<PAGE> 1
As filed pursuant to Rule 497(c)
under the Securities Act of 1933
Registration Nos. 33-85014 and 811-8810
- --------------------------------------------------------------------------------
FLEXIBLE PAYMENT INDIVIDUAL DEFERRED
ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
FIRST SUNAMERICA LIFE INSURANCE COMPANY
IN CONNECTION WITH
FS VARIABLE SEPARATE ACCOUNT
CORPORATE OFFICE:
733 THIRD AVENUE, 4TH FLOOR
NEW YORK, NEW YORK 10017
<TABLE>
<S> <C>
CORRESPONDENCE ACCOMPANIED ALL OTHER CORRESPONDENCE,
BY PAYMENTS: ANNUITY SERVICE CENTER:
P.O. BOX 100357 P.O. BOX 54299
PASADENA, CALIFORNIA 91189-0357 LOS ANGELES, CA 90054-0299
TELEPHONE NUMBER: (800) 99-NYSUN
</TABLE>
The Contracts offered by this prospectus provide for accumulation of
Contract Values and payment of annuity benefits on a fixed and/or variable
basis. The Contracts are available for both Qualified and Nonqualified Plans
(See "Taxes").
Purchase Payments under the Contracts may be allocated among the Portfolios
of the Separate Account, and/or to one or more of the Fixed Account options
funded through the Company's General Account. Each of the eighteen Portfolios of
the Separate Account described in this prospectus is invested solely in the
shares of either (1) one of the four currently available Underlying Funds of
Anchor Trust: Capital Appreciation Portfolio, Growth Portfolio, Natural
Resources Portfolio and Government and Quality Bond Portfolio; or (2) one of the
fourteen currently available Underlying Funds of the SunAmerica Trust:
International Diversified Equities Portfolio, Global Equities Portfolio,
Alliance Growth Portfolio, Growth/Phoenix Investment Counsel Portfolio,
Provident Growth Portfolio, Venture Value Portfolio, Growth-Income Portfolio,
Asset Allocation Portfolio, Balanced/Phoenix Investment Counsel Portfolio,
Worldwide High Income Portfolio, High-Yield Bond Portfolio, Global Bond
Portfolio, Fixed Income Portfolio and Cash Management Portfolio. Additional
Underlying Funds may be made available in the future.
The Fixed Account options pay fixed rates of interest declared by the
Company for specified Guarantee Periods from the date amounts are allocated to
the Fixed Account. As of the date of this prospectus, one, three, five, seven
and ten year options were available. Please contact the Company or the financial
representative from whom this prospectus was obtained for information as to
currently available guarantee options. Such declared rates will vary from time
to time but will not be less than 3% per annum, and, once established for a
particular allocation, will not change during the course of the Guarantee
Period. However, withdrawals, transfers or annuitizations from the three, five,
seven and ten year Fixed Account options prior to the end of the applicable
Guarantee Period(s) will generally result in the imposition of a Market Value
Adjustment (See "Fixed Account Options -- Market Value Adjustment").
This prospectus concisely sets forth the information a prospective investor
ought to know before investing. PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN
IT FOR YOUR FUTURE REFERENCE. Contract Owners bear the complete investment risk
for all Purchase Payments allocated to the Separate Account. With respect to
allocations to the Fixed Account, Contract Owners also bear the risk that
amounts prematurely withdrawn, transferred or annuitized from, the General
Account prior to the end of their respective Guarantee Periods could result in
the Owner receiving less than Purchase Payments so allocated.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE CONTRACTS OFFERED BY THIS PROSPECTUS INVOLVE RISK, INCLUDING LOSS OF
PRINCIPAL, AND ARE NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE CONTRACTS OFFERED BY THIS PROSPECTUS ARE AVAILABLE ONLY IN THE STATE OF
NEW YORK.
This Prospectus is dated January 31, 1996.
<PAGE> 2
ADDITIONAL INFORMATION:
The Company has filed registration statements (the "Registration
Statements") with the Commission under the Securities Act of 1933, as amended,
relating to the Contracts offered by this prospectus. This prospectus has been
filed as a part of the Registration Statements and does not contain all of the
information set forth in the Registration Statements and exhibits thereto, and
reference is hereby made to the Registration Statements and exhibits for further
information relating to the Company, the Separate Account, and the Contracts.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports and
other information with the Commission. Such reports and other information filed
by the Company can be inspected and copied, and copies can be obtained at the
public reference facilities of the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at the regional offices in Chicago and New
York. The addresses of these regional offices are as follows: 500 West Madison
Street, Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of such material also can be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the rules and
regulations of the Commission at prescribed rates.
A Statement of Additional Information about the variable portion of the
Contracts has been filed with the Commission, as part of the Registration
Statements, and is available without charge upon written or oral request to the
Company at its Annuity Service Center at the address and telephone number given
on the prior page. The Table of Contents of the Statement of Additional
Information, dated January 31, 1996, appears on page 49 of this prospectus.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
DEFINITIONS.......................................................................... 4
SUMMARY.............................................................................. 7
FEE TABLES........................................................................... 9
UNDERLYING FUND EXPENSES............................................................. 10
EXAMPLES............................................................................. 11
EXPLANATION OF FEE TABLES AND EXAMPLES............................................... 11
CONDENSED FINANCIAL INFORMATION...................................................... 12
PERFORMANCE DATA..................................................................... 13
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT AND THE GENERAL ACCOUNT............. 14
Company......................................................................... 14
Separate Account................................................................ 15
General Account................................................................. 16
SEPARATE ACCOUNT INVESTMENTS......................................................... 16
Underlying Funds................................................................ 16
Anchor Trust.................................................................. 16
SunAmerica Trust.............................................................. 17
Voting Rights................................................................... 19
Substitution of Securities...................................................... 19
FIXED ACCOUNT OPTIONS................................................................ 19
Allocations..................................................................... 19
Renewals........................................................................ 20
Market Value Adjustment......................................................... 20
CONTRACT CHARGES..................................................................... 21
Mortality and Expense Risk Charge............................................... 21
Administrative Charges.......................................................... 22
Contract Administration Charge................................................ 22
Transfer Fee.................................................................. 22
Sales Charges................................................................... 22
Withdrawal Charge............................................................. 22
Distribution Expense Charge................................................... 24
Deduction for Separate Account Income Taxes..................................... 24
Other Expenses.................................................................. 24
Reduction of Charges for Sales to Certain Groups................................ 24
DESCRIPTION OF THE CONTRACTS......................................................... 24
Summary......................................................................... 24
Owner........................................................................... 25
Annuitant....................................................................... 25
Modification of the Contract.................................................... 25
Assignment...................................................................... 25
Death Benefit................................................................... 25
Beneficiary..................................................................... 26
PURCHASES, WITHDRAWALS AND CONTRACT VALUE............................................ 26
Minimum Purchase Payment........................................................ 26
Automatic Payment Plan........................................................ 26
Automatic Dollar Cost Averaging Program....................................... 26
Asset Allocation Rebalancing Program.......................................... 27
Principal Advantage Program................................................... 27
Allocation of Purchase Payments................................................. 28
Transfer During Accumulation Period............................................. 28
Separate Account Accumulation Unit Value........................................ 29
Fixed Account Accumulation Value................................................ 29
Distribution of Contracts....................................................... 29
Withdrawals (Redemptions)....................................................... 30
Systematic Withdrawal Program................................................. 31
ERISA Plans................................................................... 31
Deferment of Fixed Account Withdrawal Payments................................ 31
Minimum Contract Value.......................................................... 31
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
ANNUITY PERIOD....................................................................... 31
Annuity Date.................................................................... 31
Deferment of Payments......................................................... 32
Payments to Owner............................................................. 32
Allocation of Annuity Payments.................................................. 32
Annuity Options................................................................. 32
Other Options................................................................... 33
Transfer During Annuity Period.................................................. 34
Death Benefit During Annuity Period............................................. 34
Annuity Payments................................................................ 34
Initial Monthly Annuity Payment............................................... 34
Subsequent Monthly Payments................................................... 34
ADMINISTRATION....................................................................... 35
TAXES................................................................................ 35
General......................................................................... 35
Withholding Tax on Distributions................................................ 36
Diversification -- Separate Account Investments................................. 36
Multiple Contracts.............................................................. 36
Tax Treatment of Assignments.................................................... 37
Qualified Plans................................................................. 37
Tax Treatment of Withdrawals.................................................... 38
Qualified Plans............................................................... 38
Nonqualified Plans............................................................ 39
ADDITIONAL INFORMATION ABOUT THE COMPANY............................................. 40
Selected Financial Data......................................................... 40
Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 41
Properties...................................................................... 46
Directors and Executive Officers................................................ 46
Executive Compensation.......................................................... 47
STATE REGULATION..................................................................... 48
CUSTODIAN............................................................................ 48
LEGAL PROCEEDINGS.................................................................... 49
REGISTRATION STATEMENTS.............................................................. 49
INDEPENDENT ACCOUNTANTS.............................................................. 49
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT.................................... 49
FINANCIAL STATEMENTS................................................................. 50
APPENDIX A -- WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT........ A-1
APPENDIX B -- SAMPLE DEATH BENEFIT COMPUTATIONS...................................... B-1
</TABLE>
- --------------------------------------------------------------------------------
DEFINITIONS
- --------------------------------------------------------------------------------
The following terms, as used in this prospectus, have the indicated
meanings:
ACCUMULATION PERIOD -- The period between the Contract Date and the Annuity
Date; the build-up phase under the Contract.
ACCUMULATION UNIT -- A unit of measurement which the Company uses to calculate
Contract Value under the variable portion of the Contracts during the
Accumulation Period.
ANCHOR TRUST -- Anchor Series Trust, an open-end management investment company.
ANNUITY SERVICE CENTER -- Its address and phone number are: P.O. Box 54299, Los
Angeles, California 90054-0299; (800)99-NYSUN. Correspondence accompanying a
payment should be directed to P.O. Box 100357, Pasadena, California 91189-0357.
The Company will notify Contract Owners of any change in address or telephone
number.
ANNUITANT -- The natural person on whose life the annuity benefits under a
Contract are based.
4
<PAGE> 5
ANNUITIZATION -- The process by which an Owner converts from the Accumulation
Period to the Annuity Period. Upon Annuitization, the Contract is converted from
the build-up phase to the phase during which the Owner or other payee(s) receive
periodic annuity payments.
ANNUITY DATE -- The date on which annuity payments are to begin.
ANNUITY PERIOD -- The period starting on the Annuity Date.
ANNUITY UNIT -- A unit of measurement which the Company uses to calculate the
amount of Variable Annuity payments.
BENEFICIARY(IES) -- The person(s) designated to receive any benefits under a
Contract upon the death of the Annuitant or the Owner.
CODE -- The Internal Revenue Code of 1986, as amended.
COMMISSION -- The Securities and Exchange Commission.
COMPANY -- First SunAmerica Life Insurance Company, a New York corporation.
CONTRACT(S) -- The Flexible Payment Individual Deferred Annuity Contracts
offered by this prospectus.
CONTRACT DATE -- The date a Contract is issued.
CONTRACT VALUE -- The value under a Contract is equal to the sum of the values
of the Owner's interest in the Fixed Account and the Separate Account.
CONTRACT YEAR -- A year starting from the Contract Date in one calendar year and
ending on the Contract Date in the succeeding calendar year.
CONTRIBUTION YEAR -- With respect to a given Purchase Payment, a year starting
from the date of the Purchase Payment in one calendar year and ending on the day
before the anniversary of such date in the succeeding calendar years. The
Contribution Year in which a Purchase Payment is made is "Contribution Year 0";
subsequent Contribution Years are successively numbered beginning with
Contribution Year 1.
CURRENT INTEREST RATE -- The interest rate as declared from time to time by the
Company to be in effect for allocations to the Fixed Account for a specified
Guarantee Period. It is equal to the sum of the subsequent Guarantee Rate and
the excess interest rate, if any, declared by the Company for such allocation.
The subsequent Guarantee Rate will not be less than 3% per annum.
DUE PROOF OF DEATH -- (1) A certified copy of a death certificate; or (2) a
certified copy of a decree of a court of competent jurisdiction as to the
finding of death; or (3) a written statement by a medical doctor who attended
the deceased at the time of death; or (4) any other proof satisfactory to the
Company.
FIXED ACCOUNT -- Contract Values allocated to the Company's General Account
under one or more of the Fixed Account options under the Contract.
FIXED ANNUITY -- A series of payments that are fixed in amount and made during
the Annuity Period to a payee under a Contract.
GENERAL ACCOUNT -- The Company's general investment account which contains all
the assets of the Company, with the exception of the Separate Account and other
segregated asset accounts.
GUARANTEE AMOUNT -- The accumulated value of that portion of a Contract
allocated to the Fixed Account for a Guarantee Period.
GUARANTEE PERIOD -- A period during which an allocation to the Fixed Account
will earn interest at the Current Interest Rate that was in effect for that
period when the allocation was made.
GUARANTEE RATE -- The interest rate in effect for a particular allocation to the
Fixed Account for a specified Guarantee Period.
5
<PAGE> 6
LATEST ANNUITY DATE -- The first day of the month following the 85th birthday of
the Annuitant. In the case of Contracts issued in connection with Qualified
Plans, the Code generally requires that a minimum distribution be taken by April
1 of the calendar year following the calendar year in which the Owner attains
age 70 1/2. Accordingly, the Company may require an Owner in a Qualified Plan to
annuitize prior to such date unless the Owner demonstrates that the minimum
distribution is otherwise being made.
MARKET VALUE ADJUSTMENT -- An adjustment applied to amounts withdrawn,
transferred or annuitized from the three, five, seven and ten year Fixed Account
options prior to the end of the applicable Guarantee Period(s).
NONQUALIFIED PLAN -- A retirement plan which does not receive favorable tax
treatment under Sections 401, 403(b), 408 or 457 of the Internal Revenue Code.
OWNER -- The person(s) having the privileges of ownership defined in the
Contracts.
PORTFOLIO -- A subdivision of the Separate Account invested wholly in shares of
one of the investment series of Anchor Trust or SunAmerica Trust.
PURCHASE PAYMENTS -- Amounts paid to the Company for the Contract by or on
behalf of an Owner.
QUALIFIED PLAN -- A retirement plan which receives favorable tax treatment under
Sections 401, 403(b), 408 or 457 of the Internal Revenue Code.
SEPARATE ACCOUNT -- A segregated investment account of the Company entitled "FS
Variable Separate Account."
SUNAMERICA TRUST -- SunAmerica Series Trust, an open-end management investment
company.
UNDERLYING FUND(S) -- The underlying series of the Anchor Trust or SunAmerica
Trust in which the Portfolios invest.
VALUATION DATE -- Each day the New York Stock Exchange is open for business.
VALUATION PERIOD -- The period commencing at the close of normal trading on the
New York Stock Exchange ("NYSE") (currently 4:00 p.m. Eastern time) on each
Valuation Date and ending at the close of normal trading on the NYSE on the next
succeeding Valuation Date.
VARIABLE ANNUITY -- A series of payments made during the Annuity Period to a
payee under a Contract which vary in amount in accordance with the investment
experience of the Portfolios to which Contract Values have been allocated.
WITHDRAWAL CHARGE -- The contingent deferred sales charge assessed against
certain withdrawals.
WITHDRAWAL VALUE -- Contract Value, minus any Contract Administration Charge,
minus any applicable Withdrawal Charge, and plus or minus any applicable Market
Value Adjustment.
6
<PAGE> 7
- --------------------------------------------------------------------------------
SUMMARY
- --------------------------------------------------------------------------------
This prospectus describes the uses and objectives of the Contracts, their
costs, and the rights and privileges of the Owner. It also contains information
about the Company, the Fixed Account, the Separate Account and its Portfolios,
and the Underlying Funds in which the Portfolios invest. We urge you to read it
carefully and retain it and the prospectuses for the Anchor Trust and SunAmerica
Trust for future reference. (The prospectuses for the Anchor Trust and
SunAmerica Trust are attached to and follow this prospectus).
WHAT IS THE CONTRACT?
The Contract offered is a tax deferred annuity which provides fixed
benefits, variable benefits or a combination of both. Individuals wishing to
purchase a Contract must complete an application and provide an initial Purchase
Payment which will be sent to the Company at its address for correspondence
accompanied by payments indicated on the cover page of this prospectus or in
such other manner as deemed acceptable to the Company. The minimum and maximum
of Purchase Payments vary depending upon the type of Contract purchased. (See
"Minimum Purchase Payment".)
WHAT IS THE DIFFERENCE BETWEEN A VARIABLE ANNUITY AND A FIXED ANNUITY?
The Contract has appropriate provisions relating to variable and fixed
accumulation values and variable and fixed annuity payments. A Variable Annuity
and a Fixed Annuity have certain similarities. Both provide that Purchase
Payments, less certain deductions, will be accumulated prior to the Annuity
Date. After the Annuity Date, annuity payments will be made to a designated
payee (normally, the Owner), for the life of the Annuitant or a period certain
or a combination thereof. The Company assumes mortality and expense risks under
the Contracts, for which it receives certain compensation.
The most significant difference between a Variable Annuity and a Fixed
Annuity is that under a Variable Annuity, all investment risk before and after
the Annuity Date is assumed by the Owner or other payee; the amounts of the
annuity payments vary with the investment performance of the Portfolios of the
Separate Account selected by the Owner. Under a Fixed Annuity, in contrast, the
investment risk after the Annuity Date is assumed by the Company and the amounts
of the annuity payments do not vary. In the case of amounts allocated to the
Fixed Account prior to the Annuity Date, the Owner bears the risks (1) that the
rate credited on amounts allocated to the Fixed Account may not exceed 3% for
any Guarantee Period, and (2) that amounts withdrawn, transferred or annuitized
from the Fixed Account prior to the end of their respective Guarantee Periods,
other than withdrawals from the one year Fixed Account option, could result in
the Owners receiving less than the Purchase Payments so allocated. (See "Fixed
Account Options -- Market Value Adjustment".)
HOW MAY PURCHASE PAYMENTS BE ALLOCATED?
Purchase Payments for the Contracts may be allocated pursuant to
instructions in the application to one or more Portfolios of the Separate
Account, and/or to the Company's General Account under one or more of the Fixed
Account options under the Contracts. The Separate Account invests in shares of
the following Underlying Funds (See "Separate Account Investments"):
ANCHOR TRUST
* CAPITAL APPRECIATION PORTFOLIO * NATURAL RESOURCES PORTFOLIO
* GROWTH PORTFOLIO * GOVERNMENT AND QUALITY BOND PORTFOLIO
SUNAMERICA TRUST
* INTERNATIONAL DIVERSIFIED EQUITIES * ASSET ALLOCATION PORTFOLIO
PORTFOLIO * BALANCED/PHOENIX INVESTMENT
* GLOBAL EQUITIES PORTFOLIO COUNSEL PORTFOLIO
* ALLIANCE GROWTH PORTFOLIO * WORLDWIDE HIGH INCOME PORTFOLIO
* GROWTH/PHOENIX INVESTMENT * HIGH-YIELD BOND PORTFOLIO
COUNSEL PORTFOLIO * GLOBAL BOND PORTFOLIO
* PROVIDENT GROWTH PORTFOLIO * FIXED INCOME PORTFOLIO
* VENTURE VALUE PORTFOLIO * CASH MANAGEMENT PORTFOLIO
* GROWTH-INCOME PORTFOLIO
Purchase Payments allocated to Fixed Account option(s) will earn interest
at the then Current Interest Rate(s) for the selected Guarantee Period(s). (See
"Fixed Account Options".)
7
<PAGE> 8
Prior to the Annuity Date, transfers may be made among the Portfolios
and/or the Fixed Account options. Fifteen transfers per Contract Year are
permitted before a transfer fee will be assessed. A Market Value Adjustment may
also apply in the case of a transfer from a Fixed Account option. (See
"Purchases, Withdrawals and Contract Value -- Transfer During Accumulation
Period".)
MAY WITHDRAWALS BE MADE BEFORE ANNUITIZATION?
Except as explained below, Contract Value may be withdrawn at any time
during the Accumulation Period. In addition to potential losses due to
investment risks, withdrawals may be reduced by a Withdrawal Charge, and a
penalty tax and income tax may apply. Contracts in connection with Qualified
Plans may be subject to additional withdrawal restrictions imposed by the Plan.
Earnings under a Contract may be withdrawn at any time during such period free
of Withdrawal Charge (although withdrawals from the Fixed Account other than at
the end of the applicable Guarantee Periods are generally subject to a Market
Value Adjustment). Alternatively, there is a free withdrawal amount which
applies to the first withdrawal during a Contract Year after the first Contract
Year. (See "Contract Charges -- Sales Charges -- Withdrawal Charge".) Certain
Owners of Nonqualified Plan Contracts and Contracts issued in connection with
Individual Retirement Annuities ("IRAs") may choose to withdraw amounts which in
the aggregate add up to 10% of their Purchase Payments annually pursuant to a
systematic withdrawal program without charge. (See "Purchases, Withdrawals and
Contract Value -- Withdrawals (Redemptions) -- Systematic Withdrawal Program".)
Withdrawals are taxable and a 10% federal tax penalty may apply to withdrawals
before age 59 1/2.
Owners should consult their own tax counsel or other tax adviser regarding
any withdrawals or distributions.
CAN I EXAMINE THE CONTRACT?
The Contract Owner may return the Contract to the Company within 10 days
after it is received by delivering or mailing it to the Company's Annuity
Service Center. If the Contract is returned to the Company, it will be
terminated and the Company will pay the Owner an amount equal to the greater of
Purchase Payments or Contract Value represented by the Contract on the date it
is received by the Company.
WHAT ARE THE CHARGES AND DEDUCTIONS UNDER A CONTRACT?
A mortality and expense risk charge is assessed daily against the assets of
each Portfolio at an annual rate of 1.37%. A distribution expense charge is
assessed daily against the assets of each Portfolio at an annual rate of 0.15%.
The Contracts also provide for certain deductions and charges, including a
contract administration charge of $30 annually, which is guaranteed not to
increase and which under certain circumstances may be waived. The Contract
permits up to 15 free transfers each Contract Year, after which point a $25
transfer fee is applicable to each subsequent transfer. Additionally, a
Withdrawal Charge may be assessed against the Contract Value during the first
seven Contribution Years (7%-6%-5%-4%-3%-2%-1%-0%) when a withdrawal is made.
(See "Contract Charges".)
DOES THE CONTRACT PAY ANY DEATH BENEFITS?
A Death Benefit is provided in the event of the death of the Owner during
the Accumulation Period. The Death Benefit is equal to the greater of: (1) the
total of Purchase Payments made prior to the death of the Owner, minus any
partial withdrawals and/or partial annuitizations; or (2) the Contract Value
upon receipt of Due Proof of Death. In addition, the Company will pay an
enhanced Death Benefit after the seventh Contract anniversary which is equal to
the greater of: (1) the Contract Value on the anniversary of the Contract Date
preceding the date of death; and (2) the Death Benefit payable on the
anniversary of the Contract Date preceding the date of death, both increased by
any Purchase Payments and reduced by any partial withdrawals and partial
annuitizations since that anniversary. (See "Description of the Contracts --
Death Benefit".)
WHAT ARE THE AVAILABLE ANNUITY OPTIONS UNDER THE CONTRACT?
There are five available annuity options under the Contract. They include
an annuity for life, a joint and survivor annuity, a joint and survivor life
annuity with 120 monthly payments guaranteed, a life annuity with 120 or 240
monthly payments guaranteed and monthly payments for a specified number of
years. The Annuity Date may not be deferred beyond an Owner's 85th birthday. If
a Contract Owner does not elect otherwise, monthly annuity payments generally
will be made under the fourth option to provide a life annuity with 120 monthly
payments certain. (See "Annuity Period -- Annuity Options".)
DOES THE OWNER HAVE ANY VOTING RIGHTS UNDER THE CONTRACT?
Owners will have the right to vote on matters affecting the Underlying
Funds to the extent that proxies are solicited by Anchor Trust or SunAmerica
Trust. If the Owner does not vote, the Company will vote such interests in the
same proportion as it votes shares for which it has received instructions. (See
"Separate Account Investments -- Voting Rights".)
8
<PAGE> 9
- --------------------------------------------------------------------------------
FEE TABLES
- --------------------------------------------------------------------------------
OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGE (AS A PERCENTAGE OF PURCHASE PAYMENTS):
<TABLE>
<CAPTION>
CONTRIBUTION YEAR
-----------------
<S> <C>
Zero.............................................................................................. 7%
One............................................................................................... 6%
Two............................................................................................... 5%
Three............................................................................................. 4%
Four.............................................................................................. 3%
Five.............................................................................................. 2%
Six............................................................................................... 1%
Seven and later................................................................................... 0%
ANNUAL CONTRACT ADMINISTRATION CHARGE................................................................... $30
TRANSFER FEE............................................................................................ $25
(applies solely to transfers in excess of fifteen in a Contract Year)
</TABLE>
- ---------------
The Owner Transaction Expenses apply to the Contract Value allocated to the
Fixed Account, as well as the Separate Account.
- --------------------------------------------------------------------------------
ANNUAL SEPARATE ACCOUNT EXPENSES
(AS A PERCENTAGE OF DAILY NET ASSET VALUE)
<TABLE>
<S> <C>
MORTALITY RISK CHARGE
Standard.......................................................................................... 0.90%
Enhanced.......................................................................................... 0.12%
-----
Total......................................................................................... 1.02%
EXPENSE RISK CHARGE................................................................................... 0.35%
DISTRIBUTION EXPENSE CHARGE........................................................................... 0.15%
-----
TOTAL EXPENSE CHARGE............................................................................ 1.52%
=====
</TABLE>
9
<PAGE> 10
- --------------------------------------------------------------------------------
UNDERLYING FUND EXPENSES
- --------------------------------------------------------------------------------
ANCHOR TRUST
(FUND EXPENSES, AS A PERCENTAGE OF AVERAGE NET ASSETS FOR
THE TRUST'S TWELVE-MONTH PERIOD ENDED NOVEMBER 30, 1995.)
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER ANNUAL
FEE EXPENSES EXPENSES
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION.......................................... .70% .10% .80%
- -----------------------------------------------------------------------------------------------------
GROWTH........................................................ .74% .11% .85%
- -----------------------------------------------------------------------------------------------------
NATURAL RESOURCES............................................. .75% .25% 1.00%
- -----------------------------------------------------------------------------------------------------
GOVERNMENT & QUALITY BOND..................................... .62% .12% .74%
- -----------------------------------------------------------------------------------------------------
</TABLE>
SUNAMERICA TRUST
(FUND EXPENSES, AS A PERCENTAGE OF AVERAGE NET ASSETS
FOR THE TRUST'S FISCAL YEAR ENDED NOVEMBER 30, 1995.)
