the techniques the Company uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Company's Reverse Repos is
counterparty risk. The Company believes, however, that the counterparties to its
Reverse Repos are financially responsible and that the counterparty risk
associated with those transactions is minimal. It is the Company's policy that
these agreements are entered into with counterparties who have a debt rating of
A/A2 or better from both S&P and Moody's. The Company continually monitors its
credit exposure with respect to those agreements. 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, the Company
assesses the risk of prepayment by analyzing the security's projected
performance over an array of interest-rate scenarios. Once an MBS is purchased,
the Company monitors its actual prepayment experience monthly to reassess the
relative attractiveness of the security with the intent to maximize total
return.
INVESTED ASSETS EVALUATION is routinely conducted by the Company.
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 investments that are determined to have declines in
value that are other than temporary are reduced to net realizable value and, in
the case of bonds, no further accruals of interest are made. The provisions for
impairment 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
34
<PAGE> 35
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 $1.2 million of mortgage loans at
September 30, 1998, and constituted 0.1% of total invested assets. At September
30, 1997, defaulted investments totaled $2.3 million, and constituted 0.1% of
total invested assets.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Company's existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. At September 30, 1998, approximately $1.18 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $52.8 million, while approximately
$123.9 million of the Bond Portfolio had an aggregate unrealized loss of $11.7
million. In addition, the Company's investment portfolio currently provides
approximately $14.4 million of monthly cash flow from scheduled principal and
interest payments. Historically, cash flows from operations and from the sale of
the Company's annuity products have been more than sufficient in amount to
satisfy the Company's liquidity needs.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding
the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease
over time, reflecting lower interest crediting rates on its fixed annuities.
Should increased liquidity be required for withdrawals, the Company believes
that a significant portion of its investments could be sold without adverse
consequences in light of the general strengthening that would be expected in the
bond market.
35
<PAGE> 36
- --------------------------------------------------------------------------------
PROPERTIES
- --------------------------------------------------------------------------------
The Company's executive offices and its principal office are in leased
premises at 733 Third Avenue, Fourth Floor, New York, New York. The Company,
through an affiliate, also leases office space in Los Angeles, California, and
in Woodland Hills, California.
First SunAmerica believes that such properties, including the equipment
located therein, are suitable and adequate to meet the requirements of the
Company's businesses.
- --------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
The directors and principal officers of First SunAmerica as of December 22,
1998 are listed below, together with information as to their ages, dates of
election and principal business occupations during the last five years (if other
than their present business occupations).
<TABLE>
<CAPTION>
OTHER POSITIONS AND
YEAR OTHER BUSINESS
PRESENT ASSUMED EXPERIENCE WITHIN
NAME AGE POSITION(S) POSITION(S) LAST FIVE YEARS** FROM-TO
---- --- ----------- ----------- ------------------------ ---------
<S> <C> <C> <C> <C> <C>
Eli Broad*............. 65 Chairman, 1994 Cofounded SAI
Chief Executive in 1957
Officer and President of
the Company
Chairman, Chief 1986
Executive Officer and
President of
SunAmerica Inc. ("SAI")
Jay S. Wintrob*........ 41 Executive Vice President 1991 (Joined SAI in 1987)
of the Company
Vice Chairman and 1998
Chief Operating Officer
of SAI
James R. Belardi*...... 41 Senior Vice President of 1992 (Joined SAI in 1986)
the Company
Executive Vice President 1995
of SAI
Jana Waring Greer*..... 46 Senior Vice President of 1991 (Joined SAI in 1974)
the Company and SAI
Scott L. Robinson*..... 52 Senior Vice President 1991 (Joined SAI in 1978)
and Treasurer of the
Company
Senior Vice President 1991
and Controller of SAI
James Rowan* 36 Senior Vice President of 1996 Vice President of SAI 1993-1995
the Company
Senior Vice President of 1995
SAI
Susan L. Harris*....... 41 Senior Vice President 1994 Vice President, 1994-1995
and Secretary of the General Counsel-
Company Corporate Affairs and
Senior Vice President, 1995 Secretary of SAI
General Counsel and Vice President, 1989-1994
Secretary of SAI Associate General
Counsel and Secretary
of SAI
(Joined SAI in 1985)
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
OTHER POSITIONS AND
YEAR OTHER BUSINESS
PRESENT ASSUMED EXPERIENCE WITHIN
NAME AGE POSITION(S) POSITION(S) LAST FIVE YEARS** FROM-TO
---- --- ----------- ----------- ------------------------ ---------
<S> <C> <C> <C> <C> <C>
David W. Ferguson...... 45 Director 1987 Partner, Davis Polk & 1980 to
Wardwell present
Thomas A. Harnett...... 74 Director 1987 Partner, Lane & 1989 to
Mitterdorf, LLP present
Peter McMillan, III.... 41 Director 1994 Executive Vice President 1994-1998
and Chief Investment
Officer of SunAmerica
Investments Inc. (DE)
Senior Vice President, 1989-1994
SunAmerica Investments
Inc. (DE)
Margery K. Neale....... 39 Director 1996 Partner, Swidler, 1990 to
Berlin, Shereff & present
Friedman, LLP
Lester Pollack......... 65 Director 1987 Chief Executive Officer, 1986 to
Centre Partners, L.P. present
Managing Partner, Lazard 1986 to
Freres & Co. Senior present
Managing Director, 1988 to
Corporate Advisors, L.P. present
Richard D. Rohr........ 72 Director 1987 Partner, Bodman, Longley 1958 to
& Dahling present
N. Scott Gillis........ 45 Senior Vice President 1994 Vice President and 1989-1994
and Controller of the Controller, SunAmerica
Company Life Companies ("SLC")
Vice President of SAI 1997 (Joined SAI in 1985)
Edwin R. Reoliquio..... 41 Senior Vice President 1995 Vice President and 1990-1995
and Chief Actuary of the Actuary, SLC
Company
Victor E. Akin......... 34 Senior Vice President of 1996 Vice President, SLC 1995-1996
the Company Director, Product 1994-1995
Development, SLC
Manager, Business 1993-1994
Development, SLC
David Bechtel.......... 31 Vice President & 1998 Vice President Deutsche 1996-1998
Assistant Treasurer of Morgan Grenfell, Inc.
