-----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, C/XCEDBJGboc7j3h9gFU0F4XdyOoOGcBosZ/QxX0fHULZlkR7L0J6JVyHeG+zMK4 YNl+3YeiWoo0iiYFzaCdmw== 0000950148-95-000907.txt : 19951201 0000950148-95-000907.hdr.sgml : 19951201 ACCESSION NUMBER: 0000950148-95-000907 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951129 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04618 FILM NUMBER: 95597536 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-K 1 FORM 10-K 1 SUNAMERICA INC. 1995 FORM 10-K 2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1995 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 $2.78 Depositary Shares representing Series D Mandatory Conversion Premium Dividend Preferred Stock New York Stock Exchange $3.10 Depositary Shares representing Series E Mandatory Conversion Premium Dividend Preferred Stock 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. / / The aggregate market value of voting stock held by non-affiliates of the Company on October 31, 1995 was $1,817,862,000. The number of shares outstanding of each of the registrant's classes of common stock on October 31, 1995, as restated to reflect a three-for-two stock split paid in the form of a stock dividend on November 10, 1995, was as follows: Common Stock (par value $1.00 per share) 44,178,615 shares Nontransferable Class B Stock (par value $1.00 per share) 10,239,658 shares DOCUMENTS INCORPORATED BY REFERENCE NOTICE OF 1996 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT (INCORPORATED INTO PART III) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3 PART I ITEM 1. BUSINESS GENERAL DESCRIPTION SunAmerica Inc. (the "Company") is a diversified financial services company serving the preretirement savings market. 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 two 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, 1995, the Company held $28.39 billion of assets, consisting of $16.84 billion of assets owned by the Company; $2.13 billion of assets managed in mutual funds and private accounts; and $9.42 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 47 million to 61 million during the 1990s, making this age group the fastest-growing segment of the U.S. population. Between 1984 and 1994, annual industry sales of annuities, including sales of guaranteed investment contracts ("GICs"), increased from $43 billion to $154 billion. During the same period, annual industry sales of mutual funds, excluding money market accounts, rose from $46 billion to $474 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 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 unaffiliated broker-dealers; banks and other financial institutions; and independent general insurance agents. SunAmerica employs approximately 1,300 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 blocks of fixed and variable annuity reserves, life insurance reserves, distribution networks and complementary fee-based financial services businesses. In November 1995, the Company entered into a definitive agreement to acquire Ford Life Insurance Company ("Ford Life") from a subsidiary of Ford Motor Company ("Ford") for approximately $172.5 million in cash. Completion of this acquisition is expected in early calendar year 1996 and is subject to customary conditions and required regulatory approvals. Under the terms of the agreement, Ford will retain Ford Life's credit life insurance business. At September 30, 1995, Ford Life had reserves for fixed annuity contracts of approximately $3 billion. In September 1995, the Company's subsidiary, SunAmerica Life Insurance Company, agreed to acquire CalFarm Life Insurance Company ("CalFarm") from its parent, Zenith National Insurance Corp. ("Zenith National"), for approximately $120 million in cash. Under the terms of the agreement, Zenith National will retain CalFarm's health insurance business. At September 30, 1995, CalFarm had assets of approximately $800 million and approximately $700 million of annuity and life insurance reserves. On November 30, 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 4 $1.14 billion in plan assets at September 30, 1995, from New England Securities Corporation, the broker-dealer subsidiary of New England Mutual 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 Imperial acquisition and Resources Trust's purchase of account servicing rights in fiscal 1995. 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, 1995, 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
Amount Percent Primary product or service -------------- ------- ----------------------------------- (In thousands) Net investment income (including net realized investment losses).......................... $332,543 65.0% Fixed-rate products -------- ----- Fee income: Variable annuity fees........... 84,583 16.5 Variable annuities Net retained commissions........ 32,584 6.4 Broker-dealer sales Asset management fees........... 26,935 5.2 Mutual funds/private management accounts Loan servicing fees............. 19,792 3.9 Premium finance Trust fees...................... 15,394 3.0 Self-directed retirement accounts -------- ----- Total fee income................ 179,288 35.0 -------- ----- Total............................. $511,831 100.0% ======== =====
For financial information on the Company's business segments, see Part IV -- "Notes to Consolidated Financial Statements -- Note 10 -- Business Segments." LIFE INSURANCE COMPANIES The Company's life insurance group includes 105-year-old SunAmerica Life Insurance Company, acquired in 1971; Anchor National Life Insurance Company ("Anchor"), acquired in 1986; 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 $15.21 billion of assets at September 30, 1995 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 1994 annuity premiums and deposits, and among the top 2% of all U.S. life insurance companies, as measured by 1994 total assets. Anchor ranks among the largest issuers of variable annuities in the nation, according to the latest published industry data. The Company's life insurance group issues a portfolio of fixed and variable annuities, 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 a California-chartered company licensed in 49 states and the District of Columbia. SunAmerica Life Insurance Company and Anchor 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. ("Duff & Phelps") and an "A2" (Excellent) rating from Moody's Investors Service ("Moody's"). They also have an "A+" (Superior) rating from industry 2 5 analyst A.M. Best Company. SunAmerica Life Insurance Company focuses on the sale of fixed-rate annuities and GICs. SunAmerica Life Insurance Company had $7.73 billion of assets at September 30, 1995. Anchor specializes in the sale of flexible premium variable annuities and GICs. At September 30, 1995, it had $7.78 billion of assets. First SunAmerica is a New York-chartered company that markets its annuity products only in the state of New York. It has an "A+" (Superior) rating from A.M. Best Company. At September 30, 1995, First SunAmerica had $163.2 million of assets. SunAmerica National is an Arizona-chartered life insurance 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. It has a "AAA" (Superior) rating from S&P. At September 30, 1995, it had $4.2 million of assets. Benefitting from continued strong demographic growth of the preretirement 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, SunAmerica Securities, Inc. ("SunAmerica Securities") and Royal Alliance Associates, Inc. ("Royal Alliance"); (ii) approximately 400 other securities firms; (iii) over 100 banks and other financial institutions; and (iv) independent general insurance agents who specialize in selling fixed annuities and other single premium products. Approximately 27,000 independent sales representatives nationally are licensed to sell the Company's annuity products. 