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File Nos. 33-81470
811-8624
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 9 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 10
(Check appropriate box or boxes)
FS VARIABLE ANNUITY ACCOUNT TWO
(Exact Name of Registrant)
First SunAmerica Life Insurance Company
(Name of Depositor)
733 Third Avenue, 4th Floor
New York, New York 10017
(Address of Depositor's Principal Offices) (Zip Code)
Depositor's Telephone Number, including Area Code: (310) 772-6000
Susan L. Harris, Esq.
First SunAmerica Life Insurance Company
c/o SunAmerica Inc.
1 SunAmerica Center
Los Angeles, California 90067-6022
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 2000 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on [ ] pursuant to paragraph (a)(1) of Rule 485.
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FS VARIABLE ANNUITY ACCOUNT TWO
Cross Reference Sheet
PART A - PROSPECTUS
-------------------
Incorporated herein by reference to Post-Effective Amendment No. 8 under
Securities Act of 1933 (the 33 Act) and No. 9 under the Investment Company Act
of 1940 (the 40 Act) to Registration Statement file No. 33-81470 and 811-8624
filed on Form N-4 on December 22, 1999.
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PART B - STATEMENT OF ADDITIONAL INFORMATION
Incorporated herein by reference to Post-Effective Amendment No. 8 under
Securities Act of 1933 (the 33 Act) and No. 9 under the Investment Company Act
of 1940 (the 40 Act) to Registration Statement file No. 33-81470 and 811-8624
filed on Form N-4 on December 22, 1999.
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
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[VISTA CAPITAL ADVANTAGE LOGO]
PROSPECTUS
DECEMBER 29, 1999
Incorporated herein by reference to Post-Effective Amendment No. 8 under
Securities Act of 1933 (the 33 Act) and No. 9 under the Investment Company Act
of 1940 (the 40 Act) to Registration Statement file No. 33-81470 and 811-8624
filed on Form N-4 on December 22, 1999.
<PAGE> 5
STATEMENT OF ADDITIONAL INFORMATION
VISTA CAPITAL ADVANTAGE
FIXED AND VARIABLE GROUP DEFERRED ANNUITY CONTRACTS
FS VARIABLE ANNUITY ACCOUNT TWO
DEPOSITOR: FIRST SUNAMERICA LIFE INSURANCE COMPANY
This Statement of Additional Information is not a prospectus; it should be read
with the prospectus dated May 1, 2000, relating to the annuity contracts
described above, a copy of which may be obtained without charge by written
request addressed to:
First SunAmerica Life Insurance Company
Annuity Service Center
P.O. Box 54299
Los Angeles, California 90054-0299
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS
MAY 1, 2000
FSVCA-SAI (12/99)
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Data ........................................................................... 1
Income Payments ........................................................................... 3
Annuity Unit Values ....................................................................... 3
Taxes ..................................................................................... 6
Distribution of Contracts ................................................................ 10
Financial Statements ....................................................................... 11
</TABLE>
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PERFORMANCE DATA
Performance data for the various Variable Portfolios are computed in the
manner described below.
MONEY MARKET PORTFOLIO
The annualized current yield and the effective yield for the Money Market
Portfolio for the 7-day period ended August 31, 1999 were 3.16% and 3.21%,
respectively.
Current yield is computed by first determining the Base Period Return
attributable to a hypothetical contract having a balance of one Accumulation
Unit at the beginning of a 7 day period using the formula:
Base Period Return = (EV-SV-CMF)/(SV)
where:
SV = value of one Accumulation Unit at the start of a 7 day period
EV = value of one Accumulation Unit at the end of the 7 day period
CMF = an allocated portion of the $30 annual contract maintenance fee,
prorated for 7 days
The change in value of an Accumulation Unit during the 7 day period
reflects the income received, minus any expenses accrued, during such 7 day
period. The contract maintenance fee is first allocated among the Variable
Portfolios and the General Account so that each Variable Portfolio's allocated
portion of the charge is proportional to the percentage of the number of Owners'
accounts that have money allocated to that Variable Portfolio. The portion of
the charge allocable to the Money Market Portfolio is further reduced, for
purposes of the yield computation, by multiplying it by the ratio that the value
of the hypothetical contract bears to the value of an account of average size
for contracts funded by the Money Market Portfolio. Finally, the result is
multiplied by the fraction 7/365 to arrive at the portion attributable to the 7
day period.
The current yield is then obtained by annualizing the Base Period Return:
Current Yield = (Base Period Return) x (365/7)
The Money Market Portfolio also quotes an "effective yield" that differs
from the current yield given above in that it takes into account the effect of
dividend reinvestment in the Underlying Fund. The effective yield, like the
current yield, is derived from the Base Period Return over a 7 day period.
However, the effective yield accounts for dividend reinvestment by compounding
the current yield according to the formula:
365/7
Effective Yield = [(Base Period Return + 1) - 1]
The yield quotations also do not reflect any impact of premium taxes,
transfer fees, or Withdrawal Charges.
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The yield quoted should not be considered a representation of the yield of
the Money Market Portfolio in the future since the yield is not fixed. Actual
yields will depend not only on the type, quality and maturities of the
investments held by the Underlying Fund and changes in interest rates on such
investments, but also on factors such as a Owner's account size (since the
impact of fixed dollar charges will be greater for small accounts than for
larger accounts).
Yield information may be useful in reviewing the performance of the Money
Market Portfolio and for providing a basis for comparison with other investment
alternatives. However, the Money Market Portfolio's yield fluctuates, unlike
bank deposits or other investments that typically pay a fixed yield for a stated
period of time.
OTHER VARIABLE PORTFOLIOS
The Variable Portfolios of the Separate Account other than the Money Market
Portfolio compute their performance data as "total return".
The total returns of the various Variable Portfolios for periods of 1 and 3
years, and since each Variable Portfolio's inception date, are shown below, both
with and without an assumed complete redemption at the end of the period.
TOTAL ANNUAL RETURN (IN PERCENT) FOR PERIOD ENDED ON
AUGUST 31, 1999 (WITH/WITHOUT REDEMPTION)
<TABLE>
<CAPTION>
VARIABLE PORTFOLIO 1 YEAR 3 YEAR SINCE INCEPTION
------------------ ------ ----------- ---------------
<S> <C> <C> <C>
International Equity** 17.08/23.08 6.58/8.03 5.55/6.48
Capital Growth* 22.61/28.61 8.54/9.94 10.89/11.69
Growth and Income* 13.46/19.46 12.85/14.15 12.98/13.74
Asset Allocation** 4.12/10.12 8.01/9.42 8.15/9.02
U.S. Government** -8.61/-2.61 2.78/4.33 1.71/2.74
</TABLE>
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* Inception date is December 6, 1995
** Inception date is December 22, 1995
Total return for a Variable Portfolio represents a single computed annual
rate of return that, when compounded annually over a specified time period (one,
five, and ten years, or since inception) and applied to a hypothetical initial
investment in a contract funded by that Variable Portfolio made at the beginning
of the period, will produce the same value at the end of the period that the
hypothetical investment would have produced over the same period. The total rate
of return (T) is computed so that it satisfies the formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5, or 10 year period as of the end of the
period (or fractional portion thereof).
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The total return figures reflect the effect of both nonrecurring and
recurring charges, as discussed herein. Recurring charges are taken into account
in a manner similar to that used for the yield computations for the Money Market
Portfolio, described above. The applicable Withdrawal Charge (if any) is
deducted as of the end of the period, to reflect the effect of the assumed
complete redemption. Because the impact of the Contract Maintenance Fee on a
particular Owner's account will generally differ from that assumed in the
computation, due to differences between most actual allocations and the assumed
one, as well as differences due to varying account sizes, the total return
experienced by an actual Variable Portfolio over the same time periods would
generally have been different from those produced by the computation. As with
the Money Market Portfolio yield figures, total return figures are derived from
historical data and are not intended to be a projection of future performance.
INCOME PAYMENTS
INITIAL MONTHLY INCOME PAYMENTS
The initial income payment is determined by applying separately that
portion of the contract value allocated to the fixed account option and the
Variable Portfolio(s), less any premium tax, to the annuity table specified in
the contract for fixed and variable income payments. Those tables are based on a
set amount per $1,000 of proceeds applied. The appropriate rate must be
determined by the sex (except where, as in the case of certain Qualified
contracts and other employer-sponsored retirement plans, such classification is
not permitted) and age of the annuitant and designated second person, if any.
The dollars applied are then divided by 1,000 and the result multiplied by
the appropriate annuity factor appearing in the table to compute the amount of
the first monthly income payment. In the case of a variable annuity, that amount
is divided by the value of an Annuity Unit as of the Annuity Date to establish
the number of Annuity Units representing each variable income payment. The
number of Annuity Units determined for the first variable income payment remains
constant for the second and subsequent monthly variable income payments,
assuming that no reallocation of contract values is made.
SUBSEQUENT MONTHLY INCOME PAYMENTS
For fixed income payments, the amount of the second and each subsequent
monthly income payment is the same as that determined above for the first
monthly payment.
For variable income payments, the amount of the second and each subsequent
monthly income payment is determined by multiplying the number of Annuity Units,
as determined in connection with the calculation of the initial monthly payment,
above, by the Annuity Unit value as of the day preceding the date on which each
income payment is due.
ANNUITY UNIT VALUES
The value of an Annuity Unit is determined independently for each Variable
Portfolio.