the Company Associate, UBS 1995-1996
Vice President & 1998 Securities LLC
Treasurer of SAI Associate, Wachtell 1994
Lipton Rosen & Latz
Associate, Wells Fargo 1993-1994
Nikko Investment
Advisers
Keith B. Jones......... 47 Vice President 1992 (Joined SAI in 1989)
of the Company
Michael L. Lindquist... 45 Vice President 1993 (Joined SAI in 1983)
of the Company
Gregory M. Outcalt..... 36 Vice President 1993 (Joined SAI in 1986)
of the Company
Scott H. Richland...... 36 Vice President 1994 Senior Vice President 1997-1998
of the Company and Treasurer of SAI
Senior Vice 1997 Vice President and 1995-1997
President of SAI Treasurer of SAI
Vice President and 1994-1995
Assistant Treasurer
of SAI
Assistant Treasurer 1993-1994
of SAI
(Joined SAI in 1990)
</TABLE>
- ---------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
37
<PAGE> 38
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
All of the executive officers of the Company also serve as employees of
SunAmerica Inc. or its affiliates and receive no compensation directly from the
Company. Some of the officers also serve as officers of other companies
affiliated with the Company. Allocations have been made as to each individual's
time devoted to his or her duties as an executive officer of the Company. No
executive officer of the Company earned allocated cash compensation in excess of
$100,000. Eli Broad, Chairman, Chief Executive Officer and President of the
Company, earned allocated cash compensation of $66,035.
Directors of the Company who are also employees of SunAmerica Inc. or its
affiliates receive no compensation in addition to their compensation as
employees of SunAmerica Inc. or its affiliates.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No shares of the Company are owned by any executive officer or director.
The Company is an indirect wholly owned subsidiary of SunAmerica Inc. Except for
Mr. Broad, the percentage of shares of SunAmerica Inc. beneficially owned by any
director does not exceed one percent of the class outstanding. At November 30,
1998, Mr. Broad was the beneficial owner of 13,015,360 shares of Common Stock of
SunAmerica Inc. (approximately 6.4% of the class outstanding) and 13,340,591
shares of Nontransferable Class B Common Stock of SunAmerica Inc. (approximately
8.2% of the class outstanding). Of the Common Stock, 1,053,738 shares represent
restricted shares granted under the Company's employee stock plans as to which
Mr. Broad has no investment power; and 9,283,050 shares represent employee stock
options held by Mr. Broad which are or will become exercisable on or before
January 30, 1999 and as to which he has no voting or investment power. Of the
Nontransferable Class B Common Stock, 12,284,360 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 November 30,
1998, all directors and officers as a group beneficially owned 16,027,507 shares
of Common Stock (approximately 8% of the class outstanding) and 13,340,591
shares of Nontransferable Class B Common Stock (approximately 82% of the class
outstanding).
- --------------------------------------------------------------------------------
REGULATION
- --------------------------------------------------------------------------------
First SunAmerica is subject to regulation and supervision by the insurance
regulatory agencies of the states in which it 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
38
<PAGE> 39
in the federal government assuming some role in the regulation of insurance
companies or allowing combinations between insurance companies, banks and other
entities. In recent years, the NAIC has approved and recommended to the states
for adoption and implementation several regulatory initiatives designed to
reduce the risk of insurance company insolvencies and market conduct violations.
These initiatives include investment reserve requirements, risk-based capital
standards, codification of insurance accounting principles, new investment
standards and restrictions on an insurance company's ability to pay dividends to
its stockholders. The NAIC is also currently developing model laws relating to
product design and illustrations for annuity products. Current proposals are
still being debated and we are monitoring developments in this area and the
effects any changes would have on us.
SunAmerica Asset Management is registered with the SEC as a registered
investment advisor under the Investment Advisors Act of 1940. The mutual funds
that it markets are subject to regulation under the Investment Company Act of
1940. SunAmerica Asset Management and the mutual funds are subject to regulation
and examination by the SEC. In addition, variable annuities and the related
separate accounts of the Company are subject to regulation by the SEC under the
Securities Act of 1933 and the Investment Company Act of 1940.
Our broker-dealer subsidiary is subject to regulation and supervision by
the states in which it transacts business, as well as by the SEC and the
National Association of Securities Dealers ("NASD"). The NASD has broad
administrative and supervisory powers relative to all aspects of business and
may examine the subsidiary's business and accounts at any time.
- --------------------------------------------------------------------------------
CUSTODIAN
- --------------------------------------------------------------------------------
Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, serves as
the custodian of the assets of the separate account.
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are no pending legal proceedings affecting the separate account.
First SunAmerica and its subsidiaries engage in various kinds of routine
litigation. In management's opinion, these matters are not of material
importance to their respective total assets nor are they material with respect
to the separate account.
39
<PAGE> 40
- --------------------------------------------------------------------------------
REGISTRATION STATEMENTS
- --------------------------------------------------------------------------------
First SunAmerica is subject to the informational requirements of the
Securities and Exchange Act of 1934 (as amended). It files reports and other
information with the SEC to meet those requirements. You can inspect and copy
this information at SEC public facilities at the following locations:
WASHINGTON, DISTRICT OF COLUMBIA
450 Fifth Street, N.W., Room 1024
Washington, D.C. 20549
CHICAGO, ILLINOIS
500 West Madison Street
Chicago, IL 60661
NEW YORK, NEW YORK
7 World Trade Center, 13th Fl.
New York, NY 10048
To obtain copies by mail contact the Washington, D.C. location. After you
pay the fees as prescribed by the rules and regulations of the SEC, the required
documents are mailed.
Registration statements under the Securities Act of 1933, as amended,
related to the contracts offered by this prospectus are on file with the SEC.
This prospectus does not contain all of the information contained in the
registrations statement and its exhibits. For further information regarding the
separate account, First SunAmerica and its general account, the Variable
Portfolios and the contract, please refer to the registration statement and its
exhibits.
The SEC also maintains a website (http://www.sec.gov) that contains the
SAI, materials incorporated by reference and other information filed
electronically with the SEC by First SunAmerica.
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
The financial statements of First SunAmerica as of September 30, 1998 and
1997 and for each of the three years in the period ended September 30, 1998
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
40
<PAGE> 41
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
Additional information concerning the operations of the separate account is
contained in a Statement of Additional Information ("SAI"), which is available
without charge upon written request addressed to us at our Annuity Service
Center, P.O. Box 54299, Los Angeles, California 90054-0299 or by calling
(800)90-VISTA. The contents of the SAI are tabulated below.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Data............................................ 1
Income Payments............................................. 3
Annuity Unit Values......................................... 3
Qualified Plans............................................. 6
Distribution of Contracts................................... 10
Financial Statements........................................ 10
</TABLE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements of First SunAmerica which are included in this
prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the General Account
and with respect to the death benefit and the Company's assumption of the
mortality and expense risks and the risk that the withdrawal charge will be
insufficient to cover the cost of distributing the contracts. They should not be
considered as bearing on the investment performance of the Underlying Fund
shares held in the Variable Portfolios of the separate account. The value of the
interests of owners, participants, Annuitants, payees and Beneficiaries under
the variable portion of the contracts is affected primarily by the investment
results of the Underlying Funds.