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 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 60% at September 30, 1995) 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. The average new single premium fixed annuity contract sold by the Company amounted to approximately $26,300 in 1995. The Company augments its retail annuity sales effort with the marketing of institutional products. At September 30, 1995, the Company had $3.61 billion of primarily fixed-maturity GIC obligations. At that date, approximately 69% of these obligations were fixed-rate and approximately 31% were variable-rate obligations that reprice periodically based upon certain defined indexes. Of the total GIC portfolio at September 30, 1995, approximately 38% was sold to asset management firms, 33% was sold to state and local governmental authorities and 29% was sold to pension plans. The average new GIC contract sold by the Company amounted to $8.9 million in 1995. 3 6 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 maturities. 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 78% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1995. 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 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 $40,000 in 1995. 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 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, 1995, 1994 and 1993, the Company's yield on average invested assets was 9.15%, 8.50% and 9.00%, respectively, before net realized investment losses, and it realized net investment spreads of 3.69%, 3.30% and 3.15%, respectively, on average invested assets. At September 30, 1995, the weighted average life of the Company's investments was approximately three-and-three-fourths years and the duration was approximately three-and-one-fourth years. Weighted average life is defined as 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 measure for the price sensitivity of a fixed-income security or portfolio to changes in interest rates. It is the weighted average time to receipt of all expected cash flows, both principal and interest, including the effects of scheduled amortization and expected prepayments, in which the weight attached to each year of receipt is the proportion of the present value of cash to be received during that year to the total present value of the portfolio. 4 7 The Company's general investment philosophy is to hold fixed maturity assets for long-term investment. Thus, it does not have a trading portfolio. The Company carries the portion of its portfolio of bonds, notes and redeemable preferred stocks that is available for sale (the "Available for Sale Portfolio") at estimated fair value. The remaining portion of its portfolio of bonds, notes and redeemable preferred stocks is held for investment and is carried at amortized cost. The following table summarizes the Company's investment portfolio at September 30, 1995: SUMMARY OF INVESTMENTS
Percent Amortized of cost portfolio -------------- --------- (In thousands) Fixed maturities: Cash and short-term investments.................................. $ 855,350 7.9% U.S. government securities....................................... 748,835 6.9 Mortgage-backed securities....................................... 4,166,388 38.5 Other bonds, notes and redeemable preferred stocks............... 2,418,680 22.3 Mortgage loans................................................... 1,543,285 14.3 ------------ ----- Total............................................................ 9,732,538 89.9 Partnerships....................................................... 774,417 7.2 Real estate........................................................ 105,637 1.0 Equity securities.................................................. 21,403 0.2 Other invested assets.............................................. 187,593 1.7 ------------ ----- Total investments.................................................. $ 10,821,588 100.0% ============ =====
At September 30, 1995, approximately $7.30 billion or 99.5% (at amortized cost) of bonds, notes and redeemable preferred stocks, including those held for investment and the Available for Sale Portfolio (the "Bond Portfolio"), was rated by S&P, Moody's or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the Company. At September 30, 1995, approximately $6.39 billion (at amortized cost) was rated investment grade by one or both of these agencies or under the NAIC guidelines, including $4.82 billion of U.S. government/agency securities and MBSs. At September 30, 1995, the Bond Portfolio included $910.1 million (fair value, $887.3 million) of bonds not rated investment grade by S&P, Moody's or the NAIC. Based on their September 30, 1995 amortized cost, these non-investment-grade bonds accounted for 5.4% of the Company's total assets and 8.4% of its invested assets. Senior secured loans ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $857.2 million at September 30, 1995. Secured Loans are senior to subordinated debt and equity, and virtually all are secured by assets of the issuer. At September 30, 1995, Secured Loans consisted of loans to 103 borrowers spanning 30 industries, with 22% of these assets (at amortized cost) concentrated in the leisure industry and with no other industry concentration constituting more than 14% of these assets. Mortgage loans aggregated $1.54 billion at September 30, 1995 and consisted of 644 first mortgage loans with an average loan balance of approximately $2.4 million, collateralized by properties located in 26 states. Approximately 48% of the portfolio was multifamily residential, 22% was retail, 7% was industrial, 5% was office and 18% was other types. At September 30, 1995, loans delinquent by more than 90 days totaled $27.4 million (1.8% of total mortgages). Partnership investments totaled $774.4 million at September 30, 1995, constituting investments in approximately 300 separate partnerships with an average size of approximately $2.5 million. This 5 8 portfolio includes: (i) $376.3 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities; (ii) $263.8 million of partnerships that make tax-advantaged investments in affordable housing, and (iii) $134.3 million of partnerships that invest in mortgage loans and income-producing real estate. At September 30, 1995, the amortized cost of all investments in default as to the payment of principal or interest totaled $61.8 million (fair value $51.3 million), constituting 0.6% 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. Founded in 1983 and acquired by the Company in January 1990, SunAmerica Asset Management managed approximately $2.29 billion of assets at September 30, 1995, including mutual fund assets; assets of investment companies, individuals, corporations, trusts and pension and profit sharing plans; 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. RETIREMENT TRUST SERVICES Through Resources Trust, acquired in January 1990, the Company earns fee income by providing administrative and custodial services for approximately 198,000 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, 1995 of approximately $9.42 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 15,000 registered representatives affiliated with 1,000 broker-dealers, including the Company's broker-dealer subsidiaries. BROKER-DEALERS The Company also owns two broker-dealers: SunAmerica Securities, which commenced business in 1989; and Royal Alliance, acquired by the Company in January 1990. As a result of the Company's ongoing active recruitment of independent registered representatives, the Company has increased its network of representatives from approximately 4,300 at September 30, 1994 to approximately 5,200 at September 30, 1995. 