The annuity tables contained in the contract are based on a 3.5% per annum
assumed investment rate. If the actual net investment rate experienced by a
Variable Portfolio exceeds 3.5%, variable income payments derived from
allocations to that Variable Portfolio will increase over time. Conversely, if
the actual rate is less than 3.5%, variable income payments will decrease over
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time. If the net investment rate equals 3.5%, the variable income payments will
remain constant. If a higher assumed investment rate had been used, the initial
monthly payment would be higher, but the actual net investment rate would also
have to be higher in order for income payments to increase (or not to decrease).
The payee receives the value of a fixed number of Annuity Units each month.
The value of a fixed number of Annuity Units will reflect the investment
performance of the Variable Portfolios elected, and the amount of each income
payment will vary accordingly.
For each Variable Portfolio, the value of an Annuity Unit is determined by
multiplying the Annuity Unit value for the preceding month by the net investment
factor for the month for which the Annuity Unit value is being calculated. The
result is then multiplied by a second factor which offsets the effect of the
assumed net investment rate of 3.5% per annum that is assumed in the annuity
tables contained in the contract.
NET INVESTMENT FACTOR
The net investment factor ("NIF") is an index applied to measure the net
investment performance of a Variable Portfolio from one month to the next. The
NIF may be greater or less than or equal to one; therefore, the value of an
Annuity Unit may increase, decrease or remain the same.
The NIF for any Variable Portfolio for a certain month is determined by
dividing (a) by (b) where:
(a) is the Accumulation Unit value of the Variable Portfolio determined as
of the end of that month, and
(b) is the Accumulation Unit value of the Variable Portfolio determined as
of the end of the preceding month.
The NIF for a Variable Portfolio for a given month is a measure of the net
investment performance of the Variable Portfolio from the end of the prior month
to the end of the given month. A NIF of 1.000 results in no change; a NIF
greater than 1.000 results in an increase; and a NIF less than 1.000 results in
a decrease. The NIF is increased (or decreased) in accordance with the increases
(or decreases, respectively) in the value of a share of the underlying fund in
which the Variable Portfolio invests; it is also reduced by separate account
asset charges that are included in the Accumulation Unit Value.
ILLUSTRATIVE EXAMPLE
Assume that one share of a given Variable Portfolio had an Accumulation
Unit value of $11.46 as of the close of the New York Stock Exchange ("NYSE") on
the last business day in September and that its Accumulation Unit value had been
$11.44 at the close of the NYSE on the last business day of the previous month.
The NIF for the month of September is:
NIF = ($11.46/$11.44)
= 1.00174825
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ILLUSTRATIVE EXAMPLE
The change in Annuity Unit value for a Variable Portfolio from one month to
the next is determined in part by multiplying the Annuity Unit value at the
prior month end by the NIF for that Variable Portfolio for the new month. In
addition, however, the result of that computation must also be multiplied by an
additional factor that takes into account, and neutralizes, the assumed
investment rate of 3.5 percent per annum upon which the income payment tables
are based. For example, if the net investment rate for a Variable Portfolio
(reflected in the NIF) were equal to the assumed investment rate, the variable
income payments should remain constant (i.e., the Annuity Unit value should not
change). The monthly factor that neutralizes the assumed investment rate of 3.5
percent per annum is:
(1/12)
1/[(1.035) ] = 0.99713732
In the example given above, if the Annuity Unit value for the Portfolio was
$10.103523 on the last business day in August, the Annuity Unit value on the
last business day in September would have been:
$10.103523 x 1.00174825 x 0.99713732 = $10.092213
To determine the initial payment, the initial annuity payment for variable
annuitization is calculated based on our mortality expectations and an assumed
interest rate (AIR) of 3.5%. Thus the initial variable annuity payment is the
same as the initial payment for a fixed interest payout annuity calculated at an
effective rate of 3.5%.
The Net Investment Factor (NIF) measures the performance of the funds that
are the basis for the amount of future annuity payments. This performance is
compared to the AIR, and if the growth in the NIF is the same as the AIR rate
the payment remains the same as the prior month. If the rate of growth of the
NIF is different than the AIR, then the payment is changed proportionately to
the ratio (1+NIF) / (1+AIR), calculated on a monthly basis. If the NIF is
greater than the AIR, then this proportion is greater than one and payments are
decreased. If the NIF is less than the AIR, then this proportion is less than
one and payments are decreased.
VARIABLE INCOME PAYMENTS
ILLUSTRATIVE EXAMPLE
Assume that a male owner, P, owns a contract in connection with which P has
allocated all of his contract value to a single Variable Portfolio. P is also
the sole annuitant and, at age 60, has elected to begin the income phase of his
contract under Option 4, with 12 years of guaranteed payments. As of the last
valuation preceding the Annuity Date, P's Account was credited with 7543.2456
Accumulation Units, each having a value of $15.432655, (i.e., P's account value
is equal to 7543.2456 x $15.432655 = $116,412.31). Assume also that the Annuity
Unit value for the Portfolio on that same date is $13.256932, and that the
Annuity Unit value on the day immediately prior to the second income payment
date is $13.327695.
P's first variable income payment is determined from the annuity rate
tables in P's contract, using the information assumed above. From the tables,
which supply monthly income payments for each $1,000 of applied contract value,
P's first variable income payment is determined by multiplying the monthly
installment of $5.42 (Option 4 tables, male Annuitant age 60 at the Annuity
Date) by the result of dividing P's account value by $1,000:
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First Payment = $5.42 x ($116,412.31/$1,000) = $630.95
The number of P's Annuity Units (which will be fixed; i.e., it will not
change unless he transfers his Account to another Account) is also determined at
this time and is equal to the amount of the first variable income payment
divided by the value of an Annuity Unit on the day immediately prior to
annuitization:
Annuity Units = $630.95/$13.256932 = 47.593968
P's second variable income payment is determined by multiplying the number
of Annuity Units by the Annuity Unit value as of the day immediately prior to
the second payment due date:
Second Payment = 47.593968 x $13.327695 = $634.32
The third and subsequent variable income payments are computed in a manner
similar to the second variable income payment.
Note that the amount of the first variable income payment depends on the
contract value in the relevant Variable Portfolio on the Annuity Date and thus
reflects the investment performance of the Variable Portfolio net of fees and
charges during the income phase. The amount of that payment determines the
number of Annuity Units, which will remain constant during the Annuity Phase
(assuming no transfers from the Variable Portfolio). The net investment
performance of the Variable Portfolio during the Annuity Phase is reflected in
continuing changes during this phase in the Annuity Unit value, which determines
the amounts of the second and subsequent variable income payments.
TAXES
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended (the "Code")
governs taxation of annuities in general. An owner is not taxed on increases in
the value of a contract until distribution occurs, either in the form of a
non-annuity distribution or as income payments under the income option elected.
For a lump sum payment received as a total surrender (total redemption), the
recipient is taxed on the portion of the payment that exceeds the cost basis of
the contract. For a payment received as a withdrawal (partial redemption),
federal tax liability is determined on a last-in, first-out basis, meaning
taxable income is withdrawn before the cost basis of the contract is withdrawn.
For contracts issued in connection with Nonqualified plans, the cost basis is
generally the Purchase Payments, while for contracts issued in connection with
Qualified plans there may be no cost basis. The taxable portion of the lump sum
payment is taxed at ordinary income tax rates. Tax penalties may also apply.
For income payments, the taxable portion is determined by a formula which
establishes the ratio that the cost basis of the contract bears to the total
value of income payments for the term of the annuity contract. The taxable
portion is taxed at ordinary income tax rates. Owners, Annuitants and
Beneficiaries under the contracts should seek competent financial advice about
the tax consequences of distributions under the retirement plan under which the
contracts are purchased.
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the separate account is not a separate entity from
the Company and its operations form a part of the Company.
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WITHHOLDING TAX ON DISTRIBUTIONS
The Code generally requires the Company (or, in some cases, a plan
administrator) to withhold tax on the taxable portion of any distribution or
withdrawal from a contract. For "eligible rollover distributions" from contracts
issued under certain types of Qualified plans, 20% of the distribution must be
withheld, unless the payee elects to have the distribution "rolled over" to
another eligible plan in a direct "trustee to trustee" transfer. This
requirement is mandatory and cannot be waived by the owner. Withholding on other
types of distributions can be waived.
An "eligible rollover distribution" is the estimated taxable portion of any
amount received by a covered employee from a plan qualified under Section 401(a)
or 403(a) of the Code, or from a tax-sheltered annuity qualified under Section
403(b) of the Code (other than (1) income payments for the life (or life
expectancy) of the employee, or joint lives (or joint life expectancies) of the
employee and his or her designated Beneficiary, or for a specified period of ten
years or more; and (2) distributions required to be made under the Code).
Failure to "roll over" the entire amount of an eligible rollover distribution
(including an amount equal to the 20% portion of the distribution that was
withheld) could have adverse tax consequences, including the imposition of a
penalty tax on premature withdrawals, described later in this section.
Withdrawals or distributions from a contract other than eligible rollover
distributions are also subject to withholding on the estimated taxable portion
of the distribution, but the owner may elect in such cases to waive the
withholding requirement. If not waived, withholding is imposed (1) for periodic
payments, at the rate that would be imposed if the payments were wages, or (2)
for other distributions, at the rate of 10%. If no withholding exemption
certificate is in effect for the payee, the rate under (1) above is computed by
treating the payee as a married individual claiming 3 withholding exemptions.
DIVERSIFICATION - SEPARATE ACCOUNT INVESTMENTS
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified, in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the contract as
an annuity contract would result in imposition of federal income tax to the
owner with respect to earnings allocable to the contract prior to the receipt of
any payments under the contract. The Code contains a safe harbor provision which
provides that annuity contracts, such as your contract, meet the diversification
requirements if, as of the close of each calendar quarter, the underlying assets
meet the diversification standards for a regulated investment company, and no
more than 55% of the total assets consist of cash, cash items, U.S. government
securities and securities of other regulated investment companies.
