-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GbyFIAlLm3c82t7vcLyQP1HrI8prbngpYpEtWl4dMakkE/2DqYb92x1iowzg0V5g gm7s9bPx8kYnk/dlCtUqOQ== 0000950148-96-002876.txt : 19961211 0000950148-96-002876.hdr.sgml : 19961211 ACCESSION NUMBER: 0000950148-96-002876 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961210 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNAMERICA INC CENTRAL INDEX KEY: 0000054727 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 860176061 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-04618 FILM NUMBER: 96678703 BUSINESS ADDRESS: STREET 1: 1 SUNAMERICA CENTER CITY: LOS ANGELES STATE: CA ZIP: 90067-6022 BUSINESS PHONE: 3107726000 FORMER COMPANY: FORMER CONFORMED NAME: KAUFMAN & BROAD INC DATE OF NAME CHANGE: 19890515 FORMER COMPANY: FORMER CONFORMED NAME: KAUFMAN & BROAD BUILDING CO DATE OF NAME CHANGE: 19711006 10-K405 1 FORM 10-K405 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission File Number 1-4618 SUNAMERICA INC. INCORPORATED IN MARYLAND 86-0176061 (IRS EMPLOYER IDENTIFICATION NO.)
1 SunAmerica Center, Los Angeles, California 90067-6022 Registrant's telephone number, including area code: (310) 772-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ---------------------- Common Stock (par value $1.00 per share) New York Stock Exchange Pacific Stock Exchange 9 1/4% Preferred Stock, Series B New York Stock Exchange $3.10 Depositary Shares representing Series E Mandatory Conversion Premium Dividend Preferred Stock New York Stock Exchange 8 1/2% Premium Equity Redemption Cumulative Security Units New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No --- --- The aggregate market value of voting stock held by non-affiliates of the Company on November 30, 1996 was $4,473,872,000. The number of shares outstanding of each of the registrant's classes of common stock on November 30, 1996 was as follows: Common Stock (par value $1.00 per share) 108,866,188 shares Nontransferable Class B Stock (par value $1.00 per share) 10,848,468 shares DOCUMENTS INCORPORATED BY REFERENCE NOTICE OF 1997 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT (INCORPORATED INTO PART III) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL DESCRIPTION SunAmerica Inc. (the "Company") is a diversified financial services company specializing in retirement savings and investment products and services. Together, the SunAmerica life insurance companies rank among the largest U.S. issuers of annuities. Complementing these annuity operations are the Company's asset management operations; its three broker-dealers, which the Company believes, based on industry data, represent the largest network of independent registered representatives in the nation; and its trust company, which provides administrative and custodial services to qualified retirement plans. At September 30, 1996, the Company held $36.87 billion of assets, consisting of $23.73 billion of assets owned by the Company; $2.14 billion of assets managed in mutual funds; and $11.00 billion of assets under custody in retirement trust accounts. The Company believes that demographic trends have produced strong consumer demand for long-term, investment-oriented products. According to U.S. Census Bureau projections, the number of individuals between the ages of 45 to 64 will grow from 46 million to 60 million during the 1990s, making this age group the fastest-growing segment of the U.S. population. Between 1985 and 1995, annual industry premiums from annuities and fund deposits increased from $53 billion to $159 billion. During the same period, annual industry sales of mutual funds, excluding money market accounts, rose from $114 billion to $477 billion. Focusing its operations on this expanding market, the Company specializes in the sale of tax-deferred long-term savings products and investments through its life insurance, asset management, retirement trust and broker-dealer subsidiaries. The Company markets fixed annuities and guaranteed investment contracts ("GICs") and fee-generating variable annuities, mutual funds and trust services. Its annuity products are distributed through a broad spectrum of financial services distribution channels, including independent registered representatives of the Company's broker-dealer subsidiaries and other broker-dealers; banks and other financial institutions; and independent general insurance agents. SunAmerica employs approximately 1,600 people. It is incorporated in Maryland and maintains its principal executive offices at 1 SunAmerica Center, Los Angeles, California 90067-6022, telephone (310) 772-6000. As used herein, the "Company" or "SunAmerica" refers to SunAmerica Inc. and, unless the context requires otherwise, its subsidiaries. In recent years, SunAmerica has strategically expanded its operations, both through internal growth and through the acquisition of fixed and variable annuity reserves, distribution networks and complementary fee-based financial services businesses. On November 29, 1996, the Company entered into a definitive agreement to acquire for approximately $240.0 million in cash the annuity operations of John Alden Financial Corporation, representing, in the aggregate, approximately $5 billion in reserves for annuity contracts at September 30, 1996. The acquisition is subject to customary conditions and required regulatory approvals, and is expected to be completed by the end of the first calendar quarter of 1997. In April 1996, the Company assumed a block of annuity contracts aggregating $959.0 million and acquired assets aggregating $919.2 million at the date of acquisition from The Central National Life Insurance Company of Omaha, a subsidiary of Beneficial Corp. In February 1996, the Company acquired Ford Life Insurance Company ("Ford Life") from a subsidiary of Ford Motor Company ("Ford") for approximately $172.5 million in cash. Under the terms of the agreement, Ford retained Ford Life's credit life insurance business. At the date of acquisition, Ford Life had assets of $3.15 billion and reserves for fixed annuity contracts of $3.06 billion. In January 1996, the Company acquired Advantage Capital Corporation ("Advantage Capital"), a Houston-based broker-dealer with more than 1,000 affiliated independent registered representatives at the date of acquisition. In December 1995, the Company acquired CalFarm Life Insurance Company ("CalFarm"), from its parent, Zenith National Insurance Corp. for approximately $120 million in 1 3 cash. Under the terms of the agreement, Zenith National Insurance Corp. retained CalFarm's health insurance business. At the date of acquisition, CalFarm had assets of $737.0 million and annuity reserves of $645.8 million. In November 1994, the Company acquired substantially all of the assets of Imperial Premium Finance, Inc. ("Imperial"), the fourth largest insurance premium finance company in the United States, based on 1993 premiums financed of approximately $1.5 billion (see "Premium Finance"). In October 1994, the Company's subsidiary, Resources Trust Company ("Resources Trust"), acquired the account servicing rights to approximately 44,500 individual retirement plan accounts ("IRAs"), representing approximately $1.25 billion in plan assets at September 30, 1996, from New England Securities Corporation, the broker-dealer subsidiary of New England Life Insurance Company. As consumer demand for investment-oriented products has grown, the Company has broadened the array of fee income producing products and services it offers and has in recent years significantly increased its fee income. Over the last several years, the Company has enhanced its marketing of variable annuities, mutual funds and trust services. Fee income has also expanded through the receipt of broker-dealer net retained commissions and as a result of the aforementioned acquisitions of Advantage Capital, Imperial and Resources Trust's additional account servicing rights. The Company's fee generating businesses entail no portfolio credit risk and require significantly less capital support than its fixed-rate business, which generates net investment income. For the year ended September 30, 1996, the Company's net investment income (including net realized investment losses) and fee income by primary product line or service are as follows: NET INVESTMENT AND FEE INCOME
Percent Primary product or service Amount ------- --------------------------------- -------------- (In thousands) Net investment income (including net realized investment losses)......................... $462,442 67.7% Fixed-rate products -------- ----- Fee income: Variable annuity fees........... 104,661 15.3 Variable annuities Net retained commissions........ 49,824 7.3 Broker-dealer sales Asset management fees........... 25,413 3.7 Mutual funds Loan servicing fees............. 23,846 3.5 Premium finance Trust fees...................... 16,684 2.5 Self-directed retirement accounts Total fee income................ 220,428 32.3 -------- ----- Total............................. $682,870 100.0% ======== =====
For financial information on the Company's business segments, see Part IV --"Notes to Consolidated Financial Statements -- Note 12 -- Business Segments." LIFE INSURANCE COMPANIES The Company's life insurance group includes 106-year-old SunAmerica Life Insurance Company, acquired in 1971; Anchor National Life Insurance Company ("Anchor"), acquired in 1986; Ford Life and CalFarm, both acquired in 1996; First SunAmerica Life Insurance Company ("First SunAmerica"), acquired in 1987; and SunAmerica National Life Insurance Company ("SunAmerica National"), formed in 1995. Collectively, these companies had $21.54 billion of assets at September 30, 1996 and served all 50 states and the District of Columbia. Based on the latest available statutory industry data, the Company believes that its life insurance group ranks among the largest issuers of fixed and variable annuities in the nation, as measured by 1995 annuity premiums and deposits, and among the top 2% of all U.S. life insurance companies, as measured by 1995 total assets. Anchor ranks among the largest issuers of variable annuities in the nation, according to the latest published industry data. 2 4 The Company's life insurance group sells a wide array of fixed and variable annuity products, as well as other products that cater to the market for tax-deferred, long-term savings products. SunAmerica Life Insurance Company is an Arizona-chartered company licensed in 48 states and the District of Columbia. Anchor, founded in 1965, is an Arizona-chartered company licensed in 49 states and the District of Columbia. Ford Life, founded in 1966, is a Michigan-chartered company licensed in 49 states and the District of Columbia. Subject to receipt of regulatory approvals, the Company intends to merge Ford Life into SunAmerica Life Insurance Company in early fiscal 1997. SunAmerica Life Insurance Company, Anchor and Ford Life each have a "AA-" (Excellent) claims-paying ability rating from Standard & Poor's Corporation ("S&P"), a "AA" (Very High) rating from Duff & Phelps, Inc. ("D&P") and an "A2" (Good) rating from Moody's Investors Service ("Moody's"). SunAmerica Life Insurance Company and Anchor each also have an "A+" (Superior) rating from industry analyst A.M. Best Company, while Ford Life has an "A" (Excellent) rating. CalFarm, founded in 1951, has an "A" rating from A.M. Best Company and is licensed in 8 states. First SunAmerica, founded in 1978, is a New York-chartered company that markets its annuity products in the states of New York and Nebraska. It has an "A+" (Superior) rating from A.M. Best Company. SunAmerica National is an Arizona-chartered company that was formed in March 1995 to issue GICs to employee benefit plans and other entities. It is currently seeking authority to transact life insurance business in 49 states and the District of Columbia and is licensed in 7 states. It has a "AAA" (Superior) rating from S&P. SunAmerica Life Insurance Company focuses on the sale of fixed-rate annuities and GICs. At September 30, 1996, it had $8.95 billion of assets. Anchor specializes in the sale of flexible premium variable annuities, including Polaris, the Company's flagship variable annuity, which offers investors nine money management groups, 22 variable annuity portfolios and five fixed-rate account options. Anchor also offers GICs. At September 30, 1996, it had $9.20 billion of assets. Ford Life specializes in the sale of single premium deferred annuities, including its newest product, which offers the contractholder the possibility to earn returns above a minimum guaranteed return, based on the performance of the Standard and Poor's 500 Index. At September 30, 1996, it had $3.18 billion of assets. CalFarm specializes in the sale of fixed-rate annuities. At September 30, 1996, it had $788.2 million of assets. First SunAmerica specializes in the sale of fixed-rate annuities and flexible premium variable annuities, including Polaris. At September 30, 1996, it had $236.0 million of assets. SunAmerica National had $101.5 million of assets at September 30, 1996. Benefiting from continued strong demographic growth of the retirement savings market, industry sales of tax-deferred savings products have represented, for a number of years, a significantly larger source of new premiums for the U.S. life insurance industry than have traditional life insurance products. Recognizing the growth potential of this market, the Company focuses its life insurance operations on the sale of annuities and GICs. Because of its focus on annuity products, which generally have more contractholder transactions than traditional life insurance products, the Company utilizes computer-driven systems that employ optical disk imaging and artificial intelligence in lieu of paper-intensive life insurance processing procedures. The Company believes its service support center and associated cost structure to be among the most competitive in the industry. The Company markets its fixed and variable annuities through the following distribution channels: (i) independent registered representatives of the Company's subsidiaries, Royal Alliance Associates, Inc. ("Royal Alliance"), SunAmerica Securities, Inc. ("SunAmerica Securities") and Advantage Capital; (ii) approximately 600 other securities firms and financial institutions; and (iii) independent general insurance agents who specialize in selling fixed annuities and other single premium products. Approximately 45,000 independent sales representatives nationally are licensed to sell the Company's annuity products. 3 5 The Company markets its GICs principally through direct marketing to banks, municipalities, asset management firms and direct plan sponsors or through intermediaries, such as managers or consultants servicing these groups. Fixed Annuities and GICs SunAmerica Life Insurance Company, Ford Life, CalFarm and First SunAmerica offer single premium and flexible premium deferred annuities that provide one-, three-, five-, seven-, or ten-year fixed interest rate guarantees. Although the Company's contracts remain in force an average of seven to ten years, a majority (approximately 74% at September 30, 1996) reprice annually at discretionary rates determined by the Company. In repricing, the Company takes into account yield characteristics of its investment portfolio, annuity surrender assumptions and competitive industry pricing. Its fixed-rate annuity products offer many of the same features as conventional certificates of deposit from financial institutions, giving investors a choice of interest period and yield as well as additional advantages particularly applicable to retirement planning, such as tax-deferred accumulation and flexible payout options (including the option of payout over the life of the annuitant). The average new single premium fixed annuity contract sold by the Company amounted to approximately $34,000 in 1996. The Company augments its retail annuity sales effort with the marketing of institutional products. At September 30, 1996, the Company had $4.17 billion of primarily fixed-maturity GIC obligations. At that date, approximately 70% of these obligations were fixed-rate and approximately 30% were variable-rate obligations that reprice periodically based upon certain defined indexes. Of the total GIC portfolio at September 30, 1996, approximately 39% was sold to asset management firms, 32% was sold to state and local governmental entities and 29% was sold to pension plans. The average new GIC contract sold by the Company amounted to $9.7 million in 1996. 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 and GIC 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-rate securities. The Company's fixed-rate products incorporate surrender charges, two-tiered interest rate structures or other limitations on when contracts can be surrendered for cash to encourage persistency. Approximately 86% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1996. Variable Annuities The variable annuity products of Anchor and First SunAmerica offer investors a broad spectrum of fund alternatives, with a choice of investment managers, as well as guaranteed fixed-rate account options. These companies earn fee income through the sale, administration and management of the variable account options of their variable annuity products. They also earn investment income on monies allocated to the fixed-rate account options of these products. Variable annuities offer retirement planning features and surrender charges similar to those offered by fixed annuities, but differ in that the annuity holder's rate of return is generally dependent upon the investment performance of the particular equity, fixed-income, money market or asset allocation funds selected by the contractholder. Because the investment risk is borne by the customer in all but the fixed-rate account options, these products require significantly less capital support than fixed annuities. The average new variable annuity contract sold by the Company amounted to approximately $37,000 in 1996. Investment Operations 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 4 6 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. The Company manages most of its invested assets internally. Its portfolio strategy is designed to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. 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 scenarios. For the years ended September 30, 1996, 1995 and 1994, the Company's yields on average invested assets were 8.74%, 9.15% and 8.50%, respectively, before net realized investment losses, and it realized net investment spreads of 3.43%, 3.69% and 3.30%, respectively, on average invested assets. At September 30, 1996, the weighted average life of the Company's investments was approximately 5.2 years and the duration was approximately 3.3. Weighted average life is the average time to receipt of all principal, incorporating the effects of scheduled amortization and expected prepayments, weighted by book value. Duration is a common option-adjusted measure for the price sensitivity of a fixed-income portfolio to changes in interest rates. It is the calculation of the relative percentage change in market value resulting from shifts in interest rates, and recognizes the changes in portfolio cashflows resulting from embedded options such as prepayments and bond calls. The Company's general investment philosophy is to hold fixed maturity assets for long-term investment. Thus, it does not have a trading portfolio. Effective December 1, 1995, pursuant to guidelines issued by the Financial Accounting Standards Board, the Company determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in prepayment risk, the Company's need for liquidity and other similar factors. Accordingly, the Company no longer classifies a portion of its Bond Portfolio as held for investment. The following table summarizes the Company's investment portfolio at September 30, 1996: SUMMARY OF INVESTMENTS
Amortized Percent of cost portfolio -------------- ---------- (In thousands) Fixed maturities: Cash and short-term investments....................... $ 529,363 3.3% U.S. government securities............................ 1,067,498 6.6 Mortgage-backed securities............................ 4,519,643 27.8 Other bonds, notes and redeemable preferred stocks.... 7,070,479 43.5 Mortgage loans........................................ 1,652,257 10.2 ----------- ----- Total................................................. 14,839,240 91.4 Partnerships............................................ 1,071,857 6.6 Real estate............................................. 105,321 0.6 Equity securities....................................... 44,871 0.3 Other invested assets................................... 177,577 1.1 ----------- ----- Total investments....................................... $16,238,866 100.0% =========== =====
5 7 All of the Bond Portfolio (at amortized cost, excluding $108.4 million of redeemable preferred stocks) at September 30, 1996 was rated by S&P, Moody's, D&P, Fitch Investor Service, Inc. ("Fitch") or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the Company. At September 30, 1996, approximately $11.31 billion (at amortized cost) of the Bond Portfolio was rated investment grade by one or more of these agencies or by the Company or the NAIC, pursuant to applicable NAIC guidelines, including $5.53 billion of U.S. government/agency securities and mortgage-backed securities. At September 30, 1996, the Bond Portfolio included $1.24 billion, (fair value, $1.27 billion) of bonds not rated investment grade by S&P, Moody's, D&P, Fitch or the NAIC. Based on their September 30, 1996 amortized cost, these non-investment-grade bonds accounted for 5.2% of the Company's total assets and 7.6% of its invested assets. Senior secured loans ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $1.54 billion at September 30, 1996. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1996, Secured Loans consisted of loans to 331 borrowers spanning 40 industries, with 15% of these assets (at amortized cost) concentrated in financial institutions, 15% concentrated in the leisure industry and 12% concentrated in utilities. No other industry concentration constituted more than 7% of these assets. Mortgage loans aggregated $1.65 billion at September 30, 1996 and consisted of 648 first mortgage loans with an average loan balance of approximately $2.5 million, collateralized by properties located in 34 states. Approximately 44% of the portfolio was multifamily residential, 20% was retail, 13% was manufactured housing, 5% was industrial, 5% was office and 13% was other types. Partnership investments totaled $1.07 billion at September 30, 1996, constituting investments in approximately 450 separate partnerships with an average size of approximately $2.4 million. This portfolio includes: (i) $498.5 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities; (ii) $473.2 million of partnerships that make tax-advantaged investments in affordable housing; and (iii) $100.2 million of partnerships that invest in mortgage loans and income-producing real estate. At September 30, 1996, the amortized cost of all investments in default as to the payment of principal or interest totaled $28.7 million (fair value $25.8 million), which constituted 0.2% of total invested assets at amortized cost. For more information concerning the Company's investments, including the risks inherent in such investments, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Liquidity." MUTUAL FUNDS AND INVESTMENT SERVICES Through its registered investment advisor, SunAmerica Asset Management Corp. ("SunAmerica Asset Management"), and its related mutual fund distributor, the Company earns fee income by distributing and managing a diversified family of mutual funds and by providing professional management of individual, corporate and pension plan portfolios. SunAmerica's mutual funds offer investors an array of equity, fixed-income, money market and tax-exempt portfolios. In November 1996, SunAmerica Asset Management introduced its new "Style Select Series," which combines the expertise of three well-respected advisors with similar investment styles in each available portfolio. Founded in 1983 and acquired by the Company in January 1990, SunAmerica Asset Management managed approximately $2.43 billion of assets at September 30, 1996, including mutual fund assets and certain of the Company's variable annuity assets. The SunAmerica mutual funds are distributed nationally through a network of approximately 350 financial institutions and unaffiliated broker-dealers, as well as by the Company's broker-dealer subsidiaries. 6 8 RETIREMENT TRUST SERVICES Through Resources Trust, acquired in January 1990, the Company earns fee income by providing administrative and custodial services for approximately 204,000 self-directed retirement accounts. These self-directed retirement accounts, including IRAs, Keoghs, 401(k) plans, and pension and profit sharing plans, had combined account assets at September 30, 1996 of approximately $11.00 billion. In September 1994, Resources Trust also began offering its new "Complete 401(k)," a product that combines the administrative and custodial services of Resources Trust with the variable annuity and mutual fund products of the Company. Resources Trust also earns investment income on customer cash balances that are interest-bearing and insured by the Federal Deposit Insurance Corporation. Resources Trust's services are sold nationally through approximately 17,500 registered representatives affiliated with 1,000 broker-dealers, including the Company's broker-dealer subsidiaries. BROKER-DEALERS The Company also owns three broker-dealers: Royal Alliance, acquired by the Company in January 1990; SunAmerica Securities, which commenced business in 1989; and Advantage Capital, acquired by the Company in 1996. As a result of the Company's ongoing active recruitment of independent registered representatives and the acquisition of Advantage Capital, the Company has increased its network of representatives from approximately 5,200 at September 30, 1995 to approximately 6,600 at September 30, 1996. The Company believes that, through ownership of these firms, it has the largest network of independent registered representatives in the nation, based on industry data. PREMIUM FINANCE Through its premium finance company, Imperial, the Company earns fee income by servicing loans that Imperial has originated and sold. Imperial provides short-term installment loans for borrowers to fund their property and casualty insurance premiums. These loans are substantially secured by the unearned premiums associated with the underlying insurance policies. Currently, Imperial sells and services most of the short-term loans that it originates. Founded in 1972 and acquired in November 1994, Imperial owned or serviced approximately 83,000 loans with an average loan balance of approximately $6,300 at September 30, 1996. Imperial generally makes loans to borrowers through a network of approximately 4,700 qualified independent property and casualty insurance agents who arrange the loan or refer the client to Imperial. REGULATION The Company's insurance subsidiaries are subject to regulation and supervision by the states in which they are authorized to transact business. State insurance laws establish supervisory agencies with broad administrative and supervisory powers related to granting and revoking licenses to transact business, regulating marketing and other trade practices, operating guaranty associations, licensing agents, approving policy forms, regulating certain premium rates, regulating insurance holding company systems, establishing reserve requirements, prescribing the form and content of required financial statements and reports, performing financial and other examinations, determining the reasonableness and adequacy of statutory capital and surplus, regulating the type, valuation and amount of investments permitted, limiting the amount of dividends that can be paid and the size of transactions that can be consummated without first obtaining regulatory approval and other related matters. During the last decade, the insurance regulatory framework has been placed under increased scrutiny by various states, the federal government and the NAIC. Various states have considered or 7 9 enacted legislation that changes, and in many cases increases, the states' authority to regulate insurance companies. Legislation has been introduced from time to time in Congress that could result in the federal government assuming some role in the regulation of insurance companies. In recent years, the NAIC has approved and recommended to the states for adoption and implementation several regulatory initiatives designed to reduce the risk of insurance company insolvencies and market conduct violations. These initiatives include investment reserve requirements, risk-based capital standards, new investment standards and restrictions on an insurance company's ability to pay dividends to its stockholders. The NAIC is also currently developing model laws relating to product design and illustrations for annuity products. Current proposals are still being debated and the Company is monitoring developments in this area and the effects any changes would have on the Company. SunAmerica Asset Management is registered with the Securities and Exchange Commission (the "Commission") as a registered investment advisor under the Investment Advisors Act of 1940. The mutual funds that it markets are subject to regulation under the Investment Company Act of 1940. SunAmerica Asset Management and the mutual funds are subject to regulation and examination by the Commission. In addition, variable annuities and the related separate accounts of the Company's life insurance subsidiaries are subject to regulation by the Commission under the Securities Act of 1933 and the Investment Company Act of 1940. Resources Trust is subject to regulation by the Colorado State Banking Board and the Federal Deposit Insurance Corporation. The Company's broker-dealer subsidiaries are subject to regulation and supervision by the states in which they transact business, as well as by the National Association of Securities Dealers, Inc. (the "NASD"). The NASD has broad administrative and supervisory powers relative to all aspects of business and may examine the subsidiaries' business and accounts at any time. The Company's premium finance business is subject to regulation and supervision by substantially all of the states in which it is authorized to transact business. State premium finance laws establish supervisory agencies with broad administrative and supervisory powers related to granting and revoking licenses to transact business, approving finance agreement forms, regulating certain finance charge rates, regulating marketing and other trade practices (including the procedures to cancel financed insurance policies for non-payment), prescribing the form and content of required financial statements and reports, performing financial and other examinations and other related matters. COMPETITION The businesses conducted by the Company's subsidiaries are highly competitive. The Company's life insurance subsidiaries compete with other life insurers, and also compete for customers' funds with a variety of investment products offered by financial services companies other than life insurance companies, such as banks, investment advisors, mutual fund companies and other financial institutions. Within the U.S. life insurance industry, the 100 largest writers of individual and group annuities account for approximately 97% of total net annuity premiums written. Net annuity premiums written among the top 100 companies range from less than $200 million to more than $9 billion annually. SunAmerica ranks in the top quartile of this group. Certain of these companies and other life insurers with which the Company competes are significantly larger and have available to them much greater financial and other resources. The Company believes the primary competitive factors among life insurance companies for investment-oriented insurance products, such as annuities and GICs, include product flexibility, product pricing, innovation in product design, the claims-paying ability rating and the name recognition of the issuing company, the availability of distribution channels and service rendered to the customer before and after a contract is issued. Other factors affecting the annuity business include the benefits (including before-tax and after-tax investment returns) and guarantees provided to the customer and the commissions paid. 8 10 Competitors of SunAmerica Asset Management include a large number of mutual fund organizations, both independent and affiliated with other financial services companies, including banks and insurance companies. Competition in mutual fund sales is based on investment performance, service to clients, and product design. Resources Trust competes for retirement plan assets against other trust companies, brokerage firms, mutual funds, banks and insurance companies. The Company's broker-dealers face competition from regional firms and large, national full service and discount brokerage firms. Imperial faces competition from other premium finance companies and many large insurance companies who directly finance their own premiums. ITEM 2. PROPERTIES The Company's executive offices and the principal offices of its life insurance subsidiaries are in leased premises at 1 SunAmerica Center, Los Angeles, California. The Company's life insurance subsidiaries also lease office space in Torrance, California; Houston, Texas; and New York, New York. The Company's broker-dealers lease space in Phoenix, Arizona; Houston, Texas; and New York, New York. The Company's asset management subsidiary leases offices in New York, New York, and the retirement trust services subsidiary occupies leased premises in Englewood, Colorado. The Company's premium finance subsidiary is headquartered in Sherman Oaks, California. The Company believes that such properties, including the equipment located therein, are suitable and adequate to meet the requirements of its businesses. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various kinds of litigation common to its businesses. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted during the fourth quarter 1996 to a vote of security-holders, through the solicitation of proxies or otherwise. 9 11 EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information regarding the executive officers of SunAmerica Inc. as of December 10, 1996:
Year assumed Other positions and other business Present position at present experience within the last five Name Age December 10, 1996 position years From-to - ------------------------- ---- -------------------- ------- ----------------------------------- ------------- Eli Broad 63 Chairman and Chief 1976 (Cofounded Company in 1957) Executive Officer President 1986 Joseph M. Tumbler 48 Vice Chairman 1995 President and Chief Executive 1989-1995 Officer, Providian Capital Management Jay S. Wintrob 39 Vice Chairman 1995 Executive Vice President 1991-1995 (Joined Company in 1987) James R. Belardi 39 Executive Vice 1995 Senior Vice President and Treasurer 1992-1995 President Vice President and Treasurer 1989-1992 (Joined Company in 1986) Lorin M. Fife 43 Senior Vice 1995 Vice President and General 1994-1995 President, and Counsel -- Regulatory Affairs General Counsel -- Vice President and 1989-1994 Regulatory Affairs Associate General Counsel (Joined Company in 1989) Marc H. Gamsin 41 Senior Vice 1996 Partner, O'Melveny & Myers LLP 1979-1996 President Jana Waring Greer 44 Senior Vice 1991 (Joined Company in 1974) President Susan L. Harris 39 Senior Vice 1995 Vice President, 1994-1995 President, General Counsel -- General Counsel -- Corporate Affairs, and Secretary Corporate Affairs, Vice President, Associate General 1989-1994 and Secretary Counsel and Secretary (Joined Company in 1985) Gary W. Krat 49 Senior Vice 1992 Chairman of SunAmerica's 1991-Present President broker-dealer operations (Joined Company in 1990) Scott L. Robinson 50 Senior Vice 1991 (Joined Company in 1978) President and Controller James W. Rowan 34 Senior Vice 1995 Vice President 1993-1995 President Assistant to the Chairman 1992 Senior Vice President, 1990-1992 Security Pacific Corp. Karel Carnohan 40 Vice President 1995 Vice President, Equity Analyst, 1994-1995 C.J. Lawrence/Deutsche Bank Securities Corporation First Vice President, Corporate 1990-1994 Finance and Investor Relations, Countrywide Credit Industries, Inc. Countrywide Mortgage Investments, Inc. Michael L. Fowler 42 Vice President 1988 (Joined Company in 1988) George L. Holdridge, Jr. 39 Vice President 1995 Senior Vice President, SunAmerica 1994-1995 Financial, Inc. Vice President and Director of 1989-1994 Technology, SunAmerica Financial, Inc. (Joined Company in 1983) Scott H. Richland 34 Vice President and 1995 Vice President and Assistant 1994-1995 Treasurer Treasurer Assistant Treasurer 1993-1994 Director, SunAmerica 1990-1993 Investments, Inc.
10 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange. The Company's Common Stock is also traded on the Boston, Midwest and Philadelphia Stock Exchanges. There is no trading or other market for the Nontransferable Class B Stock. High and low sales prices, based on the New York Stock Exchange Composite Price Tape, for the Company's Common Stock for each quarter during the fiscal years ended September 30, 1996 and 1995 are as follows:
1996 1995 ------------------- ----------------------- High Low High Low ------- --------- ---------- --------- First quarter.................. $24 7/8 $20 7/16 $13 15/16 $11 7/16 Second quarter................. 28 3/4 22 1/16 14 3/4 12 Third quarter.................. 29 1/2 22 13/16 18 1/2 14 1/8 Fourth quarter................. 36 7/8 26 1/8 21 16 3/4 ======= ========= ========= ========
The sales prices listed above have been restated and rounded to the nearest sixteenth to reflect a two-for-one split, paid in the form of a stock dividend on August 30, 1996, and a three-for-two stock split, paid in the form of a stock dividend on November 10, 1995. HOLDERS As of November 30, 1996, the number of holders of record of each class of common equity of the Company was as follows:
Number of holders Title of Class of record - -------------- ---------- Common Stock (par value $1.00 per share)........................ 2,204 Nontransferable Class B Stock (par value $1.00 per share)....... 7 =====
DIVIDENDS Dividends paid per share on the Company's Common Stock and Nontransferable Class B Stock for each quarter during the fiscal years ended September 30, 1996 and 1995 are as follows:
1996 1995 ------------------------- ------------------------- Common Nontransferable Common Nontransferable Stock Class B Stock Stock Class B Stock ------- --------------- ------- --------------- First quarter.......... $0.0750 $0.0675 $0.0500 $0.0450 Second quarter......... 0.0750 0.0675 0.0500 0.0450 Third quarter.......... 0.0750 0.0675 0.0500 0.0450 Fourth quarter......... 0.0750 0.0675 0.0500 0.0450 ------- ------- ------- ------- Total.................. $0.3000 $0.2700 $0.2000 $0.1800 ======= ======= ======= =======
The per-share dividends listed above have been restated to reflect a two-for-one stock split, paid in the form of a stock dividend on August 30, 1996, and a three-for-two stock split, paid in the form of a stock dividend on November 10, 1995. 11 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data of the Company and its subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are included elsewhere herein. Per-share amounts have been restated to reflect a two-for-one stock split, paid in the form of a stock dividend on August 30, 1996, and a three-for-two stock split, paid in the form of a stock dividend on November 10, 1995. In addition, certain items have been reclassified to conform to the current year's presentation.
Years ended September 30, --------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (In thousands, except per-share amounts) RESULTS OF OPERATIONS Net investment income........................ $ 492,756 $ 365,555 $ 294,454 $ 263,791 $ 219,384 Net realized investment losses............... (30,314) (33,012) (21,124) (21,287) (56,364) Fee income................................... 220,428 180,419 152,607 136,401 114,683 General and administrative expenses.......... (212,701) (166,540) (132,743) (135,790) (133,058) Provision for future guaranty fund assessments................................ -- -- -- (22,000) -- Amortization of deferred acquisition costs... (108,176) (86,107) (69,253) (53,216) (49,328) Other income and expenses, net............... 30,034 19,291 16,060 16,112 15,774 --------- --------- --------- --------- --------- Pretax income................................ 392,027 279,606 240,001 184,011 111,091 Income tax expense........................... (117,600) (85,400) (74,700) (57,000) (34,300) --------- --------- --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES................. 274,427 194,206 165,301 127,011 76,791 Cumulative effect of change in accounting for income taxes................................ -- -- (33,500) -- -- --------- --------- --------- --------- --------- NET INCOME................................... $ 274,427 $ 194,206 $ 131,801 $ 127,011 $ 76,791 ========= ========= ========= ========= ========= EARNINGS PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES............ $ 1.95 $ 1.42 $ 1.19 $ 0.92 $ 0.60 Cumulative effect of change in accounting for income taxes.......................... -- -- (0.27) -- -- --------- --------- --------- --------- --------- NET INCOME................................. $ 1.95 $ 1.42 $ 0.92 $ 0.92 $ 0.60 ========= ========= ========= ========= ========= CASH DIVIDENDS PER SHARE PAID TO COMMON SHAREHOLDERS: Nontransferable Class B Stock............... $ 0.270 $ 0.180 $ 0.120 $ 0.084 $ 0.060 ========= ========= ========= ========= ========= Common Stock................................ $ 0.300 $ 0.200 $ 0.133 $ 0.093 $ 0.067 ========= ========= ========= ========= =========
12 14 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
Years ended September 30, --------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- RATIOS OF EARNINGS TO FIXED CHARGES Ratio of earnings to fixed charges (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior and subordinated debt, but exclude interest incurred on fixed annuities, guaranteed investment contracts and trust deposits)......................... 5.4x 5.8x 5.8x 6.1x 4.0x ========= ========= ========= ========= ========= Ratio of earnings to fixed charges (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior and subordinated debt, fixed annuities, guaranteed investment contracts and trust deposits)............... 1.5x 1.5x 1.5x 1.4x 1.2x ========= ========= ========= ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior and subordinated debt, but exclude interest incurred on fixed annuities, guaranteed investment contracts and trust deposits)................................... 3.8x 3.4x 2.8x 2.8x 2.7x ========= ========= ========= ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior and subordinated debt, fixed annuities, guaranteed investment contracts and trust deposits)......................... 1.4x 1.4x 1.4x 1.3x 1.2x ========= ========= ========= ========= =========
At September 30, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- (In thousands) FINANCIAL POSITION Investments.......................... $16,199,784 $10,808,959 $ 9,280,390 $10,364,952 $ 9,428,266 Variable annuity assets.............. 6,380,458 5,263,006 4,513,093 4,194,970 3,293,343 Deferred acquisition costs........... 782,300 526,415 581,874 475,917 436,209 Other assets......................... 364,279 245,787 280,868 231,582 245,833 ----------- ----------- ----------- ----------- ----------- TOTAL ASSETS......................... $23,726,821 $16,844,167 $14,656,225 $15,267,421 $13,403,651 =========== =========== =========== =========== =========== Reserves for fixed annuity contracts........................... $ 9,654,674 $ 4,862,250 $ 4,519,623 $ 4,934,871 $ 5,143,339 Reserves for guaranteed investment contracts........................... 4,169,028 3,607,192 2,783,522 2,216,104 2,023,048 Variable annuity liabilities......... 6,380,458 5,263,006 4,513,093 4,194,970 3,293,343 Trust deposits....................... 436,048 426,595 442,320 378,986 367,458 Other payables and accrued liabilities......................... 489,672 747,733 860,763 1,828,153 1,372,010 Long-term notes and debentures....... 573,335 524,835 472,835 380,560 225,000 Other senior indebtedness............ -- -- 28,662 127,151 208,703 Deferred income taxes................ 125,417 146,847 74,319 96,599 40,682 Preferred securities of grantor trusts.............................. 237,631 52,631 -- -- -- Shareholders' equity................. 1,660,558 1,213,078 961,088 1,110,027 730,068 ----------- ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................. $23,726,821 $16,844,167 $14,656,225 $15,267,421 $13,403,651 =========== =========== =========== =========== ===========
13 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations of SunAmerica Inc. (the "Company") for the three years in the period ended September 30, 1996 follow. In connection with, and because it desires to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in the following discussion and elsewhere in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission ("SEC"). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. In particular, statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future or projected levels of sales of the Company's products, investment spreads or yields, or the earnings or profitability of the Company's activities. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be national in scope, such as general economic conditions and interest rates, some of which may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation, and others of which may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio, and other factors. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligation to update forward-looking information. RESULTS OF OPERATIONS INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES totaled $274.4 million or $1.95 per share in 1996, compared with $194.2 million or $1.42 per share in 1995 and $165.3 million or $1.19 per share in 1994. Results of operations in 1996 include the effects of the recently completed acquisitions (the "Acquisitions") of CalFarm Life Insurance Company ("CalFarm"), Ford Life Insurance Company ("Ford Life") and certain annuity contracts purchased from The Central National Life Insurance Company (the "Central National Annuity Contracts"). The acquisition of CalFarm was completed on December 29, 1995, the acquisition of Ford Life was completed on February 29, 1996 and the acquisition of the Central National Annuity Contracts was completed on April 1, 1996. 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 $33.5 million or $0.27 per share. Accordingly, net income amounted to $131.8 million or $0.92 per share in 1994. PRETAX INCOME totaled $392.0 million in 1996, $279.6 million in 1995 and $240.0 million in 1994. The $112.4 million improvement in 1996 over 1995 primarily resulted from increased net investment income, fee income and surrender charges, partially offset by higher general and administrative expenses and additional amortization of deferred acquisition costs. The $39.6 million improvement in 1995 over 1994 primarily resulted from increased net investment income and fee income, partially offset by increased general and administrative expenses, additional amortization of deferred acquisition costs and higher net realized investment losses. 14 16 NET INVESTMENT INCOME, which is the spread between the income earned on invested assets and the interest or dividends paid on fixed annuities and other interest-bearing liabilities, increased to $492.8 million in 1996 from $365.6 million in 1995 and $294.5 million in 1994. These amounts represent 3.43% on average invested assets (computed on a daily basis) of $14.36 billion in 1996, 3.69% on average invested assets of $9.90 billion in 1995 and 3.30% on average invested assets of $8.92 billion in 1994. The invested assets associated with the Acquisitions were primarily high-grade corporate, government and government/agency bonds and cash and short-term investments, which are generally lower yielding than a significant portion of the invested assets that comprise the remainder of the Company's portfolio. As a result of the Acquisitions, net investment income as a percent of average invested assets in 1996 declined by 42 basis points. Net investment income also includes the effect of income earned on the excess of average invested assets over average interest-bearing liabilities. This excess amounted to $1.06 billion in 1996, $741.2 million in 1995 and $647.1 million in 1994. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities was 3.01% in 1996, 3.25% in 1995 and 2.90% in 1994. As a result of the Acquisitions, this difference declined by 24 basis points in 1996. Investment income and the related yields on average invested assets totaled $1.25 billion or 8.74% in 1996, compared with $905.8 million or 9.15% in 1995 and $758.2 million or 8.50% in 1994. The $348.5 million increase in investment income recorded in 1996 and the related 41 basis point decline in yield that it represents both reflect the effects of the Acquisitions. In 1996, the investment income associated with the Acquisitions aggregated $191.6 million, and reduced the overall investment yield of the Company by 44 basis points. In addition to increasing due to the effects of the Acquisitions, investment income rose during 1996, and during 1995, as a result of higher levels of average invested assets and additional partnership income. Partnership income increased to $178.6 million (representing a yield of 19.04% on related average assets of $937.8 million) in 1996, compared with $134.1 million (representing a yield of 18.17% on related average assets of $738.0 million) in 1995 and $63.7 million (representing a yield of 11.35% on related average assets of $560.9 million) in 1994. Partnership income includes income recognized by using the cost method of accounting, which amounted to $59.1 million, $106.9 million and $26.5 million in 1996, 1995 and 1994, respectively. Such income is based upon cash distributions received from limited partnerships, the operations of which the Company does not significantly influence. Consequently, such income is not predictable and there can be no assurance that the Company will realize comparable levels of such income in the future. The increase in investment yield in 1995 over 1994 reflects the higher interest rates prevailing during the latter half of 1994 and into fiscal 1995. The Company has historically enhanced investment yield through its use of dollar roll transactions ("Dollar Rolls"), whereby the proceeds from sales of mortgage-backed securities ("MBSs") are invested in short-term securities pending the contractual repurchase of substantially the same securities at discounted prices in the forward market. The Company has been able to engage in Dollar Rolls due to the market demand for MBSs for formation of collateralized mortgage obligations, but this demand has declined over the periods presented. The Company recorded $1.4 million of enhanced yield on such transactions during 1996, compared with $4.6 million during 1995 and $15.6 million during 1994. (See "Asset-Liability Matching" for additional discussion of Dollar Rolls.) In addition, the Company has enhanced investment yield through total return corporate bond swap agreements (the "Total Return Agreements"). The Company recorded income of $32.5 million on the Total Return Agreements in 1996, compared with $13.0 million recorded during 1995 and $1.3 million recorded in 1994. The improved results in 1996 and in 1995 primarily reflect increases in the fair value of the underlying assets, resulting primarily from improved overall performance of the non-investment-grade bonds underlying the Total Return Agreements, and increases in the average 15 17 notional principal amount of the Total Return Agreements. (See "Asset-Liability Matching" for additional discussion of Total Return Agreements.) Total interest and dividend expense aggregated $761.5 million in 1996, $540.2 million in 1995 and $463.7 million in 1994. The average rate paid on all interest-bearing liabilities was 5.73% (5.34% on fixed annuity contracts and 6.43% on guaranteed investment contracts ("GICs")) in 1996, compared with 5.90% (5.48% on fixed annuity contracts and 6.68% on GICs) in 1995 and 5.60% (5.43% on fixed annuity contracts and 6.20% on GICs) in 1994. Interest-bearing liabilities averaged $13.29 billion during 1996, compared with $9.16 billion during 1995 and $8.27 billion during 1994. The average rate paid on all interest-bearing liabilities in 1996 also reflects the impact of the Acquisitions. The interest-bearing liabilities associated with the Acquisitions are primarily single premium deferred annuities that carry a lower average crediting rate than the average crediting rate paid on the Company's other annuity liabilities. Assumption of these additional interest-bearing liabilities reduced the average rate paid on all interest-bearing liabilities and on fixed annuity contracts by 20 basis points in 1996. The favorable effects of the Acquisitions more than offset a small increase in the average crediting rate on the Company's remaining interest-bearing liabilities. The increase in the average rate paid on all interest-bearing liabilities during 1995 primarily resulted from the increased average crediting rate on the Company's GICs. During 1996, 1995 and 1994, approximately 33%, 27% and 24%, respectively, of the Company's average GIC portfolio were variable-rate obligations that reprice periodically based upon certain defined indexes. At September 30, 1996, approximately 30% of the Company's GIC portfolio was composed of such obligations. In addition, in fiscal 1995, the Company increased its crediting rates on new fixed-rate GIC obligations relative to those issued during 1994 in response to higher prevailing interest rates. The average rate paid on all interest-bearing liabilities also increased in 1995 as a result of a modest increase in the average crediting rate on the Company's fixed annuity contracts. GROWTH IN AVERAGE INVESTED ASSETS since 1994 primarily reflects the impact of the Acquisitions. Average assets in 1996 include the invested assets of CalFarm for nine months, those of Ford Life for seven months and those associated with the Central National Annuity Contracts for six months. In the aggregate, the Acquisitions contributed $2.84 billion to the Company's average invested assets in 1996. The Company intends to continue to pursue a strategy of enhancing its internal growth with complementary acquisitions. On November 29, 1996, the Company entered into a definitive agreement to acquire John Alden Financial Corporation's annuity operations (which had approximately $5.00 billion of fixed annuity reserves at September 30, 1996) for approximately $240.0 million in cash. The acquisition is subject to customary conditions and required regulatory approvals, and is expected to be completed by the end of the first calendar quarter of 1997. Average invested assets also increased in 1996 and in 1995 as a result of sales of the Company's fixed-rate products, consisting of both fixed annuities (including the fixed accounts of variable annuity products) and GICs, and $519.2 million of aggregate net proceeds from the issuances of Preferred Stock of the Company, preferred securities of a subsidiary grantor trust and long-term notes. Fixed annuity premiums totaled $993.4 million in 1996, compared with $944.7 million in 1995 and $230.0 million in 1994. These premiums include premiums for the fixed accounts of variable annuities totaling $782.6 million, $286.7 million and $140.6 million, respectively. The increase in aggregate fixed annuity premiums in 1996 reflects an increase in premiums for the fixed accounts of variable annuities in 1996, which resulted primarily from greater inflows into the one-year fixed account of the Company's Polaris product. Other fixed premiums declined during 1996 despite increases resulting from the Acquisitions, primarily reflecting lower prevailing interest rates. The $714.7 million increase in fixed annuity premiums during 1995 reflects higher market demand for fixed-rate products, due, in part, to the increase in prevailing long-term interest rates that began during the latter half of fiscal 1994 and continued into the first quarter of fiscal 1995. GIC premiums decreased to $1.02 billion in 1996 from $1.77 billion in 1995 and $1.04 billion in 1994. The decline in GIC premiums in 1996 primarily resulted from planned reductions in sales of 16 18 short-term maturity products to asset management firms and in reductions of sales to banks. The increase in GIC sales during 1995 reflects the Company's broadening of its distribution channels and product line to increase its GIC client base. While GIC premiums declined, GIC surrenders also declined during 1996 to $708.7 million, compared with $1.16 billion in 1995 and $621.7 million in 1994 and the size of the Company's GIC reserves increased over the three-year period to $4.17 billion at September 30, 1996 from $2.22 billion at September 30, 1993. The GICs issued by the Company generally guarantee the payment of principal and interest at a fixed rate for a fixed term of three to five years. In the case of GICs sold to pension plans, certain withdrawals may be made at book value in the event of circumstances specified in the plan document, such as employee retirement, death, disability, hardship withdrawal or employee termination. The Company generally imposes surrender penalties in the event of other withdrawals prior to maturity. Contracts purchased by banks or state and local governmental entities either prohibit withdrawals or permit scheduled book value withdrawals subject to the terms of the underlying indenture or agreement. Contracts purchased by asset management firms either prohibit withdrawals or permit withdrawals with notice ranging from 90 to 270 days. In pricing GICs, the Company analyzes cash flow information and prices accordingly so that it is compensated for possible withdrawals prior to maturity. NET REALIZED INVESTMENT LOSSES totaled $30.3 million in 1996, $33.0 million in 1995 and $21.1 million in 1994, and represent 0.21%, 0.33% and 0.24%, respectively, of average invested assets. Net realized investment losses include impairment writedowns of $34.9 million in 1996, $42.7 million in 1995 and $55.9 million in 1994. Therefore, net gains from sales of investments totaled $4.6 million in 1996, $9.7 million in 1995 and $34.8 million in 1994. Net gains from sales of investments in 1996 include $11.8 million of net gains realized on sales of other invested assets, principally leveraged leases, $3.4 million of net gains realized on sales of common stocks and $11.9 million of net losses realized on sales of bonds. Net gains from sales of investments in 1995 include $20.9 million of net gains realized on sales of common stocks and $15.6 million of net losses realized on sales of bonds. Net gains from sales of investments in 1994 include $22.6 million of net gains realized on sales of common stocks and $27.0 million of net losses realized on sales of bonds. The Company also realized $35.1 million of net gains on sales of certain partnership interests in 1994. Sales of investments are generally made to maximize total return. Impairment writedowns in 1996 include $22.3 million of additional provisions applied to defaulted bonds. Impairment writedowns in 1995 include $23.8 million of additional provisions applied to defaulted bonds and $6.6 million of provisions applied to mortgage loans. Impairment writedowns in 1994 include $35.0 million applied to real estate. During 1994, the Company decided to hold for sale all properties owned in Arizona, thereby changing its previous intention to hold such real estate for future development. Accordingly, the Company reappraised its Arizona properties and reduced their carrying values to estimated fair values. Impairment writedowns in 1994 also include $13.2 million of additional provisions applied to defaulted bonds. VARIABLE ANNUITY FEES are based on the market value of assets supporting variable annuity contracts in separate accounts. Such fees totaled $104.7 million in 1996, $84.6 million in 1995 and $79.5 million in 1994. Increases in variable annuity fees in 1996 and 1995 reflect growth in average variable annuity assets, principally due to increased market values and the receipt of variable annuity premiums, partially offset by surrenders. Variable annuity assets averaged $5.75 billion during 1996, $4.67 billion during 1995 and $4.43 billion during 1994. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, totaled $929.2 million in 1996, $571.4 million in 1995 and $759.3 million in 1994. The increase in premiums in 1996 may be attributed, in part, to a heightened demand for equity investments, principally as a result of generally improved market performance. The decline in premiums in 1995 may be attributed, in part, to a heightened demand for fixed-rate investment options, including the fixed accounts of variable annuities (see "Growth in Average Invested Assets"). The Company has encountered increased 17 19 competition in the variable annuity marketplace during recent years and anticipates that the market will remain highly competitive for the foreseeable future. NET RETAINED COMMISSIONS are primarily derived from commissions on the sales of nonproprietary investment products by the Company's broker-dealer subsidiaries, after deducting the substantial portion of such commissions that is passed on to registered representatives. Net retained commissions totaled $49.8 million in 1996, $33.7 million in 1995 and $29.9 million in 1994. Broker-dealer sales (mainly sales of general securities, mutual funds and annuities) totaled $12.78 billion in 1996, $7.41 billion in 1995 and $6.87 billion in 1994. The significant increases in sales and net retained commissions during 1996 reflect a greater number of registered representatives (largely due to the acquisition of Advantage Capital Corporation, a Houston-based broker-dealer, on January 3, 1996) and higher average production, combined with generally favorable market conditions. Increases in net retained commissions are not proportionate to increases in sales primarily due to differences in sales mix. ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1 distribution fees, are based on the market value of assets managed in mutual funds by SunAmerica Asset Management Corp. Such fees totaled $25.4 million on average assets managed of $2.14 billion in 1996, $26.9 million on average assets managed of $2.07 billion in 1995 and $31.3 million on average assets managed of $2.39 billion in 1994. Asset management fees decreased slightly in 1996, despite a modest increase in average assets managed, principally due to changes in product mix. The decrease in asset management fees during 1995 principally resulted from the decline in average assets managed, primarily due to an excess of redemptions over sales. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $379.9 million in 1996, compared with $426.5 million in 1995 and $561.0 million in 1994. Sales of mutual funds, excluding sales of money market accounts, amounted to $223.4 million in 1996, compared with $140.2 million in 1995 and $342.6 million in 1994. Higher mutual fund sales and lower redemptions in 1996 both reflect the combined effects of additional advertising, the favorable performance records of certain of the Company's mutual funds and heightened demand for equity investments, principally as a result of improved market performance. LOAN SERVICING FEES are earned by the Company's subsidiary, Imperial Premium Finance, Inc. ("Imperial"). Imperial provides short-term installment loans for borrowers to fund their property and casualty insurance premiums. These loans are secured by the unearned premium associated with the underlying insurance policies. Currently, Imperial sells most of the short-term loans it originates and earns fee income by servicing these sold loans. Such fee income totaled $23.8 million on average loans serviced of $457.8 million in 1996, compared with $19.8 million on average loans serviced of $438.3 million in 1995. Imperial's net assets were acquired on November 30, 1994, and, therefore, no such fee income was earned in fiscal 1994. TRUST FEES are earned by Resources Trust Company for providing administrative and custodial services primarily for individual retirement accounts, as well as for other qualified pension plans. Trust fees increased to $16.7 million in 1996 (on an average of 201,800 trust accounts) from $15.4 million in 1995 (on an average of 196,000 trust accounts) and $11.9 million in 1994 (on an average of 148,500 trust accounts). The increases in trust fees and the average number of trust accounts in 1995 principally resulted from the October 1, 1994 acquisition of the right to service certain individual retirement accounts from New England Life Insurance Company. SURRENDER CHARGES on fixed and variable annuities totaled $22.1 million in 1996 (including $11.1 million attributable to the Acquisitions), compared with $11.9 million in 1995 and $10.7 million in 1994. Surrender charges generally are assessed on annuity withdrawals at declining rates during the first seven years of an annuity contract. Withdrawal payments, which include surrenders and lump- sum annuity benefits, totaled $1.42 billion (including $200.2 million attributable to the Acquisitions) in 1996, $1.31 billion in 1995 and $1.13 billion in 1994. These payments represent 11.1% (7.5% of average fixed annuity reserves associated with the Acquisitions), 14.8% and 13.2%, respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity payments from the 18 20 separate accounts totaling $637.0 million in 1996, $650.0 million in 1995 and $461.5 million in 1994. Excluding the effects of the Acquisitions, withdrawal payments as a percentage of related average fixed and variable annuity reserves in 1996 were 12.1%, lower than 1995 and 1994 levels, reflecting decreased fixed annuity withdrawal payments, slightly decreased variable annuity withdrawals and increased average fixed and variable annuity reserves. This decrease in fixed annuity withdrawals principally resulted from unusually high withdrawals in 1995 and in 1994 (mainly as a result of certain blocks of policies coming off surrender charge restrictions and greater volumes of surrenders on a closed block of business) and the success of the Company's retention efforts in 1996. Variable annuity surrenders increased in 1995 primarily due to surrenders on a closed block of business, policies coming off surrender charge restrictions and increased competition in the marketplace. Management anticipates that withdrawal rates will remain relatively stable for the foreseeable future. GENERAL AND ADMINISTRATIVE EXPENSES totaled $212.7 million in 1996, compared with $166.5 million in 1995 and $132.7 million in 1994. General and administrative expenses in 1996 reflect the impact of the Acquisitions, including Advantage Capital Corporation, and include the expenses of Imperial for the full year, compared with ten months of such expenses recorded in 1995. In addition, 1996 and 1995 include expenses related to a national advertising campaign to increase the Company's brand name awareness. 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 totaled $108.2 million in 1996, $86.1 million in 1995 and $69.3 million in 1994. The increase in 1996 primarily reflects the amortization of the deferred acquisitions costs attributable to the Acquisitions, which aggregated $16.8 million. Amortization has also increased during the three-year period due to additional fixed and variable annuity and mutual fund sales and the subsequent amortization of related deferred commissions and other acquisition costs. INCOME TAX EXPENSE totaled $117.6 million in 1996, $85.4 million in 1995 and $74.7 million in 1994, representing effective tax rates of 30% in 1996 and 31% in both 1995 and 1994. These tax rates reflect the favorable impact of affordable housing tax credits. FINANCIAL CONDITION AND LIQUIDITY SHAREHOLDERS' EQUITY increased by $447.5 million to $1.66 billion at September 30, 1996 from $1.21 billion at September 30, 1995, primarily as a result of the $274.4 million of net income recorded in 1996 and the issuance of $248.0 million of the Company's Series E Preferred Stock. These favorable factors were partially offset by $61.7 million of dividends paid to shareholders and a $12.3 million increase in net unrealized losses on debt and equity securities available for sale charged directly to shareholders' equity. BOOK VALUE PER SHARE amounted to $11.69 at September 30, 1996, compared with $8.89 at September 30, 1995 and $6.30 at September 30, 1994. Excluding net unrealized losses on debt and equity securities available for sale, book value per share amounted to $11.82 at September 30, 1996, $8.93 at September 30, 1995 and $7.53 at September 30, 1994. TOTAL ASSETS increased by $6.89 billion to $23.73 billion from $16.84 billion at September 30, 1995, principally due to a $5.39 billion increase in invested assets and a $1.12 billion increase in the separate accounts for variable annuities. INVESTED ASSETS at year end totaled $16.20 billion in 1996, compared with $10.81 billion in 1995. This $5.39 billion increase primarily resulted from the Acquisitions (with related invested assets aggregating $4.73 billion at the dates of acquisition) and sales of GICs and fixed annuity contracts, partially offset by a $26.5 million increase in net unrealized losses on debt and equity securities available for sale. The Company manages most 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 19 21 portfolio. Effective December 1, 1995, pursuant to guidelines issued by the Financial Accounting Standards Board, the Company determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in prepayment risk, the Company's need for liquidity and other similar factors. Accordingly, the Company no longer classifies a portion of its Bond Portfolio as held for investment. THE BOND PORTFOLIO had an aggregate amortized cost that exceeded its fair value by $75.6 million at September 30, 1996, compared with $12.6 million at September 30, 1995 (including net unrealized losses of $31.1 million on the portion of the portfolio that was designated as available for sale at September 30, 1995). The increase in net unrealized losses on the Bond Portfolio since September 30, 1995 principally reflects the higher relative prevailing interest rates at September 30, 1996 and their corresponding effect on the fair value of the Bond Portfolio. All of the Bond Portfolio ($12.55 billion at amortized cost, excluding $108.4 million of redeemable preferred stocks) at September 30, 1996 was rated by Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff & Phelps Credit Rating Co. ("D&P"), Fitch Investor Service, Inc. ("Fitch") or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the Company. At September 30, 1996, approximately $11.31 billion of the Bond Portfolio (at amortized cost) was rated investment grade by one or more of these agencies or by the Company or the NAIC, pursuant to applicable NAIC guidelines, including $5.53 billion of U.S. government/agency securities and MBSs. At September 30, 1996, the Bond Portfolio included $1.24 billion (fair value, $1.27 billion) of bonds not rated investment grade by S&P, Moody's, D&P, Fitch or the NAIC. Based on their September 30, 1996 amortized cost, these non-investment-grade bonds accounted for 5.2% of the Company's total assets and 7.6% of its invested assets. In addition to its direct investment in non-investment-grade bonds, the Company has entered into Total Return Agreements with an aggregate notional principal amount of $306.8 million at September 30, 1996 (see "Asset-Liability Matching"). 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 the proportion of its portfolio invested in 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, 1996. 20 22 The following table summarizes the Company's rated bonds by rating classification as of September 30, 1996 (dollars in thousands):
Issues rated by S&P/Moody's/D&P/Fitch Issues not rated by S&P/Moody's/ Total - ---------------------------------------------- D&P/Fitch, by NAIC category -------------------------- S&P/(Moody's)/ ----------------------------------------- Percent of [D&P]/GFitchH Amortized Estimated NAIC Amortized Estimated Amortized invested category(1) cost fair value category(2) cost fair value cost assets(3) - --------------- ----------- ----------- ----------- ---------- ---------- ----------- ---------- AAA+ to A- (Aaa to A3) [AAA to A-] GAAA to A-H $ 8,207,963 $ 8,103,596 1 $ 748,369 $ 746,563 $ 8,956,332 55.15% BBB+ to BBB- (Baa1 to Baa3) [BBB+ to BBB-] GBBB+ to BBB-H 1,939,333 1,917,694 2 414,468 419,519 2,353,801 14.49 BB+ to BB- (Ba1 to Ba3) [BB+ to BB-] GBB+ to BB-H 248,840 251,914 3 123,317 125,535 372,157 2.29 B+ to B- (B1 to B3) [B+ to B-] GB+ to B-H 604,286 634,341 4 149,944 145,743 754,230 4.64 CCC+ to C (Caa to C) [CCC] GCCC+ to C-H 79,909 74,946 5 19,804 22,717 99,713 0.61 CI to D [DD] GDH -- -- 6 12,948 11,228 12,948 0.08 ---------- ---------- ---------- ---------- ---------- Total rated issues $11,080,331 $10,982,491 $1,468,850 $1,471,305 $12,549,181 ========== ========== ========== ========== ========== Issues rate - --------------- S&P/(Moody's)/ [D&P]/GFitchH Estimated category(1) fair value - --------------- ----------- AAA+ to A- (Aaa to A3) [AAA to A-] GAAA to A-H $ 8,850,159 BBB+ to BBB- (Baa1 to Baa3) [BBB+ to BBB-] GBBB+ to BBB-H 2,337,213 BB+ to BB- (Ba1 to Ba3) [BB+ to BB-] GBB+ to BB-H 377,449 B+ to B- (B1 to B3) [B+ to B-] GB+ to B-H 780,084 CCC+ to C (Caa to C) [CCC] GCCC+ to C-H 97,663 CI to D [DD] GDH 11,228 ---------- Total rated issues $12,453,796 ==========
(1) S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody's rates debt securities in rating categories ranging from Aaa (the highest) to C (extremely poor prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt's relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. D&P rates debt securities in rating categories ranging from AAA (the highest) to DD (in payment default). A plus (+) or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Issues are categorized based on the highest of the S&P, Moody's, D&P and Fitch ratings if rated by multiple agencies. (2) Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for nondefaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody's/D&P/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. A substantial portion of the assets in the NAIC categories were rated by the Company pursuant to applicable NAIC rating guidelines. (3) At amortized cost. SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $1.54 billion at September 30, 1996. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1996, Secured Loans consisted of loans to 331 borrowers spanning 40 industries, with 15% of these assets (at amortized cost) concentrated in financial institutions, 15% concentrated in the leisure industry and 12% concentrated in utilities. No other industry concentration constituted more than 7% of these assets. While the trading market for Secured Loans is more limited than for publicly traded corporate debt issues, management believes that participation in these transactions has enabled the Company to improve its investment yield. Although, as a result of restrictive financial covenants, Secured Loans involve greater risk of technical default than do publicly traded investment-grade securities, management believes that the risk of loss upon default for its Secured Loans is mitigated by their financial covenants and senior secured positions. The Company's Secured Loans are rated by S&P, Moody's, D&P, Fitch or by the Company or the NAIC, pursuant to comparable statutory ratings guidelines established by the NAIC. 21 23 MORTGAGE LOANS aggregated $1.65 billion at September 30, 1996 and consisted of 648 first mortgage loans with an average loan balance of approximately $2.5 million, collateralized by properties located in 34 states. Approximately 44% of the portfolio was multifamily residential, 20% was retail, 13% was manufactured housing, 5% was industrial, 5% was office and 13% was other types. At September 30, 1996, approximately 24% of the portfolio was secured by properties located in California, 10% by properties located in Texas and no more than 9% of the portfolio was secured by properties located in any other single state. At September 30, 1996, there were 32 loans with outstanding balances of $10 million or more, which loans collectively aggregated approximately 28% of the portfolio. At the time of their origination or purchase by the Company, virtually all mortgage loans had loan-to-value ratios of 75% or less. At September 30, 1996, approximately 17% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 1999. During 1996, 1995 and 1994, loans delinquent more than 90 days, foreclosed loans and restructured loans have not been significant in relation to the portfolio. Approximately 29% of the mortgage loans in the portfolio at September 30, 1996 were seasoned loans underwritten to the Company's standards and purchased at or near par from the Resolution Trust Corporation or other financial institutions, many of which were downsizing their portfolios. Such loans generally have higher average interest rates than loans that could be originated today. The balance of the mortgage loan portfolio has been originated by the Company under strict underwriting standards. Commercial mortgage loans on properties such as offices, hotels and shopping centers generally represent a higher level of risk than do mortgage loans secured by multifamily residences. This greater risk is due to several factors, including the larger size of such loans and the effects of general economic conditions on these commercial properties. However, due to the seasoned nature of the Company's mortgage loans, its emphasis on multifamily loans and its strict underwriting standards, the Company believes that it has reduced the risk attributable to its mortgage loan portfolio while maintaining attractive yields. PARTNERSHIP investments totaled $1.07 billion at September 30, 1996, constituting investments in approximately 450 separate partnerships with an average size of approximately $2.4 million. This portfolio includes: (i) $498.5 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities, currently including approximately 440 separate issuers; (ii) $473.2 million of partnerships that make tax-advantaged investments in affordable housing, currently involving approximately 340 multifamily projects in 39 states; and (iii) $100.2 million of partnerships that invest in mortgage loans and income-producing real estate. At September 30, 1996, $427.0 million of the Company's partnerships was accounted for by using the cost method and $644.9 million by using the equity method. The risks generally associated with partnerships include those related to their underlying investments (i.e. equity securities, debt securities and real estate), plus a level of illiquidity, which is mitigated for the affordable housing partnerships by the marketability of the tax credits they generate. The Company believes that these risks are acceptable in light of anticipated partnership returns and the contractual termination provisions contained in the partnership agreements. 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 and GIC 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-rate securities. The Company's fixed-rate 22 24 products incorporate surrender charges, two-tiered interest rate structures or other limitations on when contracts can be surrendered for cash to encourage persistency. Approximately 86% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1996. 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 scenarios. At September 30, 1996, the weighted average life of the Company's investments was approximately 5.2 years and the duration was approximately 3.3. As a component of its investment strategy, the Company utilizes interest rate swap agreements ("Swap Agreements") to match assets more closely to liabilities. Swap Agreements are agreements to exchange with a counterparty interest rate payments of differing character (for example, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company typically utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities into fixed-rate instruments. At September 30, 1996, the Company had 23 outstanding Swap Agreements with an aggregate notional principal amount of $1.12 billion. These agreements mature in various years through 2002 and have an average remaining maturity of 39 months. The Company also seeks to provide liquidity from time to time by using reverse repurchase agreements ("Reverse Repos"), Dollar Rolls and by investing in MBSs. It also seeks to enhance its spread income by using Reverse Repos, Dollar Rolls and Total Return Agreements. 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. Dollar Rolls are similar to Reverse Repos except that the repurchase involves securities that are only substantially the same as the securities sold and the arrangement is not collateralized, nor is it governed by a repurchase agreement. Total Return Agreements effectively exchange a fixed rate of interest on the notional amount for the coupon income plus or minus the increase or decrease in the fair value of specified non-investment-grade corporate bonds. MBSs are generally investment-grade securities collateralized by large pools of mortgage loans. MBSs generally pay principal and interest monthly. The amount of principal and interest payments may fluctuate as a result of prepayments of the underlying mortgage loans. There are risks associated with some of the techniques the Company uses to provide liquidity, enhance its spread income and match its assets and liabilities. The primary risks associated with Total Return Agreements are the credit risk on the underlying non-investment-grade bonds, the risk of potential loss due to bond market fluctuations and the risk associated with counterparty nonperformance. The primary risk associated with the Company's Dollar Rolls, Reverse Repos and Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its Total Return Agreements, Dollar Rolls, Reverse Repos and Swap Agreements are financially responsible and that the counterparty risk associated with those transactions is minimal. Counterparty risk associated with Dollar Rolls is further mitigated by the Company's participation in an MBS trading clearinghouse. The sell and buy transactions that are submitted to this clearinghouse are marked to market on a daily basis and each participant is required to over-collateralize its net loss position by 30% with either cash, letters of credit or government securities. In addition to counterparty risk, Swap Agreements also have interest rate risk. However, the Company's Swap Agreements typically hedge variable-rate assets or liabilities, and interest rate fluctuations that adversely affect the net cash received or paid under the terms of a Swap Agreement would be offset by increased interest income earned on the variable-rate assets or reduced interest expense paid on the variable-rate liabilities. 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. 23 25 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 values of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews for bonds, management principally considers the adequacy of 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. The valuation allowances on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $28.7 million at September 30, 1996 (at amortized cost, with a fair value of $25.8 million), including $16.7 million of bonds and notes and $12.0 million of mortgage loans. At September 30, 1996, defaulted investments constituted 0.2% of total invested assets. At September 30, 1995, defaulted investments totaled $61.8 million, including $34.4 million of bonds and notes and $27.4 million of mortgage loans. At September 30, 1995, defaulted investments constituted 0.6% of total invested assets. SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company's existing portfolio of cash and short-term investments, Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. At September 30, 1996, approximately $5.66 billion of the Company's Bond Portfolio had an aggregate unrealized gain of $177.6 million, while approximately $7.00 billion of the Bond Portfolio had an aggregate unrealized loss of $253.2 million. In addition, $577.5 million remains available to the Company to issue securities under a shelf registration statement filed in October 1996, subsequent to the Company's fiscal year end (see Note 9 of Notes to Consolidated Financial Statements). Further, the Company's investment portfolio currently provides approximately $138.7 million of monthly cash flow from scheduled principal and interest payments. Management is aware that prevailing market interest rates may shift significantly and has strategies in place to manage either an increase or decrease in prevailing rates. In a rising interest rate environment, the Company's average cost of funds would increase over time as it prices its new and renewing annuities and GICs to maintain a generally competitive market rate. Management would seek to place new funds in investments that were matched in duration to, and higher yielding than, the liabilities assumed. The Company believes that liquidity to fund withdrawals would be available through incoming cash flow, the sale of short-term or floating-rate instruments or Reverse Repos on the Company's substantial MBS segment of the Bond Portfolio, thereby avoiding the sale of fixed-rate assets in an unfavorable bond market. In a declining rate environment, the Company's cost of funds would decrease over time, reflecting lower interest crediting rates on its fixed annuities and GICs. 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. On a parent company stand-alone basis, SunAmerica Inc. (the "Parent"), at September 30, 1996, had invested assets with a fair value of $1.05 billion and outstanding senior indebtedness of $573.3 million, comprising all of the Company's outstanding senior indebtedness. Additionally, as of 24 26 September 30, 1996, the Parent had three GICs purchased by local government entities which aggregated $239.1 million. During June and October 1995, respectively, the Parent purchased the common securities of SunAmerica Capital Trust I and SunAmerica Capital Trust II (the "Grantor Trusts") and issued an aggregate of $245.5 million of junior subordinated debentures (the "Debentures") to the Grantor Trusts in connection with the public issuance of preferred securities of the Grantor Trusts (see Note 8 of Notes to Consolidated Financial Statements). The Parent's annual debt service with respect to its senior indebtedness, GIC obligations and Debentures totals $98.7 million for fiscal 1997, $118.9 million for fiscal 1998, $227.3 million for fiscal 1999, $92.1 million for fiscal 2000, $101.1 million for fiscal 2001 and $2.12 billion, in the aggregate, thereafter. The Parent received dividends from its regulated life insurance subsidiaries of $94.3 million in fiscal 1996, $69.2 million in fiscal 1995 and $43.0 million in fiscal 1994. The Parent also received dividends of $16.0 million in fiscal 1996 and $2.4 million in fiscal 1994 from its other directly owned subsidiaries. The Company has transferred to third-party investors certain of its interests in various partnerships that make tax-advantaged affordable housing investments. As part of these transactions, the Parent has agreed to advance monies to support the operations of the underlying housing projects, if required, and has guaranteed that the transferred partnerships will provide, as of the transfer date and under then current tax laws, a specified level of associated tax credits and deductions to the third-party investors. In fiscal 1996 the Company prospectively adopted the accounting provisions of EITF Consensus No. 94-1 for affordable housing investments made after May 1995, the date of the consensus. Accordingly, syndication compensation is recognized in income upon transfer of the partnerships and the remaining income is deferred and amortized over a 15-year period. Previously, a portion of the income was deferred to absorb estimated payments under the guarantees with the remainder recognized in income at the date of transfer. The adoption of the consensus did not have a material effect on net income in fiscal 1996, nor is it expected to materially affect future net income. Based on an evaluation of the underlying housing projects, management does not anticipate any material cash payments with respect to the guarantees. The Parent has guaranteed that its life insurance subsidiaries will receive the statutory carrying value of certain invested assets, primarily debt obligations and real estate, aggregating $127.9 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements begin on page F-3. Reference is made to the Index to Financial Statements on page F-1 herein. Additional financial statement schedules are included on pages S-3 through S-7 herein. Reference is made to the Index to Financial Statement Schedules on page S-1 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The Notice of 1997 Annual Meeting of Shareholders and Proxy Statement, which, when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by reference in this Annual Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K, provides the information required under Part III (Items 10, 11, 12 and 13), except for the information regarding the executive officers of the Company, which is included in Part I on page 10. 25 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Reference is made to the indexes set forth on pages F-1 and S-1 of this report. EXHIBITS
Exhibit No. Description - ------ ----------------------------------------------------------------------------------- 2(a) Stock Purchase Agreement between the Company and The American Road Insurance Company, dated as of November 10, 1995, whereby the Company acquired all of the outstanding stock of Ford Life Insurance Company from The American Road Insurance Company, a subsidiary of Ford Motor Company, is incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K, dated and filed on December 12, 1995. 2(b) Share Exchange Agreement, dated January 12, 1996, among the Company, Stanford Ranch, Inc., and the Stockholders of Stanford Ranch, Inc. named therein, whereby the Company issued shares of its Common Stock in exchange for all of the outstanding shares of common stock of Stanford Ranch, Inc., is incorporated herein by reference to the Company's Notice of 1996 Annual Meeting and Proxy Statement, filed January 15, 1996. 2(c) Asset Purchase and Sale Agreement between SunAmerica Life Insurance Company and John Alden Life Insurance Company, dated as of November 29, 1996. 2(d) Stock Purchase Agreement between SunAmerica Life Insurance Company and John Alden Financial Corporation, dated as of November 29, 1996, regarding all of the outstanding stock of John Alden Life Insurance Company of New York. 3(a) Restated Charter, dated October 2, 1991, is incorporated herein by reference to Exhibit 3(a) to the Company's Form 8 dated and filed October 4, 1991, amending the Company's Annual Report on Form 10-K for the year ended September 30, 1990, filed December 20, 1990. 3(b) Articles Supplementary, dated June 24, 1992, which define the rights of the holders of the Company's 9 1/4% Preferred Stock, Series B, are incorporated herein by reference to Exhibit 3(c) to the Company's 1992 Annual Report on Form 10-K, filed November 30, 1992. 3(c) Amendment to the Company's Restated Articles of Incorporation, dated February 1, 1993, is incorporated herein by reference to Exhibit 1 to the Company's Form 8-K, filed February 3, 1993. 3(d) Articles Supplementary, dated March 9, 1993, which define the rights of the holders of the Company's Series D Mandatory Conversion Premium Dividend Preferred Stock, are incorporated herein by reference to Exhibit 3(e) to the Company's Registration Statement No. 33-66048 on Form S-4, filed July 22, 1993. 3(e) Articles Supplementary, dated August 31, 1993, which define the rights of the holders of the Company's Adjustable Rate Cumulative Preferred Stock, Series C, are incorporated herein by reference to Exhibit 3(f) to the Company's 1993 Annual Report on Form 10-K, filed December 16, 1993. 3(f) Articles of Merger, dated July 30, 1993, between the Company and SunAmerica Corporation, are incorporated herein by reference to Exhibit 3(g) to the Company's 1993 Annual Report on Form 10-K, filed December 16, 1993. 3(g) Articles Supplementary, dated January 27, 1995, which define the reacquisition of the Company's Series A Mandatory Conversion Premium Dividend Preferred Stock, are incorporated herein by reference to Exhibit 3(g) to the Company's 1995 Annual Report on Form 10-K, filed November 29, 1995. 3(h) Articles Supplementary, dated October 30, 1995, which define the rights of the holders of the Company's Series E Mandatory Conversion Premium Dividend Preferred Stock, are incorporated herein by reference to Exhibit 3(h) to the Company's Annual Report on Form 10-K, filed November 29, 1995.