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 businesses to fund their commercial property and casualty insurance premiums. These loans are substantially secured by the unearned premiums associated with the underlying insurance policies. 6 9 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 $6,000 at September 30, 1995. Imperial generally makes loans to borrowers through a network of approximately 6,000 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 and amount of investments permitted, limiting the amount of dividends that can be paid and the size of transactions that can be consummated without first obtaining regulatory approval and other related matters. During the last decade, the insurance regulatory framework has been placed under increased scrutiny by various states, the federal government and the NAIC. Various states have considered or enacted legislation that changes, and in many cases increases, the states' authority to regulate insurance companies. Legislation has been introduced from time to time in Congress that could result in the federal government assuming some role in the regulation of insurance companies. In recent years, the NAIC has approved and recommended to the states for adoption and implementation several regulatory initiatives designed to reduce the risk of insurance company insolvencies. These initiatives include new investment reserve requirements, risk-based capital standards and restrictions on an insurance company's ability to pay dividends to its stockholders. The NAIC is also currently developing model laws to govern insurance company investments. Current proposals are still being debated and the Company is monitoring developments in this area and the effects any changes would have on the Company. SunAmerica Asset Management is registered with the Securities and Exchange Commission (the "Commission") as a registered investment adviser under the Investment Advisers 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 subsidiaries are subject to regulation and supervision by substantially all of the states in which they are 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. 7 10 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 advisers, mutual fund companies and other financial institutions. Within the U.S. life insurance industry, there are approximately 125 companies that individually collect in excess of $150 million of annuity premiums annually. 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. 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 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 1995 to a vote of security-holders, through the solicitation of proxies or otherwise. 8 11 EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information regarding the executive officers of SunAmerica Inc. as of November 29, 1995:
Year assumed Other positions and other business Present position at present experience within the last five Name Age November 29, 1995 position years From-to - ------------------------- ---- -------------------- ------- ----------------------------------- ------------- Eli Broad 62 Chairman and Chief 1976 (Cofounded Company in 1957) Executive Officer President 1986 Joseph M. Tumbler 47 Vice Chairman 1995 President and Chief Executive 1989-1995 Officer, Providian Capital Management Jay S. Wintrob 38 Vice Chairman 1995 Executive Vice President 1991-1995 Senior Vice President 1989-1991 (Joined Company in 1987) James R. Belardi 38 Executive Vice 1995 Senior Vice President and 1992-1995 President Treasurer Vice President and Treasurer 1989-1992 (Joined Company in 1986) Lorin M. Fife 42 Senior Vice 1995 Vice President and General 1994-1995 President, Counsel -- Regulatory Affairs General Counsel -- Vice President and 1989-1994 Regulatory Affairs, Associate General Counsel and Assistant (Joined Company in 1989) Secretary Jana Waring Greer 43 Senior Vice 1991 Vice President 1981-1991 President (Joined Company in 1974) Susan L. Harris 38 Senior Vice 1995 Vice President, General 1994-1995 President, Counsel -- Corporate Affairs, General Counsel -- and Secretary Corporate Affairs, Vice President, Associate 1989-1994 and Secretary General Counsel and Secretary (Joined Company in 1985) Gary W. Krat 48 Senior Vice 1992 Chairman, Royal Alliance 1991-Present President Associates, Inc. Scott L. Robinson 49 Senior Vice 1991 Vice President and Controller 1986-1991 President (Joined Company in 1978) and Controller James W. Rowan 33 Senior Vice 1995 Vice President 1993-1995 President Assistant to the Chairman 1992 Senior Vice President, 1990-1992 Security Pacific Corp. Karel Carnohan 39 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. Darlene Chandler 43 Vice President 1988 (Joined Company in 1976) Michael L. Fowler 41 Vice President 1988 (Joined Company in 1988) George L. Holdridge, Jr. 38 Vice President 1995 Senior Vice President, 1994-1995 SunAmerica Financial, Inc. Vice President and Director 1989-1994 of Technology, SunAmerica Financial, Inc. (Joined Company in 1983) Scott H. Richland 33 Vice President and 1995 Vice President and 1994-1995 Treasurer Assistant Treasurer Assistant Treasurer 1993-1994 Director, SunAmerica 1990-1993 Investments, Inc.
9 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 on the New York Stock Exchange Composite Tape for the Company's Common Stock for each quarter during the fiscal years ended September 30, 1995 and 1994 are as follows:
1995 1994 ---------------- ---------------- High Low High Low ------- ------- ------ -------- First quarter................................................... $27 7/8 $22 7/8 $31 $22 Second quarter.................................................. 29 1/2 24 29 1/8 22 3/8 Third quarter................................................... 37 28 1/4 29 1/2 22 7/8 Fourth quarter.................................................. 42 33 1/2 30 7/8 26 7/8 ======= ======= ======= =======
The sales prices listed above have been restated and rounded to the nearest eighth to reflect a three-for-two stock split, paid in the form of a stock dividend on November 10, 1995. HOLDERS As of October 31, 1995, 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)........................................... 2,171 Nontransferable Class B Stock (par value $1.00 per share).......................... 11 =====
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, 1995 and 1994 are as follows:
1995 1994 ------------------------ ------------------------ Common Nontransferable Common Nontransferable Stock Class B Stock Stock Class B Stock ------ --------------- ------ --------------- First quarter................................... $0.100 $0.090 $0.067 $0.060 Second quarter.................................. 0.100 0.090 0.067 0.060 Third quarter................................... 0.100 0.090 0.067 0.060 Fourth quarter.................................. 0.100 0.090 0.067 0.060 ------ ------ ------ ------ Total........................................... $0.400 $0.360 $0.268 $0.240 ====== ====== ====== ======
The per-share dividends listed above have been restated to reflect a three-for-two stock split, paid in the form of a stock dividend on November 10, 1995. 10 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 three-for-two stock split paid in the form of a stock dividend on November 10, 1995.