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER ANNUAL
FEE EXPENSES EXPENSES
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
INTERNATIONAL DIVERSIFIED EQUITIES............................ 1.00% .70% 1.70%
- -----------------------------------------------------------------------------------------------------
GLOBAL EQUITIES............................................... .83% .31% 1.14%
- -----------------------------------------------------------------------------------------------------
ALLIANCE GROWTH............................................... .68% .11% .79%
- -----------------------------------------------------------------------------------------------------
GROWTH/PHOENIX INVESTMENT COUNSEL............................. .67% .09% .76%
- -----------------------------------------------------------------------------------------------------
PROVIDENT GROWTH.............................................. .83% .10% .93%
- -----------------------------------------------------------------------------------------------------
VENTURE VALUE................................................. .79% .21% 1.00%
- -----------------------------------------------------------------------------------------------------
GROWTH-INCOME................................................. .67% .10% .77%
- -----------------------------------------------------------------------------------------------------
ASSET ALLOCATION.............................................. .68% .13% .81%
- -----------------------------------------------------------------------------------------------------
BALANCED/PHOENIX INVESTMENT COUNSEL........................... .70% .28% .98%
- -----------------------------------------------------------------------------------------------------
WORLDWIDE HIGH INCOME......................................... 1.00% .30% 1.30%
- -----------------------------------------------------------------------------------------------------
HIGH-YIELD BOND............................................... .69% .11% .80%
- -----------------------------------------------------------------------------------------------------
GLOBAL BOND................................................... .75% .20% .95%
- -----------------------------------------------------------------------------------------------------
FIXED INCOME.................................................. .70% .26% .96%
- -----------------------------------------------------------------------------------------------------
CASH MANAGEMENT............................................... .55% .12% .67%
- -----------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
- --------------------------------------------------------------------------------
EXAMPLES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONDITIONS
An Owner would pay the following expenses
on a $1,000 investment in each indicated
Portfolio assuming 5% annual return on TIME PERIODS
PORTFOLIO assets: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
CAPITAL (a) upon surrender at the end of the (a) $ 94 $ 124 $ 157 $272
APPRECIATION stated time period.
(b) if the Contract WAS NOT surrendered (b) $ 24 $ 74 $ 127 $272
- --------------------------------------------------------------------------------------------------------------
GROWTH SAME (a) $ 95 $ 126 $ 160 $277
(b) $ 25 $ 76 $ 130 $277
- --------------------------------------------------------------------------------------------------------------
NATURAL RESOURCES SAME (a) $ 96 $ 130 $ 167 $292
(b) $ 26 $ 80 $ 137 $292
- --------------------------------------------------------------------------------------------------------------
GOVERNMENT & SAME (a) $ 94 $ 123 $ 154 $266
QUALITY BOND (b) $ 24 $ 73 $ 124 $266
- --------------------------------------------------------------------------------------------------------------
INTERNATIONAL SAME (a) $103 $ 151 $ 202 $358
DIVERSIFIED (b) $ 33 $ 101 $ 172 $358
EQUITIES
- --------------------------------------------------------------------------------------------------------------
GLOBAL SAME (a) $ 98 $ 135 $ 174 $306
EQUITIES (b) $ 28 $ 85 $ 144 $306
- --------------------------------------------------------------------------------------------------------------
ALLIANCE SAME (a) $ 94 $ 124 $ 157 $271
GROWTH (b) $ 24 $ 74 $ 127 $271
- --------------------------------------------------------------------------------------------------------------
GROWTH/PHOENIX SAME (a) $ 94 $ 123 $ 155 $268
INVESTMENT COUNSEL (b) $ 24 $ 73 $ 125 $268
- --------------------------------------------------------------------------------------------------------------
PROVIDENT SAME (a) $ 95 $ 128 $ 164 $285
GROWTH (b) $ 25 $ 78 $ 134 $285
- --------------------------------------------------------------------------------------------------------------
VENTURE VALUE SAME (a) $ 96 $ 130 $ 167 $292
(b) $ 26 $ 80 $ 137 $292
- --------------------------------------------------------------------------------------------------------------
GROWTH- SAME (a) $ 94 $ 124 $ 156 $269
INCOME (b) $ 24 $ 74 $ 126 $269
- --------------------------------------------------------------------------------------------------------------
ASSET SAME (a) $ 94 $ 125 $ 158 $273
ALLOCATION (b) $ 24 $ 75 $ 128 $273
- --------------------------------------------------------------------------------------------------------------
BALANCED/PHOENIX SAME (a) $ 96 $ 130 $ 166 $290
INVESTMENT COUNSEL (b) $ 26 $ 80 $ 136 $290
- --------------------------------------------------------------------------------------------------------------
WORLDWIDE HIGH SAME (a) $ 99 $ 139 $ 182 $321
INCOME (b) $ 29 $ 89 $ 152 $321
- --------------------------------------------------------------------------------------------------------------
HIGH-YIELD SAME (a) $ 94 $ 124 $ 157 $272
BOND (b) $ 24 $ 74 $ 127 $272
- --------------------------------------------------------------------------------------------------------------
GLOBAL SAME (a) $ 96 $ 129 $ 165 $288
BOND (b) $ 26 $ 79 $ 135 $288
- --------------------------------------------------------------------------------------------------------------
FIXED SAME (a) $ 96 $ 129 $ 165 $288
INCOME (b) $ 26 $ 79 $ 135 $288
- --------------------------------------------------------------------------------------------------------------
CASH SAME (a) $ 93 $ 121 $ 151 $259
MANAGEMENT (b) $ 23 $ 71 $ 121 $259
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
EXPLANATION OF FEE TABLES AND EXAMPLES
- --------------------------------------------------------------------------------
1. The purpose of the foregoing table and examples is to assist an investor in
understanding the various costs and expenses that he or she will bear
directly or indirectly by investing in the Separate Account. The Owner
Transaction Expenses at the beginning of the table are applicable to
Contract Value allocated to the Fixed Account as well as to the Separate
Account. However, the balance of the fee tables, and the Examples, apply
only to investments in the Separate Account. The table reflects expenses of
the Separate Account as well as the Underlying Funds. For additional
information see "Contract Charges"; see also the sections relating to
management of the Underlying Funds in their respective prospectuses. The
examples do not illustrate the tax consequences of surrendering a Contract.
2. The examples assume that there were no transactions which would result in
the imposition of the transfer fee. The amount of the transfer fee is $25
except that the first 15 transfers per Contract Year are not subject to a
fee. (See "Administrative Charges -- Transfer Fee".) Transfers from the
Fixed Account may be subject to a Market Value Adjustment even if they are
not subject to a transfer fee.
3. For purposes of the amounts reported in the Examples, the contract
administration charge is reflected by applying a percentage equivalent
charge, obtained by dividing the total amount of such charges anticipated to
be collected during the year by the total estimated average net assets of
the Portfolios and the Fixed Account attributable to the Contracts.
4. NEITHER THE FEE TABLES NOR THE EXAMPLES ARE REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
11
<PAGE> 12
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCEPTION
TO
PORTFOLIOS OF THE SEPARATE ACCOUNT 11/30/95
---------------------------------- -----------
<S> <C>
ANCHOR TRUST
Capital Appreciation (Inception Date -- 4/6/95)
Beginning AUV......................................................... $11.35
End AUV............................................................... $14.19
End # AUs............................................................. 52,583
Growth (Inception Date -- 4/6/95)
Beginning AUV......................................................... $11.02
End AUV............................................................... $12.95
End # AUs............................................................. 15,156
Natural Resources (Inception Date -- 5/30/95)
Beginning AUV......................................................... $10.17
End AUV............................................................... $10.78
End # AUs............................................................. 5,306
Government and Quality Bond (Inception Date -- 5/3/95)
Beginning AUV......................................................... $10.55
End AUV............................................................... $11.51
End # AUs............................................................. 37,576
SUNAMERICA TRUST
International Diversified Equities (Inception Date -- 4/12/95)
Beginning AUV......................................................... $9.45
End AUV............................................................... $10.07
End # AUs............................................................. 58,058
Global Equities (Inception Date -- 5/22/95)
Beginning AUV......................................................... $11.99
End AUV............................................................... $13.01
End # AUs............................................................. 26,604
Alliance Growth (Inception Date -- 4/6/95)
Beginning AUV......................................................... $11.52
End AUV............................................................... $15.44
End # AUs............................................................. 52,943
Growth/Phoenix Investment Counsel (Inception Date -- 4/6/95)
Beginning AUV......................................................... $10.61
End AUV............................................................... $12.81
End # AUs............................................................. 22,973
Provident Growth (Inception Date -- 4/6/95)
Beginning AUV......................................................... $10.36
End AUV............................................................... $12.60
End # AUs............................................................. 31,960
Venture Value (Inception Date -- 4/6/95)
Beginning AUV......................................................... $10.84
End AUV............................................................... $13.29
End # AUs............................................................. 113,664
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
INCEPTION
TO
PORTFOLIOS OF THE SEPARATE ACCOUNT 11/30/95
---------------------------------- -----------
<S> <C>
Growth-Income (Inception Date -- 4/12/95)
Beginning AUV......................................................... $11.15
End AUV............................................................... $13.32
End # AUs............................................................. 45,266
Asset Allocation (Inception Date -- 4/24/95)
Beginning AUV......................................................... $11.29
End AUV............................................................... $12.64
End # AUs............................................................. 60,824
Balanced/Phoenix Investment Counsel (Inception Date -- 5/8/95)
Beginning AUV......................................................... $10.90
End AUV............................................................... $12.33
End # AUs............................................................. 41,654
Worldwide High Income (Inception Date -- 5/2/95)
Beginning AUV......................................................... $10.13
End AUV............................................................... $11.36
End # AUs............................................................. 21,556
High-Yield Bond (Inception Date -- 5/8/95)
Beginning AUV......................................................... $11.18
End AUV............................................................... $11.48
End # AUs............................................................. 40,706
Global Bond (Inception Date -- 5/2/95)
Beginning AUV......................................................... $10.37
End AUV............................................................... $11.20
End # AUs............................................................. 12,162
Fixed Income (Inception Date -- 4/12/95)
Beginning AUV......................................................... $10.21
End AUV............................................................... $11.10
End # AUs............................................................. 5,375
Cash Management (Inception Date -- 4/27/95)
Beginning AUV......................................................... $10.44
End AUV............................................................... $10.67
End # AUs............................................................. 59,731
</TABLE>
- ---------------
AUV -- Accumulation Unit Value
AU -- Accumulation Units
- --------------------------------------------------------------------------------
PERFORMANCE DATA
- --------------------------------------------------------------------------------
From time to time the Separate Account may advertise the Cash Management
Portfolio's "yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Cash Management Portfolio refers to the net income generated for
a Contract funded by an investment in the Portfolio (which invests in shares of
the Cash Management Portfolio of SunAmerica Trust) over a seven-day period
(which period will be stated in the advertisement). This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested at the end of each seven day period. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. Neither the yield nor the
effective yield takes into
13
<PAGE> 14
consideration the effect of any capital changes that might have occurred during
the seven day period, nor do they reflect the impact of premium taxes or any
Withdrawal Charges. The impact of other recurring charges on both yield figures
is, however, reflected in them to the same extent it would affect the yield (or
effective yield) for a Certificate of average size.
In addition, the Separate Account may advertise "total return" data for its
other Portfolios. Like the yield figures described above, total return figures
are based on historical data and are not intended to indicate future
performance. The "total return" is a computed rate of return that, when
compounded annually over a stated period of time and applied to a hypothetical
initial investment in a Portfolio made at the beginning of the period, will
produce the same Contract Value at the end of the period that the hypothetical
investment would have produced over the same period (assuming a complete
redemption of the Contract at the end of the period). Recurring Contract charges
are reflected in the total return figures in the same manner as they are
reflected in the yield data for Contracts funded through the Cash Management
Portfolio. The effect of applicable Withdrawal Charges due to the assumed
redemption will be reflected in the return figures, but may be omitted in
additional return figures given for comparison.
For periods starting prior to the date the Contracts were first offered to
the public, the total return data for the Capital Appreciation, Growth, Natural
Resources and the Government and Quality Bond Portfolios of the Separate Account
will be derived from the performance of the corresponding Portfolios of Anchor
Trust, modified to reflect the charges and expenses as if the Separate Account
Portfolio had been in existence since the inception date of each respective
Anchor Trust Portfolio. Thus, such performance figures should not be construed
to be actual historic performance of the relevant Separate Account Portfolio.
Rather, they are intended to indicate the historic performance of the four
corresponding Portfolios of Anchor Trust, adjusted to provide direct
comparability to the performance of the Portfolios after the date the Contracts
were first offered to the public (which will reflect the effect of fees and
charges imposed under the Contracts). The Capital Appreciation, Growth, Natural
Resources and Government and Quality Bond Portfolios of Anchor Trust have served
since their inception as underlying investment media for separate accounts of
other insurance companies in connection with Variable Contracts not having the
same fee and charge schedules as those imposed under the Contracts.
More detailed information on the computation of advertised performance data
for the Separate Account is contained in the Statement of Additional
Information.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT
AND THE GENERAL ACCOUNT
- --------------------------------------------------------------------------------
COMPANY
The Company is a stock life insurance company organized under the laws of
the state of New York in December 1978. Its legal domicile and principal
business address is 733 Third Avenue, 4th Floor, New York, New York 10017. The
Company is an indirect wholly owned subsidiary of SunAmerica Inc., a Maryland
corporation.
The Company and its affiliates, SunAmerica Life Insurance Company, Anchor
National Life Insurance Company, SunAmerica Asset Management Corp., Imperial
Premium Finance, Inc., Resources Trust Company and two broker-dealers, offer a
full line of financial services, including fixed and variable annuities, mutual
funds, premium finance and trust administration services. As of September 30,
1995, the Company had $163.2 million in assets while SunAmerica Inc., the
Company's ultimate parent, together with its subsidiaries, held $28.39 billion
of assets, consisting of $16.84 billion of assets owned, $2.13 billion of assets
managed in mutual funds and private accounts, and $9.42 billion under custody in
retirement trust accounts.
The Company may from time to time publish in advertisements, sales
literature and reports to Owners, the ratings and other information assigned to
it by A.M. Best Company ("A.M. Best"). A.M.
14
<PAGE> 15
Best's ratings reflect its current opinion on the relative financial strength
and operating performance of an insurance company in comparison to the norms of
the life/health insurance industry. Its ratings do not apply to the Separate
Account. However, the contractual obligations under the Contracts are general
corporate obligations of the Company.
The Company is admitted to conduct life insurance and annuity business in
the state of New York. The Contracts offered by this prospectus are issued by
the Company and will be funded in the Separate Account as well as the Company's
General Account.
For more detailed information about the Company, see "Additional
Information About the Company".
SEPARATE ACCOUNT
FS Variable Separate Account was originally established by the Company on
September 9, 1994, pursuant to the provisions of New York law, as a segregated
asset account of the Company. The Separate Account meets the definition of a
"separate account" under the federal securities laws and is registered with the
Securities and Exchange Commission as a unit investment trust under the
Investment Company Act of 1940. This registration does not involve supervision
of the management of the Separate Account or the Company by the Securities and
Exchange Commission.
The assets of the Separate Account are the property of the Company.
However, the assets of the Separate Account, equal to its reserves and other
contract liabilities, are not chargeable with liabilities arising out of any
other business the Company may conduct.
Income, gains and losses, whether or not realized, from assets allocated to
the Separate Account are credited to or charged against the Separate Account
without regard to other income, gains or losses of the Company.
The Separate Account is divided into Portfolios, with the assets of each
Portfolio invested in the shares of one of the Underlying Funds. The Company
does not guarantee the investment performance of the Separate Account, its
Portfolios or the Underlying Funds. Values allocated to the Separate Account and
the amount of Variable Annuity payments will vary with the values of shares of
the Underlying Funds, and are also reduced by Contract charges.
The basic objective of a Variable Annuity contract is to provide Variable
Annuity payments which will be to some degree responsive to changes in the
economic environment, including inflationary forces and changes in rates of
return available from various types of investments. The Contract is designed to
seek to accomplish this objective by providing that Variable Annuity payments
will reflect the investment performance of the Separate Account with respect to
amounts allocated to it both before and after the Annuity Date. Since the
Separate Account is always fully invested in shares of the Underlying Funds, its
investment performance reflects the investment performance of those entities.
The values of such shares held by the Separate Account fluctuate and are subject
to the risks of changing economic conditions as well as the risk inherent in the
ability of the Underlying Funds' managements to make necessary changes in their
portfolios to anticipate changes in economic conditions. Therefore, the Owner
bears the entire investment risk that the basic objectives of the Contract may
not be realized, and that the adverse effects of inflation may not be lessened.
There can be no assurance that the aggregate amount of Variable Annuity payments
will equal or exceed the Purchase Payments made with respect to a particular
Contract for the reasons described above, or because of the premature death of
an Annuitant.
Another important feature of the Contract related to its basic objective is
the Company's promise that the dollar amount of Variable Annuity payments made
during the lifetime of the Annuitant will not be adversely affected by the
actual mortality experience of the Company or by the actual expenses incurred by
the Company in excess of expense deductions provided for in the Contract
(although the Company does not guarantee the amounts of the Variable Annuity
payments).
15
<PAGE> 16
GENERAL ACCOUNT
The General Account is made up of all of the general assets of the Company
other than those allocated to the Separate Account or any other segregated asset
account of the Company. Guarantee Periods of one, three, five, seven and ten
years are available through the General Account. A Purchase Payment may be
allocated to one or more Guarantee Periods, as elected by the Owner at the time
the Purchase Payment is made. In addition, all or part of the Owner's Contract
Value may be transferred to Guarantee Periods available under the Contract as
described under "Purchases, Withdrawals and Contract Value -- Transfer During
Accumulation Period" and "Annuity Period -- Transfer During Annuity Period".
Assets supporting amounts allocated to Guarantee Periods become part of the
Company's General Account assets and are available to fund the claims of all
classes of customers of the Company, as well as of its creditors. Accordingly,
all of the Company's assets held in the General Account will be available to
fund the Company's obligations under the Contracts as well as such other claims.
The Company will invest the assets of the General Account in the manner
chosen by the Company and allowed by applicable state laws regarding the nature
and quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments.
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT INVESTMENTS
- --------------------------------------------------------------------------------
UNDERLYING FUNDS
Each of the Portfolios of the Separate Account invests in the shares of one
of the following Underlying Funds of Anchor Trust or SunAmerica Trust, which are
investment series of open-end management investment companies registered under
the Investment Company Act of 1940:
ANCHOR TRUST
* CAPITAL APPRECIATION PORTFOLIO * NATURAL RESOURCES PORTFOLIO
* GROWTH PORTFOLIO * GOVERNMENT AND QUALITY BOND PORTFOLIO
SUNAMERICA TRUST
* INTERNATIONAL DIVERSIFIED EQUITIES * ASSET ALLOCATION PORTFOLIO
PORTFOLIO * BALANCED/PHOENIX INVESTMENT COUNSEL
* GLOBAL EQUITIES PORTFOLIO PORTFOLIO
* ALLIANCE GROWTH PORTFOLIO * WORLDWIDE HIGH INCOME PORTFOLIO
* GROWTH/PHOENIX INVESTMENT COUNSEL * HIGH-YIELD BOND PORTFOLIO
PORTFOLIO * GLOBAL BOND PORTFOLIO
* PROVIDENT GROWTH PORTFOLIO * FIXED INCOME PORTFOLIO
* VENTURE VALUE PORTFOLIO * CASH MANAGEMENT PORTFOLIO
* GROWTH-INCOME PORTFOLIO
The Underlying Funds and their investment objectives are as follows:
ANCHOR TRUST
Four Portfolios of the Separate Account invest solely in the shares of one
of the four currently available investments series, designated "Underlying
Funds," of Anchor Trust, an open-end diversified management investment company
registered under the Investment Company Act of 1940. While a brief summary of
the investment objectives of the four available Underlying Funds is set forth
below,
16
<PAGE> 17
more comprehensive information, including a discussion of potential risks, is
found in the prospectus for Anchor Trust. SunAmerica Asset Management Corp.
("SAAMCo") is the investment adviser for Anchor Trust. SAAMCo is an indirect
wholly owned subsidiary of SunAmerica Inc. Wellington Management Company
("Wellington") of Boston, Massachusetts, a professional investment counseling
firm, serves as Subadviser to SAAMCo. Wellington is not affiliated with the
Company.
Shares of Anchor Trust are and will be issued and redeemed only in
connection with investments in and payments under variable contracts sold by the
Company and its affiliate, Anchor National Life Insurance Company, as well as
two unaffiliated companies, Presidential Life Insurance Company and Phoenix
Mutual Life Insurance Company. No disadvantage to Owners is seen to arise from
the fact that Anchor Trust offers its shares in this fashion.
The four available Underlying Funds and their investment objectives are as
stated below:
CAPITAL APPRECIATION PORTFOLIO seeks long-term capital appreciation. This
Underlying Fund invests in a widely diversified group of growth equity
securities which are widely diversified by industry and company and may engage
in transactions involving stock index futures and options thereon as a hedge
against changes in market conditions.
GROWTH PORTFOLIO seeks long-term capital appreciation through investments
in growth equity securities. This Underlying Fund may engage in transactions
involving stock index futures and options thereon as a hedge against changes in
market conditions.
NATURAL RESOURCES PORTFOLIO seeks a total return in excess of the U.S. rate
of inflation as represented by the Consumer Price Index. This Underlying Fund
invests primarily in equity securities of U.S. or foreign companies which are
expected to provide favorable returns in periods of rising inflation.
GOVERNMENT AND QUALITY BOND PORTFOLIO seeks relatively high current income,
liquidity and security of principal. This Underlying Fund invests in obligations
issued, guaranteed or insured by the U.S. Government, its agencies or
instrumentalities and in corporate debt securities rated Aa or better by Moody's
Investors Service, Inc. ("Moody's") or AA or better by Standard & Poor's
Corporation ("S&P").
ANCHOR TRUST HAS UNDERLYING FUNDS IN ADDITION TO THOSE IDENTIFIED ABOVE.
HOWEVER, NONE OF SUCH OTHER UNDERLYING FUNDS IS CURRENTLY AVAILABLE FOR
INVESTMENT UNDER THE CONTRACTS DESCRIBED IN THIS PROSPECTUS.
SUNAMERICA TRUST
Fourteen Portfolios of the Separate Account invest solely in the shares of
one of the fourteen currently available investment series, designed "Underlying
Funds," of SunAmerica Trust. SunAmerica Trust is registered as a diversified,
open-end management investment company under the 1940 Act. SAAMCo serves as
investment adviser for all the Underlying Funds of SunAmerica Trust. Alliance
Capital Management L.P. ("Alliance") serves as Subadviser for the Global
Equities, Alliance Growth and Growth-Income Portfolios; Phoenix Investment
Counsel, Inc. serves as Subadviser for the Growth/Phoenix Investment Counsel and
Balanced/Phoenix Investment Counsel Portfolios; Provident Investment Counsel (an
autonomous wholly owned subsidiary of United Asset Management Corporation, a
financial services holding company) serves as Subadviser for the Provident
Growth Portfolio; Davis Selected Advisers, L.P., serves as Subadviser for the
Venture Value Portfolio; Goldman Sachs Asset Management, a separate division of
Goldman, Sachs & Co., serves as Subadviser for the Asset Allocation and Fixed
Income Portfolios; Goldman Sachs Asset Management International, an affiliate of
Goldman, Sachs & Co. serves as Subadviser for the Global Bond Portfolio; and
Morgan Stanley Asset Management Inc. serves as Subadviser for the International
Diversified Equities and Worldwide High Income Portfolios. There is no
Subadviser for the High-Yield Bond Portfolio or the Cash Management Portfolio
and SAAMCo therefore performs all investment advisory services for these
Portfolios.
17
<PAGE> 18
Shares of SunAmerica Trust are and will be issued and redeemed only in
connection with investments in and payments under variable contracts sold by the
Company and its affiliate, Anchor National Life Insurance Company. In the
future, however, SunAmerica Trust shares may be used as the underlying
investment medium for other variable annuity contracts and for variable life
contracts offered by the Company. Neither the Company nor SunAmerica Trust
currently foresees any disadvantages to either variable annuity or variable life
Contract Owners arising from such usage.
The fourteen available Underlying Funds and their investment objectives are
as stated below:
INTERNATIONAL DIVERSIFIED EQUITIES PORTFOLIO seeks long-term capital
appreciation by investing in common stocks of foreign issuers in accordance with
country weightings as determined by the Subadviser which, in the aggregate,
replicate broad country indices.
GLOBAL EQUITIES PORTFOLIO seeks long-term growth of capital through
investment primarily in common stocks or securities of U.S. and foreign issuers
with common stock characteristics which demonstrate the potential for
appreciation and through transactions in foreign currencies.
ALLIANCE GROWTH PORTFOLIO
GROWTH/PHOENIX INVESTMENT COUNSEL PORTFOLIO
PROVIDENT GROWTH PORTFOLIO
VENTURE VALUE PORTFOLIO
These four Underlying Funds have the same investment objectives, policies
and restrictions and differ only as to subadvisers. The investment objective of
each Underlying Fund is to provide long-term growth of capital by investing
primarily in common stocks or securities with common stock characteristics which
demonstrate the potential for appreciation.
GROWTH-INCOME PORTFOLIO seeks growth of capital and income by investing
primarily in common stocks or securities which demonstrate the potential for
appreciation and/or dividends.
ASSET ALLOCATION PORTFOLIO seeks high total return (including income and
capital gains) consistent with preservation of capital over the long-term
through a diversified portfolio that can include common stocks and other
securities having common stock characteristics, bonds and other intermediate and
long-term fixed-income securities and money market instruments (debt securities
maturing in one year or less) in any combination.
BALANCED/PHOENIX INVESTMENT COUNSEL PORTFOLIO seeks reasonable income,
long-term capital growth and conservation of capital by investing primarily in
common stocks and fixed income securities, with an emphasis on income-producing
securities which appear to have some potential for capital enhancement.
WORLDWIDE HIGH INCOME PORTFOLIO seeks high current income and, secondarily,
capital appreciation, by investing primarily in a portfolio of high-yielding
fixed-income securities of issuers located throughout the world.
HIGH-YIELD BOND PORTFOLIO seeks a high level of current income and
secondarily seeks capital appreciation by investing primarily in intermediate
and long-term corporate obligations, with emphasis on higher-yielding,
higher-risk, lower-rated or unrated securities.
THE WORLDWIDE HIGH INCOME AND HIGH-YIELD BOND PORTFOLIOS INVEST
PREDOMINANTLY IN, AND THE BALANCED/PHOENIX INVESTMENT COUNSEL PORTFOLIO MAY
INVEST IN, LOWER-RATED AND UNRATED BONDS. BONDS OF THIS TYPE ARE TYPICALLY
SUBJECT TO GREATER MARKET FLUCTUATIONS AND RISK OF LOSS OF INCOME AND PRINCIPAL
DUE TO DEFAULT BY THE ISSUER THAN ARE INVESTMENTS IN LOWER-YIELDING,
HIGHER-RATED BONDS. SEE THE SUNAMERICA TRUST PROSPECTUS FOR MORE INFORMATION.
GLOBAL BOND PORTFOLIO seeks a high total return, emphasizing current income
and, to a lesser extent, providing opportunities for capital appreciation,
through investment in high-quality fixed-income securities of U.S. and foreign
issuers and through transactions in foreign currencies.
18
<PAGE> 19
FIXED INCOME PORTFOLIO seeks a high total return with only moderate price
risk by investing primarily in investment grade fixed-income securities.
CASH MANAGEMENT PORTFOLIO seeks high current yield while preserving capital
by investing in a diversified selection of money market instruments.
There is no assurance that the investment objective of any of the
Underlying Funds will be met. Owners bear the complete investment risk for
Purchase Payments allocated to a Portfolio. Contract Values will fluctuate in
accordance with the investment performance of the Portfolio(s) to which Purchase
Payments are allocated, and in accordance with the imposition of the fees and
charges assessed under the Contracts.