The Treasury Department has issued regulations which establish
diversification requirements for the investment portfolios underlying variable
contracts such as the contracts. The regulations amplify the diversification
requirements for variable contracts set forth in the Code and provide an
alternative to the safe harbor provision described above. Under the regulations
an investment portfolio will be deemed adequately diversified if (1) no more
than 55% of the value of the total assets of the portfolio is represented by any
one investment; (2) no more than 70% of the value of the total assets of the
portfolio is represented by any two investments; (3) no more than 80% of the
value of the total assets of the portfolio is represented by any three
investments; and (4) no more than 90% of the value of the total assets of the
portfolio is represented by any four
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investments. For purposes of determining whether or not the diversification
standards imposed on the underlying assets of variable contracts by Section
817(h) of the Code have been met, "each United States government agency or
instrumentality shall be treated as a separate issuer."
MULTIPLE CONTRACTS
Multiple annuity contracts which are issued within a calendar year to the
same contract owner by one company or its affiliates are treated as one annuity
contract for purposes of determining the tax consequences of any distribution.
Such treatment may result in adverse tax consequences including more rapid
taxation of the distributed amounts from such multiple contracts. The Company
believes that Congress intended to affect the purchase of multiple deferred
annuity contracts which may have been purchased to avoid withdrawal income tax
treatment. Owners should consult a tax adviser prior to purchasing more than one
annuity contract in any calendar year. TAX TREATMENT OF ASSIGNMENTS
TAX TREATMENT OF ASSIGNMENTS
An assignment of a contract may have tax consequences, and may also be
prohibited by ERISA in some circumstances. Owners should therefore consult
competent legal advisers should they wish to assign their contracts.
QUALIFIED PLANS
The contracts offered by this prospectus are designed to be suitable for
use under various types of Qualified plans. Taxation of owners in each Qualified
plan varies with the type of plan and terms and conditions of each specific
plan. Owners, Annuitants and Beneficiaries are cautioned that benefits under a
Qualified plan may be subject to the terms and conditions of the plan,
regardless of the terms and conditions of the contracts issued pursuant to the
plan.
Following are general descriptions of the types of Qualified plans with
which the contracts may be used. Such descriptions are not exhaustive and are
for general information purposes only. The tax rules regarding Qualified plans
are very complex and will have differing applications depending on individual
facts and circumstances. Each purchaser should obtain competent tax advice prior
to purchasing a contract issued under a Qualified plan.
Contracts issued pursuant to Qualified plans include special provisions
restricting contract provisions that may otherwise be available and described in
this prospectus. Generally, contracts issued pursuant to Qualified plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified contracts.
(a) H.R. 10 PLANS
Section 401 of the Code permits self-employed individuals to establish
Qualified plans for themselves and their employees, commonly referred to as
"H.R. 10" or "Keogh" Plans. Contributions made to the plan for the benefit
of the employees will not be included in the gross income of the employees
until distributed from the plan. The tax consequences to owners may vary
depending upon the particular plan design. However, the Code places
limitations and restrictions on all plans on such items as: amounts of
allowable contributions; form, manner and timing of distributions; vesting
and nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of
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distributions, withdrawals and surrenders. Purchasers of contracts for
use with an H.R. 10 Plan should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
(b) TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, education and
scientific organizations described in Section 501(c)(3) of the Code. These
qualifying employers may make contributions to the contracts for the
benefit of their employees. Such contributions are not includible in the
gross income of the employee until the employee receives distributions from
the contract. The amount of contributions to the tax-sheltered annuity is
limited to certain maximums imposed by the Code. Furthermore, the Code sets
forth additional restrictions governing such items as transferability,
distributions, nondiscrimination and withdrawals. Any employee should
obtain competent tax advice as to the tax treatment and suitability of such
an investment.
(c) INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed
to an IRA which will be deductible from the individual's gross income.
These IRAs are subject to limitations on eligibility, contributions,
transferability and distributions. Sales of contracts for use with IRAs are
subject to special requirements imposed by the Code, including the
requirement that certain informational disclosure be given to persons
desiring to establish an IRA. Purchasers of contracts to be qualified as
IRAs should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
(d) ROTH IRAS
Section 408(a) of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
regular IRA under Section 408(b) of the Code, contributions to a Roth IRA
are not made on a tax-deferred basis, but distributions are tax-free if
certain requirements are satisfied. Like regular IRAs, Roth IRAs are
subject to limitations on the amount that may be contributed, those who may
be eligible and the time when distributions may commence without tax
penalty. Certain persons may be eligible to convert a regular IRA into a
Roth IRA, and the taxes on the resulting income may be spread over four
years if the conversion occurs before January 1, 1999. If and when the
contracts are made available for use with Roth IRAs, they may be subject to
special requirements imposed by the Internal Revenue Service ("IRS").
Purchasers of the contracts for this purpose will be provided with such
supplementary information as may be required by the IRS or other
appropriate agency.
(e) CORPORATE PENSION AND PROFIT-SHARING PLANS
Sections 401(a) and 401(k) of the Code permit corporate employers to
establish various types of retirement plans for employees. These retirement
plans may permit the purchase of the contracts to provide benefits under
the plan. Contributions to the plan for the benefit of employees will not
be includible in the gross income of the employee until distributed
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from the plan. The tax consequences to owners may vary depending upon the
particular plan design. However, the Code places limitations on all plans
on such items as amount of allowable contributions; form, manner and timing
of distributions; vesting and nonforfeitability of interests;
nondiscrimination in eligibility and participation; and the tax treatment
of distributions, withdrawals and surrenders.
(f) DEFERRED COMPENSATION PLANS - SECTION 457
Under Section 457 of the Code, governmental and certain other tax-exempt
employers may establish, for the benefit of their employees, deferred
compensation plans which may invest in annuity contracts. The Code, as in
the case of Qualified plans, establishes limitations and restrictions on
eligibility, contributions and distributions. Under these plans,
contributions made for the benefit of the employees will not be includible
in the employees' gross income until distributed from the plan. However,
under a 457 plan all the plan assets shall remain solely the property of
the employer, subject only to the claims of the employer's general
creditors until such time as made available to an owner or a Beneficiary.
As of January 1, 1999, all 457 plans of state and local governments must
hold assets and income in trust (or custodial accounts or an annuity
contract) for the exclusive benefit of participants and their
Beneficiaries. Purchasers of contracts for use with corporate pension
or profit sharing plans should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
DISTRIBUTION OF CONTRACTS
Vista Fund Distributors, Inc. ("VFD"), located at 101 Park Avenue, New
York, New York 10178, serves as the principal underwriter 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.
and is not affiliated with the Company.
VFD has entered into sales agreements with other broker/dealers to solicit
applications for the contracts through registered representatives who are
licensed to sell securities and variable insurance products. These agreements
provide that applications for the contracts may be solicited by registered
representatives of the broker/dealers appointed by the Company to sell its
variable annuities. Such broker/dealers will receive compensation as described
in the prospectus. For the years ended August 31, 1999, 1998 and 1997, no
commissions were paid to VFD as principal underwriter of the contracts.
Contracts are offered on a continuous basis.
FINANCIAL STATEMENTS
The audited financial statements of the Company as of December 31, 1999,
December 31, 1998 and September 30, 1998 and for the year ended December 31,
1999, for the three months ended December 31, 1998 and for each of the two
fiscal years in the period ended September 30, 1998 are presented in this
Statement of Additional Information. The audited financial statements of the
Company should be considered only as bearing on the ability of the Company to
meet its obligation under the fixed portion of the Contracts.
The financial statements of FS Variable Annuity Account Two as of August 31,
1999 and for each of the two years in the period ended August 31, 1999, are
incorporated herein by reference to Post-Effective Amendment No. 8 under
Securities Act of 1933 (the 33 Act) and No. 9 under the Investment Company Act
of 1940 (the 40 Act) to Registration Statement file No. 33-81470 and 811-8624
filed on Form N-4 on December 22, 1999. Documents incorporated herein by
reference for filing purposes will still appear at the end of this document
when it is distributed upon request.