Years ended September 30, --------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (In thousands, except per-share amounts) RESULTS OF OPERATIONS Net investment income........................ $ 365,555 $ 294,454 $ 263,791 $ 219,384 $ 162,412 Net realized investment losses............... (33,012) (21,124) (21,287) (56,364) (46,060) Fee income................................... 179,288 150,736 134,305 112,831 92,689 General and administrative expenses.......... (166,540) (132,743) (135,790) (133,058) (120,475) Provision for future guaranty fund assessments................................. -- -- (22,000) -- -- Amortization of deferred acquisition costs... (80,829) (66,925) (51,860) (48,375) (40,088) Other income and expenses, net............... 15,144 15,603 16,852 16,673 24,903 --------- --------- --------- --------- --------- Pretax income................................ 279,606 240,001 184,011 111,091 73,381 Income tax expense........................... (85,400) (74,700) (57,000) (34,300) (25,900) --------- --------- --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES................. 194,206 165,301 127,011 76,791 47,481 Cumulative effect of change in accounting for income taxes................................ -- (33,500) -- -- -- --------- --------- --------- --------- --------- NET INCOME................................... $ 194,206 $ 131,801 $ 127,011 $ 76,791 $ 47,481 ========= ========= ========= ========= ========= EARNINGS PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES................. $ 2.84 $ 2.39 $ 1.83 $ 1.20 $ 0.88 Cumulative effect of change in accounting for income taxes................................ -- (0.54) -- -- -- --------- --------- --------- --------- --------- NET INCOME................................... $ 2.84 $ 1.85 $ 1.83 $ 1.20 $ 0.88 ========= ========= ========= ========= ========= CASH DIVIDENDS PER SHARE PAID TO COMMON SHAREHOLDERS: Nontransferable Class B Stock............... $ 0.360 $ 0.240 $ 0.168 $ 0.120 $ 0.120 ========= ========= ========= ========= ========= Common Stock................................ $ 0.400 $ 0.268 $ 0.187 $ 0.133 $ 0.133 ========= ========= ========= ========= =========
11 14 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
Years ended September 30, --------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- Ratio of earnings to fixed charges (excluding interest incurred on fixed annuities, guaranteed investment contracts and trust deposits)(1)................................ 5.8x 5.8x 6.1x 4.0x 2.7x ========= ========= ========= ========= ========= Ratio of earnings to fixed charges (including interest incurred on fixed annuities, guaranteed investment contracts and trust deposits)(2)................................ 1.5x 1.5x 1.4x 1.2x 1.1x ========= ========= ========= ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends (excluding interest incurred on fixed annuities, guaranteed investment contracts and trust deposits)(3)................................ 3.4x 2.8x 2.8x 2.7x 2.3x ========= ========= ========= ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends (including interest incurred on fixed annuities, guaranteed investment contracts and trust deposits)(4)................................ 1.4x 1.4x 1.3x 1.2x 1.1x ========= ========= ========= ========= =========
- ------------------------------ (1) In computing the ratio of earnings to fixed charges (excluding interest incurred on fixed annuities, guaranteed investment contracts and trust deposits), fixed charges consist of interest expense on senior and subordinated indebtedness and dividends paid on the preferred securities of a subsidiary grantor trust. Earnings are computed by adding interest incurred on senior and subordinated indebtedness and dividends paid on the preferred securities of a subsidiary grantor trust to pretax income. (2) In computing the ratio of earnings to fixed charges (including interest incurred on fixed annuities, guaranteed investment contracts and trust deposits), fixed charges consist of interest expense on senior and subordinated indebtedness, fixed annuity contracts, guaranteed investment contracts and trust deposits and dividends paid on the preferred securities of a subsidiary grantor trust. Earnings are computed by adding interest incurred on senior and subordinated indebtedness, fixed annuity contracts, guaranteed investment contracts and trust deposits and dividends paid on the preferred securities of a subsidiary grantor trust to pretax income. (3) In computing the ratio of earnings to combined fixed charges and preferred stock dividends (excluding interest incurred on fixed annuities, guaranteed investment contracts and trust deposits), combined fixed charges and preferred stock dividends consist of interest expense on senior and subordinated indebtedness, dividends paid on the preferred securities of a subsidiary grantor trust and dividends on preferred stock of the Company on a tax-equivalent basis. Earnings are computed by adding interest incurred on senior and subordinated indebtedness and dividends paid on the preferred securities of a subsidiary grantor trust to pretax income. (4) In computing the ratio of earnings to combined fixed charges and preferred stock dividends (including interest incurred on fixed annuities, guaranteed investment contracts and trust deposits), combined fixed charges and preferred stock dividends consist of interest expense on senior and subordinated indebtedness, fixed annuity contracts, guaranteed investment contracts and trust deposits, dividends paid on the preferred securities of a subsidiary grantor trust and dividends on preferred stock of the Company on a tax-equivalent basis. Earnings are computed by adding interest incurred on senior and subordinated indebtedness, fixed annuity contracts, guaranteed investment contracts and trust deposits and dividends paid on the preferred securities of a subsidiary grantor trust to pretax income. 12 15 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
At September 30, ------------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- (In thousands) FINANCIAL POSITION Investments................. $10,808,959 $ 9,280,390 $10,364,952 $ 9,428,266 $ 7,596,275 Variable annuity assets..... 5,263,006 4,513,093 4,194,970 3,293,343 2,746,685 Deferred acquisition costs..................... 526,415 581,874 475,917 436,209 392,278 Other assets................ 245,787 280,868 231,582 245,833 279,007 ----------- ----------- ----------- ----------- ----------- TOTAL ASSETS................ $16,844,167 $14,656,225 $15,267,421 $13,403,651 $11,014,245 =========== =========== =========== =========== =========== Reserves for fixed annuity contracts.................. $ 4,862,250 $ 4,519,623 $ 4,934,871 $ 5,143,339 $ 5,359,757 Reserves for guaranteed investment contracts....... 3,607,192 2,783,522 2,216,104 2,023,048 1,598,963 Trust deposits.............. 426,595 442,320 378,986 367,458 -- Variable annuity liabilities............... 5,263,006 4,513,093 4,194,970 3,293,343 2,746,685 Other payables and accrued liabilities................ 747,733 860,763 1,828,153 1,372,010 344,789 Long-term notes and debentures................. 524,835 472,835 380,560 225,000 -- Collateralized mortgage obligations and reverse repurchase agreements...... -- 28,662 112,032 182,784 299,343 Other indebtedness.......... -- -- 15,119 25,919 156,020 Deferred income taxes....... 146,847 74,319 96,599 40,682 58,779 Preferred securities of grantor trust.............. 52,631 -- -- -- -- Shareholders' equity........ 