DETAILED INFORMATION ABOUT THE UNDERLYING FUNDS IS CONTAINED IN THE
ACCOMPANYING CURRENT PROSPECTUSES OF THE ANCHOR TRUST AND THE SUNAMERICA TRUST.
AN INVESTOR SHOULD CAREFULLY REVIEW THOSE PROSPECTUSES BEFORE ALLOCATING AMOUNTS
TO BE INVESTED IN THE PORTFOLIOS OF THE SEPARATE ACCOUNT.
VOTING RIGHTS
To the extent required by applicable law, the Company will vote the shares
of the Underlying Funds held in the Separate Account at meetings of the
shareholders of the Anchor Trust or SunAmerica Trust in accordance with
instructions received from persons having the voting interest in the
corresponding Portfolios. The Company will vote shares for which it has not
received instructions in the same proportion as it votes shares for which it has
received instructions. Neither Anchor Trust nor SunAmerica Trust hold regular
meetings of shareholders.
The number of shares which a person has a right to vote will be determined
as of a date to be chosen by the Anchor Trust or the SunAmerica Trust not more
than 60 days prior to the meeting of the Underlying Fund's shareholders. Voting
instructions will be solicited by written communication in advance of such
meeting. Except as may be limited by the terms of the retirement plan pursuant
to which the Contract was issued, the person having such voting rights will be
the Owner before the Annuity Date; thereafter the payee entitled to receive
payments under the Contract.
SUBSTITUTION OF SECURITIES
If the shares of any of the Underlying Funds should no longer be available
for investment by the Separate Account or if, in the judgment of the Company's
Board of Directors, further investment in the shares of an Underlying Fund is no
longer appropriate in view of the purposes of the Contract, the Company may
substitute shares of another mutual fund (or series thereof) for Underlying Fund
shares already purchased and/or to be purchased in the future by Purchase
Payments under the Contract. No such substitution of securities may take place
without prior approval of the Commission and under such requirements as the
Commission may impose.
- --------------------------------------------------------------------------------
FIXED ACCOUNT OPTIONS
- --------------------------------------------------------------------------------
ALLOCATIONS
Purchase Payments may also be allocated, and Contract Values in the
Separate Account transferred, to one or more of the fixed accumulation options
available through the Company's General Account. Amounts thus applied will earn
interest for one or more of the available Guarantee Periods selected by the
Owner, at Guarantee Rates based on the Current Interest Rates set by the Company
for such Guarantee Periods. Current Interest Rates may change from time to time
due to changes in market conditions or other factors. However, the Guarantee
Rate in effect at the time one of these options is selected will not change for
the remainder of the Guarantee Period. THE
19
<PAGE> 20
COMPANY'S OBLIGATION TO PAY INTEREST AT THE GUARANTEE RATE IS NOT AFFECTED BY
THE PERFORMANCE OF THE COMPANY'S GENERAL ACCOUNT INVESTMENTS.
Guarantee Periods are currently available for periods of one, three, five,
seven and ten years. An Owner may elect to allocate Purchase Payments to one or
more of those Guarantee Periods. Each such allocation (to the extent not
withdrawn, transferred or annuitized prior to the end of the Guarantee Period),
will earn interest, credited daily, at the annual effective Guarantee Rate
established for the Guarantee Period at the time the allocation is made. The
Guarantee Rate is based on the Current Interest Rate in effect at the time the
allocation is made. The Current Interest Rate applicable to renewals for new
Guarantee Periods of amounts already allocated to the Fixed Account, or to
transfers from the Separate Account to the Fixed Account may differ from the
Current Interest Rates applicable to Purchase Payments. The Current Interest
Rates are set at the sole discretion of the Company. OWNERS BEAR THE RISK THAT
CURRENT INTEREST RATES AVAILABLE AT FUTURE TIMES MAY BE MORE OR LESS THAN THOSE
CURRENTLY OR INITIALLY AVAILABLE. THEY ALSO BEAR THE RISK THAT SUCH RATES MAY
NOT EXCEED THE GUARANTEED MINIMUM RATE OF 3%.
RENEWALS
Within 30 days after the end of a Guarantee Period, amounts accumulated
during that Guarantee Period may be reallocated to the Fixed Account for a new
Guarantee Period of the same or of a different duration. If the new Guarantee
Period is of the same duration, the amounts will receive the Current Interest
Rate in effect for that duration as of the last day of the previous Guarantee
Period and the new Guarantee Period will begin the following business day. If
the new Guarantee Period is of a different duration and the election is received
after the expiration of the Guarantee Period, the amounts will receive the
Current Interest Rate described in the previous sentence until such time as the
election is received (at which time interest will be credited at the Current
Interest Rate then in effect for the new selected Guarantee Period). In that
case, the new Guarantee Period will begin on the day that the reallocation is
made. Also, during such 30-day period, those amounts may be withdrawn,
transferred or annuitized without application of the Market Value Adjustment.
(See below.) However, any such amounts withdrawn may nevertheless be subject to
the Withdrawal Charge.
At the end of a Guarantee Period, the Company will, unless the Owner has
elected otherwise, assume reallocation for the same period, unless the new
period would expire after the Annuity Date (or, if none has been selected, the
Latest Annuity Date). In the latter case, the Company will choose the longest
available Guarantee Period that will not extend beyond such date. If the renewal
occurs within one year prior to that date, interest will be credited to such
Annuity Date at the then Current Interest Rate for a one-year Guarantee Period.
MARKET VALUE ADJUSTMENT
Other than as described below, if Contract Value is withdrawn, transferred
or, prior to the Annuity Date, annuitized from the Fixed Account under one of
the Fixed Account options described above prior to the expiration of the
Guarantee Period (other than withdrawals for the purpose of paying the Death
Benefit upon the death of the Owner, withdrawals from the one year Fixed Account
option under the Automatic Dollar Cost Averaging Program or Asset Allocation
Rebalancing Program, or withdrawals made to pay Contract fees or charges), the
amounts thus withdrawn, transferred or annuitized are subject to a Market Value
Adjustment ("MVA"). The MVA reflects the impact that changing interest rates
have on the value of money invested at a fixed interest rate, such as a
20
<PAGE> 21
Guarantee Rate. The MVA may be either positive or negative, and is computed by
multiplying the amount withdrawn, transferred or annuitized by the following
factor:
[(1 + I)/(1 + J + 0.0025)]N/12 -1
where
I is the Guarantee Rate in effect;
J is the Current Interest Rate available for a period equal to the number
of years remaining in the Guarantee Period at the time of withdrawal,
transfer or annuitization (fractional years are rounded up to the next
full year); and
N is the number of full months remaining in the Guarantee Period at the
time the withdrawal, transfer or annuitization request is processed.
In general, whether the MVA will operate to increase or decrease the
Contract Value upon withdrawal, transfer or annuitization is determined by
comparing the Guarantee Rate in effect for that allocation to the Current
Interest Rate (as of the date of the transaction) that would apply for a
Guarantee Period equal to the number of full or fractional years remaining in
the Guarantee Period as of that date. (For purposes of determining the MVA, if
the Company does not offer a Guarantee Period of that duration, the applicable
Current Interest Rate will be determined by linear interpolation between Current
Interest Rates for the nearest two Guarantee Periods that are available). If the
Current Interest Rate thus determined plus one-quarter of one percent is greater
than the Guarantee Rate, the MVA will be negative and Contract Value will be
decreased. Similarly, if the Current Interest Rate plus one-quarter of one
percent is less than the Guarantee Rate, Contract Value will be increased. If
the Current Interest Rate is exactly one-quarter of one percent less than the
Guarantee Rate, the MVA will be zero and Contract Value will not be affected by
the MVA.
The impact of the MVA is more significant the greater the time remaining in
the Guarantee Period at the time of withdrawal, transfer or annuitization. If
the MVA is negative, it will be assessed first against any remaining value
allocated to the Fixed Account under the affected option; any remaining
unsatisfied MVA charge will be applied against the proceeds of the withdrawal,
transfer or annuitization. If the MVA is positive, it will be credited to the
amount withdrawn, transferred or annuitized. Some examples of how the MVA is
computed and its impact on Contract Value appear in Appendix A.
The Company will not assess a negative MVA for amounts allocated to the one
year Fixed Account option. That portion of the Contract relating to allocations
to the one year Fixed Account option is not registered under the Securities Act
of 1933 (the "Act") and is therefore not subject to the provisions of the Act.
The Fixed Account options, including the one year Fixed Account, are not subject
to the provisions of the Investment Company Act of 1940.
- --------------------------------------------------------------------------------
CONTRACT CHARGES
- --------------------------------------------------------------------------------
As is more fully described below, charges under the Contract offered by
this prospectus are assessed in three ways: (1) as deductions for administrative
expenses; (2) as charges against the assets of the Separate Account for the
assumption of mortality and expense risks and as distribution expense charges;
and (3) as Withdrawal Charges (contingent deferred sales charges). In addition,
certain deductions are made from the assets of the Underlying Funds for
investment management fees and expenses; those fees and expenses are described
in the prospectuses for the Anchor Trust and the SunAmerica Trust.
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a Mortality and Expense Risk Charge from each Portfolio
during each Valuation Period. The aggregate Mortality and Expense Risk Charge is
equal, on an annual basis, to 1.37% of the net asset value of each Portfolio
(approximately 1.02% is for mortality risks and
21
<PAGE> 22
approximately 0.35% is for expense risks). The Mortality and Expense Risk Charge
is assessed during both the Accumulation Period and the Annuity Period; however,
it is not applied to Contract Values allocated to the Fixed Account.
The mortality risks assumed by the Company arise from its contractual
obligations: (1) to make annuity payments after the Annuity Date for the life of
the Annuitant(s); (2) to waive the Withdrawal Charge in the event of the death
of the Owner; and (3) to provide both a standard and an enhanced Death Benefit
prior to the Annuity Date. The portion of the total Mortality and Expense Risk
Charge attributable to the Company's providing the first two of those three
benefits and providing a standard Death Benefit is 0.90% annually of net assets;
the balance of 0.12% is assessed for providing an enhanced Death Benefit. A
detailed explanation of the standard and enhanced Death Benefits may be found
under "Description of the Contracts -- Death Benefit".
The expense risk assumed by the Company is that the costs of administering
the Contracts and the Separate Account will exceed the amount received from the
Contract Administration Charge. (See "Administrative Charges" below). The
mortality and expense risk charges are guaranteed by the Company and cannot be
increased.
ADMINISTRATIVE CHARGES
CONTRACT ADMINISTRATION CHARGE
An annual Contract Administration Charge of $30 is charged against each
Contract. The amount of this charge is guaranteed and cannot be increased by the
Company. This charge reimburses the Company for expenses incurred in
establishing and maintaining records relating to a Contract. The Contract
Administration Charge will be assessed on each anniversary of the Contract Date
that occurs on or prior to the Annuity Date. In the event that a total surrender
of Contract Value is made, the Contract Administration Charge will be assessed
as of the date of surrender without proration. This charge is not assessed
during the Annuity Period.
The total Contract Administration Charge is allocated between the
Portfolios and the Fixed Account in proportion to the respective Contract Values
similarly allocated. The Contract Administration Charge is at cost with no
margin included for profit.
The Company may waive the Contract Administration Charge for any Contract
which has a Contract Value of $50,000 or greater on the anniversary of the
Contract Date. The Company reserves the right to suspend waiver of the Contract
Administration Charge at any time and without notice.
TRANSFER FEE
In general, a transfer fee of $25 is assessed on each transaction effecting
transfer(s) from Portfolio(s) to other Portfolio(s), from Portfolio(s) to the
Fixed Account, from the Fixed Account to Portfolio(s), and from one Guarantee
Period to another within the Fixed Account prior to the end of a Guarantee
Period. However, the first fifteen such transactions effecting transfer(s) in
any Contract Year are permitted without the imposition of the transfer fee,
which will be assessed on the sixteenth and each subsequent transaction within
the Contract Year.
This fee will be deducted from Contract Values which remain in the
Portfolio(s) (or, where applicable, the Fixed Account) from which the transfer
was made. If such remaining Contract Value is insufficient to pay the transfer
fee, then the fee will be deducted from transferred Contract Values. The
transfer fee is at cost with no margin included for profit.
SALES CHARGES
WITHDRAWAL CHARGE
Federal tax law places a number of constraints on withdrawals from annuity
contracts. Subject to those limitations, the Contract Value may be withdrawn at
any time during the Accumulation Period.
22
<PAGE> 23
Owners should consult their own tax counsel or other tax advisers regarding any
withdrawals. (See "Taxes -- Tax Treatment of Withdrawals".)
A contingent deferred sales charge, which is referred to as the Withdrawal
Charge, may be imposed upon certain withdrawals. Withdrawal Charges will vary in
amount depending upon the Contribution Year of the purchase payment at the time
of withdrawal in accordance with the Withdrawal Charge table shown below.
WITHDRAWAL CHARGE TABLE
<TABLE>
<CAPTION>
APPLICABLE WITHDRAWAL
CONTRIBUTION YEAR CHARGE PERCENTAGE
----------------- ---------------------
<S> <C>
Zero................................................... 7%
One.................................................... 6%
Two.................................................... 5%
Three.................................................. 4%
Four................................................... 3%
Five................................................... 2%
Six.................................................... 1%
Seven and later........................................ 0%
</TABLE>
The Withdrawal Charge is deducted from remaining Contract Value so that the
actual reduction in Contract Value as a result of the withdrawal will be greater
than the withdrawal amount requested and paid. For purposes of determining the
Withdrawal Charge, withdrawals will be allocated first to investment income, if
any (which may generally be withdrawn free of Withdrawal Charge), and then to
Purchase Payments on a first-in, first-out basis so that all withdrawals are
allocated to Purchase Payments to which the lowest (if any) Withdrawal Charge
applies.
Purchase Payments that are no longer subject to the Withdrawal Charge (and
not previously withdrawn), plus earnings in a Contract, may be withdrawn free of
Withdrawal Charges at any time.
In addition, for the first withdrawal during a Contract Year after the
first Contract Year, no Withdrawal Charge is applied to that part of the
withdrawal which does not exceed the greater of (a) earnings in the Contract or
(b) the Free Corridor. The Free Corridor is equal to 10% of Purchase Payments
made more than one year prior to the date of withdrawal that remain subject to
the Withdrawal Charge and that have not previously been withdrawn. The portion
of a free withdrawal which exceeds the sum of earnings in the Contract and
premiums which are both no longer subject to a Withdrawal Charge and not yet
withdrawn, is assumed to be a withdrawal against future earnings. Although
amounts withdrawn free of a Withdrawal Charge reduce principal in a Contract,
they do not reduce Purchase Payments for purposes of calculating the Withdrawal
Charge. As a result, an Owner will not receive the benefit of a free withdrawal
in a full surrender.
If the withdrawal request does not specify from which Portfolio(s) or
Guarantee Amount(s) the withdrawal is to be made, the request will be processed
by reducing the Contract Values in each category in proportion to their
allocations. Therefore, FAILURE TO SPECIFY AN ALLOCATION MAY RESULT IN THE
IMPOSITION OF A MARKET VALUE ADJUSTMENT IN CASES WHERE AMOUNTS ARE ALLOCATED TO
THE FIXED ACCOUNT.
For examples of how the Withdrawal Charge is applied, see Appendix A.
The Company will waive the Withdrawal Charge on any withdrawal necessary to
satisfy the minimum distribution requirements of the Code or upon payment of a
Death Benefit. Where legally permitted, the Withdrawal Charge may be eliminated
when a Contract is issued to an officer, director or employee of the Company or
its affiliates or to a trustee of one of the Underlying Funds.
The amounts obtained from the Withdrawal Charge will be used to pay sales
commissions and other promotional or distribution expenses associated with the
marketing of the Contracts. To the extent that the Withdrawal Charge is
insufficient to cover all sales commissions and other promotional or
distribution expenses, the Company may use any of its corporate assets,
including potential profit
23
<PAGE> 24
which may arise from the Mortality and Expense Risk Charge and the Distribution
Expense Charge, to make up any difference.
DISTRIBUTION EXPENSE CHARGE
The Company deducts a Distribution Expense Charge from each Portfolio
during each Valuation Period which is equal, on an annual basis, to 0.15% of the
net asset value of the Portfolio. This charge is designed to compensate the
Company for assuming the risk that the cost of distributing the Contracts will
exceed the revenues from the Withdrawal Charge (a contingent deferred sales
charge). The Commission considers the Distribution Expense Charge to constitute
a sales charge for purposes of the Investment Company Act of 1940. In no event
will this charge be increased. Moreover, the sum of all Withdrawal Charges
described above and the Distribution Expense Charges assessed will at no time
exceed 9% of all Purchase Payments previously made. The Distribution Expense
Charge is assessed during both the Accumulation Period and the Annuity Period;
however, it is not applied to Contract Values allocated to the Fixed Account.
DEDUCTION FOR SEPARATE ACCOUNT INCOME TAXES
While the Company is not currently maintaining a provision for taxes, the
Company has reserved the right to establish such a provision for taxes in the
future if it determines, in its sole discretion, that it will incur a tax as a
result of the operation of the Separate Account. The Company will deduct for any
taxes incurred by it as a result of the operation of the Separate Account
whether or not there was a provision for taxes and whether or not it was
sufficient. (See "Taxes".)
OTHER EXPENSES
The charges and expenses applicable to the various Underlying Funds are
borne indirectly by Owners having Contract Values allocated to the Portfolios
that invest in the respective Underlying Funds. For a summary of current
estimates of those charges and expenses, see "Underlying Fund Expenses". For
more detailed information about those charges and expenses, please refer to the
prospectus for either Anchor Trust or SunAmerica Trust, as appropriate.
REDUCTION OF CHARGES FOR SALES TO CERTAIN GROUPS
The Company may reduce the sales and administrative charges on Contracts
sold to certain groups of individuals, or to a trustee, employer or other entity
representing a group, where it is expected that such sales will result in
savings of sales or administrative expenses. The Company determines the
eligibility of groups for such reduced charges, and the amount of such
reductions for particular groups, by considering the following factors: (1) the
size of the group; (2) the total amount of Purchase Payments expected to be
received from the group; (3) the nature of the group for which the Contracts are
purchased, and the persistency expected in that group; (4) the purpose for which
the Contracts are purchased and whether that purpose makes it likely that
expenses will be reduced; and (5) any other circumstances which the Company
believes to be relevant to determining whether reduced sales or administrative
expenses may be expected. None of the reductions in charges for group sales is
contractually guaranteed. Such reductions may be withdrawn or modified by the
Company on a uniform basis. The Company's reductions in charges for group sales
will not be unfairly discriminatory to the interests of any Owners.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE CONTRACTS
- --------------------------------------------------------------------------------
SUMMARY
The Contracts provide for the accumulation of Contract Values during the
Accumulation Period. (See "Purchases, Withdrawals and Contract Value".) Upon
Annuitization, benefits are payable under
24
<PAGE> 25
the Contracts in the form of an annuity, either for the life of the Annuitant or
for a fixed number of years. (See "Annuity Period -- Annuity Options".)
OWNER
The Owner is the person normally entitled to exercise all rights of
ownership under the Contracts. The Owner is also the person entitled to receive
benefits under the Contract, although the Owner may, subject to limitations in
the case of Qualified Plans, designate an alternative payee.
ANNUITANT
The Annuitant is the person on whose life annuity payments under a Contract
depend. The Owner may change the designated Annuitant at any time prior to the
Annuity Date. In the case of a Contract issued in connection with a plan
qualified under Section 403(b) or 408 of the Code, the Owner is the Annuitant.
The Owner may also designate a second person on whose life, together with that
of the Annuitant, annuity payments depend. In the case of Qualified Plans, the
designated second person is generally required to be the Owner's spouse if the
Owner is married. In the event an Annuitant dies prior to the Annuity Date, the
Owner must notify the Company and designate a new Annuitant. The Owner must
attest to the Annuitant being alive before the Company will annuitize a
Contract.
MODIFICATION OF THE CONTRACT
Only the Company's President, a Vice President or Secretary may approve a
change or waive any provisions of the Contract. Any change or waiver must be in
writing. No agent has the authority to change or waive the provisions of the
Contract.
The Company reserves the right to change the terms of the Contract as may
be necessary to comply with changes in applicable law.
ASSIGNMENT
Contracts issued pursuant to Nonqualified Plans that are not subject to
Title 1 of the Employee Retirement Income Security Act of 1974 ("ERISA") may be
assigned by the Owner at any time during the lifetime of the Annuitant prior to
the Annuity Date. The Company will not be bound by any assignment until written
notice is received by the Company at its Annuity Service Center. The Company is
not responsible for the validity, or tax or other legal consequences of any
assignment. An assignment will not affect any payments the Company may make or
actions it may take before it receives notice of the assignment.
If the Contract is issued pursuant to a Qualified Plan (or a Nonqualified
Plan that is subject to Title 1 of ERISA), it may not be assigned, pledged or
otherwise transferred except under such conditions as may be allowed under
applicable law.
BECAUSE AN ASSIGNMENT MAY BE A TAXABLE EVENT, CONTRACT OWNERS SHOULD
CONSULT COMPETENT TAX ADVISERS SHOULD THEY WISH TO ASSIGN THEIR CONTRACTS.
DEATH BENEFIT
If the Owner dies during the Accumulation Period, a Death Benefit will be
payable to the Beneficiary upon receipt by the Company of Due Proof of Death of
the Owner. Provided the Beneficiary provides a written election to the Company
within 60 days of the Company's receipt of Due Proof of Death of the Owner, the
Beneficiary may alternatively elect to (i) receive the Death Benefit in a lump
sum payment, (ii) receive the Death Benefit in the form of one of the annuity
options (over the life of the Beneficiary or over a period not extending beyond
the life expectancy of the Beneficiary), with payments commencing within one
year of the Owner's death, (iii) elect to continue the Contract and receive the
entire Contract Value (adjusted for any applicable Withdrawal Charge and Market
Value Adjustment) within 5 years after the Owner's death, or (iv) if the Owner
was the Beneficiary's spouse, elect to continue the Contract in force. If no
option is selected within 60
25
<PAGE> 26
days of the Company's receipt of Due Proof of Death of the Owner, the Company
will pay the Death Benefit in a single lump sum to the Beneficiary.
The Death Benefit is equal to the greater of:
(1) the total dollar amount of Purchase Payments made prior to the
death of the Owner, reduced by any partial withdrawals and/or partial
annuitizations; or
(2) the Contract Value at the end of the Valuation Period during which
Due Proof of Death and an election of the type of payment to the
Beneficiary is received by the Company, at its Annuity Service Center.
(3) In addition to the standard Death Benefit, after the seventh
Contract anniversary the Company will provide an enhanced Death Benefit.
The enhanced Death Benefit is equal to the greater of (1) the Contract
Value on the anniversary of the Contract Date immediately preceding the
date of death, increased by any Purchase Payments and reduced by any
partial withdrawals and partial annuitizations; and (2) the Death Benefit
payable on the anniversary of the Contract Date immediately preceding the
date of death, increased by any Purchase Payments and reduced by any
partial withdrawals and partial annuitizations since that anniversary.
For an example of how the enhanced Death Benefit is computed, see Appendix
B.
BENEFICIARY
The Owner may designate the Beneficiary(ies) to receive any amount payable
on death. The original Beneficiary(ies) will be named in the application. Unless
an irrevocable Beneficiary(ies) designation was previously filed, the Owner may
change the Beneficiary(ies) prior to the Annuity Date by written request
delivered to the Company at its Annuity Service Center or by completing a Change
of Beneficiary Form provided by the Company. Any change will take effect when
recorded by the Company. The Company is not liable for any payment made or
action taken before it records the change.
- --------------------------------------------------------------------------------
PURCHASES, WITHDRAWALS AND CONTRACT VALUE
- --------------------------------------------------------------------------------
MINIMUM PURCHASE PAYMENT
The minimum initial Purchase Payment for Contracts issued pursuant to a
Nonqualified Plan is $5,000 and the maximum is $500,000. Minimum subsequent
Purchase Payments may be made in amounts of $500 or more ($20 or more if made in
connection with an Automatic Payment Plan, described below). The minimum initial
Purchase Payment for Contracts issued pursuant to a Qualified Plan is $2,000 and
the maximum is $500,000. Minimum subsequent Purchase Payments may be made in
amounts of $250 or more ($20 or more if made in connection with an Automatic
Payment Plan described below). The Company reserves the right to refuse any
Purchase Payment at any time. Generally, the Company will not issue a Contract
under a Nonqualified Plan to a Owner who is age 80 or older or under a Qualified
Plan to a Owner who is age 70 1/2 or older.
AUTOMATIC PAYMENT PLAN
Owners utilizing automatic bank drafts through the Company's Automatic
Payment Plan may make scheduled subsequent Purchase Payments of $20 or more per
month. An enrollment form for this program is available through the Company's
Annuity Service Center.
AUTOMATIC DOLLAR COST AVERAGING PROGRAM
Owners who wish to purchase units of the Portfolios over a period of time
may be able to do so through the Automatic Dollar Cost Averaging ("DCA")
Program. Under the DCA Program, the Owner may authorize the automatic transfer
of a fixed dollar amount ($100 minimum) of his or her choice at regular
intervals from a source account to one or more of the Portfolios (other than the
26
<PAGE> 27
source account) at the unit values determined on the dates of the transfers.
Currently, all Portfolios and the one year Fixed Account options are available
as source accounts. However the Owner must elect to have the transfers made
exclusively from one source account. The intervals between transfers may be
monthly, quarterly, semiannually or annually, at the option of the Owner. The
theory of dollar cost averaging is that, if purchases are made at fluctuating
prices, this will have the effect of reducing the aggregate average cost per
unit to less than the average of the unit prices on the same purchase dates.
However, participation in the DCA Program does not assure the Owner of a greater
profit from his or her purchases under the DCA Program; nor will it prevent or
necessarily alleviate losses in a declining market.
Another option under the DCA Program is the periodic transfer of a selected
percentage of the value of the source account to one of the Portfolios (other
than the source account). A third option is to transfer the entire Contract
Value in the source account in a stated number of transfers as selected by the
Owner.
An Owner may elect to increase, decrease or change the frequency or amount
of Purchase Payments under the DCA Program. The application and any Purchase
Payments should be sent to the Company at its Annuity Service Center. The
Company reserves the right to modify, suspend and terminate the DCA Program at
any time.
ASSET ALLOCATION REBALANCING PROGRAM
Owners may participate in the Asset Allocation Rebalancing ("AAR") Program
pursuant to which Owners authorize the Company to automatically transfer their
Contract Value on a periodic basis to maintain a particular percentage
allocation among the Portfolios or the one year Fixed Account option as selected
by the Owner. The Contract Value allocated to each Portfolio will grow or
decline at different rates depending on the investment experience of the
Portfolio, and Asset Allocation Rebalancing automatically reallocates the
Contract Value in the Portfolios and the Fixed Account option to the allocation
selected by the Owner. As with dollar cost averaging, one theory behind this
type of reallocation is that it may help an Owner purchase Accumulation Units
low and sell Accumulation Units high. However, participation in AAR does not
assure the Owner of a greater profit from his or her purchases under the
program; nor will it prevent or necessarily alleviate losses in a declining
market.