10
<PAGE> 17
PricewaterhouseCoopers LLP, 400 South Hope Street, Los Angeles, California
90071, serves as the independent accountants for the Separate Account and the
Company. The financial statements referred to above have been so included in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
11
<PAGE> 18
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 statements of
income and comprehensive income and of cash flows present fairly, in all
material respects, the financial position of First SunAmerica Life Insurance
Company (the "Company") at December 31, 1999, December 31, 1998 and September
30, 1998, and the results of its operations and its cash flows for the year
ended December 31, 1999, for the three months ended December 31, 1998 and for
each of the two fiscal years in the period ended September 30, 1998, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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
January 31, 2000
12
<PAGE> 19
FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
------------------------------------ At September 30,
1999 1998 1998
--------------- -------------- ----------------
<S> <C> <C> <C>
ASSETS
Investments:
Cash and short-term investments $ 29,350,000 $ 18,466,000 $ 55,679,000
Bonds and notes available for sale,
at fair value (amortized cost:
December 1999, $1,587,116,000;
December 1998, $1,293,637,000;
September 1998, $1,262,703,000) 1,522,921,000 1,313,390,000 1,303,872,000
Mortgage loans 211,867,000 176,737,000 187,906,000
Other invested assets 42,604,000 6,539,000 6,859,000
--------------- -------------- --------------
Total investments 1,806,742,000 1,515,132,000 1,554,316,000
Variable annuity assets held in separate
accounts 558,605,000 344,619,000 271,865,000
Accrued investment income 24,076,000 18,169,000 19,853,000
Deferred acquisition costs 137,637,000 96,918,000 87,074,000
Current income taxes receivable 6,638,000 -- --
Deferred income taxes receivable 18,275,000 -- --
Receivable from brokers for sales of
securities -- 30,597,000 6,661,000
Other assets 3,539,000 2,247,000 2,451,000
--------------- -------------- --------------
TOTAL ASSETS $ 2,555,512,000 $2,007,682,000 $1,942,220,000
=============== ============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 1,523,641,000 $1,432,558,000 $1,460,856,000
Reserves for universal life insurance
contracts 277,250,000 -- --
Income taxes currently payable -- 10,144,000 10,177,000
Payable to brokers for purchases
of securities 63,000 19,806,000 60,000
Other liabilities 34,713,000 12,088,000 7,836,000
--------------- -------------- --------------
Total reserves, payables
and accrued liabilities 1,835,667,000 1,474,596,000 1,478,929,000
--------------- -------------- --------------
Variable annuity liabilities related
to separate accounts 558,605,000 344,619,000 271,865,000
--------------- -------------- --------------
Deferred income taxes payable -- 3,792,000 5,371,000
--------------- -------------- --------------
Shareholder's equity:
Common Stock 3,000,000 3,000,000 3,000,000
Additional paid-in capital 144,428,000 144,428,000 144,428,000
Retained earnings 42,409,000 34,737,000 31,361,000
Accumulated other comprehensive income
(loss) (28,597,000) 2,510,000 7,266,000
--------------- -------------- --------------
Total shareholder's equity 161,240,000 184,675,000 186,055,000
--------------- -------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 2,555,512,000 $2,007,682,000 $1,942,220,000
=============== ============== ==============
</TABLE>
See accompanying notes
13
<PAGE> 20
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended September 30,
Year Ended Three Months Ended ----------------------------------
December 31, 1999 December 31, 1998 1998 1997
----------------- ------------------ ------------- ------------
<S> <C> <C> <C> <C>
Investment income $ 127,276,000 $ 28,010,000 $ 117,496,000 $ 65,559,000
------------- ------------ ------------- ------------
Interest expense on:
Fixed annuity contracts (76,114,000) (18,406,000) (80,624,000) (45,765,000)
Universal life insurance
contracts (6,475,000) -- -- --
Senior indebtedness -- (1,000) (109,000) (589,000)
------------- ------------ ------------- ------------
Total interest expense (82,589,000) (18,407,000) (80,733,000) (46,354,000)
------------- ------------ ------------- ------------
NET INVESTMENT INCOME 44,687,000 9,603,000 36,763,000 19,205,000
------------- ------------ ------------- ------------
NET REALIZED INVESTMENT
GAINS (LOSSES) (11,178,000) 797,000 4,690,000 5,020,000
------------- ------------ ------------- ------------
Fee income:
Variable annuity fees 6,600,000 1,189,000 3,607,000 1,712,000
Universal life insurance
fees 1,873,000 -- -- --
Surrender charges 3,296,000 662,000 4,350,000 1,809,000
------------- ------------ ------------- ------------
TOTAL FEE INCOME 11,769,000 1,851,000 7,957,000 3,521,000
------------- ------------ ------------- ------------
GENERAL AND ADMINISTRATIVE
EXPENSES (7,871,000) (1,548,000) (3,301,000) (3,222,000)
------------- ------------ ------------- ------------
AMORTIZATION OF DEFERRED
ACQUISITION COSTS (22,664,000) (5,046,000) (17,120,000) (10,386,000)
------------- ------------ ------------- ------------
ANNUAL COMMISSIONS (450,000) (90,000) (348,000) (195,000)
------------- ------------ ------------- ------------
PRETAX INCOME 14,293,000 5,567,000 28,641,000 13,943,000
Income tax expense (6,621,000) (2,191,000) (12,106,000) (5,090,000)
------------- ------------ ------------- ------------
NET INCOME 7,672,000 3,376,000 16,535,000 8,853,000
OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX:
Net unrealized gains (losses) on
debt and equity securities available
for sale:
Net unrealized gains
(losses) on debt and
equity securities available
for sale identified in
the current period (32,333,000) (4,094,000) 3,856,000 8,570,000
Less reclassification
adjustment for net
realized (gains) losses
included in net income 1,226,000 (662,000) (2,414,000) (2,565,000)
------------- ------------ ------------- ------------
OTHER COMPREHENSIVE INCOME
(LOSS) (31,107,000) (4,756,000) 1,442,000 6,005,000
------------- ------------ ------------- ------------
COMPREHENSIVE INCOME (LOSS) $ (23,435,000) $ (1,380,000) $ 17,977,000 $ 14,858,000
============= ============ ============= ============
</TABLE>
See accompanying notes
14
<PAGE> 21
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
Year Ended Three Months Ended -----------------------------------
December 31, 1999 December 31, 1998 1998 1997
----------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,672,000 $ 3,376,000 $ 16,535,000 $ 8,853,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Interest credited to:
Fixed annuity contracts 76,114,000 18,406,000 80,624,000 45,765,000
Universal life insurance
contracts 6,475,000 -- -- --
Net realized investment
(gains)losses 11,178,000 (797,000) (4,690,000) (5,020,000)
Accretion of net
discounts on investments (4,123,000) (377,000) (1,985,000) (1,070,000)
Amortization of goodwill 691,000 14,000 58,000 58,000
Provision for deferred
income taxes (5,317,000) 981,000 (389,000) 401,000
Change in:
Accrued investment income (5,907,000) -- -- --
Deferred acquisition costs 5,381,000 4,256,000 5,642,000 (4,215,000)
Income taxes receivable/
payable (16,782,000) (33,000) 7,941,000 2,535,000
Other liabilities 22,625,000 -- -- --
Other, net (1,042,000) (1,945,000) 8,472,000 (2,289,000)
------------- ------------- ------------- -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 96,965,000 23,881,000 112,208,000 45,018,000
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds and notes (497,462,000) (323,897,000) (761,591,000) (833,174,000)
Mortgage loans (66,338,000) -- (82,256,000) --
Other investments, excluding
short-term investments -- -- (11,000) --
Sales of:
Bonds and notes 399,790,000 271,632,000 864,763,000 561,887,000
Mortgage loans -- -- -- 88,371,000
Other investments, excluding
short-term investments 914,000 -- 494,000 140,000
Redemptions and maturities of:
Bonds and notes 73,380,000 18,231,000 81,254,000 51,600,000
Mortgage loans 31,188,000 11,253,000 24,501,000 13,535,000
Other investments, excluding
short-term investments 580,000 320,000 -- 99,000
Short-term investments received
from Anchor National Life
Insurance Company in
assumption reinsurance
transaction with MBL Life
Assurance Corporation 371,634,000 -- -- --
------------- ------------- ------------- -------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 313,686,000 (22,461,000) 127,154,000 (117,542,000)
------------- ------------- ------------- -------------
</TABLE>
15
<PAGE> 22
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended September 30,
Year Ended Three Months Ended -----------------------------------
December 31, 1999 December 31, 1998 1998 1997
----------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on:
Fixed annuity contracts $ 36,249,000 $ 19,411,000 $ 130,851,000 $ 131,711,000
Universal life insurance
contracts 4,790,000 -- -- --
Net exchanges from the fixed
accounts of variable annuity
contracts (37,223,000) (9,340,000) (47,852,000) (22,346,000)
Withdrawal payments on:
Fixed annuity contracts (350,019,000) (49,744,000) (221,629,000) (88,229,000)
Universal life insurance
contracts (13,781,000) -- -- --
Claims and annuity payments on:
Fixed annuity contracts (39,783,000) (7,697,000) (36,892,000) (13,774,000)
Capital contributions received -- -- -- 5,000,000
Net receipts from (repayments
of) other short-term
financings -- 8,737,000 (23,970,000) 18,659,000
Cession of non-annuity
product lines -- -- (34,776,000) --
------------- ------------ ------------- -------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (399,767,000) (38,633,000) (234,268,000) 31,021,000
------------- ------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS 10,884,000 (37,213,000) 5,094,000 (41,503,000)
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 18,466,000 55,679,000 50,585,000 6,707,000
CASH AND SHORT-TERM INVESTMENTS
OF JOHN ALDEN LIFE INSURANCE
COMPANY OF NEW YORK AT DATE OF
ACQUISITION -- -- -- 85,381,000
------------- ------------ ------------- -------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 29,350,000 $ 18,466,000 $ 55,679,000 $ 50,585,000
============= ============ ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ -- $ 1,000 $ 109,000 $ 589,000
============= ============ ============= =============
Net income taxes paid $ 28,720,000 $ -- $ 5,439,000 $ 2,154,000
============= ============ ============= =============
</TABLE>
See accompanying notes
16
<PAGE> 23
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
First SunAmerica Life Insurance Company (the "Company") is a New
York-domiciled life insurance company engaged primarily in the business of
selling and administering fixed and variable annuities and universal life
contracts in the State of New York.
The Company is an indirect wholly owned subsidiary of American
International Group, Inc. ("AIG"), an international insurance and
financial services holding company. At December 31, 1998, the Company was
a wholly owned indirect subsidiary of SunAmerica Inc., a Maryland
Corporation. On January 1, 1999, SunAmerica Inc. merged with and into AIG
in a tax-free reorganization that has been treated as a pooling of
interests for accounting purposes. Thus, SunAmerica Inc. ceased to exist
on that date. However, immediately prior to the date of the merger,
substantially all of the net assets of SunAmerica Inc. were contributed to
a newly formed subsidiary of AIG named SunAmerica Holdings, Inc., a
Delaware Corporation. SunAmerica Holdings, Inc. subsequently changed its
name to SunAmerica Inc. ("SunAmerica").