1,213,078 961,088 1,110,027 730,068 449,909 ----------- ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $16,844,167 $14,656,225 $15,267,421 $13,403,651 $11,014,245 =========== =========== =========== =========== ===========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of financial condition and results of operations of SunAmerica Inc. (the "Company") for the three years in the period ended September 30, 1995. RESULTS OF OPERATIONS INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES totaled $194.2 million or $2.84 per share in 1995, compared with $165.3 million or $2.39 per share in 1994 and $127.0 million or $1.83 per share in 1993. The cumulative effect of the change in accounting for income taxes resulting from the 1994 implementation of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," amounted to a nonrecurring non-cash charge of $33.5 million or $0.54 per share. Accordingly, net income amounted to $131.8 million or $1.85 per share in 1994. PRETAX INCOME totaled $279.6 million in 1995, $240.0 million in 1994 and $184.0 million in 1993. 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. The $56.0 million improvement in 1994 over 1993 primarily resulted from increased net investment income and fee 13 16 income, partially offset by additional amortization of deferred acquisition costs. In addition, 1993 results include a $22.0 million provision for future guaranty fund assessments. 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 $365.6 million in 1995 from $294.5 million in 1994 and $263.8 million in 1993. These amounts represent net investment spreads of 3.69% on average invested assets (computed on a daily basis) of $9.90 billion in 1995, 3.30% on average invested assets of $8.92 billion in 1994 and 3.15% on average invested assets of $8.38 billion in 1993. Net investment spreads include the effect of income earned on the excess of average invested assets over average interest-bearing liabilities. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities was 3.25% in 1995, 2.90% in 1994 and 2.81% in 1993. Investment income totaled $905.8 million in 1995, $758.2 million in 1994 and $754.4 million in 1993. Investment income increased in 1995 primarily as a result of an increase in investment yield on a higher level of average invested assets. The modest increase in investment income in 1994 over 1993 primarily resulted from an increase in earnings on a higher level of average invested assets, partially offset by a decline in investment yield. The yield on average invested assets increased to 9.15% in 1995 from 8.50% in 1994 and 9.00% in 1993. Over the last three fiscal years, the Company's quarterly investment yields on average invested assets have ranged from 8.32% to 9.54%; however, there can be no assurance that the Company will achieve similar yields in future periods. The increased investment yield in 1995 reflects the higher interest rates prevailing during the latter half of 1994 and into fiscal 1995. In addition, investment income in 1995 includes increased contributions from the Company's investments in partnerships and other similar entities, which contributions amounted to $134.1 million in 1995, compared with $63.7 million in 1994 and $45.6 million in 1993. This partnership income represents a yield of 18.17% on related average assets of $738.0 million in 1995, compared with 11.35% on related average assets of $560.9 million in 1994 and 9.37% on related average assets of $486.8 million in 1993. The decline in investment yield in 1994 resulted primarily from sales of higher-yielding securities and the reinvestment of sales proceeds in a greater volume of lower-yielding securities. The Company principally made such sales to obtain certain securities desirable in dollar roll transactions ("Dollar Rolls"), to take advantage of changes in relative value between its portfolio sectors and to more closely match its assets to its liabilities (see "Asset-Liability Matching"). In addition, investment yield declined in 1994 as the net cash provided by the Company's operating and financing activities, as well as the cash flows from redemptions and maturities of securities in the Company's investment portfolio, was invested in lower-yielding securities due to the lower interest rate environment prevailing during 1993 and the first half of 1994. The Company also historically has enhanced investment yield through its use of 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, which was particularly high in 1993. The Company recorded $4.6 million of enhanced yield on a weighted average volume of $387.0 million of such transactions during 1995, compared with $15.6 million of enhanced yield on a weighted average volume of $1.05 billion of such transactions during 1994 and $21.0 million of enhanced yield on a weighted average volume of $1.01 billion during 1993. The declines in enhanced yield relative to the volume of Dollar Rolls in 1995 and 1994 are primarily due to a narrowing of market spreads on such transactions. (See "Asset-Liability Matching" for additional discussion of Dollar Rolls.) In addition, the Company has enhanced investment yield since 1993 through total return corporate bond swap agreements (the "Total Return Agreements"). The Company recorded income of $13.0 million on the Total Return Agreements during 1995, compared with the $1.3 million recorded in 1994 and the $14.6 million recorded in 1993. The fluctuations in income recorded on the 14 17 Total Return Agreements reflect changes in the fair values of the underlying assets resulting primarily from changes in prevailing interest rates. (See "Asset-Liability Matching" for additional discussion of Total Return Agreements.) Total interest and dividend expense aggregated $540.2 million in 1995, $463.7 million in 1994 and $490.6 million in 1993. The average rate paid on all interest-bearing liabilities was 5.90% in 1995, compared with 5.60% in 1994 and 6.19% in 1993. Interest-bearing liabilities averaged $9.16 billion during 1995, compared with $8.27 billion during 1994 and $7.92 billion during 1993. The increase in the average rate paid on all interest-bearing liabilities during 1995 primarily resulted from increased average crediting rates on the Company's guaranteed investment contracts ("GICs"). The average GIC crediting rate was 6.68% in 1995, compared with 6.20% in 1994. During 1995, 1994 and 1993, approximately 27%, 24% and 15%, respectively, of the Company's average GIC portfolio were variable-rate obligations that reprice periodically based upon certain defined indexes. At September 30, 1995, approximately 31% 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 as a result of a modest increase in the average crediting rate on the Company's fixed annuity contracts. The average fixed annuity crediting rate was 5.48% in 1995, compared with 5.43% in 1994. The decrease in the average rate paid on all interest-bearing liabilities during 1994 was primarily due to a decline in prevailing interest rates that began during the latter half of fiscal 1992 and continued into the first half of fiscal 1994. This was reflected in a corresponding decline in the average crediting rate on GIC contracts and on fixed annuity contracts, the majority of which reprice annually as interest rate guarantees are renewed. In 1993, the average crediting rate was 7.02% on GIC contracts and 6.11% on fixed annuity contracts. GROWTH IN AVERAGE INVESTED ASSETS since 1993 primarily reflects sales of the Company's fixed-rate products, consisting of both fixed annuities (including the fixed accounts of variable annuity products) and GICs, and $143.4 million of aggregate net proceeds from the issuances of long-term notes and debentures. Fixed annuity premiums totaled $944.7 million in 1995, up significantly from $230.0 million in 1994 and $223.8 million in 1993. These premiums include premiums for the fixed accounts of variable annuities totaling $286.7 million, $140.6 million, and $63.9 million, respectively. GIC premiums increased to $1.77 billion in 1995 from $1.04 billion in 1994 and $691.6 million in 1993. 