26 28
Exhibit No. Description - ------ ----------------------------------------------------------------------------------- 3(i) Articles of Amendment, dated October 30, 1995, are incorporated herein by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K, filed November 29, 1995. 3(j) Articles of Amendment, dated June 7, 1996. 3(k) Bylaws, as amended and restated on November 8, 1996. 4(a) Restated Charter, dated October 3, 1991. See Exhibit 3(a). 4(b) Bylaws, as amended and restated on November 8, 1996. See Exhibit 3(k). 4(c) Articles Supplementary, dated June 24, 1992. See Exhibit 3(b). 4(d) Articles Supplementary, dated March 9, 1993. See Exhibit 3(d). 4(e) Articles Supplementary, dated August 31, 1993. See Exhibit 3(e). 4(f) Form of Subordinated Indenture, dated as of October 28, 1996, between the Company and The First National Bank of Chicago, as Trustee, is incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement No. 333-14201 on Form S-3, filed October 16, 1996. 4(g) Senior Indenture, dated as of April 15, 1993, between the Company and The First National Bank of Chicago, as Trustee, defining the rights of the holders of the Company's 8 1/8% Debentures due April 28, 2023 and certain other debt securities of the Company, is incorporated herein by reference to Exhibit 4(h) to the Company's 1993 Annual Report on Form 10-K, filed December 16, 1993. 4(h) Supplemental Indenture, dated as of June 28, 1993, supplementing the Senior Indenture, dated as of April 15, 1993, is incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement No. 333-14201 on Form S-3, filed October 16, 1996. 4(i) Supplemental Indenture, dated October 28, 1996, supplementing the Senior Indenture, dated as of April 15, 1993, as amended by the Supplemental Indenture, dated as of June 28, 1993, between the Company and The First National Bank of Chicago, as Trustee, is incorporated herein by reference to Exhibit 4.7 to the Company's Current Report on Form 8-K, filed November 6, 1996. 4(j) Junior Subordinated Indenture, dated as of March 15, 1995, as supplemented by the First Supplemental Indenture, dated as of March 15, 1995, defining the rights of the holders of the Company's 9.95% Junior Subordinated Debentures, Series A, due 2044, between the Company and The First National Bank of Chicago, is incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement No. 33-62405 on Form S-3, filed September 6, 1995. 4(k) Form of Second Supplemental Indenture, dated October 11, 1995, to the Junior Subordinated Indenture dated as of March 15, 1995, defining the rights of the holders of the Company's 8.35% Junior Subordinated Debentures due 2044, between the Company and The First National Bank of Chicago, as Trustee, is incorporated herein by reference to Exhibit 4.12 to the Company's Registration Statement No. 33-64205 on Form S-3, filed September 6, 1995. 4(l) Supplemental Indenture, dated October 28, 1996, supplementing the Junior Subordinated Indenture, dated as of March 15, 1995, between the Company and The First National Bank of Chicago, as Trustee, is incorporated herein by reference to Exhibit 4.8 to the Company's Current Report on Form 8-K, filed November 6, 1996. 4(m) Fourth Supplemental Indenture, dated November 13, 1996, to the Junior Subordinated Indenture, dated as of March 15, 1995, defining the rights of the holders of the Company's 8.30% Junior Subordinated Debentures due 2045, between the Company and The First National Bank of Chicago, as Trustee, is incorporated herein by reference to Exhibit 4.16 to the Company's Current Report on Form 8-K, filed November 12, 1996. 4(n) Purchase Contract Agreement, dated November 6, 1996, between the Company and The Bank of New York, as Purchase Contract Agent (including Form of Security Certificate), is incorporated hereby by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K, filed November 6, 1996.
27 29
Exhibit No. Description - ------ ----------------------------------------------------------------------------------- 4(o) Pledge Agreement, dated November 6, 1996, among the Company, The First National Bank of Chicago, as Collateral Agent, and The Bank of New York, as Purchase Contract Agent, is incorporated herein by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K, filed November 6, 1996. 4(p) Prepaid Securities Indenture, dated November 1, 1996, between the Company and The Bank of New York, as Trustee, is incorporated herein by reference to Exhibit 4.5 to the Company's Current Report on Form 8-K, filed November 6, 1996. 4(q) Supplemental Indenture, dated November 6, 1996, to the Prepaid Securities Indenture (including Form of Certificate for the Prepaid Securities), is incorporated herein by reference to Exhibit 4.6 to the Company's Current Report on Form 8-K, filed November 6, 1996. 4(r) Tri-Party Agreement, dated as of July 1, 1993, among The First National Bank of Chicago, Bank of America, NT & SA and the Company, appointing The First National Bank of Chicago as Successor Trustee to Bank of America NT & SA for the Company's 9% Notes due January 15, 1995 and 9.95% Debentures due February 1, 2012, is incorporated herein by reference to Exhibit 4(i) to the Company's 1993 Annual Report on Form 10-K, filed December 16, 1993. 4(s) Form of Amended and Restated Declaration of Trust of SunAmerica Capital Trust I, dated as of June 6, 1995, among the Company and the Trustees of the Trust, is incorporated herein by reference to Exhibit 4.5 to the Company's Registration Statement Nos. 33-56961 and 33-56961-01 on Form S-4, filed April 12, 1995. 4(t) Form of Amended and Restated Declaration of Trust of SunAmerica Capital Trust II, dated as of October 11, 1995, among the Company and the Trustees of the Trust, is incorporated herein by reference to Exhibit 4.10 to the Company's Registration Statement Nos. 33-62405 and 33-62405-01 on Form S-3, filed September 6, 1995. 4(u) Amended and Restated Declaration of Trust of SunAmerica Capital Trust III, dated as of November 13, 1996, among the Company and Trustees of the Trust, is incorporated herein by reference to Exhibit 4.13 to the Company's Current Report on Form 8-K, filed November 12, 1996. 4(v) Form of Guarantee Agreement, dated June 6, 1995, between the Company and the Bank of New York, as Trustee, relating to the Preferred Securities of SunAmerica Capital Trust I, is incorporated herein by reference to Exhibit 4.8 to the Company's Registration Statement Nos. 33-56961 and 33-56961-01 on Form S-4, filed April 12, 1995. 4(w) Form of Guarantee Agreement, dated October 11, 1995, between the Company and The Bank of New York, as Trustee, relating to the Preferred Securities of SunAmerica Capital Trust II, is incorporated herein by reference to Exhibit 4.14 to the Company's Registration Statement Nos. 33-62405 and 33-62405-01 on Form S-3, filed September 6, 1995. 4(x) Form of Guarantee Agreement, dated November 13, 1996, between the Company and The Bank of New York, as Trustee, relating to the Preferred Securities of SunAmerica Capital Trust III, is incorporated herein by reference to Exhibit 4.19 of the Company's Registration Statement Nos. 333-14201 and 333-14201-01 on Form S-3, filed October 16, 1996. 10(a) Amended and Restated Employment Agreement, dated March 21, 1996, between the Company and Gary W. Krat, amending the Employment Agreement, dated July 30, 1992, is incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q, for the quarter ended March 31, 1996, filed May 13, 1996. 10(b) Employment Agreement, dated July 14, 1992, between the Company and Michael L. Fowler, is incorporated herein by reference to Exhibit 10(f) to the Company's 1992 Annual Report on Form 10-K, filed November 30, 1992. 10(c) Employment Agreement, dated April 17, 1995, between the Company and Joseph M. Tumbler, is incorporated herein by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q, for the quarter ended June 30, 1995, filed August 14, 1995. 10(d) Employment Agreement, dated April 27, 1995, between the Company and Jay S. Wintrob, is incorporated herein by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q, for the quarter ended June 30, 1995, filed August 14, 1995.
28 30
Exhibit No. Description - ------ ----------------------------------------------------------------------------------- 10(e) 1988 Employee Stock Plan is incorporated herein by reference to Exhibit B to the Company's and Kaufman and Broad Home Corporation's Notice of and Joint Proxy Statement for Special Meeting of Shareholders held on February 21, 1989, filed January 24, 1989. 10(f) Amended and Restated 1978 Employee Stock Option Program, is incorporated herein by reference to Appendix A to the Company's Notice of 1987 Annual Meeting of Shareholder's and Proxy Statement, filed March 24, 1987. 10(g) Executive Deferred Compensation Plan is incorporated herein by reference to Exhibit 10(1) to the Company's 1985 Annual Report on Form 10-K, filed February 27, 1986. 10(h) 1987 Restricted Stock Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1988 Annual Meeting of Shareholders and Proxy Statement, filed March 22, 1988. 10(i) Executive Deferred Compensation Plan, dated as of October 1, 1989, is incorporated herein by reference to Exhibit 10(h) to the Company's 1994 Annual Report on Form 10-K, filed December 1, 1994. 10(j) SunAmerica Supplemental Deferral Plan is incorporated herein by reference to Exhibit 10(m) to the Company's 1989 Annual Report on Form 10-K, filed December 20, 1989. 10(k) Long-Term Performance-Based Incentive Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1994 Annual Meeting of Shareholders and Proxy Statement, filed December 21, 1993. 10(l) Performance Incentive Compensation Plan is incorporated herein by reference to the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement, filed December 1, 1994. 10(m) 1995 Performance Stock Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement, filed December 1, 1994. 10(n) Registered Representatives' Deferred Compensation Plan is incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement No. 333-10523 on Form S-3, filed August 20, 1996. 10(o) Deferred Compensation Agreement is incorporated herein by reference to Exhibit 4.2 of the Company's Registration No. 333-10523 on Form S-3, filed August 20, 1996. 10(p) Amendment to Performance Incentive Compensation Plan is incorporated herein by reference to the Company's Notice of 1996 Annual Meeting of Shareholders and Proxy Statement, filed January 15, 1996. 10(q) $250,000,000 Credit Agreement, dated as of October 27, 1996, among the Company and SunAmerica Financial, Inc. as Borrowers and Citibank, N.A. as Agent for the banks named therein, is incorporated herein by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q, for the quarter ended December 31, 1995, filed February 13, 1996. 10(r) List of Executive Compensation Plans and Arrangements. 11 Statement re Computation of per-share earnings. 12(a) Statement re Computation of ratio of earnings to fixed charges. 12(b) Statement re Computation of ratio of earnings to combined fixed charges and preferred stock dividends. 21 Subsidiaries of the Company. 23 Consent of Independent Accountants. 27 Financial Data Schedule.
29 31 REPORTS ON FORM 8-K On July 25, 1996, the Company filed a Current Report on Form 8-K announcing its third quarter 1996 earnings and its financial position at June 30, 1996. On November 6, 1996, the Company filed a Current Report on Form 8-K to file exhibits in connection with the issuance of its Premium Equity Redemption Cumulative Security Units and its 6.20% Notes due October 31, 1999 (Series I and Series II) pursuant to the Company's Registration Statement on Form S-3 (File No. 333-14201). On November 12, 1996, the Company filed a Current Report on Form 8-K announcing its fourth quarter 1996 earnings and its financial position at September 30, 1996. On November 12, 1996, the Company filed a Current Report on Form 8-K to file exhibits in connection with the issuance by SunAmerica Capital Trust III (the "Trust") of its 8.30% Trust Originated Preferred Securities pursuant to Registration Nos. 333-14201 and 333-14201-01 filed by the Company and the Trust. On November 14, 1996, the Company filed a Current Report on Form 8-K to announce that it had signed an exclusive letter of intent regarding the acquisition of John Alden Financial Corporation's annuity operations by SunAmerica Life Insurance Company. 30 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUNAMERICA INC. Date: December 10, 1996 By: SCOTT L. ROBINSON -------------------------------- ------------------------------------ Scott L. Robinson Senior Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date ---------- ----- ---- ELI BROAD Chairman, President and Chief December 10, 1996 - ---------------------------------------- Executive Officer (Principal Eli Broad Executive Officer) JAMES R. BELARDI Executive Vice President December 10, 1996 - ---------------------------------------- (Principal Financial Officer) James R. Belardi SCOTT L. ROBINSON Senior Vice President and December 10, 1996 - ---------------------------------------- Controller (Principal Scott L. Robinson Accounting Officer) Director December , 1996 - ---------------------------------------- William F. Aldinger RONALD J. ARNAULT Director December 10, 1996 - ---------------------------------------- Ronald J. Arnault KAREN HASTIE-WILLIAMS Director December 10, 1996 - ---------------------------------------- Karen Hastie-Williams DAVID O. MAXWELL Director December 10, 1996 - ---------------------------------------- David O. Maxwell BARRY MUNITZ Director December 10, 1996 - ---------------------------------------- Barry Munitz LESTER POLLACK Director December 10, 1996 - ---------------------------------------- Lester Pollack CARL E. REICHARDT Director December 10, 1996 - ---------------------------------------- Carl E. Reichardt RICHARD D. ROHR Director December 10, 1996 - ---------------------------------------- Richard D. Rohr SANFORD C. SIGOLOFF Director December 10, 1996 - ---------------------------------------- Sanford C. Sigoloff HAROLD M. WILLIAMS Director December 10, 1996 - ---------------------------------------- Harold M. Williams
31 33 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
Page(s) ----------------- Report of Independent Accountants....................................... F-2 Consolidated Balance Sheet as of September 30, 1996 and 1995............ F-3 Consolidated Income Statement for the years ended September 30, 1996, 1995 and 1994......................................................... F-4 Consolidated Statement of Cash Flows for the years ended September 30, 1996, 1995 and 1994................................................... F-5 through F-6 Notes to Consolidated Financial Statements.............................. F-7 through F-27
Separate financial statements of subsidiaries not consolidated and 50% or less owned persons accounted for by the equity method have been omitted because they do not individually constitute a significant subsidiary. F-1 34 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of SunAmerica Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated income statement and statement of cash flows present fairly, in all material respects, the financial position of SunAmerica Inc. and its subsidiaries at September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in fiscal 1994. Price Waterhouse LLP Los Angeles, California November 8, 1996, except as to Note 13 which is as of November 29, 1996 F-2 35 SUNAMERICA INC. CONSOLIDATED BALANCE SHEET
September 30, --------------------------- 1996 1995 ----------- ----------- (In thousands) ASSETS Investments: Cash and short-term investments......................................... $ 529,363 $ 855,350 Bonds, notes and redeemable preferred stocks: Available for sale, at fair value (amortized cost: 1996, $12,657,620,000; 1995, $6,615,620,000)............................... 12,582,024 6,584,488 Held for investment, at amortized cost (fair value: 1995, $736,835,000)........................................................ -- 718,283 Mortgage loans.......................................................... 1,652,257 1,543,285 Common stocks, at fair value (cost: 1996, $44,871,000; 1995, $21,403,000)......................................................... 81,385 39,906 Partnerships............................................................ 1,071,857 774,417 Real estate............................................................. 105,321 105,637 Other invested assets................................................... 177,577 187,593 ----------- ----------- Total investments....................................................... 16,199,784 10,808,959 Variable annuity assets................................................... 6,380,458 5,263,006 Accrued investment income................................................. 186,803 95,038 Deferred acquisition costs................................................ 782,300 526,415 Other assets.............................................................. 177,476 150,749 ----------- ----------- TOTAL ASSETS.............................................................. $23,726,821 $16,844,167 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Reserves, payables and accrued liabilities: Reserves for fixed annuity contracts.................................... $ 9,654,674 $ 4,862,250 Reserves for guaranteed investment contracts............................ 4,169,028 3,607,192 Trust deposits.......................................................... 436,048 426,595 Payable to brokers for purchases of securities.......................... 42,518 473,728 Income taxes currently payable.......................................... 18,436 2,465 Other liabilities....................................................... 428,718 271,540 ----------- ----------- Total reserves, payables and accrued liabilities........................ 14,749,422 9,643,770 ----------- ----------- Variable annuity liabilities.............................................. 6,380,458 5,263,006 ----------- ----------- Long-term notes and debentures............................................ 573,335 524,835 ----------- ----------- Deferred income taxes..................................................... 125,417 146,847 ----------- ----------- Company-obligated mandatorily redeemable preferred securities of subsidiary grantor trusts whose sole assets are junior subordinated debentures of the Company................................................ 237,631 52,631 ----------- ----------- Shareholders' equity: Preferred Stock......................................................... 384,549 321,642 Nontransferable Class B Stock........................................... 10,848 10,240 Common Stock............................................................ 108,604 44,175 Additional paid-in capital.............................................. 304,295 185,211 Retained earnings....................................................... 869,215 656,509 Net unrealized losses on debt and equity securities available for sale................................................................... (16,953) (4,699) ----------- ----------- Total shareholders' equity.............................................. 1,660,558 1,213,078 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................ $23,726,821 $16,844,167 =========== ===========
See accompanying notes F-3 36 SUNAMERICA INC. CONSOLIDATED INCOME STATEMENT
Years ended September 30, -------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (In thousands, except per-share amounts) Investment income....................................... $1,254,288 $ 905,802 $ 758,150 --------- --------- --------- Interest expense on: Fixed annuity contracts............................... (410,269) (258,730) (254,464) Guaranteed investment contracts....................... (252,027) (213,340) (150,424) Trust deposits........................................ (9,968) (10,519) (8,516) Senior indebtedness................................... (69,033) (55,985) (50,292) --------- --------- --------- Total interest expense................................ (741,297) (538,574) (463,696) --------- --------- --------- Dividends paid on preferred securities of grantor trusts................................................ (20,235) (1,673) -- --------- --------- --------- NET INVESTMENT INCOME................................... 492,756 365,555 294,454 --------- --------- --------- NET REALIZED INVESTMENT LOSSES.......................... (30,314) (33,012) (21,124) --------- --------- --------- Fee income: Variable annuity fees................................. 104,661 84,583 79,483 Net retained commissions.............................. 49,824 33,715 29,880 Asset management fees................................. 25,413 26,935 31,302 Loan servicing fees................................... 23,846 19,792 -- Trust fees............................................ 16,684 15,394 11,942 --------- --------- --------- TOTAL FEE INCOME........................................ 220,428 180,419 152,607 --------- --------- --------- Other income and expenses: Surrender charges..................................... 22,086 11,885 10,716 General and administrative expenses................... (212,701) (166,540) (132,743) Amortization of deferred acquisition costs............ (108,176) (86,107) (69,253) Other, net............................................ 7,948 7,406 5,344 --------- --------- --------- TOTAL OTHER INCOME AND EXPENSES......................... (290,843) (233,356) (185,936) --------- --------- --------- PRETAX INCOME........................................... 392,027 279,606 240,001 Income tax expense...................................... (117,600) (85,400) (74,700) --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES....................................... 274,427 194,206 165,301 Cumulative effect of change in accounting for income taxes.......................................... -- -- (33,500) --------- --------- --------- NET INCOME.............................................. $ 274,427 $ 194,206 $ 131,801 ========= ========= ========= EARNINGS PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES........................ $ 1.95 $ 1.42 $ 1.19 Cumulative effect of change in accounting for income taxes....................................... -- -- (0.27) --------- --------- --------- NET INCOME............................................ $ 1.95 $ 1.42 $ 0.92 ========= ========= ========= NET EARNINGS APPLICABLE TO COMMON STOCK (used in the computation of earnings per share).................... $ 262,895 $ 179,223 $ 115,381 ========= ========= ========= AVERAGE SHARES OUTSTANDING.............................. 134,587 126,228 124,830 ========= ========= =========
See accompanying notes F-4 37 SUNAMERICA INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended September 30, ------------------------------------------ 1996 1995 1994 ------------ ----------- ----------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................................... $ 274,427 $ 194,206 $ 131,801 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to: Fixed annuity contracts....................... 410,269 258,730 254,464 Guaranteed investment contracts............... 252,027 213,340 150,424 Trust deposits................................ 9,968 10,519 8,516 Net realized investment losses................... 30,314 33,012 21,124 Accretion of net discounts on investments........ (28,610) (33,756) (5,612) Provision for deferred income taxes.............. (3,457) (5,834) 78,285 Cumulative effect of change in accounting for income taxes.................................... -- -- 33,500 Change in: Accrued investment income........................ (10,347) 10,648 209 Deferred acquisition costs....................... (50,495) (24,741) (20,357) Other assets..................................... (18,958) (4,731) 365 Income taxes currently payable................... 19,052 52,433 (61,211) Other liabilities................................ 38,275 25,523 (22,410) Other, net......................................... 15,721 12,674 4,121 ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES.......... 938,186 742,023 573,219 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Bonds, notes and redeemable preferred stocks..... (11,476,827) (6,852,129) (6,739,406) Mortgage loans................................... (320,748) (250,547) (333,384) Partnerships..................................... (712,749) (410,299) (406,171) Other investments, excluding short-term investments..................................... (132,711) (92,516) (143,279) Net assets of Imperial Premium Finance, Inc...... -- (442,804) -- Net assets of CalFarm Life Insurance Company..... (168,665) -- -- Net assets of Ford Life Insurance Company........ 6,677 -- -- Annuity contracts from The Central National Life Insurance Company of Omaha.................... 224,778 -- -- Sales of: Bonds, notes and redeemable preferred stocks..... 7,490,441 4,498,853 4,317,279 Partnerships..................................... 318,303 165,710 146,568 Other investments, excluding short-term investments..................................... 63,556 71,442 92,183 Redemptions and maturities of: Bonds, notes and redeemable preferred stocks..... 2,891,448 2,134,509 1,463,932 Mortgage loans................................... 199,564 107,102 157,304 Partnerships..................................... 183,014 104,734 230,106 Other investments, excluding short-term investments..................................... 50,819 53,928 83,201 ---------- ---------- ---------- NET CASH USED BY INVESTING ACTIVITIES.............. (1,383,100) (912,017) (1,131,667) ---------- ---------- ----------
F-5 38 SUNAMERICA INC. CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Years ended September 30, 1996 1995 1994 ---------- ---------- ---------- (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payments of cash dividends to shareholders......... $ (61,721) $ (50,268) $ (50,830) Premium receipts on: Fixed annuity contracts.......................... 993,376 944,742 230,037 Guaranteed investment contracts.................. 1,019,275 1,766,629 1,038,699 Net exchanges to (from) the fixed accounts of variable annuity contracts........................ (260,635) 10,388 (30,929) Receipts of trust deposits......................... 454,237 447,398 319,318 Withdrawal payments on: Fixed annuity contracts.......................... (786,724) (690,292) (693,618) Guaranteed investment contracts.................. (708,743) (1,156,299) (621,706) Trust deposits................................... (454,718) (473,611) (264,500) Claims and annuity payments on fixed annuity contracts......................................... (232,361) (178,487) (176,136) Net proceeds from issuances of long-term notes and debentures........................................ 47,478 51,675 91,711 Net repayments of other senior indebtedness........ -- (28,662) (98,489) Net repayments of other short-term financings...... (310,560) (187,251) (413,523) Net proceeds from issuance of preferred securities of a subsidiary grantor trust..................... 179,476 -- -- Net proceeds from issuance of Series E Preferred Stock............................................. 240,547 -- -- ---------- ---------- ---------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES... 118,927 455,962 (669,966) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS....................................... (325,987) 285,968 (1,228,414) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD............................................ 855,350 569,382 1,797,796 ---------- ---------- ---------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD... $ 529,363 $ 855,350 $ 569,382 ========== ========== ========== Supplemental cash flow information: Interest paid on indebtedness.................... $ 66,037 $ 54,899 $ 56,169 ========== ========== ========== Income taxes paid, net of refunds received....... $ 102,005 $ 38,801 $ 57,626 ========== ========== ========== Non-cash financing activity: Exchange of 2,105,235 shares of 9 1/4% Series B Preferred Stock for preferred securities of a subsidiary grantor trust........................ $ -- $ 52,631 $ -- ========== ========== ==========
See accompanying notes F-6 39 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- NATURE OF OPERATIONS SunAmerica Inc. (the "Company") conducts its business through five segments: annuity operations, asset management, retirement trust services, broker-dealer operations and premium financing. Annuity operations, which include the sale and administration of fixed and variable annuities and guaranteed investment contracts, are conducted through the Company's six life insurance subsidiaries: SunAmerica Life Insurance Company, Anchor National Life Insurance Company, Ford Life Insurance Company ("Ford Life"), CalFarm Life Insurance Company ("CalFarm"), First SunAmerica Life Insurance Company and SunAmerica National Life Insurance Company. Asset management, which includes the sale and management of mutual funds, is conducted by SunAmerica Asset Management Corp. Retirement trust services are provided by Resources Trust Company and include custodial and administrative services for self-directed retirement plans. Broker-dealer operations include the sale of securities and financial services products, and are conducted by the Company's three broker-dealer subsidiaries: Royal Alliance Associates, Inc., SunAmerica Securities, Inc. and Advantage Capital Corporation. Premium financing is provided by Imperial Premium Finance, Inc. and involves the origination and servicing of short-term premium finance loans. The operations of the Company are influenced by many factors, including general economic conditions, monetary and fiscal policies of the federal government, and policies of state and other regulatory authorities. The level of sales of the Company's financial products is influenced by many factors, including general market rates of interest, strength, weakness and volatility of equity markets, and terms and conditions of competing financial products. The Company is exposed to the typical risks normally associated with a portfolio of fixed-income securities, namely interest rate, option, liquidity and credit risk. The Company controls its exposure to these risks by, among other things, closely monitoring and matching the duration of its assets and liabilities, monitoring and limiting prepayment and extension risk in its portfolio, maintaining a large percentage of its portfolio in highly liquid securities, and engaging in a disciplined process of underwriting, reviewing and monitoring credit risk. The Company also is exposed to market risk, as market volatility may result in reduced fee income in the case of assets managed in mutual funds and held in separate accounts. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company and all of its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Certain 1995 and 1994 amounts have been reclassified to conform with the 1996 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. On August 30, 1996, the Company paid a two-for-one stock split and on November 10, 1995, the Company paid a three-for-two stock split (the "Stock Splits"). The Stock Splits were effected in the form of stock dividends on the Company's Common Stock and Nontransferable Class B Stock. The par value of the shares paid in connection with the Stock Splits was charged to Additional Paid-In Capital in the balance sheet. Per-share amounts, shares outstanding, average shares outstanding, stock option plan data and related prices have been restated, for all periods presented, to reflect the Stock Splits. RECENTLY ISSUED ACCOUNTING STANDARDS. In October 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 123, "Accounting for Stock- F-7 40 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Based Compensation" ("FAS 123"). The Company expects to continue to apply Accounting Principles Board Opinion No. 25 for measurement of stock compensation and will provide the disclosure required by FAS 123 beginning in fiscal 1997. The adoption of FAS 123 is not expected to have a material effect on the Company's operating results. In fiscal 1996, the Company prospectively adopted the provisions of Emerging Issues Task Force Consensus No. 94-1, "Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects" ("EITF 94-1"), for purchase and sale transactions made after May 1995, the date of the consensus. The adoption of the consensus did not have a material effect on net income for 1996, nor is it expected to materially affect future operating results. Effective October 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly, the cumulative effect of this change in accounting for income taxes was recorded on October 1, 1993 to increase the liability for Deferred Income Taxes by $33,500,000. INVESTMENTS. Cash and short-term investments primarily include cash, commercial paper, money market investments, repurchase agreements and short-term bank participations. All such investments are carried at cost plus accrued interest, which approximates fair value, have maturities of three months or less and are considered cash equivalents for purposes of reporting cash flows. Bonds, notes and redeemable preferred stocks 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 shareholders' equity. Bonds, notes and redeemable preferred stocks held for investment (the "Held for Investment Portfolio") are carried at amortized cost. On December 1, 1995, the Company reassessed the appropriateness of classifying a portion of its portfolio of bonds, notes and redeemable preferred stocks as held for investment. This reassessment was made pursuant to the provisions of "Special Report: A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," issued by the Financial Accounting Standards Board in November 1995. As a result of its reassessment, the Company reclassified all of its Held for Investment Portfolio as available for sale. At December 1, 1995, the amortized cost of the Held for Investment Portfolio aggregated $701,512,000 and its fair value was $723,423,000. Upon reclassification, the resulting net unrealized gain of $21,911,000 was credited to Net Unrealized Losses on Debt and Equity Securities Available for Sale in the shareholders' equity section of the balance sheet. Bonds, notes and redeemable preferred stocks 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. Real estate is carried at the lower of cost or fair value. Partnerships are accounted for by using the equity method if the Company exercises significant influence over their operating affairs; otherwise, the cost method is used. For partnerships that invest in tax-advantaged affordable housing units, interest is capitalized during construction. The Company invests in such partnerships principally with the intent to syndicate them to third-party investors once construction of the underlying projects is completed. With the adoption of EITF 94-1 in 1996, investments in such partnerships are accounted for by using the equity method and sales of such partnerships are accounted for as sales of real estate. Because the Company provides certain operating and yield guarantees to the buyers, the gain realized upon sale is deferred, after recognition of syndication compensation, and amortized over a 15-year period. Previously, gains, net of amounts F-8 41 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) deferred to cover estimated obligations under the guarantees, were recognized upon sale. Syndication compensation, imputed interest and amortization of deferred gains are included in Investment Income in the income statement. 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. INTEREST RATE SWAP AGREEMENTS. The net differential to be paid or received on interest rate swap agreements ("Swap Agreements") entered into to reduce the impact of changes in interest rates is recognized over the lives of the agreements, and such differential is classified as Investment Income or Interest Expense in the income statement. All outstanding Swap Agreements are designated as hedges, and, therefore, are not marked to market. TOTAL RETURN CORPORATE BOND SWAP AGREEMENTS. Total return corporate bond swap agreements ("Total Return Agreements") have been entered into for investment purposes, and, accordingly, are marked to market with the related gain or loss classified as Investment Income in the income statement. 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. Costs incurred to sell mutual funds are also deferred and amortized over the estimated lives of the funds obtained. 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 losses on debt and equity securities available for sale that is credited or charged directly to shareholders' equity. Deferred Acquisition Costs have been increased by $13,000,000 at September 30, 1996 and $5,400,000 at September 30, 1995 for this adjustment. VARIABLE ANNUITY ASSETS AND LIABILITIES. The assets and liabilities resulting from the receipt of variable annuity premiums are segregated in separate accounts. The Company receives administrative fees for managing the funds and other fees for assuming mortality and certain expense risks. Such fees are included in Variable Annuity Fees in the income statement. GOODWILL. Goodwill, amounting to $53,462,000 at September 30, 1996, is amortized by using the straight-line method over periods ranging from 25 to 40 years and is included in Other Assets in the balance sheet. CONTRACTHOLDER RESERVES. Contractholder reserves for fixed annuity contracts and guaranteed investment 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). F-9 42 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FEE INCOME. Variable annuity fees, asset management fees and trust fees are recorded in income as earned. Net retained commissions are recognized as income on a trade date basis. Loan servicing fees are recognized as income ratably over the life of the serviced loans and include the difference between the loan yield and the rate earned by the purchasers of the loans. EARNINGS PER SHARE. The calculation of earnings per share is made by dividing applicable earnings by the weighted average number of shares of Common Stock and Nontransferable Class B Stock (collectively referred to as "Common Stock") outstanding during each period, adjusted for the incremental shares attributed to common stock equivalents. Common stock equivalents include outstanding employee stock options and convertible preferred stock, which includes the Series A, D and E Depositary Shares issued in October 1991, March 1993 and November 1995, respectively. Common stock equivalents are included in the computation only if their effect is dilutive. Net Earnings Applicable to Common Stock are reduced by preferred stock dividend requirements, which amounted to $11,532,000 in 1996, $14,983,000 in 1995 and $16,420,000 in 1994. These preferred stock dividend requirements do not include dividends paid on the convertible issues, which amounted to $15,528,000 in 1996, $13,907,000 in 1995 and $21,140,000 in 1994. F-10 43 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- ACQUISITIONS On December 29, 1995, the Company completed the acquisition of all of the outstanding stock of CalFarm Life for a cash purchase price of $120,000,000. The Company acquired assets having an aggregate fair value of $737,028,000, composed primarily of invested assets totaling $722,461,000. Liabilities assumed in this acquisition totaled $650,186,000, including $645,814,000 of fixed annuity reserves. An amount equal to the excess of the purchase price over the fair value of the net assets acquired, amounting to $29,828,000 at September 30, 1996, is included in Deferred Acquisition Costs in the balance sheet, and is being amortized, with interest, over the estimated lives of the assumed annuity contracts in proportion to the present value of estimated future profits. On February 29, 1996, the Company completed the acquisition of all of the outstanding stock of Ford Life for a cash purchase price of $172,500,000. The Company acquired assets having an aggregate fair value of $3,146,072,000, composed primarily of invested assets totaling $3,097,152,000. Liabilities assumed in this acquisition totaled $3,098,396,000, including $3,059,255,000 of fixed annuity reserves. An amount equal to the excess of the purchase price over the fair value of the net assets acquired, amounting to $115,654,000 at September 30, 1996, is included in Deferred Acquisition Costs in the balance sheet, and is being amortized, with interest, over the estimated lives of the assumed annuity contracts in proportion to the present value of estimated future profits. On April 1, 1996, the Company completed the acquisition of a $958,962,000 block of annuity contracts (the "Central National Annuity Contracts") from The Central National Life Insurance Company of Omaha, a subsidiary of Beneficial Corp. As part of this acquisition, the Company acquired assets having an aggregate fair value of $919,154,000, composed primarily of invested assets totaling $908,755,000. An amount equal to the excess of the fair value of the annuity reserves assumed over the fair value of the assets acquired, amounting to $35,797,000 at September 30, 1996, is included in Deferred Acquisition Costs in the balance sheet, and is being amortized, with interest, over the estimated lives of the assumed annuity contracts in proportion to the present value of estimated future profits. These acquisitions have been accounted for by using the purchase method of accounting. Accordingly, the income statement includes the results of CalFarm's operations for only the period from January 1, 1996 through September 30, 1996; Ford Life's operations for only the period from March 1, 1996 through September 30, 1996; and the operations associated with the Central National Annuity Contracts for only the period from April 1, 1996 through September 30, 1996. On a pro forma (unaudited) basis, assuming these acquisitions occurred on October 1, 1993, the beginning of the earliest period presented, revenues (investment income, net realized investment losses and fee income) would have been $1,577,225,000, $1,335,287,000 and $1,113,013,000, and income before cumulative effect of change in accounting for income taxes would have been $285,391,000 ($2.03 per share), $210,876,000 ($1.55 per share) and $192,008,000 ($1.41 per share) for the years ended September 30, 1996, 1995 and 1994, respectively. Pro forma revenues and operating results for the year ended September 30, 1995 include $23,279,000 of net realized investment losses incurred by Ford Life. The excess purchase price attributable to each of the above acquisitions is substantially less than a computation of the present value of estimated future profits discounted at the applicable current average crediting rate. F-11 44 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- INVESTMENTS The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale and held for investment by major category follow:
Estimated Amortized fair cost value ----------- ----------- (In thousands) AT SEPTEMBER 30, 1996: AVAILABLE FOR SALE: Securities of the United States Government..................... $ 1,067,498 $ 1,046,134 Mortgage-backed securities..................................... 4,519,643 4,458,171 Securities of public utilities................................. 216,619 211,578 Corporate bonds and notes...................................... 5,540,279 5,536,192 Redeemable preferred stocks.................................... 108,438 128,228 Other debt securities.......................................... 1,205,143 1,201,721 ----------- ----------- Total available for sale....................................... $12,657,620 $12,582,024 =========== =========== AT SEPTEMBER 30, 1995: AVAILABLE FOR SALE: Securities of the United States Government..................... $ 665,412 $ 670,174 Mortgage-backed securities..................................... 3,905,100 3,858,037 Securities of public utilities................................. 12,615 13,038 Corporate bonds and notes...................................... 1,688,254 1,682,289 Redeemable preferred stocks.................................... 34,084 45,744 Other debt securities.......................................... 310,155 315,206 ----------- ----------- Total available for sale....................................... $ 6,615,620 $ 6,584,488 =========== =========== HELD FOR INVESTMENT: Securities of the United States Government..................... $ 83,423 $ 84,356 Mortgage-backed securities..................................... 182,404 184,076 Securities of public utilities................................. 9,492 9,593 Corporate bonds and notes...................................... 403,362 419,208 Other debt securities.......................................... 39,602 39,602 ----------- ----------- Total held for investment...................................... $ 718,283 $ 736,835 =========== ===========
The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale by contractual maturity, as of September 30, 1996, follow:
Estimated Amortized fair cost value ----------- ----------- (In thousands) AVAILABLE FOR SALE: Due in one year or less........................................... $ 266,227 $ 267,294 Due after one year through five years............................. 3,338,442 3,309,392 Due after five years through ten years............................ 2,674,729 2,677,578 Due after ten years............................................... 1,858,579 1,869,589 Mortgage-backed securities........................................ 4,519,643 4,458,171 ---------- ---------- Total available for sale.......................................... $12,657,620 $12,582,024 ========== ==========
Actual maturities of bonds, notes and redeemable preferred stocks will differ from those shown above due to prepayments and redemptions. F-12 45 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- INVESTMENTS (CONTINUED) Gross unrealized gains and losses on bonds, notes and redeemable preferred stocks available for sale and held for investment by major category follow:
Gross Gross unrealized unrealized gains losses -------- --------- (In thousands) AT SEPTEMBER 30, 1996: AVAILABLE FOR SALE: Securities of the United States Government.......................... $ 542 $ (21,906) Mortgage-backed securities.......................................... 46,677 (108,149) Securities of public utilities...................................... 176 (5,217) Corporate bonds and notes........................................... 96,238 (100,325) Redeemable preferred stocks......................................... 27,455 (7,665) Other debt securities............................................... 6,530 (9,952) ---------- ---------- Total available for sale............................................ $177,618 $(253,214) ========== ========== AT SEPTEMBER 30, 1995: AVAILABLE FOR SALE: Securities of the United States Government.......................... $ 6,010 $ (1,248) Mortgage-backed securities.......................................... 62,076 (109,139) Securities of public utilities...................................... 446 (23) Corporate bonds and notes........................................... 36,100 (42,065) Redeemable preferred stocks......................................... 11,731 (71) Other debt securities............................................... 5,170 (119) ---------- ---------- Total available for sale............................................ $121,533 $(152,665) ========== ========== HELD FOR INVESTMENT: Securities of the United States Government.......................... $ 981 $ (48) Mortgage-backed securities.......................................... 2,567 (895) Securities of public utilities...................................... 101 -- Corporate bonds and notes........................................... 17,342 (1,496) ---------- ---------- Total held for investment........................................... $ 20,991 $ (2,439) ========== ==========
At September 30, 1996, gross unrealized gains on equity securities aggregated $39,194,000 and gross unrealized losses aggregated $2,680,000. At September 30, 1995, gross unrealized gains on equity securities aggregated $24,896,000 and gross unrealized losses aggregated $6,393,000. During 1994, the Company sold the remaining warrants to purchase 2,377,000 shares of the special common stock of Kaufman and Broad Home Corporation (the "KBH Warrants") for net sales proceeds of $28,618,000, and recorded a gain of $17,830,000, net of a provision for income taxes of $9,600,000. In accordance with the method used to account for the 1989 distribution of substantially all of the common stock of Kaufman and Broad Home Corporation then owned by the Company to holders of the Company's Common Stock, the Company credited the net gain directly to Retained Earnings. Therefore, there was no impact on net income as a result of the sale. F-13 46 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- INVESTMENTS (CONTINUED) Gross realized investment gains and losses on sales of all types of investments are as follows:
Years ended September 30, ------------------------------ 1996 1995 1994 -------- -------- -------- (In thousands) BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Available for sale: Realized gains............................................. $ 81,323 $ 61,104 $ 44,124 Realized losses............................................ (93,261) (83,308) (69,320) Held for investment: Realized gains............................................. -- 9,262 10,572 Realized losses............................................ -- (2,626) (10,008) EQUITIES: Realized gains............................................... 8,765 25,863 23,120 Realized losses.............................................. (5,365) (4,985) (496) OTHER INVESTMENTS: Realized gains............................................... 13,234 6,453 41,722 Realized losses.............................................. (72) (2,028) (4,950) IMPAIRMENT WRITEDOWNS........................................ (34,938) (42,747) (55,888) --------- --------- --------- Total net realized investment losses......................... $(30,314) $(33,012) $(21,124) ========= ========= =========
The sources and related amounts of investment income are as follows:
Years ended September 30, -------------------------------- 1996 1995 1994 ---------- -------- -------- (In thousands) Short-term investments...................................... $ 66,378 $ 43,485 $ 30,900 Bonds, notes and redeemable preferred stocks................ 819,812 555,260 518,215 Mortgage loans.............................................. 149,476 146,311 132,297 Equity-method partnerships.................................. 119,474 27,148 37,205 Cost-method partnerships.................................... 59,094 106,927 26,451 Other invested assets....................................... 40,054 26,671 13,082 ---------- -------- -------- Total investment income..................................... $1,254,288 $905,802 $758,150 ========== ======== ========
Expenses incurred to manage the investment portfolio amounted to $21,475,000 for the year ended September 30, 1996, $19,077,000 for the year ended September 30, 1995 and $16,751,000 for the year ended September 30, 1994 and are included in General and Administrative Expenses in the income statement. Investments in unconsolidated partnerships accounted for by using the equity method of accounting totaled $644,862,000 at September 30, 1996. At that date, total combined assets of these partnerships were $1,008,617,000 (consisting entirely of investments) and total combined liabilities were $458,485,000 (including $415,007,000 of nonrecourse notes payable to banks). For the year then ended, total combined revenues and expenses of such partnerships were $222,831,000 and $108,207,000, respectively, resulting in $114,624,000 of total combined pretax income. Investments in unconsolidated partnerships accounted for by using the equity method of accounting totaled $256,323,000 at September 30, 1995. At that date, total combined assets of these F-14 47 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- INVESTMENTS (CONTINUED) partnerships were $447,441,000 (including $445,131,000 of investments) and total combined liabilities were $188,018,000 (including $149,032,000 of nonrecourse notes payable to banks). For the year then ended, total combined revenues and expenses of such partnerships were $97,507,000 and $69,174,000, respectively, resulting in $28,333,000 of total combined pretax income. At September 30, 1996, no investment exceeded 10% of the Company's consolidated shareholders' equity. At September 30, 1996, mortgage loans were collateralized by properties located in 34 states, with loans totaling approximately 24% of the aggregate carrying value of the portfolio secured by properties located in California. At September 30, 1996, bonds, notes and redeemable preferred stocks included $1,239,048,000 (fair value of $1,266,424,000) of bonds and notes not rated investment grade by either Standard & Poor's Corporation, Moody's Investors Service, Duff & Phelps Credit Rating Co., Fitch Investor Service, Inc. or under National Association of Insurance Commissioners' guidelines. The Company had no material concentrations of non-investment-grade assets at September 30, 1996. At September 30, 1996, the amortized cost of investments in default as to the payment of principal or interest was $28,717,000, consisting of $16,700,000 of non-investment-grade bonds and $12,017,000 of mortgage loans. Such nonperforming investments had an estimated fair value of $25,752,000. The Company has entered into various Swap Agreements with major brokerage firms and money center banks principally to reduce the impact of changes in interest rates on certain floating-rate assets and liabilities. At September 30, 1996, the Company had 23 outstanding Swap Agreements with an aggregate notional principal amount of $1,124,123,000. The Swap Agreements are typically used by the Company to effectively convert certain variable-rate assets and liabilities into fixed-rate instruments. These Swap Agreements mature in various years through 2002 and have an average remaining maturity of approximately 39 months. The excess of amounts received over amounts paid out is included in Investment Income in the income statement and totaled $5,212,000, $8,017,000 and $34,337,000 for the years ended September 30, 1996, 1995 and 1994, respectively. The Company is exposed to potential credit loss in the event of nonperformance by the investment-grade-rated counterparties only with respect to the net differential payments. However, nonperformance is not anticipated and, therefore, no collateral is held or pledged. For investment purposes, the Company also has entered into various Total Return Agreements with an aggregate notional principal amount of $306,806,000 (the "Notional Amount") at September 30, 1996. The Total Return Agreements effectively exchange a fixed rate of interest (the "Payment Amount") on the Notional Amount for the coupon income plus or minus the increase or decrease in the fair value (the "Total Return") of specified non-investment-grade corporate bonds (the "Bonds"). The Total Return Agreements mature in November 1996; however, the Company intends to enter into other similar agreements. The Company is exposed to potential loss, due to credit risk on the underlying non- investment-grade bonds and bond market fluctuations, equal to the Payment Amount plus any reduction in the aggregate fair value of the Bonds below the Notional Amount. The Company is also exposed to potential credit loss in the event of nonperformance by the investment-grade-rated counterparty with respect to any increase in the aggregate market value of the Bonds above the Notional Amount. However, nonperformance is not anticipated and, therefore, no collateral is held or pledged. The excess of amounts received over amounts paid out is included in Investment Income in the income statement and totaled $32,490,000, $13,044,000 and $1,306,000 for the years ended September 30, 1996, 1995 and 1994, respectively. F-15 48 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair value disclosures are limited to reasonable estimates of the fair value of only the Company's financial instruments. The disclosures do not address the value of the Company's recognized and unrecognized nonfinancial assets (including its other invested assets, equity investments, partnerships and real estate 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, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based principally on independent pricing services, broker quotes and other independent information. Fair values include the market value, determined from independent broker quotes, of Swap Agreements that hedge certain variable-rate bonds and notes. MORTGAGE LOANS: Fair values are primarily determined by discounting future cash flows to the present at current market rates, using expected prepayment rates. Fair values include the market value, determined from independent broker quotes, of Swap Agreements that hedge certain variable-rate mortgage loans. VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the market value of the underlying securities. RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and single premium life contracts are assigned a fair value equal to current net surrender value, which includes the estimated fair value of hedging Swap Agreements, determined from independent broker quotes. Annuitized contracts are valued based on the present value of future cash flows at current pricing rates. RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the present value of future cash flows at current pricing rates and is net of the estimated fair value of hedging Swap Agreements, determined from independent broker quotes. TRUST DEPOSITS: Trust deposits are carried at the fair value of deposits payable upon demand. PAYABLE TO BROKERS FOR PURCHASES OF SECURITIES: Such obligations represent net transactions of a short-term nature for which the carrying value is considered a reasonable estimate of fair value. VARIABLE ANNUITY LIABILITIES: Fair values of contracts in the accumulation phase are based on net surrender values. Fair values of contracts in the payout phase are based on the present value of future cash flows at assumed investment rates. F-16 49 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) LONG-TERM NOTES AND DEBENTURES: Fair value is estimated based on the quoted market prices for the same or similar issues and is net of the estimated fair value of a hedging Swap Agreement, determined from independent broker quote. The estimated fair values of the Company's financial instruments at September 30, 1996 and 1995, compared with their respective carrying values, are as follows:
Carrying Fair value value ----------- ----------- (In thousands) 1996: ASSETS: Cash and short-term investments................................. $ 529,363 $ 529,363 Bonds, notes and redeemable preferred stocks.................... 12,582,024 12,582,024 Mortgage loans.................................................. 1,652,257 1,696,080 Variable annuity assets......................................... 6,380,458 6,380,458 LIABILITIES: Reserves for fixed annuity contracts............................ 9,654,674 9,233,359 Reserves for guaranteed investment contracts.................... 4,169,028 4,119,407 Trust deposits.................................................. 436,048 436,048 Payable to brokers for purchases of securities.................. 42,518 42,518 Variable annuity liabilities.................................... 6,380,458 6,183,055 Long-term notes and debentures.................................. 573,335 588,705 =========== =========== 1995: ASSETS: Cash and short-term investments................................. $ 855,350 $ 855,350 Bonds, notes and redeemable preferred stocks.................... 7,302,771 7,321,323 Mortgage loans.................................................. 1,543,285 1,600,906 Variable annuity assets......................................... 5,263,006 5,263,006 LIABILITIES: Reserves for fixed annuity contracts............................ 4,862,250 4,758,096 Reserves for guaranteed investment contracts.................... 3,607,192 3,574,445 Trust deposits.................................................. 426,595 426,595 Payable to brokers for purchases of securities.................. 473,728 473,728 Variable annuity liabilities.................................... 5,263,006 5,108,997 Long-term notes and debentures.................................. 524,835 553,429 =========== ===========
F-17 50 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- INDEBTEDNESS Indebtedness consists of the following long-term notes and debentures (interest rates are as of September 30):
September 30, ------------------- 1996 1995 -------- -------- (In thousands) Medium-term notes due 1998 through 2026 (5 3/8% to 7 3/8%)... $248,335 $199,835 8 1/8% debentures due April 28, 2023......................... 100,000 100,000 9.95% debentures due February 1, 2012........................ 100,000 100,000 9% notes due January 15, 1999................................ 125,000 125,000 -------- -------- Total indebtedness........................................... $573,335 $524,835 ======== ========
On November 6, 1996, subsequent to the Company's fiscal year end, the Company issued $431,250,000 of 6.20% notes due October 31, 1999. Short-term borrowings, which include short-term bank notes, reverse repurchase agreements and borrowings under a commercial paper program, averaged $475,619,000 at a weighted average interest rate of 4 1/2% during 1996 and $291,320,000 at a weighted average interest rate of 5 1/2% during 1995. The highest level of short-term borrowings at any month-end was $747,961,000 at 4 3/4% during 1996 and $533,810,000 at 4 7/8% during 1995. There were no short-term borrowings outstanding at September 30, 1996. Principal payments on long-term borrowings, including the 6.20% notes, are due as follows: 1998, $20,000,000; 1999, $142,775,000; 2000, $445,250,000; 2001, $24,000,000; and thereafter, $372,560,000. NOTE 7 -- CONTINGENT LIABILITIES The Company is involved in various kinds of litigation common to its businesses. 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. In 1989 and 1996, the Company sold, through three separate 100% coinsurance transactions, the general agency division of SunAmerica Life Insurance Company, the credit life business of Ford Life and the mortality-based business of CalFarm. With respect to these coinsurance transactions, SunAmerica Life Insurance Company, Ford Life and CalFarm could become liable for in-force amounts ceded of $1,148,975,000, $3,694,527,000 and $2,560,489,000, respectively, at September 30, 1996, if the coinsurers were to become unable to meet the obligations assumed under the respective coinsurance agreements. At September 30, 1996, related policyholder reserves carried by the coinsurers were $65,129,000, $60,325,000 and $98,692,000, respectively. As part of the 1989 SunAmerica Life Insurance Company coinsurance transaction, assets substantially equal to the policyholder reserves assumed by the coinsurer are held in trust to secure the obligations of the coinsurer. The Company has transferred to third-party investors certain of its interests in various partnerships that make tax-advantaged affordable housing investments. As part of these transactions, the Company has agreed to advance monies to support the operations of the underlying housing projects, if required, and has guaranteed that the transferred partnerships will provide, as of the transfer date and under then current tax laws, a specified level of associated tax credits and deductions to the third-party investors. Based on an evaluation of the underlying housing projects, management does not anticipate any material cash payments with respect to the guarantees. F-18 51 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- COMPANY-OBLIGATED PREFERRED SECURITIES OF GRANTOR TRUSTS Preferred securities of subsidiary grantor trusts comprise $52,630,875 liquidation amount of 9.95% Trust Originated Preferred Securities, issued by SunAmerica Capital Trust I on June 13, 1995 pursuant to an exchange offer, and $185,000,000 liquidation amount of 8.35% Trust Originated Preferred Securities, issued by SunAmerica Capital Trust II on October 11, 1995. In connection with the exchange of the 9.95% Trust Originated Preferred Securities for 2,105,235 shares of the Company's 9 1/4% Series B Preferred Stock (also having a liquidation preference of $52,630,875) and the related purchase by the Company of the grantor trust's common securities, the Company issued to the grantor trust $54,258,650 principal amount of 9.95% junior subordinated debentures, due 2044, which are redeemable at the option of the Company on or after June 15, 1997 at a redemption price of $25 per debenture plus accrued and unpaid interest. In connection with the issuance of the 8.35% Trust Originated Preferred Securities and the related purchase by the Company of the grantor trust's common securities, the Company issued to the grantor trust $191,224,250 principal amount of 8.35% junior subordinated debentures, due 2044, which are redeemable at the option of the Company on or after September 30, 2000 at a redemption price of $25 per debenture plus accrued and unpaid interest. In November 1996, subsequent to the Company's fiscal year end, SunAmerica Capital Trust III, a grantor trust and a consolidated wholly owned subsidiary of the Company, issued $310,000,000 liquidation amount of its 8.30% Trust Originated Preferred Securities in a public offering. In connection with the issuance of the preferred securities and the related purchase by the Company of the grantor trust's common securities, the Company issued to the grantor trust $320,670,000 principal amount of 8.30% junior subordinated debentures, due 2045, which are redeemable at the option of the Company on or after November 13, 2001 at a redemption price of $25 per debenture plus accrued and unpaid interest. The interest and other payment dates on the debentures correspond to the distribution and other payment dates on the preferred and common securities. The preferred and common securities will be redeemed on a pro rata basis, to the same extent as the debentures are repaid. Under certain circumstances involving a change in law or legal interpretation, the debentures may be distributed to holders of the preferred and common securities in liquidation of the grantor trust(s). The Company's obligations under the debentures and related agreements, taken together, provide a full and unconditional guarantee of payments due on the preferred securities. The debentures issued to the grantor trusts and the common securities purchased by the Company from the grantor trusts are eliminated in the balance sheet. F-19 52 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- SHAREHOLDERS' EQUITY The Company is authorized to issue 20,000,000 shares of preferred stock ("Preferred Stock"). All preferred shares of the Company rank on a parity with each other and rank senior to Common Stock and Nontransferable Class B Stock of the Company as to payment of dividends and distribution of assets upon dissolution, liquidation or winding up of the Company. On November 1, 1995, the Company issued 4,000,000 $3.10 Depositary Shares (the "Series E Depositary Shares"), each representing one-fiftieth of a share of Series E Mandatory Conversion Premium Dividend Preferred Stock, with a liquidation preference of $62 per share. On November 1, 1998, each of the outstanding Series E Depositary Shares will convert into three shares of Common Stock. The Company may redeem the Series E Depositary Shares prior to such date, in whole or in part, at a price per share initially equal to $81, declining by $0.006111 on each day following the date of issue to $74.767 on September 1, 1998, and equal to $74.40 thereafter. The call price is payable in shares of Common Stock having an aggregate current market price, as defined, equal to such call price, plus an amount paid in cash or in Common Stock representing all accrued and unpaid dividends. In addition, should the Company call the Series E Depositary Shares prior to November 1, 1998, holders will receive 50% of the excess, if any, of three times the current market price, as defined, of the Common Stock over $74.40, payable in shares of Common Stock. On March 10, 1993, the Company issued 5,002,500 $2.78 Depositary Shares (the "Series D Depositary Shares"), each representing one-fiftieth of a share of Series D Mandatory Conversion Premium Dividend Preferred Stock, with a liquidation preference of $37 per share. On January 2, 1996, the Company redeemed all of the Series D Depositary Shares for a call price equal to $49.95 per share plus accrued and unpaid dividends of approximately $0.247 per share. The call price was paid with 5,112,529 shares of the Company's Common Stock. At September 30, 1996, the Company had outstanding 486,800 shares of Adjustable Rate Cumulative Preferred Stock, Series C (the "Series C Preferred Shares"), with a liquidation preference of $100 per share. On October 4, 1996, subsequent to the Company's fiscal year end, the Company redeemed all of the Series C Preferred Shares for a call price equal to $100 per share plus accrued and unpaid dividends of approximately $0.642 per share. In 1992, the Company issued 5,620,000 shares of 9 1/4% Preferred Stock, Series B (the "Series B Preferred Shares"), with a liquidation preference of $25 per share. On or after June 15, 1997, the Company may redeem the Series B Preferred Shares, in whole or in part, at a price per share of $25, plus accrued and unpaid dividends. On June 13, 1995, the Company exchanged 2,105,235 Series B Preferred Shares with a liquidation preference of $52,630,875 for $52,630,875 liquidation amount of 9.95% Trust Originated Preferred Securities of SunAmerica Capital Trust I (see Note 8). On October 21, 1991, the Company issued 6,000,000 $1.11 Depositary Shares (the "Series A Depositary Shares"), each representing ownership of one-fifth of a share of Series A Mandatory Conversion Premium Dividend Preferred Stock, with a liquidation preference of $13 per share. On August 16, 1994, the Company redeemed all of the Series A Depositary Shares for a call price equal to $17.55 per share plus accrued and unpaid dividends of approximately $0.096 per share. The call price was paid with 2,476,000 shares of the Company's Common Stock. In October 1996, subsequent to the Company's fiscal year end, the Company filed a shelf registration statement under which it may issue up to $1,750,000,000 of securities in the form of debt, Preferred Stock, Common Stock, warrants, stock purchase contracts or stock purchase units. Up to $577,500,000 remains available under this registration statement after the subsequent issuance of securities discussed below and those discussed in Notes 6 and 8. F-20 53 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- SHAREHOLDERS' EQUITY (CONTINUED) In November 1996, subsequent to the Company's fiscal year end, the Company issued 11,500,000 8-1/2% Premium Equity Redemption Cumulative Securities Units (the "Units") with a stated amount of $37.50 per Unit. Each Unit consists of a stock purchase contract (the "Contract") and a United States Treasury Note (the "Treasury Note") having a principal amount equal to the stated amount and maturing on October 31, 1999. The holders of the Units will receive interest on the Treasury Notes payable by the United States Government at a rate of 7-1/2% per annum and Contract fees payable by the Company at a rate of 1% per annum (both, the "Unit Payments") based upon the stated amount. The Contract obligates the Company to deliver on October 31, 1999 to the holder of each Unit one share of Common Stock of the Company, subject to adjustment under certain defined circumstances, and obligates the holder of the Unit to pay to the Company $37.50 per Unit. The Treasury Notes will be held by a collateral agent to secure payment to the Company as required under the Contract, but may be redeemed by the holders of the Units under certain defined circumstances. The Company may call the Units (and close the Contract) prior to October 31, 1999, in whole or in part, at a price per Unit initially equal to $59.829, declining by $0.008060 on each day following the date of issue to $51.108 on August 31, 1999, and equal to $50.625 thereafter. The call price is payable in shares of Common Stock having an aggregate current market price, as defined, equal to such call price, plus an amount paid in cash equal to all accrued and unpaid Unit Payments. The Company receives no proceeds from this offering until the Contracts are consummated. The Company is authorized to issue 175,000,000 shares of its $1.00 par value Common Stock and is authorized to repurchase 4,000,000 shares of such stock. At September 30, 1996, 108,604,000 shares were outstanding and at September 30, 1995, 44,175,000 shares were outstanding. The Company is authorized to issue 25,000,000 shares of its $1.00 par value Nontransferable Class B Stock. Holders of this stock have rights identical to those of the Company's common stockholders except that they have ten votes per share and are entitled to only 90% of any cash dividend paid on the Common Stock. This stock is convertible at any time into shares of Common Stock. At September 30, 1996, 10,848,000 shares were outstanding and at September 30, 1995, 10,240,000 shares were outstanding. At September 30, 1996, under the Company's 1988 Employee Stock Plan, options to purchase 6,313,650 shares at prices ranging from $1.29 to $30.69 were outstanding (including 3,360,350 exercisable shares at prices ranging from $1.29 to $18.46) and 1,864,950 shares were reserved for future grants. Shares of Common Stock issued in connection with the exercise of employee stock options aggregated 203,800 at prices ranging from $1.29 to $18.46 in 1996; 274,701 at prices ranging from $0.82 to $15.02 in 1995 and 542,945 at prices ranging from $0.82 to $10.73 in 1994. F-21 54 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- SHAREHOLDERS' EQUITY (CONTINUED) Changes in shareholders' equity are as follows:
Years ended September 30, -------------------------------- 1996 1995 1994 -------- --------- --------- (In thousands) PREFERRED STOCK: Beginning balance.......................................... $321,642 $374,273 $452,273 Issuance of 4,000,000 Series E Preferred Shares............ 248,000 -- -- Redemption of 5,002,500 Series D Depositary Shares......... (185,093) -- -- Exchange of 2,105,235 Series B shares for 2,105,235 shares of Trust Originated Preferred Securities of SunAmerica Capital Trust I........................................... -- (52,631) -- Redemption of 6,000,000 Series A Depositary Shares......... -- -- (78,000) -------- -------- -------- Ending balance............................................. $384,549 $321,642 $374,273 ======== ======== ======== NONTRANSFERABLE CLASS B STOCK: Beginning balance.......................................... $ 10,240 $ 6,826 $ 6,828 Conversion of 4,816,000 and 2,000 shares to Common Stock... (4,816) -- (2) Stock Splits............................................... 5,424 3,414 -- -------- -------- -------- Ending balance............................................. $ 10,848 $ 10,240 $ 6,826 ======== ======== ======== COMMON STOCK: Beginning balance.......................................... $ 44,175 $ 28,977 $ 26,335 Issuance of 5,112,529 shares to redeem the Series D Depositary Shares......................................... 5,113 -- -- Conversion of Nontransferable Class B Stock to 4,776,000 and 2,000 shares.......................................... 4,776 -- 2 Issuance of 2,476,000 shares to redeem the Series A Depositary Shares......................................... -- -- 2,476 Stock options and other employee benefit plans............. 252 473 164 Stock Splits............................................... 54,288 14,725 -- -------- -------- -------- Ending balance............................................. $108,604 $ 44,175 $ 28,977 ======== ======== ======== ADDITIONAL PAID-IN CAPITAL: Beginning balance.......................................... $185,211 $188,667 $110,120 Cost of issuance of 4,000,000 Series E Preferred Shares.... (7,453) -- -- Excess of redemption value of 5,002,500 Series D Preferred Shares over par value of 5,112,529 shares of Common Stock issued, net of transaction costs.......................... 179,972 -- -- Cost of issuance of 7,400,000 shares of Trust Originated Preferred Securities of SunAmerica Capital Trust II....... (5,524) -- -- Cost of exchange of Series B Shares for shares of Trust Originated Preferred Securities........................... -- (2,500) -- Excess of redemption value of 6,000,000 Series A Depositary Shares over par value of 2,476,000 shares of Common Stock issued.................................................... -- -- 75,524 Stock options and other employee benefit plans............. 11,801 17,183 3,023 Stock Splits............................................... (59,712) (18,139) -- -------- -------- -------- Ending balance............................................. $304,295 $185,211 $188,667 ======== ======== ========