An Owner may select that rebalancing occur on a calendar quarter,
semiannual or annual basis and currently all Portfolios and the one year Fixed
Account option are available investment options under AAR. Contract Value
reallocation will occur on the last business day before the selected period
ends. If an Owner elects to participate in AAR, the entire Contract Value must
be included in the program, except for allocations to the 3, 5, 7 and 10 year
Fixed Account options. Amounts transferred under AAR are not counted against the
15 free transfers per Contract Year or subject to any transfer charge or Market
Value Adjustment. Owners may participate in AAR by completing an Asset
Allocation Rebalancing Form or by calling the Company at its Annuity Service
Center. On the application or form, as appropriate, the Owner must select the
Portfolios or one year Fixed Account option, the percentage of Contract Value to
be allocated to each under the program and the frequency of rebalancing. Owners
may modify their allocations or terminate participation in the program by
completing an Asset Allocation Rebalancing Form and indicating the appropriate
instructions. The Company reserves the right to modify, suspend or terminate AAR
at any time.
PRINCIPAL ADVANTAGE PROGRAM
Owners may participate in the Principal Advantage Program. Under the
Principal Advantage Program, the Owner's Purchase Payment is divided between one
or more of the Fixed Account options and one or more of the Portfolios. While
the Owner selects the Fixed Account option(s) and the Portfolio(s), the
Principal Advantage Program determines the portion of Purchase Payments
allocated to each. When determined in accordance with the Principal Advantage
Program, the portion allocated to the Fixed Account option(s) will be guaranteed
by the Company to grow to equal the full
27
<PAGE> 28
amount of the Purchase Payment over an established period of time. The remaining
portion of Purchase Payment is then invested in the Portfolios, where it has the
potential to achieve greater growth.
An Owner may elect to participate in the Principal Advantage Program (1) at
the time of initial purchase, by completing the instructions on the Contract
application and requesting it in the "Special Instructions" section of the
application or (2) at the time of a subsequent purchase or by reallocation of
the existing Contract Value, by contacting the Company or the financial
representative from whom this prospectus was obtained. The Company reserves the
right to modify, suspend or terminate the Principal Advantage Program at any
time.
ALLOCATION OF PURCHASE PAYMENTS
Purchase Payments are allocated to the Fixed Account and/or the
Portfolio(s) selected by the Owner. Owners making initial Purchase Payments
should specify their allocations on the application for a Contract. If the
application is in good order, the Company will apply the initial Purchase
Payment to the Fixed Account and/or the Portfolio(s), as selected, and credit
the Contract with Accumulation Units within two business days of receipt at the
Company's address for correspondence accompanied by payments. The number of
Accumulation Units in a Portfolio attributable to a Purchase Payment is
determined by dividing that portion of the Purchase Payment which is allocated
to the Portfolio by that Portfolio's Accumulation Unit value as of the end of
the Valuation Period when the allocation occurs.
IF THE APPLICATION DOES NOT SPECIFY AN ALLOCATION, THE APPLICATION IS NOT
IN GOOD ORDER. If the application for a Contract is not in good order for this
or any other reason, the Company will attempt to rectify it within five business
days of its receipt at the Company's address for correspondence accompanied by
payments. The Company will credit the initial Purchase Payment within two
business days after the application has been rectified. Unless the prospective
Owner consents otherwise, the application and the initial Purchase Payment will
be returned if the application cannot be put in good order within five business
days of such receipt.
Just like Owners making initial Purchase Payments, Owners making subsequent
Purchase Payments should specify how they want their payments allocated.
OTHERWISE, THE COMPANY WILL AUTOMATICALLY PROCESS THE PURCHASE PAYMENT BASED ON
THE PREVIOUS ALLOCATION.
TRANSFER DURING ACCUMULATION PERIOD
During the Accumulation Period, the Owner, or his or her designated agent,
may transfer Contract Values among Portfolios and/or the Fixed Account, by
written request or by telephone authorization pursuant to a duly executed
Telephone Transfer Authorization Form delivered to the Company at its Annuity
Service Center, if applicable law permits. The Company has in place procedures
which are designed to provide reasonable assurance that telephone authorizations
are genuine, including tape recording of telephone communications and requesting
identifying information. Accordingly, the Company and its affiliates disclaim
all liability for any claim, loss or expense resulting from any alleged error or
mistake in connection with a telephone transfer which was not properly
authorized by the Owner. However, if the Company fails to employ reasonable
procedures to ensure that all telephone transfers are properly authorized, the
Company may be held liable for such losses. Telephone calls authorizing
transfers must be completed by 4:00 p.m. Eastern time on a Valuation Date in
order to be effected at the price determined on such date. Transfer
authorizations, whether written or telephone, which are received after 4:00 p.m.
Eastern time will be processed as of the next Valuation Date. The Company
reserves the right to modify or discontinue at any time and without notice the
use of telephone transfers and acceptance of transfer instructions from someone
other than the Owner.
A transfer fee may be assessed (See "Contract Charges -- Administrative
Charges -- Transfer Fee".)
28
<PAGE> 29
This transfer privilege may be suspended, modified or terminated at any
time without notice.
The minimum partial transfer amount is $100. Also, no partial transfer may
be made if the value of the Owner's interest in the Portfolio from which a
transfer is being made (or the remaining Guarantee Amount, where applicable)
would be less than $100 after the transfer. These dollar amounts are subject to
change at the Company's option. The Company may waive the minimum partial
transfer amount in connection with preauthorized automatic transfer programs.
Both prior to and after the Annuity Date, Contract Values may be
transferred from the Separate Account to the Fixed Account. Any amounts
allocated or transferred to the Fixed Account may, however, be transferred from
the Fixed Account to the Separate Account only prior to the Annuity Date.
Transfers may be made within the Fixed Account prior to the expiration date
of one or more Guarantee Periods, by electing to have the respective Guarantee
Amount(s) applied to newly established Guarantee Periods. Such transfers are
counted against the 15 transfer allowance on free transfers. In addition, such
transfers are generally subject to a Market Value Adjustment.
SEPARATE ACCOUNT ACCUMULATION UNIT VALUE
Accumulation Unit value is determined Monday through Friday on each day
that the New York Stock Exchange is open for business.
A separate Accumulation Unit value is determined for each Portfolio. If the
Company elects or is required to assess a charge for taxes, a separate
Accumulation Unit value may be calculated for Contracts issued in connection
with Nonqualified and Qualified Plans, respectively, within each account.
The Accumulation Unit value for each Portfolio will vary with the price of
a share in the Underlying Fund and in accordance with the Mortality and Expense
Risk Charge, Distribution Expense Charge, and any provision for taxes.
Assessments of Withdrawal Charges, transfer fees and Contract Administration
Charges are made separately for each Certificate. They are effected by
redemption of Accumulation Units and do not affect Accumulation Unit value.
The Accumulation Unit value of a Portfolio for any Valuation Period is
calculated by subtracting (2) from (1) and dividing the result by (3) where:
(1) is the total value at the end of the Valuation Period of the
assets attributable to the Accumulation Units of the Portfolio minus
liabilities;
(2) is the cumulative unpaid charge for the assumption of mortality
and expense risks and for the distribution expense; and
(3) is the number of Accumulation Units outstanding at the end of the
Valuation Period.
FIXED ACCOUNT ACCUMULATION VALUE
The accumulation value of the fixed portion of a Contract, if any, at any
Valuation Date is equal to the sum of the values of all Guarantee Amounts
credited to the Contract up to and including that date. Each Guarantee Amount
reflects interest accumulated to the Valuation Date at the applicable Guarantee
Rate, compounded annually.
DISTRIBUTION OF CONTRACTS
Contracts are sold by registered representatives of broker-dealers who are
licensed insurance agents of the Company, either individually or through an
incorporated insurance agency. Commissions on initial Purchase Payments paid to
registered representatives may vary, but are not anticipated to exceed 6.00% of
any Purchase Payment (including any promotional sales incentives). All
commissions are paid by the Company.
29
<PAGE> 30
SunAmerica Capital Services, Inc., located at 733 Third Avenue, 4th Floor,
New York, New York, 10017, serves as distributor of the Contract. SunAmerica
Capital Services, Inc., an indirect wholly-owned subsidiary of SunAmerica Inc.,
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.
WITHDRAWALS (REDEMPTIONS)
Except as explained below, an Owner may redeem a Contract for all or a
portion of its Contract Value during the Accumulation Period. Withdrawal Charges
may be applicable, however, which would reduce the Contract Value upon
redemption. A Market Value Adjustment may also be applied, in the case of
redemptions from the Fixed Account, which would also affect Contract Value. (See
"Contract Charges -- Sales Charges -- Withdrawal Charge" and "Fixed Account
Options -- Market Value Adjustment" for additional information.)
Withdrawals and distributions from Contracts issued in connection with
certain Qualified Plans may be subject to a mandatory 20% withholding
requirement. (See "Taxes -- Withholding Tax on Distributions".)
Withdrawals of amounts attributable to contributions made pursuant to a
salary reduction agreement (in accordance with Section 403(b)(11) of the Code)
are limited to circumstances only: when the Owner attains age 59 1/2, separates
from service, dies, becomes disabled (within the meaning of Section 72(m)(7) of
the Code), or in the case of hardship. Withdrawals for hardship are restricted
to the portion of the Contract Value which represents contributions made by the
Owner and does not include any investment results. These limitations on
withdrawals apply to: (1) salary reduction contributions made after December 31,
1988; (2) income attributable to such contributions; and (3) income attributable
to amounts held as of December 31, 1988. The limitations on withdrawals do not
affect rollovers or exchanges between certain Qualified Plans. Tax penalties may
also apply. While the foregoing limitations only apply to certain Contracts
issued in connection with Section 403(b) Qualified Plans, all Owners should seek
competent tax advice regarding any withdrawals or distributions. (See "Taxes".)
Except in connection with a Systematic Withdrawal Program, described below,
the minimum partial withdrawal amount is $1,000, or, if less, the Owner's entire
interest in the Portfolio from which a withdrawal is requested (or the Fixed
Account, where applicable). The Owner's interest in the Portfolio from which the
withdrawal is requested (or the remaining Guarantee Amount) must be at least
$100 after the withdrawal is completed if anything is left in that Portfolio (or
Fixed Account allocation).
A written withdrawal request or Systematic Withdrawal Program enrollment
form, as the case may be, must be sent to the Company at its Annuity Service
Center. The required program form will not be in good order unless it includes
the Owner's Tax I.D. Number (e.g., Social Security Number) and provides
instructions regarding withholding of income taxes. The Company provides the
required forms.
If the request is for total withdrawal, the Contract, or a Lost Contract
Affidavit (which may be obtained by calling the Company at its Annuity Service
Center), must be submitted as well. The Withdrawal Value is determined on the
basis of the Contract Values next computed following receipt of a request in
proper order. The Withdrawal Value will normally be paid within seven days after
the day a proper request is received by the Company. However, the Company may
suspend the right of withdrawal from the Separate Account or delay payment for
such withdrawal more than seven days: (1) during any period when the New York
Stock Exchange ("NYSE") is closed (other than customary weekend and holiday
closings); (2) when trading on the NYSE is restricted or an emergency exists as
determined by the Commission so that disposal of the Separate Account's
investments or determination of Accumulation Unit value is not reasonably
practicable; or (3) for such other periods as the Commission, by order, may
permit for protection of Owners.
30
<PAGE> 31
SYSTEMATIC WITHDRAWAL PROGRAM
Certain Owners of Nonqualified Plan Contracts and Contracts issued in
connection with IRAs may choose to withdraw amounts which in the aggregate add
up to a maximum of 10% of their Purchase Payments annually pursuant to a
Systematic Withdrawal Program without charge. Withdrawals are taxable and a 10%
federal tax penalty may apply to withdrawals before age 59 1/2. In addition,
withdrawals from the Fixed Account prior to the end of their respective
guarantee periods are generally subject to a Market Value Adjustment. (See
"Fixed Account Option -- Market Value Adjustment".) Systematic withdrawals will
not be limited to 10% of Purchase Payments once the Withdrawal Charge is no
longer applicable. Owners must complete an enrollment form which describes the
program and send it to the Company at its Annuity Service Center. Participation
in the Systematic Withdrawal Program may be elected at the time the Contract is
issued or on any date, prior to the Annuity Date. Depending on fluctuations in
the net asset value of the Portfolios, systematic withdrawals may reduce or even
exhaust Contract Value. The minimum systematic withdrawal amount is $250 per
withdrawal. The Company reserves the right to modify, suspend or terminate the
Systematic Withdrawal Program at any time.
ERISA PLANS
Spousal consent may be required when a married Owner seeks a distribution
from a Contract that has been issued in connection with a Qualified Plan (or a
Nonqualified Plan that is subject to Title 1 of ERISA). Owners should obtain
competent advice.
DEFERMENT OF FIXED ACCOUNT WITHDRAWAL PAYMENTS
In the case of withdrawals from the Fixed Account, the Company may defer
making payment for a period of up to six months (or the period permitted by
applicable state insurance law, if less) from the date the Company receives
notice of such withdrawal request. Only under highly unusual circumstances will
the Company defer a withdrawal payment from the Fixed Account for more than 7
days, and if the Company defers payment for more than 7 days, it will pay
interest of at least 3% per annum on the amount deferred. While all the
circumstances under which the Company could defer payment upon withdrawal may
not be foreseeable at this time, such circumstances could include, for example,
a time of unusually high surrender rate among Owners, accompanied by a radical
shift in interest rates. If the Company intends to withhold payment for more
than 7 days, it will notify affected Owners in writing.
MINIMUM CONTRACT VALUE
If the Contract Value is less than $500 and no Purchase Payments have been
made during the previous three full calendar years, the Company reserves the
right, after 60 days written notice to the Owner, to terminate the Contract and
distribute its Withdrawal Value to the Owner. This privilege will be exercised
only if the Contract Value has been reduced to less than $500 as a result of
withdrawals, and state law permits. In no instance shall such termination occur
if the value has fallen below $500 due to either decline in Accumulation Unit
value or the imposition of fees and charges.
- --------------------------------------------------------------------------------
ANNUITY PERIOD
- --------------------------------------------------------------------------------
ANNUITY DATE
The Owner selects an Annuity Date (the date on which annuity payments are
to begin) at the time of application. The Annuity Date must always be the first
day of a calendar month and must be at least two years after the Contract Date,
but in any event will be no later than the Latest Annuity Date. Annuity payments
will begin no later than the Latest Annuity Date. If no Annuity Date is
selected, the Annuity Date will be the Latest Annuity Date. The Owner may change
the Annuity Date at any time
31
<PAGE> 32
at least seven days prior to the Annuity Date then indicated on the Company's
records by written notice to the Company at its Annuity Service Center.
DEFERMENT OF PAYMENTS
The Company may defer making Fixed Annuity payments for a period of up to
six months (or the period permitted by applicable state insurance law, if less).
Interest, subject to state law requirements, will be credited during the
deferral period. For a discussion of the circumstances under which the Company
could defer these payments, please refer to "Purchases, Withdrawals and Contract
Value -- Deferment of Fixed Account Withdrawal Payments".
PAYMENTS TO OWNER
The Company will make annuity payments to the Owner, unless the Owner
designates an alternate payee. Such designation must be made in writing to the
Company's Annuity Service Center and must be received more than 30 days before
the Annuity Date.
ALLOCATION OF ANNUITY PAYMENTS
If all of the Contract Value on the Annuity Date is allocated to the Fixed
Account, the Annuity will be paid as a Fixed Annuity. If all of the Contract
Value on that date is allocated to the Separate Account, the Annuity will be
paid as a Variable Annuity. If the Contract Value on that date is allocated to
both the Fixed Account and the Separate Account, the Annuity will be paid as a
combination of a Fixed Annuity and a Variable Annuity to reflect the allocation
between the Portfolios and the Fixed Account. Variable Annuity payments will
reflect the investment performance of the Portfolios. The Owner(s) may, by
written notice to the Company, convert Variable Annuity payments to Fixed
Annuity payments. However, Fixed Annuity payments may not be converted to
Variable Annuity payments.
ANNUITY OPTIONS
The Owner, or any Beneficiary who is so entitled, may elect to receive a
lump sum at the end of the Accumulation Period. However, a lump sum distribution
may be deemed to be a withdrawal, and at least a portion of it may be subject to
federal income tax. (See "Taxes -- Tax Treatment of Withdrawals".)
Alternatively, any of the annuity options listed below may be elected. The Owner
may elect an annuity option or change an annuity option at any time prior to the
Annuity Date.
If no other annuity option is elected, monthly annuity payments will be
made in accordance with annuity option 4 below, a life annuity with a 120-month
period certain (annuity option 3 in the case where payments are to be made for
the joint lives of the Annuitant and a designated second person and for the life
of the survivor). Annuity payments will be made in monthly, quarterly,
semiannual or annual installments as selected by the Owner. However, if the
amount available to apply under an annuity option is less than $5,000, the
Company has the right to pay the annuity in one lump sum. In addition, if the
first payment provided would be less than $50, the Company shall have the right
to require the frequency of payments be at quarterly, semiannual or annual
intervals so as to result in an initial payment of at least $50.
NO WITHDRAWALS OF CONTRACT VALUE ARE PERMITTED DURING THE ANNUITY PERIOD
FOR ANY ANNUITY OPTION IN WHICH PAYMENTS ARE BASED ON A PERSON'S LIFE.
The following annuity options are generally available under the Contract.
Each is available in the form of either a Fixed Annuity or a Variable Annuity
(or a combination of both Fixed and Variable Annuity). However, there may be
restrictions in the retirement plan pursuant to which a Contract has been
purchased.
32
<PAGE> 33
OPTION 1 -- LIFE INCOME
An annuity payable monthly during the lifetime of the Annuitant. Under this
option, no further payments are payable after the death of the Annuitant and
there is no provision for a death benefit payable to the Beneficiary. Therefore,
it is possible under option 1 for the payee to receive only one monthly annuity
payment under the Contract.
OPTION 2 -- JOINT AND SURVIVOR ANNUITY
An annuity payable monthly while both the Annuitant and a designated second
person are living. Upon the death of either person, the monthly income payable
will continue during the lifetime of the survivor at either the full amount
previously payable or as a percentage (either one-half or two-thirds) of the
full amount, as chosen by the Owner at the time of election of this option.
Annuity payments terminate automatically and immediately upon the death of
the surviving person without regard to the number or total amount of payments
received.
There is no minimum number of guaranteed payments and it is possible to
have only one annuity payment if both the Annuitant and the designated second
person die before the due date of the second payment.
OPTION 3 -- JOINT AND SURVIVOR LIFE ANNUITY --
120 MONTHLY PAYMENTS GUARANTEED
This option is similar to option 2, above, but with the additional
guarantee that payments will be made for not fewer than 120 monthly periods. If
the surviving Annuitant dies before all such payments have been made, the
balance of the guaranteed number of payments will be made to the Beneficiary.
OPTION 4 -- LIFE ANNUITY WITH 120 OR 240 MONTHLY
PAYMENTS GUARANTEED
An annuity payable monthly during the lifetime of the Annuitant, with the
guarantee that if, at the death of the Annuitant, payments have been made for
fewer than the guaranteed 120 or 240 monthly periods, as elected by the Owner,
the balance of the guaranteed number of payments will be made to the
Beneficiary.
OPTION 5 -- INCOME FOR A SPECIFIED PERIOD
Under this option, a payee can elect an annuity payable monthly for any
period of years from 3 to 30. This election must be made for full 12 month
periods. In the event the payee dies before the specified number of payments has
been made, the Beneficiary may elect to continue receiving the scheduled
payments or may alternatively elect to receive the discounted present value of
any remaining guaranteed payments as a lump sum.
The value of an Annuity Unit, regardless of the option chosen, takes into
account the Mortality and Expense Risk Charge. (See "Contract
Charges -- Mortality and Expense Risk Charge".) Since option 5, Income for a
Specified Period, does not contain an element of mortality risk, the payee is
not getting the benefit of the mortality component of the Mortality and Expense
Risk Charge if option 5 is selected on a variable basis.
OTHER OPTIONS
At the sole discretion of the Company, other annuity options may be made
available. However, to the extent that Withdrawal Charges would otherwise apply
to a withdrawal or termination, the identical Withdrawal Charge may apply with
respect to any additional options.
With respect to Contracts issued under Sections 401, 403(b) or 408 of the
Internal Revenue Code, any payments will be made only to the Owner and/or the
Owner's spouse.
33
<PAGE> 34
TRANSFER DURING ANNUITY PERIOD
During the Annuity Period, the Owner may transfer the Contract Value to the
Fixed Account and/or among Portfolios. Such transfers are subject to the same
limitations and conditions as are prescribed for transfers during the
Accumulation Period except that, in addition, no transfers may be made from the
Fixed Account to the Separate Account during the Annuity Period.
Transfers from the Separate Account to the Fixed Account are effected by
crediting the Fixed Account with the actuarial present value of future annuity
payments to be made, assuming that all such payments would be equal to a
subsequent Variable Annuity payment as computed on the effective date of the
transfer, in the manner described below under "Annuity Payments."
DEATH BENEFIT DURING ANNUITY PERIOD
If the Annuitant dies after the Annuity Date while the Contract is in
force, the death proceeds, if any, will depend upon the annuity option in effect
at the time of the Annuitant's death. If the Annuitant dies after the Annuity
Date and before the entire interest in the Contract has been distributed, the
remaining interest, if any, as provided for in the option elected, will be
distributed at least as rapidly as under the method of distribution in effect at
the Annuitant's death.
ANNUITY PAYMENTS
INITIAL MONTHLY ANNUITY PAYMENT
The initial annuity payment is determined by taking the Contract Value,
less any Market Value Adjustment that may apply in the case of a premature
annuitization of certain Guarantee Amounts, and then applying it to the annuity
table specified in the Contract (or, if more favorable to the payee, the annuity
tables in effect as of the Annuity Date for similar immediate annuity contracts
issued by the Company). Those tables are based on a set amount per $1,000 of
proceeds applied. The appropriate rate must be determined by the sex (except
where, as in the case of certain Qualified Plans and other employer-sponsored
retirement plans, such classification is not permitted) and age of the Annuitant
and designated second person, if any.
The dollars applied are then divided by 1,000 and the result multiplied by
the appropriate annuity factor appearing in the table to compute the amount of
the first monthly annuity payment. In the case of a Variable Annuity, that
amount is divided by the value of an Annuity Unit as of the Annuity Date to
establish the number of Annuity Units representing each Variable Annuity
payment. The number of Annuity Units determined for the first Variable Annuity
payment remains constant for the second and subsequent monthly Variable Annuity
payments, assuming that no reallocation of Contract Values is made.
SUBSEQUENT MONTHLY PAYMENTS
For a Fixed Annuity, the amount of the second and each subsequent monthly
annuity payment is the same as that determined above for the first monthly
payment.
The amount of the second and each subsequent monthly Variable Annuity
payment is determined by multiplying the number of Annuity Units, as determined
in connection with the determination of the initial monthly payment, above, by
the value of an Annuity Unit, as of the Valuation Period next preceding the date
on which each annuity payment is due.
34
<PAGE> 35
- --------------------------------------------------------------------------------
ADMINISTRATION
- --------------------------------------------------------------------------------
The Company has primary responsibility for all administration of the
Contracts and the Separate Account. The mailing address of the Company's Annuity
Service Center is P.O. Box 54299, Los Angeles, California 90054-0299, and its
telephone number is (800) 99-NYSUN.
The administrative services provided include, but are not limited to:
issuance of the Contracts; maintenance of Owner records; Owner services;
calculation of unit values; and preparation of Owner reports.
Contract statements and transaction confirmations are mailed to Owners at
least quarterly. Owners should read their statements and confirmations carefully
and verify their accuracy. Questions about periodic statements should be
communicated to the Company promptly. The Company will investigate all
complaints and make any necessary adjustments retroactively, provided that it
has received notice of a potential error within 30 days after the date of the
questioned statement. If the Company has not received notice of a potential
error within this time, any adjustment shall be made as of the date that the
Annuity Service Center receives notice of the potential error.
The Company will also provide Owners with such additional periodic and
other reports, information and prospectuses as may be required by federal
securities laws.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING
OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE
COMPANY CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE
MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS.
GENERAL
Section 72 of the Internal Revenue Code of 1986, as amended (the "Code")
governs taxation of annuities in general. 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 annuity payments under the annuity option
elected. For a lump sum payment received as a total surrender (total
redemption), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For a payment received as a withdrawal (partial
redemption), federal tax liability is determined on a last-in, first-out basis,
meaning taxable income is withdrawn before the cost basis of the Contract is
withdrawn. For Contracts issued in connection with Nonqualified Plans, the cost
basis is generally the Purchase Payments, while for Contracts issued in
connection with Qualified Plans there may be no cost basis. The taxable portion
of the lump sum payment is taxed at ordinary income tax rates. Tax penalties may
also apply.
For annuity payments, the taxable portion is determined by a formula which
establishes the ratio that the cost basis of the Contract bears to the total
value of annuity payments for the term of the annuity Contract. The taxable
portion is taxed at ordinary income tax rates. 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.
35
<PAGE> 36
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity from
the Company and its operations form a part of the Company.
WITHHOLDING TAX ON DISTRIBUTIONS
The Code generally requires the Company (or, in some cases, a plan
administrator) to withhold tax on the taxable portion of any distribution or
withdrawal from a Contract. For "eligible rollover distributions" from Contracts
issued under certain types of Qualified Plans, 20% of the distribution must be
withheld, unless the payee elects to have the distribution "rolled over" to
another eligible plan in a direct "trustee to trustee" transfer. This
requirement is mandatory and cannot be waived by the 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) annuity payments for the life (or life
expectancy) of the employee, or joint lives (or joint life expectancies) of the
employee and his or her designated beneficiary, or for a specified period of ten
years or more; and (2) distributions required to be made under the Code).
Failure to "roll over" the entire amount of an eligible rollover distribution
(including an amount equal to the 20% portion of the distribution that was
withheld) could have adverse tax consequences, including the imposition of a
penalty tax on premature withdrawals, described later in this section.
Withdrawals or distributions from a Contract other than eligible rollover
distributions are also subject to withholding on the estimated taxable portion
of the distribution, but the 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
payments under the Contract.
The Company expects that each of the Underlying Funds will be managed by
its respective investment adviser in such a manner as to comply with these
diversification requirements.
MULTIPLE CONTRACTS
Multiple annuity contracts which are issued within a calendar year to the
same contract owner by one company 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.
36
<PAGE> 37
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 the 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 or Certificate issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available and described in
this prospectus. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals -- Qualified Plans".)
(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 distributions, withdrawals and surrenders.
(B) TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, educational 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.
(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
37
<PAGE> 38
Code, including the requirement that certain informational disclosure be given
to persons desiring to establish an IRA.
(D) CORPORATE PENSION AND PROFIT-SHARING PLANS
Section 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 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 interest; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders.
(E) 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.
TAX TREATMENT OF WITHDRAWALS
QUALIFIED PLANS
Section 72(t) of the Code imposes a 10% penalty tax on the taxable portion
of any early distribution from qualified retirement plans, including contracts
issued and qualified under Code Sections 401 (H.R. 10 and Corporate Pension and
Profit Sharing Plans), 403(b) (Tax-Sheltered Annuities) and 408(b) (IRAs).
The tax penalty will not apply to the following distributions: (1) if
distribution is made on or after the date on which the Owner or Annuitant (as
applicable) reaches age 59 1/2; (2) distributions following the death or
disability of the Owner or Annuitant (as applicable) (for this purpose
"disability" is defined in Section 72(m)(7) of the Code); (3) distributions that
are part of substantially equal periodic payments made not less frequently than
annually for the life (or life expectancy) of the Owner or Annuitant (as
applicable) or the joint lives (or joint life expectancies) of such Owner or
Annuitant (as applicable) and his or her designated Beneficiary; (4)
distributions to an Owner or Annuitant (as applicable) who has separated from
service after he or she has attained age 55; (5) distributions made to the Owner
or Annuitant (as applicable) to the extent such distributions do not exceed the
amount allowable as a deduction under Code Section 213 to the Owner or Annuitant
(as applicable) for amounts paid during the taxable year for medical care; and
(6) distributions made to an alternate payee pursuant to a qualified domestic
relations order.