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. The increases in GIC sales during 1995 and 1994 reflect the success of the Company's efforts to broaden its distribution channels and its product line and to increase its GIC client base. The GICs issued by the Company and its life insurance subsidiaries 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 life insurance subsidiaries impose surrender penalties in the event of other withdrawals prior to maturity. Contracts purchased by banks or state and local governmental authorities may also 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 seven 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 (see "Financial Condition and Liquidity"). NET REALIZED INVESTMENT LOSSES totaled $33.0 million in 1995, $21.1 million in 1994 and $21.3 million in 1993, and represent 0.33%, 0.24% and 0.25%, respectively, of average invested assets. 15 18 Net realized investment losses include impairment writedowns of $42.7 million in 1995, $55.9 million in 1994 and $114.3 million in 1993. Therefore, net gains from sales of investments totaled $9.7 million in 1995, $34.8 million in 1994 and $93.0 million in 1993. Net gains in 1995 include $20.9 million of net gains realized on $30.7 million of sales of common stocks and $15.6 million of net losses realized on $6.77 billion of sales of bonds that were made primarily to maximize total return. Net gains in 1994 include $22.6 million of net gains realized on $17.6 million of sales of common stocks and $27.0 million of net losses realized on $3.25 billion of sales of bonds that were made primarily to maximize total return. The Company also realized $35.1 million of net gains on $105.4 million of sales of certain partnership interests. Net gains in 1993 include $69.1 million of net gains realized on $4.82 billion of sales of bonds that were made primarily to maximize total return. Bond sales in 1993 also include sales of $68.6 million of certain interest-only strips ("IOs") and $251.0 million of sales of senior secured loans ("Secured Loans") that were made primarily to improve the overall credit quality of the portfolio. Net gains in 1993 also include $21.5 million of net gains realized on $171.6 million of sales of certain partnership interests. 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 and $2.5 million of reserves for mortgage loan losses resulting from the January 17, 1994 Los Angeles earthquake. Impairment writedowns in 1993 include $11.8 million of provisions applied to mortgage loans that were restructured during 1993 and reduced to the aggregate appraised value of the underlying real estate, and $11.1 million of provisions applied to the Company's investment in a real estate-related separate account of Anchor National Life Insurance Company, which separate account was liquidated through sales of underlying assets to affiliated and nonaffiliated parties during 1993. Impairment writedowns in 1993 also include $88.2 million of additional provisions applied to bonds. These bond writedowns include $25.0 million applied to certain IOs. IOs, a type of MBS used as an asset-liability matching tool to hedge against rising interest rates, are investment-grade securities that give the holder the right to receive only the interest payments on a pool of underlying mortgage loans. As would be anticipated in a lower interest rate environment, the amortized cost of these IOs became impaired as a result of increased prepayments of the underlying loans. At September 30, 1995, the amortized cost, which is net of impairment writedowns, of the IOs held by the Company was $13.2 million and their fair value was $12.9 million. VARIABLE ANNUITY FEES are based on the market value of assets supporting variable annuity contracts in separate accounts. Such fees totaled $84.6 million in 1995, $79.5 million in 1994 and $67.5 million in 1993. Variable annuity fees have increased over the three years principally due to asset growth from the receipt of variable annuity premiums and, during 1995, from increased market values. Variable annuity assets averaged $4.67 billion during 1995, $4.43 billion during 1994 and $3.65 billion during 1993. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, totaled $571.4 million in 1995, $759.3 million in 1994 and $796.9 million in 1993. These declines in premiums can 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 competition in the variable annuity marketplace during 1995 and 1994 and anticipates that the market will remain highly competitive for the foreseeable future. 16 19 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 $32.6 million in 1995, $28.0 million in 1994 and $23.7 million in 1993. Broker-dealer sales (mainly mutual funds, general securities and annuities) totaled $7.41 billion in 1995, $6.87 billion in 1994 and $6.40 billion in 1993. Net retained commissions are not proportionate to 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 and private accounts by SunAmerica Asset Management Corp. ("SunAmerica Asset Management"). Such fees totaled $26.9 million on average assets managed of $2.07 billion in 1995, $31.3 million on average assets managed of $2.39 billion in 1994 and $32.3 million on average assets managed of $2.46 billion in 1993. Asset management fees decreased over the three years principally due to declines in assets managed, primarily resulting from excesses of redemptions over sales. Redemptions of mutual funds, excluding redemptions of money market and other short-term accounts, amounted to $426.5 million in 1995, compared with $561.0 million in 1994 and $391.0 million in 1993. Sales of mutual funds, excluding sales of money market and other short-term accounts, amounted to $140.2 million in 1995, compared with $342.6 million in 1994 and $532.4 million in 1993. LOAN SERVICING FEES are earned by the Company's subsidiary, Imperial Premium Finance, Inc. ("Imperial"). Imperial provides short-term installment loans for businesses to fund their commercial 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 $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 1994 or 1993. 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 $15.4 million in 1995 (on an average of 196,000 trust accounts), from $11.9 million in 1994 (on an average of 148,500 trust accounts) and $10.9 million in 1993 (on an average of 144,300 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 Mutual Life Insurance Company. SURRENDER CHARGES on fixed and variable annuities totaled $11.9 million in 1995, compared with $10.7 million in 1994 and $9.8 million in 1993. Surrender charges generally are assessed on annuity withdrawals at declining rates during the first seven years of the contract. Withdrawal payments, which include surrenders and lump-sum annuity benefits, totaled $1.31 billion in 1995, $1.13 billion in 1994 and $824.5 million in 1993. These payments represent 14.8%, 13.2% and 10.0%, respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity payments from the separate accounts totaling $650.0 million in 1995, $461.5 million in 1994 and $314.6 million in 1993. Variable annuity surrenders have increased over the three years primarily due to surrenders on a closed block of business, policies coming off surrender charge restrictions and increased competition in the marketplace. The decrease in fixed annuity surrenders during 1995 and the increase in such surrenders during 1994 reflect changes in the relative amount of policies coming off surrender charge restrictions during those years. Management anticipates that withdrawal rates will remain relatively stable for the foreseeable future and the Company's investment portfolio