41
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First SunAmerica Life Insurance Company
In our opinion, the accompanying balance sheet and the related income
statement and statement of cash flows present fairly, in all material respects,
the financial position of First SunAmerica Life Insurance Company (the
"Company") at September 30, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2, the financial statements for the year ended
September 30, 1997 have been restated to reflect the merger of John Alden Life
Insurance Company of New York ("JANY") with and into the Company. The merger was
accounted for similar to a pooling of interests. The income statement for that
year includes the operating results of JANY'S for the period from April 1, 1997
(the date of acquisition of JANY by SunAmerica Life Insurance Company, the
direct parent of the Company) through September 30, 1997. We have audited the
adjustments that were applied to restate the 1997 financial statements. In our
opinion, such adjustments are appropriate and have been properly applied to the
1997 financial statements.
PricewaterhouseCoopers LLP
Los Angeles, California
November 9, 1998
42
<PAGE> 43
FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
INVESTMENTS:
Cash and short-term investments.......................... $ 55,679,000 $ 50,585,000
Bonds and notes available for sale at fair value
(amortized cost: 1998, $1,262,703,000; 1997,
$1,459,112,000)....................................... 1,303,872,000 1,499,253,000
Mortgage loans........................................... 187,906,000 131,117,000
Other invested assets.................................... 6,859,000 9,277,000
-------------- --------------
Total investments........................................ 1,554,316,000 1,690,232,000
Variable annuity assets held in separate accounts.......... 271,865,000 171,475,000
Accrued investment income.................................. 19,853,000 22,243,000
Deferred acquisition costs................................. 87,074,000 96,516,000
Receivable from brokers for sales of securities............ 6,601,000 --
Other assets............................................... 2,451,000 4,024,000
-------------- --------------
TOTAL ASSETS............................................... $1,942,160,000 $1,984,490,000
============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts..................... $1,460,856,000 $1,556,656,000
Payable to brokers for purchases of securities........... -- 12,460,000
Income taxes currently payable........................... 10,177,000 2,236,000
Other liabilities........................................ 7,836,000 68,601,000
-------------- --------------
Total reserves, payables and accrued liabilities......... 1,478,869,000 1,639,953,000
-------------- --------------
Variable annuity liabilities related to separate
accounts................................................. 271,865,000 171,475,000
-------------- --------------
Deferred income taxes...................................... 5,371,000 4,984,000
-------------- --------------
Shareholder's equity:
Common Stock............................................. 3,000,000 3,000,000
Additional paid-in capital............................... 144,428,000 144,428,000
Retained earnings........................................ 31,361,000 14,826,000
Net unrealized gains on bonds and notes available for
sale.................................................. 7,266,000 5,824,000
-------------- --------------
Total shareholder's equity............................... 186,055,000 168,078,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY................. $1,942,160,000 $1,984,490,000
============== ==============
</TABLE>
See accompanying notes.
43
<PAGE> 44
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INCOME STATEMENT
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Investment income.............................. $117,496,000 $ 65,559,000 $ 9,957,000
------------ ------------ -----------
Interest expense on:
Fixed annuity contracts...................... (80,624,000) (45,765,000) (7,155,000)
Senior indebtedness.......................... (109,000) (589,000) (4,000)
------------ ------------ -----------
Total interest expense......................... (80,733,000) (46,354,000) (7,159,000)
------------ ------------ -----------
NET INVESTMENT INCOME.......................... 36,763,000 19,205,000 2,798,000
------------ ------------ -----------
NET REALIZED INVESTMENT GAINS (LOSSES)......... 4,690,000 5,020,000 (539,000)
------------ ------------ -----------
Fee income:
Variable annuity fees........................ 3,607,000 1,712,000 690,000
Surrender charges............................ 4,350,000 1,809,000 221,000
------------ ------------ -----------
TOTAL FEE INCOME............................... 7,957,000 3,521,000 911,000
------------ ------------ -----------
GENERAL AND ADMINISTRATIVE EXPENSES............ (3,301,000) (3,222,000) (1,480,000)
------------ ------------ -----------
AMORTIZATION OF DEFERRED ACQUISITION COSTS..... (17,120,000) (10,386,000) (500,000)
------------ ------------ -----------
ANNUAL COMMISSIONS............................. (348,000) (195,000) (19,000)
------------ ------------ -----------
PRETAX INCOME.................................. 28,641,000 13,943,000 1,171,000
Income tax expense............................. (12,106,000) (5,090,000) (448,000)
------------ ------------ -----------
NET INCOME..................................... $ 16,535,000 $ 8,853,000 $ 723,000
============ ============ ===========
</TABLE>
See accompanying notes.