F-22 55 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- SHAREHOLDERS' EQUITY (CONTINUED)
Years ended September 30, -------------------------------- 1996 1995 1994 -------- --------- --------- (In thousands) RETAINED EARNINGS: Beginning balance.......................................... $656,509 $ 512,571 $ 413,770 Net income................................................. 274,427 194,206 131,801 Dividends on: Preferred Stock.......................................... (27,063) (29,112) (37,556) Nontransferable Class B Stock............................ (4,878) (3,686) (2,458) Common Stock............................................. (29,780) (17,470) (10,816) Gain on sale of KBH Warrants, net of income taxes of $9,600,000............................................... -- -- 17,830 -------- --------- --------- Ending balance............................................. $869,215 $ 656,509 $ 512,571 ======== ========= ========= NET UNREALIZED LOSSES ON DEBT AND EQUITY SECURITIES AVAILABLE FOR SALE: Beginning balance......................................... $ (4,699) $(150,226) $ 100,701 Change in net unrealized gains/losses on debt securities available for sale...................................... (44,464) 297,910 (420,966) Change in net unrealized gains on equity securities available for sale...................................... 18,011 6,179 (49,627) Change in adjustment to deferred acquisition costs........ 7,600 (80,200) 85,600 Tax effects of net changes................................ 6,599 (78,362) 134,066 -------- --------- --------- Ending balance............................................ $(16,953) $ (4,699) $(150,226) ======== ========= =========
Dividends that the Company may receive from its life insurance subsidiaries in any year without prior approval of the Arizona, California, Michigan or New York insurance commissioners are limited by statute. At September 30, 1996, restricted net assets of these consolidated life insurance subsidiaries totaled approximately $1,227,789,000, none of which is available for the payment of dividends until calendar year 1997. The combined statutory equity of the Company's six life insurance subsidiaries totaled $1,031,611,000 at September 30, 1996; $943,755,000 at December 31, 1995; and $698,236,000 at December 31, 1994. The combined statutory net income of these subsidiaries totaled $159,011,000 for the nine months ended September 30, 1996; $67,144,000 for the year ended December 31, 1995; and $149,824,000 for the year ended December 31, 1994. F-23 56 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- INCOME TAXES The components of the provisions for income taxes on pretax income consist of the following:
Federal State Total -------- ------- -------- (In thousands) 1996: Currently payable............................................. $110,531 $10,526 $121,057 Deferred...................................................... (991) (2,466) (3,457) -------- ------- -------- Total income tax expense...................................... $109,540 $ 8,060 $117,600 ======== ======= ======== 1995: Currently payable............................................. $ 85,688 $ 5,546 $ 91,234 Deferred...................................................... (5,370) (464) (5,834) -------- ------- -------- Total income tax expense...................................... $ 80,318 $ 5,082 $ 85,400 ======== ======= ======== 1994: Currently payable............................................. $ (4,840) $ 1,255 $ (3,585) Deferred...................................................... 80,029 (1,744) 78,285 -------- ------- -------- Total income tax expense...................................... $ 75,189 $ (489) $ 74,700 ======== ======= ========
Income taxes computed at the United States federal income tax rate of 35% and income taxes provided differ as follows:
Years ended September 30, ----------------------------- 1996 1995 1994 -------- -------- ------- (In thousands) Amount computed at statutory rate............................. $137,209 $ 97,862 $84,000 Increases (decreases) resulting from: Affordable housing tax credits.............................. (21,742) (17,579) (9,619) State income taxes, net of federal tax benefit.............. 5,238 3,686 (317) Dividends-received deduction................................ (8,277) (3,271) (740) Other, net.................................................. 5,172 4,702 1,376 -------- -------- ------- Total income tax expense...................................... $117,600 $ 85,400 $74,700 ======== ======== =======
F-24 57 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. The significant components of the liability for Deferred Income Taxes are as follows:
September 30, --------------------- 1996 1995 --------- --------- (In thousands) DEFERRED TAX LIABILITIES: Investments.......................................................... $ 135,647 $ 85,036 Deferred acquisition costs........................................... 231,978 163,973 State income taxes................................................... 1,048 3,660 Other liabilities.................................................... 17,672 7,449 --------- --------- Total deferred tax liabilities....................................... 386,345 260,118 --------- --------- DEFERRED TAX ASSETS: Contractholder reserves.............................................. (231,296) (99,107) Guaranty fund assessments............................................ (9,230) (4,392) Other assets......................................................... (11,273) (7,242) Net unrealized losses on certain debt and equity securities.......... (9,129) (2,530) --------- --------- Total deferred tax assets............................................ (260,928) (113,271) --------- --------- Deferred income taxes................................................ $ 125,417 $ 146,847 ========= =========
F-25 58 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for the years ended September 30, 1996 and 1995 follow:
First Second Third Fourth -------- -------- -------- -------- (In thousands, except per-share amounts) 1996: Net investment income.............................. $102,126 $112,294 $128,533 $149,803 Net realized investment gains (losses)............. 1,404 (3,589) (12,629) (15,500) Fee income......................................... 49,845 55,367 57,530 57,686 General and administrative expenses................ (44,098) (50,242) (54,292) (64,069) Amortization of deferred acquisition costs......... (21,071) (24,216) (29,875) (33,014) Other income and expenses, net..................... 4,380 7,827 10,190 7,637 -------- -------- -------- -------- Pretax income...................................... 92,586 97,441 99,457 102,543 Income tax expense................................. (27,800) (29,200) (29,800) (30,800) -------- -------- -------- -------- Net income......................................... $ 64,786 $ 68,241 $ 69,657 $ 71,743 ======== ======== ======== ======== Per share.......................................... $ 0.47 $ 0.48 $ 0.49 $ 0.51 ======== ======== ======== ======== 1995: Net investment income.............................. $ 78,109 $ 86,716 $ 94,704 $106,026 Net realized investment losses..................... (7,231) (8,344) (8,975) (8,462) Fee income......................................... 40,228 44,002 46,653 49,536 General and administrative expenses................ (33,108) (41,116) (44,358) (47,958) Amortization of deferred acquisition costs......... (19,576) (19,789) (23,244) (23,498) Other income and expenses, net..................... 5,112 5,285 4,585 4,309 -------- -------- -------- -------- Pretax income...................................... 63,534 66,754 69,365 79,953 Income tax expense................................. (18,400) (19,400) (21,100) (26,500) -------- -------- -------- -------- Net income......................................... $ 45,134 $ 47,354 $ 48,265 $ 53,453 ======== ======== ======== ======== Per share.......................................... $ 0.33 $ 0.34 $ 0.35 $ 0.40 ======== ======== ======== ========
F-26 59 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- BUSINESS SEGMENTS Summarized data for the Company's business segments follow:
Total depreciation and Total amortization Pretax Total revenues expense income assets ---------- ------------ -------- ----------- (In thousands) 1996: Annuity operations..................... $1,292,295 $ 97,806 $350,183 $23,032,076 Broker-dealer operations............... 50,718 1,228 17,253 74,140 Retirement trust services.............. 45,146 1,166 13,570 481,974 Asset management....................... 29,711 18,295 2,448 74,410 Premium financing...................... 26,532 962 8,573 64,221 ---------- -------- -------- ----------- Total.................................. $1,444,402 $ 119,457 $392,027 $23,726,821 ========== ======== ======== =========== 1995: Annuity operations..................... $ 921,289 $ 69,554 $246,037 $16,172,140 Broker-dealer operations............... 34,273 868 12,017 42,441 Retirement trust services.............. 46,622 1,461 15,268 484,456 Asset management....................... 30,253 24,069 510 86,510 Premium financing...................... 20,772 713 5,774 58,620 ---------- -------- -------- ----------- Total.................................. $1,053,209 $ 96,665 $279,606 $16,844,167 ========== ======== ======== =========== 1994: Annuity operations..................... $ 790,211 $ 58,052 $211,419 $14,034,879 Broker-dealer operations............... 30,207 853 10,456 40,349 Retirement trust services.............. 36,412 838 10,210 478,805 Asset management....................... 32,803 19,330 7,916 102,192 ---------- -------- -------- ----------- Total.................................. $ 889,633 $ 79,073 $240,001 $14,656,225 ========== ======== ======== ===========
NOTE 13 -- SUBSEQUENT EVENT On November 29, 1996, the Company entered into a definitive agreement to acquire the annuity business of John Alden Financial Corporation for approximately $240,000,000 in cash. The transaction will include approximately $3,700,000,000 of annuity reserves to be acquired under a reinsurance contract from John Alden Life Insurance Company and the purchase of the outstanding common stock of John Alden Life Insurance Company of New York, which has approximately $1,300,000,000 of annuity reserves and $71,000,000 of adjusted statutory capital and surplus at September 30, 1996. Completion of this acquisition is expected by the end of the first calendar quarter of 1997 and is subject to customary conditions and required regulatory approvals. F-27 60 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES INDEX TO FINANCIAL STATEMENT SCHEDULES
Page number in this Annual Report on Form 10-K ---------------- Report of Independent Accountants on Financial Statement Schedules......... S-2 Schedule II -- Condensed Financial Information of Registrant............... S-3 through S-6 Schedule IV -- Reinsurance................................................. S-7
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. S-1 61 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of SunAmerica Inc. Our audits of the consolidated financial statements referred to in our report dated November 8, 1996, appearing on page F-2 of this Annual Report on Form 10-K of SunAmerica Inc. also included an audit of the Financial Statement Schedules listed on page S-1 of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in fiscal 1994. Price Waterhouse LLP Los Angeles, California November 8, 1996, except as to Note 13 to the consolidated financial statements which is as of November 29, 1996 S-2 62 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET
September 30, ------------------------------- 1996 1995 -------------- -------------- ASSETS Investment in and advances to subsidiaries................... $1,770,212,000 $1,258,116,000 Other investments............................................ 1,045,629,000 789,746,000 Other assets................................................. 104,940,000 100,454,000 -------------- -------------- TOTAL ASSETS................................................. $2,920,781,000 $2,148,316,000 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Senior notes and debentures................................ $ 573,335,000 $ 524,835,000 Junior subordinated debentures............................. 245,483,000 54,259,000 Reserves for guaranteed investment contracts............... 239,050,000 250,365,000 Payable to brokers for purchases of securities............. 46,684,000 27,208,000 Other liabilities.......................................... 155,671,000 78,571,000 -------------- -------------- Total liabilities.......................................... 1,260,223,000 935,238,000 Shareholders' equity......................................... 1,660,558,000 1,213,078,000 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $2,920,781,000 $2,148,316,000 ============== ==============
CONDENSED INCOME STATEMENT
Years ended September 30, ------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ Dividends received from subsidiary corporations... $110,256,000 $ 69,287,000 $ 45,400,000 Investment income................................. 189,911,000 158,228,000 104,299,000 Net realized investment gains (losses)............ 4,598,000 (25,459,000) 7,231,000 Other income...................................... 3,625,000 3,636,000 3,518,000 ------------ ------------ ------------ TOTAL INCOME...................................... 308,390,000 205,692,000 160,448,000 ------------ ------------ ------------ Interest expense on senior notes and debentures... (51,062,000) (44,729,000) (45,989,000) Interest expense on junior subordinated debentures...................................... (20,902,000) (2,854,000) -- Interest expense on guaranteed investment contracts....................................... (20,411,000) (21,482,000) (25,624,000) General and administrative expenses, net of reimbursement from subsidiaries of $33,930,000 in 1996, $19,095,000 in 1995 and $11,374,000 in 1994............................................. (146,000) (2,354,000) 417,000 ------------ ------------ ------------ TOTAL EXPENSES.................................... (92,521,000) (71,419,000) (71,196,000) ------------ ------------ ------------ PRETAX INCOME..................................... 215,869,000 134,273,000 89,252,000 Income tax expense................................ (35,404,000) (21,116,000) (9,607,000) ------------ ------------ ------------ INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF UNCONSOLIDATED SUBSIDIARIES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES............................................ 180,465,000 113,157,000 79,645,000 Equity in undistributed net income of unconsolidated subsidiaries...................... 93,962,000 81,049,000 30,931,000 Cumulative effect of change in accounting for income taxes..................................... -- -- 21,225,000 ------------ ------------ ------------ NET INCOME........................................ $274,427,000 $194,206,000 $131,801,000 ============ ============ ============
S-3 63 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS
Years ended September 30, --------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................... $ 274,427,000 $ 194,206,000 $ 131,801,000 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of unconsolidated subsidiaries................. (93,962,000) (81,049,000) (30,931,000) Net realized investment (gains) losses....... (4,598,000) 25,459,000 (7,231,000) Cumulative effect of change in accounting for income taxes................................ -- -- (21,225,000) Other, net................................... 22,644,000 46,736,000 (12,641,000) ------------- ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES...... 198,511,000 185,352,000 59,773,000 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net sales (purchases) of investments........... (153,640,000) 24,505,000 (57,774,000) Contributions of capital to subsidiary corporations................................. (435,928,000) (203,476,000) (45,539,000) ------------- ------------- ------------- NET CASH USED BY INVESTING ACTIVITIES.......... (589,568,000) (178,971,000) (103,313,000) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of cash dividends..................... (61,721,000) (50,268,000) (50,830,000) Net proceeds from issuances of senior notes and debentures.................................... 47,478,000 51,675,000 91,711,000 Repayments of senior notes..................... -- -- (15,119,000) Net proceeds from issuance of junior subordinated debentures....................... 185,700,000 -- -- Withdrawal payments on guaranteed investment contracts..................................... (31,725,000) (36,472,000) (299,330,000) Proceeds from issuances of guaranteed investment contracts.......................... -- -- 110,000,000 Net proceeds from issuance of Series E Preferred Stock............................... 240,547,000 -- -- ------------- ------------- ------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES.................................... 380,279,000 (35,065,000) (163,568,000) ------------- ------------- ------------- NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS................................... (10,778,000) (28,684,000) (207,108,000) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD........................................ 120,959,000 149,643,000 356,751,000 ------------- ------------- ------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD........................................ $ 110,181,000 $ 120,959,000 $ 149,643,000 ============= ============= ============= Non-cash financing activity: Exchange of junior subordinated debentures, Series A, due 2044 for 2,105,235 shares of 9 1/4% Series B Preferred Stock and for the common securities of a subsidiary grantor trust........................................ $ -- $ 54,259,000 $ -- ============= ============= =============
S-4 64 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1 -- INDEBTEDNESS Notes payable consist of the following (interest rates are as of September 30):
September 30, ---------------------------- 1996 1995 ------------ ------------ SENIOR NOTES AND DEBENTURES: Medium-term notes due 1998 through 2026 (5 3/8% to 7 3/8%)...... $248,335,000 $199,835,000 8 1/8% debentures due April 28, 2023............................ 100,000,000 100,000,000 9.95% debentures due February 1, 2012........................... 100,000,000 100,000,000 9% notes due January 15, 1999................................... 125,000,000 125,000,000 ------------ ------------ Total senior notes and debentures............................... 573,335,000 524,835,000 ------------ ------------ JUNIOR SUBORDINATED DEBENTURES: 9.95% junior subordinated debentures, series A, due 2044........ 54,259,000 54,259,000 8.35% junior subordinated debentures, due 2044.................. 191,224,000 -- ------------ ------------ Total junior subordinated debentures............................ 245,483,000 54,259,000 ------------ ------------ Total indebtedness.............................................. $818,818,000 $579,094,000 ============ ============
On November 6, 1996, subsequent to the Parent's fiscal year end, the Parent issued $431,250,000 of 6.20% notes due October 31, 1999. On November 13, 1996, the Parent issued to Sunamerica Capital Trust III, a grantor trust and a consolidated wholly owned subsidiary of the Parent, $320,670,000 principal amount of 8.30% junior subordinated debentures, due 2045, in connection with the issuance by trust of its Trust Originated Preferred Securities (see Note 8 of Notes to Consolidated Financial Statements). In addition, the Company is the issuer of the following guaranteed investment contracts ("GICs") (interest rates are as of September 30):
September 30, ---------------------------- 1996 1995 ------------ ------------ 8 1/2% GIC due serially through 2002 (including interest credited of $1,252,000 in 1996 and $1,363,000 in 1995)......... $190,627,000 $193,723,000 8 3/8% GIC due serially through 2003 (including interest credited of $254,000 in 1996 and $330,000 in 1995)............. 39,294,000 47,625,000 7 3/8% GIC due in 2018 (including interest credited of $272,000 in 1996 and $132,000 in 1995).................................. 9,129,000 9,017,000 ------------ ------------ Total guaranteed investment contracts........................... $239,050,000 $250,365,000 ============ ============
Aggregate debt service payments, including GICs, debt and debt issued subsequent to the Parent's fiscal year end, are due as follows: 1997, $135,085,000; 1998, $172,283,000; 1999, $280,691,000; 2000, $563,382,000; 2001, $127,745,000; and $3,609,951,000, in the aggregate, thereafter. S-5 65 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- GUARANTEES The Company has transferred to third-party investors certain of its interests in various partnerships that make tax-advantaged affordable housing investments. As part of these transactions, the Parent has agreed to advance monies to support the operations of the underlying housing projects, if required, and has guaranteed that the transferred partnerships will provide, as of the transfer date and under then current tax laws, a specified level of associated tax credits and deductions to the third-party investors. Based on an evaluation of the underlying housing projects, management does not anticipate any material cash payments with respect to the guarantees. The Parent has guaranteed that its life insurance subsidiaries will receive the statutory carrying value of certain invested assets, principally bonds and real estate, aggregating $127,866,000. NOTE 3 -- CONTINGENCIES The Company is involved in various kinds of litigation common to its businesses. 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. S-6 66 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE IV -- REINSURANCE AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
Percentage Ceded Assumption of amount Gross to other from other Net assumed amount companies companies amount to net ---------- ---------- ---------- -------- ---------- 1996: Life insurance in force.... $8,009,173 $7,701,296 $ -- $307,877 --% ========== ========== ====== ======== ========== Premiums: Annuities and other single premiums......... $ 984,334 $ -- $ 9,042 $993,376 0.91% Annual life insurance premiums................ 42,364 42,364 -- -- -- Accident and health insurance premiums...... 16,613 16,613 -- -- -- ---------- ---------- ------ -------- ---------- Total premiums........... $1,043,311 $ 58,977 $ 9,042 $993,376 0.91% ========== ========== ====== ======== ========== 1995: Life insurance in force.... $1,907,878 $1,592,650 $ -- $315,228 --% ========== ========== ====== ======== ========== Premiums: Annuities and other single premiums......... $ 944,742 $ -- $ -- $944,742 --% Annual life insurance premiums................ 16,225 16,225 -- -- -- ---------- ---------- ------ -------- ---- Total premiums........... $ 960,967 $ 16,225 $944,742 --% ========== ========== ====== ======== ========== 1994: Life insurance in force.... $2,140,257 $1,822,112 $ -- $318,145 --% ========== ========== ====== ======== ========== Premiums: Annuities and other single premiums......... $ 230,037 $ -- $ -- $230,037 --% Annual life insurance premiums................ 15,588 15,588 -- -- -- ---------- ---------- ------ -------- ---------- Total premiums........... $ 245,625 $ 15,588 $ -- $230,037 --% ========== ========== ====== ======== ==========
S-7 67 SUNAMERICA INC. 1996 FORM 10-K 68 1 SunAmerica Center Los Angeles, California 90067-6022 (310) 772-6000 69 EXHIBIT INDEX
Exhibit Number Description - ------ ----------------------------------------------------------------------------------- 2(c) Asset Purchase and Sale Agreement between SunAmerica Life Insurance Company and John Alden Life Insurance Company, dated as of November 29, 1996. 2(d) Stock Purchase Agreement between SunAmerica Life Insurance Company and John Alden Financial Corporation, dated as of November 29, 1996, regarding all of the outstanding stock of John Alden Life Insurance Company of New York. 3(j) Articles of Amendment, dated June 7, 1996. 3(k) Bylaws, as amended and restated on November 8, 1996. 10(r) List of Executive Compensation Plans and Arrangements. 11 Statement re Computation of per-share earnings. 12(a) Statement re Computation of ratio of earnings to fixed charges. 12(b) Statement re Computation of ratio of earnings to combined fixed charges and preferred stock dividends. 21 Subsidiaries of the Company. 23 Consent of Independent Accountants. 27 Financial Data Schedule. 99 Agreement to furnish exhibits and schedules.
EX-2.(C) 2 EXHIBIT 2.(C) - SEGMENT - "ASSET" 1 ASSET PURCHASE AND SALE AGREEMENT By and Between JOHN ALDEN LIFE INSURANCE COMPANY and SUNAMERICA LIFE INSURANCE COMPANY Dated November 29, 1996 TABLE OF CONTENTS PAGE ARTICLE 1 - PURCHASE AND SALE OF ASSETS; CLOSING 2 1.1. Closing 2 1.2. Transfer of Assets 3 1.3. Ceding Commission; Payment 5 1.4. Closing Deliveries 9 1.5. Additional Closing Deliveries 12 1.6. Post Closing Adjustments 12 ARTICLE 2 - ASSUMPTION OF LIABILITIES AND OBLIGATIONS 15 2.1. Assumption of Seller Liabilities 15 2.2. Guaranty Fund Assessments 15 ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF SELLER 18 3.1. Organization, Standing and Authority of Seller 18 3.2. Authorization 18 3.3. Actions and Proceedings 19 3.4. No Conflict or Violation 19 3.5. Consents and Approvals 20 3.6. Brokerage and Financial Advisers 21 3.7. Compliance With Laws 21 3.8. Annuity Contracts 21 3.9. Permits, Licenses and Franchises 24 3.10. Regulatory Filings 25 3.11. Reinsurance 26 3.12. Absence of Certain Changes or Events 26 3.13. Assigned Contracts 28 3.14. Intellectual Property 29 3.15. Purchased Assets 29 3.16. Statutory Financial Statements 30 3.17. Reserves 31 3.18. Threats of Cancellation 32 3.19. Credited Rates 33 3.20. Related Agreements 33 3.21. Third Party Administration Agreements 33 3.22. Mortgage Loans 34 3.23. No Waiver of Defenses 40 3.24. Agent Balances 41 3.25. GAAP Financial Statements 41 ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF PURCHASER 42 4.1. Organization and Standing 42 4.2. Authorization 42 4.3. Actions and Proceedings 43 4.4. No Conflict or Violation 43 4.5. Consents and Approvals 44 4.6. Brokerage and Financial Advisers 44 4.7. GAAP Financial Statements 45 4.8. Statutory Financial Statements 45 4.9. Rating 46 ARTICLE 5 - PRE-CLOSING COVENANTS 47 5.1. Conduct of Business 47 5.2. Certain Transactions 50 5.3. Investigations 50 5.4. HSR Act Filings 51 5.5. Consents and Reasonable Efforts 51 5.6. Representations and Warranties 52 5.7. Computer Software and Other Intellectual Property 53 5.8. Financial Statements and Reports 53 5.9. Termination of Certain Reinsurance Arrangements 54 5.10. Woodland Hills Option 54 5.11. Oxford Put 54 5.12. Marketing Agreement 55 ARTICLE 6 - CONDITIONS PRECEDENT TO THE OBLIGATION OF PURCHASER TO CLOSE 55 ARTICLE 7 - CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLER TO CLOSE 58 ARTICLE 8 - POST-CLOSING COVENANTS 61 8.1. Continued Access and Cooperation 61 8.2. Further Assurances 63 8.3. Expenses 63 8.4. Employee Plans 64 8.5. Non-Discriminatory Treatment of Policyholders 65 8.6. Repayment of Agent Balances 65 8.7. No Inducement to Replace; Non-Twisting; Non- Churning; Non-Competition 66 8.8. Preferred Stock Divided Repayment 70 8.9. Policyholder Consents 70 8.10. Current Report on Form 8-K 71 ARTICLE 9 - TERMINATION; SURVIVAL 71 9.1. Termination of Agreement 71 9.2. Effect of Termination 73 ARTICLE 10 - SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION 73 10.1. Survival of Representations 73 10.2. Indemnification by Purchaser 74 10.3. Indemnification by Seller 76 10.4. Indemnification Procedure 78 ARTICLE 11 - PUBLICITY AND CONFIDENTIALITY 82 11.1. Publicity 82 11.2. Confidentiality 83 ARTICLE 12 - MISCELLANEOUS 84 12.1. Notices 84 12.2. Entire Agreement 86 12.3. Amendments 87 12.4. Waivers 88 12.5. Governing Law 88 12.6. Binding Effect; Assignment; Third Party Beneficiaries 89 12.7. Severability 89 12.8. Headings 90 12.9. Counterparts 90 12.10.Arbitration 90 SIGNATURES 92 ANNEX A - Definitions EXHIBITS - A - Indemnity Reinsurance Agreement B - Assumption Reinsurance Agreement C - Trust Agreement D - Transition Services Agreement E - Administrative Services Agreement F - Assignment and Assumption Agreement G - License Agreement H - Bill of Sale I - Opinion of Seller's Counsel J - Opinion of Purchaser's Counsel K - Loan Documentation L - Terms of Marketing Agreement SCHEDULES - 1.2(a)(i) - Closing Date Portfolio Securities 1.2(a)(ii) - Policy Loans 1.2(a)(iii) - Additional Assets 1.2(d)(i) - Assigned Contracts 1.2(d)(ii) - Licensing Restrictions 3.3 - Actions and Proceedings 3.4 - Certain Matters 3.5 - Consents and Approvals 3.7 - Compliance 3.8(a) - Annuity Contract Forms 3.8(b) - Annuity Contracts 3.8(c) - Certain Commission Contracts 3.8(e) - Contested Benefits 3.8(h) - Known Agent Violations 3.9(a) - Licensed Jurisdictions 3.9(b) - Permit Exceptions 3.10 - Regulatory Filings 3.11 - Reinsurance Agreements 3.12 - Certain Changes or Events 3.13 - Other Necessary Contracts 3.14 - Intellectual Property 3.17(a) - Reserve Liabilities 3.17(b) - Reserve Exceptions 3.18 - Threats of Cancellation 3.20 - Related Agreements 3.21 - Third Party Administration Agreements 3.22(a) - Mortgage Loans 3.22(b) - Participations 3.22(d) - Waivers, Amendments & Releases 3.22(f) - Missing Original Notes 3.22(l) - Tax Delinquencies 3.24 - Agent Balances 4.3 - Purchaser's Litigation 4.4 - Purchaser's Certain Matters 4.5 - Purchaser's Consents and Approvals Excluded Transactions ASSET PURCHASE AND SALE AGREEMENT ASSET PURCHASE AND SALE AGREEMENT (the "Agreement") dated November 29, 1996 by and between John Alden Life Insurance Company, a Minnesota corporation ("Seller"), and SunAmerica Life Insurance Company, an Arizona corporation ("Purchaser"). W I T N E S S E T H: WHEREAS, Seller is engaged, among other businesses, in the business of selling and administering annuity policies and related activities in the United States other than in the State of New York (the "Annuity Business"); WHEREAS, John Alden Life Insurance Company of New York, a New York corporation ("JANY"), is engaged in the business of selling and administering annuity, life and health related insurance policies and related activities solely in the State of New York; WHEREAS, Seller owns or holds certain assets used or held for use in the Annuity Business and owns all of the outstanding capital stock of JANY (the "JANY Stock"); and WHEREAS, Seller wishes to sell to Purchaser, and Purchaser wishes to acquire from Seller, certain of the assets of Seller used in the conduct of the Annuity Business pursuant to the terms and conditions set forth in this Agreement and the JANY Stock pursuant to the terms and conditions set forth in a Stock Purchase and Sale Agreement between Seller and Purchaser dated concurrently herewith (the "JANY Stock Purchase Agreement"). NOW, THEREFORE, in consideration of the premises, representations and warranties and the mutual covenants and agreements contained herein and other good, valuable and sufficient consideration, the receipt of which is hereby acknowledged, Seller and Purchaser (collectively, the "Parties" and, sometimes individually, a "Party"), intending to be legally bound, hereby agree as follows. The capitalized terms used in this Agreement and not defined herein shall have the meanings specified in Annex A attached hereto. Unless the context otherwise requires, such capitalized terms shall include the singular and plural and the conjunctive and disjunctive forms of the terms defined. ARTICLE 1 PURCHASE AND SALE OF ASSETS; CLOSING Section 1.1. Closing. The closing of the transactions contemplated hereby (the "Closing") shall take place at 10:00 a.m. local time at the offices of Kelley Drye & Warren LLP, 101 Park Avenue, New York, New York 10178, or such other time and place as Purchaser and Seller may mutually agree in writing, on the last business day of the month in which the satisfaction of all conditions set forth in Articles 6 and 7 hereof concerning the Parties' respective obligations to consummate the transactions contemplated herein occurs or such other date as Seller and Purchaser may mutually agree in writing (the "Closing Date") and, subject to completion, shall be deemed to have been consummated and become effective for all purposes as of 11:59 p.m. on the Closing Date. Section 1.2. Transfer of Assets. (a) Subject to the terms and conditions set forth herein, at the Closing, Seller shall sell, assign, transfer, convey and deliver to Purchaser as a reinsurance premium, and Purchaser shall purchase and accept from Seller, all of Seller's right, title and interest in and to the following assets, with such changes therein, additions thereto and deletions therefrom as may occur from the date hereof through the Closing as permitted or required pursuant to the terms hereof or otherwise agreed to by the Parties in writing (collectively, the "Reinsurance Premium"): (i) the Closing Date Portfolio Securities, including the Accrued and Unpaid Investment Income thereon and all documentation related thereto. (ii) all of Seller's right and interest to receive principal and interest paid on policy loans under the Annuity Contracts (with the exception of any policy loans listed in Schedule 1.2(a)(iii)) (the "Policy Loans") outstanding after the Closing Date. The Policy Loans outstanding as of September 21, 1996 are listed on Schedule 1.2(a)(ii) attached hereto. An estimate of all Policy Loans outstanding on the Closing Ledger Date will be set forth in an updated Schedule 1.2(a)(ii) to be delivered by Seller to Purchaser at the Closing. Schedule 1.2(a)(ii) includes with respect to each Policy Loan outstanding on September 21, 1996, and will include with respect to each Policy Loan set forth on the updated Schedule 1.2(a)(ii) to be delivered on the Closing Date, the policy number, balance and form and contract number. (iii) those additional assets listed on Schedule 1.2(a)(iii) attached hereto. (iv) cash in the amounts required to be paid pursuant to Sections 1.2(c) hereof, with respect to Rejected Mortgages, and 1.3(d)(i) hereof, with respect to excess Reserve Liabilities. (b) On the Closing Date, delivery of the Closing Date Portfolio Securities shall be made by transfer to the trust account (the "Trust") established pursuant to the Trust Agreement. The cash portion of the Reinsurance Premium shall be transferred to the Trust by wire transfer of immediately available funds. Securities, cash equivalents, mortgage loans and other assets included among the Closing Date Portfolio Securities shall be transferred by such instruments of transfer as are acceptable to the Trustee and reasonably acceptable to Purchaser. The gross amount of the cash payment wired by Seller shall be reduced by an amount equal to one day's interest on such gross amount at an interest rate equal to the three month LIBOR rate in effect on the Business Day preceding the Closing Date plus 25 basis points. (c) Notwithstanding anything contained in this Section 1.2 to the contrary, Purchaser shall have the right not to purchase up to $50,000,000 Book Value of (i) mortgages or (ii) mortgage related private placements which comprise a portion of the October 21 Portfolio Securities (the "Rejected Mortgages"), and such Rejected Mortgages shall not be sold, assigned, transferred, conveyed or delivered to Purchaser hereunder; provided, however, that upon written notice by Purchaser to Seller delivered not less than 10 days prior to the Closing specifying such Rejected Mortgages, Seller shall deliver cash to the Trust, as part of the Reinsurance Premium, in an amount equal to the Book Value of the Rejected Mortgages. (d) At the Closing, Seller shall assign, transfer, convey and deliver to Purchaser, and Purchaser shall accept from Seller, the following: (i) Seller's rights including all claims arising under the contracts and license agreements listed on Schedule 1.2(d)(i) attached hereto (the "Assigned Contracts"); and (ii) originals or copies of all customer lists, policy information, Seller's Annuity Contract forms and rating plans, disclosure and other documents and filings required under applicable Laws, and all claim, sales, underwriting, financial, accounting, tax, business, marketing and compliance records in the possession or control of Seller ("control" for the purposes of this Section 1.2(d)(ii) being defined as the ability to cause delivery to Seller) and relating to the Annuity Business, including, without limitation, any database, magnetic or optical media (to the extent not subject to the licensing restrictions listed on Schedule 1.2(d)(ii) attached hereto) and any other form of recorded, computer generated or stored information or process, but excluding any such records that both (A) are, and would upon transfer cease to be, subject to the attorney-client privilege and (B) do not relate to the Purchased Assets or Assumed Liabilities (collectively, the "Books and Records"). (e) Seller and Purchaser agree that for tax purposes, the fair market value of the Closing Date Portfolio Securities shall be the GAAP book values used by Purchaser to reflect the Closing Date Portfolio Securities on its Financial Statements on the Closing Date. Section 1.3. Ceding Commission; Payment. (a) In consideration for the sale, assignment, transfer, conveyance and delivery of the Reinsurance Premium to Purchaser by Seller in accordance with and upon the terms and conditions set forth in this Agreement, on the Closing Date Purchaser shall pay to Seller One Hundred Eight Million Fifty Thousand Dollars ($108,050,000) in cash, subject to adjustment as provided in Section 1.3(c) below (the "Closing Date Ceding Commission"). Purchaser shall pay the Closing Date Ceding Commission to Seller on the Closing Date by wire transfer of immediately available funds to such bank account as Seller shall designate to Purchaser in writing at least three Business Days prior to the Closing Date. Payment of the Closing Date Ceding Commission shall be accompanied by (i) an amount in cash equal to the Accrued and Unpaid Investment Income as set forth on the Estimated Closing Date Statement and (ii) any payments required to be made as a reduction in the Reinsurance Premium pursuant to Section 1.3(d)(ii) hereof. The gross amount of the cash payment wired to Seller pursuant to this Section 1.3(a) shall be reduced by an amount equal to one day's interest on such gross amount at an interest rate equal to the three month LIBOR rate in effect on the Business Day preceding the Closing Date plus 25 basis points. (b) On the Closing Date, Seller shall deliver to the Purchaser a statement (the "Estimated Closing Date Statement") of Seller's good faith estimate as of the Closing Date unless otherwise noted below of (i) all Reserve Liabilities (ii) the Policy Loan Balance, (iii) the Book Value of all Closing Date Portfolio Securities, (iv) all JANY Reserve Liabilities (as defined in the JANY Stock Purchase Agreement), (v) the Accrued and Unpaid Investment Income, (vi) the gross amount on a tax lot by tax lot basis of any realized capital gain ("Capital Gain") or capital loss ("Capital Loss") on the disposition of any June 21 Portfolio Securities between June 21, 1996 and the Closing Date, (vii) the Adjusted Capital and Surplus of JANY and (viii) the amount of cash flows applicable to the Combined Reserve Liabilities from the Closing Ledger Date through Closing Date (the "Net Cash Flows"). The Estimated Closing Date Statement shall be prepared in a manner consistent with the calculation of such items as of June 21, 1996. Such calculations are reflected in Schedules 1.2(a)(i) (Closing Date Portfolio Securities), 1.2(a)(ii) (Policy Loans) and 3.17 (Reserve Liabilities) attached hereto and have been prepared in accordance with SAP. (c) The Closing Date Ceding Commission shall be adjusted as follows (using the calculations set forth on the Estimated Closing Date Statement for this purpose): (i) To the extent Combined Reserve Liabilities as set forth on the Estimated Closing Date Statement, as adjusted below, are less than $5,013,914,419 ("Expected Reserves"), the Closing Date Ceding Commission shall be reduced by an amount equal to (i) (A) the amount by which the Expected Reserves exceed the Combined Reserve Liabilities divided by (B) the Expected Reserves multiplied by (ii) the difference between $240,000,000 and the Adjusted Capital and Surplus of JANY. For purposes of this Section 1.3(c)(i), Combined Reserve Liabilities shall be adjusted for the Net Cash Flows applicable to the Combined Reserves not included in such reserves from the Closing Ledger Date through the Closing Date. (ii) The Closing Date Ceding Commission will be adjusted by interest at a rate of 2% per annum on the net cash flows applicable to the Combined Reserves not included in such reserves from the Closing Ledger Date through the Closing Date. (iii) The Closing Date Ceding Commission shall be (A) reduced by any Capital Gains realized with respect to the June 21 Portfolio Securities between June 21, 1996 and the Closing Date and (B) increased by any Capital Losses realized with respect to the June 21 Portfolio Securities between June 21, 1996 and the Closing Date. For purposes of this Section 1.3(c)(iii), Capital Gains and Capital Losses shall be deemed to include, without limitation, any gain or loss resulting from any sale, pre-payment, maturity or similar event affecting a June 21 Portfolio Security, but shall be deemed to exclude Capital Gains or Capital Losses with respect to Excluded Transactions. (d) As of the Closing Date, the Reinsurance Premium shall be adjusted as follows (using the calculations set forth on the Estimated Closing Date Statement): (i) To the extent Reserve Liabilities exceed the sum of (A) the Book Value of the Closing Date Portfolio Securities, (B) any cash deposited in the Trust pursuant to Section 1.2(c) hereof and (C) the Policy Loan Balance, Seller shall deliver to Purchaser at Closing by transfer to the Trust cash equal to such deficiency. The amount of any such cash payment shall be made by wire transfer of immediately available funds, and the gross amount thereof shall be reduced by an amount equal to one day's interest on such gross amount at an interest rate equal to the three month LIBOR rate in effect on the Business Day preceding the Closing Date plus 25 basis points. (ii) To the extent the sum of (A) the Book Value of the Closing Date Portfolio Securities, (B) any cash deposited pursuant to Section 1.2(c) hereof and (C) the Policy Loan Balance exceeds Reserve Liabilities, Purchaser shall deliver to Seller cash equal to said excess. Section 1.4. Closing Deliveries. (a) At the Closing, Seller shall execute and deliver or cause to be executed and delivered to Purchaser the following: (i) the Indemnity Reinsurance Agreement between Seller and Purchaser substantially in the form of Exhibit A attached hereto (the "Indemnity Reinsurance Agreement"); (ii) the Assumption Reinsurance Agreement between Seller and Purchaser substantially in the form of Exhibit B attached hereto (the "Assumption Reinsurance Agreement"); (iii) the Trust Agreement among Seller, Purchaser and Bankers Trust Company of California, N.A., in its capacity as trustee thereunder (the "Trustee"), substantially in the form of Exhibit C attached hereto (the "Trust Agreement"); (iv) the Transition Services Agreement between Seller and Purchaser substantially in the form of Exhibit D attached hereto (the "Transition Services Agreement"); (v) the Administrative Services Agreement between Seller and Purchaser substantially in the form of Exhibit E attached hereto (the "Administrative Services Agreement"); (vi) the Assignment and Assumption Agreement between Seller and Purchaser substantially in the form of Exhibit F attached hereto (the "Assignment and Assumption Agreement"); (vii) the License Agreement between Seller and Purchaser substantially in the form of Exhibit G attached hereto (the "License Agreement"); (viii) the Bill of Sale between Seller and Purchaser substantially in the form of Exhibit H attached hereto (the "Bill of Sale"); (ix) the opinion of counsel to Seller, substantially in the form of Exhibit I attached hereto ("Seller's Opinion"); (x) the Reinsurance Premium pursuant to Section 1.2 hereof; (xi) the Assigned Contracts; (xii) the Books and Records; (xiii) a certificate of an executive officer of Seller, dated the Closing Date, representing and warranting to the effect that (A) the person signing such certificate is familiar with the provisions of this Agreement and (B) the conditions specified in Article 6 of this Agreement have been satisfied; (xiv) written consents to assignments, where necessary, from all applicable parties relating to the Third Party Administration Agreements; and (xv) such other documents as may be necessary or advisable in Purchaser's reasonable judgment to vest in Purchaser all of Seller's rights, title and interest in and to the (i) assets transferred as the Reinsurance Premium, (ii) the Assigned Contracts and (iii) the Books and Records (clauses (i), (ii) and (iii), collectively the "Purchased Assets") and the Assumed Liabilities. The Indemnity Reinsurance Agreement, the Assumption Reinsurance Agreement, the Transition Services Agreement, the Administrative Services Agreement, the Bill of Sale, the Assignment and Assumption Agreement, the Trust Agreement and the License Agreement are referred to collectively herein as the "Ancillary Agreements." (b) At the Closing, Purchaser shall execute and deliver or cause to be executed and delivered to Seller the following: (i) the Indemnity Reinsurance Agreement; (ii) the Assumption Reinsurance Agreement; (iii) the Trust Agreement; (iv) the Transition Services Agreement; (v) the Administrative Services Agreement; (vi) the Assignment and Assumption Agreement; (vii) the License Agreement; (viii) the opinion of counsel to Purchaser, substantially in the form of Exhibit J hereto ("Purchaser's Opinion"); (ix) a certificate of an executive officer of Purchaser, dated the Closing Date, representing and warranting to the effect that (A) the person signing such certificate is familiar with the provisions of this Agreement and (B) the conditions specified in Article 7 of this Agreement have been satisfied; (x) such other documents as may be necessary or advisable in Seller's reasonable judgment to consummate the transactions contemplated hereby; and (xi) the Closing Date Ceding Commission. Section 1.5. Additional Closing Deliveries. In addition to the transactions and deliveries contemplated above, at the Closing each of the agreements between or among JANY and Seller or any Affiliates of Seller will be terminated (other than the Transition Services Agreement to be entered into pursuant to the JANY Stock Purchase Agreement). Section 1.6. Post Closing Adjustments. (a) No later than 60 days after the Closing Date, Seller shall prepare and deliver to Purchaser a statement (the "Final Closing Date Statement") that sets forth the actual financial data as of the Closing Date required to be estimated in the Estimated Closing Date Statement. The Final Closing Date Statement shall be prepared in a manner consistent with the Estimated Closing Date Statement and shall be accompanied by a copy of all documents used in the preparation thereof. The Final Closing Date Statement and the calculations and information set forth therein shall be reviewed and certified by a Fellow of the Society of Actuaries who is also a Member of the American Academy of Actuaries (an FSA and MAAA) familiar with the business of Seller and in particular the Annuity Business. The Final Closing Date Statement shall be binding on Purchaser unless Purchaser delivers to Seller within 60 days after its receipt of the Final Closing Date Statement from Seller written notice of disagreement specifying in reasonable detail the nature and extent of the disagreement. (b) If Purchaser and Seller are unable to resolve any disagreement with respect to the Final Closing Date Statement within 30 days after Seller receives a timely notice of disagreement, the items of disagreement alone shall be referred for final determination to the U.S. national office of Price Waterhouse or, if such firm is unable or unwilling to make such final determination, to such other independent accounting firm as the Parties shall mutually designate. The firm making such determination is referred to herein as the "Independent Party." The Final Closing Date Statement shall be deemed to be binding on Purchaser and Seller upon the earlier to occur of (i) Purchaser's failure to deliver to Seller a notice of disagreement within 30 days after its receipt of the Final Closing Date Statement prepared by Seller, (ii) resolution of any disagreement by mutual agreement of the Parties after a timely notice of disagreement has been delivered to Seller or (iii) notification by the Independent Party of its final determination of the items of disagreement submitted to it. The fees and disbursements of the Independent Party shall be borne equally, one-half by Purchaser and one-half by Seller. (c) The Closing Date Ceding Commission, including the adjustments set forth in Section 1.3(c) hereof, shall be recalculated based on the actual financial information set forth in the Final Closing Date Statement, which will establish the "Final Ceding Commission." If the Final Ceding Commission is greater than the Closing Date Ceding Commission, Purchaser will pay to Seller an amount equal to the difference between the Final Ceding Commission and the Closing Date Ceding Commission. If the Final Ceding Commission is less than the Closing Date Ceding Commission, Seller shall pay to Purchaser an amount equal to the difference between the Final Ceding Commission and the Closing Date Ceding Commission. (d) A Reinsurance Premium adjustment shall be made as follows using the calculations set forth on the Final Closing Date Statement): (i) If the Final Closing Net Assets are less than the amount of the Reserve Liabilities, Seller shall deliver cash to the Trustee in an amount equal to such difference for deposit in the Trust. (ii) If the Final Closing Net Assets are greater than the amount of the Reserve Liabilities, Purchaser and Seller shall cause the Trustee to pay cash to Seller in an amount equal to such excess, as contemplated by the Trust Agreement. (e) An adjustment with respect to the Accrued but Unpaid Investment Income will be made as follows (using the calculations set forth on the Final Closing Date Statement): (i) If the Accrued but Unpaid Investment Income is greater than Accrued but Unpaid Investment Income set forth on the Estimated Closing Date Statement, Purchaser shall pay cash to Seller in an amount equal to such excess. (ii) If the Accrued but Unpaid Investment Income is less than Accrued but Unpaid Investment Income set forth on the Estimated Closing Date Statement, Seller shall pay cash to Purchaser in an amount equal to such difference. (f) All amounts paid under this Section 1.6 shall be paid in cash in immediately available funds within 10 days after receipt by Purchaser of a binding Final Closing Date Statement with interest calculated at a rate equal to the three month LIBOR rate plus 25 basis points on the amount due from the Closing Date through but not including the date on which such amount is actually paid. ARTICLE 2 ASSUMPTION OF LIABILITIES AND OBLIGATIONS Section 2.1. Assumption of Seller Liabilities. On the Closing Date, Purchaser shall assume (a) pursuant to the Indemnity Reinsurance Agreement, as between Seller and Purchaser, any and all Insurance Liabilities and Other Liabilities of Seller arising out of or with respect to each Annuity Contract pending its Novation (as contemplated by Section 2.4 of the Assumption Reinsurance Agreement); (b) pursuant to the Assumption Reinsurance Agreement, any and all Insurance Liabilities and Other Liabilities of Seller arising out of or with respect to each Annuity Contract from and after its Novation (as contemplated by Section 2.4 of the Assumption Reinsurance Agreement); and (c) pursuant to the Assignment and Assumption Agreement, all contractual liabilities and obligations of Seller relating to the period after the Closing Date under the Assigned Contracts. The liabilities referred to in the preceding clauses (a) through (c) are herein referred to as the "Assumed Liabilities." Purchaser is not assuming any liabilities or obligations of any nature whatsoever, fixed or contingent, known or unknown, other than the Assumed Liabilities. Section 2.2. Guaranty Fund Assessments. (a) Purchaser shall pay or reimburse Seller for 100% of all guaranty fund assessments (or any other assessment of a state entity formed to protect policyholders against failure of an insurer to perform its contractual obligations due to impairment or insolvency, including but not limited to assessments of the Colorado Life and Health Insurance Protection Association and the Wisconsin Insurance Security Fund) ("Guaranty Fund Assessments") payable by Seller and included in Other Liabilities. (b) On or before the Closing Date, Seller shall deliver to Purchaser a report of annuity premiums written by state as reported to the National Organization of Life & Health Guaranty Associates ("NOLHGA") for 1993, 1994 and 1995. Seller shall deliver to Purchaser copies of reports for 1996 and each subsequent year when filed with NOLHGA until Purchaser determines that it no longer needs such reports. With respect to each report of premiums, Seller shall prepare a schedule allocating premiums between the Annuity Contracts and other annuities issued by Seller on a state-by-state basis for the time period covered by the report of premiums and Seller shall deliver same to Purchaser (prior to the Closing Date, with respect to the reports for 1993, 1994 and 1995). Seller shall deliver to Purchaser a copy of any notice (including but not limited to a notice of assessment) that Seller receives relating to any insolvency which occurs on or after the Closing Date. (c) With respect to each notice of assessment by the fund of a state delivered to Purchaser by Seller, Seller shall prepare a schedule showing the allocation of such assessment between the Seller and the Purchaser. Subject to Section 2.2(d) below, Purchaser shall pay its share of such assessment within 30 days after its receipt of the notice of assessment and the schedules contemplated by this paragraph. (d) Each notice and schedule delivered to Purchaser pursuant to Section 2.2(c) hereof shall be binding on Purchaser unless Purchaser notifies Seller of any disagreement, specifying in reasonable detail the nature and extent of the disagreement. If Purchaser and Seller are unable to resolve any disagreement with respect to any assessment within 30 days after Seller receives a timely notice of disagreement, the items of disagreement alone shall be referred for final determination to the U.S. national office of Price Waterhouse or, if such firm is unable or unwilling to make such final determination, to such other independent accounting firm as the Parties shall mutually designate. The firm making such determination is referred to herein as the "Independent Party." Each assessment shall be deemed to be binding on Purchaser and Seller upon the earlier to occur of (i) Purchaser's failure to deliver to Seller a notice of disagreement within 30 days after its receipt of the assessment and related schedules prepared by Seller, (ii) resolution of any disagreement by mutual agreement of the Parties after a timely notice of disagreement has been delivered to Seller or (iii) notification by the Independent Party of its final determination of the items of disagreement submitted to it. The fees and disbursements of the Independent Party shall be borne equally, one-half by Purchaser and one-half by Seller. (e) Except as provided in Section 3.4 of the Indemnity Reinsurance Agreement, to the extent Seller realizes a credit against any premium tax payable by it as a result of any Guaranty Fund Assessment paid by Purchaser pursuant to this Section 2.2, it shall pay to Purchaser an amount equal to such credit within 30 days after the date for filing of the annual premium tax return for such state. For purposes of this Section 2.2, Seller will be deemed to realize a credit for Guaranty Fund Assessments paid by Purchaser pursuant to this Section 2.2 if and when the premium tax payable by Seller calculated without giving effect to available credits for Guaranty Fund Assessments paid by Purchaser pursuant to this Section 2.2 (but applying all other credits and debits available to Seller in such manner as Seller elects in its sole discretion, except that guaranty fund credits atttributable to Guaranty Fund Assessments paid by Purchaser will be deemed utilized first against premium taxes paid by Purchaser under Section 3.4 of the Indemnity Reinsurance Agreement) is greater than the premium tax payable by Seller giving effect to such credit, and the amount of such credit realized shall be deemed to equal such difference; provided, however, that in the event of a merger, only Seller credits shall be taken into account. Purchaser's right to the benefit of any credit shall be determined first under Section 3.5 of the Indemnity Reinsurance Agreement and then under this Section 2.2. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Purchaser as follows: Section 3.1. Organization, Standing and Authority of Seller. Seller is a corporation duly organized as a capital stock life and health insurance company, validly existing and in good standing under the Laws of the State of Minnesota. Seller has all corporate power and authority necessary or required by Law to engage in the conduct of the Annuity Business as currently conducted by it. Section 3.2. Authorization. Seller has all corporate power and authority necessary to execute, deliver and perform its obligations under this Agreement and under each of the Ancillary Agreements to be executed by it. Seller is duly licensed, qualified or admitted to do business and is in good standing in all jurisdictions in which it is required to be so qualified, licensed or admitted to do business by the Laws thereof, including, without limitation in each jurisdiction in which Annuity Contracts have been issued, except where the failure to so qualify, be admitted or licensed, individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect. The execution and delivery by Seller of this Agreement and the Ancillary Agreements to be executed by it, and the performance by Seller of its obligations under such agreements, have been duly authorized by all necessary corporate and shareholder actions on the part of Seller. This Agreement and each of the Ancillary Agreements executed by Seller, when executed by all of the parties thereto, will constitute a valid and binding obligation of Seller enforceable against Seller in accordance with its terms, except insofar as enforceability may be limited by bankruptcy, insolvency, moratorium or other Laws which may affect creditors' rights and remedies generally and by principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). Section 3.3. Actions and Proceedings. Except as disclosed on Schedule 3.3 attached hereto, (a) there are no outstanding Orders by or with any court, arbitrator or Governmental Entity before which Seller or any of its material Affiliates is or was a party that, (i) relate to the Annuity Business or the Purchased Assets or (ii) individually or in the aggregate, have a Material Adverse Effect and (b) there are no Actions pending or, to the knowledge of Seller, threatened against Seller or any of its material Affiliates (i) related to the Annuity Business or to which any of the Purchased Assets is subject that seeks monetary damages in excess of $100,000 individually or $500,000 in the aggregate or seeks an unspecified amount of damages, (ii) that seeks injunctive or similar relief or (iii) which would, individually or in the aggregate, have a Material Adverse Effect. Section 3.4. No Conflict or Violation. Except as disclosed on Schedule 3.4 attached hereto, the execution, delivery and performance by Seller of this Agreement and the Ancillary Agreements to which it is a party in accordance with the respective terms and conditions hereof and thereof do not and will not (a) violate any provision of the charter or by-laws of Seller, as amended to date, (b) violate, constitute a default under or result in the breach, cancellation or termination of, accelerate the performance required under, or result in the creation of any lien, claim, restriction, charge or encumbrance or other defect of title ("Liens") upon any of the assets of Seller or any of the Purchased Assets pursuant to, any mortgage, deed of trust, guaranty, note, indenture, bond, lease, agreement or other instrument to which Seller is a party or by or to which it or any of such assets or the Purchased Assets may be bound, (c) violate any Order of any court, arbitrator or Governmental Entity against, or binding upon, or any agreement with, or condition imposed by, any court, arbitrator or Governmental Entity binding upon Seller, such assets or any of the Purchased Assets, (d) violate any Law or (e) result in the breach or violation of any of the terms or conditions of, constitute a default under, or otherwise cause an impairment or revocation of, any license, permit, order, approval, registration, authorization, qualification or filing with or under any Law or Governmental Entity (collectively, "Permits") related to the Annuity Business, except for Liens, violations, breaches or defaults with respect to assets of Seller other than the Purchased Assets that, individually or in the aggregate, do not have a Material Adverse Effect. Section 3.5. Consents and Approvals. Except as required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and rules and regulations thereunder (the "HSR Act") or as set forth on Schedule 3.5 attached hereto, no consent, approval, exemption or authorization is required to be obtained from, no notice is required to be given to and no filing is required to be made with any third party (including, without limitation, Governmental Entities of competent jurisdiction) by Seller in order (a) for this Agreement, each of the Ancillary Agreements and each of the Assigned Contracts to which Seller will be a party to constitute a valid and binding obligation of Seller, (b) to authorize or permit the consummation of the transactions contemplated hereby by Seller or (c) to prevent the termination of any material right, privilege, franchise, Permit or agreement related to the Annuity Business or to prevent any material loss related to the Annuity Business. Section 3.6. Brokerage and Financial Advisers. No broker, finder or financial adviser has acted directly or indirectly as such for, or is entitled to any compensation from, Seller in connection with this Agreement or the transactions contemplated hereby, except CS First Boston, whose fees for services rendered in connection with such transactions will be paid by Seller. Section 3.7. Compliance With Laws. Except as disclosed in Schedule 3.7 attached hereto, Seller is not in material violation of any Law or any Order of any court, arbitrator or Governmental Entity pertaining to the Annuity Business. Section 3.8. Annuity Contracts. The forms of all policies and endorsements utilized for all Annuity Contracts in effect on the date of this Agreement are listed and described on Schedule 3.8(a) attached hereto. All Annuity Contracts in effect on October 21, 1996 are listed and described on Schedule 3.8(b) attached hereto. All Annuity Contracts in effect on the Closing Ledger Date will be set forth in an updated Schedule 3.8(b) delivered to Purchaser at the Closing. Schedule 3.8(b) includes with respect to each Annuity Contract in effect on October 21, 1996 and will include with respect to each Annuity Contract in effect on the Closing Ledger Date, the policy number, policyholder name, form, plan code and account balance. Schedule 3.8(b) attached hereto also sets forth statutory reserves by plan code with respect to the Annuity Contracts as of September 21, 1996 and the updated Schedule 3.8(b) will set forth such information with respect to the Annuity Contracts as of the date of such Schedule set forth above. All Annuity Contracts are in all respects, to the extent required under applicable Laws, on forms approved by applicable insurance regulatory authorities or which have been filed and not objected to by such authorities within the period provided for objection, and such forms comply in all material respects and have been administered in all material respects in accordance with applicable Laws. Without limiting the foregoing: (a) Seller has offered and sold each Annuity Contract in compliance with all applicable Laws (it being acknowledged that no representation is made with respect to independent agents of Seller except as provided in Section 3.8(h) hereof) and all of Seller's registrations, filings or submissions made by it with respect to the Annuity Contracts with any Governmental Entity were in material compliance with applicable Laws when filed. (b) The transactions contemplated by this Agreement will not affect the validity and binding character of any Annuity Contract entered into or issued by Seller or render any admitted assets of Seller non-admitted under applicable Laws up to and including the Closing Date. (c) Except as set forth in Schedule 3.8(c) attached hereto, and except in accordance with customary insurance industry practice, (i) Seller is not liable to pay commissions upon the renewal of any Annuity Contract nor (ii) is it a party to any agreement providing for the third-party collection of annuity premiums payable to Seller by any other Person which commissions or premiums exceed $100,000 in the aggregate. (d) All Annuity Contracts (including all Policy Loans related thereto and the policy loans identified on Schedule 1.2(a)(iii) attached hereto) are in full force and effect and are legal, valid and binding obligations of Seller, and to the knowledge of Seller the other parties thereto, and are enforceable against Seller, and to the knowledge of Seller the other parties thereto, in accordance with their respective terms, except to the extent that enforcement thereof may be limited by or subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of general application relating to or affecting creditors' rights and to general equity principles (other than equitable rescission rights). (e) All Annuity Contract benefits payable by Seller, and to the knowledge of Seller, by any other Person that is a party to or bound by any reinsurance, coinsurance or other similar contract with Seller, have been paid in accordance with the terms of the Annuity Contracts under which they arose, except for such benefits for which there is, in the reasonable opinion of Seller, a reasonable basis to contest and all such contested benefits have been disclosed in Schedule 3.8(e) attached hereto. (f) No outstanding Annuity Contract issued, reinsured or underwritten by Seller entitles the holder thereof or any other Person to receive dividends, distributions or other benefits based on the revenues or earnings of Seller or any other Person. (g) The underwriting standards utilized and ratings applied by Seller and, to the knowledge of Seller, by any other Person that is a party to or bound by any reinsurance, coinsurance or other similar contract with Seller conform in all respects to industry accepted practices and to the standards and ratings required pursuant to the terms of the respective reinsurance, coinsurance or other similar contracts. (h) To the knowledge of Seller, each producer who wrote, sold or produced any portion of the Annuity Business for Seller was duly licensed as an insurance agent (for the type of business written, sold or produced by such producer) in the particular jurisdiction in which such producer wrote, sold or produced such business. Except as otherwise provided in Schedule 3.8(h) attached hereto, to the knowledge of Seller, no insurance agent who wrote, sold or produced any portion of the Annuity Business for Seller violated in any material respect any terms or provisions of any Law, except such violations as have been (i) cured, (ii) resolved through agreements with applicable Governmental Entities or (iii) are barred by an applicable statute of limitations. (i) The treatment under the Internal Revenue Code of 1986, as amended, and any successor thereto (the "Code") of all Annuity Contracts is no less favorable to the Policyholder thereof than the treatment under the Code for which such Annuity Contracts were intended to qualify at the time of their issuance, except for any failure to qualify for such treatment that results from (i) changes to the Code, regulations, pronouncements, announcements or guidance issued in connection with the treatment of the contracts under the Code which were enacted (or have an effective date) after the Closing Date, (ii) amendments, modifications, supplements, riders, endorsements or revisions to the Annuity Contracts after the Closing Date or (iii) changes in the manner in which the Annuity Contracts are administered after the Closing Date. Section 3.9. Permits, Licenses and Franchises. Schedule 3.9 attached hereto lists all jurisdictions in which Seller is licensed to issue the Annuity Contracts and each Annuity Contract form utilized in the respective jurisdictions. Seller has been duly authorized by all relevant Governmental Entities to issue the Annuity Contracts that it is currently writing, and was duly authorized to issue the Annuity Contracts that it is not currently writing at the time such Annuity Contracts were issued, in each of the respective jurisdictions in which it conducts the Annuity Business. Except as set forth on Schedule 3.9 attached hereto, Seller has all Permits necessary to conduct the Annuity Business as currently conducted by Seller. All of the Permits are in full force and effect and Seller has not received notice from any Governmental Entity of its intention to revoke or not renew any Permit, except for such failures to have Permits in full force and effect, revocations, non-renewals and other events which do not and will not, individually or in the aggregate, have a Material Adverse Effect. Section 3.10. Regulatory Filings. Seller has made available for inspection by Purchaser all material registrations, filings and submissions made by Seller with any Governmental Entity and final financial and market conduct reports of examinations with respect to Seller issued by any such Governmental Entity along with copies of Seller's responses thereto to the extent that such registrations, filings, submissions and reports relate to the Annuity Business and were made or issued on or subsequent to January 1, 1993. Except as listed on Schedule 3.10 attached hereto, Seller has filed all material reports, statements, documents, registrations, filings or submissions (including without limitation any sales, marketing or advertising material) required to be filed by it with any Governmental Entity to the extent the same relate to the Annuity Business. Except as listed on Schedule 3.10 attached hereto, (a) no material deficiencies have been asserted by any such Governmental Entity with respect to such registrations, filings or submissions that have not been satisfied; (b) such registrations, filings or submissions were in material compliance with applicable Law when filed; (c) since December 31, 1994, Seller has not submitted any written response with respect to material comments related to the Annuity Business from any Governmental Entity concerning such registrations, filings, submissions or reports of examination; (d) since December 31, 1992, no fine or penalty has been imposed on Seller by any Governmental Entity specifically with respect to the Annuity Business; and (e) no deposits have been made by Seller with, or at the direction of, any Governmental Entity with respect to the Annuity Business which were not shown in the most recent Annual Statement of Seller. Section 3.11. Reinsurance. Schedule 3.11 sets forth all reinsurance or co-insurance agreements (together with all other agreements related thereto) related to the Annuity Contracts to which Seller is a party and all such contracts, arrangements, treaties, understandings and agreements under which Seller has any obligation to cede or assume insurance. All such agreements are valid and binding against Seller and, to the knowledge of Seller, the other parties thereto, and are in full force and effect in accordance with their terms and conform in all material respects to all applicable Laws and neither Seller, nor to the knowledge of Seller, any other party thereto is in material default under any such agreement. Except as otherwise provided on Schedule 3.11, no party to any such agreement has audited Seller with respect thereto. Section 3.12. Absence of Certain Changes or Events. Except as disclosed on Schedule 3.12 attached hereto or except as expressly contemplated or required by this Agreement, since December 31, 1995, (a) with respect to Seller's Annuity Business, Seller has not, except in the ordinary course of the Annuity Business consistent with past practice, (I) engaged in any material transaction, (II) entered into any material agreement or (III) waived or released any material right or obligation and (b) except as disclosed on Schedule 3.12 attached hereto, there has not been, occurred or arisen in connection with Seller's Annuity Business: (i) any work stoppage, strike, labor difficulty or union organizational campaign (in process or threatened) at or affecting Seller's Annuity Business; (ii) any payment, discharge or satisfaction by Seller of any material Lien or liability other than material Liens or liabilities that were paid, discharged or satisfied in the ordinary course of business and consistent with past practice; (iii) any sale, transfer or conveyance of any investments or other assets of Seller related to the Annuity Business with an individual Book Value in excess of $100,000 or an aggregate Book Value in excess of $10,000,000, except in the ordinary course of business and consistent with past practice; (iv) any amendment, termination, waiver, disposal or lapse of, or other failure to preserve, any material license, Permit or other form of authorization of Seller; (v) any amendment of, or any failure by Seller to perform all of its obligations under, or any default