The exceptions stated in items (4), (5) and (6) above do not apply in the
case of an IRA.
Limitations imposed by the Code on withdrawals from tax-sheltered annuities
are described above under "Purchases, Withdrawals and Contract
Value -- Withdrawals (Redemptions)".
The taxable portion of a withdrawal or distribution from Contracts issued
under certain types of plans may, under some circumstances, be "rolled over"
into another eligible plan so as to continue to defer income tax on the taxable
portion. Effective January 1, 1993, such treatment is available for any
"eligible rollover distribution" made by certain types of plans (as described
above under "Taxes -- Withholding Tax on Distributions") that is transferred
within 60 days of receipt into a plan qualified under section 401(a) or 403(a)
of the Code, a tax-sheltered annuity, an IRA, or an individual
38
<PAGE> 39
retirement account described in section 408(a) of the Code. Plans making such
eligible rollover distributions are also required, with some exceptions
specified in the Code, to provide for a direct "trustee to trustee" transfer of
the distribution to the transferee plan designated by the recipient.
Amounts received from IRAs may also be rolled over into other IRAs,
individual retirement accounts or certain other plans, subject to limitations
set forth in the Code.
NONQUALIFIED PLANS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate Purchase
Payments made, any amount withdrawn not in form of an annuity payment will be
treated as coming first from the earnings and then, only after the income
portion is exhausted, as coming from the principal. Withdrawn earnings are
includible in a taxpayer's gross income. Section 72 further provides that a 10%
penalty will apply to the income portion of any premature distribution. The
penalty is not imposed on amounts received: (1) after the taxpayer reaches
59 1/2; (2) upon the death of the Owner or Annuitant (as applicable); (3) if the
taxpayer is totally disabled; (4) in a series of substantially equal periodic
payments made for the life of the taxpayer or for the joint lives of the
taxpayer and his or her Beneficiary; (5) under an immediate annuity; or (6)
which are allocable to purchase payments made prior to August 14, 1982.
The above information applies to Contracts issued pursuant to Section 457
of the Code, but does not apply to other Qualified Plan Contracts. Separate tax
withdrawal penalties and restrictions apply to Qualified Plan Contracts.
39
<PAGE> 40
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE COMPANY
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
The following selected financial data of First SunAmerica Life Insurance
Company should be read in conjunction with the financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations beginning on pages 52 and 41, respectively.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net investment income....................... $ 2,784 $ 1,892 $ 1,161 $ 2,368 $ 2,155
Net realized investment gains (losses)...... (1,348) 445 1,932 3,489 944
Variable annuity fee income................. 412 382 240 40 --
General and administrative expenses......... (1,088) (1,040) (1,066) (1,224) (973)
Amortization of deferred acquisition
costs..................................... (300) -- (220) (2,356) (538)
Other income and expenses, net.............. 245 58 (342) 561 (582)
-------- -------- -------- -------- -------
Pretax income............................... 705 1,737 1,705 2,878 1,006
Income tax expense.......................... (182) (655) (829) (1,210) (431)
-------- -------- -------- -------- -------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES............... 523 1,082 876 1,668 575
Cumulative effect of change in accounting
for income taxes.......................... -- (725) -- -- --
-------- -------- -------- -------- -------
NET INCOME.................................. $ 523 $ 357 $ 876 $ 1,668 $ 575
======== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments................................. $121,218 $ 78,928 $ 85,130 $111,353 $68,379
Variable annuity assets..................... 32,760 26,390 24,695 8,836 --
Deferred acquisition costs.................. 6,491 5,651 2,540 1,297 2,664
Deferred income taxes....................... -- 886 1,031 835 --
Other assets................................ 2,688 2,282 3,876 1,527 2,166
-------- -------- -------- -------- -------
TOTAL ASSETS................................ $163,157 $114,137 $117,272 $123,848 $73,209
========= ========= ========= ========= ========
Reserves for fixed annuity contracts........ $106,332 $ 66,881 $ 68,228 $ 59,400 $53,058
Variable annuity liabilities................ 32,760 26,390 24,695 8,836 --
Other reserves, payables and accrued
liabilities............................... 2,003 1,051 1,220 34,690 442
Deferred income taxes....................... 244 -- -- -- 455
Shareholder's equity........................ 21,818 19,815 23,129 20,922 19,254
-------- -------- -------- -------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY.................................... $163,157 $114,137 $117,272 $123,848 $73,209
========= ========= ========= ========= ========
</TABLE>
40
<PAGE> 41
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following is management's discussion and analysis of financial
condition and results of operations of First SunAmerica Life Insurance Company
(the "Company") for the three years in the period ended September 30, 1995.
RESULTS OF OPERATIONS
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES
totaled $0.5 million in 1995, compared with $1.1 million in 1994 and $0.9
million in 1993. The cumulative effect of the change in accounting for income
taxes resulting from the 1994 implementation of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," amounted to a
nonrecurring non-cash charge of $0.7 million. Accordingly, net income amounted
to $0.4 million in 1994.
PRETAX INCOME totaled $0.7 million in 1995 and $1.7 million in both 1994
and 1993. The $1.0 million decline in 1995 primarily resulted from net realized
investment losses incurred, partially offset by an increase in net investment
income.
NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, increased to $2.8 million in 1995 from $1.9
million in 1994 and $1.2 million in 1993. These amounts represent net investment
spreads of 2.70% on average invested assets (computed on a daily basis) of
$103.2 million in 1995, 2.24% on average invested assets of $84.5 million in
1994 and 1.40% on average invested assets of $82.7 million in 1993. Net
investment spreads include the effect of income earned on the excess of average
invested assets over average interest-bearing liabilities. The difference
between the Company's yield on average invested assets and the rate paid on
average interest-bearing liabilities was 1.69% in 1995, 1.13% in 1994 and 0.02%
in 1993. Net investment income has increased over the three years due to both
higher levels of average invested assets and an increase in the portfolio yield.
Investment income totaled $7.8 million in 1995, $5.5 million in 1994 and
$5.1 million in 1993. Investment income increased in 1995 primarily as a result
of an increase in investment yield on a higher level of average invested assets.
The modest increase in investment income in 1994 over 1993 primarily resulted
from an increase in overall portfolio yield as the Company reduced its average
level of lower-yielding short-term investments. The yield on average invested
assets increased to 7.59% in 1995 from 6.54% in 1994 and 6.17% in 1993. Over the
last three fiscal years, the Company's quarterly investment yields on average
invested assets have ranged from 5.85% to 7.81%; however, there can be no
assurance that the Company will achieve similar yields in future periods.
The increased investment yield in 1995 reflects the higher interest rates
prevailing during the latter half of 1994 and into fiscal 1995. In addition, the
net cash provided by the Company's operating and financing activities and the
cash flows from redemptions and maturities of securities in the Company's
investment portfolio was invested in higher yielding instruments.
Total interest expense aggregated $5.0 million in 1995, $3.6 million in
1994 and $3.9 million in 1993. The average rate paid on fixed annuity contracts
was 5.90% in 1995, compared with 5.41% in 1994 and 6.15% in 1993. Fixed annuity
contracts averaged $85.5 million in 1995, compared with $67.2 million in 1994
and $64.1 million in 1993. The increase in the average rate paid on fixed
annuities during 1995 primarily resulted from increased average crediting rates
on the Company's new fixed annuity contracts relative to those issued in 1994 to
maintain a generally competitive market rate in a higher interest rate
environment. The decrease in the average rate paid on fixed annuities during
1994 was primarily due to a decline in prevailing interest rates that began
during the latter half of fiscal 1992 and continued into the first half of
fiscal 1994.
41
<PAGE> 42
NET REALIZED INVESTMENT LOSSES totaled $1.3 million in 1995, compared with
net realized investment gains of $0.4 million in 1994 and $1.9 million in 1993,
and represent 1.31%, 0.53% and 2.34%, respectively, of average invested assets.
Net realized investment losses in 1995 include $1.2 million of net losses
realized on $46.3 million of sales of mortgage backed securities ("MBSs") that
were made primarily to maximize total return. Net gains in 1994 and 1993 are
also related to sales of MBSs that were made primarily to maximize total return.
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $0.4 million
in both 1995 and 1994 and $0.2 million in 1993. Variable annuity fees have
increased over the three years principally due to asset growth from the receipt
of variable annuity premiums and, during 1995, from increased market values.
Variable annuity assets averaged $27.8 million during 1995, $26.1 million during
1994 and $16.5 million during 1993. Variable annuity premiums, which exclude
premiums allocated to the fixed accounts of variable annuity products, totaled
$5.9 million in 1995, $5.7 million in 1994 and $14.5 million in 1993. The
decline in premiums from 1993 to 1994 can be attributed, in part, to a
heightened demand for fixed-rate investment options, including the fixed
accounts of variable annuities. The Company has encountered increased
competition in the variable annuity marketplace during 1995 and 1994 and
anticipates that the market will remain highly competitive for the foreseeable
future.
SURRENDER CHARGES on fixed and variable annuities totaled $194,000 in 1995,
compared with $367,000 in 1994 and $44,000 in 1993. Surrender charges generally
are assessed on annuity withdrawals at declining rates during the first five to
seven years of the contract. Withdrawal payments, which include surrenders and
lump-sum annuity benefits, totaled $17.7 million in 1995, $12.9 million in 1994
and $2.9 million in 1993. These payments represent 16.93%, 15.04% and 3.85%,
respectively, of average fixed and variable annuity reserves. Withdrawals
include variable annuity payments from the separate accounts totaling $3.6
million in 1995, $2.4 million in 1994 and $0.4 million in 1993. Both fixed and
variable annuity surrenders increased from the unusually low rates of prior
years to more normal levels during 1994 and 1995, due to anticipated higher
surrenders as the annuity block has matured. Management anticipates that
withdrawal rates will remain relatively stable for the foreseeable future and
the Company's investment portfolio has been structured to provide sufficient
liquidity for anticipated withdrawals.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.1 million in 1995, compared
with $1.0 million in 1994 and $1.1 million in 1993. General and administrative
expenses remain closely controlled through a company-wide cost containment
program and represent approximately 1% of average total assets.
AMORTIZATION OF DEFERRED ACQUISITION COSTS increased during 1995 to $0.3
million primarily due to additional fixed and variable annuity sales and the
subsequent amortization of related deferred commissions and other acquisition
costs. There was no amortization in 1994 and $0.2 million in 1993. The decrease
in amortization of deferred acquisition costs from 1993 to 1994 is primarily due
to the decline in net realized investment gains which are included in gross
profits for purposes of computing amortization.
INCOME TAX EXPENSE totaled $0.2 million in 1995, $0.7 million in 1994 and
$0.8 million in 1993, representing effective tax rates of 26% in 1995, 38% in
1994 and 49% in 1993. The higher tax rate in 1993 reflects the payment of state
income taxes relating to net realized investment gains recorded in 1992. The
lower tax rate in 1995 reflects a prior period state income tax benefit.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDER'S EQUITY increased by $2.0 million to $21.8 million at
September 30, 1995 from $19.8 million at September 30, 1994, primarily as a
result of the $1.5 million reduction of net unrealized losses on debt and equity
securities available for sale charged directly to shareholders equity and net
income of $0.5 million in 1995.
42
<PAGE> 43
TOTAL ASSETS increased by $49.1 million to $163.2 million at September 30,
1995 from $114.1 million at September 30, 1994, principally due to a $42.3
million increase in invested assets and a $6.4 million increase in the separate
accounts for variable annuities.
INVESTED ASSETS at year end totaled $121.2 million in 1995, compared with
$78.9 million in 1994. This increase primarily resulted from sales of fixed
annuity contracts which totaled $51.7 million in 1995, up from $7.8 million in
1994 and $9.1 million in 1993. The increase in fixed annuity premiums during
1995 reflects generally heightened demand for fixed-rate products in 1995
relative to the comparable 1994 periods. This heightened demand may be
attributed, in part, to the increase in prevailing long-term interest rates that
began during the latter half of the 1994 fiscal year and continued into the
first quarter of fiscal 1995.
The Company manages all of its invested assets internally. The Company's
general investment philosophy is to hold fixed maturity assets for long-term
investment. Thus, it does not have a trading portfolio. The Company carries the
portion of its portfolio of bonds and notes that is available for sale (the
"Available for Sale Portfolio") at estimated fair value. The remaining portion
of its portfolio of bonds and notes is held for investment and is carried at
amortized cost.
BONDS AND NOTES, including those held for investment and the Available for
Sale Portfolio (the "Bond Portfolio"), at September 30, 1995, had an aggregate
amortized cost that exceeded its fair value by $1.5 million (including net
unrealized losses of $1.4 million on the Available for Sale Portfolio). The fair
value of the Bond Portfolio was $5.9 million below its amortized cost at
September 30, 1994 (including net unrealized losses of $5.7 million on the
Available for Sale Portfolio). The decrease in net unrealized losses on the Bond
Portfolio since September 30, 1994 principally reflects the lower relative
prevailing interest rates at September 30, 1995 and their corresponding effect
on the fair value of the Bond Portfolio.
The entire Bond Portfolio at September 30, 1995 was rated by Standard &
Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's") or under
comparable statutory rating guidelines established by the National Association
of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the
Company. At September 30, 1995, approximately $101.7 million (at amortized cost)
was rated investment grade by one or both of these agencies or under the NAIC
guidelines, including $100.5 million of U.S. government/agency securities and
MBSs.
At September 30, 1995, the Bond Portfolio included $9.8 million (fair
value, $8.4 million) of bonds not rated investment grade by S&P, Moody's or the
NAIC. Based on their September 30, 1995 amortized cost, these
non-investment-grade bonds accounted for 5.9% of the Company's total assets and
8.0% of invested assets.
Non-investment-grade securities generally provide higher yields and involve
greater risks than investment-grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment-grade issuers. In addition, the trading market for these
securities is usually more limited than for investment-grade securities. The
Company intends that its holdings of such securities not exceed current levels,
but its policies may change from time to time, including in connection with any
possible acquisition. The Company had no material concentrations of
non-investment-grade securities at September 30, 1995.
The table on the following page summarizes the Company's rated bonds by
rating classification as of September 30, 1995.
43
<PAGE> 44
SUMMARY OF RATED BONDS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ISSUES NOT RATED BY S&P (MOODY'S)
ISSUES RATED BY S&P (MOODY'S) BY NAIC CATEGORY TOTAL
- ------------------------------------------ --------------------------------- -----------------------------------
ESTIMATED NAIC ESTIMATED PERCENT OF ESTIMATED
S&P (MOODY'S) AMORTIZED FAIR CATEGORY AMORTIZED FAIR AMORTIZED INVESTED FAIR
CATEGORY(1) COST VALUE (2) COST VALUE COST ASSETS(3) VALUE
- ------------------ --------- ---------- -------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA+ to A-
(Aaa to A3)..... $68,049 $ 68,067 1 $28,517 $ 28,556 $ 96,566 78.67% $ 96,623
BBB+ to BBB-
(Baa1 to Baa3).. 1,411 1,501 2 3,769 3,567 5,180 4.22 5,068
BB+ to BB-
(Ba1 to Ba3).... 927 938 3 -- -- 927 0.76 938
B+ to B-
(B1 to B3)...... 7,108 5,931 4 988 1,000 8,096 6.60 6,931
CCC+ to C-
(Caa to C)...... 745 500 5 -- -- 745 0.61 500
D................. -- -- 6 -- -- -- -- --
------- ------- ------- ------- -------- --------
TOTAL RATED
ISSUES.......... $78,240 $ 76,937 $33,274 $ 33,123 $111,514 $110,060
======= ======= ======= ======= ======== ========
</TABLE>
- ---------------
(1) S&P rates debt securities in eleven rating categories, from AAA (the
highest) to D (in payment default). A plus(+) or minus(-) indicates the
debt's relative standing within the rating category. A security rated BBB-
or higher is considered investment grade. Moody's rates debt securities in
nine rating categories, from Aaa (the highest) to C (extremely poor
prospects of attaining real investment standing). The number 1, 2 or 3 (with
1 the highest and 3 the lowest) indicates the debt's relative standing
within the rating category. A security rated Baa3 or higher is considered
investment grade. Issues are categorized based on the higher of the S&P or
Moody's rating if rated by both agencies.
(2) Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest)
for nondefaulted bonds plus one category, 6, for bonds in or near default.
These six categories correspond with the S&P(Moody's) rating groups listed
above, with categories 1 and 2 considered investment grade. A substantial
portion of the assets in the NAIC categories were rated by the Company based
on its implementation of NAIC rating guidelines.
(3) At amortized cost.
MORTGAGE LOANS aggregated $4.7 million at September 30, 1995 and consisted
of 2 first mortgage loans collateralized by properties located in California.
Both of these loans were multifamily residential loans to the same borrower. At
the time of their purchase by the Company, these mortgage loans had
loan-to-value ratios of 75% or less. At September 30, 1995, neither loan was
delinquent. No mortgage loans were foreclosed upon during fiscal years 1995,
1994 or 1993.
ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. The Company believes that
its fixed-rate liabilities should be backed by a portfolio principally composed
of fixed maturities that generate predictable rates of return. The Company does
not have a specific target rate of return. Instead, its rates of return vary
over time depending on the current interest rate environment, the slope of the
yield curve, the spread at which fixed maturities are priced over the yield
curve and general competitive conditions within the industry. Its portfolio
strategy is designed to achieve adequate risk-adjusted returns consistent with
its investment objectives of effective asset-liability matching, liquidity and
safety.
The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its annuity obligations. The Company seeks to achieve a
predictable spread between what it earns on its assets and what it pays on its
liabilities by investing principally in fixed maturities. The Company's
fixed-rate products incorporate surrender charges or other limitations on when
contracts can be surrendered for cash to encourage persistency. Approximately
92% of the Company's fixed annuity reserves had surrender penalties or other
restrictions at September 30, 1995.
As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view to maintaining a desired investment spread between the
yield on portfolio assets and the rate paid on its reserves under a variety of
possible future interest rate
44
<PAGE> 45
scenarios. At September 30, 1995, the weighted average life of the Company's
investments was approximately three and three-fourths years and the duration was
slightly in excess of three years.
The Company also seeks to provide liquidity and enhance its spread income
by using reverse repurchase agreements ("Reverse Repos"), and by investing in
MBSs. Reverse Repos involve a sale of securities and an agreement to repurchase
the same securities at a later date at an agreed upon price and are generally
over-collateralized. MBSs are generally investment-grade securities
collateralized by large pools of mortgage loans. MBSs generally pay principal
and interest monthly. The amount of principal and interest payments may
fluctuate as a result of prepayments of the underlying mortgage loans.
There are risks associated with some of the techniques the Company uses to
enhance its spread income and match its assets and liabilities. The primary risk
associated with Reverse Repos is the risk associated with counterparty
nonperformance. The Company believes, however, that the counterparties to its
Reverse Repos are financially responsible and that the counterparty risk
associated with those transactions is minimal. The primary risk associated with
MBSs is that a changing interest rate environment might cause prepayment of the
underlying obligations at speeds slower or faster than anticipated at the time
of their purchase.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying value of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews for
bonds, management principally considers the adequacy of collateral (if any),
compliance with contractual covenants, the borrower's recent financial
performance, news reports and other externally generated information concerning
the creditor's affairs. In the case of publicly traded bonds, management also
considers market value quotations, if available. For mortgage loans, management
generally considers information concerning the mortgaged property and, among
other things, factors impacting the current and expected payment status of the
loan and, if available, the current fair value of the underlying collateral.
The carrying values of bonds that are determined to have declines in value
that are other than temporary are reduced to net realizable value and no further
accruals of interest are made. If needed, mortgage loan valuation allowances
would be based on losses expected by management to be realized on transfers of
mortgage loans to real estate, on the disposition and settlement of mortgage
loans and on mortgage loans that management believes may not be collectible in
full. Accrual of interest is suspended when principal and interest payments on
mortgage loans are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments (at amortized cost) that
are in default as to the payment of principal or interest, totaled $0.7 million
(fair value, $0.5 million) at September 30, 1995. At September 30, 1995,
defaulted investments constituted 0.6% of total invested assets at amortized
cost. At September 30, 1994, there were no defaulted investments.
SOURCES OF LIQUIDITY are readily available to the Company in the form of
existing cash and short-term investments, Reverse Repo capacity on invested
assets and, if required, proceeds from invested asset sales. At September 30,
1995, approximately $60.5 million of the Company's Bond Portfolio had an
aggregate unrealized gain of $0.6 million, while approximately $51.0 million of
the Bond Portfolio had an aggregate unrealized loss of $2.1 million. In
addition, the Company's investment portfolio also currently provides
approximately $1.5 million of monthly cash flow from scheduled principal and
interest payments.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market rate.
Management would seek to place new funds in investments that were matched in
duration to, and higher yielding than, the liabilities assumed. The Company
believes that liquidity to fund withdrawals would be available through incoming
cash flow, the sale of short-term or floating-rate instruments or Reverse Repos
on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding
the sale of fixed-rate assets in an unfavorable bond market.
45
<PAGE> 46
In a declining rate environment, the Company's cost of funds would decrease
over time, reflecting lower interest crediting rates on its fixed annuities.
Should increased liquidity be required for withdrawals, the Company believes
that a significant portion of its investments could be sold without adverse
consequences in light of the general strengthening that would be expected in the
bond market.
- --------------------------------------------------------------------------------
PROPERTIES
- --------------------------------------------------------------------------------
The Company's principal office is in leased premises at 733 Third Avenue,
4th Floor New York, New York 10017. The Company, through an affiliate, also
leases office space in Los Angeles, California and in Torrance, California which
is utilized for certain policy administration, recordkeeping and data processing
functions.
The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of its business.
- --------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
The directors and principal officers of the Company as of December 8, 1995
are listed below, together with information as to their ages, dates of election
and principal business occupation during the last five years (if other than
their present business occupation).
<TABLE>
<CAPTION>
OTHER POSITIONS AND
YEAR OTHER BUSINESS
ASSUMED EXPERIENCE WITHIN
NAME AGE PRESENT POSITION(S) POSITION(S) LAST FIVE YEARS** FROM-TO
- --------------------- --- ------------------------------------ ----------- ------------------------- ---------
<S> <C> <C> <C> <C> <C>
Eli Broad* 62 Chairman, Chief Executive Officer 1994 Cofounded SunAmerica Inc.
and President of the Company ("SAI") in 1957
Chairman, Chief Executive Officer 1986
and President of SAI
Jay S. Wintrob* 38 Executive Vice President of the 1991 Senior Vice President 1989-1991
Company 1995 (Joined SAI in 1987)
Vice Chairman of SAI
James R. Belardi* 38 Senior Vice President of the Company 1992 Vice President and 1989-1992
Executive Vice President of SAI 1995 Treasurer
(Joined SAI in 1986)
Jana W. Greer* 43 Senior Vice President of the Company 1994 Vice President 1981-1991
and SAI (Joined SAI in 1974)
Peter McMillan, III* 38 Executive Vice President and Chief 1994 Senior Vice President, 1989-1994
Investment Officer of SunAmerica SunAmerica Investments,
Investments, Inc. Inc.
Gary W. Krat* 48 Senior Vice President of the Company 1992 Chairman, Royal Alliance 1991 to
and SAI Associates, Inc. present
Chief Executive Officer, 1990 to
Royal Alliance present
Associates, Inc.
President, Integrated 1986-1990
Scott L. Robinson* 49 Senior Vice President and Treasurer 1991 Vice President and 1986-1991
of the Company Controller
Senior Vice President and Controller (Joined SAI in 1978)
of SAI
Lorin M. Fife* 42 Senior Vice President, General 1994 Vice President and 1994-1995
Counsel and Assistant Secretary of General Counsel-
the Company Regulatory Affairs of SAI
Senior Vice President and General 1995 Vice President and 1989-1994
Counsel-Regulatory Affairs of SAI Associate General Counsel
of SAI
(Joined SAI in 1989)
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
OTHER POSITIONS AND
YEAR OTHER BUSINESS
ASSUMED EXPERIENCE WITHIN
NAME AGE PRESENT POSITION(S) POSITION(S) LAST FIVE YEARS** FROM-TO
- --------------------- --- ------------------------------------ ----------- ------------------------- ---------
<S> <C> <C> <C> <C> <C>
Susan L. Harris* 38 Senior Vice President and Secretary 1994 Vice President, General 1994-1995
of the Company Counsel-Corporate Affairs
and Secretary of SAI
Senior Vice President and General 1995 Vice President, Associate 1989-1994
Counsel-Corporate Affairs and General Counsel and
Secretary of SAI Secretary of SAI
(Joined SAI in 1985)
N. Scott Gillis 42 Senior Vice President and Controller 1994 Vice President and 1989-1994
of the Company Controller, SunAmerica
Life Companies
(Joined SAI in 1985)
Edwin R. Reoliquio 38 Senior Vice President and Chief 1995 Vice President and 1990-1995
Actuary of the Company Actuary, SunAmerica Life
Companies
Marc Gamsin 39 Director Partner, O'Melveny & 1979 to
Myers present
David W. Ferguson 42 Director Partner, Davis Polk & 1980 to
Wardwell present
Thomas A. Harnett 71 Director Partner, Lane & 1989 to
Mitterdorf present
Lester Pollack 62 Director Chief Executive Officer, 1986 to
Centre Partners, L.P. present
General Partner, Lazard 1986 to
Freres & Co. present
Senior Managing Director, 1988 to
Corporate Partners, L.P. present
Richard D. Rohr 69 Director Partner, Bodman, 1958 to
Longley & Dahling present
</TABLE>
- ---------------
* Also serves as a director
** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
All of the executive officers of the Company also serve as employees of
SunAmerica Inc. or its affiliates and receive no compensation directly from the
Company. Some of the officers also serve as officers of other companies
affiliated with the Company. Allocations have been made as to each individual's
time devoted to his or her duties as an executive officer of the Company.
The following table shows the cash compensation paid or earned, based on
these allocations, to the chief executive officer and top four executive
officers of the Company whose allocated compensation exceeds $100,000 and to all
executive officers of the Company as a group for services rendered in all
capacities in the Company during 1995:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL OR ALLOCATED CASH
NUMBER IN GROUP CAPACITIES IN WHICH SERVED COMPENSATION
--------------------- -------------------------------------------------- --------------
<S> <C> <C>
Eli Broad............ Chairman, Chief Executive Officer and President $ 11,538
Jay Wintrob.......... Executive Vice President 7,212
James R. Belardi..... Senior Vice President 7,500
Gary W. Krat......... Senior Vice President 37,500
N. Scott Gillis...... Senior Vice President and Controller 8,904
All Executive
Officers as a Group
(12)............... $156,016
========
</TABLE>
Directors of the Company who are also employees of SunAmerica Inc. or its
affiliates receive no compensation in addition to their compensation as
employees of SunAmerica Inc. or its affiliates.
47
<PAGE> 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No shares of the Company are owned by any executive officer or director.