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, the strength,
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 acquired, amounting to $103,695,000 at September 30, 1997,
is included in Deferred Acquisition Costs in 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
through the date of merger. The balance sheet at September 30, 1997 and
the income statement and statement of cash flows for the year ended
September 30,
17
<PAGE> 24
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
2. BUSINESS COMBINATION (Continued)
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, 1996, the beginning of the earliest period presented herein,
investment income would have been $117,059,000 and net income would have
been $12,434,000 for the year ended September 30, 1997.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles. 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.
Certain items have been reclassified to conform to the current period's
presentation.
Under generally accepted accounting principles, premiums collected on the
non-traditional life and annuity insurance products, such as those sold by
the Company, are not reflected as revenues in the Company's statement of
earnings, as they are recorded directly to policyholder liabilities upon
receipt.
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.
INVESTED ASSETS: Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and
short-term bank participations. All such investments are carried at cost
plus accrued interest, which approximates fair value, have maturities of
three months or less and are considered cash equivalents for purposes of
reporting cash flows.
Bonds and notes available for sale 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
reduced by impairment provisions, 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
18
<PAGE> 25
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
increased by $20,200,000 at December 31, 1999, and decreased by
$15,900,000 at December 31, 1998, $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 is amortized by using the straight-line method over a
period of 25 years and is included in Other Assets in the balance sheet.
There was no goodwill remaining at December 31, 1999.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts and universal life insurance 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, universal life insurance fees and
surrender charges are recorded in income as earned.
INCOME TAXES: The Company files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Its federal income tax
return is consolidated with those of its direct parent, SunAmerica Life
Insurance Company (the "Parent"), and its affiliate, Anchor National Life
Insurance Company ("ANLIC"). Income taxes have been calculated as if the
Company filed a separate return. Deferred
19
<PAGE> 26
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
income tax assets and liabilities are recognized based on the difference
between financial statement carrying amounts and income tax bases of
assets and liabilities using enacted income tax rates and laws.
RECENTLY ISSUED ACCOUNTING STANDARDS: 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 was postponed by SFAS 137, and now will be effective
for the Company as of January 1, 2001. Therefore it is not included in the
accompanying 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.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was adopted for the
year ended December 31, 1999 and is included in Note 14 of the
accompanying financial statements.
4. FISCAL YEAR CHANGE
Effective December 31, 1998, the Company changed its fiscal year end from
September 30 to December 31. Accordingly, the financial statements include
the results of operations for the transition period, which are not
necessarily indicative of operations for a full year. The financial
statements as of and for the three months ended December 31, 1998 were
originally filed as the Company's unaudited Transition Report on Form
10-Q.
Results for comparable prior period are summarized below.
<TABLE>
<CAPTION>
Three Months Ended
December 31, 1997
------------------
<S> <C>
Investment income $29,882,000
Net investment income 8,547,000
Net realized investment gains 2,075,000
Total fee income 1,653,000
Pretax income 7,193,000
Net income 4,274,000
===========
</TABLE>
5. ACQUISITION
On December 31, 1998, ANLIC acquired the individual life business and the
individual and group annuity business of MBL Life Assurance Corporation
("MBL Life"), via a 100% coinsurance transaction, for a cash purchase
price of $128,420,000. As part of this transaction,
20
<PAGE> 27
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
5. ACQUISITION (Continued)
ANLIC acquired assets having an aggregate fair value of $5,718,227,000,
composed primarily of invested assets totaling $5,715,010,000. Liabilities
assumed in this acquisition totaled $5,831,266,000, including
$3,460,503,000 of fixed annuity reserves, $2,308,742,000 of universal life
reserves and $24,011,000 of guaranteed investment contract reserves.
Included in the block of business acquired from MBL Life were policies
whose owners are residents of the State of New York ("the New York
Business"). On July 1, 1999, the New York Business was acquired by the
Company via an assumption reinsurance agreement. As part of this
acquisition, invested assets equal to $678,272,000, universal life
reserves equal to $282,247,000, group pension reserves equal to
$406,118,000, and other net assets of $10,093,000 were assumed by the
Company. On a pro forma basis, assuming the MBL Life acquisition had been
consummated on October 1, 1996, the beginning of the earliest period
presented here, investment income would have been $150,619,000,
$164,183,000 and $112,246,000 for the year ended December 31, 1999 and the
years ended September 30, 1998 and 1997, respectively. Net income would
have been $9,364,000, $19,920,000 and $12,238,000 for the year ended
December 31, 1999 and the years ended September 30, 1998 and 1997,
respectively.
The $128,420,000 purchase price was allocated between the Company and
ANLIC based on the estimated future gross profits of the two blocks of
business. The portion allocated to the Company was $10,000,000.
As part of the Acquisition, the Company received $34,657,000 from MBL Life
to pay policy enhancements guaranteed by the MBL Life rehabilitation
agreement to policyholders meeting certain requirements. A primary
requirement was that annuity policyholders must have converted their MBL
Life policy to a policy type currently offered by the Company or one of
its affiliates by December 31, 1999. The enhancements are to be credited
in four installments on January 1, 2000, June 30, 2001, June 30, 2002 and
June 30, 2003, to eligible policies still active on each of those dates.
On December 31, 1999 the enhancement reserve for such payments totaled
$35,807,000, which includes interest credited at 6.75% on the original
reserve. Of this amount, $4,621,000 was credited to policyholders in
February 2000 for the January 1, 2000 installment.
21
<PAGE> 28
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
6. 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 DECEMBER 31, 1999:
Securities of the United States
Government $ 1,479,000 $ 1,347,000
Mortgage-backed securities 602,095,000 574,247,000
Securities of public utilities 41,758,000 41,071,000
Corporate bonds and notes 667,450,000 637,985,000
Other debt securities 274,334,000 268,271,000
-------------- --------------
Total $1,587,116,000 $1,522,921,000
============== ==============
AT DECEMBER 31, 1998:
Securities of the United States
Government $ 10,230,000 $ 10,263,000
Mortgage-backed securities 534,759,000 546,409,000
Securities of public utilities 78,396,000 80,442,000
Corporate bonds and notes 567,623,000 573,599,000
Other debt securities 102,629,000 102,677,000
-------------- --------------
Total $1,293,637,000 $1,313,390,000
============== ==============
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
============== ==============
</TABLE>
22
<PAGE> 29
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS (Continued)
The amortized cost and estimated fair value of bonds and notes available
for sale by contractual maturity, as of December 31, 1999, follow:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
-------------- --------------
<S> <C> <C>
Due in one year or less $ 47,125,000 $ 46,887,000
Due after one year through five years 299,033,000 295,798,000
Due after five years through ten years 445,835,000 419,857,000
Due after ten years 193,028,000 186,133,000
Mortgage-backed securities 602,095,000 574,246,000
-------------- --------------
Total $1,587,116,000 $1,522,921,000
============== ==============
</TABLE>
Actual maturities of bonds and notes will differ from those shown above
due to prepayments and redemptions. Gross unrealized gains and losses on
bonds and notes available for sale by major category follow:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Gains Losses
----------- ------------
<S> <C> <C>
AT DECEMBER 31, 1999:
Securities of the United States
Government $ 5,000 $ (137,000)
Mortgage-backed securities 873,000 (28,721,000)
Securities of public utilities 56,000 (743,000)
Corporate bonds and notes 2,867,000 (32,332,000)
Other debt securities 454,000 (6,517,000)
----------- ------------
Total $ 4,255,000 $(68,450,000)
=========== ============
AT DECEMBER 31, 1998:
Securities of the United States
Government $ 35,000 $ (2,000)
Mortgage-backed securities 13,104,000 (1,454,000)
Securities of public utilities 2,585,000 (539,000)
Corporate bonds and notes 18,094,000 (12,118,000)
Other debt securities 748,000 (700,000)
----------- ------------
Total $34,566,000 $(14,813,000)
=========== ============
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)
=========== ============
</TABLE>
23
<PAGE> 30
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS (Continued)
Gross unrealized gains on equity securities available for sale aggregated
$9,000 at December 31, 1998 and September 30, 1998 and $19,000 at
September 30, 1997. There were no gross unrealized gains or losses on
equity securities available for sale at December 31, 1999 and no gross
unrealized losses at December 31, 1998, September 30, 1998 and September
30, 1997.
Gross realized investment gains and losses on sales of investments are as
follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Years Ended September 30,
December 31, December 31, ------------------------------
1999 1998 1998 1997
------------ ------------------ ------------ -----------
<S> <C> <C> <C> <C>
BONDS AND NOTES:
Realized gains $ 6,040,000 $ 4,290,000 $ 13,067,000 $ 6,441,000
Realized losses (9,688,000) (1,843,000) (7,509,000) (1,466,000)
MORTGAGE LOANS:
Realized losses -- -- (289,000) (15,000)
OTHER INVESTMENTS:
Realized gains 164,000 -- 22,000 140,000
Realized losses -- -- (209,000) --
IMPAIRMENT WRITEDOWNS (7,694,000) (1,650,000) (392,000) (80,000)
------------ ----------- ------------ -----------
Total net realized
investment gains
(losses) $(11,178,000) $ 797,000 $ 4,690,000 $ 5,020,000
============ =========== ============ ===========
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Years Ended September 30,
December 31, December 31, ------------------------------
1999 1998 1998 1997
------------ ------------------ ------------ -----------
<S> <C> <C> <C> <C>
Short-term investments $ 4,795,000 $ 1,122,000 $ 2,340,000 $ 1,334,000
Bonds and notes 103,503,000 22,811,000 100,808,000 56,253,000
Mortgage loans 17,139,000 3,980,000 13,901,000 7,714,000
Other invested assets 1,839,000 97,000 447,000 258,000
------------ ----------- ------------ -----------
Total investment income $127,276,000 $28,010,000 $117,496,000 $65,559,000
============ =========== ============ ===========
</TABLE>
Expenses incurred to manage the investment portfolio amounted to
$1,548,000 for the year ended December 31, 1999, $218,000 for the three
months ended December 31, 1998, $814,000 for the year ended September 30,
1998 and $387,000 for the year ended September 30, 1997 and are included
in General and Administrative Expenses in the income statement.