under, or any waiver of any right under, or any termination (other than on the stated expiration date) of, any contract that involves or reasonably would involve the annual expenditure or receipt by Seller of more than $100,000 except for actions taken with respect to Annuity Contracts in force (including, without limitation, reinsurance thereon) in the ordinary course of business and consistent with past practice; (vi) any termination, amendment or entering into by Seller as ceding or assuming insurer of any reinsurance, coinsurance or other similar contract or any trust agreement or security agreement related thereto except as disclosed in Schedule 3.11 attached hereto or contemplated hereby; (vii) any Lien created on or in any of the Purchased Assets or assumed by Seller with respect to any of such assets, which Lien relates to liabilities individually or in the aggregate exceeding $100,000 (but excluding Liens arising through securities lending in the ordinary course of Seller's business); (viii) any material change in any underwriting, actuarial, investment, financial reporting, marketing or accounting practice or policy followed by Seller related to the Annuity Business, or in any assumption underlying such a practice or policy, or in any method of calculating any bad debt, contingency, or other reserve for financial reporting or any other accounting purposes related to the Annuity Business other than as required by GAAP, SAP or applicable Law. (ix) any contract or agreement, written or oral, to take any of the actions set forth in clauses (i) through (viii) of this Section 3.12. Section 3.13. Assigned Contracts. Each of the Assigned Contracts is valid and binding against Seller and, to the knowledge of Seller, each other party thereto, and in full force and effect according to its terms and is freely assignable to Purchaser pursuant to this Agreement and the Assignment and Assumption Agreement without notice to or consent of any person or entity, other than as specified on Schedule 3.5 attached hereto. Other than as set forth on Schedule 3.13 attached hereto, except for the Assigned Contracts, there are no contracts of Seller necessary to the Annuity Business as currently conducted by Seller. Neither Seller nor, to Seller's knowledge, any other party to any Assigned Contract is in violation, breach or default in any material respect with respect to any such Assigned Contract. Section 3.14. Intellectual Property. Schedule 3.14 attached hereto sets forth a list of all computer software programs and other intellectual property used by Seller that Seller reasonably believes to be necessary to conduct the Annuity Business as currently being conducted. Schedule 3.14 attached hereto also sets forth whether each such computer software program is (i) owned by Seller or (ii) licensed by Seller. Schedule 3.14 attached hereto sets forth each licensing agreement pursuant to which Seller has the right to use such licensed software. To the knowledge of Seller, Seller is not in conflict with or in violation or infringement of any rights, asserted or otherwise, of any other Person with respect to any such software and other intellectual property, nor has Seller received any notice of any such conflict, violation or infringement. Seller has the non-exclusive right to use all such licensed software and other intellectual property and will have the right to use such software after the Closing Date to the extent necessary to provide administration services under the Transition Services Agreement and the Transition Services Agreement contemplated by the JANY Stock Purchase Agreement so long as the services provided thereunder do not substantively change from the administration currently conducted by Seller. Schedule 3.14 attached hereto sets forth the amounts paid by Seller since December 31, 1995 for use of the licensed software. Section 3.15. Purchased Assets. Seller has good and marketable title to all assets included within the Purchased Assets (other than cash and the Assigned Contracts), free of any Lien, except to the extent the Annuity Contracts are subject to a reinsurance, coinsurance or similar agreement as set forth on Schedule 3.11 attached hereto. As of June 21, 1996, the June 21 Portfolio Securities in the aggregate had a Book Value equal to the amount set forth on Schedule 1.2(a)(i) attached hereto and an aggregate gross book annual effective yield (before reduction for third party mortgage servicing costs) of at least 8.18%. Section 3.16. Statutory Financial Statements. Seller has previously delivered to Purchaser true, complete and correct copies of the audited statements of admitted assets, liabilities and capital and surplus (statutory basis) of Seller as of December 31, 1993, 1994 and 1995, and the related summaries of operations, statements of capital and surplus and cash flow (statutory basis) for the years then ended, together with the notes related thereto. Seller has previously delivered to Purchaser true, complete and correct copies of the Annual Statements of Seller as filed with the Department of Commerce, State of Minnesota for the years ended December 31, 1993, 1994 and 1995, together with all attachments, exhibits and schedules thereto and all affirmations and certifications filed therewith applicable to the Annuity Business and the actuarial opinions applicable to the Annuity Business for such years. Seller has previously made available to Purchaser for review (without the right to remove or make copies) all auditors' work papers related to the Annuity Business and related to the foregoing audited financial information. Seller has previously delivered to Purchaser true, complete and correct copies of the Quarterly Statements of Seller as filed with the Department of Commerce, State of Minnesota for the quarters ended March 31, 1996, June 30, 1996 and September 30, 1996, together with all attachments, exhibits and schedules thereto and all affirmations and certifications filed therewith applicable to the Annuity Business. Each such Annual Statement and Quarterly Statement complied in all material respects with all applicable Laws when so filed and was timely filed with all required Governmental Entities. No material deficiencies have been asserted or are otherwise known by Seller with respect thereto. Each such financial statement (and the exhibits and schedules relating thereto), including without limitation each statement of assets, liabilities, surplus and other funds (statutory basis) of Seller and each of the summaries of operations, statements of capital and surplus and cash flow (statutory basis) contained in the respective financial statement was prepared in accordance with SAP applied on a consistent basis (except for changes, if any, disclosed therein) and each such Annual Statement and Quarterly Statement fairly presents (in accordance with SAP) the financial condition of Seller as of the respective dates thereof, and its results of operations or cash flows, as the case may be, for and during the respective periods covered thereby (provided the Quarterly Statements are subject to normal year end adjustments and lack footnotes and other presentation items). There were no material liabilities affecting Seller as of December 31, 1995 required in accordance with SAP to be reflected or disclosed in the Annual Statement for the period then ended, or as of March 31, 1996, June 30, 1996 or September 30, 1996 required in accordance with SAP to be reflected or disclosed in the Quarterly Statement for the period then ended, which are not so reflected or disclosed therein. Seller has not prepared any GAAP financial statements with respect to the Annuity Business. Section 3.17. Reserves. The Reserve Liabilities as of June 30, 1996 and September 21, 1996 have been calculated in the manner reflected on Schedule 3.17(a) attached hereto. Except as set forth in Schedule 3.17(b) attached hereto, all reserves with respect to Annuity Contracts as established or reflected, and all other provisions made for policy and contract claims with respect to Annuity Contracts (calculated gross of reinsurance applicable to London Life Reinsurance Company pursuant to the agreement dated October 1, 1996 and Lincoln National Reassurance Company pursuant to the agreement dated December 31, 1991 and, at a minimum, to be calculated to include 66-2/3% of the additional reserves (or such greater amount of reserves as have actually been posted), solely due to compliance with Actuarial Guideline 33, for policies issued on or prior to December 21, 1994, and 100% of such additional reserves (or such greater amount of reserves as have actually been posted) for policies issued subsequent to December 21, 1994) (collectively, "Reserve Liabilities"), in the respective Annual and Quarterly Statements were determined in accordance with SAP and generally recognized actuarial methods and standards, consistently applied, were fairly stated in accordance with sound actuarial principles, using prescribed morbidity and mortality tables and interest rates that are in accordance with the nature of the benefits specified in the related Annuity Contracts of Seller, and such Reserve Liabilities and other provisions met the applicable requirements of the insurance Laws and regulations of the State of Minnesota. Without limitation of the foregoing sentence, to Seller's knowledge, adequate provision for all Reserve Liabilities has been made to cover the total amount of all reasonably anticipated matured and unmatured benefits, claims and other liabilities under all Annuity Contracts. Section 3.18. Threats of Cancellation. Except as set forth in Schedule 3.18 attached hereto, since December 31, 1995 through the date of this Agreement, no Policyholder, group of Policyholder Affiliates, or Persons writing, selling or producing, either directly or through reinsurance assumed, insurance business that individually or in the aggregate for each such Policyholder, group or Person, respectively, accounted for (i) 5% or more of the annual premium or annuity income (as determined in accordance with SAP) or (ii) 1% of account values of Seller's and JANY's Annuity Business, taken as a whole, in each case at or for the 12 month period then ended, has terminated or, to the knowledge of Seller, threatened to terminate its relationship with Seller. Section 3.19. Credited Rates. Seller has complied and is in compliance with all applicable contract provisions and Laws associated with credited interest rates related to the Annuity Contracts. Section 3.20. Related Agreements. Each of the Related Agreements is similar in all material respects to one of the forms set forth on Schedule 3.20 attached hereto. Seller knows of no Related Agreements other than those listed in Schedule 3.20 attached hereto concerning commissions payable on the Annuity Contracts. Seller is not in breach of any of the Related Agreements, and to the knowledge of Seller, none of the other parties to the Related Agreements is in breach thereof. Section 3.21. Third Party Administration Agreements. Schedule 3.21 attached hereto lists all third party administration agreements relating to the Annuity Contracts, regardless of whether Seller is receiving or providing services (the "Third Party Administration Agreements"). The Third Party Administration Agreements are valid and binding obligations of Seller, enforceable against Seller in accordance with their terms, and to Seller's knowledge, are valid and binding obligations of the other parties thereto, enforceable against such other parties in accordance with their terms. Seller is not in breach of any of such Third Party Administration Agreements and, to the knowledge of Seller, none of the other parties to such Third Party Administration Agreements is in breach thereof. Section 3.22. Mortgage Loans. (a) Except as set forth on Schedule 3.22(a) attached hereto, Seller is the holder of a first lien position on the Mortgage Loans free and clear of any other Liens, except for with respect to the Mortgaged Property or the mortgage related thereto (a) the lien of current real property taxes and assessments, ground rents, personal property taxes, water rates, water frontage charges and/or meter charges, sewer taxes or rents and other similar charges or assessments, in each case not yet due and payable, (b) covenants, conditions and restrictions, rights of way, easements and other matters of public record of a type acceptable to lending institutions generally or specifically referred to in the title insurance policy or title opinion issued in connection with the original loan made with respect to the Mortgaged Property, (c) mechanics' or similar liens or claims for work, labor and materials, (d) zoning and other land use restrictions and ordinances, including, without limitation, landmark, historic and wetland designations, (e) rights of tenants under leases or other rights of tenants or rights of other occupants of the premises with or without the legal right to do so, (f) any state of facts an accurate survey would show with respect to the Mortgaged Property, (g) the failure of the premises to comply with applicable occupancy Law or municipal violations of record, (h) in the case where the Mortgaged Property is a condominium unit, the lien of a condominium association on such Mortgaged Property for unpaid maintenance or common expense assessments not yet due and payable, (i) littoral or riparian rights, if any, (j) any right, title or interest in any minerals, mineral rights or related matters including but not limited to oil, gas, coal and other hydrocarbons whether or not shown by the public records and (l) the lien of any secondary financing, in each case, which do not materially impair the Mortgage Loan ("Permitted Mortgage Liens"). As of the date specified therein, the (i) loan number, (ii) loan class, (iii) lien priority, (iv) borrower's name, (v) property address, (vi) outstanding principal amount, (vii) book value, (viii) delinquency status, (ix) status code, (x) current interest rate (or the method of calculating same), (xi) service fee rate, (xii) net interest rate, (xiii) maturity date and (xiv) percentage owned by Seller for each Mortgage Loan are materially as set forth in the Mortgage Loan Schedule. Except as set forth on Schedule 3.22(a) attached hereto, the proceeds of each Mortgage Loan have been fully disbursed and there are no future or additional advances to be made with respect to any Mortgage Loans. Except as set forth on Schedule 3.22(a) attached hereto, no Mortgage Loan has been delinquent for a period of more than 30 days within the last 12 months in the payment of any principal or interest thereon. Each Mortgage Loan is a permitted investment for Minnesota life insurers under applicable Law. (b) With respect to each Mortgage Loan and any and all Loan Documents relating thereto, to Seller's knowledge (i) each of such Mortgage Loans and Loan Documents are the legal, valid, and binding obligation of the mortgagor, obligor or the guarantor, as applicable, and each is enforceable in accordance with its terms, except as enforcement thereof may be limited by applicable bankruptcy or insolvency Laws, provided that in this case, Seller may rely upon borrower's closing counsel's opinion letter if originated by Seller, or upon representations and warranties given to Seller by another financial institution or entity if purchased by Seller, or in the absence of either, without due inquiry or investigation by Seller so long as Purchaser is assigned the benefits of such opinions, representations or warranties, (ii) none of such Mortgage Loans or Loan Documents is the subject of any agreement, contract or other arrangement (other than this Agreement) pursuant to which any interest in any Mortgage Loan or any payment due under any Mortgage Loan or with respect to any Mortgage Property has been or is intended to be sold, used as collateral, transferred to or otherwise disposed of to any Person or Persons by the original lender, subject to the participatory interests of other lenders or investors as are set forth on Schedule 3.22(b) attached hereto. (c) With respect to each Mortgage Loan and any and all Loan Documents relating thereto, the mortgagor does not have a valid defense to the payment in full of such Mortgage Loan that arises from applicable Laws and such Mortgage Loan is not subject to any right of rescission, set-off, abatement, diminution or counterclaim, except in any case as such right or defense may be provided by bankruptcy, insolvency, reorganization or other similar Laws affecting the enforcement of creditors' rights generally and by general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or at law). (d) None of the terms of any Loan Documents relating to any Mortgage Loan have been waived, amended or modified in any respect, except as set forth on the Mortgage Loan Schedule and except for such waivers, amendments and modifications as do not adversely affect (i) any mortgagor's, obligor's or guarantor's obligation to pay principal, interest or other sums required (including the timing of such payments) to be paid under such Loan Documents, (ii) Seller's Liens against the Mortgage Property securing the Mortgage Loan or (iii) the enforceability in a timely manner of such Liens. Except as set forth in the Mortgage Loan Schedule, no Mortgage Loan has been satisfied, subordinated or rescinded, in whole or in part, except (i) upon full payment of the underlying loan or, in the case of a partial release, in connection with the receipt of an independent third party MAI self-contained appraisal evidencing that there is sufficient collateral (which for this purposes shall mean no more than 80% loan to value) remaining with respect to such Mortgage Loan or (ii) as a result of a final judgment or its equivalent of a condemnation or eminent domain proceeding which does not materially impair the Mortgaged Property or Mortgage Loan. Except as set forth on Schedule 3.22(d) attached hereto, no mortgagor, obligor nor any guarantor listed on the Mortgage Loan Schedule in respect of any Mortgage Loan has been released, in whole or in part except in accordance with the terms of the Note and Mortgage, except in the case of a partial release either (i) as a result of a written loan modification or assumption agreement or (ii) if, prior to the release of any mortgagor, obligor or guarantor, a determination was made by Seller that (a) such mortgagor, obligor or guarantor was insolvent or deemed to have a lack of ability to make any material contribution with respect to the outstanding Mortgage Loan debt and (b) that the remaining mortgagor, obligor or guarantor was able to repay the outstanding Mortgage Loan debt, in either case such that the release of any mortgagor, obligor or guarantor would not have a material adverse impact on the repayment of the Mortgage Loan. (e) None of the Mortgage Loans are cross-collateralized with any other mortgage loan except for another Mortgage Loan other than a cross-collateralization which does not have a material adverse impact on the repayment of the Mortgage Loan. (f) The Mortgage File with respect to each Mortgage Loan contains all of the Loan Documents relating to each such Mortgage Loan, including, but not limited to, all documents described on Exhibit K and all such documents are true, complete and correct copies of the documents they purport to be. Except as set forth on Schedule 3.22(f) attached hereto, the Mortgage Loan Files contain the original promissory notes and/or other evidence of indebtedness (including all amendments thereto) and the originals of all credit enhancements, if any, as applicable. (g) With regard to the Mortgaged Property relating to any Mortgage Loan, to the knowledge of Seller no material amount of Hazardous Substances has been disposed of or identified on, under or at such Mortgaged Property the presence of which is either in violation of Law or would, under applicable Laws require (or permit any Governmental Entity to require) removal or remediation of such Hazardous Substance, except to the extent that removal or remediation has occurred or will occur prior to the Closing Date and except as would not materially affect the Mortgaged Property or the repayment of the Mortgaged Loan. (h) To the knowledge of Seller, there is no pending or threatened condemnation proceeding affecting any Mortgaged Property, or any part thereof, which could have an adverse effect upon the current use of such Mortgaged Property. (i) To the knowledge of Seller, there is no pending or threatened Action relating to such Mortgage Loan affecting the Mortgaged Property relating to such Mortgage Loan which would have a material and adverse effect upon such Mortgage Loan. (j) Seller has received no written notice (i) of any material violation of any Law which is a direct result of the maintenance, operation, occupancy, or use of any of the Mortgaged Property related to such Mortgage Loan, in its present manner such that the violation would materially adversely affect the operation, occupancy or other use of such Mortgaged Property and (ii) that any material Permits and approvals required by Governmental Entities having jurisdiction over the operation of such Mortgaged Property in its present manner have not been performed, issued or paid for or are not in full force and effect. (k) With respect to each Mortgage Loan, (i) each Mortgage is covered by a title insurance policy or where customary an opinion of title from a law firm in such jurisdiction insuring or opining that the Mortgage creates the first priority Lien it purports to create and that the Mortgage is not subject to any defect or encumbrance except Permitted Mortgage Liens, (ii) no claims have been made by Seller or, to Seller's knowledge, any other Person under any title policy relating to any Mortgage Loan, (iii) there has been no act or omission by Seller, or to Seller's knowledge, any party holding an interest in any title policy (including without limitation any failure to pay the premiums therefor) that creates sufficient grounds for the defense by the title insurer of any claims by the insured or that otherwise limits the title insurer's liability under any title policy relating to any Mortgage Loan and (iv) there has been no act or omission by Seller, or to Seller's knowledge, any party holding an interest in any title policy that has caused a subordination of the priority of any Lien as insured under any title policy relating to any Mortgage Loan. Seller is the insured under any title policy relating to any Mortgage Loan, either by name, endorsement or by virtue of being the successor to the original named insured lender. Seller is either the sole insured or a participant insured in those Mortgage Loans in which the Seller does not hold 100% of the first Lien. (l) There are no delinquent real estate taxes in respect of any Mortgage Property except as set forth on the Mortgage Loan Schedule or any deficiency in any obligor's obligations to pay amounts into escrow (other than in the case of escrows where property taxes have been increased in the past 12 months). (m) If upon origination the Mortgaged Property relating to such Mortgage Loan was in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards (and the flood insurance described below is available), a flood insurance policy meeting the requirements of the current guidelines of the Federal Insurance Administrator, if available, is in effect with a generally acceptable insurance carrier, in an amount representing coverage not less than the lesser of (i) the unpaid principal balance of such Mortgage Loan, (ii) the full insurable value of such Mortgaged Property or (iii) the maximum amount of insurance available under the Flood Disaster Protection Act of 1973. (n) A hazard insurance policy with a standard mortgagee clause is in effect with respect to each Mortgage Loan (other than a Mortgage Loan secured solely by unimproved land), in an amount representing coverage not less than the lesser of (i) the unpaid principal balance of such Mortgage Loan or (ii) the full insurable value of the Mortgaged Property relating to such Mortgage Loan. (o) With respect to any Mortgage Loan that is secured in whole or in part by the interest of a borrower as a lessee under a ground lease of a Mortgaged Property, such ground lease has an original term (including any extension options set forth therein) which extends not less than five years beyond the maturity date of the related Mortgage Loan. (p) All servicing contracts related to the Mortgage Loans originated by Seller are terminable at the election of Seller at termination fees that are no greater than customary termination fees paid in accordance with industry practice. Section 3.23. No Waiver of Defenses. Seller has not waived any defenses, claims or Actions which would have been available to Seller under the Annuity Contracts or the Related Agreements. Section 3.24. Agent Balances. Schedule 3.24 attached hereto sets forth all producers with respect to the Annuity Contracts having a balance owed by such producer to Seller for fees and commissions relating to the Annuity Contracts and the nature and amount of such balance. Section 3.25. GAAP Financial Statements. On or prior to the date hereof, Seller has delivered to Purchaser true, correct and complete copies of (a) the audited consolidated balance sheets of John Alden Financial Corporation ("John Alden") and its subsidiaries as of December 31, 1995 and 1994, prepared in accordance with GAAP, together with the notes thereon and the related report of Price Waterhouse the independent certified public accountant of John Alden, and (b) the audited consolidated statements of income, stockholders' equity and cash flows of John Alden and its subsidiaries for the years ended December 31, 1995, 1994 and 1993 prepared in accordance with GAAP, together with the notes thereon and the related report of Price Waterhouse (collectively, the "John Alden Financial Statements"). Seller has delivered to Purchaser true, correct and complete copies of the consolidated balance sheets, and the related consolidated statements of income, stockholders' equity and cash flows of John Alden and its subsidiaries for the quarters ended March 31, 1996, June 30, 1996 and September 30, 1996, prepared in accordance with GAAP (the "Interim John Alden Financial Statements"). The John Alden Financial Statements and the Interim John Alden Financial Statements are based on the books and records of John Alden and its subsidiaries and have been prepared in accordance with GAAP consistently applied (except in the case of the Interim John Alden Financial Statements for normal year end adjustments). The John Alden Financial Statements have been, audited by Price Waterhouse. The John Alden Financial Statements and the Interim John Alden Financial Statements fairly present in all material respects the consolidated financial position and results of operations of John Alden and its subsidiaries as of the dates and for the periods indicated therein. For purposes of this Article 3, references to the knowledge of Seller means, after reasonable inquiry, the actual knowledge of officers of Seller having the title of Senior Vice President or higher. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller as follows: Section 4.1. Organization and Standing. Purchaser is a corporation duly organized and validly existing under the Laws of the State of Arizona. Purchaser has all corporate power and authority necessary or required by Law to own, lease and operate its assets, properties and business and to carry on the operations of its business as currently conducted by it. Section 4.2. Authorization. Purchaser has all corporate power and authority necessary to execute, deliver and perform its obligations under this Agreement and under each of the Ancillary Agreements to be executed by it. Purchaser is duly licensed, qualified or admitted to do business and is in good standing in all jurisdictions in which it is required to be so qualified, licensed or admitted to do business by the Laws thereof, except where the failure to so qualify, be admitted or licensed, individually or in the aggregate is not reasonably likely to have a Material Adverse Affect on Purchaser. The execution and delivery by Purchaser of this Agreement and the Ancillary Agreements to be executed by it, and the performance by Purchaser of its obligations under such agreements, have been duly authorized by all necessary corporate and shareholder actions on the part of Purchaser. This Agreement and each of the Ancillary Agreements executed by Purchaser, when executed by all of the parties thereto, will constitute a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except insofar as enforceability may be limited by bankruptcy, insolvency, moratorium or other Laws which may affect creditors' rights and remedies generally and by principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). Section 4.3. Actions and Proceedings. Except as disclosed on Schedule 4.3 attached hereto, (a) there are no outstanding Orders by or with any court, arbitrator or Governmental Entity before which Purchaser or any of its material Affiliates is or was a party that, individually or in the aggregate, have a Material Adverse Effect on Purchaser, and (b) there are no Actions pending or, to Purchaser's knowledge, threatened against Purchaser or any of its material Affiliates which would, individually or in the aggregate, have a Material Adverse Effect on Purchaser. Section 4.4. No Conflict or Violation. Except as disclosed on Schedule 4.4 attached hereto, the execution, delivery and performance by Purchaser of this Agreement and the Ancillary Agreements to which it is a party in accordance with the respective terms and conditions hereof and thereof do not and will not (a) violate any provision of the charter, by-laws or other organizational document of Purchaser, in each case, as amended to date, (b) violate, constitute a default under, or result in the breach, cancellation or termination of, accelerate the performance required under, or result in the creation of any Lien upon any of the assets of Purchaser, pursuant to, any mortgage, deed of trust, guaranty, note, indenture, bond, lease, agreement or other instrument to which Purchaser is a party or by or to which it or any of its assets may be bound, (c) violate any Order of any court, arbitrator or Governmental Entity against, or binding upon, or any agreement with, or condition imposed by, any court, arbitrator or Governmental Entity binding upon Purchaser or any of its assets, (d) violate any Law or (e) result in the breach of any of the terms or conditions of, constitute a default under, or otherwise cause an impairment or revocation of, any Permit necessary for Purchaser to conduct the Annuity Business. Section 4.5. Consents and Approvals. Except as required under the HSR Act or as set forth on Schedule 4.5 attached hereto, no consent, approval, exemption or authorization is required to be obtained from, no notice is required to be given to and no filing is required to be made with any third party (including, without limitation, Governmental Entities of competent jurisdiction) by Purchaser in order (a) for this Agreement, each of the Ancillary Agreements and each of the Assigned Contracts to which Purchaser will be a party to constitute a valid and binding obligation of Purchaser, (b) to authorize or permit the consummation of the transactions contemplated hereby by Purchaser or (c) to authorize or permit Purchaser to conduct the Annuity Business after the Closing. Section 4.6. Brokerage and Financial Advisers. No broker, finder or financial adviser has acted directly or indirectly as such for, or is entitled to any compensation from, Purchaser in connection with this Agreement or the transactions contemplated hereby, except Goldman Sachs & Company, whose fees for services rendered in connection with such transactions will be paid by Purchaser. Section 4.7. GAAP Financial Statements. On or prior to the date hereof, Purchaser has delivered to Seller true, correct and complete copies of (a) the audited consolidated balance sheets of SunAmerica Inc. ("SunAmerica") and its subsidiaries as of December 31, 1995 and 1994, prepared in accordance with GAAP, together with the notes thereon and the related report of Price Waterhouse, the independent certified public accountant of SunAmerica, and (b) the audited consolidated statements of income, stockholders' equity and cash flows of SunAmerica and its subsidiaries for the years ended December 31, 1995, 1994 and 1993 prepared in accordance with GAAP, together with the notes thereon and the related report of Price Waterhouse (collectively, the "SunAmerica Financial Statements"). Purchaser has delivered to Seller true, correct and complete copies of the consolidated balance sheets, and the related consolidated statements of income, stockholders' equity and cash flows of SunAmerica and its subsidiaries for the quarters ended March 31, 1996 and June 30, 1996, prepared in accordance with GAAP (the "Interim SunAmerica Financial Statements"). The SunAmerica Financial Statements and the Interim SunAmerica Financial Statements are based on the books and records of SunAmerica and its subsidiaries, and the SunAmerica Financial Statements have been prepared in accordance with GAAP consistently applied, audited by Price Waterhouse and fairly present in all material respects the consolidated financial position and results of operations of SunAmerica and its subsidiaries as of the dates and for the periods indicated therein. Section 4.8. Statutory Financial Statements. Purchaser has furnished to Seller true, complete and correct copies of the Annual Statements of Purchaser as filed with the Arizona Department of Insurance for the years ended December 31, 1995, 1994 and 1993, together with all attachments, exhibits and schedules thereto and all affirmations and certifications filed therewith and applicable actuarial opinions for such years. Purchaser has furnished to Seller true, complete and correct copies of the Quarterly Statements of Purchaser as filed with the Arizona Department of Insurance for the quarters ended March 31, 1996 and June 30, 1996, together with all attachments, exhibits and schedules thereto and all affirmations and certifications filed therewith and no further amendments thereto are being considered. Each such Annual Statement and Quarterly Statement complied in all material respects with all applicable Laws when so filed and were timely filed with all required Governmental Entities. No material deficiencies have been asserted or are otherwise known by Purchaser with respect thereto. Each such Annual Statement and Quarterly Statement was prepared in accordance with SAP applied on a consistent basis (except for changes, if any, disclosed therein) and fairly presents (in accordance with SAP) the financial condition of Purchaser as of the respective dates thereof or its results of operations or cash flows, as the case may be, for and during the respective periods covered thereby (provided the Quarterly Statements are subject to normal year end adjustments and lack footnotes and other presentation items). There were no material liabilities affecting Purchaser as of December 31, 1995 required in accordance with SAP to be reflected or disclosed in the Annual Statement for the period then ended, or as of March 31, 1996 or June 30, 1996 required in accordance with SAP to be disclosed in the Quarterly Statement for the period then ended, which are not so reflected or disclosed therein. Section 4.9. Rating. As of the date hereof, the Standard & Poor's Corporation Claims - Paying Ability Rating of Purchaser is AA- and the Moody's Investor Service, Inc. Financial Strength rating of Purchaser is A2. Purchaser's A.M. Best & Co. rating is A+ (superior) and its Duff & Phelps rating is AA. For purposes of this Article 4, references to the knowledge of Purchaser means, after reasonable inquiry, the actual knowledge of officers of Purchaser having the title of Senior Vice President or higher. ARTICLE 5 PRE-CLOSING COVENANTS Section 5.1. Conduct of Business. (a) Prior to the Closing, Seller shall, unless Seller shall receive the prior written consent of Purchaser: (i) operate the Annuity Business as presently operated and only in the ordinary course and consistent with past practice (including but not limited to past underwriting standards and investment philosophies) subject however to such changes as may be required by changes in applicable Laws or contemplated by this Agreement ; and (ii) use commercially reasonable efforts to preserve its relationship with and the goodwill of its brokers, customers, suppliers, employees and other Persons having business dealings with Seller in connection with the Annuity Business. (b) Without limiting the generality of the foregoing, Seller will: (i) use commercially reasonable efforts to maintain in full force and effect all material contracts, documents and arrangements related to the Annuity Business, to continue all current marketing and selling programs relating to the Annuity Business in accordance with its current marketing plan, to process Annuity Contracts consistent with past practice, and to maintain each rating classification assigned to Seller as of the date hereof by insurance rating agencies. (ii) cause the Books and Records to be maintained in the usual manner and consistent with past practice and not permit a material change in any underwriting, investment, actuarial, financial reporting or accounting practice or policy of Seller or in any assumption underlying such a practice or policy, or in any method of calculating any bad debt, contingency or other reserve for financial reporting purposes (including without limitation any practice, policy, assumption or method relating to or affecting the determination of Annuity Contracts in force, premium or investment income, Reserve Liabilities or operating ratios with respect to expenses, losses or lapses) except as may be required by a change in GAAP, SAP or Law. (iii) (A) cause all Reserve Liabilities with respect to Annuity Contracts established or reflected in the Books and Records of Seller to be (1) established or reflected on a basis consistent with those Reserve Liabilities and reserving methods followed by Seller in the preparation of its December 31, 1995 Annual Statement filed with the Department of Commerce, State of Minnesota and (2) adequate to cover the total amount of all reasonably anticipated matured and unmatured benefits, dividends, losses, claims, expenses and other liabilities of Seller under all Annuity Contracts pursuant to which Seller has or will have any liability (including without limitation any liability arising under or as a result of any reinsurance, coinsurance or other similar contract); and (B) continue to own assets that qualify as legal reserve assets under all applicable Laws in an amount at least equal to its Reserve Liabilities. (iv) continue to comply with all Laws applicable to its Annuity Business, operations or affairs. (c) Unless otherwise provided in this Agreement, without the approval of Purchaser, which approval shall not be unreasonably withheld, from and after the date hereof until the Closing, Seller will refrain from: (i) selling or otherwise transferring, assigning, disposing of, granting or permitting to exist any Lien on, any October 21 Portfolio Securities; (ii) increasing the rates of compensation (including bonuses) payable or to become payable to any officer, employee, agent, independent contractor or consultant of Seller in connection with the Annuity Business other than in the ordinary course of business, consistent with past practice; (iii) except in the ordinary course of business consistent with past practice, incurring any obligation, liability or indebtedness, incurring any extraordinary losses, or disposing of, canceling, waiving or permitting to lapse any rights of material value relating to or affecting the Annuity Business; (iv) changing in any material respect its accounting principles or practices (including, without limitation, any changes in depreciation or amortization policies or rates or any changes in any assumptions underlying any method of calculating reserves) other than as required by a change in GAAP, SAP or Law; (v) except as disclosed herein, entering into or amending or terminating any transaction or contract related to the Annuity Business that could reasonably be expected to have a Material Adverse Effect; (vi) except in the ordinary course of business consistent with past practice, terminating, amending or executing any material reinsurance, coinsurance or other similar contract, as ceding or assuming insurer related to the Annuity Contracts, except as contemplated by Section 5.9 hereof; or (vii) entering into any contract or agreement to do any of the foregoing. Section 5.2. Certain Transactions. Except as contemplated by the reinsurance agreements listed on Schedule 3.11 attached hereto, from the date of this Agreement through the Closing, neither Seller nor any of its directors or officers will (and Seller shall cause its investment bankers and legal counsel not to) solicit, encourage, initiate or engage in any negotiations or discussions with, or provide any information to, or otherwise cooperate in any other manner with, any Person or group (other than Purchaser and its Affiliates) concerning any coinsurance, reinsurance, replacement, sale or other disposition, directly or indirectly, of the Annuity Business. Section 5.3. Investigations. From the date hereof through the Closing Date, Purchaser shall be entitled, through its employees, counsel, actuaries and other Representatives, to make such investigation of the assets, liabilities, business and operations of the Annuity Business, and such examination of the Books and Records, as Purchaser may reasonably request, including, without limitation, for the purpose of investigating the financial condition, service quality and operations of Seller. Any investigation, examination or interview by Purchaser of employees of Seller shall be conducted at reasonable times upon reasonable prior notice; and each of the Parties and its officers, employees and Representatives, including, without limitation, counsel, investment bankers and independent public accountants, shall cooperate with the other's employees and Representatives, as the case may be, in connection with such review and examination; provided, however, that such examination shall not be deemed a waiver by Purchaser of any of its rights with respect to the representations and warranties of Seller. Section 5.4. HSR Act Filings. Seller and Purchaser shall, as promptly as practicable, file, or cause to be filed, Notification and Report Forms under the HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust Division of the United States Department of Justice (the "Antitrust Division") in connection with the transactions contemplated by this Agreement, the Ancillary Agreements and the other agreements contemplated hereby and thereby, and will use their respective reasonable efforts to respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation and to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date. Seller and Purchaser will each furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of necessary filings or submissions to any government or regulatory agency, including, without limitation, any filings necessary under the provisions of the HSR Act. Section 5.5. Consents and Reasonable Efforts. Seller and Purchaser shall cooperate and use their commercially reasonable efforts to obtain all consents, approvals and agreements of, and to give and make all notices and filings with, any Governmental Entities, necessary to authorize, approve or permit the consummation of the transactions contemplated by this Agreement, the Ancillary Agreements and the other agreements contemplated hereby and thereby. Seller shall use its commercially reasonable efforts to obtain all approvals and consents to the transactions contemplated by this Agreement and the Ancillary Agreements as set forth on Schedule 3.5 attached hereto. Purchaser will use its commercially reasonable efforts to obtain all approvals and consents to the transactions contemplated by this Agreement and the Ancillary Agreements as set forth on Schedule 4.5 attached hereto. Without limiting the foregoing, Purchaser will permit Representatives of Seller to participate in the meeting at which the transactions contemplated by this Agreement are presented to the Arizona Department of Insurance for approval. Section 5.6. Representations and Warranties. From the date hereof through the Closing Date, (a) Seller shall use its reasonable efforts to conduct its affairs in such a manner so that, except as otherwise contemplated or permitted by this Agreement, the representations and warranties contained in Article 3 shall continue to be true, complete and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date, (b) Purchaser shall use its reasonable efforts to conduct its affairs in such a manner so that, except as otherwise contemplated or permitted by this Agreement, the representations and warranties as to Purchaser contained in Article 4 shall continue to be true and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date, (c) Seller shall notify Purchaser promptly of any event, condition or circumstance known to Seller occurring from the date hereof through the Closing Date that would constitute a violation or breach of this Agreement by Seller and (d) Purchaser shall notify Seller promptly of any event, condition or circumstance known to Purchaser occurring from the date hereof through the Closing Date that would constitute a violation or breach of this Agreement by Purchaser. Section 5.7. Computer Software and Other Intellectual Property. With respect to software and other intellectual property listed on Schedule 3.14 attached hereto that is licensed to Seller, but which is not freely assignable by Seller to Purchaser, Seller will use its best efforts to cooperate with Purchaser, upon Purchaser's request, to obtain at Purchaser's sole cost and expense from the licensors of such software and other intellectual property the right for Purchaser to operate such software and other intellectual property. Section 5.8. Financial Statements and Reports. (a) At the time of filing with the Department of Commerce, State of Minnesota, Seller will deliver to the Purchaser true and complete copies of each Annual Statement and Quarterly Statement filed after the date hereof and on or prior to the Closing Date. (b) From and after the date hereof and through the Closing Date, Seller shall continue to prepare in the ordinary course of business consistent with past practice and shall deliver, as soon as available, to Purchaser, true and complete copies of customarily prepared internal management information reports (including financial statements, reports and analyses prepared by or for Seller) prepared by Seller related to the Annuity Business, including without limitation normal internal reports which Seller prepares (such as those reflecting weekly net production, surrenders, head count and claims and monthly cash flow and operations expense) but excluding any statements, reports or analyses prepared in connection with any analyses of the transaction contemplated in this Agreement. Without limiting the foregoing, Seller will provide to Purchaser weekly a list of the October 21 Portfolio Securities held by Seller, which reflects the Market Value and Book Value thereof (monthly) and any changes from the immediately preceding week (weekly), including, without limitation, weekly maturities, prepayments, sales, redemptions or similar events. Section 5.9. Termination of Certain Reinsurance Arrangements. Prior to the Closing, Seller will terminate the Coinsurance Agreement effective October 1, 1996 between Seller and London Life Reinsurance Company and recapture of the annuity portion of the Coinsurance Agreement effective December 31, 1991 with Lincoln National Reassurance Company. Seller shall be responsible for payment of the recapture fees payable thereunder and, under no circumstances shall Purchaser be responsible for any costs or fees of any type in connection with the termination of such agreements. Section 5.10. Woodland Hills Option. Seller hereby grants to Purchaser an option to assume Seller's rights and obligations with respect to Seller's equipment and facilities located at 20950 Warner Center Lane, Woodland Hills, California 91367, subject to appropriate lessor consent, on the same financial terms currently available to Seller and on such other terms as Purchaser and Seller shall mutually agree; provided, however, such option shall result in no costs to Seller or any ongoing liability to Seller. Section 5.11. Oxford Put. In the event Purchaser does not obtain the consent of Oxford Life Insurance Company to the assignment of the Coinsurance Agreement dated January 31, 1990 between Seller and Oxford Life Insurance Company and the related trust agreement (the "Oxford Agreement") on or prior to the 15th Business Day preceding the Closing Date, it will on such Business Day notify Purchaser of the failure to obtain such consent and (i) the Annuity Contracts subject to the Oxford Agreement (the "Oxford Annuity Contracts") shall be excluded from the Annuity Contracts to be assumed by Purchaser at the Closing (ii) the policy loans with respect to the Oxford Annuity Contracts will not be included in the Policy Loans, (iii) the reserve liabilities with respect to the Oxford Annuity Contracts will not be included in Reserve Liabilities and (iv) the Oxford Agreement shall not be included as an Assigned Contract (the "Oxford Put"). If the Oxford Put is implemented, at Purchaser's election, the Parties will execute and deliver at the Closing an administration services agreement on terms substantially similar to those of the Administrative Services Agreement, provided that the compensation will be structured to provide a pass-through to Purchaser of the compensation payable to Seller pursuant to the Oxford Agreement with respect to the Oxford Annuity Contracts. In addition, all references to Oxford Life Insurance Company, the Oxford Agreement and the Oxford Annuity Contracts in the Schedules to this Agreement shall be deemed deleted. Section 5.12. Marketing Agreement. The Parties will negotiate in good faith towards a marketing agreement, containing among other things, the terms set forth on Exhibit N attached hereto and such other terms and conditions as may be mutually acceptable to the Parties. ARTICLE 6 CONDITIONS PRECEDENT TO THE OBLIGATION OF PURCHASER TO CLOSE The obligations of Purchaser to consummate the transactions contemplated hereby are, unless waived by Purchaser in accordance with Section 12.4 hereof, subject to the fulfillment, at or before the Closing, of each of the following conditions: (i) No Law or Order of a court, arbitrator or Governmental Entity of competent jurisdiction shall be in effect which prohibits, restricts or enjoins, and no Action shall be pending or threatened which seeks to prohibit, restrict, enjoin, nullify, seek material damages with respect to or otherwise materially adversely affect, the consummation of the transactions contemplated by this Agreement. (ii) The applicable waiting period under the HSR Act, including all extensions thereof, shall have expired or been terminated and Purchaser shall have been furnished with appropriate evidence, reasonably satisfactory to it, of such expiration or termination. (iii) All Permits, consents and waivers required from all Governmental Entities legally required to consummate the Closing and to perform this Agreement and each of the Ancillary Agreements and to consummate the transactions contemplated herein and thereby shall have been obtained and shall be in full force and effect and Purchaser shall have been furnished with appropriate evidence, reasonably satisfactory to it, of the granting of such Permits, consents and waivers; provided, however, that this condition shall be deemed satisfied with respect to approvals of the transactions contemplated by the Assumption Reinsurance Agreement by state insurance regulators, upon receipt of the required Permits, consents and waivers from the Minnesota Department of Commerce and the Arizona Department of Insurance. (iv) All necessary consents to the transactions contemplated by this Agreement and the Ancillary Agreements shall have been obtained, including, without limitation, those listed on Schedule 3.5 attached hereto. (v) Except for such changes as may be permitted or required pursuant to the terms hereof, the representations and warranties of Seller set forth in Article 3 hereof shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing, except that any such representations and warranties that are given as of a specified date and relate solely to a specified date or period shall be true and correct only as of such date or period. (vi) Seller shall have performed and complied with all covenants and agreements required to be performed or complied with by Seller under this Agreement prior to or concurrently with the Closing in all material respects. (vii) Purchaser shall have received all certificates and other documents required to be delivered to Purchaser at or before the Closing pursuant to this Agreement duly executed by all necessary Persons (other than Purchaser). (viii) Purchaser shall have received the Closing deliveries described in Section 1.4 hereof. (ix) Purchaser and Seller shall have previously or concurrently closed the transactions contemplated by the JANY Stock Purchase Agreement. (x) The Combined Reserve Liabilities as of the Closing shall be at least $4,813,357,842 [96% of the aggregate of such reserve liabilities as at June 21, 1996]; provided, however, that if the Oxford Put has been exercised, the Reserve Liabilities with respect to the Oxford Annuity Contracts will be included in Combined Reserve Liabilities for the purpose of this calculation. (xi) Since December 31, 1995, there shall not have occurred any event or events or state of facts that individually or in the aggregate has or could reasonably be expected to have a Material Adverse Effect; provided, however, that for purposes of this subclause (xi), events or facts which affect the insurance or annuity industry generally (e.g., a change in general economic or market conditions, a change in tax Law or a change in insurance Law), shall not be included in determining whether a Material Adverse Effect has occurred. (xii) The Closing Date Portfolio Securities tendered by Seller to the Trust pursuant to Section 1.2(b) hereof and any other assets therein (to the extent such assets would be admitted assets if held by Purchaser outside of the Trust) shall qualify as admitted assets of Purchaser in Arizona for purposes of SAP and Purchaser shall have received regulatory confirmation thereof from the Arizona Department of Insurance. ARTICLE 7 CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLER TO CLOSE The obligations of Seller to consummate the transactions contemplated hereby are, unless waived by Seller in accordance with Section 12.4 hereof, subject to the fulfillment, at or before the Closing, of each of the following conditions: (i) No Law or Order of a court, arbitrator or Governmental Entity of competent jurisdiction shall be in effect which prohibits, restricts or enjoins, and no Action shall be pending or threatened which seeks to prohibit, restrict, enjoin, nullify, seek material damages with respect to or otherwise materially adversely affect, the consummation of the transactions contemplated by this Agreement. (ii) The applicable waiting period under the HSR Act, including all extensions thereof, shall have expired or been terminated and Seller shall have been furnished with appropriate evidence, reasonably satisfactory to it, of such expiration or termination. (iii) All Permits, consents and waivers required from all Governmental Entities legally required to consummate the Closing and to perform this Agreement and each of the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby shall have been obtained and shall be in full force and effect and Seller shall have been furnished with appropriate evidence, reasonably satisfactory to it, of the granting of such Permits, consents and waivers; provided, however, that this condition shall be deemed satisfied with respect to approvals of the transactions contemplated by the Assumption Reinsurance Agreement by state insurance regulators, upon receipt of the required Permits, consents and waivers from the Minnesota Department of Commerce and the Arizona Department of Insurance. (iv) All necessary consents to the transactions contemplated by this Agreement, the Assigned Contracts and each of the Ancillary Agreements shall have been obtained, including, without limitation, those listed on Schedule 4.5 attached hereto. (v) Except for changes as may be permitted or required pursuant to the terms hereof, the representations and warranties of Purchaser set forth in Article 4 hereof shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing, except that any such representations and warranties that are given as of a specified date and relate solely to a specified date or period shall be true and correct only as of such date or period. (vi) Purchaser shall have performed and complied with all covenants and agreements required to be performed or complied with by Purchaser under this Agreement prior to or concurrently with the Closing in all material respects. (vii) Seller shall have received all certificates and other documents required to be delivered to Seller at or before the Closing pursuant to this Agreement duly executed by all necessary Persons (other than Seller). (viii) Seller shall have received the Closing deliveries described in Sections 1.3 and 1.4 hereof. (ix) Purchaser and Seller shall have previously or concurrently closed the transactions contemplated by the JANY Stock Purchase Agreement. (x) Since December 31, 1995, there shall not have occurred any event or events or state of facts that individually or in the aggregate has or could reasonably be expected to have a Material Adverse Effect on Purchaser; provided, however, that for purposes of this subclause (x), events or facts which affect the insurance or annuity industry generally (e.g., a change in general economic or market conditions, a change in tax Law or a change in insurance Law), shall not be included in determining whether a Material Adverse Effect on Purchaser has occurred. ARTICLE 8 POST-CLOSING COVENANTS Section 8.1. Continued Access and Cooperation. (a) Following the Closing Date, Seller shall (i) allow Purchaser, upon reasonable prior notice and during regular business hours, through its employees and other Representatives, at Purchaser's expense to examine and make copies of any books and records retained by Seller within its possession or control ("control" for the purposes of this Section 8.1(a) being defined as the ability to cause delivery to Seller or access by Purchaser) and furnish Purchaser with such financial and reporting data and other information with respect to the Annuity Contacts, the Third Party Administration Agreements, Assigned Contracts and the Related Agreements as Purchaser may from time to time reasonably request, to the extent they relate to the Annuity Business, for any reasonable business purpose, including, without limitation, the preparation or examination of Tax Returns, regulatory filings and financial statements and the conduct of any Action, whether pending or threatened, concerning the conduct of the Annuity Business prior to the Closing Date at Seller's offices or other facilities or properties and (ii) maintain such books and records for Purchaser's examination and copying. Access to such books and records shall be at Purchaser's expense and may not unreasonably interfere with Seller's or any successor company's business operations and Purchaser shall reimburse Seller for all reasonable out-of-pocket expenses incurred by Seller in copying such records. Seller shall retain such books and records for a period of at least seven years (extended by a period equal to any extension of the statute of limitations with respect to tax matters with respect to which such books and records are necessary and of which Purchaser shall notify Seller), after which time such books and records shall be delivered to Purchaser. Purchaser shall not copy or remove from Seller's premises the accountant's work papers made available to Purchaser and its Representatives. (b) Following the Closing Date, Purchaser shall (i) allow Seller, upon reasonable prior notice and during regular business hours, through its employees and other Representatives, at Seller's expense to examine and make copies of the Books and Records transferred to Purchaser at the Closing for any reasonable business purpose, including, without limitation, the preparation or examination of Tax Returns, regulatory filings and financial statements and the conduct of any Action or the conduct of any regulatory, contract holder, participant or other dispute resolution, whether pending or threatened, at Purchaser's offices or other facilities or properties and (ii) maintain such Books and Records for Seller's examination and copying. Access to such Books and Records shall be at Seller's expense and may not unreasonably interfere with Purchaser's or any successor company's business operations and Seller shall reimburse Purchaser for all reasonable out-of-pocket expenses incurred by Purchaser in copying such records. Purchaser shall retain any such Books and Records for a period of at least seven years (extended by a period equal to any extension of the statute of limitations with respect to tax matters with respect to which such Books and Records are necessary and of which Seller shall notify Purchaser). Section 8.2. Further Assurances. (a) Upon the terms and subject to the conditions herein provided, each of Seller and Purchaser shall use all commercially reasonable efforts to take or cause to be taken, all actions or do, or cause to be done, all things or execute or cause to be executed any documents necessary, proper or advisable under applicable Laws to consummate and make effective the transactions contemplated by this Agreement, the Ancillary Agreements and the other agreements contemplated hereby and thereby. (b) On and after the Closing Date, Seller and Purchaser shall take all commercially reasonable action and execute any additional documents, instruments or conveyances of any kind (not containing additional representations and warranties) and give all notices and obtain all consents, approvals and Orders of Governmental Entities and other third parties which may be necessary to carry out any of the provisions hereof, including, without limitation, putting Purchaser in full possession and operating control of the Purchased Assets and the Annuity Business it is assuming pursuant to this Agreement and the Ancillary Agreements. Section 8.3. Expenses. Except as otherwise specifically provided in this Agreement and the respective Ancillary Agreements, the Parties shall bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement, the Ancillary Agreements and the transactions contemplated hereby and thereby, including, without limitation, all fees and expenses of their respective Representatives; provided, however, that Purchaser shall bear (a) the cost of the filing fees in connection with the filings with the FTC and the Antitrust Division under the HSR Act with respect to the transactions contemplated hereby (which expense shall be borne equally by Seller and Purchaser if separate filings are required with respect to the transactions contemplated by this Agreement and the transactions contemplated by the Stock Purchase Agreement) and (b) the actual out-of-pocket costs of providing policyholder notices in order to implement the Assumption Reinsurance Agreement in accordance with its terms. Section 8.4. Employee Plans. Purchaser will provide to any employee of Seller or its Affiliates who on or after the Closing Date, at the sole discretion of Purchaser, becomes an employee of Purchaser or its Affiliates (an "Ex-Employee") with such compensation and benefits as are currently being provided to Purchaser's employees of similar rank and tenure level. Nothing in this Section 8.4 shall be construed as requiring the Purchaser to (i) employ any of Seller's employees or (ii) provide any Ex- Employee with such compensation or employee benefits as such Ex- Employee had previously received from Seller or its Affiliates or (iii) provide any former employee of Seller who is not an Ex- Employee with any severance benefits. Any Ex-Employee actually employed by Purchaser may request that assets held by Seller in Seller's 401(k) Plan on behalf of such Ex-Employee will be transferred as soon as practicable after the Service Transfer Date to the trustees of a qualified plan maintained by Purchaser or its Affiliate (if permitted) or retained in Seller's 401(k) Plan (subject to the rights of Ex-Employees with respect thereto). Each request will be honored by Seller if Seller, in its sole discretion, determines that such transfer complies with applicable Law. Any such assets transferred will be transferred in accordance with the provisions of Purchaser's and Seller's 401(k) Plan. Section 8.5. Non-Discriminatory Treatment of Policyholders. Except as otherwise provided in the Indemnity Reinsurance Agreement, from and after the Closing Date Purchaser shall use all commercially reasonable efforts to provide, at all times and from time to time, to the Policyholders under the Annuity Contracts crediting rates and renewal rates and standards of policyholder service and administration which are no less than those provided to other policyholders of annuity contracts issued, coinsured or reinsured by Purchaser or its Affiliates with respect to policies of a similar type and nature (including without limitation factors such as issue date, actual and anticipated lapse rates and surrender charge periods and other relevant features and market conditions) as the Annuity Contracts. Purchaser will use commercially reasonable efforts to include a provision substantially similar to this Section 8.5 in any agreement for the sale, transfer or bulk reinsurance of all or substantially all of the Annuity Contracts. Section 8.6. Repayment of Agent Balances. Within 10 days after the Closing Date, Seller shall deliver to Purchaser a schedule setting forth those producers with respect to the Annuity Contracts having a balance owed by such producers to Seller for fees or commissions relating to the Annuity Contracts, the amount and nature of such balances, the specific Annuity Contracts to which they relate, the dates such balances were incurred and all other information required by Purchaser to facilitate the recovery by Purchaser of such amounts. From and after the Closing until the Service Transfer Date, if at any time any producer identified on such schedule becomes entitled to a payment from Purchaser in connection with the sale of an Annuity Contract, such payment shall be first applied to reduce the amount of such balance and shall be paid by Purchaser to Seller (in accordance with Purchaser's normal payment cycle). Purchaser shall provide Seller with a quarterly report of all such payments and balances pursuant to this Section 8.6. Section 8.7. No Inducement to Replace; Non-Twisting; Non- Churning; Non-Competition. (a) In partial consideration of the payment of the Final Ceding Commission, the Parties agree that, for a period of seven years after the Closing (the "Restricted Period"), neither Seller nor any of its present or future Affiliates shall carry on or engage in, directly or indirectly, the business of selling or administering annuity contracts (a "Competing Business") in any county or city in which the Annuity Business has been conducted) or in New York State, where JANY is engaged in the business of selling and administering annuity contracts) or where Purchaser or its Affiliates conduct a similar business after the Closing Date. (b) Notwithstanding the provisions of Section 8.7(a) hereof, during the Restricted Period, Seller and Houston National Life Insurance Company ("Houston") may (A) market, underwrite and sell directly or indirectly (i) policies of Houston and (ii) single premium immediate annuities of the Seller and (B) assume annually up to $200,000,000 of deferred annuities; provided, however, that (I) the aggregate of any sales made in accordance with (A) above shall not exceed $50,000,000 annually and (II) any assumptions made pursuant to (B) above shall not exceed $200,000,000 annually; provided further, however, that the Purchaser must consent in writing to all assumptions made pursuant to (B) above which in the aggregate will exceed $100,000,000 annually, such consent not to be unreasonably withheld; and provided further, however, that the sales and assumptions set forth in (i) and (ii) above shall be limited in amount to the minimum amount and extent reasonably necessary to (x) assure Houston and Seller each maintains its qualification as a life insurance company for federal income tax purposes and (y) to enable Houston and Seller to maintain their licenses as life insurance companies in the states in which they are licensed to do business. Clause (B) above shall not permit Seller, whether individually or in concert with others, to re-enter the Annuity Business. With respect to the assumption of deferred annuities by Seller or Houston pursuant to clause (B) of this Section 8.7(b) during the Restricted Period, Seller shall, and shall cause Houston to, offer to Purchaser the right to provide such annuities, provided Purchaser is able to provide such annuities on terms no less favorable in the aggregate to Seller or Houston, as the case may be, than those available from independent third parties. Purchaser shall have a period of 30 days to respond to each such offer. Notwithstanding the provisions of Section 8.7(a) hereof, (i) Seller may administer (A) the annuity contracts excluded from the definition of "Annuity Contracts" by the last sentence thereof, (B) direct written annuity contracts of Aristar Life Insurance Company pursuant to that service agreement between Seller and Aristar Life Insurance Company dated October 29, 1987 and (C) annuity contracts of Houston and Seller issued pursuant to the foregoing provisions of this 8.7(b), and (ii) Seller may market annuity products issued by unaffiliated third parties. (c) Notwithstanding the provisions of Section 8.7(a) hereof, during the Restricted Period, Seller or its Affiliates may acquire after the Closing an entity or business engaged in a Competing Business if not more than 50% of the gross revenues, computed in accordance with statutory accounting principles for insurance companies or GAAP for other companies, of such entity or business (for the fiscal year of such entity or business immediately preceding such acquisition) are derived from a Competing Business, provided that promptly upon consummation of such acquisition, Seller or its Affiliate, as the case may be, shall provide to Purchaser an opportunity to negotiate to acquire such Competing Business (and Seller or such Affiliate will negotiate such sale to Purchaser in good faith) and, provided, further, if such Competing Business is not acquired by Purchaser, Seller shall not, and shall not permit any of its Affiliates to, expand the Competing Business through the sale of any annuity product and shall hold such business as a liquidating "closed block." Notwithstanding the foregoing, in no event shall the name "John Alden" or any derivation thereof, be used in connection with such Competing Business. (d) The provisions of Section 8.7(a) hereof shall not apply to any Person who becomes an Affiliate of Seller after the Closing Date by virtue of an acquisition of an ownership interest in Seller or any Affiliate of Seller, if such Person was engaged in the business of selling, issuing or administering annuity contracts in the United States of America immediately prior to such acquisition, and such new Affiliate's only relationship with Seller and its Affiliates related to such Competing Business arises solely as a result of such ownership interest. Notwithstanding the foregoing, in no event (i) shall the name "John Alden" or any derivation thereof be used in connection with such business or (ii) shall Seller or its controlled Affiliates market their own annuity products. Furthermore, during the four-year period after the Closing Date, not more than 50% of the annuity products sold or marketed by Seller or its controlled Affiliates may be annuity products of such Competing Business, such New Affiliate or its Affiliates. (e) Seller will refrain and will cause its present and future Affiliates, Subsidiaries and employees to refrain from causing or attempting to cause, influence or induce (or assisting any other Person in causing or attempting to cause, influence or induce) (i) any Policyholder to replace or terminate any Annuity Contract issued, reinsured, underwritten, or sold by Seller, in whole or in part, with products of Seller or any other Person at any time; (ii) any reinsurer to terminate or reduce any reinsurance, coinsurance, or other similar contract, or sever a relationship, with Purchaser at any time relating to annuity contracts; or (iii) any agent (including without limitation any insurance agent) to resign or sever or reduce a relationship with Purchaser at any time relating to annuity contracts. Seller will not participate as principal or agent in any transfer involving a "Section 1035" exchange or replacement of any Annuity Contract. (f) Seller acknowledges that the covenants of Seller set forth in this Section 8.7 are an essential element of this Agreement and that, but for the agreement of Seller to comply with these covenants, Purchaser would not have entered into this Agreement. Seller acknowledges that each of the covenants of Seller set forth in this Section 8.7 constitutes an independent covenant and shall not be affected by performance or nonperformance of any other provision of this Agreement by Purchaser. (g) Seller recognizes and agrees that a breach by Seller or any of its Affiliates of any provision of this Section 8.7 could cause irreparable harm to Purchaser, that Purchaser's remedies at law in the event of such breach or threatened breach could be inadequate, and that, accordingly, in the event of such breach or threatened breach, Purchaser shall be authorized to seek a restraining order or injunction or both against Seller or any such Affiliate, in addition to any other rights and remedies which are available to Purchaser. (h) If the provisions of this Section 8.7 are more restrictive, as to duration, geographic limitations or scope, than permitted by the Laws of any jurisdiction in which Purchaser seeks enforcement hereof, it shall be limited to the extent required to permit enforcement under such Laws. In particular, the parties intend that, to the extent appropriate to permit the enforcement hereof, the covenants contained in this Section 8.7 shall be construed as a series of separate and divisible covenants, one for each county and city in which the Annuity Business has been carried on and in which Purchaser conducts a similar business after the Closing Date. Except for geographic coverage, each such separate covenant shall be deemed identical in all respects. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in this section, then such unenforceable covenant shall be deemed reformed or eliminated for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. Section 8.8. Preferred Stock Divided Repayment. Within 30 days after receipt by Purchaser, Purchaser shall remit to Seller, by wire transfer of immediately available funds, the portion of any dividend or dividends undeclared as of the Closing Date received by Purchaser after the Closing Date on preferred stock (or similar instrument) included in the Closing Date Portfolio Securities which relate to the period up to and including the Closing Date. Each such payment shall be accompanied by interest calculated at a rate equal to the three month LIBOR rate plus 25 basis points on the amount of such payment from the date receipt by the Company through the date on which such amount is actually paid. Section 8.9. Policyholder Consents. Promptly after the Closing, Purchaser shall (i) distribute to policyholders of Annuity Contracts notice of the transactions reflected herein and (ii) use commercially reasonable efforts to obtain Novations of all Annuity Contracts (as contemplated by Section 2.4 of the Assumption Reinsurance Agreement). Seller shall provide, at Purchaser's expense, such assistance as Purchaser reasonably requests with respect to Purchaser's performance of the preceding sentence. Section 8.10. Current Report on Form 8-K. Seller will cooperate with Purchaser, at Seller's expense, in SunAmerica's preparation of a Current Report on Form 8-K prepared in connection with the transactions contemplated hereby; provided, however, that notwithstanding anything else contained in this Section 8.10, Purchaser shall bear any and all costs and expenses incurred by Seller's independent accountants in connection with their preparation of the GAAP financial statements of the Annuity Business. Purchaser shall use reasonable efforts to provide Seller and Seller's counsel with an opportunity to review references to Seller contained in such filing. ARTICLE 9 TERMINATION; SURVIVAL Section 9.1. Termination of Agreement. Notwithstanding anything contained herein to the contrary, this Agreement may be terminated: (a) at any time prior to the Closing, by mutual written consent of Seller and Purchaser; (b) by written notice by Purchaser to Seller if there has been a material breach by Seller of any of the representations, warranties, agreements or covenants of Seller set forth herein which is not subject to cure prior to the Closing, or a failure of any other condition not subject to cure prior to the Closing to which the obligations of Purchaser are subject; (c) by written notice by Seller to Purchaser if there has been a material breach by Purchaser of any of the representations, warranties, agreements or covenants of Purchaser set forth herein which is not subject to cure prior to the Closing, or a failure of any other condition not subject to cure prior to the Closing to which the obligations of Seller are subject; (d) at any time after April 30, 1997 (the "Termination Date") and prior to the Closing, by Purchaser by written notice to Seller, if (A) the Closing shall not have been consummated on or before the Termination Date and (B) the failure to consummate the Closing on or before the Termination Date did not result from the failure by Purchaser to perform or comply with any covenant or agreement contained in this Agreement required to be performed or complied with prior to the Closing by Purchaser; (e) at any time after the Termination Date and prior to the Closing, by Seller by written notice to Purchaser, if (i) the Closing shall not have been consummated on or before the Termination Date and (ii) the failure to consummate the Closing on or before the Termination Date did not result from the failure by Seller to perform or comply with any covenant or agreement contained in this Agreement required to be performed or complied with prior to the Closing by Seller; or (f) subject to Section 8.2 hereof, by written notice to Purchaser or Seller to the other, at any time after a Governmental Entity having jurisdiction over Purchaser or Seller has notified such Party that it will not provide an approval, consent or Order necessary for the terminating Party to consummate the transactions contemplated by this Agreement or the Ancillary Agreements and the Parties cannot subsequently procure such approval, consent or Order using their respective commercially reasonable efforts. Section 9.2. Effect of Termination. In the event that this Agreement shall be terminated pursuant to Section 9.1, all further obligations of the Parties under this Agreement shall terminate without further liability of either Party to the other; provided that the obligations of the Parties contained in Section 8.3 (Expenses), Article 11 (Confidentiality) and Article 12 (Miscellaneous) shall survive any such termination. A termination under Section 9.1 shall not relieve any Party of any liability for a breach of, or for any misrepresentation under, this Agreement, or be deemed to constitute a waiver of any available remedy (including specific performance if available) for any such breach or misrepresentation. ARTICLE 10 SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION Section 10.1. Survival of Representations. (a) The representations and warranties of Purchaser set forth in Article 4 hereof shall survive the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby for a period of 21 months following the Closing Date; provided, however, that the representations contained in Sections 4.1 (Organization, Standing and Authority of Seller), and 4.2 (Authorization) shall survive until the expiration of all applicable statutes of limitations (including all periods of extension, whether automatic or permissive). (b) The representations and warranties of Seller set forth in Article 3 hereof shall survive the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby for a period of 21 months following the Closing Date; provided, however, that the representations contained in Sections 3.1 (Organization, Standing and Authority of Seller), 3.2 (Authorization), 3.8 (Annuity Contracts) (paragraph (i) only) and 3.15 (Purchased Assets) shall survive until the expiration of all applicable statutes of limitations (including all periods of extension, whether automatic or permissive) and the representations and warranties contained in Section 3.22 (Mortgage Loans) (paragraph (g) only) will survive until the fifth anniversary of the Closing Date. (c) No Action may be commenced by any Person with respect to any claim arising out of or relating to such warranties or representations after the expiration of the period for which such representations and warranties shall survive pursuant to this Section 10.1 (the "Applicable Survival Period"); provided, however, that, subject to this Article 10, any Person shall have the right to commence a suit, action or proceeding after the expiration of the Applicable Survival Period with respect to claims arising out of or relating to such representations and warranties which shall have been asserted by such Person under Section 10.4 hereof before the expiration of the Applicable Survival Period. Section 10.2. Indemnification by Purchaser. (a) Subject to Sections 10.1, the following provisions of this Section 10.2 and 10.4 hereof, Purchaser shall indemnify Seller and its Affiliates (collectively, the "Seller Group") for, and shall hold it harmless from, any and all damages, claims, suits, actions, causes of action, proceedings, investigations, losses, liabilities, assessments, judgments, deficiencies and expenses (including, without limitation, reasonable legal, accounting and other professional expenses) ("Liabilities") asserted against or incurred or sustained by the Seller Group relating to, associated with or arising out of (i) any breach by Purchaser of any covenant or agreement contained in this Agreement applicable to Purchaser, (ii) any breach by Purchaser of any of the warranties or representations of Purchaser set forth in Article 4 of this Agreement, (iii) any of the Assumed Liabilities or (iv) the conduct of the Annuity Business by Purchaser or the ownership, leasing or use of the Purchased Assets by Purchaser during the period after the Closing; provided, however, that notwithstanding anything contained in this Section 10.2(a) to the contrary, Purchaser shall not be obligated hereunder to indemnify the Seller Group for, or to hold the Seller Group harmless from, any Liabilities under this Section 10.2(a) to the extent that Seller is obligated to indemnify Purchaser in respect of the same Liabilities pursuant to Section 10.3 hereof. (b) The Seller Group shall be entitled to indemnification under Section 10.2(a)(ii) hereof only when the aggregate amount of all Liabilities with respect to which the Seller Group would otherwise be entitled to indemnification under Section 10.2(a)(ii) hereof and Sections 9.2(a)(ii) and 9.2(b) under the JANY Stock Purchase Agreement exceed $1.5 million. In addition, as soon as practicable after such Liabilities exceed $1.5 million, Purchaser shall pay to Seller $750,000. In no event shall the amount payable by Purchaser and its Affiliates to the Seller Group pursuant to Section 10.2(a)(ii) hereof and Sections 9.2(a)(ii) and 9.2(b) of the JANY Stock Purchase Agreement exceed $240,000,000. (c) If any event shall occur or circumstance shall exist which would otherwise entitle the Seller Group to indemnification hereunder, Liabilities shall be deemed reduced to the extent of any proceeds (other than (i) proceeds from self-insurance and (ii) proceeds under experience-rated insurance policies the premiums for which would be increased by reason of the filing of a claim thereunder with respect to such Liability) actually recovered, net of the cost of such recovery, by the Seller Group from any third party (including, without limitation, any insurance company) with respect thereto. In furtherance of the immediately preceding sentence, Seller agrees to, and to cause its Affiliates to, (i) in good faith, diligently seek recovery, at its or their own expense, all such proceeds from all third parties with respect to all Liabilities with respect to which it or they make or may make a claim for indemnification hereunder and (ii) keep Purchaser fully and promptly informed of all material matters related thereto. (d) To the extent that the undertakings set forth in Section 10.2(a) hereof may be unenforceable, Purchaser shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Liabilities incurred by the Seller Group. Section 10.3. Indemnification by Seller. (a) Subject to Sections 10.1, the following provisions of this Section 10.3 and 10.4 hereof, Seller shall indemnify Purchaser and its Affiliates (collectively, the "Purchaser Group") for, and shall hold it harmless from, any and all Liabilities asserted against or incurred or sustained by Purchaser Group relating to, associated with or arising out of: (i) any breach by Seller of any covenant or agreement contained in this Agreement by Seller, (ii) any breach by Seller of any of the warranties or representations set forth in Article 3 of this Agreement (other than Section 3.22(g) hereof), (iii) any Excluded Liability or Extra Contractual Obligation or (iv) any Liability related to the Annuity Contracts or the Annuity Business, or the ownership, leasing or use of the Purchased Assets prior to the Closing Date, regardless of whether at the time of the Closing such Liabilities were (A) foreseen or unforeseen, (B) known or unknown, (C) existing or arose in the future, (D) fixed or contingent, (E) matured or unmatured, (F) asserted before or after the Closing Date or (G) reflected in any of the Schedules attached hereto, other than Assumed Liabilities. (b) Subject to Section 10.1, the following provisions of this Section 10.3 and 10.4 hereof, Seller shall indemnify the Purchaser Group for, and shall hold it harmless from, (i) one-half of any and all Liabilities up to an aggregate of $3,000,000 (i.e., $1.5 million of the first $3.0 million)and (ii) any and all Liabilities in excess of $3,000,000 asserted against or incurred or sustained by the Purchaser Group relating to, associated with or arising out of any breach of the representations and warranties of Seller set forth in Section 3.22(g) hereof and Sections 2.32(g) and 2.18(b) of the JANY Stock Purchase Agreement (without giving effect to the knowledge and materiality qualifiers set forth therein). (c) The Purchaser Group shall be entitled to indemnification under Section 10.3(a)(ii) hereof and 9.3(a)(ii) and 9.3(a)(iii) under the JANY Stock Purchase Agreement, only when the aggregate amount of all Liabilities with respect to which the Purchaser Group would otherwise be entitled to indemnification under Section 10.3(a)(ii) hereof and 9.3(a)(ii) and 9.3(a)(iii) under the JANY Stock Purchase Agreement exceed $1.5 million. In addition, as soon as practicable after such Liabilities exceeds $1.5 million, Seller shall pay to Purchaser $750,000. In no event shall the amount payable by Seller and its Affiliates to the Purchaser Group pursuant to Section 10.3(a)(ii) hereof and 9.3(a)(ii) and 9.3(a)(iii) under the JANY Stock Purchase Agreement exceeds $240,000,000. (d) If any event shall occur or circumstance shall exist which would otherwise entitle the Purchaser Group to indemnification hereunder, Liabilities shall be deemed reduced to the extent of any proceeds (other than (i) proceeds from self-insurance and (ii) proceeds under experience-rated insurance policies the premiums for which would be increased by reason of the filing of a claim thereunder with respect to such Liability) actually recovered, net of the cost of such recovery, by the Purchaser Group from any third party (including, without limitation, any insurance company) with respect thereto. In furtherance of the immediately preceding sentence, Purchaser agrees to, and to cause its Affiliates to, (i) in good faith, diligently seek recovery, at its or their own expense, all such proceeds from all third parties with respect to all Liabilities with respect to which it or they make or may make a claim for indemnification hereunder and (ii) keep Seller fully and promptly informed of all material matters related thereto. (e) To the extent that the undertakings set forth in Section 10.3(a) hereof may be unenforceable, Seller shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Liabilities incurred by the Purchaser Group. Section 10.4. Indemnification Procedure. (a) Within a reasonable time after obtaining knowledge thereof, a Person who may be entitled to indemnification hereunder (the "Indemnitee") shall promptly give the Party who may be obligated to provide such indemnification (the "Indemnitor") written notice of any Liability which the Indemnitee has determined has given or could give rise to a claim for indemnification hereunder (a "Notice of Claim"); provided, however, no failure or delay in giving any such Notice of Claim shall relieve the Indemnitor of its obligations except, and only to the extent, that it is prejudiced thereby. A Notice of Claim shall specify in reasonable detail the nature and all known particulars related to a Liability. The Indemnitor shall perform its indemnification obligations in respect of a Liability described in a Notice of Claim under Sections 10.2 or 10.3 hereof, as the case may be, within 30 days after the Indemnitor shall have received such Notice of Claim. (b) The Indemnitor shall inform the Indemnitee promptly after the Indemnitor has made a good faith determination, based on the facts alleged in such Notice of Claim or which have otherwise become known to the Indemnitor, either that the Indemnitor acknowledges that it has an indemnification obligation hereunder in respect of such Liability or that the Indemnitor has made a good faith determination that it has no indemnification obligation hereunder in respect of such Liability. If the Indemnitor fails to perform its obligations under this Section 10.4, or if the Indemnitor shall have informed the Indemnitee in writing in that the Indemnitor does not have an indemnification obligation hereunder in respect of such Liability, then the Indemnitee shall have the right, but not the obligation, to take the actions which the Indemnitor would have had the right to take in connection with the performance of such obligations and, if the Indemnitee is entitled to indemnification hereunder in respect of the event or circumstance as to which the Indemnitee takes such actions, then the Indemnitor shall, in addition to indemnifying Indemnitee for the Liability, indemnify the Indemnitee for all of the legal, accounting and other costs, fees and expenses reasonably and actually incurred in connection therewith. (c) The Indemnitor shall have the right and obligation, in good faith and at its own cost and expense, to cure, remediate, mitigate, remedy or otherwise handle any event or circumstance which gives rise to a Liability in respect of which a Notice of Claim has been given (including events and circumstances which can be cured, remediated, mitigated or remedied through the expenditure of money and events and circumstances which give rise to a Liability which can be measured in terms of money), regardless of the nature of such Liability. Such right and obligation shall include, without limitation, (i) the right to investigate any such event or circumstance, and (ii) the right to defend, contest or otherwise oppose any third party claim, demand, suit, action or proceeding related to such event or circumstance with legal counsel selected by it. The exercise of such right and performance of such obligation shall not constitute an admission or agreement by Indemnitor that it has an indemnification obligation hereunder in respect of such Liability. If the Indemnitor proposes to settle or compromise any such third party action, demand, claim, suit or proceeding, the Indemnitor shall give written notice to that effect (together with a statement in reasonable detail of the terms and conditions of such settlement or compromise) to the Indemnitee a reasonable time prior to effecting such settlement or compromise. (d) The Indemnitee shall have the right, but not the obligation, to participate, at its own cost and expense, in the defense, contest or other opposition of any such third party claim, demand, suit, action or proceeding through legal counsel selected by it and shall have the right, but not the obligation, to assert any and all cross-claims or counterclaims which it may have. So long as the Indemnitor is in good faith performing its obligations under this Section 10.4, the Indemnitee shall (i) at Indemnitor's cost and expense, cooperate in all reasonable ways with, make its and its Affiliates' relevant files and records available for inspection and copying by, make its and its Affiliates' employees reasonably available to and otherwise render reasonable assistance to the Indemnitor upon request and (ii) not compromise or settle any such claim, demand, suit, action or proceeding without the prior written consent of the Indemnitor. The Indemnitee shall have the right (i) to object to the settlement or compromise of any such third party action, demand, claim, suit or proceeding whereupon if such settlement is solely a cash settlement (A) the Indemnitee will assume the defense, contest or other opposition of any such third party action, demand, claim, suit or proceeding for its own account and as if it were the Indemnitor and (B) the Indemnitor shall be released from any and all liability with respect to any such third party action, demand, claim, suit or proceeding to the extent that such liability exceeds the liability which the Indemnitor would have had in respect of such a settlement or compromise, or (ii) to assume, at any time by giving written notice to that effect to the Indemnitor, the cure, mitigation, remediation, remedy or other handling of such event or circumstance and the defense, contest or other opposition of any such third party action, demand, claim, suit or proceeding for its own account whereupon the Indemnitor shall be released from any and all liability with respect to such event or circumstance and such third party action, demand, claim, suit or proceeding. (e) After the Closing, each Party shall take all commercially reasonable actions which may be necessary to enable the other Party to exercise its rights and perform its obligations under this Section 10.4. (f) Notwithstanding anything contained herein to the contrary, each Party shall use, and shall cause its Affiliates to use, commercially reasonable efforts to mitigate any and all damages, losses, liabilities, costs and expenses in respect of which it may be entitled to indemnification hereunder. ARTICLE 11 PUBLICITY AND CONFIDENTIALITY Section 11.1. Publicity. Neither Party, shall or shall permit its Affiliates to, issue any publicity, release or announcement concerning the execution and delivery of this Agreement, the provisions hereof or the transactions contemplated hereby without the prior written approval of the form and content of such publicity, release or announcement by the other; provided, however, that no such approval shall be required when such publicity, release or announcement is required by (i) applicable Law, (ii) applicable rules or regulations of, or any listing agreement with, a national or foreign stock exchange or the Automated Quotation System maintained by the National Association of Securities Dealers, Inc. or (iii) any Order of any court, arbitrator or Governmental Entity of competent jurisdiction; and, provided further, that, prior to issuing any publicity, release or announcement without such prior written approval, the Party issuing or whose Affiliate is issuing such publicity, release or announcement shall have given reasonable prior notice to the other Party of such intended issuance and, if requested by the other Party, shall have used reasonable efforts at such other Party's cost and expense to obtain a protective order or similar protection for the benefit of the other Party. In addition, with the prior written consent of the Parties, not to be unreasonably withheld, CS First Boston and Goldman Sachs & Company each may cause to be published such tombstone advertisements with respect to the transactions contemplated by this Agreement as it shall deem appropriate. Nothing contained herein shall prevent the communication of information with any Governmental Entity or any agency or other organization which rates the financial solvency or claims-paying ability of Seller or Purchaser, including without limitation, A.M. Best Company, Inc., Duff & Phelps, Standard & Poor's Corporation and Moody's Investors Services, Inc. or state insurance departments or other regulatory bodies. Section 11.2. Confidentiality. (a) All data, reports, records and other information of any kind received by a Party or its Affiliates or Representatives (such Party being hereinafter referred to as the "Receiving Party") from the other Party or its Affiliates or Representatives (such other Party being hereinafter referred to as the "Delivering Party") under this Agreement or in connection with the transactions contemplated hereby shall be treated as confidential (collectively, "Confidential Information"). Except as otherwise provided herein, the Receiving Party shall not use (and shall not permit its Affiliates or Representatives to use) Confidential Information for its own (or their own) benefit and shall use commercially reasonable efforts (and shall cause its Affiliates, directors, officers and employees to use commercially reasonable efforts) to maintain the confidentiality of Confidential Information. If the Receiving Party or any of its Affiliates or Representatives is required to disclose Confidential Information by or to any court, arbitrator or Governmental Entity of competent jurisdiction, the Receiving Party shall, prior to such disclosure, promptly notify the Delivering Party of such requirement and all particulars related to such requirement. The Delivering Party shall have the right, at its own cost and expense, to object to such disclosure and to seek confidential treatment of any Confidential Information to be so disclosed on such terms as it shall determine. (b) The restrictions set forth in Section 11.2(a) hereof shall not apply to the use or disclosure of Confidential Information to the extent, but only to the extent, (i) permitted or required pursuant to any other agreement between or among the Parties or their respective Affiliates or Representatives, (ii) necessary by a Party or its Affiliates in connection with exercising its or their rights or performing its or their duties or obligations under this Agreement, the Ancillary Agreements or the other agreements described in clause (i) of this sentence, (iii) contemplated by the last two sentences of Section 11.2(a) hereof or (iv) that the Receiving Party can demonstrate such Confidential Information (A) is or becomes generally available to the public through no fault or neglect of the Receiving Party, (B) is received in good faith on a non-confidential basis from a third party who discloses such Confidential Information without violating any obligations of secrecy or confidentiality, (C) is independently developed after the time of receipt as shown by dated written records or (D) was already possessed at the time of receipt as shown by prior dated written records. (c) For the purposes of this Section 11.2, (i) information which is specific shall not be deemed to be within an exception set forth in Section 11.2(b) hereof merely because it is embraced by general information which is within such an exception and (ii) a combination of information shall not be deemed to be within an exception set forth in Section 11.2(b) hereof merely because individual aspects of such combination are within such an exception unless the combination of information itself, its principle of operation and its value or advantages are within such an exception. ARTICLE 12 MISCELLANEOUS Section 12.1. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally (by courier or otherwise), sent by certified, registered or express mail, postage prepaid and return receipt requested, or transmitted by facsimile (with a copy of such notice or other communication and a confirmation of transmission sent by certified, registered or express mail, postage prepaid and return receipt requested no later than the close of business on the next business day following such transmission) and shall be addressed as follows: when Purchaser is to be notified: SunAmerica Life Insurance Company 1 SunAmerica Center, Century City Los Angeles, California 90067-6022 Attention: General Counsel Facsimile No.: (310) 772-6574 with a copy to: SunAmerica Life Insurance Company 1 SunAmerica Center, Century City Los Angeles, California 90067-6022 Attention: Controller Facsimile No.: (310) 772-6684 and O'Melveny & Myers 1999 Avenue of the Stars Suite 700 Los Angeles, California 90067 Attention: Robert D. Haymer, Esq. Facsimile No.: (310) 246-6779 when Seller is to be notified: John Alden Life Insurance Company 7300 Corporate Center Drive Miami, Florida 33126-1223 Attention: General Counsel Facsimile No.: (305) 715-1342 With copies to: John Alden Financial Corporation 7300 Corporate Center Drive Miami, Florida 33126-1223 Attention: General Counsel Facsimile No.: (305) 715-1497 Kelley Drye & Warren LLP Two Stamford Plaza 281 Tresser Boulevard Stamford, Connecticut 06901 Attention: Jay R. Schifferli, Esq. Facsimile No.: (203) 327-2669 A Party may, by notice given in accordance with this Section 12.1 to the other Party, designate another address or Person to which notices required or permitted to be given pursuant to this Agreement shall thereafter be transmitted. Each notice transmitted in the manner described in this Section 12.1 shall be deemed to have been given, received and become effective for all purposes at the time it shall have been (i) delivered to the addressee as indicated by the return receipt (if transmitted by mail), transmitted to the addressee (if transmitted by facsimile and subject to delivery of the mailed copy thereof) or the affidavit of the messenger (if transmitted by personal delivery) or (ii) presented for delivery to the addressee as so indicated during normal business hours, if such delivery shall have been refused for any reason. Section 12.2. Entire Agreement. This Agreement (including the Ancillary Agreements, the other agreements contemplated hereby and thereby, the JANY Stock Purchase Agreement, the Annex, the Exhibits and the Schedules attached hereto (the "Transaction Agreements")) contains the entire agreement and understanding between the Parties with respect to the subject matter hereof and cancels and supersedes all of the previous or contemporaneous agreements, representations, warranties and understandings, whether written or oral, by or between the Parties with respect to the subject matter hereof. Except for the representations and warranties expressly set forth in the Transaction Agreements, Purchaser disclaims reliance upon (i) any representations, warranties or guarantees (whether express or implied and whether oral or written) by Seller, JANY or any of their Affiliates or any of their respective Affiliates' Representatives (including, without limitation, any projections of future sales, revenues, expenses or earnings and any statements regarding the prospects of the Annuity Business as presently conducted by Seller) or (ii) any other information with respect to the Annuity Business, the Purchased Assets, Seller, JANY or their industry provided by or on behalf of them. Nothing contained in any document or instrument of conveyance, transfer, assignment or delivery executed or delivered at the Closing pursuant to this Agreement shall amend, extend, modify, renew or alter in any manner any representation, warranty, covenant, agreement or indemnity contained herein. Nothing contained in the Transaction Agreements or in any of the Schedules hereto or thereto or in any of the other agreement contemplated hereby or thereby shall constitute or be interpreted or construed as an admission by any Party or any of its Affiliates of liability to third parties, whether under Laws or otherwise, or as an admission that any Party or any of its Affiliates are in violation of or have ever violated any Law. Section 12.3. Amendments. No addition to, and no cancellation, renewal, extension, modification or amendment of or approval under, this Agreement shall be binding upon a Party unless such addition, cancellation, renewal, extension, modification, amendment or approval is set forth in a written instrument which states that it adds to, amends, cancels, renews or extends this Agreement or grants an approval hereunder and which is executed and delivered on behalf of each Party by an officer of, or attorney-in- fact for, such Party. Section 12.4. Waivers. No waiver of any provision of this Agreement shall be binding upon a Party unless such waiver is expressly set forth in a written instrument which is executed and delivered on behalf of such Party by an officer of, or attorney-in- fact for such Party. Such waiver shall be effective only to the extent specifically set forth in such written instrument. Neither the exercise (from time to time or at any time) nor the delay or failure (at any time or for any period of time) to exercise any right, power or remedy shall operate as a waiver of, the right to exercise, or impair, limit or restrict the exercise of part of any Party of any such right, power or remedy any other right, power or remedy at any time and from time to time thereafter. No waiver of any right, power or remedy of a Party shall be deemed to be a waiver of any other right, power or remedy of such Party or shall, except to the extent so waived, impair, limit or restrict the exercise of such right, power or remedy. Section 12.5. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. Each Party consents and submits to the non-exclusive personal jurisdiction of any federal court in the State of Delaware in respect of any proceeding for the sole purpose of injunctive relief or to enforce an arbitration award under Section 12.10 hereof. Each Party consents to service of process upon it with respect to any such proceeding by registered mail, return receipt requested, and by any other means permitted by applicable Laws. Each Party waives any objection that it may now or hereafter have to the laying of venue of any such proceeding in federal court in the State of Delaware and any claim that it may now or hereafter have that any such proceeding in any such court has been brought in an inconvenient forum. Section 12.6. Binding Effect; Assignment; Third Party Beneficiaries. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. Neither Seller nor Purchaser shall assign any of its rights or delegate any of its duties hereunder, (in whole or in part and by operation of law or otherwise) without the prior written consent of the other Party hereto, except that Purchaser may assign its rights and obligations under this Agreement to any of its Affiliates provided Purchaser shall remain liable for its obligations hereunder notwithstanding such assignment. Any assignment of rights or delegation of duties under this Agreement by a Party without the prior written consent of the other Party, if such consent is required hereby, shall be void. No Person (including, without limitation, any employee of a Party) shall be, or be deemed to be, a third party beneficiary of this Agreement. Section 12.7. Severability. If any provision of this Agreement shall hereafter be held to be invalid, unenforceable or illegal, in whole or in part, in any jurisdiction under any circumstances for any reason, (i) such provision shall be reformed to the minimum extent necessary to cause such provision to be valid, enforceable and legal while preserving the intent of the Parties as expressed in, and the benefits to the Parties provided by, this Agreement or (ii) if such provision cannot be so reformed, such provision shall be severed from this Agreement and an equitable adjustment shall be made to this Agreement (including, without limitation, addition of necessary further provisions to this Agreement) so as to give effect to the intent as so expressed and the benefits so provided. Such holding shall not affect or impair the validity, enforceability or legality of such provision in any other jurisdiction or under any other circumstances. Neither such holding nor such reformation or severance shall affect or impair the legality, validity or enforceability of any other provision of this Agreement. Section 12.8. Headings. The headings in this Agreement have been inserted for convenience of reference only, and shall not be considered a part of this Agreement and shall not limit, modify or affect in any way the meaning or interpretation of this Agreement. Section 12.9. Counterparts. This Agreement may be executed by the parties in any number of counterparts, each of which when so executed and delivered shall constitute an original instrument, but all such counterparts shall together constitute one and the same instrument. This Agreement shall become effective and be deemed to have been executed and delivered by all of the Parties at such time as counterparts shall have been executed and delivered by both of the Parties, regardless of whether each of the Parties has executed the same counterpart. It shall not be necessary when making proof of this Agreement to account for any counterparts other than a sufficient number of counterparts which, when taken together, contain signatures of both of the Parties. Section 12.10. Arbitration. The Parties acknowledge and agree that the transactions contemplated herein substantially affect and impact interstate commerce. Therefore, all disputes or differences between Seller and Purchaser arising under or which are related to this Agreement (other than proceedings for the sole purpose of injunctive relief) upon which an amicable understanding cannot be reached within 30 days shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, except as hereinafter provided, and judgment upon the award entered by the Arbitrators (as defined below) may be entered in any court having jurisdiction thereof. The Arbitrators provided for herein shall construe this Agreement in light of the prevailing custom and practices for acquisition transactions of a similar nature. The "Arbitrators" shall consist of one neutral arbitrator (or as provided below, three neutral arbitrators). The Parties agree that the arbitration, if implemented under this Agreement, shall be held at a site selected by the Arbitrators. The Parties agree to arbitrate within 90 days following the transmittal of written demand of either Party to arbitrate any dispute arbitrable under this Agreement. The Parties will in good faith, within 15 days following notice of written demand to arbitrate attempt to agree on a single Arbitrator. If the Parties cannot within 15 days thereafter agree on a single arbitrator, each of the Parties shall appoint an Arbitrator, notifying the other Party of the name and address of such Arbitrator. The Arbitrators appointed by each Party shall agree upon and appoint a third neutral Arbitrator. If either Party shall fail to appoint an Arbitrator as herein provided, or should the two Arbitrators so named fail to select the third Arbitrator within 30 days after their appointment, then, in either event, the President of the American Arbitration Association or its successor shall appoint such second and/or third Arbitrator. A decision of a majority of the Arbitrators shall be final and binding and there shall be no appeal therefrom. The Arbitrators shall within 45 days after the final hearing enter an award and the award shall be supported by a written opinion. The fees of the Arbitrators and the direct costs of the arbitration shall be shared equally by the Parties; all other costs of the respective Parties, including without limitation fees and expenses of the respective Party's attorneys, witnesses, and discovery shall be paid by the respective Party, except to the extent that the Arbitrators otherwise direct based on the equities of the situation. The arbitration shall be held in New York, New York, unless otherwise agreed between the Parties. IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above. SUNAMERICA LIFE INSURANCE COMPANY By: /s/ JAY S. WINTROB _________________________________ Name: Jay S. Wintrob Title: Executive Vice President JOHN ALDEN LIFE INSURANCE COMPANY By: /s/ GLENDON E. JOHNSON ___________________________________ Name: Glendon E. Johnson Title: Chairman, President & C.E.O. ANNEX A The following terms are defined in the following Sections. DEFINED TERM SECTION Administrative Services Agreement 1.5 Agreement Introduction Ancillary Agreements 1.5 Annuity Business Introduction Antitrust Division 5.4 Applicable Survival Period 10.1 Assigned Contracts 1.2 Assignment and Assumption Agreement 1.5 Assumed Liabilities 2.1 Assumption Reinsurance Agreement 1.5 Bill of Sale 1.5 Books and Records 1.2 Capital Loss 1.3 Capital Gain 1.3 Ceding Commission 1.3 Closing Date Adjustments 1.3 Closing Date Ceding Commission 1.3 Closing 1.1 Closing Date 1.1 Code 3.8 Competing Business 8.7 Confidential Information 11.2(a) Continuing Employees 8.4 Delivering Party 11.2(a) Dividend Declaration Date 8.8 Estimated Closing Date Statement 1.3 Excluded Transactions 1.3 Final Closing Adjustments 1.7 Final Closing Date Statement 1.7 FTC 5.4 Houston 8.7 HSR Act 3.5 Indemnitee 10.4(a) Indemnitor 10.4(a) Indemnity Reinsurance Agreement 1.5 Independent Party 1.7 Interim John Alden Financial Statements 3.25 Interim SunAmerica Financial Statements 4.7 JANY Stock Purchase Agreement Introduction JANY Stock Introduction JANY Introduction John Alden 3.25 Liabilities 10.2(a) License Agreement 1.5 Liens 3.4 Net Cash Flows 1.3(c)(i) NOLHGA 2.2 Notice of Claim 10.4(a) Oxford Agreement 5.11 Oxford Annuity Contracts 5.11 Oxford Put 5.11 Parties Introduction Party Introduction Permits 3.4 Permitted Mortgage Liens 3.22 Policy Loans 1.2 Portfolio Securities 1.2 Purchased Assets 1.2 Purchaser Introduction Purchaser Financial Statements 4.7 Purchaser Group 10.3(a) Purchaser's Opinion 1.5 Receiving Party 11.2(a) Reinsurance Premium 1.2 Rejected Mortgage 1.2 Reserve Liabilities 3.17 Restricted Period 8.7 Seller Introduction Seller Group 10.2(a) Seller's Opinion 1.5 SunAmerica 4.7 SunAmerica Financial Statements 4.7 Termination Date 9.1 Third Party Administration Agreements 3.25 Transition Services Agreement 1.5 Transaction Agreements 12.2 Trust Agreement 1.5 Trustee 1.5 "Accrued and Unpaid Investment Income" means the aggregate accrued but unpaid interest through and including the Closing Date on bonds, mortgages and other interest bearing instruments included in the Closing Date Portfolio Securities plus accrued but unpaid interest through and including the Closing Date on any and all Policy Loans related to the Policy Loan Balance plus declared but unpaid dividends on Preferred Stock. "Action" means any action, claim, complaint, cause of action, arbitration, petition, investigation, suit or administrative or other proceeding, whether civil or criminal, at law or in equity, before any court, arbitrator or Governmental Entity. "Adjusted Capital and Surplus of JANY" means, as of the Closing Date, capital and surplus plus asset valuation reserves of JANY as shown on lines 38, 11.4 and 24.1 of page 3 of the 1995 Annual Statement of JANY, calculated as of the Closing Date in a manner consistent with such calculation at year end. "Affiliate" shall mean any Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Person specified. For purposes of this definition, "control" (and its derivative terms "controlled," "controls," etc.) shall mean the power and right to direct the management and policies of another Person, whether by ownership of voting securities, the ability to elect a majority of the board of directors or other managing board or committee, management contract, or otherwise. "Annuity Contracts" means all policies described on Schedule 3.8(a) attached hereto. Annuity Contracts as used in this Agreement is intended to refer to all single premium deferred annuity policies, flexible premium deferred annuity policies, single premium immediate annuity policies, supplementary contracts and guaranteed investment contracts included in the Annuity Business which are in-force as of the Closing Ledger Date, as well as any riders providing for other supplemental benefits, and all supplements, endorsements, riders and ancillary agreements in connection therewith and specifically includes without limitation (i) all lapsed Annuity Contracts that are reinstated and (ii) any supplemental benefits arising out of the Annuity Contracts. Notwithstanding anything to the contrary in this Agreement, "Annuity Contracts" shall not include (i) any policy for which the reserves or applicable premiums are not actually transferred to Purchaser, (ii) any policy not described in Schedule 3.8(b) attached hereto, (iii) Annuity Contracts issued on or prior to April 1, 1978, (iv) single premium immediate annuities and supplementary contracts involving life contingencies, (v) universal life flexible premium deferred annuity riders, (vi) annuity policies assumed by Seller from Aristar Life Insurance Company and (vii) if the Oxford Put is implemented pursuant to Section 5.10 hereof, the Oxford Annuity Contracts. For purposes of the representations and warranties of Seller set forth in Article 3 hereof, the term "Annuity Contracts" shall be deemed to include policies described on Schedule 3.8(a) attached hereto sold after the Closing Ledger Date and on or prior to the Closing Date or which terminated after the Closing Ledger Date and on or prior to the Closing Date. "Book Value" means book value computed in accordance with SAP, without marking to market and without including Accrued and Unpaid Investment Income. "Business Day" means any day on which banks and other financial institutions are not required to be closed pursuant to applicable Laws in any of New York, New York, Los Angeles, California and Miami, Florida. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act. "Closing Date Portfolio Securities" means the cash, securities, mortgage loans and other assets of Seller identified on Schedule 1.2(a)(i) attached hereto (which Schedule also sets forth the Book Value of each such asset as of October 21, 1996) (the "October 21 Portfolio Securities"), (i) less the Rejected Mortgages, (ii) less any such assets which have been sold before the Closing Date with the approval of Purchaser in accordance with Section 5.1(c)(i) hereof, (iii) less any October 21 Portfolio Securities that have matured or been redeemed in accordance with their terms between October 21, 1996 and the Closing Date. "Closing Ledger Date" means the 21st day of the month in which the Closing occurs or, if such day is not a Business Day, on the next preceding Business Day. "Combined Reserve Liabilities" means the Reserve Liabilities for Annuity Contracts plus all reserves with respect to JANY's Insurance Contracts (as defined in the JANY Stock Purchase Agreement), in the aggregate. "Commercially reasonable efforts" when used with respect to any Party, means the reasonable efforts of such Party without the requirement that such Party incur any extraordinary out-of-pocket expenses, incur any other unanticipated burden or commence or pursue any action, suit or proceeding. "Environmental Laws" means any Law pertaining to health, industrial hygiene or the environmental condition on or under any property including, without limitation, CERCLA and the Toxic Substance Control Act, and the rules and regulations thereunder. "Excluded Liabilities" means (i) all liability for premium taxes arising on account of premiums paid on or prior to the Closing Ledger Date with respect to the Annuity Contracts, (ii) all liability for commission payments and other fees or compensation payable with respect to the Annuity Contracts to or for the benefit of brokers and agents and other distribution sources, to the extent that such amounts are based on premiums paid on or prior to the Closing Ledger Date, (iii) trailer commissions (which are based upon account values) accruable on or prior to the Closing Ledger Date and (iv) all Guaranty Fund Assessments imposed as a result of a conservatorship or other insolvency proceeding commenced on or prior to the Closing Date with respect to the Annuity Contracts. "Excluded Transactions" means with respect to the June 21 Portfolio Securities the sale or assignment of such Portfolio Securities which resulted in (i) $1,174,000 of capital losses on bonds, (ii) $1,072,000 in capital gains on bonds, (iii) $3,107,000 of losses due to mortgage write downs and sales, and (iv) $161,000 of gains on mortgage prepayments, as set forth on the Schedule attached hereto entitled "Excluded Transactions." "Execution Date" means the date of this Agreement. "Extra Contractual Obligations" means all liabilities (i) for compensatory, consequential, exemplary, punitive or similar damages which directly relate to any alleged or actual act, error, omission, fraud or misrepresentation by Seller, any of its Affiliates or any of its or its Affiliates' officers or employees, whether intentional or otherwise, prior to the Closing Date, or (ii) from any actual or alleged reckless conduct or bad faith by Seller, any of its Affiliates or any of its or its Affiliates' officers or employees in connection with Seller's handling of any claim under any of the Annuity Contracts or in connection with the issuance, offer, sale, delivery, cancellation or administration by Seller or any of its Affiliates or any of its or its Affiliates' officers or employees of any of the Annuity Contracts or (iii) in connection with any acceleration of the benefits under the Annuity Contracts or any claims for the present value of the Annuity Contracts, in either case, in connection with rehabilitation, liquidation, receivership or other similar proceedings filed against Seller. "Final Closing Net Assets" means the sum of (i) the Book Value of the Closing Date Portfolio Securities as of the Closing Date as set forth on the Final Closing Date Statement, (ii) any cash deposited in the Trust pursuant to Section 1.2(c) hereof and (iii) the Policy Loan Balance as set forth on the Final Closing Date Statement, which sum will be (x) increased by any amount paid by Seller pursuant to Section 1.3(d)(i) hereof or (y) decreased by the amount paid by Purchaser pursuant to Section 1.3(d)(ii) hereof. "GAAP" shall mean United States generally accepted accounting principles as in effect from time to time, consistently applied throughout the specified period and in the immediately prior comparable period. "Governmental Entity" means any agency, administrative division or department (or administrative subdivision), commission, regulatory authority (including without limitation any insurance regulatory authority), taxing or administrative authority, court or other judicial body, legislature of the government of the United States or any state, city, municipality, county, town, district or other political subdivision thereof or any state, city, municipality, county, town, district or other political subdivision thereof or any quasi-governmental entity, including, without limitation, the employees or agents thereof. "Hazardous Substance" means (i) any and all substances defined as "hazardous substances," "extremely hazardous substances," "toxic substances," "hazardous waste," "hazardous materials" or "infectious waste" for purposes of CERCLA or any other Environmental Law and (ii) any petroleum or petroleum-based products. "Insurance Liabilities" means only the contractual liabilities and obligations of Seller arising under the Annuity Contracts, as evidenced by the written policy forms and riders, and no other liabilities whatsoever. Without limiting the foregoing, Insurance Liabilities shall not include Excluded Liabilities or any Extra Contractual Obligations. "June 21 Portfolio Securities" means the cash, securities, mortgage loans and other assets identified on Schedule 1.2(a)(i) as of June 21, 1996. "Laws" means any and all federal, state or local statutes, laws, ordinances, rules and regulations. "Loan Documents" means the Mortgage Note, the Mortgage and any and all other agreements, certificates, documents or instruments in Seller's possession or under its control relating to the origination, closing and modification of a Mortgage Loan, including without limitation any related assignment of rents, security agreement, UCC financing statement, guaranty, letter of credit, pledge agreement, loan agreement or other instrument creating a security interest in, and Lien upon, real and/or personal property. "Market Value" means (i) with respect to any publicly traded security, the last reported sales price on the business day immediately preceding the date on which such valuation is being made, (ii) with respect to other (private) securities, the value estimated using publicly quoted market prices for similar securities, as identified by Seller, increased by 30 basis points and (iii) with respect to mortgages, the GAAP book value per Seller's financial statements. "Material Adverse Effect" means any change, effect, event or occurrence that has, or is reasonably likely to have, individually or in the aggregate, a material adverse impact on (i) the assets, business, financial position or results of operations of the Annuity Business, the Annuity Contracts or the Purchased Assets or (ii) the ability of Seller to consummate the transactions contemplated by this Agreement and the Ancillary Agreements; provided that "Material Adverse Effect" shall be deemed to exclude the impact of (i) changes in Laws, or interpretations thereof by any Governmental Entity, relating to or affecting the Annuity Business and (ii) changes in GAAP or SAP. "Material Adverse Effect on Purchaser" means any change, effect, event or occurrence that has, or is reasonably likely to have, individually or in the aggregate, a material adverse impact on (i) the business, financial position or results of operations of Purchaser (either before or after the Closing and the closing under the JANY Stock Purchase Agreement) or (ii) the ability of Purchaser to consummate the transactions contemplated by this Agreement and the Ancillary Agreements; provided that "Material Adverse Effect on Purchaser" shall be deemed to exclude the impact of (i) changes in Laws or interpretations thereof by any Governmental Entity relating to or affecting the business of Purchaser and (ii) changes in GAAP or SAP. "Mortgage" means the mortgage, deed of trust or other instrument (and all modifications thereto) creating a lien on real property described therein or on the tenant's interest under a ground lease of real property described therein, in either case securing a Mortgage Note. "Mortgage Loan" means any individual mortgage loan that is identified on the Mortgage Loan Schedule. "Mortgage Loan Principal Balance" means, with respect to any Mortgage Loan, the unpaid principal balance as of the date specified in the Mortgage Loan Schedule. "Mortgage Loan Schedule" means the list of Mortgage Loans subject to this Agreement and identified on Schedule 3.22(a) attached hereto, which schedule sets forth the following information with respect to each Mortgage Loan as of the date specified therein. (i) the Mortgage Loan numbers; (ii) the name of the mortgagor and the name or address of the Mortgaged Property; (iii) the Mortgage Loan Principal Balance; (iv) lien priority of the Mortgage; (v) the maturity date; and (vi) the current interest rate. (vii) the Mortgage Loan Status (current, litigation, bankruptcy, tax plans, etc.). "Mortgage Note" means the note or other evidence of the indebtedness under a Mortgage Loan. "Mortgaged Property" means the land and improvements that secure a Mortgage, which in the case of a leasehold mortgage shall mean the tenant's interest in the real property underlying the ground lease or, where the context so requires, the real property underlying the ground lease. "Order" means any decree, injunction, judgment, order, ruling, assessment or writ. "Other Liabilities" means (i) all liability for premium taxes arising on account of premiums paid to Purchaser with respect to the Annuity Contracts after the Closing Ledger Date, (ii) all liability for commission payments and other fees or compensation payable with respect to the Annuity Contracts to or for the benefit of brokers and agents and other distribution sources, to the extent that such amounts are based on premiums paid to Purchaser after the Closing Ledger Date, (iii) trailer commissions (which are based upon account values) accruable after the Closing Ledger Date and (iv) all Guaranty Fund Assessments imposed as a result of conservatorship or other insolvency proceedings commenced subsequent to the Closing Date with respect to the Annuity Contracts. "Person" shall mean any natural person, corporation, general partnership, limited partnership, limited liability company, proprietorship, trust, union, association, court, tribunal, agency, government, department, commission, self-regulatory organization, arbitrator, board, bureau, instrumentality, or other entity, enterprise, authority, or business organization. "Policyholders" means, as applicable, the beneficiaries under, or policyholders with respect to, or owners of, the Annuity Contracts, or any other Person entitled to payment with respect to the Annuity Contracts. "Policy Loan Balance" means the aggregate outstanding principal amount of all Policy Loans as of a date of calculation (other than the Policy Loans associated with the Oxford Annuity Contracts in the event the Oxford Put is implemented). "Qualified Investments" means (A) readily marketable direct obligations of the Government of the United States or any agency or instrumentality thereof or obligations unconditionally guaranteed by the full faith and credit of the Government of the United States; (B) demand deposits with (1) any commercial bank that is a member of the Federal Reserve System, the parent of which issues commercial paper rated at least "P-1" (or the then equivalent grade) by Moody's and "A-1" (or the then equivalent grade) by S&P, is organized under the Laws of the United States or any State thereof and is rated "TBW-1" or the equivalent or better by Thomson BankWatch or any other nationally recognized agency or, (2) a United States branch or agency of any commercial bank organized under the Laws of any Organization for Economic Cooperation and Development member country (as of the Execution Date of this Agreement) which is rated "TBW-1" or the equivalent or better by Thomson BankWatch or other internationally recognized agency; (C) commercial paper issued by any corporation rated at least P-1 or the then equivalent grade by Moody's and A-1 or the then equivalent grade by S&P; (D) money market mutual funds (i) whose portfolio is comprised solely of (1) marketable direct obligations of the United States government or its agencies, and/or (2) bank or corporate obligations which individually meet the rating criteria stipulated in (B) or (C) above, (ii) whose total net assets exceed $1 billion and (iii) where the Seller's investment in such fund is limited to an amount not exceeding 10% of such fund's assets; or (E) such other assets as the Party receiving such Qualified Investments may expressly approve in writing. "Related Agreements" means the agreements providing for the payment of commissions relating to the Annuity Contracts. "Representatives" means, with respect to any Person, such person's Affiliates, subsidiaries, shareholders, directors, partners, joint ventures, officers, employees, agents, representatives, producers, independent contractors, consultants, lenders, brokers, finders, investment bankers, financial advisors, attorneys and accountants. Seller's Representatives include without limitation CS First Boston. Purchaser's Representatives include without limitation Goldman Sachs & Company. "Service Transfer Date" means the date which is nine months from the Closing Date, unless an earlier date is agreed to in writing by Seller and Purchaser. "SAP" means the statutory accounting principals and practices, as in effect from time to time, required or permitted for life insurance companies by applicable Laws of the National Association of Insurance Commissioners and the insurance regulatory authority in the state in which the company in question is domiciled, consistently applied throughout the specified period and in the immediately prior comparable period. "Taxes" shall mean all taxes, charges, fees, levies, or other similar assessments, including, without limitation, income, gross receipts, ad valorem, premium, excise, real property, personal property, windfall profit, sales, use, transfer, licensing, withholding, employment, payroll, and franchise taxes imposed by any Governmental Entity; and such term shall include any interest (through the date of payment), penalties, assessments, or additions to tax resulting from, attributable to, or incurred in connection with any such tax or any contest or dispute thereof. "Tax Returns" shall mean returns, declarations, statements, reports, schedules, forms and information returns and any amended Tax Return required to be supplied to a taxing authority in respect of or relating to Taxes. EX-2.(D) 3 EXHIBIT 2.(D) - SEGMENT - "STOCK" 1 STOCK PURCHASE AND SALE AGREEMENT By and Between JOHN ALDEN LIFE INSURANCE COMPANY and SUNAMERICA LIFE INSURANCE COMPANY Dated November 29, 1996 TABLE OF CONTENTS PAGE ARTICLE 1 - PURCHASE AND SALE OF STOCK; CLOSING 2 1.1. Closing 2 1.2. Purchase and Sale of JANY Stock 2 1.3. Closing Deliveries 3 1.4. Additional Closing Deliveries 4 1.5. Settlement of Intercompany Obligations 4 1.6. Disputes 6 ARTICLE 2 - REPRESENTATIONS AND WARRANTIES OF SELLER 6 2.1. Organization, Standing and Authority of Seller 6 2.2. Authorization 7 2.3. Actions and Proceedings 7 2.4. No Conflict or Violation 8 2.5. Consents and Approvals 8 2.6. Brokerage and Financial Advisers 9 2.7. Compliance With Laws 9 2.8. Insurance Contracts 9 2.9. Permits, Licenses and Franchises 12 2.10. Regulatory Filings 13 2.11. Reinsurance 14 2.12. Absence of Certain Changes or Events 14 2.13. Computer Software and Other Intellectual Property 17 2.14. Contracts 18 2.15. Statutory Financial Statements 20 2.16. JANY Capital Stock 22 2.17. Tax Matters 22 2.18. Real Property 24 2.19. Owned Properties 25 2.20. Pension and Other Employee Plans 26 2.21. Labor Matters 29 2.22. Banks 29 2.23. Reserves 30 2.24. Books and Records 31 2.25. Threats of Cancellation 31 2.26. Operations Insurance 31 2.27. Intercompany Liabilities 32 2.28. Employee Loans 32 2.29. Credited Rates 32 2.30. Related Agreements. 32 2.31. Third Party Administration Agreements 33 2.32. Mortgage Loans 33 2.33. No Waiver of Defenses 39 2.34. GAAP Financial Statements 39 ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF PURCHASER 40 3.1. Organization and Standing 41 3.2. Authorization 41 3.3. Actions and Proceedings 41 3.4. No Conflict or Violation 42 3.5. Consents and Approvals 42 3.6. Brokerage and Financial Advisers 43 3.7. GAAP Financial Statements 43 3.8. Statutory Financial Statements 44 3.9. Rating 45 3.10. Investment Intent and Acknowledgement 45 ARTICLE 4 - PRE-CLOSING COVENANTS 46 4.1. Conduct of Business 46 4.2. Certain Transactions 50 4.3. Investigations 51 4.4. HSR Act Filings 51 4.5. Consents and Reasonable Efforts 52 4.6. Representations and Warranties 52 4.7. Financial Statements and Reports 53 4.8. Transfer Real Estate Owned 54 4.9. Stay-on Bonus. 54 ARTICLE 6 - CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLER TO CLOSE 56 ARTICLE 7 - POST-CLOSING COVENANTS 59 7.1. Continued Access and Cooperation 59 7.2. Further Assurances 60 7.3. Expenses 61 7.4. Tax Indemnification and Other Tax Matters 61 7.5. Employee Plans 70 7.6. Non-Discriminatory Treatment of Policyholders 71 7.7. Change of Name 71 ARTICLE 8 - TERMINATION; SURVIVAL 72 8.1. Termination of Agreement 72 8.2. Effect of Termination 73 ARTICLE 9 - SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION 74 9.1. Survival of Representations 74 9.2. Indemnification by Purchaser and JANY 75 9.3. Indemnification by Seller 77 9.4. Indemnification Procedure 79 ARTICLE 10 - PUBLICITY AND CONFIDENTIALITY 82 10.1. Publicity 82 10.2. Confidentiality 83 ARTICLE 11 - MISCELLANEOUS 85 11.1. Notices 85 11.2. Entire Agreement 87 11.3. Amendments 88 11.4. Waivers 88 11.5. Governing Law 88 11.6. Binding Effect; Assignment; Third Party Beneficiaries 89 11.7. Severability 89 11.8. Headings 90 11.9. Counterparts 90 11.10. Arbitration 90 SIGNATURES 92 ANNEX A - Definitions EXHIBITS A - Transition Services Agreement B - Opinion of Seller's Counsel C - Opinion of Purchaser's Counsel D - Loan Documentation SCHEDULES 2.3 - Actions and Proceedings 2.4 - Certain Matters - Conflicts 2.5 - Consents and Approvals 2.7 - Compliance 2.8(a) - Insurance Contract Forms 2.8(b) - In Force Insurance Contracts 2.8(c) - Certain Commissions Contracts 2.8(e) - Contested Benefits 2.8(f) - Distributions and Other Benefits 2.8(h) - Known Agent Violations 2.8(f) - Distributions and Other Benefits 2.9 - Permit Exceptions 2.10 - Regulatory Filings 2.11 - Reinsurance Agreements 2.12 - Certain Changes or Events 2.13 - Intellectual Propterty 2.14 - Contracts 2.17 - Tax Matters 2.18 - Real Property 2.20 - Pension and Other Employee Plans 2.22 - Bank Accounts 2.23(a) - Reserve Liabilities 2.23(b) - Reserve Exceptions 2.25 - Threats of Cancellation 2.26 - Operations Insurance 2.27 - Intercompany Liabilities 2.28 - Employee Loans 2.30 - Related Agreements 2.31 - Third Party Administration Agreements 2.32(a) - Mortgage Loans 2.32(b) - Participation 2.32(d) - Waivers, Amendments and Releases Mortgage Loans 2.32(f) - Missing Original Notes 2.32(l) - Tax Delinquencies 3.3 - Purchaser's Actions and Proceedings 3.4 - Purchaser's Conflicts or Violations 3.5 - Purchaser's Consents and Approvals STOCK PURCHASE AND SALE AGREEMENT STOCK PURCHASE AND SALE AGREEMENT (the "Agreement") dated November 29, 1996 by and between John Alden Life Insurance Company, a Minnesota corporation ("Seller"), and SunAmerica Life Insurance Company, an Arizona corporation ("Purchaser"). W I T N E S S E T H: WHEREAS, John Alden Life Insurance Company of New York, a New York corporation (along with any business or predecessor company acquired by it, "JANY"), is engaged in the business of selling and administering annuity, life and health related insurance policies and related activities solely in the State of New York (the "Insurance Business"); WHEREAS, Seller owns all of the outstanding capital stock of JANY (the "JANY Stock"); and WHEREAS, Seller wishes to sell to Purchaser, and Purchaser wishes to acquire from Seller, all of the JANY Stock pursuant to the terms and conditions set forth in this Agreement and certain other assets of Seller pursuant to the terms and conditions set forth in the Asset Purchase and Sale Agreement dated concurrently herewith between Seller and Purchaser (the "Asset Purchase Agreement"). NOW, THEREFORE, in consideration of the premises, representations and warranties and the mutual covenants and agreements contained herein and other good, valuable and sufficient consideration, the receipt of which is hereby acknowledged, Seller and Purchaser (collectively, the "Parties" and, sometimes individually, a "Party"), intending to be legally bound, hereby agree as follows. The capitalized terms used in this Agreement and not defined herein shall have the meanings specified in Annex A attached hereto. Unless the context otherwise requires, such capitalized terms shall include the singular and plural and the conjunctive and disjunctive forms of the terms defined. ARTICLE 1 PURCHASE AND SALE OF STOCK; CLOSING Section 1.1. Closing. The closing of the transactions contemplated hereby (the "Closing") shall take place at 10:00 a.m. local time, at the offices of Kelley Drye & Warren LLP, 101 Park Avenue, New York, New York, 10178, or such other time and place as Purchaser and Seller may mutually agree in writing, on the last business day of the month in which the satisfaction of all conditions set forth in Articles 5 and 6 hereof concerning the Parties' respective obligations to consummate the transactions contemplated herein occurs or such other date as Seller and Purchaser may mutually agree in writing (the "Closing Date") and, subject to completion, shall be deemed to have been consummated and become effective for all purposes as of 11:59 p.m. on the Closing Date. Section 1.2. Purchase and Sale of JANY Stock. Subject to the terms and conditions set forth herein, at the Closing, Seller shall sell, assign and deliver to Purchaser, and Purchaser shall purchase and accept from Seller, all of Seller's right, title and interest in and to the JANY Stock. In consideration for the sale, assignment and delivery of the JANY Stock, at the Closing Purchaser shall pay to Seller a purchase price of One Hundred Thirty Two Million Dollars ($132,000,000) (the "Purchase Price"). Purchaser shall pay the Purchase Price to Seller on the Closing Date by wire transfer of immediately available funds to such bank account as Seller shall designate to Purchaser at least three business days prior to the Closing Date. The amount of the cash payment wired to Seller shall be reduced by an amount equal to one day's interest at an interest rate equal to the three month LIBOR rate in effect on the day preceding the Closing Date plus 25 basis points. Section 1.3. Closing Deliveries. (a) At the Closing, Seller shall or shall cause JANY to deliver to Purchaser the following: (i) the certificates representing the JANY Stock duly endorsed in blank or accompanied by stock transfer powers in proper form duly endorsed in blank, together with all necessary stock transfer stamps affixed thereto and such other instruments as shall reasonably be required by Purchaser to transfer to Purchaser all rights, title and interest in the JANY stock; (ii) all minutes and minute books of JANY; (iii) all stock transfer books and stock ledgers of JANY; (iv) all blank certificates for shares of capital stock of JANY; (v) resignations of all directors and officers of JANY serving in office immediately prior to the Closing; (vi) the opinion of counsel to Seller and JANY, substantially in the form of Exhibit B attached hereto ("Seller's Opinion"); and (vii) a certificate of an executive officer of Seller, dated the Closing Date, representing and warranting to the effect that (A) the officer signing such certificate is familiar with the provisions of this Agreement and (B) the conditions specified in Article 4 of this Agreement have been satisfied. (b) At the Closing, Purchaser shall deliver to Seller the following: (i) the opinions of counsel to Purchaser, substantially in the form of Exhibit C attached hereto ("Purchaser's Opinion"); (ii) a certificate of an executive officer of Purchaser, dated the Closing Date, representing and warranting to the effect that (A) the Person signing such certificate is familiar with the provisions of this Agreement and (B) the conditions specified in Article 5 of this Agreement have been satisfied; (iii) written consents to assignments, where necessary from all applicable parties relating to the Third Party Administration Agreements; and (iv) the Purchase Price. Section 1.4. Additional Closing Deliveries. In addition to the transactions and deliveries contemplated above, the following acts or transactions will occur at the Closing: (a) Seller and Purchaser will enter into a Transition Services Agreement substantially in the form of Exhibit A attached hereto (the "Transition Services Agreement"); and (b) all of the agreements between or among (i) JANY and Seller or (ii) JANY and any Affiliates of Seller will be terminated. Section 1.5. Settlement of Intercompany Obligations. (a) At least five days prior to the Closing, Seller will estimate and cause to be paid by or to Seller or its Affiliates and JANY, as the case may be, in cash, all obligations accrued through the Closing on JANY's books and records payable by or to JANY from or to Seller and its Affiliates, which payments shall have been incurred in the ordinary course of business on a basis consistent with past practice, except that Seller shall not allocate to JANY any portion of any bonuses for any Person who is not an employee of JANY. Seller shall deliver to Purchaser a reasonably detailed description of all such payments at least five days prior to the Closing. (b) Seller shall prepare and deliver to Purchaser on or before the 60th day after the Closing Date a reconciliation statement of the estimated obligations paid by or to Seller and its Affiliates by or to JANY pursuant to Section 1.5(a) hereof and the actual amount of the amount of such obligations (other than as provided in Section 7.4(d) hereof) (the "Reconciliation Statement"). If the total actual amount of such obligations is less than the estimated amount paid to Seller or its Affiliates by JANY pursuant to Section 1.5(a) hereof, Seller shall pay to JANY in cash an amount equal to such difference, together with interest from the Closing Date through the date of payment at the rate per annum equal to the three month LIBOR rate in effect on the date of payment plus 25 basis points. Such payment shall accompany the reconciliation statement. If the actual total amount and revised estimate of such obligations exceeds the estimated amount paid to Seller or its Affiliates by JANY pursuant to Section 1.5(a) hereof, Purchaser shall pay, or cause JANY to pay, to Seller or its Affiliates, as the case may be, within 10 days after delivery of such statement cash in an amount equal to such excess, together with interest from the Closing Date through the date of such payment at the rate per annum equal to the three month LIBOR rate in effect on the date of payment plus 25 basis points. After the date hereof, JANY will not enter into any contract or, except as required by this Agreement or any contract listed on Schedule 2.27 attached hereto, engage in any transaction with Seller or any Affiliate of Seller. Section 1.6. Disputes. If Purchaser and Seller are unable to resolve any disagreement with respect to the Reconciliation Statement within 30 days after Seller receives a timely notice of disagreement, the items of disagreement alone shall be referred for final determination to the U.S. national office of Price Waterhouse or, if such firm is unable or unwilling to make such final determination, to such other independent accounting firm as the Parties shall mutually designate. The firm making such determination is referred to herein as the "Independent Party." The Reconciliation Statement shall be deemed to be binding on Purchaser and Seller upon the earlier to occur of (i) Purchaser's failure to deliver to Seller a notice of disagreement within 30 days after its receipt of the Reconciliation Statement prepared by Seller, (ii) resolution of any disagreement by mutual agreement of the Parties after a timely notice of disagreement has been delivered to Seller or (iii) notification by the Independent Party of its final determination of the items of disagreement submitted to it. The fees and disbursements of the Independent Party shall be borne equally, one-half by Purchaser and one-half by Seller. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Purchaser as follows: Section 2.1. Organization, Standing and Authority of Seller. Seller is a corporation duly organized as a capital stock life and health insurance company, validly existing and in good standing under the Laws of the State of Minnesota. JANY is a corporation duly organized, validly existing and in good standing in the State of New York. JANY has all corporate power and authority necessary or required by Law to engage in the conduct of the Insurance Business as currently conducted by it. Seller has furnished Purchaser with true and correct copies of the Articles of Incorporation and By-laws of JANY, along with all amendments thereto. Section 2.2. Authorization. Seller has all corporate power and authority necessary to execute, deliver and perform its obligations under this Agreement and the Transition Services Agreement. The execution and delivery by Seller of this Agreement and the Transition Services Agreement, and the performance by Seller and JANY of its obligations hereunder and thereunder, have been duly authorized by all necessary corporate and shareholder actions on the part of Seller and JANY. This Agreement and the Transition Services Agreement, when executed by all of the parties thereto, will each constitute a valid and binding obligation of Seller enforceable against Seller in accordance with its terms, except insofar as enforceability may be limited by bankruptcy, insolvency, moratorium or other Laws which may affect creditors' rights and remedies generally and by principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). Section 2.3. Actions and Proceedings. (a) Except as disclosed on Schedule 2.3 attached hereto, there are no outstanding Orders by or with any court, arbitrator or Governmental Entity before which Seller or any of its material Affiliates or JANY is or was a party. (b) Except as set forth on Schedule 2.3 attached hereto, there are no Actions pending or, to the knowledge of Seller, threatened either by or against JANY, Seller with respect to JANY or any of JANY's properties or assets which (i) seeks monetary damages exceeding $50,000 individually or $500,000 in the aggregate or an unspecified amount of damages, (ii) seeks any injunction or similar relief or (iii) would, individually or in the aggregate, have a Material Adverse Effect. (c) There are no Actions presently pending or, to the knowledge of Seller, threatened, and there are no final Orders presently outstanding which pertain to any of the JANY Stock. Section 2.4. No Conflict or Violation. Except as disclosed on Schedule 2.4 attached hereto, the execution, delivery and performance by Seller of this Agreement and the Transition Services Agreement in accordance with the respective terms and conditions hereof and thereof do not and will not (a) violate or constitute a default under any provision of the charter or by-laws of Seller or JANY, in each case, as amended to date, (b) violate or result in the breach, cancellation or termination of, accelerate the performance required under, or result in the creation of any lien, claim, restriction, charge or encumbrance or other defect of title ("Liens") upon the JANY Stock or any of the material properties or assets of JANY pursuant to, any mortgage, deed of trust, guaranty, note, indenture, bond, lease, agreement or other instrument to which either of Seller or JANY is a party or by or to which it or any of the assets of JANY may be bound, (c) violate any Order of any court, arbitrator or Governmental Entity against, or binding upon, or any agreement with, or condition imposed by, any Governmental Entity binding upon Seller or JANY or any of such properties or assets of JANY, (d) violate any Law or (e) result in the breach or violation of any of the terms or conditions of, constitute a default under, or otherwise cause an impairment or revocation of, any license, permit, order, approval, registration, authorization, qualification or filing with or under any Law or Governmental Entity (collectively, "Permits") related to the Insurance Business. Section 2.5. Consents and Approvals. Except as required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and rules and regulations thereunder (the "HSR Act") or as set forth on Schedule 2.5 attached hereto, no consent, approval, exemption or authorization is required to be obtained from, no notice is required to be given to and no filing is required to be made with any third party (including, without limitation, Governmental Entities of competent jurisdiction) by Seller or JANY in order (a) for this Agreement and the Transition Services Agreement to constitute a valid and binding obligation of Seller, (b) to authorize or permit the consummation of the transactions contemplated hereby by Seller and JANY or (c) to prevent the termination of any material right, privilege, franchise, license, permit or agreement of JANY or to prevent any material loss to JANY. Section 2.6. Brokerage and Financial Advisers. No broker, finder or financial adviser has acted directly or indirectly as such for, or is entitled to any compensation from, Seller or JANY in connection with this Agreement or the transactions contemplated hereby, except CS First Boston, whose fees for services rendered in connection with such transactions will be paid by Seller. Section 2.7. Compliance With Laws. Except as disclosed in Schedule 2.7 attached hereto, neither Seller nor JANY is in material violation of any Law or any Order of any court, arbitrator or Governmental Entity pertaining to JANY or any of its assets. Section 2.8. Insurance Contracts. The forms of all policies and endorsements utilized for the In Force Insurance Contracts of JANY are described on Schedule 2.8(a) attached hereto. All In Force Insurance Contracts in effect on October 21, 1996 or September 21, 1996, (as indicated in such Schedule) are listed in Schedule 2.8(b) attached hereto. All In Force Insurance Contracts in effect on Closing Ledger Date will be set forth in an updated Schedule 2.8(b) delivered to Purchaser at the Closing. Schedule 2.8(b) includes (and the updated Schedule 2.8(b) will include) with respect to each In Force Insurance Contract the policy number, policyholder name, form, plan code and account balance. All In Force Insurance Contracts are in all respects, to the extent required under applicable Law, on forms approved by applicable insurance regulatory authorities or which have been filed and not objected to by such authorities within the period provided for objection, and such forms comply in all material respects and have been administered in all material respects in accordance with applicable Law. Without limiting the foregoing: (a) JANY has offered and sold each Insurance Contract in compliance with all applicable Laws (it being acknowledged that no representation is made with respect to compliance by independent agents of JANY except as provided in Section 2.8(h) hereof) and all of Seller's registrations, filings or submissions made by it with respect to the Insurance Contracts with any Governmental Entity were in material compliance with applicable Laws when filed. (b) The transactions contemplated by this Agreement will not materially affect the validity and binding character of any Insurance Contract entered into or issued by JANY or render any admitted assets of JANY non-admitted under the applicable Laws up to and including the Closing Date. (c) Except as set forth in Schedule 2.8(c) attached hereto, and except in accordance with customary insurance industry practice, (i) JANY is not liable to pay commissions upon the renewal of any insurance policy nor (ii) is it a party to any agreement providing for the third-party collection of annuity or insurance premiums payable to JANY by any other Person, which commissions or premiums exceed $100,000 in the aggregate. (d) All In Force Insurance Contracts are in full force and effect and are legal, valid and binding obligations of JANY, and to the knowledge of Seller each other party thereto, and are enforceable against JANY, and to the knowledge of Seller each other party thereto, in accordance with their respective terms, except to the extent that enforcement thereof may be limited by or subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general application relating to or affecting creditors' rights and to general equity principles (other than equitable rescission rights). (e) All Insurance Contract benefits payable by JANY and, to the knowledge of Seller, by any other Person that is a party to or bound by any reinsurance, coinsurance or other similar contract with JANY have been paid in accordance with the terms of the Insurance Contracts under which they arose, except for such benefits for which there is, in the reasonable opinion of Seller or JANY, a reasonable basis to contest and all such contested benefits have been disclosed in Schedule 2.8(e) attached hereto. (f) Except as set forth on Schedule 2.8(f) attached hereto, no In Force Insurance Contract issued, reinsured or underwritten by JANY entitles the holder thereof or any other Person to receive dividends, distributions or other benefits based on the revenues or earnings of JANY or any other Person. (g) The underwriting standards utilized and ratings applied by JANY and, to the knowledge of Seller, by any other Person that is a party to or bound by any reinsurance, coinsurance or other similar contract with JANY conform in all respects to industry accepted practices and to the standards and ratings required pursuant to the terms of the respective reinsurance, coinsurance or other similar contracts. (h) To the knowledge of Seller, each producer who wrote, sold or produced business for JANY was duly licensed as an insurance agent (for the type of business written, sold or produced by such producer) in the particular jurisdiction in which such producer wrote, sold or produced such business. Except as otherwise provided in Schedule 2.8(h) attached hereto, to the knowledge of Seller, no insurance agent who wrote, produced or sold any portion of the business of JANY for Seller violated in any material respect any terms or provisions of any Law, except such violations as have been (i) cured, (ii) resolved through agreements with applicable Governmental Entities or (iii) are barred by an applicable statute of limitations. (i) The treatment under the Internal Revenue Code of 1986, as amended, and any successor thereto (the "Code") of all Insurance Contracts is no less favorable to the Policyholder thereof than the treatment under the Code for which such Insurance Contracts were intended to qualify at the time of their issuance, except for any failure to qualify for such treatment that results from (i) changes to the Code, regulations, pronouncements, announcements or guidance issued in connection with the treatment of the contracts under the Code which were enacted (or have an effective date) after the Closing Date, (ii) amendments, modifications, supplements, riders, endorsements or revisions to the Insurance Contracts after the Closing Date or (iii) changes in the manner in which the Insurance Contracts are administered after the Closing Date. Section 2.9. Permits, Licenses and Franchises. JANY is licensed to issue life and health related insurance policies only in the State of New York. JANY has been duly authorized by the New York Department of Insurance to issue the Insurance Contracts that it is currently writing, and was duly authorized to issue the Insurance Contracts that it is not currently writing at the time such Insurance Contracts were issued. Except as set forth on Schedule 2.9 attached hereto, JANY has all Permits necessary to conduct the Insurance Business as currently conducted by JANY. Neither the ownership of its property or assets nor the business conducted by JANY requires the qualification, registration, license or admission in any jurisdiction outside the State of New York, except where the failure to be so qualified, registered, licensed or admitted, individually or in the aggregate, would not have a Material Adverse Effect. All of the Permits are in full force and effect and JANY has not received notice from any Governmental Entity of its intention to revoke or not renew any Permit, except for such failures to have Permits in full force and effect, revocations, non-renewals and other events which do not and will not, individually or in the aggregate, have a Material Adverse Effect. Section 2.10. Regulatory Filings. Seller has made available for inspection by Purchaser all material registrations, filings and submissions made by JANY with any Governmental Entity and final financial and market conduct reports of examinations with respect to JANY issued by any such Governmental Entity along with copies of JANY's or Seller's responses thereto made or issued on or subsequent to January 1, 1993. Except as listed on Schedule 2.10 attached hereto, JANY has filed all material reports, statements, documents, registrations, filings or submissions (including without limitation any marketing, advertising or sales material) required to be filed by it with any Governmental Entity. Except as listed on Schedule 2.10 attached hereto, (a) no material deficiencies have been asserted by any such Governmental Entity with respect to such registrations, filings or submissions that have not been satisfied; (b) such registrations, filings or submissions were in material compliance with applicable Law when filed; (c) since December 31, 1994, neither Seller nor JANY has submitted any written response with respect to material comments from any Governmental Entity concerning such filings, registrations, submissions or reports of examination; (d) since December 31, 1992, no fine or penalty has been imposed on JANY (or on Seller with respect to JANY) by any Governmental Entity; and (e) no deposits have been made by JANY (or by Seller with respect to JANY) with, or at the direction of, any Governmental Entity which were not shown in the most recent Annual Statement of JANY. Section 2.11. Reinsurance. Schedule 2.11 sets forth all reinsurance or co-insurance agreements (together with all other agreements related thereto) to which JANY is a party related to the Insurance Contracts, and all such contracts, arrangements, treaties, understandings and agreements under which JANY has any obligation to cede or assume insurance. All such agreements are valid and binding against JANY and, to the knowledge of Seller the other parties thereto, and are in full force and effect in accordance with their terms and conform in all material respects to all applicable Laws and neither JANY nor, to Seller's knowledge, any other party thereto is in material default under any such agreement. Except as otherwise provided on Schedule 2.11 attached hereto, no party to any such agreement has audited Seller with respect thereto. Section 2.12. Absence of Certain Changes or Events. Except as disclosed on Schedule 2.12 attached hereto or except as expressly contemplated or required by this Agreement, since December 31, 1995, (a) JANY has not, except in the ordinary course of business, consistent with past practice, (i) engaged in any material transaction, (ii) entered into any material agreement, (iii) waived or released any material right or obligation or (iv) incurred any indebtedness for borrowed money and (b) except as disclosed on Schedule 2.12 attached hereto, there has not been, occurred or arisen: (i) any declaration, setting aside, or payment of any dividend or other distribution in respect of the capital stock of JANY, or any direct or indirect redemption, purchase or other acquisition by JANY of any such stock or of any interest in or right to acquire any such stock; (ii) any issuance, sale or disposition by JANY of any debenture, note, stock or other security issued by JANY, or any material modification or amendment of any right of the holder of any outstanding debenture, note, capital stock or other security issued by JANY. (iii) any Lien created on any of the assets of JANY or assumed by JANY with respect to any of such assets which Lien relates to liabilities individually or in the aggregate exceeding $100,000 (but excluding Liens arising through securities lending in the ordinary course of JANY's business); (iv) any prepayment of any liabilities (other than pursuant to any Insurance Contract) individually or in the aggregate exceeding $100,000; (v) any liability involving the borrowing of money by JANY individually or in the aggregate exceeding $100,000; (vi) any damage, destruction or loss (whether or not covered by insurance) affecting any of the assets of JANY which damage, destruction or loss individually or in the aggregate exceeds $100,000; (vii) any work stoppage, strike, labor difficulty or union organizational campaign (in process or threatened) at or affecting JANY; (viii) any payment, discharge or satisfaction by JANY of any material Lien or liability other than material Liens or liabilities that were paid, discharged or satisfied in the ordinary course of business and consistent with past practice; (ix) any sale, transfer or conveyance of any investments or other assets of JANY with an individual Book Value in excess of $100,000, except in the ordinary course of business and consistent with past practice; (x) any amendment, termination, waiver, disposal or lapse of, or other failure to preserve, any material license, Permit or other form of authorization of JANY; (xi) any amendment of, or any failure by JANY to perform all of its obligations under, or any default under, or any waiver of any right under, or any termination (other than on the stated expiration date) of, any contract that involves or reasonably would involve the annual expenditure or receipt by JANY of more than $100,000 except for actions taken with respect to Insurance Contracts (including, without limitation, reinsurance thereon) in the ordinary course of business and consistent with past practice; (xii) any amendment of the articles or certificate of incorporation or by-laws of JANY; (xiii) any termination, amendment or entering into by JANY as ceding or assuming insurer of any reinsurance, coinsurance or other similar contract or any trust agreement or security agreement related thereto, except as contemplated hereby; (xiv) any transaction or arrangement under which JANY paid, loaned or advanced any amount to or in respect of, or sold, transferred, or leased any of its assets or any services to (i) any officer or director of Seller, JANY or any Affiliate of Seller, (ii) any Affiliate of Seller or JANY, or (iii) any business or other Person in which Seller, JANY, any such officer or director, or any Affiliate of Seller or JANY has any material interest, except transactions or arrangements not exceeding $100,000 in the aggregate which are consistent with past practice; (xv) any material change in any underwriting, actuarial, investment, financial reporting, marketing or accounting practice or policy followed by JANY, or in any assumption underlying such a practice or policy, or in any method of calculating any bad debt, contingency or other reserve for financial reporting or any other accounting purposes other than as required by GAAP, SAP or applicable Law and consistent with past practice; (xvi) any expenditure or commitment for additions to property, plant, equipment or other tangible or intangible capital assets of JANY which exceed $100,000 in the aggregate; (xvii) any accruals or payments by Seller or JANY or employer contributions under any employee benefit plan in respect of employees of JANY, other than those in accordance with the terms of such plans and consistent with past practice; (xviii) any increase in compensation outside the ordinary course; or (xix) any contract or agreement, written or oral, to take any of the actions set forth in the preceding clauses (i) through (xviii) of this Section 2.12. Section 2.13. Computer Software and Other Intellectual Property. Schedule 2.13 attached hereto sets forth a list of all computer software programs and other intellectual property used by JANY that Seller reasonably believes to be necessary to conduct the Insurance Business as currently being conducted. Schedule 2.13 attached hereto also sets forth whether each such computer software program is (i) owned by JANY or licensed by JANY and (ii) the title of each licensing agreement pursuant to which JANY has the right to use such licensed software. Schedule 2.13 attached hereto sets forth each licensing agreement pursuant to which Seller has the right to use such licensed software. To the knowledge of Seller, JANY is not in conflict with or in violation or infringement of any rights, asserted or otherwise, of any other Person with respect to any owned software or licensed software or other intellectual property, nor has Seller received any notice of any such conflict, violation or infringement. JANY has the non-exclusive right to use all such licensed software and other intellectual property. Section 2.14. Contracts. (a) Schedule 2.14 lists and briefly describes (including the parties to and the date and subject matter of) each and every contract, agreement, lease, license, commitment or arrangement to which JANY is a party or which is binding upon JANY, except only for those specifically listed in Schedules 2.8(b), 2.8(c), 2.8(f), 2.11, 2.12, 2.13, 2.18, 2.26, 2.27, 2.30, 2.31, 2.32(a) or 2.32(d) attached hereto, attached hereto or those which may be terminated by JANY without penalty or having a value to or imposing an obligation upon JANY not in excess of $100,000 in the aggregate annually. (b) Schedule 2.14 hereto also identifies each contract in force entered into by JANY in connection with or related to JANY's business and operations within the following categories: (i) all agency or consultation contracts other than contracts terminable without penalty or other liability (other than liabilities previously accrued thereunder) upon 90 days' or less notice; (ii) all contracts with any Person containing any provision limiting the ability of JANY to engage in any business or to compete with or to obtain products or services from any Person or, to the knowledge of Seller, limiting the ability of any Person to compete with or to provide products or services to JANY; (iii) all direct or indirect guarantees of any obligation of JANY, or contracts for the provision for credit support to JANY with respect to obligations to third parties, by Seller or any of its Affiliates; (iv) all contracts relating to the future disposition or acquisition by JANY of any assets or of any interest in any business enterprise (other than contracts entered into in the ordinary course of business and consistent with past practice); (v) all outstanding proxies, powers of attorney or similar delegations of authority (other than delegations of authority for the service of process pursuant to applicable insurance or corporate laws and other than such proxies, powers of attorney or similar delegations of authority entered into or made in the ordinary course of business and consistent with past practice); (vi) all contracts for the provision of administrative, managerial or other services by or for JANY to or from any other Person; (vii) all partnerships, joint ventures, profit- sharing or similar contracts; (viii) all contracts relating to the borrowing of money by JANY or to the direct or indirect guarantee by JANY of any obligation for borrowed money in excess, individually or in the aggregate, of $100,000 in respect of indebtedness of any other Person, including without limitation any contract relating to (i) the maintenance of compensating balances that are not terminable by JANY without penalty or other liability upon not more than 60 calendar days' notice, (ii) any line of credit or similar facility, (iii) the payment for property, products, or services of any other Person even if such property, products or services have not yet been conveyed, delivered or rendered or (iv) the obligation to take-or-pay, keep-well, make-whole or maintain surplus or earnings levels or perform other financial ratios or requirements; and (ix) all leases or subleases of real property used in the business, operations or affairs of JANY, and all other leases, subleases, or rental or use contracts for which JANY is liable. (c) Except as set forth on Schedule 2.14 attached hereto, each of the contracts listed on Schedule 2.14 is in full force and effect and is legal, valid and binding on JANY and to Seller's knowledge the other parties thereto, and is enforceable against JANY and to Seller's knowledge the other parties thereto in accordance with its terms, except to the extent that enforcement thereof may be limited by or subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general application relating to or affecting creditors' rights and to general equity principles (other than equitable rescission rights). Neither JANY nor, to Seller's knowledge, any other party to such contract is in material violation, breach or default of any such contract. There have been delivered or made available to Purchaser true and complete copies of all of the contracts set forth in Schedule 2.14 attached hereto. Section 2.15. Statutory Financial Statements. Seller has previously delivered to Purchaser true, complete and correct copies of the audited statements of admitted assets, liabilities and capital and surplus (statutory basis) of Seller as of December 31, 1993, 1994, and 1995, and the related summaries of operations, statements of capital and surplus and cash flow (statutory basis) for the years then ended, together with the notes related thereto. Seller has previously delivered to Purchaser true, complete and correct copies of the Annual Statements of JANY as filed with the New York Department of Insurance, for the years ended December 31, 1993, 1994 and 1995, together with all attachments, exhibits and schedules thereto and all affirmations and certifications filed therewith and the actuarial opinions for such years. Seller has previously made available to Purchaser for review (without the right to remove or make copies) all auditors' work papers related to the foregoing audited financial information. Seller has previously delivered to Purchaser true, complete and correct copies of the Quarterly Statements of JANY as filed with the New York Department of Insurance, for the quarters ended March 31, 1996, June 30, 1996 and September 30, 1996, together with all exhibits and schedules thereto. Each such Annual Statement and Quarterly Statement complied in all material respects with all applicable Laws when so filed and was timely filed with all required Governmental Entities. No material deficiencies have been asserted or are otherwise known by Seller with respect thereto. Each such financial statement (and the exhibits and schedules relating thereto), including without limitation each statement of assets, liabilities, surplus and other funds (statutory basis) of Seller and each of the summaries of operations, statements of capital and surplus and cash flow (statutory basis) contained in the respective financial statement was prepared in accordance with SAP applied on a consistent basis (except for changes, if any, disclosed therein) and each such Annual Statement and Quarterly Statement fairly presents (in accordance with SAP) the financial condition of JANY as of the respective dates thereof, and its results of operations or cash flows, as the case may be, for and during the respective periods covered thereby (provided the Quarterly Statements are subject to normal year end adjustments and lack footnotes and other presentation items). There were no material liabilities affecting JANY as of December 31, 1995 required in accordance with SAP to be reflected or disclosed in the Annual Statement for the period then ended, or as of March 31, 1996, June 30, 1996 or September 30, 1996 required in accordance with SAP to be reflected or disclosed in the Quarterly Statement for the period then ended, which are not so reflected or disclosed therein. JANY has not prepared any GAAP financial statements. Section 2.16. JANY Capital Stock. (a) The authorized capital stock of JANY consists of 360,000 shares of common stock, $20 par value per share, all of which shares have been validly issued and are fully paid and are outstanding and, subject to any liability imposed by Section 630 of the New York Business Corporation Law, non-assessable. All such shares were issued in compliance with applicable Laws. Such shares are all of the shares of JANY Stock. Except for this Agreement, there are no outstanding subscriptions, options, warrants, rights, convertible or exchangeable securities, agreements or commitments which obligate or require Seller or JANY to issue or sell any shares of capital stock of JANY. JANY has no subsidiaries and does not control, directly or indirectly, any other Person. JANY is not a party to any joint venture or partnership arrangement and does not own or control any interest in any other Person except in connection with JANY's portfolio investments. (b) The JANY Stock is owned beneficially and of record by Seller free and clear of all Liens. Upon consummation of the transactions contemplated hereby, good and valid title and interest in and to the JANY Stock shall have been sold, assigned and delivered to Purchaser free and clear of all Liens. Section 2.17. Tax Matters. (a) Except as set forth on Schedule 2.17 attached hereto, all Tax Returns, required to be filed with respect to JANY have been timely filed for all years and periods for which such Tax Returns were due (taking into account all filing date extensions), all Taxes due and payable for the periods covered by such Tax Returns have been duly and timely paid, there are no outstanding waivers or extensions of statutes of limitation with respect to any Taxes required to be shown on any such Tax Return, and all required estimated payments of Taxes sufficient to avoid any penalties for underpayment have been made, and, to the knowledge of Seller, there are no material misstatements contained in any such Tax Return. To the knowledge of Seller, since December 31, 1995, JANY has not incurred any liability with respect to any Taxes, except in the ordinary course of the Insurance Business. Except as set forth in Schedule 2.17 attached hereto, there are no presently pending or, to the knowledge of Seller, threatened audits or assessments by any federal, state or local taxing authority involving material issues which pertain to JANY or any of the material properties owned by JANY. There are no Liens with respect to Taxes (except for Liens with respect to real property Taxes not yet delinquent) upon any of the assets and properties of JANY. All federal income Taxes owed by the affiliated group referred to in Section 2.17(g) hereof have been paid for each taxable period during which JANY was a member of such group, other than any unpaid Taxes that, if required to be paid, would not have a Material Adverse Effect. (b) With respect to any period through September 30, 1996 for which Tax Returns have not yet been filed, or for which Taxes are not yet due or owing, JANY has made due and sufficient current accruals for such Taxes in accordance with SAP and GAAP, and such current accruals through such date are duly and fully provided for in the financial statements of JANY for the period then ended. (c) The federal and state income and state premium Tax Returns of JANY have not been audited or examined by the relevant Governmental Entity, and the statute of limitations for the federal and state income and premium Tax Returns for all periods through the respective years specified in Schedule 2.17 attached hereto has expired. Seller has previously delivered to the Purchaser copies, which are true and complete in all material respects, of each of (i) the most recent audit reports relating to the federal and state income and state premium Taxes due from JANY for the last three taxable years and (ii) the federal and state income and state premium Tax Returns filed by JANY for each of the last three taxable years, and Seller has made available to Purchaser for inspection true and correct copies of such Tax Returns (insofar as such returns relate to JANY) filed by any affiliated, combined or consolidated group of which JANY was then a member. (d) No audit or other proceeding by any Governmental Entity is pending or, to the knowledge of Seller, threatened with respect to any Taxes due from JANY or any Tax Return filed by or relating to JANY. To the knowledge of Seller, no assessment of Tax has been formally proposed by any Governmental Entity, orally or in writing, against JANY. (e) JANY is not a party to, is not bound by and has no obligation under, any tax sharing contract and, to the knowledge of Seller, JANY does not have any liability for indemnification of third parties with respect to Taxes or liabilities for Taxes as a transferee. (f) The insurance reserves set forth in the federal income Tax Returns filed by or on behalf of JANY have been determined in all material respects in accordance with section 807 or 846 of the Code, as applicable, and will be so determined in the federal income Tax Return to be filed on behalf of JANY for the period ending on the Closing Date. (g) JANY is (and will continue to be on the Closing Date) a member of the affiliated group that files consolidated federal income Tax Returns with Seller. Section 2.18. Real Property. (a) Schedule 2.18 attached hereto identifies all real property which is owned by or leased to JANY other than interests arising under any Mortgage (the "Real Property"). JANY owns good and indefeasible title to, or has a valid leasehold interest in, free and clear of all Liens, all such Real Property currently used in the conduct of its business or of a type required to be disclosed in Schedule A of an Annual Statement if owned by JANY. No improvement on any such Real Property owned by JANY encroaches upon any real property of any other Person and there are no physical, mechanical or structural defects therein. JANY owns, leases or has a valid right under contract or otherwise to use adequate means of ingress and egress to, from and over all Real Property. JANY has not granted any rights of occupancy with respect to the Real Property leased by it. (b) (i) Neither JANY nor, to the knowledge of Seller, any other Person has used any of the Real Property for the storage, treatment, generation, transportation, manufacture, processing, handling, production, distribution, deposit, burial, use, or disposal of any Hazardous Substance which has created or might create any liability of owners or occupants of the Real Property under, or which would require reporting to a Governmental Entity pursuant to, Environmental Laws; (ii) JANY has no liability arising out of or resulting from a release of any Hazardous Substance on or from any Real Property; (iii) JANY has complied in all material respects with all applicable Environmental Laws relating to the Real Property and the business, activities and processing conducted thereon; (iv) no asbestos or PCB's are contained in or stored on the Real Property or the improvements thereon; (v) no radon gas is contained in any of such improvements; and (vi) there are no storage tanks located in, on or under the Real Property. Section 2.19. Owned Properties. JANY is the sole and exclusive owner of, and has good and marketable title to, all of the properties and assets owned by it, free and clear of all Liens other than: (i) those reflected in the June 30, 1996 interim statutory financial statements of JANY, including, without limitation, obligations with respect to the Insurance Contracts; (ii) liens for taxes, charges and assessments imposed by any taxing authority which are not yet due and payable or which are being contested in good faith by appropriate proceedings; (iii) mechanics', suppliers', installment sales and similar liens for services rendered or materials furnished, the charges for which are not yet due and payable or which are being contested in good faith by appropriate proceedings, and purchase money security interests and similar security interests for goods purchased by JANY; (iv) in the case of the Real Property and equipment, defects or imperfections in title, liens, claims, easements or rights, restrictions and encumbrances which do not materially interfere with the use of such properties as presently used by JANY or the conduct of the Insurance Business as presently conducted by JANY; and (v) Liens arising through securities lending in the ordinary course of JANY's business. Section 2.20. Pension and Other Employee Plans. Schedule 2.20 attached hereto lists all benefit plans and, without duplication, all employee benefit plans and collective bargaining, employment or severance agreements or other similar arrangements to which JANY is a party or by which it is bound, legally or otherwise, including without limitation (i) any profit-sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, severance, welfare or incentive plan, agreement or arrangement, (ii) any plan, agreement or arrangement providing for "fringe benefits" or perquisites to employees, officers, directors or agents, including but not limited to benefits relating to JANY's automobiles, clubs, vacation, child care, parenting, sabbatical, sick leave, medical, dental, hospitalization, life insurance and other types of insurance, (iii) any employment agreement, or (iv) any other "employee benefit plan" within the meaning of ERISA). Seller has delivered to Purchaser true and complete copies of all current governing documents and summary plan descriptions with respect to such plans, agreements and arrangements, or summary descriptions of any such plans, agreements or arrangements not otherwise in writing. JANY is in compliance with the applicable provisions of ERISA (as amended through the date of this Agreement), the regulations and other published regulatory authorities thereunder, and all other laws applicable with respect to all benefit plans. JANY has performed all of its obligations under all benefit plans. To the knowledge of Seller, there are no Actions (other than routine claims for benefits) pending or threatened against such benefit plans of their assets, or arising out of such benefit plans, and, to the knowledge of Seller, no facts exist which could give rise to any such Actions. Other than as indicated on Schedule 2.20 attached hereto: (a) JANY neither maintains, sponsors nor contributes to any program or arrangement covering employees of JANY that is an "employee pension benefit plan," an "employee welfare benefit plan," or a "multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"), or any other incentive or benefit arrangement ("Non-ERISA Plans"); (b) No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), which could subject the Purchaser or JANY to any tax penalty on prohibited transactions and which has not adequately been corrected; (c) Each ERISA Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan; (d) Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan which is intended to comply with Code Section 401(a), stating that such ERISA Plan is qualified thereunder; (e) No ERISA Plan subject to Title IV of ERISA has been terminated; (f) No ERISA Plan has incurred any "accumulated funding deficiency" as such term is defined in Section 302 of ERISA and Section 412 of the Code (whether or not waived); (g) No liability to the Pension Benefit Guaranty Corporation (the "PBGC"), other than for premiums, has been incurred with respect to any ERISA Plan; (h) No proceeding or other action has been initiated by the PBGC to terminate any ERISA Plan, nor has written notice been given by the PBGC of an intention to commence or seek the commencement of any such proceeding or actions; and (i) JANY has not, within the last six years before the Closing, completely or partially withdrawn from a "multi-employer plan" covering its employees. (j) Each ERISA plan has been duly authorized by the Board of Directors of JANY. Each such plan is qualified in form and operation under Section 401(a) of the Code and each trust under each such plan is exempt from tax under Section 501(a) of the Code. No event has occurred that will or could give rise to disqualification or loss of tax-exempt status of any such plan or trust under such sections. No event has occurred that will or could subject any such plans to tax under Section 511 of the Code. No nonexempt prohibited transaction (within the meaning of Section 4975 of the Code) or party-in-interest transaction (within the meaning of Section 406 of ERISA) has occurred with respect to any of such plans. (k) Seller has delivered to Purchaser for each such plan copies of the following documents: (i) the Form 5500 filed in each of the three most recent plan years, including but not limited to all schedules thereto and financial statements with attached opinions of independent accountants, (ii) the most recent determination letter from the IRS, (iii) the consolidated statement of assets and liabilities of such plan as of its most recent valuation date, and (iv) the statement of changes in fund balance and in financial position or the statement of changes in net assets available for benefits under such plan for the most recently ended plan year. The financial statements so delivered fairly present the financial condition and the results of operations of each of such plans as of such dates, or for such periods in accordance with GAAP. (l) All group health plans of JANY and any ERISA affiliate have been operated in compliance with the group health plan continuation coverage requirements of Section 4980B of the Code to the extent such requirements are applicable. (m) There has been no act or omission by JANY or any ERISA affiliate that has given rise to or may give rise to fines, penalties, taxes, or related charges under Section 502(c) or (l) or Section 4071 or ERISA or Chapter 43 of the Code. Section 2.21. Labor Matters. JANY is not a party to any representation or collective bargaining agreement with any employees of JANY. There is no strike, slowdown, picketing, work stoppage, labor trouble or other similar event in which employees of JANY are participating or, to the knowledge of Seller, have threatened to participate. Section 2.22. Banks. Schedule 2.22 attached hereto sets forth (a) the name, location and account number of each bank, trust company, securities broker and other financial institution at which JANY maintains an account, safe deposit box, lock box or vault or maintains a banking, custodial, trading or other similar relationship and (b) the name of each individual authorized by JANY to effect transactions with respect to such account, safe deposit box, lock box or vault. Section 2.23. Reserves. Except as set forth in Schedule 2.23 attached hereto, all reserves with respect to Insurance Contracts as established or reflected, and all other provisions made for policy and contract claims with respect to Insurance Contracts (collectively, "JANY Reserve Liabilities"), in the respective Annual and Quarterly Statements were determined in accordance with SAP and generally recognized actuarial methods and standards, consistently applied, were fairly stated in accordance with sound actuarial principles, using prescribed morbidity and mortality tables and interest rates that are in accordance with the nature of the benefits specified in the related Insurance Contracts of JANY, and such JANY Reserve Liabilities and other provisions met the applicable requirements of the insurance laws and regulations of the State of New York. The JANY Reserve Liabilities as of October 21, 1996 have been calculated in the manner set forth on Schedule 2.23 attached hereto. Without limitation of the foregoing sentence, to Seller's knowledge, adequate provision for all JANY Reserve Liabilities has been made to cover the total amount of all reasonably anticipated matured and unmatured benefits, claims and other liabilities under all Insurance Contracts. JANY owns assets that qualify as legal reserve assets under applicable Laws in an amount at least equal to all such JANY Reserve Liabilities. Except as described in Schedule 2.23(b) attached hereto, all reserves and accrued liabilities for estimated losses, settlements, costs and expenses from pending suits, actions and proceedings included in JANY's most recent Quarterly Financial Statements filed with the New York Department of Insurance were determined in accordance with Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board. Section 2.24. Books and Records. The minute books of JANY contain a true and complete record in all material respects of all corporate actions taken at all meetings and by all written consents in lieu of meetings of JANY's stockholder and Board of Directors and all committees thereof. The stock record books of JANY reflect accurately all transactions in its capital stock. The books, files, reports, documents, plans and operating records of, or maintained by Seller or JANY, and all other data in the possession or control of Seller and of JANY and primarily relating to or otherwise reasonably required for the operation of JANY's business have been maintained in all material respects in accordance with all applicable Laws. Section 2.25. Threats of Cancellation. Except as set forth in Schedule 2.25 attached hereto, since December 31, 1995 through the date of this Agreement, no Policyholder, group of Policyholder Affiliates, or Persons writing, selling or producing, either directly or through reinsurance assumed, insurance business that individually or in the aggregate for each such Policyholder, group or Person, respectively, accounted for (i) 5% or more of the annual premium or annuity income (as determined in accordance with SAP) or (ii) 1% of account values of Seller and JANY, taken as a whole, in each case at or for the 12 month period then ended, has terminated or, to the knowledge of Seller, threatened to terminate its relationship with JANY. Section 2.26. Operations Insurance. Schedule 2.26 attached hereto lists all casualty, liability, property and other similar insurance contracts that insure the business, operations or affairs of JANY or affect or relate to the ownership, use or operations of any of JANY's assets (including, without limitation, the names of the insurers and the type of coverage thereof) and (a) that have been issued to JANY or (b) that are held by Seller or by any Affiliate of Seller (other than JANY) for the benefit of JANY. All such insurance policies shall terminate as of the Closing Date. Section 2.27. Intercompany Liabilities. Except as reflected in the Annual or Quarterly Financial Statements of JANY filed with the New York Department of Insurance, or disclosed in Schedule 2.27 attached hereto, there are no liabilities, contracts or commitments between JANY on the one hand, and Seller or any Affiliate of Seller, on the other. Except as disclosed in Schedule 2.27 attached hereto, during the period from June 30, 1996 to the date hereof, no such intercompany liabilities have been paid and no settlements of such intercompany liabilities have been made except intercompany liabilities that have been paid or settled on a basis consistent with the JANY's past practice or as provided in Section 2.12(xiv). Section 2.28. Employee Loans. All loans issued by JANY to any officer, director or employee of Seller or JANY are set forth on Schedule 2.28 attached hereto. Except as set forth on Schedule 2.28 attached hereto, all such loans were issued in accordance with commercially reasonable underwriting standards and there is no default on any such loan. Section 2.29. Credited Rates. JANY has complied and is in compliance with all applicable contract provisions and Laws associated with credited interest rates related to the Insurance Contracts. Section 2.30. Related Agreements. Each of the Related Agreements is similar in all material respects to one of the forms set forth on Schedule 2.30 attached hereto. Neither Seller nor JANY knows of any Related Agreements other than those that gave rise to the commissions listed in Schedule 2.30 attached hereto concerning commissions payable on the Insurance Contracts. JANY is not in breach of any of the Related Agreements and, to the knowledge of Seller, none of the other parties to the Related Agreements is in breach thereof. Section 2.31. Third Party Administration Agreements. Schedule 2.31 attached hereto lists all third party administration agreements to which JANY is a party (the "Third Party Administration Agreements"). The Third Party Administration Agreements are valid and binding obligations of JANY, enforceable against JANY in accordance with their terms, and to JANY's knowledge, are valid and binding obligations of the other parties thereto, enforceable against such other parties in accordance with their terms. JANY is not in breach of any of such Third Party Administration Agreements and, to the knowledge of Seller, none of the other parties to such Third Party Administration Agreements is in breach thereof. Section 2.32. Mortgage Loans. (a) Except as set forth on Schedule 2.32(a) attached hereto, Seller is the holder of a first lien position on the Mortgage Loans free and clear of any other Liens, except for with respect to the Mortgaged Property or the mortgage related thereto (a) the lien of current real property taxes and assessments, ground rents, personal property taxes, water rates, water frontage charges and/or meter charges, sewer taxes or rents and other similar charges or assessments, in each case not yet due and payable, (b) covenants, conditions and restrictions, rights of way, easements and other matters of public record of a type acceptable to lending institutions generally or specifically referred to in the title insurance policy or title opinion issued in connection with the original loan made with respect to the Mortgaged Property, (c) mechanics' or similar liens or claims for work, labor and materials, (d) zoning and other land use restrictions and ordinances, including, without limitation, landmark, historic and wetland designations, (e) rights of tenants under leases or other rights of tenants or rights of other occupants of the premises with or without the legal right to do so, (f) any state of facts an accurate survey would show with respect to the Mortgaged Property, (g) the failure of the premises to comply with applicable occupancy Law or municipal violations of record, (h) in the case where the Mortgaged Property is a condominium unit, the lien of a condominium association on such Mortgaged Property for unpaid maintenance or common expense assessments not yet due and payable, (i) littoral or riparian rights, if any, (j) any right, title or interest in any minerals, mineral rights or related matters including but not limited to oil, gas, coal and other hydrocarbon whether or not shown by the public records and, (k) the lien of any secondary financing in each case, which do not materially impair the Mortgage Loan ("Permitted Mortgage Liens"). As of the date specified therein, the (i) loan number, (ii) loan class, (iii) lien priority, (iv) borrower's name, (v) property address, (vi) outstanding principal amount, (vii) book value, (viii) delinquency status, (ix) status code, (x) current interest rate (or the method of calculating same), (xi) service fee rate, (xii) net interest rate, (xiii) maturity date and (xiv) percentage owned by JANY for each Mortgage Loan are materially as set forth in the Mortgage Loan Schedule. Except as set forth on Schedule 2.32(a) attached hereto, the proceeds of each Mortgage Loan have been fully disbursed and there are no future or additional advances to be made with respect to any Mortgage Loans. Except as set forth on Schedule 2.32(a) attached hereto, no Mortgage Loan has been delinquent for a period of more than 30 days within the last 12 months in the payment of any principal or interest thereon. Each Mortgage Loan is a permitted investment for Minnesota life insurers under applicable Law. (b) With respect to each Mortgage Loan and any and all Loan Documents relating thereto, to Seller's knowledge (i) each of such Mortgage Loans and Loan Documents are the legal, valid, and binding obligation of the mortgagor, obligor or the guarantor, as applicable, and each is enforceable in accordance with its terms, except as enforcement thereof may be limited by applicable bankruptcy or insolvency Laws, provided that in this case, Seller may rely upon borrower's closing counsel's opinion letter if originated by Seller, or upon representations and warranties given to Seller by another financial institution or entity if purchased by Seller, or in the absence of either, without due inquiry or investigation by Seller so long as Purchaser is assigned the benefits of such opinions, representations or warranties, (ii) none of such Mortgage Loans or Loan Documents is the subject of any agreement, contract or other arrangement (other than this Agreement) pursuant to which any interest in any Mortgage Loan or any payment due under any Mortgage Loan or with respect to any Mortgage Property has been or is intended to be sold, used as collateral, transferred to or otherwise disposed of to any Person or Persons by the original lender, subject to the participatory interests of other lenders or investors as are set forth on Schedule 2.32(b) attached hereto. (c) With respect to each Mortgage Loan and any and all Loan Documents relating thereto, the mortgagor does not have a valid defense to the payment in full of such Mortgage Loan that arises from applicable Laws and such Mortgage Loan is not subject to any right of rescission, set-off, abatement, diminution or counterclaim, except in any case as such right or defense may be provided by bankruptcy, insolvency, reorganization or other similar Laws affecting the enforcement of creditors' rights generally and by general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or at law). (d) None of the terms of any Loan Documents relating to any Mortgage Loan have been waived, amended or modified in any respect, except as set forth on the Mortgage Loan Schedule and except for such waivers, amendments and modifications as do not adversely affect (i) any mortgagor's, obligor's or guarantor's obligation to pay principal, interest or other sums required (including the timing of such payments) to be paid under such Loan Documents, (ii) Seller's Liens against the Mortgage Property securing the Mortgage Loan or (iii) the enforceability in a timely manner of such Liens. Except as set forth in the Mortgage Loan Schedule, no Mortgage Loan has been satisfied, subordinated or rescinded, in whole or in part except (i) upon full payment of the underlying loan or, in the case of a partial release, in connection with the receipt of an independent third party MAI self-contained appraisal evidencing that there is sufficient collateral (which for this purposes shall mean no more than 80% loan to value) remaining with respect to such Mortgage Loan or (ii) as a result of a final judgment or its equivalent of a condemnation or eminent domain proceeding which does not materially impair the Mortgaged Property or Mortgage Loan. Except as set forth on Schedule 2.32(d) attached hereto, no mortgagor, obligor nor any guarantor listed on the Mortgage Loan Schedule in respect of any Mortgage Loan has been released, in whole or in part except in accordance with the terms of the Note and Mortgage except in the case of a partial release either (i) as a result of a written loan modification or assumption agreement or (ii) if, prior to the release of any mortgagor, obligor or guarantor, a determination was made by Seller that (A) such mortgagor, obligor or guarantor was insolvent or deemed to have a lack of ability to make any material contribution with respect to the outstanding Mortgage Loan debt and (B) that the remaining mortgagor, obligor or guarantor was able to repay the outstanding Mortgage Loan debt, in either case such that the release of any mortgagor, obligor or guarantor would not have a material adverse impact on the repayment of the Mortgage Loan. (e) None of the Mortgage Loans are cross-collateralized with any other mortgage loan except for another Mortgage Loan other than a cross-collateralization which does not have a material adverse impact on the repayment of the Mortgage Loan. (f) The Mortgage File with respect to each Mortgage Loan contains all of the Loan Documents relating to each such Mortgage Loan, including, but not limited to, all documents described on Exhibit D and all such documents are true, complete and correct copies of the documents they purport to be. Except as set forth on Schedule 2.32(f) attached hereto, the Mortgage Loan Files contain the original promissory notes and/or other evidence of indebtedness (including all amendments thereto) and the originals of all credit enhancements, if any, as applicable. (g) With regard to the Mortgaged Property relating to any Mortgage Loan, to the knowledge of Seller no material amount of Hazardous Substances has been disposed of or identified on, under or at such Mortgaged Property the presence of which is either in violation of Law or would, under applicable Laws, require (or permit any Governmental Entity to require) removal or remediation of such Hazardous Substance, except to the extent that removal or remediation has occurred or will occur prior to the Closing Date and except as would not materially affect the Mortgaged Property or the repayment of the Mortgaged Loan. (h) To the knowledge of Seller, there is no pending or threatened condemnation proceeding affecting any Mortgaged Property, or any part thereof, which could have an adverse effect upon the current use of such Mortgaged Property. (i) To the knowledge of Seller, there is no pending or threatened Action relating to such Mortgage Loan affecting the Mortgaged Property relating to such Mortgage Loan which would have a material and adverse effect upon such Mortgage Loan. (j) Seller has received no written notice (i) of any material violation of any Law which is a direct result of the maintenance, operation, occupancy, or use of any of the Mortgaged Property related to such Mortgage Loan, in its present manner such that the violation would materially adversely affect the operation, occupancy or other use of such Mortgaged Property and (ii) that any material Permits and approvals required by Governmental Entities having jurisdiction over the operation of such Mortgaged Property in its present manner have not been performed, issued or paid for or are not in full force and effect. (k) With respect to each Mortgage Loan, (i) each Mortgage is covered by a title insurance policy or where customary an opinion of title from a law firm in such jurisdiction, insuring or opining that the Mortgage creates the first priority Lien it purports to create and that the Mortgage is not subject to any defect or encumbrance except Permitted Mortgage Liens, (ii) no claims have been made by Seller or, to Seller's knowledge, any other Person under any title policy relating to any Mortgage Loan, (iii) there has been no act or omission by Seller, or to Seller's knowledge, any party holding an interest in any title policy (including without limitation any failure to pay the premiums therefor) that creates sufficient grounds for the defense by the title insurer of any claims by the insured or that otherwise limits the title insurer's liability under any title policy relating to any Mortgage Loan and (iv) there has been no act or omission by Seller, or to Seller's knowledge, any party holding an interest in any title policy that has caused a subordination of the priority of any Lien as insured under any title policy relating to any Mortgage Loan. Seller is the insured under any title policy relating to any Mortgage Loan, either by name, endorsement or by virtue of being the successor to the original named insured lender. Seller is either the sole insured or a participant insured in those Mortgage Loans in which the Seller does not hold 100% of the first Lien. (l) Except as set forth on Schedule 2.32(l) attached hereto, there are no delinquent real estate taxes in respect of any Mortgage Property except as set forth on the Mortgage Loan Schedule or any deficiency in any obligor's obligations to pay amounts into escrow (other than in the case of escrows where property taxes have been increased in the past 12 months). (m) If upon origination the Mortgaged Property relating to such Mortgage Loan was in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards (and the flood insurance described below is available), a flood insurance policy meeting the requirements of the current guidelines of the Federal Insurance Administrator, if available, is in effect with a generally acceptable insurance carrier, in an amount representing coverage not less than the lesser of (i) the unpaid principal balance of such Mortgage Loan, (ii) the full insurable value of such Mortgaged Property or (iii) the maximum amount of insurance available under the Flood Disaster Protection Act of 1973. (n) A hazard insurance policy with a standard mortgagee clause is in effect with respect to each Mortgage Loan (other than a Mortgage Loan secured solely by unimproved land), in an amount representing coverage not less than the lesser of (i) the unpaid principal balance of such Mortgage Loan or (ii) the full insurable value of the Mortgaged Property relating to such Mortgage Loan. (o) All servicing contracts related to the Mortgage Loans originated by JANY are terminable at the election of JANY at termination fees that are no greater than customary termination fees paid in accordance with industry practice. Section 2.33. No Waiver of Defenses. JANY has not waived any defenses, claims or Actions which would have been available to JANY under the Insurance Contracts or the Related Agreements. Section 2.34. GAAP Financial Statements. On or prior to the date hereof, JANY has delivered to Purchaser true, correct and complete copies of (a) the audited consolidated balance sheets of John Alden Financial Corporation ("John Alden") and its subsidiaries as of December 31, 1995 and 1994, prepared in accordance with GAAP, together with the notes thereon and the related report of Price Waterhouse the independent certified public accountant of John Alden, and (b) the audited consolidated statements of income, stockholders' equity and cash flows of John Alden and its subsidiaries for the years ended December 31, 1995, 1994 and 1993 prepared in accordance with GAAP, together with the notes thereon and the related report of Price Waterhouse (collectively, the "John Alden Financial Statements"). JANY has delivered to Purchaser true, correct and complete copies of the consolidated balance sheets, and the related consolidated statements of income, stockholders' equity and cash flows of John Alden and its subsidiaries for the quarters ended March 31, 1996, June 30, 1996 and September 30, 1996, prepared in accordance with GAAP (the "Interim John Alden Financial Statements"). The John Alden Financial Statements and the Interim John Alden Financial Statements are based on the books and records of John Alden and its subsidiaries and have been prepared in accordance with GAAP consistently applied (except in the case of the Interim John Alden Financial Statements for normal year end adjustments). The John Alden Financial Statements have been audited by Price Waterhouse. The John Alden Financial Statements and the Interim John Alden Financial Statements fairly present in all material respects the consolidated financial position and results of operations of John Alden and its subsidiaries as of the dates and for the periods indicated therein. For purposes of this Article 2, references to the knowledge of Seller means, after reasonable inquiry, the actual knowledge of the officers of Seller having the title of Senior Vice President or higher. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller as follows: Section 3.1. Organization and Standing. Purchaser is a corporation duly organized and validly existing under the Laws of the State of Arizona. Purchaser has all corporate power and authority necessary or required by Law to own, lease and operate its assets, properties and business and to carry on the operations of its business as currently conducted by it. Section 3.2. Authorization. Purchaser has all corporate power and authority necessary to execute, deliver and perform its obligations under this Agreement. Purchaser is duly licensed, qualified or admitted to do business and is in good standing in all jurisdictions in which it is required to be so qualified, licensed or admitted to do business by the Laws thereof, except where the failure to so qualify, be admitted or licensed, individually or in the aggregate is not reasonably likely to have a Material Adverse Affect on Purchaser. The execution and delivery by Purchaser of this Agreement, and the performance by Purchaser of its obligations hereunder, have been duly authorized by all necessary corporate and shareholder actions on the part of Purchaser. This Agreement, when executed by the Parties, will constitute a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except insofar as enforceability may be limited by bankruptcy, insolvency, moratorium or other Laws which may affect creditors' rights and remedies generally and by principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). Section 3.3. Actions and Proceedings. Except as disclosed on Schedule 3.3 attached hereto, (a) there are no outstanding Orders by or with any court, arbitrator or Governmental Entity before which Purchaser or any of its material Affiliates is or was a party that, individually or in the aggregate, have a Material Adverse Effect on Purchaser, and (b) there are no Actions pending or, to Purchaser's knowledge, threatened against Purchaser or any of its material Affiliates which, if adversely determined, would, individually or in the aggregate, have a Material Adverse Effect on Purchaser. Section 3.4. No Conflict or Violation. Except as disclosed on Schedule 3.4 attached hereto, the execution, delivery and performance by Purchaser of this Agreement in accordance with the terms and conditions hereof do not and will not (a) violate any provision of the charter, by-laws or other organizational document of Purchaser, in each case, as amended to date, (b) violate, constitute a default under, or result in the breach, cancellation or termination of, accelerate the performance required under, or result in the creation of any Lien upon any of the assets of Purchaser, pursuant to, any mortgage, deed of trust, guaranty, note, indenture, bond, lease, agreement or other instrument to which Purchaser is a party or by or to which it or any of its assets may be bound, (c) violate any Order of any court, arbitrator or Governmental Entity against, or binding upon, or any agreement with, or condition imposed by, any court, arbitrator or Governmental Entity binding upon Purchaser or any of such assets, (d) violate any Law or (e) result in the breach of any of the terms or conditions of, constitute a default under, or otherwise cause an impairment or revocation of, any Permit related to Purchaser's business. Section 3.5. Consents and Approvals. Except as required under the HSR Act or as set forth on Schedule 3.5 attached hereto, no consent, approval, exemption or authorization is required to be obtained from, no notice is required to be given to and no filing is required to be made with any third party (including, without limitation, Governmental Entities of competent jurisdiction) by Purchaser in order (a) for this Agreement and the Transition Services Agreement to constitute a valid and binding obligation of Purchaser, (b) to authorize or permit the consummation of the transactions contemplated hereby by Purchaser or (c) to authorize or permit Purchaser to conduct the business of JANY after the Closing. Section 3.6. Brokerage and Financial Advisers. No broker, finder or financial adviser has acted directly or indirectly as such for, or is entitled to any compensation from, Purchaser in connection with this Agreement or the transactions contemplated hereby, except Goldman Sachs & Company, whose fees for services rendered in connection with such transactions will be paid by Purchaser. Section 3.7. GAAP Financial Statements. On or prior to the date hereof, Purchaser has delivered to Seller true, correct and complete copies of (a) the audited consolidated balance sheets of SunAmerica Inc. ("SunAmerica") and its subsidiaries as of December 31, 1995 and 1994, prepared in accordance with GAAP, together with the notes thereon and the related report of Price Waterhouse, the independent certified public accountant of SunAmerica, and (b) the audited consolidated statements of income, stockholders' equity and cash flows of SunAmerica and its subsidiaries for the years ended December 31, 1995, 1994 and 1993, prepared in accordance with GAAP, together with the notes thereon and the related report of Price Waterhouse (collectively, the "SunAmerica Financial Statements"). Purchaser has delivered to Seller true, correct and complete copies of the consolidated balance sheets, and the related consolidated statements of income, stockholders' equity and cash flows of SunAmerica and its subsidiaries for the quarters ended March 31, 1996 and June 30, 1996, prepared in accordance with GAAP (the "Interim Purchaser Financial Statements"). The SunAmerica Financial Statements and the Interim Purchaser Financial Statements are based on the books and records of SunAmerica and its subsidiaries, and the SunAmerica Financial Statements have been prepared in accordance with GAAP consistently applied, audited by Price Waterhouse and fairly present in all material respects the consolidated financial position and results of operations of SunAmerica and its subsidiaries as of the dates and for the periods indicated therein. Section 3.8. Statutory Financial Statements. Purchaser has furnished to Seller true, complete and correct copies of the Annual Statements of Purchaser as filed with the Arizona Department of Insurance for the years ended December 31, 1995, 1994 and 1993, together with all attachments, exhibits and schedules thereto and all affirmations and certifications filed therewith and applicable actuarial opinions for such years. Purchaser has furnished to Seller true, complete and correct copies of the Quarterly Statements of Purchaser as filed with the Arizona Department of Insurance for the quarters ended March 31, 1996 and June 30, 1996, together with all attachments, exhibits and schedules thereto and all affirmations and certifications filed therewith and no further amendments thereto are being considered. Each such Annual Statement and Quarterly Statement complied in all material respects with all applicable Laws when so filed and were timely filed with all required Governmental Entities. No material deficiencies have been asserted or are otherwise known by Purchaser with respect thereto. Each such Annual Statement and Quarterly Statement was prepared in accordance with SAP applied on a consistent basis (except for changes, if any, disclosed therein) and fairly presents (in accordance with SAP) the financial condition of Purchaser as of the respective dates thereof or its results of operations or cash flows, as the case may be, for and during the respective periods covered thereby, (provided the Quarterly Statements are subject to normal year end adjustments and lack footnotes and other presentation items). There were no material liabilities affecting Purchaser as of December 31, 1995 required in accordance with SAP to be reflected or disclosed in the Annual Statement for the period then ended, or as of March 31, 1996 or June 30, 1996 required in accordance with SAP to be reflected or disclosed in the Quarterly Statement for the period then ended, which are not so reflected or disclosed therein. Section 3.9. Rating. As of the date hereof, the Standard & Poor's Corporation Claims - Paying Ability Rating of Purchaser is AA- and the Moody's Investor Service, Inc. Financial Strength rating of Purchaser is A2. Purchaser's A.M. Best & Co. rating is A+ (superior) and its Duff & Phelps rating is AA. Section 3.10. Investment Intent and Acknowledgement. Purchaser is purchasing the JANY Stock for its own account and not with a view toward, or for resale in connection with, any distribution thereof. Purchaser acknowledges that it and its representatives and advisors have had the opportunity to ask questions of and receive answers from Seller, JANY and their representatives to the extent that Purchaser and its representatives and advisors have deemed necessary and appropriate and to review all written documentation and other information requested by them, for the purpose of evaluating JANY, the purchase of the JANY Stock and the transactions contemplated by this Agreement, the Ancillary Agreements and the agreements contemplated hereby and thereby. In entering into this Agreement and in purchasing the JANY Stock, Purchaser has relied solely upon its own due diligence, its knowledge of the industry in which the Insurance Business is conducted and the representations and warranties of Seller expressly set forth in this Agreement, and not upon any other representations, warranties or statements of any kind; provided, however, that such diligence and knowledge shall not be deemed a waiver by Purchaser of any of its rights with respect to the representations and warranties of Seller. For purposes of this Article 3, references to the knowledge of Purchaser means, after reasonable inquiry, the actual knowledge of officers of Purchaser having the title of Senior Vice President or higher. ARTICLE 4 PRE-CLOSING COVENANTS Section 4.1. Conduct of Business. (a) Prior to the Closing, Seller shall, and shall cause JANY to, unless Seller shall receive the prior written consent of Purchaser: (i) operate the business of JANY as presently operated and only in the ordinary course and consistent with past practice (including but not limited to past underwriting standards and investment philosophies) subject however to such changes as may be required by changes in applicable Laws or contemplated by this Agreement; and (ii) use commercially reasonable efforts to preserve its relationship with and the goodwill of its brokers, customers, suppliers, employees and other Persons having business dealings with Seller and/or JANY in connection with its business. (b) Without limiting the generality of the foregoing, Seller will or will cause JANY to: (i) use commercially reasonable efforts to (A) maintain all licenses, qualifications and authorizations necessary for JANY to do business in the State of New York, (B) maintain in full force and effect all material contracts, documents and arrangements set forth in Schedule 2.14 hereof, (C) maintain all of JANY's material assets and properties in good working order and condition, ordinary wear and tear excepted, (D) continue all current marketing and selling programs relating to JANY's business in accordance with its current marketing plan and (E) maintain each rating classification assigned to JANY as of the date hereof by insurance rating agencies. (ii) cause the books and records of JANY to be maintained in the usual manner and consistent with past practice and not permit a material change in any underwriting, investment, actuarial, financial reporting or accounting practice or policy of JANY or in any assumption underlying such a practice or policy, or in any method of calculating any bad debt, contingency or other reserve for financial reporting purposes (including without limitation any practice, policy, assumption or method relating to or affecting the determination of insurance or annuities in force, premium or investment income, JANY Reserve Liabilities or operating ratios with respect to expenses, losses or lapses) except as may be required by a change in GAAP, SAP or Law. (iii) (A) prepare and file all Tax Returns required to be filed by JANY prior to or on the Closing Date and (B) pay all Taxes indicated on such Tax Returns or otherwise due and payable prior to or on the Closing Date, unless such Taxes are being contested in good faith and adequate reserves have been established on the books and records of JANY. (iv) (A) cause all JANY Reserve Liabilities with respect to Insurance Contracts established or reflected in the books and records of JANY to be (1) established or reflected on a basis consistent with those JANY Reserve Liabilities and reserving methods followed by JANY in the preparation of its December 31, 1995 Annual Statement filed with the New York Department of Insurance and (2) adequate to cover the total amount of all reasonably anticipated matured and unmatured benefits, dividends, losses, claims, expenses and other liabilities of JANY under all Insurance Contracts pursuant to which JANY has or will have any liability (including without limitation any liability arising under or as a result of any reinsurance, coinsurance or other similar contract); and (B) cause JANY to continue to own assets that qualify as legal reserve assets under all applicable Laws in an amount at least equal to the JANY Reserve Liabilities. (v) use commercially reasonable efforts to maintain in full force and effect until the Closing substantially the same levels of coverage for JANY as the insurance afforded under the contracts listed in Schedule 2.26 attached hereto and cooperate with Purchaser, at Purchaser's cost and expense, to obtain additional or carry-on insurance with respect to JANY after the Closing. Any and all benefits under the contracts listed in Schedule 2.26 attached hereto paid or payable prior to the Closing with respect to the business, operations, affairs or assets and properties of JANY shall be paid or payable to JANY. (vi) cause JANY to continue to administer the Insurance Contracts (including surrenders) in the ordinary course, consistent with past practice. (vii) cause JANY to continue to comply with all Laws applicable to its business, operations or affairs, except for such failures to comply as would not, individually or in the aggregate, have a Material Adverse Effect. (viii) cause JANY to invest current and future cash assets in high grade public corporate bonds (NAIC 1 or 2) designated by Purchaser on the first Business Day of each week or, if Purchaser does not make such a designation, in Qualified Investments and provide Purchaser with weekly reports showing the above investments in the form prepared by JANY in the ordinary course of its business. (c) Unless otherwise provided in this Agreement, Seller will prevent JANY, without the approval of Purchaser, which approval shall not be unreasonably