The Company is an indirect wholly-owned subsidiary of SunAmerica Inc. Except for
Mr. Broad, the percentage of shares of SunAmerica Inc. beneficially owned by any
director does not exceed one percent of the class outstanding. At November 30,
1995, Mr. Broad was the beneficial owner of 2,149,694 shares of Common Stock
(approximately 4.7% of the class outstanding) and 8,857,081 shares of Class B
Common Stock (approximately 86.5% of the class outstanding). Of the Common
Stock, 250,659 shares represent restricted shares granted under the Company's
employee stock plans as to which Mr. Broad has no investment power; 506,250
shares are held by a trust formed by Mr. Broad of which he is a beneficiary; and
1,344,234 shares represent employee stock options held by Mr. Broad which are or
will become exercisable on or before February 2, 1996 and as to which he has no
voting or investment power. Of the Class B Stock, 843,750 shares are held by a
trust formed by Mr. Broad of which he is a beneficiary; 32,568 shares are held
by a foundation of which Mr. Broad is a director and as to which he has shared
voting and investment power; and 2,902,500 shares are registered in the name of
a corporation as to which Mr. Broad exercises voting and investment power. At
December 11, 1995, all directors and officers as a group beneficially owned
3,645,981 shares of Common Stock (approximately 8% of the class outstanding) and
8,857,081 shares of Class B Common Stock (approximately 86.5% of the class
outstanding).
- --------------------------------------------------------------------------------
STATE REGULATION
- --------------------------------------------------------------------------------
The Company is subject to regulation and supervision by the State of New
York and the Insurance Commission of the State of New York. Insurance laws
establish supervisory agencies with broad administrative and supervisory powers
related to granting and revoking licenses to transact business, regulating
marketing and other trade practices, operating guaranty associations, licensing
agents, approving policy forms, regulating certain premium rates, regulating
insurance holding company systems, establishing reserve requirements,
prescribing the form and content of required financial statements and reports,
performing financial and other examinations, determining the reasonableness and
adequacy of statutory capital and surplus, regulating the type and amount of
investments permitted, limiting the amount of dividends that can be paid and the
size of transactions that can be consummated without first obtaining regulatory
approval and other related matters.
During the last decade, the insurance regulatory framework has been placed
under increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation that changes, and in many
cases increases, the states' authority to regulate insurance companies.
Legislation has been introduced from time to time in Congress that could result
in the federal government assuming some role in the regulation of insurance
companies. In recent years, the NAIC has approved and recommended to the states
for adoption and implementation several regulatory initiatives designed to
reduce the risk of insurance company insolvencies. These initiatives include new
investment reserve requirements, risk-based capital standards and restrictions
on an insurance company's ability to pay dividends to its stockholders. The NAIC
is also currently developing model laws to govern insurance company investments.
Current proposals are still being debated and the Company is monitoring
developments in this area and the effects any changes would have on the Company.
- --------------------------------------------------------------------------------
CUSTODIAN
- --------------------------------------------------------------------------------
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, serves as the custodian of the assets of the Separate
Account. The custodian is remunerated by the Company based on a schedule of fees
under an agreement between the custodian and the Company.
48
<PAGE> 49
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The Company is involved in various kinds of litigation common to its
business. These cases are in various stages of development and, based on reports
of counsel, management believes that provisions made for potential losses are
adequate and any further liabilities and costs will not have a material adverse
impact upon the Company's financial position or results of operations.
- --------------------------------------------------------------------------------
REGISTRATION STATEMENTS
- --------------------------------------------------------------------------------
Registration statements have been filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 as amended, with
respect to the Contracts offered by this prospectus. This prospectus does not
contain all the information set forth in the registration statements and the
exhibits filed as part of the registration statements, to all of which reference
is hereby made for further information concerning the Separate Account, the
General Account, the Company, the Underlying Funds, the Contract and the
Certificates. Statements found in this prospectus as to the terms of the
Contracts and other legal instruments are summaries, and reference is made to
such instruments as filed.
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
The financial statements of First SunAmerica Life Insurance Company as of
September 30, 1995 and 1994 and for each of the three years in the period ended
September 30, 1995 included in this Prospectus have been so included in reliance
on the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
Additional information concerning the operations of the Separate Account is
contained in a Statement of Additional Information, which is available without
charge upon written request addressed to the Company at its Annuity Service
Center P.O. Box 54299, Los Angeles, California 90054-0299 or (800)99-NYSUN. The
contents of the Statement of Additional Information are tabulated below.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Performance Data...................................................................... 3
Annuity Unit Values; Annuity Payments................................................. 7
Distribution of Contracts............................................................. 10
Financial Statements.................................................................. 11
</TABLE>
49
<PAGE> 50
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements of the Company which are included in this
prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the General Account
and with respect to the death benefit and the Company's assumption of the
mortality and expense risks and the risk that the Withdrawal Charge will be
insufficient to cover the cost of distributing the Contracts. They should not be
considered as bearing on the investment performance of the Underlying Fund
shares held in the Portfolios of the Separate Account. The value of the
interests of Owners, Annuitants, payees and Beneficiaries under the variable
portion of the Contracts is affected primarily by the investment results of the
Underlying Funds.
50
<PAGE> 51
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First SunAmerica Life Insurance Company
In our opinion, the accompanying balance sheet and the related income
statement and statement of cash flows present fairly, in all material respects,
the financial position of First SunAmerica Life Insurance Company at September
30, 1995 and 1994, and the results of its operations and its cash flows for each
of the three years in the period ended September 30, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 6, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," in fiscal 1994.
Price Waterhouse LLP
Los Angeles, California
November 6, 1995
51
<PAGE> 52
FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
Investments:
Cash and short-term investments............................. $ 6,382,000 $ 14,785,000
Bonds and notes:
Available for sale, at fair value (amortized cost: 1995,
$109,217,000; 1994, $61,766,000)....................... 107,771,000 56,066,000
Held for investment, at amortized cost (fair value: 1995,
$2,289,000; 1994, $3,117,000).......................... 2,297,000 3,314,000
Mortgage loans.............................................. 4,733,000 4,763,000
Common stocks, at fair value (cost: 1995, $112,000)......... 35,000 --
------------ ------------
Total investments........................................... 121,218,000 78,928,000
Variable annuity assets....................................... 32,760,000 26,390,000
Accrued investment income..................................... 928,000 717,000
Deferred acquisition costs.................................... 6,491,000 5,651,000
Deferred income taxes......................................... -- 886,000
Other assets.................................................. 1,760,000 1,565,000
------------ ------------
TOTAL ASSETS.................................................. $ 163,157,000 $ 114,137,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts........................ $ 106,332,000 $ 66,881,000
Income taxes currently payable.............................. 23,000 441,000
Other liabilities........................................... 1,980,000 610,000
------------ ------------
Total reserves, payables and accrued liabilities............ 108,335,000 67,932,000
------------ ------------
Variable annuity liabilities.................................. 32,760,000 26,390,000
------------ ------------
Deferred income taxes......................................... 244,000 --
------------ ------------
Shareholder's equity:
Common Stock................................................ 3,000,000 3,000,000
Additional paid-in capital.................................. 14,428,000 14,428,000
Retained earnings........................................... 5,250,000 4,727,000
Net unrealized losses on debt and equity securities
available for sale....................................... (860,000) (2,340,000)
------------ ------------
Total shareholder's equity.................................. 21,818,000 19,815,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................... $ 163,157,000 $ 114,137,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
52
<PAGE> 53
FIRST SUNAMERICA LIFE INSURANCE COMPANY
INCOME STATEMENT
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Investment income................................ $ 7,834,000 $ 5,527,000 $ 5,101,000
----------- ----------- -----------
Interest expense on:
Fixed annuity contracts........................ (5,042,000) (3,635,000) (3,940,000)
Senior indebtedness............................ (8,000) -- --
----------- ----------- -----------
Total interest expense........................... (5,050,000) (3,635,000) (3,940,000)
----------- ----------- -----------
NET INVESTMENT INCOME............................ 2,784,000 1,892,000 1,161,000
----------- ----------- -----------
NET REALIZED INVESTMENT GAINS (LOSSES)........... (1,348,000) 445,000 1,932,000
----------- ----------- -----------
VARIABLE ANNUITY FEE INCOME...................... 412,000 382,000 240,000
----------- ----------- -----------
Other income and expenses:
Surrender charges.............................. 194,000 367,000 44,000
General and administrative expenses............ (1,088,000) (1,040,000) (1,066,000)
Amortization of deferred acquisition costs..... (300,000) -- (220,000)
Other, net..................................... 51,000 (309,000) (386,000)
----------- ----------- -----------
TOTAL OTHER INCOME AND EXPENSES.................. (1,143,000) (982,000) (1,628,000)
----------- ----------- -----------
PRETAX INCOME.................................... 705,000 1,737,000 1,705,000
Income tax expense............................... (182,000) (655,000) (829,000)
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES.................... 523,000 1,082,000 876,000
Cumulative effect of change in accounting for
income taxes................................... -- (725,000) --
----------- ----------- -----------
NET INCOME....................................... $ 523,000 $ 357,000 $ 876,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE> 54
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 523,000 $ 357,000 $ 876,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Interest credited to fixed annuity contracts........ 5,042,000 3,635,000 3,940,000
Net realized investment (gains) losses.............. 1,348,000 (445,000) (1,932,000)
Accretion of net discounts on investments........... (394,000) (24,000) (55,000)
Amortization of goodwill............................ 58,000 58,000 58,000
Provision for deferred income taxes................. 333,000 1,388,000 (904,000)
Cumulative effect of change in accounting for income
taxes............................................. -- 725,000 --
Change in:
Deferred acquisition costs.......................... (2,740,000) (1,011,000) (1,243,000)
Income taxes receivable/payable..................... (418,000) (555,000) 387,000
Other, net.............................................. (323,000) (115,000) 291,000
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 3,429,000 4,013,000 1,418,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds and notes available for sale.................... (125,130,000) (67,563,000) (95,150,000)
Bonds and notes held for investment................... -- (1,019,000) (2,052,000)
Sales of:
Bonds and notes available for sale.................... 55,553,000 50,708,000 60,544,000
Mortgage loans........................................ -- -- 16,159,000
Redemptions and maturities of:
Bonds and notes available for sale.................... 20,358,000 5,791,000 1,583,000
Bonds and notes held for investment................... 1,011,000 -- --
Other, net.............................................. (77,000) 31,000 35,000
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES................... (48,285,000) (12,052,000) (18,881,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Premium receipts on fixed annuity contracts........... 51,681,000 7,840,000 9,105,000
Withdrawal payments on fixed annuity contracts........ (14,131,000) (10,504,000) (2,475,000)
Claims and annuity payments on fixed annuity
contracts........................................... (2,974,000) (3,194,000) (2,272,000)
Other, net............................................ 1,877,000 427,000 54,000
------------ ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES........ 36,453,000 (5,431,000) 4,412,000
------------ ------------ ------------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS......... (8,403,000) (13,470,000) (13,051,000)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF
PERIOD................................................ 14,785,000 28,255,000 41,306,000
------------ ------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD........ $ 6,382,000 $ 14,785,000 $ 28,255,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness......................... $ 8,000 $ -- $ --
============ ============ ============
Income taxes paid (recovered)......................... $ 254,000 $ (178,000) $ 1,149,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
54
<PAGE> 55
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: First SunAmerica Life Insurance Company (the "Company") is an
indirect wholly owned subsidiary of SunAmerica Inc. (the "Parent"). Certain
items have been reclassified to conform to the current year's presentation.
INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, money market investments, repurchase agreements and short-term
bank participations. All such investments are carried at cost plus accrued
interest, which approximates fair value, have maturities of three months or less
and are considered cash equivalents for purposes of reporting cash flows. Bonds
and notes available for sale and common stocks are carried at aggregate fair
value and changes in unrealized gains or losses, net of tax, are credited or
charged directly to shareholder's equity. It is management's intent, and the
Company has the ability, to hold the remainder of bonds and notes until
maturity, and, therefore, these investments are carried at amortized cost. Bonds
and notes, whether available for sale or held for investment, 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.
Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income using the interest method over the contractual lives of the
investments.
DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and
amortized, with interest, over the estimated lives of the contracts in relation
to the present value of estimated gross profits, which are composed of net
interest income, net realized investment gains and losses, variable annuity
fees, surrender charges and direct administrative expenses. Deferred acquisition
costs consist of commissions and other costs that vary with, and are primarily
related to, the production or acquisition of new business.
As debt and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to deferred acquisition costs equal to the
change in amortization that would have been recorded if such securities had been
sold at their stated aggregate fair value and the proceeds reinvested at current
yields. The change in this adjustment, net of tax, is included with the change
in net unrealized gains or losses on debt and equity securities available for
sale that is credited or charged directly to shareholder's equity. At September
30, 1995 and 1994, deferred acquisition costs have been increased by $200,000
and $2,100,000, respectively, for this adjustment.
VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities
resulting from the receipt of variable annuity premiums are segregated in
separate accounts. The Company receives fees for assuming mortality and certain
expense risks. Such fees are included in Variable Annuity Fee Income in the
income statement.
GOODWILL: Goodwill, amounting to $879,000 at September 30, 1995, is
amortized by using the straight-line method over a period of 25 years and is
included in Other Assets in the balance sheet.
CONTRACTHOLDER RESERVES: Contractholder reserves for fixed annuity
contracts are accounted for as investment-type contracts in accordance with
Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments," and are recorded at accumulated value
(premiums received, plus accrued interest, less withdrawals and assessed fees).
FEE INCOME: Variable annuity fees are recognized in income as earned.
55
<PAGE> 56
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: The Company is included in the consolidated federal income
tax return of the Parent and files as a "life insurance company" under the
provisions of the Internal Revenue Code of 1986. Income taxes have been
calculated as if the Company filed a separate return. Effective October 1, 1993,
deferred income tax assets and liabilities are recognized based on the
difference between financial statement carrying amounts and income tax bases of
assets and liabilities using enacted income tax rates and laws.
2. INVESTMENTS
The amortized cost and estimated fair value of bonds and notes available
for sale and held for investment by major category follow:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States government.................. $ 37,693,000 $ 37,759,000
Mortgage-backed securities.................................. 60,558,000 60,367,000
Corporate bonds and notes................................... 10,966,000 9,645,000
------------ ------------
Total available for sale................................. $109,217,000 $107,771,000
============ ============
HELD FOR INVESTMENT:
Securities of the United States government.................. $ 2,297,000 $ 2,289,000
============ ============
AT SEPTEMBER 30, 1994:
AVAILABLE FOR SALE:
Securities of the United States government.................. $ 39,775,000 $ 36,398,000
Mortgage-backed securities.................................. 13,943,000 12,883,000
Corporate bonds and notes................................... 8,048,000 6,785,000
------------ ------------
Total available for sale................................. $ 61,766,000 $ 56,066,000
============ ============
HELD FOR INVESTMENT:
Securities of the United States government.................. $ 2,301,000 $ 2,102,000
Corporate bonds and notes................................... 1,013,000 1,015,000
------------ ------------
Total held for investment................................ $ 3,314,000 $ 3,117,000
============ ============
</TABLE>
56
<PAGE> 57
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of bonds and notes available
for sale and held for investment by contractual maturity, as of September 30,
1995, follow:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
AVAILABLE FOR SALE:
Due in one year or less..................................... $ -- $ --
Due after one year through five years....................... -- --
Due after five years through ten years...................... 10,966,000 9,645,000
Due after ten years......................................... 37,693,000 37,759,000
Mortgage-backed securities.................................. 60,558,000 60,367,000
------------ ------------
Total available for sale................................. $109,217,000 $107,771,000
============ ============
HELD FOR INVESTMENT:
Due in one year or less..................................... $ -- $ --
Due after one year through five years....................... -- --
Due after five years through ten years...................... 2,297,000 2,289,000
Due after ten years......................................... -- --
Mortgage-backed securities.................................. -- --
------------ ------------
Total held for investment................................ $ 2,297,000 $ 2,289,000
============ ============
</TABLE>
Actual maturities of bonds and notes will differ from those shown above
because of prepayments and redemptions.
57
<PAGE> 58
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
Gross unrealized gains and losses on bonds and notes available for sale and
held for investment by major category follow:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
---------- -----------
<S> <C> <C>
AT SEPTEMBER 30, 1995:
AVAILABLE FOR SALE:
Securities of the United States government...................... $263,000 $ (197,000)
Mortgage-backed securities...................................... 257,000 (448,000)
Corporate bonds and notes....................................... 102,000 (1,423,000)
-------- -----------
Total available for sale..................................... $622,000 $(2,068,000)
======== ===========
HELD FOR INVESTMENT:
Securities of the United States government...................... $ 22,000 $ (30,000)
======== ===========
AT SEPTEMBER 30, 1994:
AVAILABLE FOR SALE:
Securities of the United States government...................... $ -- $(3,377,000)
Mortgage-backed securities...................................... -- (1,060,000)
Corporate bonds and notes....................................... 36,000 (1,299,000)
-------- -----------
Total available for sale..................................... $ 36,000 $(5,736,000)
======== ===========
HELD FOR INVESTMENT:
Securities of the United States government...................... $ 8,000 $ (207,000)
Corporate bonds and notes....................................... 2,000 --
-------- -----------
Total held for investment.................................... $ 10,000 $ (207,000)
======== ===========
</TABLE>
At September 30, 1995, gross unrealized losses on equity securities
aggregated $112,000 and gross unrealized gains aggregated $35,000.
Gross realized investment gains and losses on sales of all types of
investments are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1995 1994 1993
----------- --------- ----------
<S> <C> <C> <C>
Bonds and notes available for sale:
Realized gains.................................... $ 423,000 $ 644,000 $2,157,000
Realized losses................................... (1,771,000) (199,000) (225,000)
----------- -------- ----------
Total net realized investment gains (losses)...... $(1,348,000) $ 445,000 $1,932,000
=========== ======== ==========
</TABLE>
The sources and related amounts of investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Short-term investments............................... $1,045,000 $ 685,000 $1,120,000
Bonds and notes...................................... 6,291,000 4,341,000 3,220,000
Mortgage loans....................................... 498,000 501,000 761,000
---------- ---------- ----------
Total investment income.................... $7,834,000 $5,527,000 $5,101,000
========== ========== ==========
</TABLE>
58
<PAGE> 59
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
Expenses incurred to manage the investment portfolio amounted to $125,000
for the year ended September 30, 1995, $102,000 for the year ended September 30,
1994, and $84,000 for the year ended September 30, 1993 and are included in
General and Administrative Expenses in the income statement.
The carrying values of investments in any one entity or its affiliates
exceeding 10% of the Company's shareholder's equity are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
-------------
<S> <C>
Short-term investments:
Southern California Edison Commercial Paper................................. $ 3,989,000
Mortgage loans:
Hyman & Rose Shulman Family Trust........................................... 4,733,000
==========
</TABLE>
At September 30, 1995, bonds and notes included $9,768,000 (at amortized
cost, with a fair value of $8,369,000) of investments not rated investment grade
by either Standard & Poor's Corporation, Moody's Investors Service or under
National Association of Insurance Commissioners' guidelines. The Company had no
material concentrations of noninvestment-grade assets at September 30, 1995.
At September 30, 1995, the amortized cost of investments in default as to
the payment of principal or interest was $745,000 and the fair value was
$500,000, all of which are unsecured non-investment-grade bonds.
At September 30, 1995, $257,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory requirements.
3. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to the
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 equity investments)
and liabilities or the value of anticipated future business. The Company does
not plan to sell most of its assets or settle most of its liabilities at these
estimated fair values.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Selling expenses and potential taxes
are not included. The estimated fair value amounts were determined using
available market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND SHORT TERM INVESTMENTS: Carrying value is considered to be a
reasonable estimate of fair value.
BONDS AND NOTES: Fair value is based principally on independent pricing
services, broker quotes and other independent information.
59
<PAGE> 60
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
MORTGAGE LOANS: Fair values are primarily determined by discounting future
cash flows to the present at current market rates, using expected prepayment
rates and further discounting for current market factors.
VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the market
value of the underlying securities.
RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are
assigned fair value equal to current net surrender value. Annuitized contracts
are valued based on the present value of future cash flows at current pricing
rates.
VARIABLE ANNUITY LIABILITIES: Fair values of contracts in the accumulation
phase are based on net surrender values. Fair values of contracts in the payout
phase are based on the present value of future cash flows at assumed investment
rates.
The estimated fair values of the Company's financial instruments at
September 1995 and 1994, compared with their respective carrying values, are as
follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
------------ ------------
<S> <C> <C>
1995:
Assets:
Cash and short-term investments............................. $ 6,382,000 $ 6,382,000
Bonds and notes............................................. 110,068,000 110,060,000
Mortgage loans.............................................. 4,733,000 4,733,000
Variable annuity assets..................................... 32,760,000 32,760,000
Liabilities:
Reserves for fixed annuity contracts........................ 106,332,000 102,782,000
Variable annuity liabilities................................ 32,760,000 31,740,000
============ ============
1994:
Assets:
Cash and short-term investments............................. $ 14,785,000 $ 14,785,000
Bonds and notes............................................. 59,380,000 59,183,000
Mortgage loans.............................................. 4,763,000 4,763,000
Variable annuity assets..................................... 26,390,000 26,390,000
Liabilities:
Reserves for fixed annuity contracts........................ 66,881,000 64,626,000
Variable annuity liabilities................................ 26,390,000 25,476,000
============ ============
</TABLE>
4. 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 are
adequate and any further liabilities and costs will not have a material adverse
impact upon the Company's financial position or results of operations.
60
<PAGE> 61
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDER'S EQUITY
The Company is authorized to issue 300 shares of its $10,000 par value
Common Stock. At September 30, 1995, 1994 and 1993, 300 shares are outstanding.
Changes in shareholder's equity are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
RETAINED EARNINGS:
Beginning balance............................... $ 4,727,000 $ 4,370,000 $3,494,000
Net income...................................... 523,000 357,000 876,000
----------- ----------- ----------
Ending balance.................................. $ 5,250,000 $ 4,727,000 $4,370,000
=========== =========== ==========
NET UNREALIZED GAINS (LOSSES) ON DEBT AND
EQUITY SECURITIES AVAILABLE FOR SALE:
Beginning balance............................... $(2,340,000) $ 1,331,000 $ --
Excess of market value over amortized cost
on debt and equity securities available for
sale......................................... -- -- 2,039,000
Change in net unrealized gains (losses) on debt
and equity securities available for sale..... 4,177,000 (7,739,000) --
Change in adjustment to deferred acquisition
costs........................................ (1,900,000) 2,100,000 --
Tax effect of net change........................ (797,000) 1,968,000 (708,000)
----------- ----------- ----------
Ending balance.................................... $ (860,000) $(2,340,000) $1,331,000
=========== =========== ==========
</TABLE>
For a life insurance company domiciled in the State of New York, no
dividend may be distributed to any shareholder unless notice of the domestic
insurer's intention to declare such dividend and the amount have been filed with
the Superintendent of Insurance not less than 30 days in advance of such
proposed declaration, nor if the Superintendent disapproves the distribution of
the dividend within the 30-day period. No dividends were paid in fiscal years
1995, 1994 or 1993.
Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Company's net loss for the nine months ended
September 30, 1995 was $1,755,000. The statutory net income for the year ended
December 31, 1994 was $726,000 and for the year ended December 31, 1993 the
statutory net loss was $597,000. The Company's statutory capital and surplus was
$13,962,000 at September 30, 1995, $16,122,000 at December 31, 1994 and
$15,623,000 at December 31, 1993.
61
<PAGE> 62
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The components of the provisions for income taxes on pretax income consist
of the following:
<TABLE>
<CAPTION>
NET
REALIZED
INVESTMENT
GAINS
(LOSSES) OPERATIONS TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
1995:
Currently payable.................................... $ (592,000) $ 441,000 $ (151,000)
Deferred............................................. (28,000) 361,000 333,000
---------- ---------- ----------
Total income tax expense................... $ (620,000) $ 802,000 $ 182,000
========== ========== ==========
1994:
Currently payable.................................... $ 121,000 $ (854,000) $ (733,000)
Deferred............................................. 65,000 1,323,000 1,388,000
---------- ---------- ----------
Total income tax expense................... $ 186,000 $ 469,000 $ 655,000
========== ========== ==========
1993:
Currently payable.................................... $1,091,000 $ 642,000 $1,733,000
Deferred............................................. (46,000) (858,000) (904,000)
---------- ---------- ----------
Total income tax expense................... $1,045,000 $ (216,000) $ 829,000
========== ========== ==========
</TABLE>
Income taxes computed at the United States federal income tax rate of 35%
for 1995 and 1994 and 34.75% for 1993 and income taxes provided differ as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Amount computed at statutory rate........................ $ 247,000 $ 608,000 $ 592,000
Increases (decreases) resulting from:
Amortization of differences between book and tax bases
of net assets acquired.............................. 20,000 10,000 (20,000)
State income taxes, net of federal tax benefit......... (86,000) 36,000 250,000
Other, net............................................. 1,000 1,000 7,000
-------- -------- --------
Total income tax expense................................. $ 182,000 $ 655,000 $ 829,000
======== ======== ========
</TABLE>
Effective October 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Accordingly, the cumulative effect of this change in accounting for income taxes
was recorded during the quarter ended December 31, 1993 to decrease the asset
for deferred income taxes by $725,000.
62
<PAGE> 63
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. 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 asset for deferred income taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Investments................................................. $ (142,000) $ (45,000)
Deferred acquisition costs.................................. (1,703,000) (1,026,000)
Other....................................................... (66,000) (41,000)
----------- -----------
Total deferred tax liabilities.............................. (1,911,000) (1,112,000)
----------- -----------
Deferred tax assets:
Contractholder reserves..................................... 1,125,000 659,000
State income taxes.......................................... 79,000 79,000
Net unrealized losses on certain debt and equity
securities............................................... 463,000 1,260,000
----------- -----------
Total deferred tax assets................................... 1,667,000 1,998,000
----------- -----------
Deferred income tax asset (liability)......................... $ (244,000) $ 886,000
=========== ===========
</TABLE>
7. RELATED PARTY MATTERS
The Company pays commissions to two affiliated companies, Royal Alliance
Associates, Inc. ("Royal") and SunAmerica Securities, Inc. These broker-dealers
represent a significant portion of the Company's business, amounting to
approximately 14.8%, 26.5% and 49.3% of premiums in 1995, 1994 and 1993,
respectively. Commissions paid to these broker-dealers totaled $761,000 in 1995,
$326,000 in 1994, and $733,000 in 1993. Occupancy and office services expenses
paid to Royal totaled $113,000 for the year ended September 30, 1995, $122,000
for the year ended September 30, 1994 and $135,000 for the year ended September
30, 1993.
The Company purchases administrative, investment management, accounting,
marketing and data processing services from SunAmerica Financial, Inc., whose
purpose is to provide services to the SunAmerica companies. Amounts paid for
such services totaled $722,000 for the year ended September 30, 1995, $706,000
for the year ended September 30, 1994 and $586,000 for the year ended September
30, 1993.
During the year ended September 30, 1993, the Company sold to SunAmerica
Life Insurance Company, its immediate parent, two mortgage loans for cash equal
to their aggregate book value of $16,547,000.
63
<PAGE> 64
APPENDIX A
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1 -- SEPARATE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
SEPARATE ACCOUNT)
These examples assume the following:
(1) The Initial Purchase Payment was $10,000, allocated solely to one
Portfolio;
(2) The date of full surrender or partial withdrawal occurs during the
3rd Contribution Year;
(3) The Owner's Contract Value at the time of surrender or withdrawal
is $12,000; and
(4) No other Purchase Payments or previous partial withdrawals have
been made.