44
<PAGE> 45
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 16,535,000 $ 8,853,000 $ 723,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Interest credited to fixed annuity contracts............ 80,624,000 45,765,000 7,155,000
Net realized investment (gains) losses.................. (4,690,000) (5,020,000) 539,000
Accretion of net discounts on investments............... (1,985,000) (1,070,000) (343,000)
Amortization of goodwill................................ 58,000 58,000 58,000
Provision for deferred income taxes..................... (389,000) 401,000 740,000
Change in:
Deferred acquisition costs.............................. 5,642,000 (4,215,000) (5,736,000)
Income taxes receivable/payable......................... 7,941,000 2,535,000 (322,000)
Other, net................................................ 8,472,000 (2,289,000) (254,000)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 112,208,000 45,018,000 2,560,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds and notes......................................... (761,591,000) (833,174,000) (124,681,000)
Mortgage loans.......................................... (82,256,000) -- --
Other investments, excluding short-term investments..... (11,000) -- --
Sales of:
Bonds and notes......................................... 864,763,000 561,887,000 80,440,000
Mortgage loans.......................................... -- 88,371,000 --
Other investments, excluding short-term investments..... 494,000 140,000 --
Redemptions and maturities of:
Bonds and notes......................................... 81,254,000 51,600,000 11,514,000
Mortgage loans.......................................... 24,501,000 13,535,000 4,736,000
Other investments, excluding short-term investments..... -- 99,000 --
------------- ------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ 127,154,000 (117,542,000) (27,991,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity contracts............... $ 130,851,000 $ 131,711,000 $ 45,417,000
Net exchanges from the fixed accounts of variable annuity
contracts............................................... (47,852,000) (22,346,000) (4,719,000)
Withdrawal payments on fixed annuity contracts............ (221,629,000) (88,229,000) (9,850,000)
Claims and annuity payments on fixed annuity contracts.... (36,892,000) (13,774,000) (3,752,000)
Capital contributions received............................ -- 5,000,000 --
Net receipts from (repayments of) other short-term
financings.............................................. (23,970,000) 18,659,000 (1,340,000)
Cession of non-annuity product lines...................... (34,776,000) -- --
------------- ------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ (234,268,000) 31,021,000 25,756,000
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS............................................... 5,094,000 (41,503,000) 325,000
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD...... 50,585,000 6,707,000 6,382,000
CASH AND SHORT-TERM INVESTMENTS OF MERGED ENTITY AT DATE OF
MERGER.................................................... -- 85,381,000 --
------------- ------------- -------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD............ $ 55,679,000 $ 50,585,000 $ 6,707,000
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness............................. $ 109,000 $ 589,000 $ 4,000
============= ============= =============
Net income taxes paid..................................... $ 5,439,000 $ 2,154,000 $ 30,000
============= ============= =============
</TABLE>
See accompanying notes.
45
<PAGE> 46
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
First SunAmerica Life Insurance Company (The "Company") is a wholly-owned
indirect subsidiary of SunAmerica Inc. (the "Parent"). The Company is a New
York-domiciled life insurance company engaged primarily in the business of
selling and administering fixed and variable annuity contracts in the state of
New York.
The operations of the Company are influenced by many factors, including
general economic conditions, monetary and fiscal policies of the federal
government, and policies of state and other regulatory authorities. The level of
sales of the Company's financial products is influenced by many factors,
including general market rates of interest, strengths, weakness and volatility
of equity markets, and terms and conditions of competing financial products. The
Company is exposed to the typical risks normally associated with a portfolio of
fixed-income securities, namely interest rate, option, liquidity and credit
risk. The Company controls its exposure to these risks by, among other things,
closely monitoring and matching the duration of its assets and liabilities,
monitoring and limiting prepayment and extension risk in its portfolio,
maintaining a large percentage of its portfolio in highly liquid securities, and
engaging in a disciplined process of underwriting, reviewing and monitoring
credit risk. The Company also is exposed to market risk, as market volatility
may result in reduced fee income in the case of assets held in separate
accounts.
2. BUSINESS COMBINATION
On March 31, 1997, SunAmerica Life Insurance Company, the direct parent of
the Company, completed the acquisition of all of the outstanding stock of John
Alden Life Insurance Company of New York ("JANY"). On October 31, 1997, JANY was
merged with and into the Company. On the date of acquisition, JANY had assets
having an aggregate fair value of $1,536,179,000, composed primarily of invested
assets totaling $1,403,807,000. Liabilities assumed in this acquisition totaled
$1,411,179,000, including $1,363,764,000 of fixed annuity reserves. An amount
equal to the excess of the purchase price over the fair value of the net assets
required, amounting to $103,695,000 at September 30, 1997, is included in
Deferred Acquisition Costs on the balance sheet. The acquisition was accounted
for by using the purchase method of accounting and the merger by using the
pooling method from the date of acquisition. The balance sheet at September 30,
1997 and the income statement and statement of cash flows for the year ended
September 30, 1997 have been restated from those originally contained in the
September 30, 1997 Annual Report on Form 10-K to include the assets and
liabilities of JANY and the results of JANY's operations and cash flows for the
six-month period from April 1, 1997 through September 30, 1997. On a pro forma
(unaudited) basis, assuming the acquisition and merger had occurred on October
1, 1995, the beginning of the earliest period presented herein, revenues (net
investment income, net realized investment losses and fee income) would have
been $40,891,000 and $29,768,000 and net income would have been $12,434,000 and
$6,710,000 for the years ended September 30, 1997 and 1996, respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles. Certain
prior period amounts have been reclassified to conform with the 1998
presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and short-term
bank participations. All such
46
<PAGE> 47
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investments are carried at cost plus accrued interest, which approximates fair
value, have maturities of three months or less and are considered cash
equivalents for purposes of reporting cash flows.
Bonds and notes available for sale are carried at aggregate fair value and
changes in unrealized gains or losses, net of tax, are credited or charged
directly to shareholder's equity. Bonds and notes are reduced to estimated net
realizable value when necessary for declines in value considered to be other
than temporary. Estimates of net realizable value are subjective and actual
realization will be dependent upon future events.
Mortgage loans are carried at amortized unpaid balances, net of provisions
for estimated losses. Other invested assets include real estate, which is
carried at the lower of cost or fair value, policy loans, which are carried at
unpaid balances, and common stock, which is carried at fair value.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined by using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income by using the interest method over the contractual lives of the
investments.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net interest income, net realized
investment gains and losses, variable annuity fees, surrender charges and direct
administrative expenses. Deferred acquisition costs consist of commissions and
other costs that vary with, and are primarily related to, the production or
acquisition of new business.
As debt and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to deferred acquisition costs equal to the
change in amortization that would have been recorded if such securities had been
sold at their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains or losses on debt and equity securities available for
sale that is credited or charged directly to shareholder's equity. Deferred
Acquisition Costs have been decreased by $30,000,000 at September 30, 1998 and
$31,200,000 at September 30, 1997 for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities
resulting from the receipt of variable annuity premiums are segregated in
separate accounts. The Company receives administrative fees for managing the
funds and other fees for assuming mortality and certain expense risks. Such fees
are included in Variable Annuity Fees in the income statement.
GOODWILL: Goodwill, amounting to $705,000 at September 30, 1998, is
amortized by using the straight-line method over a period of 25 years and is
included in Other Assets in the balance sheet. Goodwill is evaluated for
impairment when events or changes in economic conditions indicate that the
carrying amount may not be recoverable.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts are accounted for as investment- type contracts in accordance with
Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments," and are recorded at accumulated value
(premiums received, plus accrued interest, less withdrawals and assessed fees).
FEE INCOME: Variable annuity fees and surrender charges are recorded in
income as earned.