has been structured to provide sufficient liquidity for anticipated withdrawals. GENERAL AND ADMINISTRATIVE EXPENSES totaled $166.5 million in 1995, compared with $132.7 million in 1994 and $135.8 million in 1993. General and administrative expenses in 1995 include the expenses of recently acquired Imperial. In addition, 1995 includes expenses related to a national advertising campaign to increase the Company's brand name awareness. General and administrative 17 20 expenses remain closely controlled through a company-wide cost containment program and represent approximately 1% of average total assets. PROVISION FOR FUTURE GUARANTY FUND ASSESSMENTS totaled $22.0 million in 1993. No such provision was recorded in 1995 or in 1994. Guaranty associations of the states in which the Company sells annuities assess insurance companies to pay policyholder claims relating to insurer insolvencies. This provision represents management's best estimate, based upon available industry data, of the Company's ultimate exposure to future assessments anticipated as a result of certain large insurance company failures that occurred prior to fiscal 1994. AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $80.8 million in 1995, $66.9 million in 1994 and $51.9 million in 1993. Such amortization has increased during the three-year period primarily 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 $85.4 million in 1995, $74.7 million in 1994 and $57.0 million in 1993, representing effective tax rates of 31% in all three years. These tax rates reflect the favorable impact of certain affordable housing tax credits. FINANCIAL CONDITION AND LIQUIDITY SHAREHOLDERS' EQUITY increased by $252.0 million to $1.21 billion at September 30, 1995 from $961.1 million at September 30, 1994, primarily as a result of the $194.2 million of net income recorded in 1995 and a $145.5 million reduction of net unrealized losses on debt and equity securities available for sale charged directly to shareholders' equity. These favorable factors were partially offset by a reduction of outstanding preferred stock resulting from an exchange of $52.6 million of 9 1/4% Series B Preferred Stock for $52.6 million of preferred securities of SunAmerica Capital Trust I (the "Grantor Trust Preferred Securities"), a grantor trust and a wholly owned subsidiary of the Company (see Note 6 of Notes to Consolidated Financial Statements), and $50.3 million of dividends paid to shareholders. BOOK VALUE PER SHARE amounted to $17.78 at September 30, 1995, compared with $12.60 at September 30, 1994 and $15.09 at September 30, 1993. Excluding net unrealized gains and losses on debt and equity securities available for sale, book value per share amounted to $17.86 at September 30, 1995, $15.05 at September 30, 1994 and $13.44 at September 30, 1993. TOTAL ASSETS increased by $2.18 billion to $16.84 billion at September 30, 1995 from $14.66 billion at September 30, 1994, principally due to a $1.53 billion increase in invested assets and a $749.9 million increase in the separate accounts for variable annuities. INVESTED ASSETS at year end totaled $10.81 billion in 1995, compared with $9.28 billion in 1994. This $1.53 billion increase primarily resulted from sales of GICs and fixed annuity contracts and a $145.5 million decrease 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 portfolio. The Company carries the portion of its portfolio of bonds, notes and redeemable preferred stocks that is available for sale (the "Available for Sale Portfolio") at estimated fair value. The remaining portion of its portfolio of bonds, notes and redeemable preferred stocks is held for investment and is carried at amortized cost. BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS, including those held for investment and the Available for Sale Portfolio (the "Bond Portfolio"), at September 30, 1995, had an aggregate amortized cost that exceeded its fair value by $12.6 million (including net unrealized losses of $31.1 million on the Available for Sale Portfolio). The fair value of the Bond Portfolio was $321.0 million below its amortized cost at September 30, 1994 (including net unrealized losses of $329.0 million on the Available for Sale Portfolio). The decrease in net unrealized losses on the Bond 18 21 Portfolio since September 30, 1994 principally reflects the lower relative prevailing interest rates at September 30, 1995 and their corresponding effect on the fair value of the Bond Portfolio. Approximately $7.30 billion or 99.5% of the Bond Portfolio (at amortized cost) at September 30, 1995 was rated by Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's") or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the Company. At September 30, 1995, approximately $6.39 billion (at amortized cost) was rated investment grade by one or both of these agencies or under the NAIC guidelines, including $4.82 billion of U.S. government/agency securities and MBSs. At September 30, 1995, the Bond Portfolio included $910.1 million (fair value, $887.3 million) of bonds not rated investment grade by S&P, Moody's or the NAIC. Based on their September 30, 1995 amortized cost, these non-investment-grade bonds accounted for 5.4% of the Company's total assets and 8.4% of 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 $305.8 million at September 30, 1995 (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 its holdings of such securities not exceed current levels, but its policies may change from time to time, including in connection with any possible acquisition. The Company had no material concentrations of non-investment-grade securities at September 30, 1995. The following table summarizes the Company's rated bonds by rating classification as of September 30, 1995 (dollars in thousands):
Issues rated by S&P/Moody's Issues not rated by S&P/Moody's Total - -------------------------------------------- by NAIC category ------------------------------------ -------------------------------------- Percent of S&P/(Moody's) Amortized Estimated NAIC Amortized Estimated Amortized invested Estimated category (1) cost fair value category (2) cost fair value cost assets (3) fair value - ------------------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ---------- AAA+ to A- (Aaa to A3) $4,054,907 $4,045,527 1 $1,200,751 $1,206,734 $5,255,658 48.57% $5,252,261 BBB+ to BBB- (Baa1 to Baa3) 297,670 299,430 2 836,386 836,553 1,134,056 10.48 1,135,983 BB+ to BB- (Ba1 to Ba3) 44,436 43,319 3 146,347 147,983 190,783 1.76 191,302 B+ to B- (B1 to B3) 415,393 409,455 4 227,044 224,684 642,437 5.94 634,139 CCC+ to C (Caa to C) 27,191 20,799 5 13,789 10,084 40,980 0.38 30,883 D -- -- 6 35,906 31,013 35,906 0.33 31,013 ---------- ---------- ---------- ---------- ---------- ---------- Total rated issues $4,839,597 $4,818,530 $2,460,223 $2,457,051 $7,299,820 $7,275,581 ========== ========== ========== ========== ========== ==========