No investments in any one entity or its affiliates exceeded 10% of the
Company's shareholder's equity at December 31, 1999.
At December 31, 1999, mortgage loans were collateralized by properties
located in 33 states, with loans totaling approximately 34% of the
aggregate carrying value of the portfolio secured by properties located in
California, approximately 11% by properties located in New York and
Michigan and no more than 5% of the portfolio was secured by properties
located in any other single state.
At December 31, 1999, bonds and notes included $123,849,000 of bonds and
notes not rated investment grade. The Company had no material
concentrations of non-investment-grade assets at December 31, 1999.
24
<PAGE> 31
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS (Continued)
At December 31, 1999, the carrying value of investments in default as to
the payment of principal or interest was $1,760,000. Such nonperforming
assets had an estimated fair value of $1,293,000.
At December 31, 1999, $519,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory
requirements.
7. 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.
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 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.
25
<PAGE> 32
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
RESERVES FOR UNIVERSAL LIFE INSURANCE CONTRACTS: Universal life and single
life premium contracts are assigned a fair value equal to current net
surrender value.
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.
The estimated fair values of the Company's financial instruments at
December 31, 1999, December 31, 1998 and September 30, 1998, compared with
their respective carrying values, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
-------------- --------------
<S> <C> <C>
DECEMBER 31, 1999:
ASSETS:
Cash and short-term investments $ 29,350,000 $ 29,350,000
Bonds and notes 1,522,921,000 1,522,921,000
Mortgage loans 211,867,000 211,197,000
Variable annuity assets held in
separate accounts 558,605,000 558,605,000
LIABILITIES:
Reserves for fixed annuity contracts 1,523,641,000 1,458,786,000
Reserves for universal life
insurance contracts 277,250,000 261,522,000
Variable annuity liabilities related
to separate accounts 558,605,000 535,282,000
Payable to brokers for purchase of
securities 63,000 63,000
============== ==============
DECEMBER 31, 1998:
ASSETS:
Cash and short-term investments $ 18,466,000 $ 18,466,000
Bonds and notes 1,313,390,000 1,313,390,000
Mortgage loans 176,737,000 182,013,000
Variable annuity assets held in
separate accounts 344,619,000 344,619,000
Receivable from brokers for sales
of securities 30,597,000 30,597,000
LIABILITIES:
Reserves for fixed annuity contracts 1,432,558,000 1,382,574,000
Variable annuity liabilities related
to separate accounts 344,619,000 328,064,000
Payable to brokers for purchase of
securities 19,806,000 19,806,000
============== ==============
</TABLE>
26
<PAGE> 33
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
Carrying
Value Fair Value
-------------- --------------
<S> <C> <C>
SEPTEMBER 30, 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 6,661,000 6,661,000
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
Payable to brokers for purchase of
securities 60,000 60,000
============== ==============
</TABLE>
8. REINSURANCE
The business which was assumed from MBL Life is subject to existing
reinsurance ceded agreements. The agreements, which represent
predominantly yearly renewable term insurance, allow for maximum retention
on any single life of $2,000,000. In order to limit even further the
exposure to loss on any single insured and to recover an additional
portion of the benefits paid over such limits, the Company entered into a
reinsurance treaty effective January 1, 1999 under which the Company
retains no more than $100,000 of risk on any one insured life. At December
31, 1999, a total reserve credit of $397,000 was taken against the life
insurance reserves. With respect to these coinsurance agreements, the
Company could become liable for all obligations of the reinsured policies
if the reinsurers were to become unable to meet the obligations assumed
under the respective reinsurance agreements. The Company monitors its
credit exposure with respect to these agreements. However, due to the high
credit ratings of the reinsurers, such risks are considered to be minimal.
9. 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, results of operations, or cash flows.
The Company's current financial strength and counterparty credit ratings
from Standard & Poor's are based in part on a guarantee (the "Guarantee")
of the Company's insurance policy obligations by American Home Assurance
Company ("American Home"), a subsidiary of AIG, and a member of an AIG
intercompany pool, and the belief that the Company is
27
<PAGE> 34
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
9. CONTINGENT LIABILITIES (Continued)
viewed as a strategically important member of AIG. The Guarantee is
unconditional and irrevocable, and policyholders have the right to enforce
the Guarantee directly against American Home.
The Company's current financial strength rating from Moody's is based in
part on a support agreement between the Company and AIG (the "Support
Agreement"), pursuant to which AIG has agreed that AIG will cause the
Company to maintain a policyholders' surplus of not less than $1 million
or such greater amount as shall be sufficient to enable the Company to
perform its obligations under any policy issued by it. The Support
Agreement also provides that if the Company needs funds not otherwise
available to it to make timely payment of its obligations under policies
issued by it, AIG will provide such funds at the request of the Company.
The Support Agreement is not a direct or indirect guarantee by AIG to any
person of any obligation of the Company. AIG may terminate the Support
Agreement with respect to outstanding obligations of the Company only
under circumstances where the Company attains, without the benefit of the
Support Agreement, a financial strength rating equivalent to that held by
the Company with the benefit of the support agreement. Policyholders have
the right to cause the Company to enforce its rights against AIG and, if
the Company fails or refuses to take timely action to enforce the Support
Agreement or if the Company defaults in any claim or payment owed to such
policyholder when due, have the right to enforce the Support Agreement
directly against AIG.
American Home does not publish financial statements, although it files
statutory annual and quarterly reports with the New York State Insurance
Department, where such reports are available to the public. AIG is a
reporting company under the Securities Exchange Act of 1934, and publishes
annual reports on Form 10-K and quarterly reports on Form 10-Q, which are
available from the Securities and Exchange Commission.
28
<PAGE> 35
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
10. SHAREHOLDER'S EQUITY
The Company is authorized to issue 300 shares of its $10,000 par value
Common Stock. At December 31, 1999, December 31, 1998 and September 30, 1998,
300 shares were outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Years Ended September 30,
December 31, December 31, ---------------------------------
1999 1998 1998 1997
------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
Beginning balances $ 144,428,000 $ 144,428,000 $ 144,428,000 $ 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 balances $ 144,428,000 $ 144,428,000 $ 144,428,000 $ 144,428,000
============= ============= ============= =============
RETAINED EARNINGS:
Beginning balances $ 34,737,000 $ 31,361,000 $ 14,826,000 $ 5,973,000
Net income 7,672,000 3,376,000 16,535,000 8,853,000
------------- ------------- ------------- -------------
Ending balances $ 42,409,000 $ 34,737,000 $ 31,361,000 $ 14,826,000
============= ============= ============= =============
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS):
Beginning balances $ 2,510,000 $ 7,266,000 $ 5,824,000 $ (181,000)
Change in net unrealized gains
(losses) on equity securities (9,000) -- (10,000) (110,000)
Change in net unrealized gains
(losses) on bonds and notes
available for sale (83,948,000) (21,416,000) 1,028,000 40,648,000
Change in adjustment to
deferred acquisition costs 36,100,000 14,100,000 1,200,000 (31,300,000)
Tax effects of net changes 16,750,000 2,560,000 (776,000) (3,233,000)
------------- ------------- ------------- -------------
Ending balances $ (28,597,000) $ 2,510,000 $ 7,266,000 $ 5,824,000
============= ============= ============= =============
</TABLE>
29
<PAGE> 36
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
10. SHAREHOLDER'S EQUITY (Continued)
For a life insurance company domiciled in the State of New York, no
dividend may be distributed to any shareholder unless notice of the
domestic insurer's intention to declare such dividend and the amount have
been filed with the Superintendent of Insurance not less than 30 days in
advance of such proposed declaration, or if the Superintendent disapproves
the distribution of the dividend within the 30-day period. No dividends
were paid in the year ended December 31, 1999, three months ended December
31, 1998 or the fiscal years ended 1998 or 1997.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net income for the years ended
December 31, 1999, 1998 and 1997 was $14,210,000, $16,263,000 and
$18,390,000, respectively. The Company's statutory capital and surplus was
$111,338,000 at December 31, 1999, $96,474,000 at December 31, 1998 and
$94,239,000 at September 30, 1998.