EXAMPLE A -- FULL SURRENDER:
(1) Earnings in the Portfolio ($12,000 - $10,000 = $2,000) are not
subject to the Withdrawal Charge.
(2) The balance of the full surrender ($12,000 - $2,000 = $10,000) is
subject to the Withdrawal Charge applicable during the 3rd Contribution
Year (4%, from the Withdrawal Charge Table).
(3) The amount of the Withdrawal Charge is .04 X $10,000 = $400.
(4) The amount of the full surrender is $12,000 - $400 = $11,600.
EXAMPLE B -- PARTIAL WITHDRAWAL (IN THE AMOUNT OF $3,000):
(1) For the same reason as given in Step 1 of Example A, above, $2,000
can be withdrawn free of the Withdrawal Charge.
(2) Although 10% of the Purchase Payment is available without
imposition of a Withdrawal Charge (.10 X $10,000 = $1,000), this free
withdrawal amount is, like the Withdrawal Charge, applied first to
earnings. Since the earnings exceed the free withdrawal amount, only the
earnings can be withdrawn free of the scheduled Withdrawal Charge.
(3) The balance of the requested partial withdrawal
($3,000 - $2,000 = $1,000) is subject to the Withdrawal Charge applicable
during the 3rd Contribution Year (4%).
(4) The amount of the Withdrawal Charge is equal to the amount
required to complete the partial withdrawal ($3,000 - $2,000 = $1,000)
divided by (1 - .04) = 0.96, less the amount required to complete the
partial withdrawal.
Withdrawal Charge = ($1,000/0.96) - $1,000
= $41.67
In this example, in order for the Owner to receive the amount requested
($3,000), a gross withdrawal of $3,041.67 must be processed with $41.67
representing the Withdrawal Charge calculated above.
Examples C and D assume the following:
(1) The Initial Purchase Payment was $20,000, allocated solely to one
Portfolio;
(2) The full surrender or partial withdrawal occurs during the 2nd
Contribution Year;
(3) The Owner's Contract Value at the time of surrender or withdrawal
is $21,500; and
(4) No other Purchase Payments or partial withdrawals have been made.
EXAMPLE C -- PARTIAL WITHDRAWAL (IN THE MAXIMUM AMOUNT AVAILABLE WITHOUT
WITHDRAWAL CHARGE):
(1) Earnings in the Portfolio ($21,500 - $20,000 = $1,500) are not
subject to the Withdrawal Charge.
(2) An Additional Free Withdrawal of 10% of the Purchase Payments less
earnings (.10 X $20,000 - $1,500 = $500) is also available free of the
Withdrawal Charge, so that
(3) The maximum partial withdrawal without Withdrawal Charge is the
sum of the Earnings and the Additional Free Withdrawal
($1,500 + $500 = $2,000).
A-1
<PAGE> 65
EXAMPLE D -- FULL SURRENDER IMMEDIATELY FOLLOWING THE PARTIAL WITHDRAWAL IN
EXAMPLE C:
(1) The Owner's Contract Value after the partial withdrawal in Example
C is $21,500 - $2,000 = $19,500.
(2) The Purchase Payment amount for calculating the Withdrawal Charge
is the original $20,000 (Additional Free Withdrawal amounts do not reduce
the Purchase Payment amount for purposes of calculating the Withdrawal
Charge).
(3) The amount of the Withdrawal Charge is .05 X $20,000 = $1,000.
(4) The amount of the full surrender is $19,500 - $1,000 = $18,500.
PART 2 -- GENERAL ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The Market Value Adjustment Factor is reproduced here for convenience:
[(1 + I)/(1 + J + 0.0025)]N/12 -1
where
I is the Guarantee Rate in effect;
J is the Current Interest Rate available for a period equal to the
number of years remaining in the Guarantee Period at the time of
withdrawal, transfer or annuitization (fractional years are rounded up
to the next full year); and
N is the number of full months remaining in the Guarantee Period at the
time the withdrawal, transfer or annuitization request is processed.
These examples assume the following:
(1) An initial Purchase Payment of $10,000 was made and allocated to a
ten year Guarantee Period with a Guarantee Rate of 7% (.07);
(2) a partial withdrawal of $4,000 is requested 2 1/2 years (30
months) from the expiration date (i.e., N = 30);
(3) the accumulated value attributable to the Purchase Payment (i.e.,
the Guarantee Amount) on the date of withdrawal is $16,341.78 at each
anniversary; and
(4) no transfers, additional Purchase Payments, or other withdrawals
have been made.
The Guarantee Amount of $16,341.78 reflects deductions for Contract
Administration Charges at each anniversary. Since the withdrawal is effected in
the Purchase Payment's 7th Contribution Year, no Withdrawal Charge is
applicable.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of withdrawal, the Current Interest Rate for a
new Guarantee Period of 3 years (2 1/2 years rounded up to the next full
year) is 8%:
The MVA factor = [(1 + I)/(1 + J + .0025)]N/12 -1
= [(1.07)/(1.08 + .0025)](30/12) -1
= (0.988453)2.5 -1
= 0.971381-1
= -0.028619
The requested withdrawal amount is multiplied by the MVA factor to
determine the MVA:
MVA = $4,000 X (-0.028619) = -$114.48
$114.48 represents the MVA that will be deducted from the remaining
accumulated value.
A-2
<PAGE> 66
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of withdrawal, the Current Interest Rate for a
new Guarantee Period of 3 years is 6%:
The MVA factor = [(1 + I)/(1 + J + .0025)]N/12 -1
= [(1.07)/(1.06 +.0025)](30/12) -1
= (1.007059)2.5 -1
= 1.017741-1
= +0.017741
The requested withdrawal amount is multiplied by the MVA factor to
determine the MVA:
$4,000 X 0.017741 = +$70.96
$70.96 represents the MVA that would be added to the amount withdrawn.
PART 3 -- GENERAL ACCOUNT -- EXAMPLE OF FULL WITHDRAWAL WITH MVA AND WITHDRAWAL
CHARGE
Assume the same facts as in Part 2, above, except that under assumption (2)
a complete withdrawal is requested with 4 1/2 years (54 months) remaining in the
Guarantee Period (i.e., N = 54). The Guarantee Amount on the date of withdrawal
is $14,329.65. As was the case with the Examples in Part 1, above, the earnings
may be withdrawn free of Withdrawal Charge, leaving the initial Purchase Payment
of $10,000 subject to the Charge. The applicable Withdrawal Charge, from the
table on page 18 of the prospectus, is 2% or $200.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of withdrawal the Current Interest Rate for a
new Guarantee Period of 5 years is 8%:
The MVA factor = [(1 + I)/(1 + J + .0025)]N/12 -1
= [(1.07)/(1.08 + .0025)](54/12) -1
= (0.988453)4.5 -1
= 0.949077-1
= -0.050923
The Withdrawal Charge of $200 is applied first; the MVA factor is
applied against the remaining Guarantee Amount:
MVA = ($14,329.65 - $200) X (-0.050923) = -$719.52
The net amount available upon withdrawal is the Guarantee Amount
reduced by the Withdrawal Charge, the MVA and the Contract Administration
Charge:
$14,329.65 - $200 - $719.52 - $30 = $13,380.13
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of withdrawal the Current Interest Rate for a
new Guarantee Period of 5 years is 6%:
The MVA factor = [(1 + I)/(1 + J + .0025)]N/12 - 1
= [(1.07)/(1.06 + .0025)](54/12) - 1
= (1.007059)4.5 - 1
= 1.032159 - 1
= +0.032159
The MVA is:
($14,329.65 - $200) X (+0.032159) = +$454.40
And the net amount available upon surrender is:
$14,329.65 - $200 + $454.40 - $30 = $14,554.05
A-3
<PAGE> 67
APPENDIX B
SAMPLE DEATH BENEFIT COMPUTATIONS
Assume P purchases a Contract on January 1, 1989, with an initial Purchase
Payment of $100,000. P's Contract Value, which includes estimated investment
activity and which does not reflect actual past or anticipated future earnings,
experiences the following transactions:
<TABLE>
<CAPTION>
DATE TRANSACTION AMOUNT CONTRACT VALUE
- ------------------- -------------------------- -------- --------------
<S> <C> <C> <C>
January 1, 1989 Purchase Payment $100,000 $100,000
May 10, 1989 Purchase Payment $ 25,000 $126,000
July 20, 1990 Partial Withdrawal $ 20,000 $120,000
October 20, 1991 Purchase Payment $ 25,000 $127,000
March 17, 1992 Partial Annuitization $ 50,000 $ 75,000
February 13, 1993 Partial Withdrawal $ 10,000 $ 62,000
April 11, 1994 Purchase Payment $100,000 $165,000
September 9, 1995 Purchase Payment $ 10,000 $177,000
JANUARY 1, 1996 [7th Contract anniversary] $181,000
February 15, 1996 Purchase Payment $ 20,000 $180,000
December 19, 1996 Partial Withdrawal $ 30,000 $145,000
JANUARY 1, 1997 [8th Contract anniversary] $170,000
September 12, 1997 Partial Annuitization $ 50,000 $160,000
December 24, 1997 Purchase Payment $ 75,000 $170,000
JANUARY 1, 1998 [9th Contract anniversary] $185,000
September 9, 1998 $190,000
</TABLE>
EXAMPLE 1 -- P DIES ON JANUARY 1, 1996
Since P's death did not occur after the 7th Contract anniversary, the
guaranteed benefit at P's death would be the greater of the Contract Value on
January 1, 1996 ($181,000) or the total amount of Purchase Payments, less
withdrawals or annuitizations as of January 1, 1996 ($180,000) under the terms
of the standard Death Benefit.
Consequently, the Death Benefit payable on January 1, 1996 is $181,000.
EXAMPLE 2 -- P DIES ON JANUARY 1, 1997
The guaranteed benefit at P's death would be $170,000 under the terms of
the standard Death Benefit.
In addition, since P's death occurred after the 7th Contract anniversary,
the Contract provides for an enhanced Death Benefit if such is greater than the
standard Death Benefit. Under the terms of the enhanced Death Benefit, the
guaranteed benefit at P's death would be $171,000, representing the greater of
(a) or (b) below.
(a) Contract Value on the Contract (b) Death Benefit on the Contract
anniversary immediately preceding anniversary immediately
date of death (January 1, 1996), preceding date of death
plus any purchase payments and (January 1, 1996), plus any
less any withdrawals or purchase payments and less any
annuitizations since that withdrawals or annuitizations
Contract anniversary. since that Contract anniversary.
The Contract Value on January 1, As shown in Example 1, the Death
1996 was $181,000. Since that date, Benefit that would have been
P made a $20,000 Purchase Payment payable on January 1, 1996 was
and withdrew $30,000. $181,000. Since that date, P made
a $20,000 Purchase Payment and
withdrew $30,000.
$181,000 + $20,000 - $30,000 $181,000 + $20,000 - $30,000
= $171,000 = $171,000
Consequently, the Death Benefit payable on January 1, 1997 is $171,000.
B-1
<PAGE> 68
EXAMPLE 3 -- P DIES ON JANUARY 1, 1998
The guaranteed benefit at P's death would be $195,000 under the terms of
the standard Death Benefit.
The enhanced Death Benefit would be $196,000, representing the greater of
(a) or (b) below.
(a) Contract Value on January 1, 1997 (b) Death Benefit payable on
was $170,000. Since that date, January 1, 1997 was $171,000
P annuitized $50,000 and made a (as shown in Example 2). Since
$75,000 Purchase Payment. that date, P annuitized $50,000
and made a $75,000 Purchase
Payment.
$170,000 - $50,000 + $75,000 $171,000 - $50,000 + $75,000
= $195,000 = $196,000
Consequently, the Death Benefit payable on January 1, 1998 is $196,000.
EXAMPLE 4 -- P DIES ON SEPTEMBER 9, 1998
The guaranteed benefit at P's death would be $195,000 under the terms of
the standard Death Benefit.
The enhanced Death Benefit would be $196,000, representing the greater of
(a) or (b) below.
(a) Contract Value on January 1, (b) Death Benefit payable on
1998 was $185,000. January 1, 1998 (as shown
in Example 3).
Since there were no transactions subsequent to January 1, 1998 in P's
Contract, the Death Benefit payable on September 9, 1998 is $196,000.
B-2
<PAGE> 69
<TABLE>
<S> <C> <C>
- ------------------------------
- ------------------------------
- ------------------------------ Stamp
</TABLE>
FIRST SUNAMERICA LIFE INSURANCE COMPANY
ANNUITY SERVICE CENTER
P.O. BOX 54299
LOS ANGELES, CA 90054-0299
<PAGE> 70
Please forward a copy, without charge, of the Statement of Additional
Information concerning Polaris to:
(Please print or type and fill in all information.)
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
City/State/Zip
- ------------------------------------------------------------------------------
Date: Signed:
----------------------- -------------------------------------
<PAGE> 71
As filed pursuant to Rule 497(c)
under the Securities Act of 1933
Registration Nos. 33-85014 and 811-8810
STATEMENT OF ADDITIONAL INFORMATION
Fixed and Variable Deferred Annuity Contracts
issued by
FS VARIABLE SEPARATE ACCOUNT
Depositor: FIRST SUNAMERICA LIFE INSURANCE COMPANY
This Statement of Additional Information is not a prospectus; it should be read
with the prospectus 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
January 31, 1996
<PAGE> 72
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Performance Data....................................................3
Annuity Unit Values; Annuity Payments...............................7
Distribution of Contracts...........................................10
Financial Statements................................................11
</TABLE>
<PAGE> 73
PERFORMANCE DATA
From time to time the Separate Account may advertise the Cash
Management Portfolio's "yield" and "effective yield." Both yield figures are
based on historical earnings and are not intended to indicate future
performance. The "yield" of the Cash Management Portfolio refers to the net
income generated for a Contract funded by an investment in the Portfolio (which
invests in shares of the Cash Management Portfolio of SunAmerica Trust) over a
seven-day period (which period will be stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The "effective yield"
is calculated similarly but, when annualized, the income earned by an
investment in the Portfolio is assumed to be reinvested at the end of each
seven day period. The "effective yield" will be slightly higher than the
"yield" because of the compounding effect of this assumed reinvestment.
Neither the yield nor the effective yield takes into consideration the effect
of any capital changes that might have occurred during the seven day period,
nor do they reflect the impact of premium taxes or any Withdrawal Charges. The
impact of other recurring charges on both yield figures is, however, reflected
in them to the same extent it would affect the yield (or effective yield) for a
Certificate of average size.
In addition, the Separate Account may advertise "total return" data
for its other Portfolios. Like the yield figures described above, total return
figures are based on historical data and are not intended to indicate future
performance. The "total return" is a computed rate of return that, when
compounded annually over a stated period of time and applied to a hypothetical
initial investment in a Portfolio made at the beginning of the period, will
produce the same Contract Value at the end of the period that the hypothetical
investment would have produced over the same period (assuming a complete
redemption of the Contract at the end of the period). Recurring Contract
charges are reflected in the total return figures in the same manner as they
are reflected in the yield data for Contracts funded through the Cash
Management Portfolio. The effect of applicable Withdrawal Charges due to the
assumed redemption will be reflected in the return figures, but may be omitted
in additional return figures given for comparison.
For periods starting prior to the date the Contracts were first
offered to the public, the total return data for the Capital Appreciation,
Growth, Natural Resources and the Government and Quality Bond Portfolios of the
Separate Account will be derived from the performance of the corresponding
Portfolios of the Anchor Trust, modified to reflect the charges and expenses as
if the Separate Account Portfolio had been in existence since the inception
date of each respective Anchor Trust Portfolio. Thus, such performance figures
should not be construed to be actual historic performance of the relevant
Separate Account Portfolio. Rather, they are intended to indicate the historic
performance of the four corresponding Portfolios of the Anchor Trust, adjusted
to provide direct comparability to the performance of the Portfolios after the
date the Contracts were first offered to the public (which will reflect the
effect of fees and charges imposed under the Contracts). The Capital
Appreciation, Growth, Natural Resources and Government and Quality Bond
Portfolios of Anchor Trust have served since their inception as underlying
investment media for separate accounts of other insurance companies in
connection with Variable Contracts not having the same fee and charge schedules
as those imposed under the Contracts.
Performance data for the various Portfolios are computed in the manner
described below.
Cash Management Portfolio
The annualized current yield and the effective yield for the Cash
Management Portfolio for the 7 day period ending November 30, 1995 were 4.19%
and 4.27%, 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:
<PAGE> 74
Base Period Return = (EV-SV)/(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
The value of the Accumulation Unit at the end of the period (EV) is
determined by (1) adding, to the value of the Accumulation Unit at the
beginning of the period (SV), the investment income from the Underlying Fund
attributed to the Unit over the period, and (2) subtracting, from the result,
the sum of (a) the portion of the annual Mortality and Expense Risk and
Distribution Expense Charges allocable to the 7 day period (obtained by
multiplying the annually-based charges by the fraction 7/365), and (b) a
prorated portion of the annual Administrative Expense Charge of $35 per
Contract. The Administrative Expense Charge is first allocated among the
Portfolios and the General Account so that each Portfolio's allocated portion
of the charge is proportional to the percentage of the number of Participants'
accounts that have money allocated to that Portfolio. The Charge 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 Certificates funded by the Cash Management Portfolio.
Finally, as is done with the other charges discussed above, 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 Cash Management 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:
Effective Yield = [(Base Period Return + 1) to the 365/7 power - 1].
Net investment income for yield quotation purposes will not include
either realized capital gains and losses or unrealized appreciation and
depreciation, whether reinvested or not. The yield quotations also do not
reflect any impact of premium taxes, transfer fees, or Withdrawal Charges.
The yield quoted should not be considered a representation of the
yield of the Cash Management 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 Participant'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
Cash Management Portfolio and for providing a basis for comparison with other
investment alternatives. However, the Cash Management Portfolio's yield
fluctuates, unlike bank deposits or other investments that typically pay a
fixed yield for a stated period of time.
Other Portfolios
The Portfolios of the Separate Account other than the Cash Management
Portfolio compute their performance data as "total return".
The total returns of the various Portfolios since each Portfolio's
inception date are shown below, both with and without an assumed complete
redemption at the end of the period.
<PAGE> 75
TOTAL ANNUAL RETURN (IN PERCENT) FOR
PERIOD ENDING ON NOVEMBER 30, 1995
(RETURN WITH/WITHOUT REDEMPTION)
<TABLE>
<CAPTION>
Inception Since
Portfolio Date Inception
- --------- --------- ---------
<S> <C> <C>
Anchor Trust
------------
Capital Appreciation 4/6/95 17.92/24.92
Growth 4/6/95 10.43/17.43
Natural Resources 5/30/95 -1.13/ 5.87
Gov't & Quality Bond 5/3/95 2.00/ 9.00
SunAmerica Trust
----------------
Int'l Diversified
Equities 4/12/95 -0.53/ 6.47
Global Equities 5/22/95 1.41/ 8.41
Alliance Growth 4/6/95 26.95/33.95
Growth/Phoenix
Investment Counsel 4/6/95 13.75/20.75
Provident Growth 4/6/95 14.53/21.53
Venture Value 4/6/95 15.56/22.56
Growth-Income 4/12/95 12.38/19.38
Asset Allocation 4/24/95 4.85/11.85
Balanced/Phoenix
Investment Counsel 5/8/95 6.10/13.10
Worldwide High Income 5/2/95 5.16/12.16
High-Yield Bond 5/8/95 -4.31/ 2.69
Global Bond 5/2/95 0.94/ 7.94
Fixed Income 4/12/95 1.64/ 8.64
</TABLE>
Total return for a 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 Certificate funded by that Portfolio made at the beginning of
the period, will produce the same Contract Value at the end of the period that
the hypothetical investment would have produced over the same period. The
total rate of return (T) is computed so that it satisfies the formula:
P(1+T) to the nth power = 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).
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
Cash Management 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 Administrative Expense
charges on a particular Participant'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 Portfolio over the same time periods
would generally have been different from those produced by the computation. As
with the Cash Management Portfolio yield figures, total return figures are
derived from historical data and are not intended to be a projection of future
performance.
<PAGE> 76
ANNUITY UNIT VALUES; ANNUITY PAYMENTS
Net Investment Factor
The Net Investment Factor ("NIF") is an index applied to measure the
net investment performance of a Portfolio from one Valuation Date to the next.
The NIF may be greater or less than or equal to one (1.000); therefore, the
value of an Annuity Unit Value may increase, decrease or remain the same.
The NIF for a Portfolio for a given Valuation Period is a measure of
the net investment performance of the Portfolio from the end of the prior
Valuation Period to the end of the given Period. A NIF of 1.000 for a Period
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 Portfolio invests; it is also reduced
by Separate Account asset charges.
The NIF for any Portfolio for any Valuation Period is determined by
dividing (a) by (b) and then subtracting (c) from the result where:
(a) is the net result of:
(1) the net asset value of an Underlying Fund share held in
the Portfolio determined as of the Valuation Date at the end
of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution
declared by the Underlying Fund if the "ex-dividend" date
occurs during the Valuation Period, plus or minus
(3) a per share credit or charge with respect to any taxes
paid or reserved for by the Company during the Valuation
Period which are determined by the Company to be attributable
to the operation of the Portfolio (no federal income taxes are
applicable under present law);
(b) is the net asset value of the Underlying Fund share held in the
Portfolio determined as of the Valuation Date at the end of the
preceding Valuation Period; and
(c) is the asset charge factor determined by the Company for the
valuation Period to reflect the charges for assuming the mortality and
expense risks and the distribution expenses.
Illustrative Example
Assume that one share of a given Portfolio's Underlying Fund had a net
asset value of $11.46 as of the close of the New York Stock Exchange ("NYSE")
on a Tuesday; that its net asset value had been $11.44 at the close of the NYSE
on Monday, the day before; and that no dividends or other distributions on that
share had been made during the intervening Valuation Period. The NIF for the
Valuation Period (ending on Tuesday's close of the NYSE) is:
NIF = ($11.46/$11.44) - 0.00004133
= 1.00174825 - 0.00004133
= 1.00170692
The amount subtracted from the ratio of the two net asset values
(0.00004133) is the daily equivalent of the annual asset charge against the
Portfolio of 1.52%.
Annuity Unit Value
The value of an Annuity Unit is determined independently for each
Portfolio, but was initially set at the then current Portfolio values.
<PAGE> 77
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 Portfolio exceeds 3.5%, Variable Annuity payments derived from allocations
to that Portfolio will increase over time. If the net investment rate equals
3.5%, the Variable Annuity 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
annuity 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 Portfolios elected, and the amount of each
annuity payment will vary accordingly.
For each Portfolio, the value of an Annuity Unit for any Valuation
Period is determined by multiplying the Annuity Unit Value for the immediately
preceding Valuation Period by the NIF for the Valuation Period 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 which is assumed in the annuity tables contained in the
Contract.
Illustrative Example
The change in Annuity Unit value for a Portfolio from one Valuation
Date to the next is determined in part by multiplying the Annuity Unit value on
the prior date by the Net Investment Factor for that Portfolio for that
Valuation Period. 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 annuity payment tables are based. For example, if the net investment rate
for a Portfolio (reflected in the Net Investment Factor) were equal to the
assumed investment rate, the Variable Annuity payments should remain constant
(i.e., the Annuity Unit value should not change). The daily factor that
neutralizes the assumed investment rate of 3.5 percent per annum is:
1/[(1.035) to the (1/365) power] = 0.99990575
In the example given above, if the Annuity Unit value for the
Portfolio was $10.103523 on Monday, the Annuity Unit value on Tuesday would
have been:
$10.103523 x 1.00170692 x 0.99990575 = $10.119815
Variable Annuity Payments
Illustrative Example
Assume that a male Participant, P, owns a Certificate in connection
with which P has allocated all of his Contract Value to a single Portfolio. P
is also the sole Annuitant and, at age 60, has elected to annuitize his
Certificate under Option 4, a Life Annuity With 120 Monthly Payments
Guaranteed. As of the last Valuation Date 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 at that Valuation Date is equal to
7543.2456 x $15.432655 = $116,412.31). Assume also that the Annuity Unit value
for the Portfolio at the same Valuation Date is $13.256932, and that the
Annuity Unit value on the Valuation Date immediately prior to the second
annuity payment date is $13.327695.
P's first Variable Annuity payment is determined from the annuity rate
tables in P's Contract, using the information assumed above. From the tables,
which supply monthly annuity payments for each $1,000 of applied Contract
Value, P's first Variable Annuity 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:
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
Annuity payment divided by the value of an Annuity Unit at the Valuation Date
immediately prior to annuitization:
Annuity Units = $630.95/$13.256932 = 47.593968
P's second Variable Annuity payment is determined by multiplying the
number of Annuity Units by the Annuity Unit value as of the Valuation Date
immediately prior to the second payment due date:
Second Payment = 47.593968 x $13.327695 = $634.32
The third and subsequent Variable Annuity payments are computed in a
manner similar to the second Variable Annuity payment.
Note that the amount of the first Variable Annuity payment depends on
the Contract Value in the relevant Portfolio on the Annuity Date and thus
reflects the investment performance of the Portfolio net of fees and charges
during the Accumulation Period. The amount of that payment determines the
number of Annuity Units, which will remain constant during the Annuity Period
(assuming no transfers from the Portfolio). The net investment performance of
the Portfolio during the Annuity Period is reflected in continuing changes
during the Period in the Annuity Unit value, which determines the amounts of
the second and subsequent Variable Annuity payments.
<PAGE> 78
DISTRIBUTION OF CONTRACTS
The Contracts are offered through the distributor for the Separate
Account, SunAmerica Capital Services, Inc., located at 733 Third Avenue, 4th
Floor, New York, New York 10017. SunAmerica Capital Services, Inc. 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.
For the period from inception to November 30, 1995, the aggregate
amount of underwriting commissions paid by the Company to SunAmerica Capital
Services, Inc. was $355,597, of which $28,455 was retained by it.
Contracts are offered on a continuous basis.
FINANCIAL STATEMENTS
The financial statements of the Company as of September 30, 1995 and
1994 and for each of the three years in the period ended September 30, 1995
are presented in the prospectus. The financial statements of the Company
should be considered only as bearing on the ability of the Company to meet its
obligation under the Contracts. The financial statements of FS Variable
Separate Account as of November 30, 1995 and for the period from inception to
November 30, 1995 are included in this Statement of Additional Information.
Price Waterhouse 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 Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
<PAGE> 79
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS
NOVEMBER 30, 1995
<PAGE> 80
REPORT OF INDEPENDENT ACCOUNTANTS
January 22, 1996
To the Board of Directors of First SunAmerica Life Insurance Company
and the Contractholders of its separate account,
FS Variable Separate Account
In our opinion, the accompanying statement of net assets, including the
schedule of portfolio investments, and the related statements of operations and
of changes in net assets present fairly, in all material respects, the
financial position of each of the Variable Accounts constituting FS Variable
Separate Account, a separate account of First SunAmerica Life Insurance Company
(the "Separate Account") at November 30, 1995, and the results of their
operations and the changes in their net assets for the period from inception
(April 6, 1995) to November 30, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Separate Account's management; our responsibility is to express an opinion
on these financial statements based on our audit. We conducted our audit of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit, which included confirmation of securities owned at November 30, 1995
by correspondence with the custodian, provides a reasonable basis for the
opinion expressed above.