INCOME TAXES: The Company is included in the consolidated federal income
tax return of the Parent and files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Income taxes have been
calculated as if the Company filed a separate return. Deferred income
47
<PAGE> 48
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
tax assets and liabilities are recognized based on the difference between
financial statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting comprehensive income and its components in a
full set of general purpose financial statements. SFAS 130 is effective for the
Company as of October 1, 1998 and is not included in these financial statements.
Implementation of SFAS 130 will not have an impact on the Company's results of
operations, financial condition or liquidity.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. SFAS 133 is effective for the Company as of October 1, 1999 and is
not included in these financial statements. The Company has not completed its
analysis of the effect of SFAS 133, but management believes that it will not
have a material impact on the Company's results of operations, financial
condition or liquidity.
48
<PAGE> 49
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
The amortized cost and estimated fair value of bonds and notes available
for sale by major category follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
<S> <C> <C>
AT SEPTEMBER 30, 1998:
Securities of the United States Government....... $ 518,000 $ 549,000
Mortgage-backed securities....................... 454,934,000 472,557,000
Securities of public utilities................... 81,525,000 84,711,000
Corporate bonds and notes........................ 658,674,000 677,717,000
Other debt securities............................ 67,052,000 68,338,000
-------------- --------------
Total.................................... $1,262,703,000 $1,303,872,000
============== ==============
AT SEPTEMBER 30, 1997:
Securities of the United States Government....... $ 36,083,000 $ 36,950,000
Mortgage-backed securities....................... 487,585,000 501,683,000
Securities of public utilities................... 50,855,000 53,018,000
Corporate bonds and notes........................ 754,322,000 775,073,000
Other debt securities............................ 130,267,000 132,529,000
-------------- --------------
Total.................................... $1,459,112,000 $1,499,253,000
============== ==============
</TABLE>
The amortized cost and estimated fair value of bonds and notes available
for sale by contractual maturity, as of September 30, 1998, follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less.......................... $ 8,342,000 $ 8,377,000
Due after one year through five years............ 257,156,000 268,154,000
Due after five years through ten years........... 430,780,000 440,068,000
Due after ten years.............................. 111,491,000 114,716,000
Mortgage-backed securities....................... 454,934,000 472,557,000
-------------- --------------
Total.................................... $1,262,703,000 $1,303,872,000
============== ==============
</TABLE>
Actual maturities of bonds and notes will differ from those shown above due
to prepayments and redemptions.
49
<PAGE> 50
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
Gross unrealized gains and losses on bonds and notes available for sale by
major category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
----------- ------------
<S> <C> <C>
AT SEPTEMBER 30, 1998:
Securities of the United States Government............. $ 31,000 $ --
Mortgage-backed securities............................. 17,733,000 (110,000)
Securities of public utilities......................... 3,562,000 (376,000)
Corporate bonds and notes.............................. 30,219,000 (11,176,000)
Other debt securities.................................. 1,297,000 (11,000)
----------- ------------
Total.......................................... $52,842,000 $(11,673,000)
=========== ============
AT SEPTEMBER 30, 1997:
Securities of the United States Government............. $ 867,000 $ --
Mortgage-backed securities............................. 14,176,000 (78,000)
Securities of public utilities......................... 2,163,000 --
Corporate bonds and notes.............................. 21,181,000 (430,000)
Other debt securities.................................. 2,270,000 (8,000)
----------- ------------
Total.......................................... $40,657,000 $ (516,000)
=========== ============
</TABLE>
Gross unrealized gains on equity securities available for sale aggregated
$9,000 and $19,000 at September 30, 1998 and 1997, respectively. There were no
unrealized losses at September 30, 1998 and 1997.
Gross realized investment gains and losses on sales of investments are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
BONDS AND NOTES:
Realized gains........................... $13,067,000 $6,441,000 $1,039,000
Realized losses.......................... (7,509,000) (1,466,000) (1,295,000)
MORTGAGE LOANS:
Realized losses.......................... (289,000) (15,000) --
OTHER INVESTMENTS:
Realized gains........................... 22,000 140,000 --
Realized losses.......................... (209,000) -- (112,000)
IMPAIRMENT WRITEDOWNS...................... (392,000) (80,000) (171,000)
----------- ---------- ----------
Total net realized investment
gains (losses)................. $ 4,690,000 $5,020,000 $ (539,000)
=========== ========== ==========
</TABLE>
50
<PAGE> 51
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Short-term investments................... $ 2,340,000 $ 1,334,000 $ 390,000
Bonds and notes.......................... 100,808,000 56,253,000 9,186,000
Mortgage loans........................... 13,901,000 7,714,000 381,000
Other invested assets.................... 447,000 258,000 --
------------ ----------- ----------
Total investment income........ $117,496,000 $65,559,000 $9,957,000
============ =========== ==========
</TABLE>
Expenses incurred to manage the investment portfolio amounted to $814,000
for the year ended September 30, 1998, $387,000 for the year ended September 30,
1997, and $121,000 for the year ended September 30, 1996, and are included in
General and Administrative Expenses in the income statement.
The carrying value of investments in any one entity or its affiliates
exceeding 10% of the Company's shareholder's equity at September 30, 1998 is as
follows:
<TABLE>
<S> <C>
Bonds and notes:
Mellon Bank NA............................... $24,484,000
===========
</TABLE>
At September 30, 1998, mortgage loans were collateralized by properties
located in 34 states and the District of Columbia, with loans totaling
approximately 16% of the aggregate carrying value of the portfolio secured by
properties located in New York, approximately 15% by properties located in
California, and approximately 10% by properties located in Michigan. No more
than 8% of the portfolio was secured by properties in any other single state.
At September 30, 1998, bonds and notes included $97,045,000 of bonds and
notes not rated investment grade. The Company had no material concentrations of
non-investment-grade assets at September 30, 1998.
At September 30, 1998, the carrying value of investments in default as to
the payment of principal or interest was $1,167,000 all of which were mortgage
loans. Such nonperforming investments had an estimated fair value equal to their
carrying value.
At September 30, 1998, $518,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory requirements.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to reasonable
estimates of the fair value of only the Company's financial instruments. The
disclosures do not address the value of the Company's recognized and
unrecognized nonfinancial assets (including its other invested assets) and
liabilities or the value of anticipated future business. The Company does not
plan to sell most of its assets or settle most of its liabilities at these
estimated fair values.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Selling expenses and potential taxes
are not included. The estimated fair value amounts were determined using
available market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
51
<PAGE> 52
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND SHORT-TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS AND NOTES: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
MORTGAGE LOANS: Fair values are primarily determined by discounting future
cash flows to the present at current market rates, using expected prepayment
rates.
VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets
are carried at the market value of the underlying securities.
RECEIVABLE FROM (PAYABLE TO) BROKERS FOR SALES (PURCHASES) OF
SECURITIES: Such obligations represent net transactions of a short-term nature
for which the carrying value is considered a reasonable estimate of fair value.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are
assigned a fair value equal to current net surrender value. Annuitized contracts
are valued based on the present value of future cash flows at current pricing
rates.
VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Fair values of
contracts in the accumulation phase are based on net surrender values. Fair
values of contracts in the payout phase are based on the present value of future
cash flows at assumed investment rates.
52
<PAGE> 53
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at
September 30, 1998 and 1997, compared with their respective carrying values, are
as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------------- --------------
<S> <C> <C>
1998:
ASSETS:
Cash and short-term investments.................. $ 55,679,000 $ 55,679,000
Bonds and notes.................................. 1,303,872,000 1,303,872,000
Mortgage loans................................... 187,906,000 194,471,000
Variable annuity assets held in separate
accounts...................................... 271,865,000 271,865,000
Receivable from brokers for sales of
securities.................................... 6,601,000 6,601,000
LIABILITIES:
Reserves for fixed annuity contracts............. 1,460,856,000 1,406,853,000
Variable annuity liabilities related to separate
accounts...................................... 271,865,000 256,623,000
============== ==============
1997:
ASSETS:
Cash and short-term investments.................. $ 50,585,000 $ 50,585,000
Bonds and notes.................................. 1,499,253,000 1,499,253,000
Mortgage loans................................... 131,117,000 136,648,000
Variable annuity assets held in separate
accounts...................................... 171,475,000 171,475,000
LIABILITIES:
Reserves for fixed annuity contracts............. 1,556,656,000 1,486,551,000
Payable to brokers for purchases of securities... 12,460,000 12,460,000
Variable annuity liabilities related to separate
accounts...................................... 171,475,000 163,045,000
============== ==============
</TABLE>
6. CONTINGENT LIABILITIES
The Company is involved in various kinds of litigation common to its
business. These cases are in various stages of development and, based on reports
of counsel, management believes that provisions made for potential losses
relating to such litigation are adequate and any further liabilities and costs
will not have a material adverse impact upon the Company's financial position or
results of operations.
7. SHAREHOLDER'S EQUITY
The Company is authorized to issue 300 shares of its $10,000 par value
Common Stock. At September 30, 1998 and 1997, 300 shares were outstanding.
53
<PAGE> 54
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDER'S EQUITY (CONTINUED)
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balance.................... $144,428,000 $ 14,428,000 $14,428,000
Additional paid-in capital acquired
as a result of the merger with
JANY.............................. -- 125,000,000 --
Capital contributions received....... -- 5,000,000 --
------------ ------------ -----------
Ending balance.................. $144,428,000 $144,428,000 $14,428,000
============ ============ ===========
RETAINED EARNINGS:
Beginning balance.................... $ 14,826,000 $ 5,973,000 $ 5,250,000
Net income........................... 16,535,000 8,853,000 723,000
------------ ------------ -----------
Ending balance....................... $ 31,361,000 $ 14,826,000 $ 5,973,000
============ ============ ===========
NET UNREALIZED GAINS (LOSSES) ON BONDS
AND NOTES
AVAILABLE FOR SALE:
Beginning balance............... $ 5,824,000 $ (181,000) $ (860,000)
Change in net unrealized gains
(losses) on bonds and notes
available for sale........... 1,018,000 40,538,000 1,145,000
Change in adjustment to deferred
acquisition costs............ 1,200,000 (31,300,000) (100,000)
Tax effect of net changes....... (776,000) (3,233,000) (366,000)
------------ ------------ -----------
Ending balance.................. $ 7,266,000 $ 5,824,000 $ (181,000)
============ ============ ===========
</TABLE>
For a life insurance company domiciled in the State of New York, no
dividend may be distributed to any shareholder unless notice of the domestic
insurer's intention to declare such dividend and the amount have been filed with
the Superintendent of Insurance not less than 30 days in advance of such
proposed declaration, or if the Superintendent disapproves the distribution of
the dividend within the 30-day period. No dividends were paid in fiscal years
1998, 1997 or 1996.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the nine months ended
September 30, 1998 was $15,170,000. The statutory net income for the year ended
December 31, 1997 was $18,390,000 and the statutory net income for the year
ended December 31, 1996 was $9,989,000. The Company's statutory capital and
surplus was $94,239,000 at September 30, 1998, $83,861,000 at December 31, 1997
and $77,929,000 at December 31, 1996.
54
<PAGE> 55
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The components of the provisions for income taxes on pretax income consist
of the following:
<TABLE>
<CAPTION>
NET REALIZED
INVESTMENT
GAINS (LOSSES) OPERATIONS TOTAL
-------------- ---------- -----------
<S> <C> <C> <C>
1998:
Currently payable........................... $2,711,000 $9,784,000 $12,495,000
Deferred.................................... (515,000) 126,000 (389,000)
---------- ---------- -----------
Total income tax expense............ $2,196,000 $9,910,000 $12,106,000
========== ========== ===========
1997:
Currently payable........................... $1,790,000 $2,899,000 $ 4,689,000
Deferred.................................... (11,000) 412,000 401,000
---------- ---------- -----------
Total income tax expense............ $1,779,000 $3,311,000 $ 5,090,000
========== ========== ===========
1996:
Currently payable........................... $ (121,000) $ (171,000) $ (292,000)
Deferred.................................... (105,000) 845,000 740,000
---------- ---------- -----------
Total income tax expense............ $ (226,000) $ 674,000 $ 448,000
========== ========== ===========
</TABLE>
Income taxes computed at the United States federal income tax rate of 35%
and income taxes provided differ as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1998 1997 1996
----------- ---------- --------
<S> <C> <C> <C>
Amount computed at statutory rate................ $10,024,000 $4,880,000 $410,000
Increases (decreases) resulting from:
Amortization of differences between book and
tax bases of net assets acquired............ 20,000 20,000 20,000
State income taxes, net of federal tax
benefit..................................... 2,042,000 200,000 25,000
Other, net..................................... 20,000 (10,000) (7,000)
----------- ---------- --------
Total income tax expense............... $12,106,000 $5,090,000 $448,000
=========== ========== ========
</TABLE>
55
<PAGE> 56
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The significant
components of the liability for Deferred Income Taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Investments........................................... $ 1,782,000 $ 891,000
Deferred acquisition costs............................ 29,505,000 30,144,000
Net unrealized gains on debt and equity securities
available for sale.................................. 3,912,000 3,136,000
Other liabilities..................................... 46,000 125,000
------------ ------------
Total deferred tax liabilities.............. 35,245,000 34,296,000
------------ ------------
DEFERRED TAX ASSETS:
Contractholder reserves............................... (18,535,000) (26,202,000)
State income taxes.................................... (79,000) (80,000)
Other assets.......................................... (11,260,000) (3,030,000)
------------ ------------
Total deferred tax assets........................ (29,874,000) (29,312,000)
------------ ------------
Deferred income taxes............................ $ 5,371,000 $ 4,984,000
============ ============
</TABLE>
9. RELATED-PARTY MATTERS
The Company pays commissions to six affiliated companies, SunAmerica
Securities, Inc., Advantage Capital Corp., Financial Services Corp., Sentra
Securities Corp., Spelman & Co. Inc. and Royal Alliance Associates, Inc.