11. INCOME TAXES
The components of the provisions for federal income taxes on pretax income
consist of the following:
<TABLE>
<CAPTION>
Net realized
Investment
Gains (Losses) Operations Total
----------- ----------- ------------
<S> <C> <C> <C>
December 31, 1999:
Currently payable $ 2,345,000 $ 9,593,000 $ 11,938,000
Deferred (6,772,000) 1,455,000 (5,317,000)
----------- ----------- ------------
Total income tax expense
(benefit) $(4,427,000) $11,048,000 $ 6,621,000
=========== =========== ============
December 31, 1998:
Currently payable $ 1,165,000 $ 45,000 $ 1,210,000
Deferred (595,000) 1,576,000 981,000
----------- ----------- ------------
Total income tax expense $ 570,000 $ 1,621,000 $ 2,191,000
=========== =========== ============
September 30, 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
=========== =========== ============
September 30, 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
=========== =========== ============
</TABLE>
30
<PAGE> 37
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
11. INCOME TAXES (Continued)
Income taxes computed at the United States federal income tax rate of 35%
and income taxes provided differ as follows:
<TABLE>
<CAPTION>
Three
Year Ended Months Ended Years Ended September 30,
December 31, December 31, ----------------------------
1999 1998 1998 1997
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Amount computed at statutory rate $ 4,984,000 $1,949,000 $10,024,000 $ 4,880,000
Increases (decreases)
resulting from:
Amortization of differences
between book and tax bases
of net assets acquired 223,000 5,000 20,000 20,000
State income taxes, net of
federal tax benefit 1,817,000 237,000 2,042,000 200,000
Dividend received deduction (263,000) -- -- --
Other, net (140,000) -- 20,000 (10,000)
----------- ---------- ----------- -----------
Total income tax expense $ 6,621,000 $2,191,000 $12,106,000 $ 5,090,000
=========== ========== =========== ===========
</TABLE>
31
<PAGE> 38
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
11. 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 (receivable) liability for Deferred
Income Taxes are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------- September 30,
1999 1998 1998
------------ ------------ --------------
<S> <C> <C> <C>
DEFERRED TAX LIABILITIES:
Investments $ -- $ 1,517,000 $ 1,782,000
Deferred acquisition costs 22,643,000 29,018,000 29,505,000
Net unrealized gains on debt and
equity securities available for
sale -- 1,347,000 3,912,000
Other liabilities 44,000 46,000 46,000
------------ ------------ ------------
Total deferred tax liabilities 22,687,000 31,928,000 35,245,000
------------ ------------ ------------
DEFERRED TAX ASSETS:
Contractholder reserves (18,026,000) (18,550,000) (18,535,000)
State income taxes -- (79,000) (79,000)
Net unrealized losses on debt and
equity securities available for
sale (15,398,000) -- --
Other assets (7,538,000) (9,507,000) (11,260,000)
------------ ------------ ------------
Total deferred tax assets (40,962,000) (28,136,000) (29,874,000)
------------ ------------ ------------
Deferred income taxes $(18,275,000) $ 3,792,000 $ 5,371,000
============ ============ ============
</TABLE>
12. COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") which requires the reporting of comprehensive income in addition to
net income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net income. The adoption of SFAS 130 did not have an impact
on the Company's results of operations, financial condition or liquidity.
Comprehensive income amounts for the prior year are disclosed to conform
to the current year's presentation.
32
<PAGE> 39
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
12. COMPREHENSIVE INCOME (Continued)
The before tax, after tax, and tax (expense) benefit amounts for each
component of the (decrease) increase in unrealized gains or losses on debt
and equity securities available for sale for both the current and prior
periods are summarized below:
<TABLE>
<CAPTION>
Tax Benefit
Before Tax (Expense) Net of Tax
------------ ------------ ------------
<S> <C> <C> <C>
Year ended December 31, 1999:
Net unrealized losses on debt
and equity securities available
for sale identified in the
current period $(93,613,000) $ 32,765,000 $(60,848,000)
Increase in deferred acquisition
cost adjustment identified in
the current period 43,869,000 (15,354,000) 28,515,000
------------ ------------ ------------
Subtotal (49,744,000) 17,411,000 (32,333,000)
------------ ------------ ------------
Reclassification adjustment for:
Net realized losses included
in net income 9,656,000 (3,380,000) 6,276,000
Related change in deferred
acquisition costs (7,769,000) 2,719,000 (5,050,000)
------------ ------------ ------------
Total reclassification
adjustment 1,887,000 (661,000) 1,226,000
------------ ------------ ------------
Total other comprehensive loss $(47,857,000) $ 16,750,000 $(31,107,000)
============ ============ ============
Three months ended December 31, 1998:
Net unrealized losses on debt
and equity securities available
for sale identified in the
current period $(17,664,000) $ 6,182,000 $(11,482,000)
Increase in deferred acquisition
cost adjustment identified in
the current period 11,367,000 (3,979,000) 7,388,000
------------ ------------ ------------
Subtotal (6,297,000) 2,203,000 (4,094,000)
------------ ------------ ------------
Reclassification adjustment for:
Net realized losses included
in net income (3,752,000) 1,314,000 (2,438,000)
Related change in deferred
acquisition costs 2,733,000 (957,000) 1,776,000
------------ ------------ ------------
Total reclassification
adjustment (1,019,000) 357,000 (662,000)
------------ ------------ ------------
Total other comprehensive loss $ (7,316,000) $ 2,560,000 $ (4,756,000)
============ ============ ============
</TABLE>
33
<PAGE> 40
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
12. COMPREHENSIVE INCOME (Continued)
<TABLE>
<CAPTION>
Tax Benefit
Before Tax (Expense) Net of Tax
------------ ------------ ------------
<S> <C> <C> <C>
Fiscal Year ended September 30, 1998:
Net unrealized gains on debt
and equity securities available
for sale identified in the
current period $ 17,664,000 $ (6,182,000) $ 11,482,000
Increase in deferred acquisition
cost adjustment identified in
the current period (11,732,000) 4,106,000 (7,626,000)
------------ ------------ ------------
Subtotal 5,932,000 (2,076,000) 3,856,000
------------ ------------ ------------
Reclassification adjustment for:
Net realized gains included
in net income (16,646,000) 5,826,000 (10,820,000)
Related change in deferred
acquisition costs 12,932,000 (4,526,000) 8,406,000
------------ ------------ ------------
Total reclassification
adjustment (3,714,000) 1,300,000 (2,414,000)
------------ ------------ ------------
Total other comprehensive income $ 2,218,000 $ (776,000) $ 1,442,000
============ ============ ============
Fiscal Year ended September 30, 1997:
Net unrealized gains on debt
and equity securities available
for sale identified in the
current period $ 45,904,000 $(16,066,000) $ 29,838,000
Increase in deferred acquisition
cost adjustment identified in
the current period (32,720,000) 11,452,000 (21,268,000)
------------ ------------ ------------
Subtotal 13,184,000 (4,614,000) 8,570,000
------------ ------------ ------------
Reclassification adjustment for:
Net realized gains included
in net income (5,366,000) 1,878,000 (3,488,000)
Related change in deferred
acquisition costs 1,420,000 (497,000) 923,000
------------ ------------ ------------
Total reclassification
adjustment (3,946,000) 1,381,000 (2,565,000)
------------ ------------ ------------
Total other comprehensive income $ 9,238,000 $ (3,233,000) $ 6,005,000
============ ============ ============
</TABLE>
34
<PAGE> 41
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
13. 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 $1,976,000 in the
year ended December 31, 1999, $615,000 in the three months ended December
31, 1998, $3,855,000 in the year ended 1998 and $4,486,000 in the year
ended 1997. These broker-dealers represent a significant portion of the
Company's business, amounting to 37.5%, 27.8%, 33.0% and 38.9% of premiums
in the year ended December 31, 1999, three months ended December 31, 1998,
and the years ended September 30, 1998 and 1997, respectively. One
unaffiliated broker-dealer was responsible for 25% of total premiums in
the year ended December 31, 1999 and no other single unaffiliated
broker-dealer was responsible for more than 8% of total premiums in the
year ended December 31, 1999.
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 $7,959,000 for the year ended December 31,
1999, $1,631,000 for the three months ended December 31, 1998, $3,877,000
for the year ended September 30, 1998 and $2,454,000 for the year ended
September 30, 1997. The marketing components of such costs during these
periods amounted to $2,907,000, $630,000, $1,877,000 and $1,223,000,
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, 1997, the Company sold one bond with a
book value of $2,072,000 to SunAmerica. The Company recorded a net gain of
$83,000 on the transaction.
35
<PAGE> 42
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
The following financial statements are included in Part B of the
Registration Statement:
Audited Financial Statements of First SunAmerica Life
Insurance Company as of December 31, 1999, December 31, 1998
and September 30, 1998, and for the year ended December 31,
1999, for the three months ended December 31, 1998 and for
each of the two fiscal years in the period ended September
30, 1998.
Audited Financial Statements of FS Variable Annuity Account
Two (Portion relating to the Vista Capital Advantage
Variable Annuity) for the fiscal year ended August 31, 1999.
[Incorporated by Reference]
(b) Exhibits
<TABLE>
<S> <C> <C>
(1) Resolutions Establishing Separate Account.. ***
(2) Custody Agreements......................... **
(3) (a) Distribution Contract.................. ****
(b) Selling Agreement...................... ***
(4) Variable Annuity Contract.................. ***
(5) Application for Contract................... ***
(6) Depositor - Corporate Documents
(a) Certificate of Incorporation........ ***
(b) By-Laws............................. ***
(7) Reinsurance Contract....................... **
(5) Fund Participation Agreement............... ****
(9) Opinion of Counsel......................... ***
Consent of Counsel......................... ***
(10) Consent of Independent Accountants......... *
(11) Financial Statements Omitted from Item 23.. **
(12) Initial Capitalization Agreement........... **
(13) Performance Computations................... **
(14) Diagram and Listing of All Persons Directly
or Indirectly Controlled By or Under Common
Control with First SunAmerica Life Insurance
Company, the Depositor of Registrant....... ******
(15) Powers of Attorney......................... *****
</TABLE>
* Filed Herewith
** Not Applicable
*** Filed on 12-24-97, Post-Effective Amendments 5
and 6 to this Registration Statement.
**** Filed on 11-14-95, Post-Effective Amendments 1
and 3 to this Registration Statement.
***** Filed on 12-23-96, Post-Effective Amendments 3
and 5 of this Registration Statement.