<PAGE> 81
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS
NOVEMBER 30, 1995
<TABLE>
<CAPTION> International
Capital Natural Government and Diversified Global Alliance
Appreciation Growth Resources Quality Bond Equities Equities Growth
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Investments in Anchor Series
Trust, at market value $746,192 $196,314 $57,178 $432,338 $ 0 $ 0 $ 0
Investments in SunAmerica Series
Trust, at market value 0 0 0 0 584,588 346,075 817,196
Liabilities 0 0 0 0 0 0 0
---------------------------------------------------------------------------------------
Net Assets $746,192 $196,314 $57,178 $432,338 $584,588 $346,075 $817,196
=======================================================================================
Accumulation units outstanding 52,583 15,156 5,306 37,576 58,058 26,604 52,943
=======================================================================================
Unit value of accumulation units $14.19 $12.95 $10.78 $11.51 $10.07 $13.01 $15.44
=======================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 82
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS
NOVEMBER 30, 1995
(CONTINUED)
<TABLE>
<CAPTION>
Growth/ Balanced/
Phoenix Phoenix
Investment Provident Venture Growth- Asset Investment Worldwide
Counsel Growth Value Income Allocation Counsel High Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Investments in Anchor
Series Trust, at
market value $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Investments in SunAmerica
Series Trust,
at market value 294,313 402,674 1,510,906 602,738 768,528 513,587 244,980
Liabilities 0 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------
Net Assets $294,313 $402,674 $1,510,906 $602,738 $768,528 $513,587 $244,980
==================================================================================================
Accumulation units
outstanding 22,973 31,960 113,664 45,266 60,824 41,654 21,556
==================================================================================================
Unit value of accumulation
units $12.81 $12.60 $13.29 $13.32 $12.64 $12.33 $11.36
==================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 83
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS
NOVEMBER 30, 1995
(CONTINUED)
<TABLE>
<CAPTION>
High-Yield Global Fixed Cash
Bond Bond Income Management
Portfolio Portfolio Portfolio Portfolio TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in Anchor Series Trust,
at market value $ 0 $ 0 $ 0 $ 0 $1,432,022
Investments in SunAmerica Series Trust,
at market value 467,489 136,288 59,573 637,848 7,386,783
Liabilities 0 0 0 0 0
------------------------------------------------------------------------
Net Assets $467,489 $136,288 $59,573 $637,848 $8,818,805
========================================================================
Accumulation units outstanding 40,706 12,162 5,375 59,731
=========================================================
Unit value of accumulation units $11.48 $11.20 $11.10 $10.67
=========================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 84
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
SCHEDULE OF PORTFOLIO INVESTMENTS
NOVEMBER 30, 1995
<TABLE>
<CAPTION>
Market Value Market
Variable Accounts Shares Per Share Value Cost
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ANCHOR SERIES TRUST:
Capital Appreciation Portfolio 32,297 $23.10 $ 746,192 $ 710,217
Growth Portfolio 10,118 19.40 196,314 198,897
Natural Resources Portfolio 3,824 14.95 57,178 57,583
Government and Quality Bond Portfolio 30,828 14.02 432,338 433,935
---------------------------
1,432,022 1,400,632
---------------------------
SUNAMERICA SERIES TRUST:
International Diversified Equities Portfolio 57,609 10.15 584,588 573,475
Global Equities Portfolio 26,502 13.06 346,075 336,887
Alliance Growth Portfolio 52,280 15.63 817,196 765,226
Growth/Phoenix Investment Counsel Portfolio 22,404 13.14 294,313 277,777
Provident Growth Portfolio 30,740 13.10 402,674 386,306
Venture Value Portfolio 112,200 13.47 1,510,906 1,413,463
Growth-Income Portfolio 43,952 13.71 602,738 564,990
Asset Allocation Portfolio 60,337 12.74 768,528 737,784
Balanced/Phoenix Investment Counsel Portfolio 41,157 12.48 513,587 483,351
Worldwide High Income Portfolio 21,458 11.42 244,980 240,860
High-Yield Bond Portfolio 44,411 10.53 467,489 457,522
Global Bond Portfolio 12,371 11.02 136,288 131,691
Fixed Income Portfolio 5,506 10.82 59,573 57,923
Cash Management Portfolio 59,637 10.70 637,848 628,913
---------------------------
7,386,783 7,056,168
---------------------------
$8,818,805 $8,456,800
===========================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 85
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (APRIL 6, 1995) TO NOVEMBER 30, 1995
<TABLE>
<CAPTION>
International
Capital Natural Government and Diversified Global Alliance
Appreciation Growth Resources Quality Bond Equities Equities Growth
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends and capital gain
distributions $ 4,866 $17,402 $1,129 $18,695 $ 0 $ 0 $ 0
-----------------------------------------------------------------------------------------
Total investment income 4,866 17,402 1,129 18,695 0 0 0
-----------------------------------------------------------------------------------------
Expenses:
Mortality risk charge (1,745) (606) (140) (1,208) (1,521) (745) (1,890)
Expense risk charge (599) (208) (48) (414) (522) (256) (649)
Distribution expense charge (256) (89) (21) (178) (224) (109) (278)
-----------------------------------------------------------------------------------------
Total expenses (2,600) (903) (209) (1,800) (2,267) (1,110) (2,817)
-----------------------------------------------------------------------------------------
Net investment income (loss) 2,266 16,499 920 16,895 (2,267) (1,110) (2,817)
-----------------------------------------------------------------------------------------
Realized gains (losses) from
securities transactions:
Proceeds from shares sold 3,354 640 332 2,612 103,158 23,247 10,800
Cost of shares sold (3,017) (640) (338) (2,675) (101,320) (22,791) (10,181)
-----------------------------------------------------------------------------------------
Net realized gains (losses) from
securities transactions 337 0 (6) (63) 1,838 456 619
-----------------------------------------------------------------------------------------
Net unrealized appreciation/
depreciation of investments:
Beginning of period 0 0 0 0 0 0 0
End of period 35,975 (2,583) (405) (1,597) 11,113 9,188 51,970
-----------------------------------------------------------------------------------------
Change in net unrealized
appreciation/depreciation
of investments 35,975 (2,583) (405) (1,597) 11,113 9,188 51,970
-----------------------------------------------------------------------------------------
Increase in net assets from
operations $38,578 $13,916 $ 509 $15,235 $ 10,684 $ 8,534 $ 49,772
=========================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 86
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (APRIL 6, 1995) TO NOVEMBER 30, 1995
(CONTINUED)
<TABLE>
<CAPTION>
Growth/Phoenix Balanced/Phoenix
Investment Provident Venture Growth- Asset Investment Worldwide
Counsel Growth Value Income Allocation Counsel High Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends and capital
gains distributions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
--------------------------------------------------------------------------------------------------
Total investment income 0 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------
Expenses:
Mortality risk charge (606) (968) (4,146) (1,439) (2,009) (1,300) (457)
Expense risk charge (208) (332) (1,423) (494) (689) (446) (157)
Distribution expense charge (89) (142) (609) (212) (296) (191) (67)
--------------------------------------------------------------------------------------------------
Total expenses (903) (1,442) (6,178) (2,145) (2,994) (1,937) (681)
--------------------------------------------------------------------------------------------------
Net investment income (loss) (903) (1,442) (6,178) (2,145) (2,994) (1,937) (681)
--------------------------------------------------------------------------------------------------
Realized gains (losses) from
securities transactions:
Proceeds from shares sold 10,787 1,326 1,136 2,275 98,803 79,921 511
Cost of shares sold (10,569) (1,241) (1,079) (2,188) (97,432) (78,271) (503)
--------------------------------------------------------------------------------------------------
Net realized gains (losses)
from securities transactions 218 85 57 87 1,371 1,650 8
--------------------------------------------------------------------------------------------------
Net unrealized appreciation/
depreciation of investments:
Beginning of period 0 0 0 0 0 0 0
End of period 16,536 16,368 97,443 37,748 30,744 30,236 4,120
--------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation/depreciation
of investments 16,536 16,368 97,443 37,748 30,744 30,236 4,120
--------------------------------------------------------------------------------------------------
Increase in net assets
from operations $ 15,851 $15,011 $91,322 $35,690 $29,121 $29,949 $3,447
==================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 87
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (APRIL 6, 1995) To NOVEMBER 30, 1995
(CONTINUED)
<TABLE>
<CAPTION>
High-Yield Global Fixed Cash
Bond Bond Income Management
Portfolio Portfolio Portfolio Portfolio TOTAL
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends and capital gains distributions $ 0 $ 0 $ 0 $ 0 $ 42,092
---------------------------------------------------------------------
Total investment income 0 0 0 0 42,092
---------------------------------------------------------------------
Expenses:
Mortality risk charge (996) (289) (222) (3,120) (23,407)
Expense risk charge (342) (99) (76) (1,070) (8,032)
Distribution expense charge (146) (42) (33) (459) (3,441)
---------------------------------------------------------------------
Total expenses (1,484) (430) (331) (4,649) (34,880)
---------------------------------------------------------------------
Net investment income (loss) (1,484) (430) (331) (4,649) 7,212
---------------------------------------------------------------------
Realized gains (losses) from securities transactions:
Proceeds from shares sold 2,813 587 177,216 926,533 1,446,051
Cost of shares sold (2,777) (574) (175,909) (918,943) (1,430,448)
---------------------------------------------------------------------
Net realized gains (losses) from securities transactions 36 13 1,307 7,590 15,603
---------------------------------------------------------------------
Net unrealized appreciation/depreciation of investments:
Beginning of period 0 0 0 0 0
End of period 9,967 4,597 1,650 8,935 362,005
---------------------------------------------------------------------
Change in net unrealized appreciation/depreciation
of investments 9,967 4,597 1,650 8,935 362,005
---------------------------------------------------------------------
Increase in net assets from operations $ 8,519 $4,180 $ 2,626 $ 11,876 $ 384,820
=====================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 88
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM INCEPTION (APRIL 6, 1995) TO NOVEMBER 30, 1995
<TABLE>
<CAPTION>
Government International
Capital Natural and Diversified Global Alliance
Appreciation Growth Resources Quality Bond Equities Equities Growth
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income (loss) $ 2,266 $ 16,499 $ 920 $ 16,895 $ (2,267) $(1,110) $ (2,817)
Net realized gains (losses)
from securities transactions 337 0 (6) (63) 1,838 456 619
Change in net unrealized appreciation/
depreciation of investments 35,975 (2,583) (405) (1,597) 11,113 9,188 51,970
------------------------------------------------------------------------------------------
Increase in net assets
from operations 38,578 13,916 509 15,235 10,684 8,534 49,772
------------------------------------------------------------------------------------------
From capital transactions:
Net proceeds from units sold 603,264 123,939 40,106 293,439 453,818 306,248 631,298
Cost of units redeemed (1,491) 0 (170) 0 (616) (1,466) 0
Net transfers 105,841 58,459 16,733 123,664 120,702 32,759 136,126
------------------------------------------------------------------------------------------
Increase in net assets
from capital transactions 707,614 182,398 56,669 417,103 573,904 337,541 767,424
------------------------------------------------------------------------------------------
Increase in net assets 746,192 196,314 57,178 432,338 584,588 346,075 817,196
Net assets at beginning of period 0 0 0 0 0 0 0
------------------------------------------------------------------------------------------
Net assets at end of period $746,192 $196,314 $57,178 $432,338 $584,588 $346,075 $817,196
==========================================================================================
ANALYSIS OF INCREASE (DECREASE) IN
UNITS OUTSTANDING:
Units sold 44,806 10,253 3,756 26,469 45,880 24,097 43,439
Units redeemed (107) 0 (16) 0 (62) (115) 0
Units transferred 7 ,884 4,903 1,566 11,107 12,240 2,622 9,504
------------------------------------------------------------------------------------------
Increase in units outstanding 52,583 15,156 5,306 37,576 58,058 26,604 52,943
Beginning units 0 0 0 0 0 0 0
-----------------------------------------------------------------------------------------
Ending units 52,583 15,156 5,306 37,576 58,058 26,604 52,943
==========================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 89
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM INCEPTION (APRIL 6, 1995) TO NOVEMBER 30, 1995
(CONTINUED)
<TABLE>
<CAPTION>
Growth/Phoenix Balanced/Phoenix
Investment Provident Venture Growth- Asset Investment Worldwide
Counsel Growth Value Income Allocation Counsel High Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
From operations:
Net investment income (loss) $ (903) $(1,442) $(6,178) $(2,145) $(2,994) $(1,937) $ (681)
Net realized gains (losses)
from securities
transactions 218 85 57 87 1,371 1,650 8
Change in net unrealized
appreciation/depreciation
of investments 16,536 16,368 97,443 37,748 30,744 30,236 4,120
--------------------------------------------------------------------------------------------------
Increase in net assets
from operations 15,851 15,011 91,322 35,690 29,121 29,949 3,447
--------------------------------------------------------------------------------------------------
From capital transactions:
Net proceeds from units
sold 254,342 244,599 1,080,358 468,499 633,888 430,161 102,352
Cost of units redeemed (307) (518) (358) (2,650) (1,659) (451) (176)
Net transfers 24,427 143,582 339,584 101,199 107,178 53,928 139,357
--------------------------------------------------------------------------------------------------
Increase in net assets
from capital
transactions 278,462 387,663 1,419,584 567,048 739,407 483,638 241,533
--------------------------------------------------------------------------------------------------
Increase in net assets 294,313 402,674 1,510,906 602,738 768,528 513,587 244,980
Net assets at beginning
of period 0 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------
Net assets at end of period $294,313 $402,674 $1,510,906 $602,738 $768,528 $513,587 $244,980
==================================================================================================
ANALYSIS OF INCREASE
(DECREASE) IN UNITS
OUTSTANDING:
Units sold 20,902 20,095 86,388 37,489 52,229 37,058 9,170
Units redeemed (24) (42) (28) (214) (135) (38) (16)
Units transferred 2,095 11,907 27,304 7,991 8,730 4,634 12,402
--------------------------------------------------------------------------------------------------
Increase in units
outstanding 22,973 31,960 113,664 45,266 60,824 41,654 21,556
Beginning units 0 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------
Ending units 22,973 31,960 113,664 45,266 60,824 41,654 21,556
==================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 90
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM INCEPTION (APRIL 6, 1995) TO NOVEMBER 30, 1995
(CONTINUED)
<TABLE>
<CAPTION>
High-Yield Global Fixed Cash
Bond Bond Income Management
Portfolio Portfolio Portfolio Portfolio TOTAL
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income (loss) $ (1,484) $ (430) $ (331) $ (4,649) $ 7,212
Net realized gains (losses) from securities transactions 36 13 1,307 7,590 15,603
Change in net unrealized appreciation/depreciation
of investments 9,967 4,597 1,650 8,935 362,005
---------------------------------------------------------------------
Increase in net assets from operations 8,519 4,180 2,626 11,876 384,820
---------------------------------------------------------------------
From capital transactions:
Net proceeds from units sold 305,078 112,095 120,469 1,544,123 7,748,076
Cost of units redeemed (1,491) 0 0 (2,115) (13,468)
Net transfers 155,383 20,013 (63,522) (916,036) 699,377
---------------------------------------------------------------------
Increase in net assets from capital transactions 458,970 132,108 56,947 625,972 8,433,985
---------------------------------------------------------------------
Increase in net assets 467,489 136,288 59,573 637,848 8,818,805
Net assets at beginning of period 0 0 0 0 0
---------------------------------------------------------------------
Net assets at end of period $467,489 $136,288 $ 59,573 $ 637,848 $8,818,805
=====================================================================
ANALYSIS OF INCREASE (DECREASE) IN UNITS
OUTSTANDING:
Units sold 27,010 10,323 11,471 146,481
Units redeemed (132) 0 0 (201)
Units transferred 13,828 1,839 (6,096) (86,549)
------------------------------------------------------
Increase in units outstanding 40,706 12,162 5,375 59,731
Beginning units 0 0 0 0
------------------------------------------------------
Ending units 40,706 12,162 5,375 59,731
======================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 91
See accompanying notes to financial statements.
<PAGE> 92
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FS Variable Separate Account of First SunAmerica Life
Insurance Company (the "Separate Account") is a segregated
investment account of First SunAmerica Life Insurance Company
(the "Company"). The Company is an indirect, wholly owned
subsidiary of SunAmerica Inc. The Separate Account is
registered as a segregated unit investment trust pursuant to
the provisions of the Investment Company Act of 1940, as
amended.
The Separate Account is composed of eighteen variable
portfolios (the "Variable Accounts"). Each of the Variable
Accounts is invested in the shares of either (1) one of the
four currently available investment portfolios of Anchor
Series Trust ("Anchor Trust") or (2) one of the fourteen
currently available investment portfolios of SunAmerica Series
Trust ("SunAmerica Trust"). The Anchor Trust and the
SunAmerica Trust (the "Trusts") are each diversified,
open-end, affiliated investment companies, which retain
investment advisers to assist in the investment activities of
the Trusts. The contractholder may elect to have payments
allocated to any of five guaranteed-interest funds of the
Company (the "General Account"), which are not a part of the
Separate Account. The financial statements include balances
allocated by the contractholder to the eighteen Variable
Accounts and do not include balances allocated to the General
Account.
The Variable Accounts became initially available for sale on
March 1, 1995. The inception dates for the eighteen
individual funds were as follows: April 6, 1995 for the
Growth, Capital Appreciation, Venture Value, Provident Growth,
Growth/Phoenix Investment Counsel and Alliance Growth funds;
April 12, 1995 for the Fixed Income, Growth-Income and
International Diversified Equities funds; April 24, 1995 for
the Asset Allocation fund; April 27, 1995 for the Cash
Management fund; May 2, 1995 for the Global Bond and Worldwide
High Income funds; May 3, 1995 for the Government and Quality
Bond fund; May 8, 1995 for the Balanced/Phoenix Investment
Counsel fund; May 22, 1995 for the Global Equities fund; and
May 30, 1995 for the Natural Resources fund.
The investment objectives and policies of the four portfolios
of the Anchor Trust are summarized below:
1
<PAGE> 93
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CAPITAL APPRECIATION PORTFOLIO seeks long-term capital
appreciation. This portfolio invests in growth
equity securities which are widely diversified by
industry and company and may engage in transactions involving
stock index futures and options thereon as a hedge against
changes in market conditions.
GROWTH PORTFOLIO seeks long-term capital appreciation through
investment in growth equity securities. This portfolio may
engage in transactions involving stock index futures and
options thereon as a hedge against changes in market
conditions.
NATURAL RESOURCES PORTFOLIO seeks a total return in excess of
the U.S. rate of inflation as represented by the Consumer
Price Index. This portfolio invests primarily in equity
securities of U.S. or foreign companies which are expected to
provide favorable returns in periods of rising inflation.
GOVERNMENT AND QUALITY BOND PORTFOLIO seeks relatively high
current income, liquidity and security of principal. This
portfolio invests in obligations issued, guaranteed or insured
by the U.S. Government, its agencies or instrumentalities and
in corporate debt securities rated Aa or better by Moody's
Investor Service, Inc. or AA or better by Standard & Poor's
Corporation.
Anchor Trust has portfolios in addition to those identified
above. However, none of these other portfolios is currently
available for investment under the Separate Account.
The investment objectives and policies of the fourteen
portfolios of the SunAmerica Trust are summarized below:
INTERNATIONAL DIVERSIFIED EQUITIES PORTFOLIO seeks long-term
capital appreciation by investing in accordance with country
weightings as determined by the investment adviser in common
stocks of foreign issuers which, in the aggregate, replicate
broad country indices.
GLOBAL EQUITIES PORTFOLIO seeks long-term growth of capital
through investment primarily in common stocks or securities of
U.S. and foreign issuers with common stock
2
<PAGE> 94
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
characteristics which demonstrate the potential for
appreciation and through transactions in foreign currencies.
ALLIANCE GROWTH, GROWTH/PHOENIX INVESTMENT COUNSEL, PROVIDENT
GROWTH AND VENTURE VALUE PORTFOLIOS each seek long-term growth
of capital by investing primarily in common stocks or
securities with common stock characteristics which demonstrate
the potential for appreciation.
GROWTH-INCOME PORTFOLIO seeks growth of capital and income by
investing primarily in common stocks or securities which
demonstrate the potential for appreciation and/or dividends.
ASSET ALLOCATION PORTFOLIO seeks high total return (including
income and capital gains) consistent with preservation of
capital over the long-term through a diversified portfolio
that can include common stocks and other securities having
common stock characteristics, bonds and other intermediate and
long-term fixed-income securities and money market instruments
(debt securities maturing in one year or less) in any
combination.
BALANCED/PHOENIX INVESTMENT COUNSEL PORTFOLIO seeks reasonable
income, long-term capital growth and conservation of capital
by investing primarily in common stocks and fixed-income
securities, with an emphasis on income-producing securities
which appear to have some potential for capital enhancement.
WORLDWIDE HIGH INCOME PORTFOLIO seeks high current income and,
secondarily, capital appreciation, by investing primarily in a
portfolio of high-yielding fixed-income securities of issuers
located throughout the world.
HIGH-YIELD BOND PORTFOLIO seeks a high level of current income
and, secondarily, seeks capital appreciation by investing
primarily in intermediate and long-term corporate obligations,
with emphasis on higher-yielding, higher-risk, lower-rated or
unrated securities.
3
<PAGE> 95
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
GLOBAL BOND PORTFOLIO seeks a high total return, emphasizing
current income and, to a lesser extent, providing
opportunities for capital appreciation, through investment in
high-quality fixed-income securities of U.S. and foreign
issuers and through transactions in foreign currencies.
FIXED INCOME PORTFOLIO seeks a high total return with only
moderate price risk by investing primarily in investment
grade, fixed-income securities.
CASH MANAGEMENT PORTFOLIO seeks high current yield while
preserving capital by investing in a diversified selection of
money market instruments.
Investments in the variable portfolios of the Trusts are
valued at the net asset value of the shares of the designated
portfolio of the Trust. Securities transactions are valued on
the date the securities are purchased or sold. Dividends and
capital gains distributions are recorded when received.
Realized gains and losses on the sale of investments in the
Trusts are recognized at the date of sale and are determined
on an average cost basis.
Accumulation unit values are computed daily based on the total
net assets of the Variable Accounts.
2. CHARGES AND DEDUCTIONS
Charges and deductions are applied against the current value
of the Separate Account and are paid as follows:
WITHDRAWAL CHARGE: The contract value may be withdrawn at any
time during the accumulation period. There is a free
withdrawal amount for the first withdrawal during a contract
year after the first contract year. The free withdrawal
amount is the greater of earnings in the contract or 10% of
the purchase payments made more than one year prior to the
date of withdrawal that remain subject to the withdrawal
charge and that have not previously been withdrawn. Should a
withdrawal exceed the free withdrawal
4
<PAGE> 96
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. CHARGES AND DEDUCTIONS (continued)
amount, a withdrawal charge, in certain circumstances, is
imposed and paid to the Company.
Withdrawal charges vary in amount depending upon the contract
year in which the purchase payment being withdrawn was made.
The withdrawal charge is deducted from the remaining
contract value so that the actual reduction in contract value
as a result of the withdrawal will be greater than the
withdrawal amount requested and paid. For purposes of
determining the withdrawal charge, withdrawals will be
allocated first to investment income, if any (which may
generally be withdrawn free of a withdrawal charge), and then
to purchase payments on a first-in, first-out basis so that
all withdrawals are allocated to purchase payments to which
the lowest (if any) withdrawal charge applies.
Any amount withdrawn which exceeds a free withdrawal may be
subject to a withdrawal charge in accordance with the
withdrawal charge table shown below:
<TABLE>
<CAPTION>
Contribution Applicable Withdrawal
Year Charge Percentage
-------------- -----------------------
<S> <C>
Zero 7%
First 6%
Second 5%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and later 0%
</TABLE>
CONTRACT ADMINISTRATION CHARGE: An annual contract administration
charge of $30 is charged against each contract, which reimburses the
Company for expenses incurred in establishing and maintaining
records relating to a contract. The contract administration charge
will be assessed on each anniversary of the issue date of the
contract prior to the
5
<PAGE> 97
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. CHARGES AND DEDUCTIONS (continued)
date when annuity payments begin. In the event that a total
surrender of contract value is made, the charge will be assessed as
of the date of surrender without proration.
TRANSFER FEE: A transfer fee of $25 is assessed on each transfer of
funds in excess of fifteen transactions within a contract year.
MORTALITY AND EXPENSE RISK CHARGE: The Company deducts mortality
and expense risk charges, which total to an annual rate of 1.37% of
the net asset value of each portfolio, computed on a daily basis.
The mortality risk charge is compensation for the mortality risks
assumed by the Company from its contractual obligations to make
annuity payments after the contract has annuitized for the life of
the annuitant, to waive the withdrawal charge in the event of the
death of the contractholder and to provide both a standard and an
enhanced death benefit if the contractholder dies prior to the date
annuity payments begin. The expense risk charge is compensation for
the risk assumed by the Company that the cost of administering the
contracts will exceed the amount received from the contract
administration charge.
DISTRIBUTION EXPENSE CHARGE: The Company deducts a distribution
expense charge which is designed to compensate the Company for
assuming the risk that the cost of distributing the contracts will
exceed the revenues from the withdrawal charge. As compensation for
assuming this distribution expense risk, the Company deducts an
amount, computed on a daily basis, which is equal to an annual rate
of 0.15% of the net asset value of each portfolio.
SEPARATE ACCOUNT INCOME TAXES: The Company currently does not
maintain a provision for taxes, but has reserved the right to
establish such a provision for taxes in the future if it determines,
in its sole discretion, that it will incur a tax as a result of the
operation of the Separate Account.
6
<PAGE> 98
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENT IN ANCHOR TRUST AND SUNAMERICA TRUST
The aggregate cost of the Trusts' shares acquired and the aggregate
proceeds from shares sold during the period from inception (April 6,
1995) to November 30, 1995 consist of the following:
<TABLE>
<CAPTION>
Cost of Shares Proceeds from
Variable Accounts Acquired Shares Sold
-------------------------------- --------------- ---------------
<S> <C> <C>
ANCHOR TRUST:
Capital Appreciation Portfolio $ 713,234 $ 3,354
Growth Portfolio 199,537 640
Natural Resources Portfolio 57,922 332
Government and Quality Bond
Portfolio 436,610 2,612
SUNAMERICA TRUST:
International Diversified
Equities Portfolio 674,795 103,158
Global Equities Portfolio 359,678 23,247
Alliance Growth Portfolio 775,408 10,800
Growth/Phoenix Investment
Counsel Portfolio 288,347 10,787
Provident Growth Portfolio 387,546 1,326
Venture Value Portfolio 1,414,542 1,136
Growth-Income Portfolio 567,178 2,275
Asset Allocation Portfolio 835,216 98,803
Balanced/Phoenix Investment
Counsel Portfolio 561,621 79,921
Worldwide High Income
Portfolio 241,362 511
High-Yield Bond Portfolio 460,299 2,813
Global Bond Portfolio 132,265 587
Fixed Income Portfolio 233,832 177,216
Cash Management Portfolio 1,547,856 926,533
================ ================
</TABLE>
7
<PAGE> 99
FS VARIABLE SEPARATE ACCOUNT
OF
FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
4. FEDERAL INCOME TAXES
The Company qualifies for federal income tax treatment granted to life
insurance companies under subchapter L of the Internal Revenue Service
Code (the "Code"). The operations of the Separate Account are part of
the total operations of the Company and are not taxed separately. The
Separate Account is not treated as a regulated investment company
under the Code.
8