Commissions paid to these broker-dealers totaled $3,855,000 in 1998, $4,486,000
in 1997, and $2,646,000 in 1996. These broker-dealers represent a significant
portion of the Company's business, amounting to 33.0%, 38.9% and 57.9% of
premiums in 1998, 1997 and 1996, respectively. No single unaffiliated
broker-dealer was responsible for more than 22% of total premiums in each of the
years ended September 30, 1998, 1997, and 1996.
The Company paid occupancy and office services expenses to Royal Alliance
Associates, Inc. totaling $15,000 for the year ended September 30, 1996. The
Company paid no such charges in the years ended September 30, 1998 and 1997.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, whose purpose
is to provide services to the Company and its affiliates. Amounts paid for such
services totaled $3,877,000 for the year ended September 30, 1998, $2,454,000
for the year ended September 30, 1997 and $2,097,000 for the year ended
September 30, 1996. The marketing component of such costs during these periods
amounted to $1,877,000, $1,223,000 and $1,082,000, respectively, and are
deferred and amortized as part of Deferred Acquisition Costs. The other
components of these costs are included in General and Administrative Expenses in
the income statement.
During the year ended September 30, 1998, the Company sold bonds to the
Parent for cash equal to their current market value, which aggregated
$2,155,000. The Company recorded a net gain of $83,000 on the transactions.
56
<PAGE> 57
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS
On July 15, 1998, Anchor National Life Insurance Company, an affiliate of
the Company, entered into a definitive agreement to acquire the individual life
business and the individual and group annuity business of MBL Life Assurance
Corporation ("MBL Life") via a 100% coinsurance transaction for approximately
$130,000,000 in cash. The transaction will include approximately $2,000,000,000
of universal life reserves and $3,000,000,000 of fixed annuity reserves. The
affiliate plans to reinsure a large portion of the mortality risk associated
with the acquired block of universal life business. Completion of this
acquisition is expected by the end of calendar year 1998 and is subject to
customary conditions and required approvals. Included in this block of business
is approximately $250,000,000 of individual life business and $500,000,000 of
group annuity business whose contract owners are residents of New York State
(the "New York Business"). Approximately six months subsequent to completion of
the transaction, the New York Business will be acquired by the Company via an
assumption reinsurance agreement between the Company and MBL Life, which will
supersede the coinsurance agreement. The $130,000,000 purchase price will be
allocated between the Company and its affiliate based on their respective
assumed life insurance reserves.
On August 20, 1998, the Company's Parent announced that it has entered into
a definite agreement to merge with and into American International Group, Inc.
("AIG"). Under the terms of the agreement, each share of the Parent's common
stock (including Nontransferable Class B Common Stock) will be exchanged for
.855 shares of AIG's common stock. The transaction will be treated as a pooling
of interests for accounting purposes and will be a tax-free reorganization. The
transaction was approved by both the Parent's and AIG's shareholders on November
18, 1998, and, subject to various regulatory approvals, will be completed in
late 1998 or early 1999.
57
<PAGE> 58
10. SUBSEQUENT EVENTS (CONTINUED)
APPENDIX A
MARKET VALUE ADJUSTMENT ("MVA")
The MVA reflects the impact that changing interest rates have on the value of
money invested at a fixed interest rate. The longer the period of time remaining
in the term you initially agreed to leave your money in the fixed account
option, the greater the impact of changing interest rates. The impact of the MVA
can be either positive or negative, and is computed by multiplying the amount
withdrawn, transferred or annuitized by the following factor:
(N/12)
[(1+I/(1+J+0.0025)] - 1
where:
I is the interest rate you are earning on the money invested in the
fixed account 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 account option (fractional years are
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 account option.
EXAMPLES OF THE MVA
The examples below assume the following:
(1) You made an initial Purchase Payment of $10,000 and allocated it to the
10-year fixed account option at a rate of 5%;
(2) You make a partial withdrawal of $4,000 when 2 1/2 years (30 months)
remain in the 10-year term you initially agreed to leave your money in
the fixed account option (N=30);
(3) The accumulated value attributable to the Purchase Payment on the date
of withdrawal is $14,168.20; and
(4) You have not made any other transfers, additional Purchase Payments, or
withdrawals.
No withdrawal charges are reflected because your Purchase Payment has been in
the contract for seven full years. If a withdrawal charge applies, it is
deducted before the MVA. The MVA is assessed on the amount withdrawn less any
withdrawal charges.
POSITIVE ADJUSTMENT
Assume that on the date of withdrawal, the interest rate in effect for a new
Purchase Payments in the 3-year fixed account option is 4%.
(N/12)
The MVA factor is = [(1+I/(1+J+0.0025)] - 1
(30/12)
= [(1.05)/(1.04+.0025)] - 1
(2.5)
= (1.007194) - 1
= 1.018083 - 1
= + 0.018083
The requested withdrawal amount is multiplied by the MVA factor to determine the
MVA:
$4,000 x (+0.018083) = +$72.33
$72.33 represents the MVA that would be added to your withdrawal.
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 (2 1/2 years rounded up
to the next full year) is 6%.
(N/12)
The MVA factor is = [(1+I)/(1+J+0.0025)] - 1
(30/12)
= [(1.05)/(1.06+.0025)] - 1
(2.5)
= (0.988235) - 1
= 0.970847 - 1
= - 0.029153
The requested withdrawal amount is multiplied by the MVA factor to determine the
MVA:
$4,000 X (- 0.029153) = -$116.61
$116.61 represents the MVA that will be deducted from the money remaining in the
10-year fixed account option.