****** Filed on October 21, 1999, Post-Effective
Amendments 7 and 8 to this Registration Statement
Item 25. Directors and Officers of the Depositor
The officers and directors of First SunAmerica Life Insurance Company
are listed below. Their principal business address is 1 SunAmerica Center, Los
Angeles, California 90067-6022, unless otherwise noted.
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Eli Broad Chairman, President and Chief Executive Officer
Jay S. Wintrob Director and Executive Vice President
Marc H. Gamsin Director and Senior Vice President
Tom Baxter(l) Director
Vicki E. Marmorstein(2) Director
Debbie Potash-Turner(3) Director
Richard D. Rohr(4) Director
Margery K. Neale (5) Director
Lester Pollack(6) Director
Jana W. Greer Director and Senior Vice President
</TABLE>
<PAGE> 43
<TABLE>
<S> <C>
James R. Belardi Director and Senior Vice
President
Susan L. Harris Director, Senior Vice
President and Secretary
Gregory M. Outcalt Senior Vice President
and Controller
N. Scott Gillis Director and
Senior Vice President
Edwin R. Raquel Senior Vice President and
Chief Actuary
Scott H. Richland Vice President
Stewart R. Polakov Vice President
David R. Bechtel Vice President and Treasurer
P. Daniel Demko, Jr. Vice President
Kevin J. Hart Vice President
</TABLE>
- ----------------
(1) 400 S. Hope St., 15th Floor, Los Angeles, California 90071
(2) 633 W. Fifth St., Suite 400, Los Angeles, California 90071
(3) 733 Third Avenue, Third Floor, New York, New York 10017
(4) 100 Renaissance Center, 34th Floor, Detroit, Michigan 48243
(5) 919 Third Avenue, New York, New York 10022-9998
(6) One Rockefeller Plaza, Suite 1025, New York, New York 10020
Item 26. Persons Controlled By or Under Common Control With Depositor or
Registrant
The Registrant is a separate account of First SunAmerica Life
Insurance Company (Depositor). For a complete listing and diagram of all
persons directly of indirectly controlled by or under common control with the
Depositor or Registrant, see Exhibit 14 of the Initial Registration Statement
of Variable Annuity Account Seven and Anchor National Life Insurance Company
(File Nos. 333-65965 and 811-09003)(N-4) and (333-65953)(S-1), which is
incorporated herein by reference. As of January 4, 1999, First SunAmerica became
an indirect wholly-owned subsidiary of American International Group, Inc.
("AIG"). An organizational chart for AIG can be found in Form 10-K, SEC file
number 001-08787 filed March 30, 2000.
Item 27. Number of Contract Owners
As of August 31, 1999, there were 361 owners of Qualified Contracts
and 587 owners of Non-qualified Contracts.
Item 28. Indemnification
None.
Item 29. Principal Underwriter
Vista Fund Distributors, Inc. serves as distributor to the
Registrant. Its principal business address is One Chase Manhattan Plaza, New
York, New York 10081. The following are the directors and officers of Vista Fund
Distributors, Inc.
<TABLE>
<CAPTION>
Name Position with Distributor
---- -------------------------
<S> <C>
Lynn J. Mangum Chairman/Director
Richard Baxt President
William J. Tomko Senior Vice President
Gregory A. Trichtinger Vice President
Kevin Dell Vice President/Secretary
Robert Tuch Assistant Secretary
Dennis R. Sheehan Executive Vice President/Director
</TABLE>
<TABLE>
<CAPTION>
Net Distribution Compensation on
Name of Discounts and Redemption or Brokerage
Distributor Commissions Annuitization Commissions Commissions*
- ----------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Vista Fund None None None None
Distributors,
Inc.
</TABLE>
- --------------------
*Distribution fee is paid by First SunAmerica Life Insurance Company.
<PAGE> 44
Item 30. Location of Accounts and Records
First SunAmerica Life Insurance Company, the Depositor for the
Registrant, is located at 733 Third Avenue, 4th Floor, New York, New York 10017.
Vista Fund Distributors, Inc., the distributor of the Contracts, is located at
101 Park Avenue, New York, New York 10178. Each maintains those accounts and
records required to be maintained by it pursuant to Section 31(a) of the
Investment Company Act and the rules promulgated thereunder.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02100, maintains certain accounts and records pursuant to the
instructions of the Registrant.
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
Registrant undertakes to (1) file post-effective amendments to this
Registration Statement as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never more than 16 months
old for so long as payments under the variable annuity Contracts may be
accepted; (2) include either (A) as part of any application to purchase a
Contract offered by the prospectus forming a part of the Registration Statement,
a space that an applicant can check to request a Statement of Additional
Information, or (B) a postcard or similar written communication affixed to or
included in the Prospectus that the Applicant can remove to send for a Statement
of Additional Information; and (3) deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form N-4 promptly upon written or oral request.
Item 33. Representation
a) The Company hereby represents that it is relying upon a No-Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been
complied with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement,
including the prospectus, used in connection with the offer of the
contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in
connection with the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase
the contract specifically to bring the redemption restrictions
imposed by Section 403(b)(11) to the attention of the potential
participants;
4. Obtain from each plan participant who purchases a Section 403(b)
annuity contract, prior to or at the time of such purchase, a signed
statement acknowledging the participant's understanding of (1) the
restrictions on redemption imposed by Section 403(b)(11), and (2)
other investment alternatives available under the employer's Section
403(b) arrangement to which the participant may elect to transfer
his contract value.
b) REPRESENTATION PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF
1940: The Company represents that the fees and charges to be deducted under
the variable annuity contract described in the prospectus contained in this
registration statement are, in the aggregate, reasonable in relation to the
services rendered, the expenses expected to be incurred, and the risks
assumed in connection with the contract.
<PAGE> 45
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant certifies that it meets the Securities Act Rule 485
for effectiveness of this Registration Statement and has caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf, in the City of Los Angeles, and the State of California, on this 6th
day of April, 2000.
FS VARIABLE ANNUITY ACCOUNT TWO
(Registrant)
By: FIRST SUNAMERICA LIFE INSURANCE COMPANY
(Depositor)
By: /s/ JAY S. WINTROB
---------------------------------------
Jay S. Wintrob
Executive Vice President
By: FIRST SUNAMERICA LIFE INSURANCE COMPANY
(Depositor, on behalf of itself and
Registrant)
By: /s/ JAY S. WINTROB
---------------------------------------
Jay S. Wintrob
Executive Vice President
As required by the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C> <C>
ELI BROAD* President, Chief Executive
--------------------- Officer, & Chairman of Board
Eli Broad (Principal Executive Officer)
MARC H. GAMSIN* Senior Vice President
--------------------- & Director
Marc H. Gamsin
N. SCOTT GILLIS* Senior Vice President
--------------------- & Director
N. Scott Gillis
JAMES R. BELARDI* Director
---------------------
James R. Belardi
THOMAS A. BAXTER* Director
---------------------
Thomas A. Baxter
JANA W. GREER* Director
---------------------
Jana W. Greer
VICKI E. MARMORSTEIN* Director
---------------------
Vicki E. Marmorstein
/s/ SUSAN L. HARRIS Director April 6, 2000
---------------------
Susan L. Harris
DEBBIE POTASH-TURNER* Director
---------------------
Debbie Potash-Turner
MARGERY K. NEALE* Director
---------------------
Margery K. Neale
</TABLE>
<PAGE> 46
<TABLE>
<S> <C> <C> <C>
LESTER POLLACK* Director
---------------------
Lester Pollack
RICHARD D. ROHR* Director
---------------------
Richard D. Rohr
JAY S. WINTROB* Director
---------------------
Jay S. Wintrob
*By: /s/ SUSAN L. HARRIS Attorney-in-Fact
-------------------
Susan L. Harris
</TABLE>
Date: April 6, 2000
** KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints SUSAN L. HARRIS AND CHRISTINE A. NIXON or
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
as fully to all intents as he might or could do in person, including
specifically, but without limiting the generality of the foregoing, to (i) take
any action to comply with any rules, regulations or requirements of the
Securities and Exchange Commission under the federal securities laws; (ii) make
application for and secure any exemptions from the federal securities laws;
(iii) register additional annuity contracts under the federal securities laws,
if registration is deemed necessary. The undersigned hereby ratifies and
confirms all that said attorneys-in-fact and agents or any of them, or their
substitutes, shall do or cause to be done by virtue thereof.
<TABLE>
<S> <C> <C>
**/s/ GREGORY M. OUTCALT Senior Vice President April 6, 2000
- ------------------------ and Controller
Gregory M. Outcalt
</TABLE>
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
(10) Consent of Independent Accountants
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Registration Statement on Form N-4 for Variable
Annuity Account Two of First SunAmerica Life Insurance Company of our report
dated January 31, 2000, relating to the financial statements of First
SunAmerica Life Insurance Company, and the incorporation by reference of our
report dated December 9, 1999, relating to the financial statements of Variable
Annuity Account Two. We also consent to the incorporation by reference of our
report dated November 9, 1998, relating to the financial statements of First
SunAmerica Life Insurance Company, into the Prospectus which constitutes part
of this Registration Statement. We also consent to the incorporation by
reference in such Prospectus of our report dated March 11, 1999, relating to
the statement of assets acquired and liabilities assumed in the MBL Life
Assurance Corporation transaction at December 31, 1998, appearing on page 8 of
Anchor National Life Insurance Company's Current Report on Form 8-K/A dated
March 12, 1999. We also consent to the reference to us under the heading
"Financial Statements" in such Statement of Additional Information and to the
reference to us under the heading "Independent Accountants" in such Prospectus.
PricewaterhouseCoopers LLP /s/ PricewaterhouseCoopers LLP
Los Angeles, California
April 7, 2000