withheld, from and after the date hereof until the Closing, from: (i) selling, assigning, transferring, mortgaging, pledging, leasing, granting or permitting to exist any Lien on or otherwise disposing of any assets which are material to JANY's business, taken as a whole, as presently conducted, other than with respect to investment and portfolio assets in the ordinary course of business, consistent with past practice; (ii) increasing the rates of compensation (including bonuses) payable or to become payable to any officer, employee, agent, independent contractor or consultant of JANY; (iii) except in the ordinary course of business consistent with past practice, incurring any obligation, liability or indebtedness, incurring any extraordinary losses, or disposing of, canceling, waiving or permitting to lapse any rights of material value; (iv) changing in any material respect its accounting principles or practices (including, without limitation, any changes in depreciation or amortization policies or rates or any changes in any assumptions underlying any method of calculating reserves) other than as required by a change in GAAP, SAP or Law; (v) except as disclosed herein, entering into or amending or terminating any transaction or contract that could reasonably be expected to have a Material Adverse Effect; (vi) splitting, combining, redeeming, repurchasing or reclassifying the capital stock of JANY or declaring, setting aside, making or paying any dividend or other distribution in respect of the capital stock of JANY; (vii) issuing or selling (or agreeing to issue or sell) any note, debenture, stock, or other security or any options, warrants, conversion or other rights to purchase any such securities or any securities convertible into or exchangeable for such securities or granting, or agreeing to grant, any such options; (viii) amending the articles of incorporation or bylaws or other charter or organizational documents of JANY; (ix) except in the ordinary course of business consistent with past practice, terminating, amending or executing any material reinsurance, coinsurance or other similar contract, as ceding or assuming insurer related to the Insurance Contracts; (x) settling any intercompany account or obligations between Seller (or any of its Affiliates) and JANY; or (xi) entering into any contract or agreement to do any of the foregoing; Section 4.2. Certain Transactions. From the date of this Agreement through the Closing, neither Seller, JANY nor any of their respective directors or officers will (nor will Seller permit its investment bankers or legal counsel to) solicit, encourage, engage in or initiate any negotiations or discussions with, or provide any information to, or otherwise cooperate in any other manner with, any Person or group (other than Purchaser and its Affiliates) concerning any sale, coinsurance, reinsurance, replacement or other disposition, directly or indirectly of the business of JANY or JANY's capital stock (except in the case of coinsurance or reinsurance, for performance of obligations under the reinsurance agreements listed on Schedule 2.11). Section 4.3. Investigations. From the date hereof through the Closing Date, Purchaser shall be entitled, through its counsel, actuaries and other employees and Representatives, to make such investigation of the assets, liabilities, business and operations of JANY, and such examination of the books and records of JANY, as Purchaser may reasonably request, including, without limitation, for the purpose of investigating the financial condition, service quality and operations of JANY. Any investigation, examination or interview by Purchaser of employees of Seller and JANY shall be conducted at reasonable times upon reasonable prior notice; and each of the Parties and its officers, employees and representatives, including, without limitation, counsel, investment bankers and independent public accountants, shall cooperate with the other's employees and representatives, as the case may be, in connection with such review and examination; provided, however, that such examination shall not be deemed a waiver by Purchaser of any of its rights with respect to the representations and warranties of Seller. Section 4.4. HSR Act Filings. Seller and Purchaser shall, as promptly as practicable, file, or cause to be filed, Notification and Report Forms under the HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust Division of the United States Department of Justice (the "Antitrust Division") in connection with the transactions contemplated by this Agreement and the other agreements contemplated hereby, and will use their respective reasonable efforts to respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation and to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date. Seller and Purchaser will each furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of necessary filings or submissions to any government or regulatory agency, including, without limitation, any filings necessary under the provisions of the HSR Act. Section 4.5. Consents and Reasonable Efforts. Seller and Purchaser shall, and Seller will cause JANY to, cooperate and use their commercially reasonable efforts to obtain all consents, approvals and agreements of, and to give and make all notices and filings with, any Governmental Entities, necessary to authorize, approve or permit the consummation of the transactions contemplated by this Agreement and the other agreements contemplated hereby. Seller shall, and Seller will cause JANY to, use its commercially reasonable efforts to obtain all approvals and consents to the transactions contemplated by this Agreement as set forth on Schedule 2.5 attached hereto. Purchaser will use its commercially reasonable efforts to obtain all approvals and consents to the transactions contemplated by this Agreement as set forth on Schedule 3.5 attached hereto, if any. In addition, if required by the New York Department of Insurance as a condition to consummation of the transactions contemplated hereby, Purchaser shall cause JANY to be merged at or after the Closing with another insurance company Affiliate of Purchaser. Section 4.6. Representations and Warranties. From the date hereof through the Closing Date, (a) Seller shall use its reasonable efforts to conduct its affairs, and to cause JANY to conduct its affairs, in such a manner so that, except as otherwise contemplated or permitted by this Agreement, the representations and warranties contained in Article 2 shall continue to be true, complete and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date, (b) Purchaser shall use its reasonable efforts to conduct its affairs in such a manner so that, except as otherwise contemplated or permitted by this Agreement, the representations and warranties as to Purchaser contained in Article 3 shall continue to be true and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date, (c) Seller shall notify Purchaser promptly of any event, condition or circumstance known to Seller occurring from the date hereof through the Closing Date that would constitute a violation or breach of this Agreement by Seller and (d) Purchaser shall notify Seller promptly of any event, condition or circumstance known to Purchaser occurring from the date hereof through the Closing Date that would constitute a violation or breach of this Agreement by Purchaser. Section 4.7. Financial Statements and Reports. (a) At the time of filing with the New York Department of Insurance, Seller will deliver to the Purchaser true and complete copies of each Annual Statement and Quarterly Statement filed by JANY after the date hereof and on or prior to the Closing. (b) From and after the date hereof and through the Closing Date, Seller shall continue to prepare in the ordinary course of business consistent with past practice and shall deliver, as soon as available, to Purchaser, true and complete copies of customarily prepared internal management information reports (including financial statements, reports, and analyses prepared by or for Seller or JANY) prepared by or for Seller and as relate to any of the business, operations, or affairs of JANY, including without limitation normal internal reports which Seller or JANY prepares (such as those reflecting weekly net production, surrenders, head count and claims and monthly cash flow and operations expense) but excluding any statements, reports or analyses prepared in connection with any analyses of the transaction contemplated in this Agreement. Without limiting the foregoing, Seller will provide to Purchaser weekly a list of the portfolio securities held by Seller, which reflects the market value and book value thereof (monthly) and any changes from the immediately preceding week (weekly), including without limitation, weekly maturities, prepayments, sales, redemptions or similar events. Section 4.8. Transfer Real Estate Owned. On or prior to the Closing Date, Seller shall cause JANY to transfer to Seller or its Affiliates all real estate owned (excluding leasehold interests) by JANY (on an as is-where is basis, with no representations or warranties) in exchange for a cash payment by Seller to JANY equal to the book value of such real estate owned on the date of exchange. Section 4.9. Stay-on Bonus. Seller, and not JANY, will pay any stay-on bonus to JANY employees announced on or before the Closing Date. ARTICLE 5 CONDITIONS PRECEDENT TO THE OBLIGATION OF PURCHASER TO CLOSE The obligations of Purchaser to consummate the transactions contemplated hereby are, unless waived by Purchaser in accordance with Section 11.4 hereof, subject to the fulfillment, at or before the Closing, of each of the following conditions: (i) No Law or Order of a court, arbitrator or Governmental Entity of competent jurisdiction shall be in effect which prohibits, restricts or enjoins, and no Action shall be pending or threatened which seeks to prohibit, restrict, enjoin, nullify, seek material damages with respect to or otherwise materially adversely affect, the consummation of the transactions contemplated by this Agreement. (ii) The applicable waiting period under the HSR Act, including all extensions thereof, shall have expired or been terminated and Purchaser shall have been furnished with appropriate evidence, reasonably satisfactory to it, of such expiration or termination. (iii) All Permits, consents and waivers required from all Governmental Entities legally required to consummate the Closing and to perform this Agreement and the Transition Services Agreement and to consummate the transactions contemplated herein and thereby shall have been obtained and shall be in full force and effect and Purchaser shall have been furnished with appropriate evidence, reasonably satisfactory to it, of the granting of such Permits, consents and waivers. (iv) All necessary consents to the transactions contemplated by this Agreement and the Transition Services Agreement shall have been obtained including, without limitation, those listed on Schedule 2.5 attached hereto, if any. (v) Except for such changes as may be permitted or required pursuant to the terms hereof, the representations and warranties of Seller set forth in Article 2 hereof shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing, except that any such representations and warranties that are given as of a specified date and relate solely to a specified date or period shall be true and correct only as of such date or period. (vi) Seller shall have performed and complied with all covenants and agreements required to be performed or complied with by Seller under this Agreement prior to or concurrently with the Closing in all material respects. (vii) Purchaser shall have received all certificates and other documents required to be delivered to Purchaser at or before the Closing pursuant to this Agreement duly executed by all necessary Persons (other than Purchaser). (viii) Purchaser shall have received the Closing deliveries described in Section 1.3 hereof. (ix) The transactions contemplated by this Agreement shall have been approved by the New York Insurance Department. (x) Purchaser and Seller shall have previously or concurrently closed the transactions contemplated by the Asset Purchase Agreement. (xi) Since December 31, 1995, there shall not have occurred any event or events or state of facts that individually or in the aggregate has or could reasonably be expected to have a Material Adverse Effect; provided, however, that for purposes of this subclause (xi), events or facts which affect the insurance or annuity industry generally (e.g., a change in general economic or market conditions, a change in tax Law or a change in insurance Law), shall not be included in determining whether a Material Adverse Effect has occurred. ARTICLE 6 CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLER TO CLOSE The obligations of Seller to consummate the transactions contemplated hereby are, unless waived by Seller in accordance with Section 11.4 hereof, subject to the fulfillment, at or before the Closing, of each of the following conditions: (i) No Law or Order of a court, arbitrator or Governmental Entity of competent jurisdiction shall be in effect which prohibits, restricts or enjoins, and no Action shall be pending or threatened which seeks to prohibit, restrict, enjoin, nullify, seek material damages with respect to or otherwise materially adversely affect, the consummation of the transactions contemplated by this Agreement. (ii) The applicable waiting period under the HSR Act, including all extensions thereof, shall have expired or been terminated and Seller shall have been furnished with appropriate evidence, reasonably satisfactory to it, of such expiration or termination. (iii) All Permits, consents and waivers required from all Governmental Entities legally required to consummate the Closing and to perform this Agreement and the Transition Services Agreement and to consummate the transactions contemplated hereby and thereby shall have been obtained and shall be in full force and effect and Seller shall have been furnished with appropriate evidence, reasonably satisfactory to it, of the granting of such Permits, consents and waivers. (iv) All necessary consents to the transactions contemplated by this Agreement and the Transition Services Agreement shall have been obtained, including, without limitation, those listed on Schedule 3.5 attached hereto. (v) Except for changes as may be permitted or required pursuant to the terms hereof, the representations and warranties of Purchaser set forth in Article 3 hereof shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing, except that any such representations and warranties that are given as of a specified date and relate solely to a specified date or period shall be true and correct only as of such date or period. (vi) Purchaser shall have performed and complied with all covenants and agreements required to be performed or complied with by Purchaser under this Agreement prior to or concurrently with the Closing in all material respects. (vii) Seller shall have received all certificates and other documents required to be delivered to Seller at or before the Closing pursuant to this Agreement duly executed by all necessary Persons (other than Seller and JANY). (viii) Seller shall have received the Closing deliveries described in Sections 1.3 and 1.4 hereof. (ix) The transaction contemplated by this Agreement shall have been approved by the New York Insurance Department. (x) Purchaser and Seller shall have previously or concurrently closed the transactions contemplated by the Asset Purchase Agreement. (xi) Since December 31, 1995 there shall not have occurred any event or events or state of facts that individually or in the aggregate has or could reasonably be expected to have a Material Adverse Effect on Purchaser; provided, however, that for purposes of this subclause (xi), events or facts which affect the insurance or annuity industry generally (e.g., a change in general economic or market conditions, a change in tax Law or a change in insurance Law), shall not be included in determining whether a Material Adverse Effect on Purchaser has occurred. ARTICLE 7 POST-CLOSING COVENANTS Section 7.1. Continued Access and Cooperation. (a) Following the Closing Date, Seller shall (i) allow Purchaser, upon reasonable prior notice and during regular business hours, through its employees and other Representatives, at Purchaser's expense, to examine and make copies of any books and records retained by Seller within its possession or control ("control" for the purpose of this Section 8.1(a) being defined as the ability to cause delivery to Seller or access by Purchaser), to the extent they relate to JANY or the Insurance Business, for any reasonable business purpose, including, without limitation, the preparation or examination of Tax Returns, regulatory filings and financial statements and the conduct of any Action, whether pending or threatened, concerning the conduct of JANY or the Insurance Business prior to the Closing Date at Seller's offices or other facilities or properties and (ii) maintain such books and records for Purchaser's examination and copying. Access to such books and records shall be at Purchaser's expense and may not unreasonably interfere with Seller's or any successor company's business operations and Purchaser shall reimburse Seller for all reasonable out-of-pocket expenses incurred by Seller in copying such records. Seller shall retain such books and records for a period of at least seven years (extended by a period equal to any extension of the statute of limitations with respect to tax matters with respect to which such books and records are necessary and of which Purchaser shall notify Seller), after which time such books and records shall be delivered to Purchaser. (b) Following the Closing Date, Purchaser shall (i) allow Seller, upon reasonable prior notice and during regular business hours, through its employees and other Representatives, at Seller's expense, to examine and make copies of the books and records of JANY for any reasonable business purpose relating to Seller's prior ownership of JANY, including, without limitation, the preparation or examination of Tax Returns, regulatory filings and financial statements and the conduct of any Action or the conduct of any regulatory, contract holder, participant or other dispute resolution whether pending or threatened at Purchaser's offices or other facilities or properties, and (ii) maintain such books and records for Seller's examination and copying. Access to such books and records shall be at Seller's expense and may not unreasonably interfere with Purchaser's or any successor company's business operations and Seller shall reimburse Purchaser for all reasonable out-of-pocket expenses incurred by Purchaser in copying such books and records. Purchaser shall retain such books and records for a period of at least seven years (extended by a period equal to any extension of the statute of limitations with respect to tax matters with respect to which such books and records are necessary and of which Seller shall notify Purchaser). Section 7.2. Further Assurances. (a) Upon the terms and subject to the conditions herein provided, each of Seller and Purchaser shall use all commercially reasonable efforts to take or cause to be taken, all actions or do, or cause to be done, all things or execute or cause to be executed any documents necessary, proper or advisable under applicable Laws to consummate and make effective the transactions contemplated by this Agreement, the Transition Services Agreements and the other agreements contemplated hereby and thereby. (b) On and after the Closing Date, Seller and Purchaser shall take all commercially reasonable action and execute any additional documents, instruments or conveyances of any kind (not containing additional representations and warranties) and give all notices and obtain all consents, approvals and Orders of Governmental Entities and other third parties which may be necessary to carry out any of the provisions hereof, including, without limitation, putting Purchaser in full possession and operating control of JANY. Section 7.3. Expenses. Except as otherwise specifically provided in this Agreement and the Transition Services Agreement, the Parties shall bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement, the Transition Services Agreement and the transactions contemplated hereby and thereby, including, without limitation, all fees and expenses of their respective Representatives; provided, however, that Purchaser shall bear (a) the cost of the filing fees in connection with the filings with the FTC and the Antitrust Division under the HSR Act with respect to the transactions contemplated hereby (which expense shall be borne equally by Seller and Purchaser if separate filings are required with respect to the transactions contemplated by this Agreement and the transactions contemplated by the JALIC Asset Purchase Agreement), and (b) the cost of obtaining required insurance regulatory approvals (other than any approvals that relate solely to Seller), from regulatory authorities. Section 7.4. Tax Indemnification and Other Tax Matters. (a) Seller shall be liable for, shall pay to the relevant Tax Authorities, and shall indemnify and hold JANY and Purchaser harmless against, (i) all Taxes that relate to (A) with respect to any taxable period that commences prior to the Closing Date, but ends on or after the Closing Date, the portion of the taxable period that commences on the first day of such taxable period and continues up to and including the Closing Date (the "Pre-Closing Straddle Period"), and (B) any other taxable period ending on or before the Closing Date, (ii) any Tax liability arising under Treasury Regulation section 1.1502-6 or equivalent state law provision as a result of JANY being included in a consolidated, combined or unitary federal or state income or franchise Tax Return prior to the Closing Date, (iii) federal income and state Taxes required to be paid by or on behalf of JANY as a result of the Section 338(h)(10) Election (and any equivalent state law election) (as herein defined), if made pursuant to Section 7.4(g) hereof, (iv) any Tax liability arising as a result of JANY ceasing to be a member of the affiliated group of Seller for purposes of Section 1504 of the Code and (v) Taxes incurred by Purchaser or JANY as a result of a breach of a representation by Seller set forth in Section 2.17 hereof or a failure on the part of Seller to comply with the covenants and undertakings set forth in this Section 7.4, including Seller's covenant to join in making the Section 338(h)(10) Election, if so directed by Purchaser pursuant to Section 7.4(g) hereof, provided that such failure does not result from any act or omission on the part of Purchaser or, after the Closing Date, JANY. The federal income Taxes described in Section 7.4(a)(iii) above shall be calculated by comparing (x) JANY's actual liability for federal income Taxes for the taxable period in which the "deemed asset sale" resulting from the Section 338(h)(10) Election is reported to (y) the liability for federal income Taxes that JANY would have had for such period had the Section 338(h)(10) Election not been made. The state Taxes described in Section 7.4(a)(iii) above shall mean JANY's actual liability for state income or other Taxes payable to the State of New York or any other state or local Tax jurisdiction arising from the "deemed asset sale" or other consequences resulting from the Section 338(h)(10) Election (and any state law equivalent or any election that is deemed to result from the filing of the Section 338 (h)(10) Election). (b) Except as provided in Section 7.4(a) or Section 9.4 hereof, Purchaser and JANY shall be liable for, shall pay to the appropriate Tax Authorities, and shall hold Seller harmless against all Taxes that relate to (i) with respect to any taxable period that commences prior to the Closing Date but ends after the Closing Date, the portion of the taxable period that commences on the first day after the Closing Date and continues up to and including the last day of such taxable period (the "Post-Closing Straddle Period") and (ii) any taxable period that begins after the Closing Date. (c) Whenever it is necessary for purposes of this Section 7.4 to determine the liability for Taxes of JANY for a taxable period that begins before and ends after the Closing Date, the determination shall be made by assuming that JANY had a taxable year which ended at the close of business on the Closing Date, except that exemptions, allowances or deductions that are calculated on an annual basis (such as the deduction for depreciation) shall be apportioned on a time basis. (d) Except to the extent provided in this Section 7.4(d), JANY's participation under the tax allocation agreement among the Houston National Life Insurance Company consolidated group ("Tax Allocation Agreement") shall be terminated as of the Closing Date. After the date hereof, JANY shall continue to make Tax payments to Seller pursuant to the Tax Allocation Agreement ("Tax Allocation Payments") and appropriate estimated tax payments to the State of New York in respect of taxable periods described in Section 7.4(a)(i) above; provided, however, the computation of such payments shall not take into account (and Seller shall indemnify JANY against) any Taxes described in Section 7.4(a) (ii), (iii), (iv) and (v) above. At the time a consolidated federal income Tax Return that includes JANY for a taxable period described in Section 7.4(a)(i) hereof is filed, (i) Purchaser shall pay (or cause JANY to pay) to Seller the amount by which (x) the amount of Tax to be reported on such Tax Return that pertains to JANY, exclusive of any Taxes described in Section 7.4(a) (ii), (iii), (iv) and (v) above ("JANY's Adjusted Tax Return Liability") exceeds (y) the total Tax Allocation Payments previously made by JANY in respect of the taxable period covered by such Tax Return ("JANY's Total Tax Allocation Payments"), and (ii) Seller shall pay to Purchaser or JANY the amount by which JANY's Total Tax Allocation Payments exceeds JANY's Adjusted Tax Return Liability, as well as any other amounts required to be paid to JANY pursuant to the Tax Allocation Agreement with respect to the taxable period covered by the Tax Return. At the time any state or local Tax Return of JANY is filed that pertains to a taxable period described in Section 7.4(a)(i) hereof or that covers Taxes described in Section 7.4(a)(iii) hereof, Seller shall pay to Purchaser or JANY so much of the Tax liability of JANY to be reported on such Tax Return that relates to Taxes described in Section 7.4(a)(ii), (iii) and (v) hereof. Any payments required to be made by Seller or Purchaser pursuant to the preceding two sentences shall also include interest, if any, commencing on the due date (without extensions) of the Tax Return in question at an annual rate equal to the one year LIBOR rate in effect on such due date plus 25 basis points. Any disputes regarding the calculation of any payments required to be made pursuant to this Section 7.4(d) shall be resolved pursuant to the procedure set forth in Section 1.6 above. Except for the payments permitted or required to be made by Purchaser or JANY pursuant to this Section 7.4(d), nothing contained herein shall in any way affect Seller's indemnification obligations pursuant to Section 7.4(a) hereof, including with respect to any subsequently determined deficiencies in Tax arising in respect of any Tax Return covering a period described in Section 7.4(a)(i) hereof. (e) In the event that Seller or JANY is or becomes entitled to or receives any refund of Taxes attributable to JANY in respect of the Pre-Closing Straddle Period or any other taxable period ending on or prior to the Closing Date, (i) Purchaser, JANY and Seller shall cooperate with each other and take all reasonable actions necessary to obtain such refund and (ii) the amount thereof plus any interest related thereto, shall be (A) the property of (and paid over to) Seller (but net of any Taxes imposed on JANY with respect thereto) if it relates to a Tax period or portion thereof ending on or before June 30, 1996 and was not reflected as an asset or used to reduce the accrual for Taxes, on the Financial Statement for the period ended June 30, 1996, and (B) JANY in all other cases. (f) (i) Seller shall prepare and timely file (or provide to Purchaser for filing, if applicable) all Tax Returns required or permitted by applicable Law to be filed by JANY (or by Seller on its behalf) with respect to periods ending on or before the Closing Date. Seller shall cause JANY to close its books as of the Closing Date in compliance with the requirements of Treasury Regulation 1.1502-76(b) and any similar state or local Law. If the Closing Date shall not occur at the end of a calendar month, Seller, with Purchaser's written consent, which will not be unreasonably withheld, shall be permitted to ratably allocate the calendar month's items of income and expense in accordance with Regulation Section 1.1502-76(b)(2)(iii). Purchaser and JANY shall (A) cooperate with Seller for the purpose of making any election under applicable Law to permit JANY to file any short period Tax Return for the taxable period ending on the Closing Date and (B) provide access to all relevant books and records for purposes of preparing such Tax Returns. Unless otherwise required by applicable Law and disclosed in writing to Purchaser by Seller in advance of the filing of the relevant Tax Return, any Tax Return to be prepared by Seller pursuant to this Section 7.4(f) shall be prepared on a basis consistent with past practice and shall not be prepared in a manner calculated to accelerate or defer any income or deductions into any taxable period in order to achieve a result favorable to Seller and detrimental to Purchaser as a result of the transactions contemplated by this Agreement. Purchaser shall be given the opportunity to review any such Tax Return not less than 30 days prior to the due date for the filing of such return with the relevant Governmental Entity, and Seller shall consult with Purchaser in good faith with respect to any issues that Purchaser may have regarding such Tax Return. Purchaser shall have the right to approve (which approval will not be unreasonably withheld) any position taken in such Tax Return that affects Purchaser's or JANY's liability for Tax Allocation Payments or estimated Tax payments pursuant to Section 7.4(d) hereof or Taxes described in Section 7.4(b) hereof. Unless required by applicable Law, Seller shall not file an amended Tax Return for JANY without Purchaser's consent if such amendment would cause or increase JANY's liability for any Taxes described in Section 7.4(b) hereof. (ii) Purchaser shall file or cause to be filed when due all Tax Returns with respect to Taxes that are required to be filed by or with respect to JANY for taxable years or periods ending after the Closing Date. With respect to any such Tax Return that covers a Pre-Closing Straddle Period, a copy of such Tax Return shall, to the extent permitted by applicable law, be prepared on a basis consistent with past practices of JANY and shall be provided to Seller within 30 days prior to the due date (including extensions) for the filing thereof. Seller shall have the right to approve (which approval shall not be unreasonably withheld) such Tax Return to the extent it would require an indemnification payment by Seller pursuant to Section 7.4(a) hereof. Unless required by applicable law, Purchaser shall not file an amended Tax Return for JANY without Seller's written consent if such amendment would cause or increase Seller's indemnification obligations pursuant to Section 7.4(a) hereof. (g) At Purchaser's request, Seller will join with Purchaser in making a timely election pursuant to Section 338(h)(10) of the Code (the "338(h)(10) Election"), and any equivalent election in any state or states that Purchaser may designate, with respect to the purchase and sale of JANY Stock contemplated by this Agreement. For purposes of determining the "deemed sales price", as defined in Regulation Section 1.338(h)(10)-(f) for purposes of this Section 7.4(g), the liabilities of JANY shall be equal to the amount of such liabilities for Federal income tax purposes as of the Closing Date. Purchaser shall have the initial responsibility for the timely preparation of IRS Form 8023-A, and all supporting statements, schedules, and required information applicable thereto (including an allocation of the purchase price to the assets of JANY), and such Form 8023-A, statements, schedules, and information (the "Form 8023-A Package") shall be submitted to Seller for its review no later than 120 days after the Closing Date. Within 30 days after the receipt by Seller of the Form 8023-A Package, Seller shall notify Purchaser of any objections or proposed changes. If Seller has no objections or proposed changes or if Purchaser and Seller agree on the resolution of all objections or proposed changes, Purchaser and Seller shall promptly file Form 8023-A and the relevant attachments with the IRS via certified mail with return receipt requested. As soon as practicable thereafter, Purchaser and Seller shall furnish to each other a photocopy of such certificate of mailing and return receipt. If Seller and Purchaser shall fail to reach an agreement with respect to any objection or proposed change within 180 days following the Closing Date, then any disputed objection(s) or proposed change(s) shall be submitted for resolution to the national offices of Price Waterhouse LLP or, if such firm refuses or is unable to undertake such matter, such other public accounting firm as Purchaser and Seller shall mutually agree (the "Resolution Accountant"). Purchaser and Seller shall use reasonable efforts to cause a report of the Resolution Accountant to be rendered within 10 Business Days of its appointment, and the Resolution Accountant's determination as to the appropriateness and extent of changes (if any) to the Form 8023-A Package shall be final and binding. The fees and disbursements of the Resolution Accountant's with respect to making such determination shall be borne one-half by Seller and one-half by Purchaser. Promptly after such determination, Purchaser and Seller shall file Form 8023-A and the relevant attachments with the IRS in accordance with the procedure described above. Purchaser and Seller agree to file their respective tax returns, reports and forms, including IRS Form 8023-A, in a manner consistent with the finalized Form 8023-A Package. (h) Purchaser or JANY shall promptly (i) notify Seller of the commencement of any claim, audit, examination or other proposed change or adjustment by any Governmental Entity concerning any Taxes for which Seller may be responsible under Section 7.4(a) hereof (a "Tax Claim") and (ii) furnish Seller with copies of any correspondence received from any Governmental Entity in connection with such Tax Claim. Seller shall promptly (i) notify Purchaser or JANY of the commencement of any claim, audit, examination or other proposed change or adjustment by any Governmental Entity concerning any Tax for which Purchaser or JANY may be responsible under Section 7.4(b) hereof and (ii) furnish Purchaser or the JANY with copies of any correspondence received from any Governmental Entity in connection with such claim. Notwithstanding the foregoing, no failure or delay in giving any notice described above shall relieve Seller of its obligations under this Section 7.4 except, and only to the extent, that it is prejudiced thereby. (i) At its election, Seller may contest or settle any Tax Claim in any legally permissible manner at its sole cost and expense and, upon Seller's payment of such Taxes to the relevant Governmental Entity, may sue for a refund thereof. Seller shall control all correspondence, responses and proceedings related to any such contest or refund suit, and may pursue or forego any administrative proceedings, appeals or litigation in respect of such Tax Claim. Purchaser and JANY, as appropriate, will cooperate fully, provide access to all books and records, and will take all lawful action in connection with such contest or refund suit as Seller may reasonably request. Seller shall keep Purchaser and JANY, as appropriate, regularly apprised of the progress of any such contest or refund suit. In the event that such contest or refund suit may reasonably be expected to increase materially the liability of JANY for Taxes described in Section 7.4(b) hereof, or increase JANY's obligation to make payments pursuant to Section 7.4(d) hereof dealing with tax sharing agreements, if any hereof, Seller shall consult with Purchaser in good faith as to any considerations that Purchaser may have regarding such contest or refund suit. If, during the course of an audit, the IRS proposes an adjustment to the purchase price allocation reflected in the Form 8023-A Package as ultimately approved by Seller or determined by the Resolution Accountant pursuant to Section 7.4(g) hereof, Seller shall (i) use its reasonable best efforts to defend in good faith such purchase price allocation in the course of the audit, (ii) keep Purchaser apprised of the progress of the audit, (iii) give Purchaser and JANY an opportunity to participate, at their own expense, in contesting the proposed adjustment to the purchase price allocation and (iv) obtain Purchaser's approval of any proposed settlement of the issues, which approval shall not be unreasonably withheld. (j) In the event that Seller does not elect to contest a Tax Claim pursuant to Section 7.4(i) hereof, Purchaser or JANY may (but shall not be required to) contest such claim for the account of Seller, in which case (i) Seller shall have the right to review and approve in advance any correspondence or responses sent to any Governmental Entity by or on behalf of the JANY with respect to any Tax Claim and to participate in any subsequent administrative proceedings, appeals and litigation, if any, and (ii) Purchaser and JANY, as appropriate, shall provide access to all relevant books and records. Purchaser and JANY, as appropriate, shall keep Seller regularly apprised of the progress of any such contest, proceedings, appeals or litigation. In the event that Purchaser or JANY elects to contest such claim, Purchaser and JANY shall indemnify and hold harmless Seller for any Tax liability in excess of the amount of the Tax liability that would have arisen under the settlement that Seller was willing to accept and which Seller has disclosed to Purchaser and JANY in writing in advance of such election. (k) In the event that, for any tax period ending after the Closing Date, JANY recognizes a loss or becomes entitled to a credit that may be carried back to a taxable period of JANY during which it was included in Seller's consolidated federal income Tax Return or any combined or unitary Tax Return that includes Seller or its Affiliates, such carryback shall be made only with Seller's written consent; provided that Seller shall consent to such carryback, shall cooperate in the filing of any required returns or claims for refund and shall pay Purchaser any Tax refund received or the amount of reduction in Taxes so obtained (net of any tax or other cost incurred by Seller in connection therewith) if Seller, in its reasonable discretion, determines that permitting such carryback or filing such returns or claims will not materially adversely affect Seller or its Affiliates. Section 7.5. Employee Plans. With respect to the John Alden Retirement Plan of Seller (the "Pension Plan") and the John Alden Employee Savings Incentive Plan of Seller (the "401(k) Plan"), Purchaser and Seller agree as follows: (a) Pension Plan. Effective as of the Closing, JANY employees with accrued benefits under the Seller's Pension Plan will be offered, subject to any required spousal consent rules, the right to receive the value of such accrued benefits in a lump sum. (b) 401(k) Plan. Assets held by Seller in Seller's 401(k) Plan on behalf of all Employees, at each such Employee's option, will be transferred as soon as practicable after the Closing to the trustees of a qualified plan maintained by Purchaser or its Affiliates (if permitted) or retained in Seller's 401(k) Plan (subject to rights of Employees with respect thereto). Any assets transferred will be transferred in accordance with the provisions of Seller's and Purchaser's 401(k) Plans. Section 7.6. Non-Discriminatory Treatment of Policyholders. Except as otherwise provided in the Indemnity Reinsurance Agreement between Seller and Purchaser dated concurrently herewith, from and after the Closing Date Purchaser shall use all commercially reasonable efforts to cause JANY to provide, at all times and from time to time, to the Policyholders under the Insurance Contracts crediting rates and renewal rates and standards of policyholder service and administration which are no less than those provided to other policyholders of insurance or annuity contracts issued, coinsured or reinsured by Purchaser or its Affiliates of a similar type and nature (including without limitation factors such as issue date, actual and anticipated lapse rates and surrender charge periods and other relevant features and market conditions) as the Insurance Contracts. Purchaser will use commercially reasonable efforts to include a provision substantially similar to this Section 7.6 in any agreement for the sale, transfer or bulk reinsurance of all or substantially all of the Insurance Contracts. Section 7.7. Change of Name. Purchaser will use commercially reasonable efforts to cause the name of JANY to be changed prior to December 31, 1997 to a name that does not include the phrase "John" or "Alden" or any variant thereof or any name substantially similar to John Alden. As soon as practicable after obtaining the approval of the New York Department of Insurance to a change of name, the policies sold under the "John Alden" name shall be endorsed with the new name of JANY. Seller hereby grants to Purchaser a license to use the "John Alden" name: (i) until such time as the name change has been approved; and (ii) thereafter, but only for the limited purpose of referring to JANY as being formerly known under its prior name. ARTICLE 8 TERMINATION; SURVIVAL Section 8.1. Termination of Agreement. Notwithstanding anything contained herein to the contrary, this Agreement may be terminated: (a) or at any time prior to the Closing, by mutual written consent of Seller and Purchaser; (b) by written notice by Purchaser to Seller if there has been a material breach by Seller of any of the representations, warranties, agreements or covenants of Seller set forth herein which is not subject to cure prior to the Closing, or a failure of any other condition not subject to cure prior to the Closing to which the obligations of Purchaser are subject; (c) by written notice by Seller to Purchaser if there has been a material breach by Purchaser of any of the representations, warranties, agreements or covenants of Purchaser set forth herein which is not subject to cure prior to the Closing, or a failure of any other condition not subject to cure prior to the Closing to which the obligations of Seller are subject; (d) at any time after April 30, 1997 (the "Termination Date") and prior to the Closing, by Purchaser by written notice to Seller, if (A) the Closing shall not have been consummated on or before the Termination Date and (B) the failure to consummate the Closing on or before the Termination Date did not result from the failure by Purchaser to perform or comply with any covenant or agreement contained in this Agreement required to be performed or complied with prior to the Closing by Purchaser; (e) at any time after the Termination Date and prior to the Closing, by Seller by written notice to Purchaser, if (i) the Closing shall not have been consummated on or before the Termination Date and (ii) the failure to consummate the Closing on or before the Termination Date did not result from the failure by Seller to perform or comply with any covenant or agreement contained in this Agreement required to be performed or complied with prior to the Closing by Seller; or (f) subject to Section 7.2 hereof, by written notice to Purchaser or Seller to the other, at any time after a Governmental Entity having jurisdiction over Purchaser or Seller has notified such Party that it will not provide an approval, consent or Order necessary for the terminating Party to consummate the transactions contemplated by this Agreement or the Ancillary Agreements and the Parties cannot subsequently procure such approval, consent or Order using their respective commercially reasonable efforts. Section 8.2. Effect of Termination. In the event that this Agreement shall be terminated pursuant to Section 8.1, all further obligations of the parties under this Agreement shall terminate without further liability of either Party to the other; provided that the obligations of the parties contained in Section 7.3 (Expenses), Article 10 (Confidentiality) and Article 11 (Miscellaneous) shall survive any such termination. A termination under Section 8.1 shall not relieve any Party of any liability for a breach of, or for any misrepresentation under, this Agreement, or be deemed to constitute a waiver of any available remedy (including specific performance if available) for any such breach or misrepresentation. ARTICLE 9 SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION Section 9.1. Survival of Representations. (a) The representations and warranties of Purchaser set forth in Article 3 hereof shall survive the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby for a period of 21 months following the Closing Date; provided, however, that the representations contained in Section 3.1 (Organization, Standing and Authority of Purchaser), and 3.2 (Authorization) shall survive until the expiration of all applicable statutes of limitations (including all periods of extension, whether automatic or permissive). (b) The representations and warranties of Seller set forth in Article 2 hereof shall survive the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby for a period of 21 months following the Closing Date; provided, however, that the representations contained in Sections 2.1 (Organization, Standing and Authority of JANY and Seller), 2.2 (Authorization), 2.16 (JANY Capital Stock), 2.17 (Tax Matters) and 2.21 (Pension and Other Employee Plans) shall survive until the expiration of all applicable statutes of limitations (including all periods of extension, whether automatic or permissive), and Sections 2.18 (Real Property) (paragraph (b) only) and 2.32 (Mortgages) (paragraph (g) only) will survive until the fifth anniversary of the Closing Date. (c) No Action may be commenced by any Person with respect to any claim arising out of or relating to such warranties or representations after the expiration of the period for which such representations and warranties shall survive pursuant to this Section 9.1 (the "Applicable Survival Period"); provided, however, that, subject to this Article 9, any Person shall have the right to commence a suit, action or proceeding after the expiration of the Applicable Survival Period with respect to claims arising out of or relating to such representations and warranties which shall have been asserted by such Person under Section 9.4 hereof before the expiration of the Applicable Survival Period. Section 9.2. Indemnification by Purchaser and JANY. (a) Subject to Sections 7.4, 9.1, the following provisions of this Section 9.2 and 9.4 hereof, Purchaser shall indemnify Seller and its Affiliates (other than JANY after the Closing) (collectively, the "Seller Group") for, and shall hold it harmless from, any and all damages, claims, suits, actions, causes of action, proceedings, investigations, losses, liabilities, assessments, judgments, deficiencies and expenses (including, without limitation, reasonable legal, accounting and other professional expenses) ("Liabilities") asserted against or incurred or sustained by the Seller Group relating to, associated with or arising out of (i) any breach by Purchaser of any covenant or agreement contained in this Agreement by Purchaser or (ii) any breach by Purchaser of any of the warranties or representations of Purchaser set forth in Article 3 of this Agreement. (b) From and after the Closing, JANY shall indemnify each member of the Seller Group for, and hold the Seller Group harmless from, any and all Liabilities of any kind or nature asserted against or incurred or sustained by any or all of the members of the Seller Group arising out of, related to or associated with the Insurance Business or JANY, regardless of whether at the time of Closing such Liabilities were (A) foreseen or unforeseen, (B) known or unknown, (C) existing or arose in the future, (D) fixed or contingent, (E) matured or unmatured, (F) reflected in any of the Schedules attached hereto or (G) relate to or are associated with events occurring or circumstances existing before or after the Closing; provided, however, that notwithstanding anything contained in this Section 9.2(b) to the contrary, JANY shall not be obligated hereunder to indemnify the Seller Group for, or to hold the Seller Group harmless from, any Liabilities under this Section 9.2(b) to the extent that Seller is obligated to indemnify Purchaser in respect of the same Liabilities pursuant to Section 9.3 hereof (or would be obligated to indemnify Purchaser if (i) the limitation on representations or warranties under Section 9.1, or (ii) the dollar limitations on indemnification set forth in Section 9.2(c) hereof did not apply). (c) The Seller Group shall be entitled to indemnification under Section 9.2(a)(ii) and 9.2(b), only when the aggregate amount of all Liabilities with respect to which the Seller Group would otherwise be entitled to indemnification under Sections 9.2(a)(ii) and 9.2(b) hereof and Section 10.2(a)(ii) of the Asset Purchase Agreement exceed $1.5 million. In addition, as soon as practicable after such Liabilities exceed $1.5 million, Purchaser shall pay to Seller $750,000. In no event shall the amount payable by Purchaser and its Affiliates (including JANY) to the Seller Group pursuant to Section 9.2(a)(ii) and 9.2(b) hereof and Section 10.2(a)(ii) of the Asset Purchase Agreement exceed $240,000,000. (d) If any event shall occur or circumstance shall exist which would otherwise entitle the Seller Group to indemnification hereunder, Liabilities shall be deemed reduced to the extent of any proceeds (other than (i) proceeds from self-insurance and (ii) proceeds under experience-rated insurance policies the premiums for which would be increased by reason of the filing of a claim thereunder with respect to such Liability or expense) actually recovered, net of the cost of such recovery, by the Seller Group from any third party (including, without limitation, any insurance company) with respect thereto. In furtherance of the immediately preceding sentence, Seller agrees to, and to cause its Affiliates to, (i) in good faith, diligently seek recovery, at its or their own expense, of all such proceeds from all third parties with respect to all Liabilities with respect to which it or they make or may make a claim for indemnification hereunder and (ii) keep Purchaser fully and promptly informed of all material matters related thereto. (e) To the extent that the undertakings set forth in Section 9.2(a) and (b) hereof may be unenforceable, Purchaser shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Liabilities incurred by the Seller Group. Section 9.3. Indemnification by Seller. (a) Subject to Sections 7.4, 9.1, the following provisions of this Section 9.3, and 9.4 hereof, Seller shall indemnify Purchaser and its Affiliates (including JANY after the Closing) (collectively, the "Purchaser Group") for, and shall hold them harmless from, any and all Liabilities asserted against or incurred or sustained by Purchaser relating to, associated with or arising out of: (i) any breach by Seller of any covenant or agreement contained in this Agreement by Seller, (ii) any breach by Seller of any of the warranties or representations set forth in Article 2 of this Agreement (other than Sections 2.18(b) and 2.32(g) hereof), (iii) any Extra Contractual Obligations, (iv) any Vanishing Premium Liabilities; provided, however, that Seller shall not be required to provide the indemnification with respect to Vanishing Premium Liabilities related to any In Force Insurance Contract if Purchaser reduces the dividend scale applicable to such Insurance Contract or (v) the Insurance Contracts issued by JANY without Permits as identified on Schedule 2.9 attached hereto. (b) Subject to Section 9.1, the following provisions of this Section 9.3 and 9.4 hereof, Seller shall indemnify the Purchaser Group for, and shall hold it harmless from, (i) one- half of any and all Liabilities up to an aggregate of $3,000,000 (i.e., $1.5 million of the first $3.0 million of such Liabilities) and (ii) any and all Liabilities in excess of $3,000,000 asserted against or incurred or sustained by the Purchaser Group relating to, associated with or arising out of any breach of the representations and warranties of Seller set forth in Sections 2.18(b) and 2.32(g) hereof and Section 3.22(g) of the Asset Purchase Agreement (without giving effect to the knowledge and materiality qualifiers set forth therein). (c) The Purchaser Group shall be entitled to indemnification under Section 9.3(a)(ii), 9.3(a)(iii) and 9.3(a)(iv) hereof only when the aggregate amount of all Liabilities with respect to which the Purchaser Group would otherwise be entitled to indemnification under Sections 9.3(a)(ii), 9.3(a)(iii) and 9.3(a)(v) hereof and Section 10.3(a)(ii) of the Asset Purchase Agreement exceeds $1.5 million. In addition, as soon as practicable after such Liabilities exceeds $1.5 million, Seller shall pay to Purchaser $750,000. In no event shall the amount payable by Seller and its Affiliates to the Purchaser Group pursuant to Sections 9.3(a)(ii), 9.3(a)(iii) and 9.3(a)(v) hereof and Section 10.3(a)(ii) of the Asset Purchase Agreement exceeds $240,000,000. (d) If any event shall occur or circumstance shall exist which would otherwise entitle the Purchaser Group to indemnification hereunder, Liabilities shall be deemed reduced to the extent of any proceeds (other than (i) proceeds from self-insurance and (ii) proceeds under experience-rated insurance policies the premiums for which would be increased by reason of the filing of a claim thereunder with respect to such Liability) actually recovered, net of the cost of such recovery, by the Purchaser Group from any third party (including, without limitation, any insurance company) with respect thereto. In furtherance of the immediately preceding sentence, Purchaser agrees to, and to cause its Affiliates to, (i) in good faith, diligently seek recovery, at its or their own expense, of all such proceeds from all third parties with respect to all Liabilities with respect to which it or they make or may make a claim for indemnification hereunder and (ii) keep Seller fully and promptly informed of all material matters related thereto. (e) To the extent that the undertakings set forth in Section 9.3(a) hereof may be unenforceable, Seller shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Liabilities incurred by the Purchaser Group. Section 9.4. Indemnification Procedure. (a) Within a reasonable time after obtaining knowledge thereof, a Person who may be entitled to indemnification hereunder (the "Indemnitee") shall promptly give the Party who may be obligated to provide such indemnification (the "Indemnitor") written notice of any Liability which the Indemnitee has determined has given or could give rise to a claim for indemnification hereunder (a "Notice of Claim"); provided, however, no failure or delay in giving any such Notice of Claim shall relieve the Indemnitor of its obligations except, and only to the extent, that it is prejudiced thereby. A Notice of Claim shall specify in reasonable detail the nature and all known particulars related to a Liability. The Indemnitor shall perform its indemnification obligations in respect of a Liability described in a Notice of Claim under Sections 9.2 or 9.3 hereof, as the case may be, within 30 days after the Indemnitor shall have received such Notice of Claim. (b) The Indemnitor shall inform the Indemnitee promptly after the Indemnitor has made a good faith determination, based on the facts alleged in such Notice of Claim or which have otherwise become known to the Indemnitor, either that the Indemnitor acknowledges that it has an indemnification obligation hereunder in respect of such Liability or that the Indemnitor has made a good faith determination that it has no indemnification obligation hereunder in respect of such Liability. If the Indemnitor fails to perform its obligations under this Section 9.4 or if the Indemnitor shall have informed the Indemnitee in writing in that the Indemnitor does not have an indemnification obligation hereunder in respect of such Liability, then the Indemnitee shall have the right, but not the obligation, to take the actions which the Indemnitor would have had the right to take in connection with the performance of such obligations and, if the Indemnitee is entitled to indemnification hereunder in respect of the event or circumstance as to which the Indemnitee takes such actions, then the Indemnitor shall, in addition to indemnifying Indemnitee for the Liability, indemnify the Indemnitee for all of the legal, accounting and other costs, fees and expenses reasonably and actually incurred in connection therewith. (c) The Indemnitor shall have the right and obligation, in good faith and at its own cost and expense, to cure, remediate, mitigate, remedy or otherwise handle any event or circumstance which gives rise to a Liability in respect of which a Notice of Claim has been given (including events and circumstances which can be cured, remediated, mitigated or remedied through the expenditure of money and events and circumstances which give rise to a Liability which can be measured in terms of money), regardless of the nature of such Liability. Such right and obligation shall include, without limitation, (i) the right to investigate any such event or circumstance, and (ii) the right to defend, contest or otherwise oppose any third party claim, demand, suit, action or proceeding related to such event or circumstance with legal counsel selected by it. The exercise of such right and performance of such obligation shall not constitute an admission or agreement by Indemnitor that it has an indemnification obligation hereunder in respect of such Liability. If the Indemnitor proposes to settle or compromise any such third party action, demand, claim, suit or proceeding, the Indemnitor shall give written notice to that effect (together with a statement in reasonable detail of the terms and conditions of such settlement or compromise) to the Indemnitee a reasonable time prior to effecting such settlement or compromise. (d) The Indemnitee shall have the right, but not the obligation, to participate, at its own cost and expense, in the defense, contest or other opposition of any such third party claim, demand, suit, action or proceeding through legal counsel selected by it and shall have the right, but not the obligation, to assert any and all cross-claims or counterclaims which it may have. So long as the Indemnitor is in good faith performing its obligations under this Section 9.4, the Indemnitee shall (i) at Indemnitor's cost and expense, cooperate in all reasonable ways with, make its and its Affiliates' relevant files and records available for inspection and copying by, make its and its Affiliates' employees reasonably available to and otherwise render reasonable assistance to the Indemnitor upon request and (ii) not compromise or settle any such claim, demand, suit, action or proceeding without the prior written consent of the Indemnitor. The Indemnitee shall have the right (i) to object to the settlement or compromise of any such third party action, demand, claim, suit or proceeding whereupon if such settlement is solely a cash settlement (A) the Indemnitee will assume the defense, contest or other opposition of any such third party action, demand, claim, suit or proceeding for its own account and as if it were the Indemnitor and (B) the Indemnitor shall be released from any and all liability with respect to any such third party action, demand, claim, suit or proceeding to the extent that such liability exceeds the liability which the Indemnitor would have had in respect of such a settlement or compromise, or (ii) to assume, at any time by giving written notice to that effect to the Indemnitor, the cure, mitigation, remediation, remedy or other handling of such event or circumstance and the defense, contest or other opposition of any such third party action, demand, claim, suit or proceeding for its own account whereupon the Indemnitor shall be released from any and all liability with respect to such event or circumstance and such third party action, demand, claim, suit or proceeding. (e) After the Closing, Purchaser shall and shall cause JANY to take all commercially reasonable actions which may be necessary to enable Seller to exercise its rights and perform its obligations under this Section 9.4. (f) Notwithstanding anything contained herein to the contrary, each Party shall use, and shall cause its Affiliates to use, commercially reasonable efforts to mitigate any and all damages, losses, liabilities, costs and expenses in respect of which it may be entitled to indemnification hereunder. ARTICLE 10 PUBLICITY AND CONFIDENTIALITY Section 10.1. Publicity. Neither Party shall or shall permit its Affiliates to issue any publicity, release or announcement concerning the execution and delivery of this Agreement, the provisions hereof or the transactions contemplated hereby without the prior written approval of the form and content of such publicity, release or announcement by the other; provided, however, that no such approval shall be required when such publicity, release or announcement is required by (i) applicable Law, (ii) applicable rules or regulations of, or any listing agreement with, a national or foreign stock exchange or the Automated Quotation System maintained by the National Association of Securities Dealers, Inc. or (iii) any Order of any court, arbitrator or Governmental Entity of competent jurisdiction; and, provided further, that, prior to issuing any publicity, release or announcement without such prior written approval, the Party issuing or whose Affiliate is issuing such publicity, release or announcement shall have given reasonable prior notice to the other Party of such intended issuance and, if requested by the other Party, shall have used reasonable efforts at such other Party's own cost and expense to obtain a protective order or similar protection for the benefit of the other Party. In addition, with the prior written consent of the Parties, not to be unreasonably withheld, CS First Boston and Goldman Sachs & Company each may cause to be published such tombstone advertisements with respect to the transactions contemplated by this Agreement as it shall deem appropriate. Nothing contained herein shall prevent the communication of information with any Governmental Entity or any agency or other organization which rates the financial solvency or claims-paying ability of Seller, Purchaser or JANY, including without limitation, A.M. Best Company, Inc., Duff & Phelps, Standard & Poor's Corporation and Moody's Investors Services, Inc. or state insurance departments or other regulatory bodies. Section 10.2. Confidentiality. (a) All data, reports, records and other information of any kind received by a Party or its Affiliates or Representatives (such Party being hereinafter referred to as the "Receiving Party") from the other Party or its Affiliates or Representatives, (such other Party being hereinafter referred to as the "Delivering Party") under this Agreement or in connection with the transactions contemplated hereby shall be treated as confidential (collectively, "Confidential Information"). Except as otherwise provided herein, the Receiving Party shall not use (and shall not permit its Affiliates, or Representatives to use) Confidential Information for its own (or their own) benefit and shall use commercially reasonable efforts (and shall cause its Affiliates, directors, officers and employees to use commercially reasonable efforts) to maintain the confidentiality of Confidential Information. If the Receiving Party or any of its Affiliates or Representatives is required to disclose Confidential Information by or to any court, arbitrator or Governmental Entity of competent jurisdiction, the Receiving Party shall, prior to such disclosure, promptly notify the Delivering Party of such requirement and all particulars related to such requirement. The Delivering Party shall have the right, at its own cost and expense, to object to such disclosure and to seek confidential treatment of any Confidential Information to be so disclosed on such terms as it shall determine. (b) The restrictions set forth in Section 10.2(a) hereof shall not apply to the use or disclosure of Confidential Information to the extent, but only to the extent, (i) permitted or required pursuant to any other agreement between or among the Parties or their respective Affiliates or Representatives, (ii) necessary by a Party or its Affiliates in connection with exercising its or their rights or performing its or their duties or obligations under this Agreement, the Transition Services Agreement or the other agreements described in clause (i) of this sentence, (iii) contemplated by the last two sentences of Section 10.2(a) hereof or (iv) that the Receiving Party can demonstrate such Confidential Information (A) is or becomes generally available to the public through no fault or neglect of the Receiving Party, (B) is received in good faith on a non-confidential basis from a third party who discloses such Confidential Information without violating any obligations of secrecy or confidentiality, (C) is independently developed after the time of receipt as shown by dated written records or (D) was already possessed at the time of receipt as shown by prior dated written records. (c) For the purposes of this Section 10.2, (i) information which is specific shall not be deemed to be within an exception set forth in Section 10.2(b) hereof merely because it is embraced by general information which is within such an exception and (ii) a combination of information shall not be deemed to be within an exception set forth in Section 10.2(b) hereof merely because individual aspects of such combination are within such an exception unless the combination of information itself, its principle of operation and its value or advantages are within such an exception. ARTICLE 11 MISCELLANEOUS Section 11.1. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally (by courier or otherwise), sent by certified, registered or express mail, postage prepaid and return receipt requested or transmitted by facsimile (with a copy of such notice or other communication and a confirmation of transmission sent by certified, registered or express mail, postage prepaid and return receipt requested no later than the close of business on the next business day following such transmission), and shall be addressed as follows: when Purchaser is to be notified: SunAmerica Life Insurance Company 1 SunAmerica Center, Century City Los Angeles, California 90067-6022 Attention: General Counsel Facsimile No.: (310) 772-6574 with a copy to: SunAmerica Life Insurance Company 1 SunAmerica Center, Century City Los Angeles, California 90067-6022 Attention: Controller Facsimile No.: (310) 772-6684 and O'Melveny & Myers 1999 Avenue of the Stars Suite 700 Los Angeles, California 90067 Attention: Robert D. Haymer, Esq. Facsimile No.: (310) 246-6779 when Seller is to be notified: John Alden Life Insurance Company 7300 Corporate Center Drive Miami, Florida 33126-1223 Attention: General Counsel Facsimile No.: (305) 715-1342 with copies to: John Alden Financial Corporation 7300 Corporate Center Drive Miami, Florida 33126-1223 Attention: General Counsel Facsimile No.: (305) 715-1497 Kelley Drye & Warren LLP Two Stamford Plaza 281 Tresser Boulevard Stamford, Connecticut 06901 Attention: Jay R. Schifferli, Esq. Facsimile No.: (203) 327-2669 A Party may, by notice given in accordance with this Section 11.1 to the other Party, designate another address or Person to which notices required or permitted to be given pursuant to this Agreement shall thereafter be transmitted. Each notice transmitted in the manner described in this Section 11.1 shall be deemed to have been given, received and become effective for all purposes at the time it shall have been (i) delivered to the addressee as indicated by the return receipt (if transmitted by mail), transmitted to the addressee (if transmitted by facsimile and subject to delivery of the mailed copy thereof) or the affidavit of the messenger (if transmitted by personal delivery) or (ii) presented for delivery to the addressee as so indicated during normal business hours, if such delivery shall have been refused for any reason. Section 11.2. Entire Agreement. This Agreement (including the Transition Services Agreement, the Asset Purchase Agreement, the other agreements contemplated hereby and thereby, the Annex, the Exhibits and the Schedules attached hereto (the "Transaction Agreements")) contains the entire agreement and understanding between the Parties with respect to the subject matter hereof and cancels and supersedes all of the previous or contemporaneous agreements, representations, warranties and understandings, whether written or oral, by or between the Parties with respect to the subject matter hereof. Except for the representations and warranties expressly set forth in the Transaction Agreements, Purchaser disclaims reliance upon (i) any representations, warranties or guarantees (whether express or implied and whether oral or written) by Seller, JANY or any of their Affiliates or any of their or their respective Affiliates' Representatives (including, without limitation, any projections of future sales, revenues, expenses or earnings and any statements regarding the prospects of the Insurance Business as presently conducted by JANY) or (ii) any other information with respect to the Insurance Business, Seller, JANY, their respective assets and properties or their industry provided by or on behalf of them. Nothing contained in any document or instrument of conveyance, transfer, assignment or delivery executed or delivered at the Closing pursuant to this Agreement shall amend, extend, modify, renew or alter in any manner any representation, warranty, covenant, agreement or indemnity contained herein. Nothing contained in the Transaction Agreements or in any of the Schedules attached hereto or thereto or in any other agreement contemplated hereby or thereby shall constitute or be interpreted or construed as an admission by any Party or any of its Affiliates of liability to third parties, whether under any Law or otherwise, or as an admission that any Party or any of its Affiliates are in violation of or have ever violated any such Law. Section 11.3. Amendments. No addition to, and no cancellation, renewal, extension, modification or amendment of, or approval under this Agreement shall be binding upon a Party unless such addition, cancellation, renewal, extension, modification, amendment or approval is set forth in a written instrument which states that it adds to, amends, cancels, renews or extends this Agreement or grants an approval hereunder and which is executed and delivered on behalf of each Party by an officer of, or attorney-in- fact for, such Party. Section 11.4. Waivers. No waiver of any provision of this Agreement shall be binding upon a Party unless such waiver is expressly set forth in a written instrument which is executed and delivered on behalf of such Party by an officer of, or attorney-in- fact for such Party. Such waiver shall be effective only to the extent specifically set forth in such written instrument. Neither the exercise (from time to time or at any time) nor the delay or failure (at any time or for any period of time) to exercise any right, power or remedy shall operate as a waiver of, the right to exercise, or impair, limit or restrict the exercise of part of any Party of any such right, power or remedy any other right, power or remedy at any time and from time to time thereafter. No waiver of any right, power or remedy of a Party shall be deemed to be a waiver of any other right, power or remedy of such Party or shall, except to the extent so waived, impair, limit or restrict the exercise of such right, power or remedy. Section 11.5. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. Each Party consents and submits to the non-exclusive personal jurisdiction of any federal court in the State of Delaware in respect of any proceeding for the sole purpose of injunctive relief or to enforce an arbitration award under Section 11.10 hereof. Each Party consents to service of process upon it with respect to any such proceeding by registered mail, return receipt requested, and by any other means permitted by applicable Laws. Each Party waives any objection that it may now or hereafter have to the laying of venue of any such proceeding in federal court in the State of Delaware and any claim that it may now or hereafter have that any such proceeding in any such court has been brought in an inconvenient forum. Section 11.6. Binding Effect; Assignment; Third Party Beneficiaries. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. Neither Seller nor Purchaser shall assign any of its rights or delegate any of its duties hereunder (in whole or in part and by operation of law or otherwise) without the prior written consent of the other Party hereto except that Purchaser may assign its rights and obligations under this Agreement to any of its Affiliates provided Purchaser shall remain liable for all of its obligations hereunder notwithstanding such assignment. Any assignment of rights or delegation of duties under this Agreement by a Party without the prior written consent of the other Party, if such consent is required hereby, shall be void. No Person (including, without limitation, any employee of a Party) shall be, or be deemed to be, a third party beneficiary of this Agreement. Section 11.7. Severability. If any provision of this Agreement shall hereafter be held to be invalid, unenforceable or illegal, in whole or in part, in any jurisdiction under any circumstances for any reason, (i) such provision shall be reformed to the minimum extent necessary to cause such provision to be valid, enforceable and legal while preserving the intent of the Parties as expressed in, and the benefits to the Parties provided by, this Agreement or (ii) if such provision cannot be so reformed, such provision shall be severed from this Agreement and an equitable adjustment shall be made to this Agreement (including, without limitation, addition of necessary further provisions to this Agreement) so as to give effect to the intent as so expressed and the benefits so provided. Such holding shall not affect or impair the validity, enforceability or legality of such provision in any other jurisdiction or under any other circumstances. Neither such holding nor such reformation or severance shall affect or impair the legality, validity or enforceability of any other provision of this Agreement. Section 11.8. Headings. The headings in this Agreement have been inserted for convenience of reference only, and shall not be considered a part of this Agreement and shall not limit, modify or affect in any way the meaning or interpretation of this Agreement. Section 11.9. Counterparts. This Agreement may be executed by the parties in any number of counterparts, each of which when so executed and delivered shall constitute an original instrument, but all such counterparts shall together constitute one and the same instrument. This Agreement shall become effective and be deemed to have been executed and delivered by all of the Parties at such time as counterparts shall have been executed and delivered by both of the Parties, regardless of whether each of the Parties has executed the same counterpart. It shall not be necessary when making proof of this Agreement to account for any counterparts other than a sufficient number of counterparts which, when taken together, contain signatures of both of the Parties. Section 11.10. Arbitration. The Parties acknowledge and agree that the transactions contemplated herein substantially affect and impact interstate commerce. Therefore, all disputes or differences between Seller and Purchaser arising under or which are related to this Agreement (other than proceedings for the sole purpose of injunctive relief) upon which an amicable understanding cannot be reached within 30 days shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, except as hereinafter provided, and judgment upon the award entered by the Arbitrators (as defined below) may be entered in any court having jurisdiction thereof. The Arbitrators provided for herein shall construe this Agreement in light of the prevailing custom and practices for acquisition transactions of a similar nature. The "Arbitrators" shall consist of one neutral arbitrator (or as provided below, three neutral arbitrators). The Parties agree that the arbitration, if implemented under this Agreement, shall be held at a site selected by the Arbitrators. The Parties agree to arbitrate within 90 days following the transmittal of written demand of either Party to arbitrate any dispute arbitrable under this Agreement. The Parties will in good faith, within 15 days following notice of written demand to arbitrate attempt to agree on a single Arbitrator. If the Parties cannot within 15 days thereafter agree on a single arbitrator, each of the Parties shall appoint an Arbitrator, notifying the other Party of the name and address of such Arbitrator. The Arbitrators appointed by each Party shall agree upon and appoint a third neutral Arbitrator. If either Party shall fail to appoint an Arbitrator as herein provided, or should the two Arbitrators so named fail to select the third Arbitrator within 30 days after their appointment, then, in either event, the President of the American Arbitration Association or its successor shall appoint such second and/or third Arbitrator. A decision of a majority of the Arbitrators shall be final and binding and there shall be no appeal therefrom. The Arbitrators shall within 45 days after the final hearing enter an award and the award shall be supported by a written opinion. The fees of the Arbitrators and the direct costs of the arbitration shall be shared equally by the Parties; all other costs of the respective Parties, including without limitation fees and expenses of the respective Party's attorneys, witnesses, and discovery shall be paid by the respective Party, except to the extent that the Arbitrators otherwise direct based on the equities of the situation. The arbitration shall be held in New York, New York, unless otherwise agreed between the Parties. IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above. SUNAMERICA LIFE INSURANCE COMPANY By: /s/ JAY S. WINTROB _____________________________________ Name: Jay S. Wintrob Title: Executive Vice President JOHN ALDEN LIFE INSURANCE COMPANY By: /s/ GLENDON E. JOHNSON _____________________________________ Name: Glendon E. Johnson Title: Chairman, President & C.E.O. ANNEX A The following terms are defined in the following Sections. DEFINED TERM SECTION Agreement Introduction Ancillary Agreements 3.10 Antitrust Division 4.4 Applicable Purchaser Survival Period 9.1 Arbitrators 11.10 Asset Purchase Agreement Introduction Books and Records 1.5 Closing 1.1 Closing Date 1.1 Code 2.9 Confidential Information 10.2 Deemed Asset Sale 7.4 Delivering Party 10.2 ERISA 2.20 ERISA Plans 2.20 401K Plan 7.5 Form 8023-A Package 7.4 FTC 4.4 Houston 7.4 HSR Act 2.5 Indemnitee 9.4 Indemnitor 9.4 Insurance Business Introduction Interim John Alden Financial Statements 2.34 Interim Purchaser Financial Statements 3.7 JANY's Adjusted Tax Return Liability 7.4 JANY Employee 7.5 JANY Reserve Liabilities 2.23 JANY Stock Introduction JANY Introduction John Alden 2.34 John Alden Financial Statements 2.34 knowledge 2.3 Liabilities 9.2 Liens 2.4 Notice of Claim 9.4 Parties Introduction Party Introduction Pension Benefit Guaranty Corporation 2.20 Pension Plan 7.5 Permits 2.5 Pre-Closing Straddle Period 7.4 Post-Closing Straddle Period 7.4 Purchase Price 1.2 Purchaser Introduction Purchaser Financial Statements 3.7 Purchaser Group 9.3 Purchaser's Opinion 1.3 Real Property 2.18 Receiving Party 10.2 Resolution Accountant 7.4 Seller Introduction Seller Group 9.2 Seller's Opinion 1.3 Tax Allocation Agreement 7.4 Tax Allocation Payments 7.4 Tax Claim 7.4 Termination Date 8.1 Third Party Administration Agreements 2.31 Transition Services Agreement 1.4 Transaction Agreements 1.2 "Action" means any action, claim, complaint, cause of action, arbitration, petition, investigation, suit or administrative or other proceeding, whether civil or criminal, at law or in equity, before any court, arbitrator or Governmental Entity. "Affiliate" shall mean any Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Person specified. For purposes of this definition, "control" (and its derivative terms "controlled," "controls," etc.) shall mean the power and right to direct the management and policies of another Person, whether by ownership of voting securities, the ability to elect a majority of the board of directors or other managing board or committee, management contract, or otherwise. "Book Value" means book value computed in accordance with SAP, without marking to market and without including Accrued and Unpaid Investment Income. "Business Day" means any day on which banks and other financial institutions are not required to be closed pursuant to applicable Laws in any of New York, New York, Los Angeles, California and Miami, Florida. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act. "Closing Ledger Date" means the 21st day of the month in which the Closing occurs or, if such day is not a Business Day, the next preceding Business Day. "Combined Reserve Liabilities" means the Reserve Liabilities for JALIC Annuity Contracts plus all reserves with respect to JANY's insurance contracts, in the aggregate. "Commercially reasonable efforts" when used with respect to any Party, means the reasonable efforts of such Party without the requirement that such Party incur any extraordinary out-of-pocket expenses, incur any other unanticipated burden or commence or pursue any action, suit or proceeding. "Environmental Laws" means any Law pertaining to health, industrial hygiene or the environmental condition on or under any property including, without limitation, CERCLA and the Toxic Substance Control Act, and the rules and regulations thereunder. "Excluded Liabilities" means (i) all liability for premium taxes arising on account of premiums paid on or prior to the Closing Ledger Date with respect to the Insurance Contracts, (ii) all liability for commission payments and other fees or compensation payable with respect to the Insurance Contracts to or for the benefit of brokers and agents and other distribution sources, to the extent that such amounts are based on premiums paid on or prior to the Closing Ledger Date, (iii) trailer commissions (which are based upon account values) accruable on or prior to the Closing Ledger Date, and (iv) all guaranty fund assessments (or any other assessment from a state entity formed to protect policyholders against failure of an insurer to perform its contractual obligations) imposed as a result of a conservatorship or other insolvency proceeding commenced on or prior to the Closing Date with respect to the Insurance Contracts. "Execution Date" means the date of this Agreement. "Extra Contractual Obligations" means all liabilities (i) for compensatory, consequential, exemplary, punitive or similar damages which directly relate to any alleged or actual act, error, omission, fraud or misrepresentation by Seller or any of its Affiliates or any of its or its Affiliates' officers or employees, whether intentional or otherwise, prior to the Closing Date, or (ii) from any actual or alleged reckless conduct or bad faith by Seller, or any of its Affiliates or any of its or its Affiliates' officers or employees, in connection with Seller's handling of any claim under any of the Insurance Contracts or in connection with the issuance, offer, sale, delivery, cancellation or administration by Seller or any of its Affiliates or any of its or its Affiliates' officers or employees of any of the Insurance Contracts. "GAAP" shall mean United States generally accepted accounting principles as in effect from time to time, consistently applied throughout the specified period and in the immediately prior comparable period. "Governmental Entity" means any agency, administrative division or department (or administrative subdivision), commission, regulatory authority (including without limitation any insurance regulatory authority), taxing or administrative authority, court or other judicial body, legislature of the government of the United States or any state, city, municipality, county, town, district or other political subdivision thereof on any state, city, municipality, county, town, district or other political subdivision thereof or any quasi-governmental entity, including, without limitation, the employees or agents thereof. "Hazardous Substance" means (i) any and all substances defined as "hazardous substances," "extremely hazardous substances," "toxic substances," "hazardous waste," "hazardous materials" or "infectious waste" for purposes of CERCLA or any other Environmental Law and (ii) any petroleum or petroleum-based products. "In Force Insurance Contracts" means the Insurance Contracts in effect on the date hereof, and as of the Closing Date, as the case may be. "Insurance Contracts" means all annuity and other policies and supplementary contracts, as well as any riders providing for other supplemental benefits, and all supplements, endorsements, riders and ancillary agreements in connection therewith, and specifically includes without limitation (i) all lapsed Insurance Contracts subject to reinstatement and (ii) any supplemental benefits arising out of the Insurance Contracts. "Laws" means any and all federal, state or local statutes, laws, ordinances, rules and regulations. "Loan Documents" means the Mortgage Note, the Mortgage and any and all other agreements, certificates, documents or instruments in Seller's possession or under its control relating to the origination, closing and modification of a Mortgage Loan, including without limitation any related assignment of rents, security agreement, UCC financing statement, guaranty, letter of credit, pledge agreement, loan agreement or other instrument creating a security interest in, and Lien upon, real and/or personal property. "Material Adverse Effect" means any change, effect, event or occurrence that has, or is reasonably likely to have, individually or in the aggregate, a material adverse impact on (i) the assets, business, financial position or results of operations of JANY or (ii) the ability of Seller or JANY to consummate the transactions contemplated by this Agreement and the Transition Services Agreement; provided that "Material Adverse Effect" shall be deemed to exclude the impact of (i) changes in Laws or interpretations thereof by any Governmental Entity relating to or affecting the Insurance Business and (ii) changes in GAAP or SAP. "Material Adverse Effect on Purchaser" means any change, effect, event or occurrence that has, or is reasonably likely to have, individually or in the aggregate, a material adverse impact on (i) the business, financial position or results of operations of Purchaser (and after giving effect to the Closing, together with JANY) or (ii) the ability of Purchaser to consummate the transactions contemplated by this Agreement and the Transition Services Agreement; provided that "Material Adverse Effect on Purchaser" shall be deemed to exclude the impact of (i) changes in Laws or interpretations thereof by any Governmental entity relating to or affecting the business of Purchaser and (ii) changes in GAAP or SAP. "Mortgage" means the mortgage, deed of trust or other instrument (and all modifications thereto) creating a Lien on real property described therein or on the tenant's interest under a ground lease of real property described therein, in either case securing a Mortgage Note. "Mortgage Loan" means any individual mortgage loan that is identified on the Mortgage Loan Schedule. "Mortgage Loan Schedule" means the list of Mortgage Loans subject to this Agreement and identified on Schedule 2.32(a) attached hereto, which schedule sets forth the following information with respect to each Mortgage Loan as of the date specified therein. (i) the Mortgage Loan numbers; (ii) the name of the mortgagor and the name or address of the Mortgaged Property; (iii) the Mortgage Loan Principal Balance; (iv) lien priority of the Mortgage; (v) the maturity date; and (vi) the current interest rate. (vii) the Mortgage Loan Status (current, litigation, bankruptcy, tax plans, etc.). "Mortgage Note" means the note or other evidence of the indebtedness under a Mortgage Loan. "Mortgaged Property" means the land and improvements that secure a Mortgage, which in the case of a leasehold mortgage shall mean the tenant's interest in the real property underlying the ground lease or, where the context so requires, the real property underlying the ground lease. "Order" means any decree, injunction, judgment, order, ruling, assessment or writ. "Person" shall mean any natural person, corporation, general partnership, limited partnership, limited liability company,proprietorship, trust, union, association, court, tribunal, agency, government, department, commission, self-regulatory organization, arbitrator, board, bureau, instrumentality, or other entity, enterprise, authority, or business organization. "Policyholders" means, as applicable, the beneficiaries under, or policyholders with-respect to, or owners of, the Insurance Contracts, or any other Person entitled to payment with respect to the Insurance Contracts. "Related Agreements" means the agreements providing for the payment of commissions relating to the Insurance Contracts as listed in Schedule 2.30. "Representatives" means, with respect to any Person, such person's Affiliates, subsidiaries, shareholders, directors, partners, joint ventures, officers, employees, agents, representatives, producers, independent contractors, consultants, lenders, brokers, finders, investment bankers, financial advisors, attorneys and accountants. Seller's Representatives include without limitation CS First Boston. Purchaser's Representatives include without limitation Goldman Sachs & Company. "Qualified Investments" means (A) readily marketable direct obligations of the Government of the United States or any agency or instrumentality thereof or obligations unconditionally guaranteed by the full faith and credit of the Government of the United States; (B) demand deposits with (1) any commercial bank that is a member of the Federal Reserve System, the parent of which issues commercial paper rated at least "P-1" (or the then equivalent grade) by Moody's and "A-1" (or the then equivalent grade) by S&P, is organized under the Laws of the United States or any State thereof and is rated "TBW-1" or the equivalent or better by Thomson BankWatch or any other nationally recognized agency or, (2) a United States branch or agency of any commercial bank organized under the Laws of any Organization for Economic Cooperation and Development member country (as of the Execution Date of this Agreement) which is rated "TBW-1" or the equivalent or better by Thomson BankWatch or other internationally recognized agency; (C) commercial paper issued by any corporation rated at least P-1 or the then equivalent grade by Moody's and A-1 or the then equivalent grade by S&P; (D) money market mutual funds (i) whose portfolio is comprised solely of (1) marketable direct obligations of the United States government or its agencies, and/or (2) bank or corporate obligations which individually meet the rating criteria stipulated in (B) or (C) above, (ii) whose total net assets exceed $1 billion and (iii) where the Seller's investment in such fund is limited to an amount not exceeding 10% of such fund's assets; or (E) such other assets as the Party receiving such Qualified Investments may expressly approve in writing. "SAP" means the statutory accounting principals and practices, as in effect from time to time, required or permitted for life insurance companies by applicable Laws of the National Association of Insurance Commissioners and the insurance regulatory authority in the state in which the company in question is domiciled, as the case may be, consistently applied throughout the specified period and in the immediately prior comparable period "Taxes" shall mean all taxes, charges, fees, levies, or other similar assessments, including, without limitation, income, gross receipts, ad valorem, premium, excise, real property, personal property, windfall profit, sales, use, transfer, licensing, withholding, employment, payroll, and franchise taxes imposed by any Governmental Entity; and such term shall include any interest (through the date of payment), penalties, assessments, or additions to tax resulting from, attributable to, or incurred in connection with any such tax or any contest or dispute thereof. "Tax Returns" shall mean returns, declarations, statements, reports, schedules, forms and information returns and any amended Tax Return required to be supplied to a taxing authority in respect of or relating to Taxes. "Vanishing Premium Liabilities" means any Liabilities arising out of or connected with a claim that an Insurance Contract which utilizes dividends, credited interest or other earnings to reduce the premium was sold based on a premium and earnings illustration or representation that was allegedly or actually fraudulent or misleading. EX-3.(J) 4 EXHIBIT 3.(J) 1 EXHIBIT 3(j) STATE OF MARYLAND 450982 STATE DEPARTMENT OF ASSESSMENTS AND TAXATION 301 West Preston Street, Baltimore, Maryland 21201 DATE: JUNE 07, 1996 THIS IS TO ADVISE YOU THAT THE ARTICLES OF AMENDMENT FOR SUNAMERICA INC. WERE RECEIVED AND APPROVED FOR RECORD ON JUNE 7, 1996 AT 9:10 AM. FEE PAID: 78.00 SEAL WILLIAM B. MARKER CHARTER SPECIALIST 2 SUNAMERICA INC. ARTICLES OF AMENDMENT SunAmerica Inc., a Maryland corporation, having its principal office in the State of Maryland in Baltimore City, Maryland (which is hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Charter of the Corporation is hereby amended by striking out paragraph (e) of Section 8 of Article Fifth of the Charter and inserting in lieu thereof the following: (e) At any time when the number of outstanding shares of Nontransferable Class B Stock as reflected on the stock transfer books of the Corporation falls below 5% of the aggregate number of the issued and outstanding shares of Common Stock and Nontransferable Class B Stock of the Corporation, or the Board of Directors and the holders of a majority of the outstanding shares Nontransferable Class B Stock approve the conversion of all of the Nontransferable Class B Stock into Common Stock, then, immediately upon the occurrence of either such event, the outstanding shares of Nontransferable Class B Stock shall be converted into shares of Common Stock. In the event of such a conversion, certificates formerly representing outstanding shares of Nontransferable Class B Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock. SECOND: The amendment does not increase the authorized stock of the Corporation. THIRD: The foregoing amendment to the Charter of the Corporation has been advised by the Board of Directors and approved by the stockholders of the Corporation. IN WITNESS WHEREOF, SunAmerica Inc. has caused these presents to be signed in its name and on its behalf by its Vice Chairman and witnessed by its Secretary on June 5, 1996. WITNESS: SunAmerica Inc. /s/ SUSAN L. HARRIS By: /s/ JAY S. WINTROB - ----------------------- --------------------------- Susan L. Harris, Jay S. Wintrob Secretary THE UNDERSIGNED, Vice Chairman of SunAmerica Inc., who executed on behalf of the Corporation the foregoing Articles of Amendment of which this certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Articles of Amendment to be the corporate act of said Corporation and hereby certifies that to the best of his knowledge, information, and belief the matters and facts set forth therein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. /s/ JAY S. WINTROB ------------------------------- Jay S. Wintrob EX-3.(K) 5 EXHIBIT 3.(K) 1 Exhibit 3(k) SUNAMERICA INC. BY-LAWS ARTICLE I. STOCKHOLDERS SECTION 1.01. Annual Meeting. The Corporation shall hold an annual meeting of its stockholders to elect directors and transact any other business within its powers, either at 2:00 p.m. on the second Friday in February in each year if not a legal holiday, or at such other time on such other day falling on or before the 30th day thereafter as shall be set by the Board of Directors. Except as the Charter or statute provides otherwise, any business may be considered at an annual meeting without the purpose of the meeting having been specified in the notice. Failure to hold an annual meeting does not invalidate the Corporation's existence or affect any otherwise valid corporate acts. SECTION 1.02. Special Meeting. At any time in the interval between annual meetings, a special meeting of the stockholders may be called by the Chairman of the Board or the President or by a majority of the Board of Directors by vote at a meeting or in writing (addressed to the Secretary of the Corporation) with or without a meeting. Special meetings of the stockholders shall be called by the Secretary at the request of stockholders only on the written request of stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting. A request for a special meeting shall state the purpose of the meeting and the matters proposed to be acted on at it. The Secretary shall inform the stockholders who make the request of the reasonably estimated costs of preparing and mailing a notice of the meeting and, on payment of these costs to the Corporation, notify each stockholder entitled to notice of the meeting. SECTION 1.03. Place of Meetings. Meetings of stockholders shall be held at such place in the United States as is set from time to time by the Board of Directors. SECTION 1.04. Notice of Meetings; Waiver of Notice. Not less than ten nor more than 90 days before each stockholders' meeting, the Secretary shall give written notice of the meeting to each stockholder entitled to vote at the meeting and each other stockholder entitled to notice of the meeting. The notice shall state the time and place of the meeting and, if the meeting is a 2 special meeting or notice of the purpose is required by statute, the purpose of the meeting. Notice is given to a stockholder when it is personally delivered to him or her, left at his or her residence or usual place of business, or mailed to him or her at his or her address as it appears on the records of the Corporation. Notwithstanding the foregoing provisions, each person who is entitled to notice waives notice if he or she before or after the meeting signs a waiver of the notice which is filed with the records of stockholders' meetings, or is present at the meeting in person or by proxy. SECTION 1.05. Quorum; Voting. Unless statute or the Charter provides otherwise, at a meeting of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting constitutes a quorum, and a majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, except that a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a director. SECTION 1.06. Adjournments. Whether or not a quorum is present, a meeting of stockholders convened on the date for which it was called may be adjourned from time to time without further notice by a majority vote of the stockholders present in person or by proxy to a date not more than 120 days after the original record date. Any business which might have been transacted at the meeting as originally notified may be deferred and transacted at any such adjourned meeting at which a quorum shall be present. SECTION 1.07. General Right to Vote; Proxies. Unless the Charter provides for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders. In all elections for directors, each share of stock may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A stockholder may vote the stock the stockholder 3 owns of record either in person or by proxy. A stockholder may sign a writing authorizing another person to act as proxy. Signing may be accomplished by the stockholder or the stockholder's authorized agent signing the writing or causing the stockholder's signature to be affixed to the writing by any reasonable means, including facsimile signature. A stockholder may authorize another person to act as proxy by transmitting, or authorizing the transmission of, a telegram, cablegram, datagram, or other means of electronic transmission to the person authorized to act as proxy or to a proxy solicitation firm, proxy support service organization, or other person authorized by the person who will act as proxy to receive the transmission. Unless a proxy provides otherwise, it is not valid more than 11 months after its date. A proxy is revocable by a stockholder at any time without condition or qualification unless the proxy states that it is irrevocable and the proxy is coupled with an interest. A proxy may be made irrevocable for so long as it is coupled with an interest. The interest with which a proxy may be coupled includes an interest in the stock to be voted under the proxy or another general interest in the Corporation or its assets or liabilities. SECTION 1.08. List of Stockholders. At each meeting of stockholders, a full, true and complete list of all stockholders entitled to vote at such meeting, showing the number and class of shares held by each and certified by the transfer agent for such class or by the Secretary, shall be furnished by the Secretary. SECTION 1.09. Conduct of Business and Voting. At all meetings of stockholders, unless the voting is conducted by inspectors, the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies, the acceptance or rejection of votes and procedures for the conduct of business not otherwise specified by these By-Laws, the Charter or law, shall be decided or determined by the chairman of the meeting. If demanded by stockholders, present in person or by proxy, entitled to cast 10% in number of votes entitled to be cast, or if ordered by the chairman, the vote upon any election or question shall be taken by ballot and, upon like demand or order, the voting shall be conducted by two inspectors, in which event the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided, by such inspectors. Unless so demanded or ordered, no vote need be by ballot and voting need not be conducted by inspectors. The stockholders at any meeting may choose an inspector or inspectors to act at such meeting, and in default of such election the chairman of the meeting may appoint an inspector or inspectors. No candidate for election as a director at a meeting shall serve as an inspector thereat. 4 SECTION 1.10. No Meeting by Conference Telephone. Stockholders must participate in meetings in person or by proxy and may not participate in a meeting by means of a conference telephone or similar communications equipment. ARTICLE II. BOARD OF DIRECTORS SECTION 2.01. Function of Directors. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors, except as conferred on or reserved to the stockholders by statute or by the Charter or By-Laws. SECTION 2.02. Number of Directors. The Corporation shall have at least three directors; provided that, if there is no stock outstanding, the number of Directors may be less than three but not less than one, and, if there is stock outstanding and so long as there are less than three stockholders, the number of Directors may be less than three but not less than the number of stockholders. The Corporation shall have the number of directors provided in the Charter until changed as herein provided. A majority of the entire Board of Directors may alter the number of directors set by the Charter to not exceeding 12 nor less than the minimum number then permitted herein, but the action may not affect the tenure of office of any director. SECTION 2.03. Election and Tenure of Directors. At each annual meeting, the stockholders shall elect directors to hold office until the next annual meeting and until their successors are elected and qualify. 5 SECTION 2.04. Removal of Director. Unless statute or the Charter provides otherwise, the stockholders may remove any director, with or without cause, by the affirmative vote of a majority of all the votes entitled to be cast for the election of directors. SECTION 2.05. Vacancy on Board. The stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the removal of a director. A director elected by the stockholders to fill a vacancy which results from the removal of a director serves for the balance of the term of the removed director. A majority of the remaining directors, whether or not sufficient to constitute a quorum, may fill a vacancy on the Board of Directors which results from any cause except an increase in the number of directors, and a majority of the entire Board of Directors may fill a vacancy which results from an increase in the number of directors. A director elected by the Board of Directors to fill a vacancy serves until the next annual meeting of stockholders and until his or her successor is elected and qualifies. SECTION 2.06. Regular Meetings. After each meeting of stockholders at which directors shall have been elected, the Board of Directors shall meet as soon as practicable for the purpose of organization and the transaction of other business. In the event that no other time and place are specified by resolution of the Board, the President or the Chairman, with notice in accordance with Section 2.08, the Board of Directors shall meet immediately following the close of, and at the place of, such stockholders' meeting. Any other regular meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Board of Directors. SECTION 2.07. Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board or the President or by a majority of the Board of Directors by vote at a meeting, or in writing with or without a meeting. A special meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Board of Directors. In the absence of designation such meeting shall be held at such place as may be designated in the call. SECTION 2.08. Notice of Meeting. Except as provided in Section 2.06, the Secretary shall give notice to each director of each regular and special meeting of the Board of Directors. The notice shall state the time and place of the meeting. Notice is given to a director when it is delivered personally to him or her, left at his or her residence or usual place of business, or sent by telegraph, facsimile transmission or telephone, at least 24 hours 6 before the time of the meeting or, in the alternative by mail to his or her address as it shall appear on the records of the Corporation, at least 72 hours before the time of the meeting. Unless these By-Laws or a resolution of the Board of Directors provides otherwise, the notice need not state the business to be transacted at or the purposes of any regular or special meeting of the Board of Directors. No notice of any meeting of the Board of Directors need be given to any director who attends except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened, or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Any meeting of the Board of Directors, regular or special, may adjourn from time to time to reconvene at the same or some other place, and no notice need be given of any such adjourned meeting other than by announcement. SECTION 2.09. Action by Directors. Unless statute or the Charter or By-Laws requires a greater proportion, the action of a majority of the directors present at a meeting at which a quorum is present is action of the Board of Directors. One-third of the entire Board of Directors shall constitute a quorum for the transaction of business. In the absence of a quorum, the directors present by majority vote and without notice other than by announcement may adjourn the meeting from time to time until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the Board and filed with the minutes of proceedings of the Board. 7 SECTION 2.10. Meeting by Conference Telephone. Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at a meeting. SECTION 2.11. Compensation. By resolution of the Board of Directors a fixed sum and expenses, if any, for attendance at each regular or special meeting of the Board of Directors or of committees thereof, and other compensation for their services as such or on committees of the Board of Directors, may be paid to directors. Directors who are full-time employees of the Corporation need not be paid for attendance at meetings of the board or committees thereof for which fees are paid to other directors. A director who serves the Corporation in any other capacity also may receive compensation for such other services, pursuant to a resolution of the directors. ARTICLE III. COMMITTEES SECTION 3.01. Committees. The Board of Directors may appoint from among its members an Executive Committee and other committees composed of one or more directors and delegate to these committees any of the powers of the Board of Directors, except the power to authorize dividends on stock, elect directors, issue stock other than as provided in the next sentence, recommend to the stockholders any action which requires stockholder approval, amend these By-Laws, or approve any merger or share exchange which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of stock providing for or establishing a method or procedure for determining the maximum number of shares to be issued, a committee of the Board, in accordance with that general authorization or any stock option or other plan or program adopted by the Board of Directors, may authorize or fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors. SECTION 3.02. Committee Procedure. Each committee may fix rules of procedure for its business. One-third of the members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the committee. The members of a committee present at any 8 meeting, whether or not they constitute a quorum, may appoint a director to act in the place of an absent member. Any action required or permitted to be taken at a meeting of a committee may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the committee and filed with the minutes of the committee. The members of a committee may conduct any meeting thereof by conference telephone in accordance with the provisions of Section 2.10. SECTION 3.03. Emergency. In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Corporation by its directors and officers as contemplated by the Charter and these By-Laws, a quorum of the then incumbent Executive Committee shall conduct and manage the affairs and business of the Corporation in accordance with the provisions of Section 3.01. In the event of the unavailability, at such time, of a quorum of the then incumbent Executive Committee, the available directors shall elect an Executive Committee consisting of one or more members of the Board of Directors, whether or not they be officers of the Corporation, which member(s) shall constitute the Executive Committee for the full conduct and management of the affairs of the Corporation in accordance with the foregoing provisions of this Section. This Section shall be subject to implementation by resolution of the Board of Directors passed from time to time for that purpose, and any provisions of these By-Laws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementary resolutions shall be suspended until it shall be determined by any interim Executive Committee acting under this Section that it shall be to the advantage of the Corporation to resume the conduct and management of its affairs and business under all the other provisions of these By-Laws. 9 ARTICLE IV. OFFICERS SECTION 4.01. Executive and Other Officers. The Corporation shall have a Chairman, one or more Vice-Chairmen, a President, one or more Vice Presidents, a Secretary, and a Treasurer and such other officers as may be established and appointed by the Board of Directors. The Board of Directors shall designate who shall serve as chief executive officer, who shall have general supervision of the business and affairs of the Corporation, and may designate a chief operating officer, who shall have supervision of the operations of the Corporation. In the absence of any designation, the Chairman of the Board, if there be one, shall serve as chief executive officer and the President shall serve as chief operating officer. In the absence of the Chairman of the Board, or if there be none, the President shall be the chief executive officer. The same person may hold both offices. The Corporation may also have one or more assistant officers and subordinate officers as may be established by the Board of Directors. A person may hold more than one office in the Corporation except that no person may serve concurrently as both President and Vice-President of the Corporation. The Chairman of the Board shall be a director; the other officers may be directors. SECTION 4.02. Chairman of the Board. The Chairman of the Board, if one be elected, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present. Unless otherwise specified by the Board of Directors, he or she shall be the chief executive officer of the Corporation. In general, he or she shall perform such duties as are customarily performed by the chief executive officer of a corporation and may perform any duties of the President and shall perform such other duties and have such other powers as are from time to time assigned to him or her by the Board of Directors. SECTION 4.03. President. Unless otherwise provided by resolution of the Board of Directors, the President, in the absence of the Chairman of the Board, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present. Unless otherwise specified by the Board of Directors, the President shall be the chief operating officer of the Corporation and perform the duties customarily performed by chief operating officers; he or she may execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments, except in cases in which the signing and execution thereof shall have been expressly delegated to some other officer or agent of the Corporation. In general, he or 10 she shall perform such other duties customarily performed by a president of a corporation and shall perform such other duties and have such other powers as are from time to time assigned to him or her by the Board of Directors or the chief executive officer of the Corporation. SECTION 4.04. Vice-Presidents. The Vice-President or Vice-Presidents, at the request of the chief executive officer or the President, or in the President's absence or during his or her inability to act, shall perform the duties and exercise the functions of the President, and when so acting shall have the powers of the President. If there be more than one Vice-President, the Board of Directors may determine which one or more of the Vice-Presidents shall perform any of such duties or exercise any of such functions, or if such determination is not made by the Board of Directors, the chief executive officer, or the President may make such determination; otherwise any of the Vice-Presidents may perform any of such duties or exercise any of such functions. Each Vice-President shall perform such other duties and have such other powers, and have such additional descriptive designations in their titles (if any), as are from time to time assigned to them by the Board of Directors, the chief executive officer, or the President. SECTION 4.05. Secretary. The Secretary shall keep the minutes of the meetings of the stockholders, of the Board of Directors and of any committees, in books provided for the purpose; he or she shall see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; he or she shall be custodian of the records of the Corporation; he or she may witness any document on behalf of the Corporation, the execution of which is duly authorized, see that the corporate seal is affixed where such document is required or desired to be under its seal, and, when so affixed, may attest the same. In general, he or she shall perform such other duties customarily performed by a secretary of a corporation, and shall perform such other duties and have such other powers as are from time to time assigned to him or her by the Board of Directors, the chief executive officer, or the President. 11 SECTION 4.06. Treasurer. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit, or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Board of Directors; he or she shall render to the President and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation. In general, he or she shall perform such other duties customarily performed by a treasurer of a corporation, and shall perform such other duties and have such other powers as are from time to time assigned to him or her by the Board of Directors, the chief executive officer, or the President. SECTION 4.07. Assistant and Subordinate Officers. The assistant and subordinate officers of the Corporation are all officers below the office of Vice-President, Secretary, or Treasurer. The assistant or subordinate officers shall have such duties as are from time to time assigned to them by the Board of Directors, the chief executive officer, or the President. SECTION 4.08. Election, Tenure and Removal of Officers. The Board of Directors shall elect the officers of the Corporation. The Board of Directors may from time to time authorize any officer to appoint assistant and subordinate officers. Election or appointment of an officer, employee or agent shall not of itself create contract rights. All officers shall be appointed to hold their offices, respectively, during the pleasure of the Board. The Board of Directors (or, as to any assistant or subordinate officer, any committee or officer authorized by the Board) may remove an officer at any time. The removal of an officer does not prejudice any of his or her contract rights. The Board of Directors (or, as to any assistant or subordinate officer, any committee or officer authorized by the Board) may fill a vacancy which occurs in any office for the unexpired portion of the term. SECTION 4.09. Compensation. The Board of Directors shall have power to fix the salaries and other compensation and remuneration, of whatever kind, of all officers of the Corporation. No officer shall be prevented from receiving such salary by reason of the fact that he or she is also a director of the Corporation. The Board of Directors may authorize any committee or officer, upon whom the power of appointing assistant and subordinate officers may have been conferred, to fix the salaries, compensation and remuneration of such assistant and subordinate officers. ARTICLE V. 12 STOCK SECTION 5.01. Certificates for Stock. Each stockholder is entitled to certificates which represent and certify the shares of stock he or she holds in the Corporation. Each stock certificate shall include on its face the name of the Corporation, the name of the stockholder or other person to whom it is issued, and the class of stock and number of shares it represents. It shall be in such form, not inconsistent with law or with the Charter, as shall be approved by the Board of Directors or any officer or officers designated for such purpose by resolution of the Board of Directors. Each stock certificate shall be signed by the Chairman of the Board, the President, or a Vice-President, and countersigned by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer. Each certificate may be sealed with the actual corporate seal or a facsimile of it or in any other form and the signatures may be either manual or facsimile signatures. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. SECTION 5.02. Transfers. The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock; and may appoint transfer agents and registrars thereof. The duties of transfer agent and registrar may be combined. SECTION 5.03. Record Dates or Closing of Transfer Books. The Board of Directors may set a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to stockholders, including which stockholders are entitled to notice of a meeting, vote at a meeting, receive a dividend, or be allotted other rights. The record date may not be prior to the close of business on the day the record date is fixed nor, subject to Section 1.06, more than 90 days before the date on which the action requiring the determination will be taken; the 13 transfer books may not be closed for a period longer than 20 days; and, in the case of a meeting of stockholders, the record date or the closing of the transfer books shall be at least ten days before the date of the meeting. SECTION 5.04. Stock Ledger. The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the offices of a transfer agent for the particular class of stock, or, if none, at the principal office in the State of Maryland or the principal executive offices of the Corporation. SECTION 5.05. Certification of Beneficial Owners. The Board of Directors may adopt by resolution a procedure by which a stockholder of the Corporation may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may certify; the purpose for which the certification may be made; the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board considers necessary or desirable. On receipt of a certification which complies with the procedure adopted by the Board in accordance with this Section, the person specified in the certification is, for the purpose set forth in the certification, the holder of record of the specified stock in place of the stockholder who makes the certification. SECTION 5.06. Lost Stock Certificates. The Board of Directors of the Corporation may determine the conditions for issuing a new stock certificate in place of one which is alleged to have been lost, stolen, or destroyed, or the Board of Directors may delegate such power to any officer or officers of the Corporation. In their discretion, the Board of Directors or such officer or officers may refuse to issue such new certificate save upon the order of some court having jurisdiction in the premises. ARTICLE VI. FINANCE SECTION 6.01. Checks, Drafts, Etc. All checks, drafts and orders 14 for the payment of money, notes and other evidences of indebtedness, issued in the name of the Corporation, shall, unless otherwise provided by resolution of the Board of Directors or the Executive Committee, be signed by the President, a Vice-President or an Assistant Vice-President and countersigned by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. SECTION 6.02. Annual Statement of Affairs. The President or chief accounting officer shall prepare annually a full and correct statement of the affairs of the Corporation, to include a balance sheet and a financial statement of operations for the preceding fiscal year. The statement of affairs shall be submitted at the annual meeting of the stockholders and, within 20 days after the meeting, placed on file at the Corporation's principal office. SECTION 6.03. Fiscal Year. The fiscal year of the Corporation shall be the twelve calendar months period ending September 30 in each year, unless otherwise provided by the Board of Directors or the Executive Committee. SECTION 6.04. Dividends. If declared by the Board of Directors at any meeting thereof, the Corporation may pay dividends on its shares in cash, property, or in shares of the capital stock of the Corporation, unless such dividend is contrary to law or to a restriction contained in the Charter. ARTICLE VII. INDEMNIFICATION SECTION 7.01. Procedure. Any indemnification, or payment of expenses in advance of the final disposition of any proceeding, shall be made promptly, and in any event within 60 days, upon the written request of the director or officer entitled to seek indemnification (the "Indemnified Party"). The right to indemnification and advances hereunder shall be enforceable by the Indemnified Party in any court of competent jurisdiction, if (i) the Corporation denies such request, in whole or in part, or (ii) no disposition thereof is made 15 within 60 days. The Indemnified Party's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be reimbursed by the Corporation. It shall be a defense to any action for advance for expenses that (a) a determination has been made that the facts then known to those making the determination would preclude indemnification or (b) the Corporation has not received both (i) an undertaking as required by law to repay such advances in the event it shall ultimately be determined that the standard of conduct has not been met and (ii) a written affirmation by the Indemnified Party of such Indemnified Party's good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met. SECTION 7.02. Exclusivity, Etc. The indemnification and advance of expenses provided by the Charter and these By-Laws shall not be deemed exclusive of any other rights to which a person seeking indemnification or advance of expenses may be entitled under any law (common or statutory), or any agreement, vote of stockholders or disinterested directors or other provision that is consistent with law, both as to action in his or her official capacity and as to action in another capacity while holding office or while employed by or acting as agent for the Corporation, shall continue in respect of all events occurring while a person was a director or officer after such person has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of such person. The Corporation shall not be liable for any payment under this By-Law in connection with a claim made by a director or officer to the extent such director or officer has otherwise actually received payment under insurance policy, agreement, vote or otherwise, of the amounts otherwise indemnifiable hereunder. All rights to indemnification and advance of expenses under the Charter of the Corporation and hereunder shall be deemed to be a contract between the Corporation and each director or officer of the Corporation who serves or served in such capacity at any time while this By-Law is in effect. Nothing herein shall prevent the amendment of this By-Law, provided that no such amendment shall diminish the rights of any person hereunder with respect to events occurring or claims made before its adoption or as to claims made after its adoption in respect of events occurring before its adoption. Any repeal or modification of this By-Law shall not in any way diminish any rights to indemnification or advance of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to events occurring, or claims made, while this By-Law or any provision hereof is in force. SECTION 7.03. Severability; Definitions. The invalidity or 16 unenforceability of any provision of this Article VII shall not affect the validity or enforceability of any other provision hereof. The phrase "this By-Law" in this Article VII means this Article VII in its entirety. ARTICLE VIII. SUNDRY PROVISIONS SECTION 8.01. Books and Records. The Corporation shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its stockholders and Board of Directors and of any executive or other committee when exercising any of the powers of the Board of Directors. The books and records of a Corporation may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written form but may be maintained in the form of a reproduction. The original or a certified copy of these By-Laws shall be kept at the principal office of the Corporation. SECTION 8.02. Corporate Seal. The Board of Directors shall provide a suitable seal, bearing the name of the Corporation, which shall be in the charge of the Secretary. The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. If the Corporation is required to place its corporate seal to a document, it is sufficient to meet the requirement of any law, rule, or regulation relating to a corporate seal to place the word "(seal)" adjacent to the signature of the person authorized to sign the document on behalf of the Corporation. SECTION 8.03. Bonds. The Board of Directors may require any officer, agent or employee of the Corporation to give a bond to the Corporation, conditioned upon the faithful discharge of his or her duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors. 17 SECTION 8.04. Voting Stock in Other Corporations. Stock of other corporations or associations, registered in the name of the Corporation, may be voted by the President, a Vice-President, the Secretary, or a proxy appointed by any of them. The Board of Directors, however, may by resolution appoint some other person to vote such shares, in which case such person shall be entitled to vote such shares upon the production of a certified copy of such resolution. SECTION 8.05. Mail. Any notice or other document which is required by these By-Laws to be mailed shall be deposited in the United States mails, postage prepaid. SECTION 8.06. Execution of Documents. A person who holds more than one office in the Corporation may not act in more than one capacity to execute, acknowledge, or verify an instrument required by law to be executed, acknowledged, or verified by more than one officer. SECTION 8.07. Amendments. Subject to the provisions of Section 2.02, (a) any provision of these By-Laws may be altered or repealed and new by-laws may be adopted at any annual meeting of the stockholders or at a special meeting called for that purpose and (b) the Board of Directors shall have the power, at any regular or special meeting thereof, to make and adopt new by-laws, or to amend, alter or repeal any provision of these By-Laws. ARTICLE IX. SPECIAL VOTE OF OUTSIDE DIRECTORS WITH RESPECT TO CERTAIN PROPOSED TRANSACTIONS SECTION 9.01. Type of Transaction; Vote Required. In the event the Corporation or an Affiliate (as hereinafter defined) of the Corporation proposes to enter into a Rule 13e-3 Transaction (as hereinafter defined), such transaction shall not be consummated unless it has been approved by a majority of the Outside Directors (as hereinafter defined) as being fair to the Unaffiliated Stockholders (as hereinafter defined) of the Corporation. In considering whether to approve such transaction, the Outside Directors shall be entitled to seek the advice and opinion only of independent legal counsel, an independent investment banker, or such other independent experts they may select, provided that such independent legal counsel, independent investment banker or such other independent experts have no current or recent material affiliation with the Corporation or such Affiliate of the Corporation. 18 SECTION 9.02. Definitions. For the purposes of this Article IX; (a) "Affiliate of the Corporation" shall have the same meaning as the term "affiliate" of an issuer under Regulation Section 241.13e-3(a)(1), 17 C.F.R. Section 240.13e-3(a)(1), promulgated under the Securities Exchange Act of 1934, as amended. (b) "Rule 13e-3 Transaction" shall have the same meaning as that term is given under Regulation Section 241.13e-3(a)(3), 17 C.F.R. Section 240.13e-3(a)(3), promulgated under the Securities Exchange Act of 1934, as amended. (c) "Outside Directors" shall mean those duly elected and acting directors of the Corporation who are not employees (as that term is defined in Section 3121(d) of the Internal Revenue Code of 1986, as amended) of the Corporation, or of any subsidiary of the Corporation, except that Eli Broad shall not be deemed to be an Outside Director of the Corporation whether or not he is such an employee of the Corporation at the time of the approval of such Rule 13e-3 Transaction. (d) "Unaffiliated Stockholders" shall have the same meaning as the term "unaffiliated security holder" is given under Regulation Section 240.13e-3(a)(3)(ii)(4), 17 C.F.R. Section 240.13e-3(a)(3)(ii)(4), promulgated under the Securities Exchange Act of 1934, as amended. (e) "Voting Stock of the Corporation" shall mean the outstanding shares of capital stock of the Corporation at the time to vote generally in the election of directors. 19 SECTION 9.03. Amendment. Article VII of the By-Laws to the contrary notwithstanding, this Article IX cannot be altered, amended or repealed except upon the affirmative vote of the holders of not less than a majority of the total voting power of the Voting Stock of the Corporation held by Unaffiliated Stockholders voting at a duly held meeting at which a quorum is present. 20 SECRETARY'S CERTIFICATE I, Susan L. Harris, hereby certify that I am duly elected, qualified and acting Secretary of SunAmerica Inc., a Maryland corporation, and that the foregoing Bylaws are the Bylaws of said corporation as adopted by action of the Board of Directors of the corporation duly taken on November 8, 1996. These Bylaws have not been amended, modified or rescinded and are in full force and effect as of the date hereof. IN WITNESS WHEREOF, I have executed this Certificate as Secretary of the Corporation this 8th day of November, 1996. /s/ Susan L. Harris ------------------------- Susan L. Harris, Secretary EX-10.(R) 6 EXHIBIT 10.(R) 1 EXHIBIT 10(r) SUNAMERICA INC. List of Executive Compensation Plans and Arrangements
Exhibit No. Description - ------ ----------------------------------------------------------------------------------- 10(a) Amended and Restated Employment Agreement, dated March 21, 1996, between the Company and Gary W. Krat, amending the Employment Agreement, dated July 30, 1992, is incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q, for the quarter ended March 31, 1996, filed May 13, 1996. 10(b) Employment Agreement, dated July 14, 1992, between the Company and Michael L. Fowler, is incorporated herein by reference to Exhibit 10(f) to the Company's 1992 Annual Report on Form 10-K, filed November 30, 1992. 10(c) Employment Agreement, dated April 17, 1995, between the Company and Joseph M. Tumbler, is incorporated herein by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q, for the quarter ended June 30, 1995, filed August 14, 1995. 10(d) Employment Agreement, dated April 27, 1995, between the Company and Jay S. Wintrob, is incorporated herein by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q, for the quarter ended June 30, 1995, filed August 14, 1995. 10(e) 1988 Employee Stock Plan is incorporated herein by reference to Exhibit B to the Company's and Kaufman and Broad Home Corporation's Notice of and Joint Proxy Statement for Special Meeting of Shareholders held on February 21, 1989, filed January 24, 1989. 10(f) Amended and Restated 1978 Employee Stock Option Program, is incorporated herein by reference to Appendix A to the Company's Notice of 1987 Annual Meeting of Shareholder's and Proxy Statement, filed March 24, 1987. 10(g) Executive Deferred Compensation Plan is incorporated herein by reference to Exhibit 10(1) to the Company's 1985 Annual Report on Form 10-K, filed February 27, 1986. 10(h) 1987 Restricted Stock Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1988 Annual Meeting of Shareholders and Proxy Statement, filed March 22, 1988. 10(i) Executive Deferred Compensation Plan, dated as of October 1, 1989, is incorporated herein by reference to Exhibit 10(h) to the Company's 1994 Annual Report on Form 10-K, filed December 1, 1994. 10(j) SunAmerica Supplemental Deferral Plan is incorporated herein by reference to Exhibit 10(m) to the Company's 1989 Annual Report on Form 10-K, filed December 20, 1989. 10(k) Long-Term Performance-Based Incentive Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1994 Annual Meeting of Shareholders and Proxy Statement, filed December 21, 1993. 10(l) Performance Incentive Compensation Plan is incorporated herein by reference to the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement, filed December 1, 1994. 10(m) 1995 Performance Stock Plan is incorporated herein by reference to Appendix A to the Company's Notice of 1995 Annual Meeting of Shareholders and Proxy Statement, filed December 1, 1994. 10(n) Registered Representatives' Deferred Compensation Plan is incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement No. 333-10523 on Form S-3, filed August 20, 1996. 10(o) Deferred Compensation Agreement is incorporated herein by reference to Exhibit 4.2 of the Company's Registration No. 333-10523 on Form S-3, filed August 20, 1996. 10(p) Amendment to Performance Incentive Compensation Plan is incorporated herein by reference to the Company's Notice of 1996 Annual Meeting of Shareholders and Proxy Statement, filed January 15, 1996.
EX-11 7 EXHIBIT 11 1 EXHIBIT 11 SUNAMERICA INC. STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS (In thousands, except per-share amounts)
Years ended September 30, ----------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Average number of common and common stock equivalent shares outstanding during the period: Common Stock issued and outstanding at beginning of period 108,830 107,410 99,490 96,040 94,362 Average number of common shares issued upon exercise of employee stock options or under other employee stock plans 278 1,081 248 2,391 1,014 Average number of common stock equivalent shares arising from outstanding employee stock options 4,450 3,062 2,652 2,800 2,790 Average number of shares issuable upon conversion of convertible preferred stock: Series A Mandatory Conversion Premium Dividend Preferred Stock -- -- 6,490 11,182 16,860 Series D Mandatory Conversion Premium Dividend Preferred Stock 2,584 14,675 15,010 8,352 -- Series E Mandatory Conversion Premium Dividend Preferred Stock 10,808 -- -- -- -- Average number of shares issued upon redemption of Series A Depositary Shares on August 16, 1994 -- -- 940 -- -- Average number of shares issued upon redemption of Series D Depositary Shares on January 2, 1996 7,642 -- -- -- -- Average number of shares redeemed upon exchange of Common Stock for Nontransferable Class B Stock on June 6, 1996 (5) -- -- -- -- -------- -------- -------- -------- -------- Average number of common and common stock equivalent shares outstanding during the period 134,587 126,228 124,830 120,765 115,026 ======== ======== ======== ======== ========
2 EXHIBIT 11 SUNAMERICA INC. STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS (In thousands, except per-share amounts) (Continued)
Years ended September 30, ----------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Earnings applicable to common stock: Income before cumulative effect of change in accounting for income taxes $274,427 $194,206 $165,301 $127,011 $ 76,791 Less preferred dividend requirements other than those related to convertible issues: 9-1/4% Preferred Stock, Series B (8,124) (11,440) (12,996) (12,996) (3,249) SunAmerica Adjustable Rate Cumulative Preferred Stock, Series C (3,408) (3,543) (3,424) (3,478) (4,630) -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting for income taxes applicable to common stock 262,895 179,223 148,881 110,537 68,912 Cumulative effect of change in accounting for income taxes -- -- (33,500) -- -- -------- -------- -------- -------- -------- Net income applicable to common stock $262,895 $179,223 $115,381 $110,537 $ 68,912 ======== ======== ======== ======== ======== Earnings per common and common equivalent share: Income before cumulative effect of change in accounting for income taxes $ 1.95 $ 1.42 $ 1.19 $ 0.92 $ 0.60 Cumulative effect of change in accounting for income taxes -- -- (0.27) -- -- -------- -------- -------- -------- -------- Net income $ 1.95 $ 1.42 $ 0.92 $ 0.92 $ 0.60 ======== ======== ======== ======== ========
EX-12.(A) 8 EXHIBIT 12.(A) 1 EXHIBIT 12(a) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (FIXED CHARGES INCLUDE DIVIDENDS PAID ON PREFERRED SECURITIES OF GRANTOR TRUSTS AND INTEREST INCURRED ON SENIOR AND SUBORDINATED DEBT, BUT EXCLUDE INTEREST INCURRED ON FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (In thousands, except ratios) Earnings: Pretax income $ 392,027 $ 279,606 $ 240,001 $ 184,011 $ 111,091 --------- --------- --------- --------- --------- Add: Interest incurred on: Senior indebtedness 69,033 55,985 50,292 36,246 33,224 Subordinated notes -- -- -- -- 3,941 --------- --------- --------- --------- --------- Total interest incurred 69,033 55,985 50,292 36,246 37,165 --------- --------- --------- --------- --------- Dividends paid on preferred securities of grantor trusts 20,235 1,673 -- -- -- --------- --------- --------- --------- --------- Total earnings $ 481,295 $ 337,264 $ 290,293 $ 220,257 $ 148,256 ========= ========= ========= ========= ========= Fixed charges: Interest incurred on: Senior indebtedness $ 69,033 $ 55,985 $ 50,292 $ 36,246 $ 33,224 Subordinated notes -- -- -- -- 3,941 --------- --------- --------- --------- --------- Total interest incurred 69,033 55,985 50,292 36,246 37,165 Dividends paid on preferred securities of grantor trusts 20,235 1,673 -- -- -- --------- --------- --------- --------- --------- Total fixed charges $ 89,268 $ 57,658 $ 50,292 $ 36,246 $ 37,165 ========= ========= ========= ========= ========= Ratio of earnings to fixed charges (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior and subordinated debt, but exclude interest incurred on fixed annuities, guaranteed investment contracts and trust deposits) 5.4x 5.8x 5.8x 6.1x 4.0x ========= ========= ========= ========= =========
2 EXHIBIT 12(a) (CONTINUED) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (FIXED CHARGES INCLUDE DIVIDENDS PAID ON PREFERRED SECURITIES OF GRANTOR TRUSTS AND INTEREST INCURRED ON SENIOR AND SUBORDINATED DEBT, FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, ------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- --------- --------- --------- --------- Earnings: (In thousands, except ratios) Pretax income $ 392,027 $ 279,606 $ 240,001 $ 184,011 $ 111,091 ---------- --------- --------- --------- --------- Add: Interest incurred on: Fixed annuity contracts 410,269 258,730 254,464 308,910 362,094 Guaranteed investment contracts 252,027 213,340 150,424 136,984 140,114 Trust deposits 9,968 10,519 8,516 8,438 4,256 Senior indebtedness 69,033 55,985 50,292 36,246 33,224 Subordinated notes -- -- -- -- 3,941 ---------- --------- --------- --------- --------- Total interest incurred 741,297 538,574 463,696 490,578 543,629 ---------- --------- --------- --------- --------- Dividends paid on preferred securities of grantor trusts 20,235 1,673 -- -- -- ---------- --------- --------- --------- --------- Total earnings $1,153,559 $ 819,853 $ 703,697 $ 674,589 $ 654,720 ========== ========= ========= ========= ========= Fixed charges: Interest incurred on: Fixed annuity contracts $ 410,269 $ 258,730 $ 254,464 $ 308,910 $ 362,094 Guaranteed investment contracts 252,027 213,340 150,424 136,984 140,114 Trust deposits 9,968 10,519 8,516 8,438 4,256 Senior indebtedness 69,033 55,985 50,292 36,246 33,224 Subordinated notes -- -- -- -- 3,941 ---------- --------- --------- --------- --------- Total interest incurred 741,297 538,574 463,696 490,578 543,629 Dividends paid on preferred securities of grantor trusts 20,235 1,673 -- -- -- ---------- --------- --------- --------- --------- Total fixed charges $ 761,532 $ 540,247 $ 463,696 $ 490,578 $ 543,629 ========== ========= ========= ========= ========= Ratio of earnings to fixed charges (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior and subordinated debt, fixed annuities, guaranteed investment contracts and trust deposits) 1.5x 1.5x 1.5x 1.4x 1.2x ========== ========= ========= ========= =========
EX-12.(B) 9 EXHIBIT 12.(B) 1 EXHIBIT 12(b) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (FIXED CHARGES INCLUDE DIVIDENDS PAID ON PREFERRED SECURITIES OF GRANTOR TRUSTS AND INTEREST INCURRED ON SENIOR AND SUBORDINATED DEBT, BUT EXCLUDE INTEREST INCURRED ON FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, ----------------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (In thousands, except ratios) Earnings: Pretax income $ 392,027 $ 279,606 $ 240,001 $ 184,011 $ 111,091 --------- --------- --------- --------- --------- Add: Interest incurred on: Senior indebtedness 69,033 55,985 50,292 36,246 33,224 Subordinated notes -- -- -- -- 3,941 --------- --------- --------- --------- --------- Total interest incurred 69,033 55,985 50,292 36,246 37,165 --------- --------- --------- --------- --------- Dividends paid on preferred securities of grantor trusts 20,235 1,673 -- -- -- --------- --------- --------- --------- --------- Total earnings $ 481,295 $ 337,264 $ 290,293 $ 220,257 $ 148,256 ========= ========= ========= ========= ========= Combined fixed charges and preferred stock dividends: Interest incurred on: Senior indebtedness $ 69,033 $ 55,985 $ 50,292 $ 36,246 $ 33,224 Subordinated notes -- -- -- -- 3,941 --------- --------- --------- --------- --------- Total interest incurred 69,033 55,985 50,292 36,246 37,165 Dividends paid on preferred securities of grantor trusts 20,235 1,673 -- -- -- Dividends paid on preferred stock of SunAmerica Inc., on a tax equivalent basis 38,662 41,914 54,528 42,675 17,733 --------- --------- --------- --------- --------- Total combined fixed charges and preferred stock dividends $ 127,930 $ 99,572 $ 104,820 $ 78,921 $ 54,898 ========= ========= ========= ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior and subordinated debt, but exclude interest incurred on fixed annuities, guaranteed investment contracts and trust deposits) 3.8x 3.4x 2.8x 2.8x 2.7x ========= ========= ========= ========= =========
2 EXHIBIT 12(b) (CONTINUED) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (FIXED CHARGES INCLUDE DIVIDENDS PAID ON PREFERRED SECURITIES OF GRANTOR TRUSTS AND INTEREST INCURRED ON SENIOR AND SUBORDINATED DEBT, FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, ------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- --------- --------- --------- --------- (In thousands, except ratios) Earnings: Pretax income $ 392,027 $ 279,606 $ 240,001 $ 184,011 $ 111,091 ---------- --------- --------- --------- --------- Add: Interest incurred on: Fixed annuity contracts 410,269 258,730 254,464 308,910 362,094 Guaranteed investment contracts 252,027 213,340 150,424 136,984 140,114 Trust deposits 9,968 10,519 8,516 8,438 4,256 Senior indebtedness 69,033 55,985 50,292 36,246 33,224 Subordinated notes -- -- -- -- 3,941 ---------- --------- --------- --------- --------- Total interest incurred 741,297 538,574 463,696 490,578 543,629 ---------- --------- --------- --------- --------- Dividends paid on preferred securities of grantor trusts 20,235 1,673 -- -- -- ---------- --------- --------- --------- --------- Total earnings $1,153,559 $ 819,853 $ 703,697 $ 674,589 $ 654,720 ========== ========= ========= ========= ========= Combined fixed charges and preferred stock dividends: Interest incurred on: Fixed annuity contracts $ 410,269 $ 258,730 $ 254,464 $ 308,910 $ 362,094 Guaranteed investment contracts 252,027 213,340 150,424 136,984 140,114 Trust deposits 9,968 10,519 8,516 8,438 4,256 Senior indebtedness 69,033 55,985 50,292 36,246 33,224 Subordinated notes -- -- -- -- 3,941 --------- --------- --------- --------- --------- Total interest incurred 741,297 538,574 463,696 490,578 543,629 Dividends paid on preferred securities of grantor trusts 20,235 1,673 -- -- -- Dividends paid on preferred stock of SunAmerica Inc., on a tax equivalent basis 38,662 41,914 54,528 42,675 17,733 --------- --------- --------- --------- --------- Total combined fixed charges and preferred stock dividends $ 800,194 $ 582,161 $ 518,224 $ 533,253 $ 561,362 ========== ========= ========= ========= ========= Ratios of earnings to combined fixed charges and preferred stock dividends (which include dividends paid on preferred securities of grantor trusts and interest incurred on senior and subordinated debt, fixed annuities, guaranteed investment contracts and trust deposits) 1.4x 1.4x 1.4x 1.3x 1.2x ========== ========= ========= ========= =========
EX-21 10 EXHIBIT 21 1 EXHIBIT 21 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES LIST OF SUBSIDIARIES List of subsidiaries and certain other affiliates with percentage of voting securities owned by SunAmerica Inc. or SunAmerica Inc.'s subsidiary which is the immediate parent.
PERCENTAGE OF VOTING SECURITIES OWNED BY COMPANY OR COMPANY'S SUBSIDIARY WHICH IS THE NAME OF COMPANY IMMEDIATE PARENT - ---------------- ------------------------- ARIZONA CORPORATIONS: % Anchor National Life Insurance Company 100 SunAmerica Life Insurance Company of America 100 SunAmerica National Life Insurance Company 100 CALIFORNIA CORPORATIONS: CalFarm Life Insurance Company 100 Imperial Premium Finance of California, Inc. 100 COLORADO CORPORATION: Resources Trust Company 100 DELAWARE CORPORATIONS: Royal Alliance Associates, Inc. 100 SunAmerica Asset Management Corp. 100 SunAmerica Capital Services, Inc. 100 SunAmerica Capital Trust I 100 SunAmerica Capital Trust II 100 SunAmerica Capital Trust III 100 SunAmerica Capital Trust IV 100 SunAmerica Capital Trust V 100 SunAmerica Capital Trust VI 100 SunAmerica Fund Services, Inc. 100 Imperial Premium Finance, Inc. 100 SunAmerica Securities, Inc. 100 GEORGIA CORPORATION: SunAmerica Financial, Inc. 100 MICHIGAN CORPORATION: Ford Life Insurance Company 100 NEW YORK CORPORATIONS: Advantage Capital Corporation 100 First SunAmerica Life Insurance Company 100
EX-23 11 EXHIBIT 23 1 EXHIBIT 23 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-8 pertaining to the Amended and Restated 1978 Employee Stock Option Program (No. 2-53718) and the 1988 Employee Stock Plan (No. 33-28744) and Form S-3 pertaining to Debt Securities, Preferred Stock, Common Stock, Warrants to Purchase any of the foregoing Debt Securities, Preferred Stock and Common Stock, Stock Purchase Contracts and Stock Purchase Units (No. 333-14201, 333-14201-01, 333-14201-02, 333-14201-03 and 333-14201-04) of SunAmerica Inc. of our report dated November 8, 1996, except as to Note 13 which is as of November 29, 1996, appearing on page F-2 of this Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page S-2 of this Form 10-K. Price Waterhouse LLP Los Angeles, California December 10, 1996 EX-27 12 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT OF SUNAMERICA INC.'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1996 SEP-30-1996 12,582,024 0 0 81,385 1,652,257 105,321 16,199,784 529,363 0 782,300 23,726,821 13,823,702 0 0 0 573,335 0 384,549 119,452 1,156,557 23,726,821 0 1,155,052 (30,314) 220,428 662,296 108,176 (30,034) 392,027 117,600 274,427 0 0 0 274,427 1.95 1.95 0 0 0 0 0 0 0
EX-99 13 EXHIBIT 99 - SEGMENT - "AGREE" 1 EXHIBIT 99.1 AGREEMENT TO FURNISH EXHIBITS AND SCHEDULES The Company hereby agrees to furnish supplementally to the Securities and Exchange Commission upon its request a copy of any of the exhibits and schedules to Exhibits 2(c) and 2(d) to this Report on Form 10-K. Each of such Exhibits to this Report on Form 10-K sets forth a description of each schedule and exhibit. -----END PRIVACY-ENHANCED MESSAGE-----