58
<PAGE> 59
10. SUBSEQUENT EVENTS (CONTINUED)
EXAMPLE OF FULL WITHDRAWAL WITH MVA AND WITHDRAWAL CHARGE
Assume the same facts as in Part 2, above, except that under assumption (2)
a complete withdrawal is requested with 4 1/2 years (54 months) remaining in the
guarantee period (i.e., N = 54). The guarantee amount on the date of withdrawal
is $12,878.13. As was the case with the Examples in Part 1, above, the earnings
may be withdrawn free of withdrawal charge, leaving the initial Purchase Payment
of $10,000 subject to the Charge. The applicable withdrawal charge is 2% or
$200.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of withdrawal the current interest rate for a
new guarantee period of 5 years is 4%:
N/12
The MVA factor = [(1 + I)/(1 + J + .0025)] -1
(54/12)
= [(1.05)/(1.04 + .0025)] -1
4.5
= (1.007194) -1
= 1.032784 -1
= +0.032784
The MVA is:
($12,878.13 - $200) X (+0.032784) = +$415.64
And the net amount available upon surrender is:
$12,878.13 - $200 + $415.64 = $13,093.77
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of withdrawal the current interest rate for a
new guarantee period of 5 years is 6%:
N/12
The MVA factor = [(1 + I)/(1 + J + .0025)] -1
(54/12)
= [(1.05)/(1.06 + .0025)] -1
4.5
= (0.988235) -1
= 0.948138 -1
= -0.051862
The withdrawal charge of $200 is applied first; the MVA factor is
applied against the remaining guarantee amount:
MVA = ($12,878.13 - $200 - $30) X (-0.051862) = -$657.51
The net amount available upon withdrawal is the guarantee amount
reduced by the withdrawal charge and the MVA:
$12,878.13 - $200 - $657.51 = $12,020.62
59
<PAGE> 60
APPENDIX B
WITHDRAWALS AND WITHDRAWAL CHARGES
PART 1 -- SEPARATE ACCOUNT (THE MVA DOES NOT APPLY TO THE SEPARATE ACCOUNT)
These examples assume the following:
(1) The initial Purchase Payment was $10,000, allocated solely to one
Variable Portfolio;
(2) The date of full surrender or partial withdrawal occurs during the
3rd contribution year;
(3) The contract value at the time of surrender or withdrawal is
$12,000; and
(4) No other Purchase Payments or previous partial withdrawals have
been made.
EXAMPLE A -- FULL SURRENDER:
(1) Earnings in the Variable Portfolio ($12,000 - $10,000 = $2,000)
are not subject to the withdrawal charge.
(2) The balance of the full surrender ($12,000 - $2,000 = $10,000) is
subject to a 5% withdrawal charge applicable during the 3rd contribution
year.
(3) The amount of the withdrawal charge is .05 X $10,000 = $500.
(4) The contract administration charge is deducted from the full
surrender amount. The amount of the full surrender is
$12,000 - $500 - $30 = $11,470.
EXAMPLE B -- PARTIAL WITHDRAWAL (IN THE AMOUNT OF $3,000):
(1) For the same reasons as given in Steps 1 and 2 of Example A,
above, $2,000 can be withdrawn free of the withdrawal charge.
(2) Although 10% of the Purchase Payment is available without
imposition of a withdrawal charge (.10 X $10,000 = $1,000), this free
withdrawal amount is, like the withdrawal charge, applied first to
earnings. Since the earnings exceed the free withdrawal amount, only the
earnings can be withdrawn free of the scheduled withdrawal charge.
(3) The balance of the requested partial withdrawal
($3,000 - $2,000 = $1,000) is subject to the withdrawal charge applicable
during the 3rd contribution year (5%).
(4) The amount of the withdrawal charge is equal to the amount
required to complete the partial withdrawal ($3,000 - $2,000 = $1,000)
divided by (1 - .05) = 0.95, less the amount required to complete the
partial withdrawal.
withdrawal charge = ($1,000/0.95) - $1,000
= $52.63
In this example, in order for the owner to receive the amount requested
($3,000), a gross withdrawal of $3,052.63 must be processed with $52.63
representing the withdrawal charge calculated above.
Examples C and D assume the following:
(1) The initial Purchase Payment was $20,000, allocated solely to one
Variable Portfolio;
(2) The full surrender or partial withdrawal occurs during the 3rd
contribution year;
B-1
<PAGE> 61
(3) The owner's contract value at the time of surrender or withdrawal
is $21,500; and
(4) No other Purchase Payments or partial withdrawals have been made.
EXAMPLE C -- PARTIAL WITHDRAWAL (IN THE MAXIMUM AMOUNT AVAILABLE WITHOUT
WITHDRAWAL CHARGE):
(1) Earnings in the Variable Portfolio ($21,500 - $20,000 = $1,500)
are not subject to the withdrawal charge.
(2) An additional free withdrawal of 10% of the Purchase Payments less
earnings (.10 X $20,000 - $1,500 = $500) is also available free of the
withdrawal charge, so that
(3) The maximum partial withdrawal without withdrawal charge is the
sum of the earnings and the additional free withdrawal
($1,500 + $500 = $2,000).
EXAMPLE D -- FULL SURRENDER IMMEDIATELY FOLLOWING THE PARTIAL WITHDRAWAL IN
EXAMPLE C:
(1) The owner's contract value after the partial withdrawal in Example C
is $21,500 - $2,000 = $19,500.
(2) The Purchase Payment amount for calculating the withdrawal charge
is the original $20,000 (additional free withdrawal amounts do not reduce
the Purchase Payment amount for purposes of calculating the withdrawal
charge).
(3) The amount of the withdrawal charge is .05 X $20,000 = $1,000.
(4) The contract administration charge is deducted from the full
surrender amount. The amount of the full surrender is
$19,500 - $1,000 - $30 = $18,470.
B-2
<PAGE> 62
<TABLE>
<S> <C> <C>
- ------------------------------------
- ------------------------------------ Stamp
- ------------------------------------
</TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
ANNUITY SERVICE CENTER
P.O. BOX 54299
LOS ANGELES, CALIFORNIA 90054-0299
<PAGE> 63
Please forward a copy, without charge, of the Statement of Additional
Information concerning the Vista Capital Advantage issued by First SunAmerica
Life Insurance Company to:
(Please print or type and fill in all information.)
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
City/State/Zip
- ------------------------------------------------------------------------------
Date: ________________________ Signed: _____________________________________