- ------------------------------ (1) S&P rates debt securities in eleven rating categories, from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody's rates debt securities in nine rating categories, from Aaa (the highest) to C (extremely poor prospects of attaining real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt's relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. Issues are categorized based on the higher of the S&P or Moody's rating if rated by both agencies. (2) Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for nondefaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody's rating groups listed above, with categories 1 and 2 considered investment grade. A substantial portion of the assets in the NAIC categories were rated by the Company based on its implementation of NAIC rating guidelines. (3) At amortized cost. 19 22 SENIOR SECURED LOANS are included in the Bond Portfolio and their amortized cost aggregated $857.2 million at September 30, 1995. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1995, Secured Loans consisted of loans to 103 borrowers spanning 30 industries, with 22% of these assets (at amortized cost) concentrated in the leisure industry and with no other industry concentration constituting more than 14% 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 majority of the Company's Secured Loans are not rated by S&P or Moody's. MORTGAGE LOANS aggregated $1.54 billion at September 30, 1995 and consisted of 644 first mortgage loans with an average loan balance of approximately $2.4 million, collateralized by properties located in 26 states. Approximately 48% of the portfolio was multifamily residential, 22% was retail, 7% was industrial, 5% was office and 18% was other types. At September 30, 1995, approximately 28% of the portfolio was secured by properties located in California and no more than 12% of the portfolio was secured by properties in any other single state. At September 30, 1995, there were 28 loans with outstanding balances of $10 million or more, which loans collectively aggregated approximately 27% 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, 1995, approximately 22% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 1998. At September 30, 1995, loans delinquent by more than 90 days totaled $27.4 million (1.8% of total mortgages). Loans foreclosed upon and transferred to real estate in the balance sheet totaled $17.3 million (1.1% of total mortgages) at September 30, 1995. Approximately 36% of the mortgage loans in the portfolio at September 30, 1995 were seasoned loans underwritten to the Company's standards and purchased at or near par from the Resolution Trust Corporation and 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. At September 30, 1995, mortgage loans having an aggregate carrying value of $47.9 million had been restructured. Of this amount, $12.0 million was restructured during 1995 and $35.2 million was restructured during 1992. PARTNERSHIP investments totaled $774.4 million at September 30, 1995, constituting investments in approximately 300 separate partnerships with an average size of approximately $2.5 million. This portfolio includes: (i) $376.3 million of partnerships managed by independent money managers that invest in a broad selection of equity and fixed-income securities, currently including approximately 800 separate issuers; (ii) $263.8 million of partnerships that make tax-advantaged investments in affordable housing, currently involving approximately 265 multifamily projects in 34 states; and (iii) $134.3 million of partnerships that invest in mortgage loans and income-producing real estate. At September 30, 1995, $518.1 million of the Company's partnerships was accounted for by using the cost method and $256.3 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 20 23 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 maturities. 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 78% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1995. As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-maturity assets and liabilities under commonly used stress-test interest rate scenarios. Based on the results of these computer simulations, the investment portfolio has been constructed with a view to maintaining a desired investment spread between the yield on portfolio assets and the rate paid on its reserves under a variety of possible future interest rate scenarios. At September 30, 1995 the weighted average life of the Company's investments was approximately three-and-three-fourths years and the duration was approximately three-and-one- fourth years. 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, fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities into fixed-rate instruments. At September 30, 1995, the Company had 22 outstanding Swap Agreements with an aggregate notional principal amount of $881.4 million. These agreements mature in various years through 2001 and have an average remaining maturity of 25 months. The Company also seeks to provide liquidity 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. 21 24 There are risks associated with some of the techniques the Company uses to enhance its spread income and match its assets and liabilities. The primary risk associated with Dollar Rolls, Reverse Repos and Swap Agreements is the risk associated with counterparty nonperformance. In addition, Swap Agreements also have interest rate risk. However, the Company's Swap Agreements hedge variable-rate assets or liabilities, and interest rate fluctuations that adversely affect the net cash received or paid under the terms of the 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 risks associated with Total Return Agreements are the risk of potential loss due to bond market fluctuation and counterparty risk. The Company believes, however, that the counterparties to its Dollar Rolls, Reverse Repos, Swap Agreements and Total Return 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. The primary risk associated with MBSs is that a changing interest rate environment might cause prepayment of the underlying obligations at speeds slower or faster than anticipated at the time of their purchase. INVESTED ASSETS EVALUATION routinely includes a review by the Company of its portfolio of debt securities. Management identifies monthly those investments that require additional monitoring and carefully reviews the carrying value of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews for bonds, management principally considers the adequacy of collateral (if any), compliance with contractual covenants, the borrower's recent financial performance, news reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. The carrying values of bonds that are determined to have declines in value that are other than temporary are reduced to net realizable value and no further accruals of interest are made. 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 (at amortized cost) that are in default as to the payment of principal or interest, totaled $61.8 million at September 30, 1995, including $34.4 million (fair value, $23.9 million) of bonds and notes and $27.4 million of mortgage loans whose fair value was equal to their amortized cost. At September 30, 1995, defaulted investments constituted 0.6% of total invested assets at amortized cost. At September 30, 1994, defaulted investments totaled $56.2 million, including $10.3 million of bonds and notes and $45.9 million of mortgage loans. At September 30, 1994, defaulted investments constituted 0.6% of total invested assets at amortized cost and their fair value was equal to their amortized cost. SOURCES OF LIQUIDITY are readily available to the Company in the form of existing cash and short-term investments, Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. At September 30, 1995, approximately $4.95 billion of the Company's Bond Portfolio had an aggregate unrealized gain of $142.5 million, while approximately $2.38 billion of the Bond Portfolio had an aggregate unrealized loss of $155.1 million. In addition, the Company's investment portfolio also currently provides approximately $104.7 million of monthly cash flow from scheduled principal and interest payments. 22 25 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, 1995, had invested assets with a carrying value of $789.7 million and outstanding senior indebtedness of $524.8 million, comprising all of the Company's consolidated senior indebtedness. Additionally, as of September 30, 1995, the Parent had three GICs purchased by local government authorities that aggregated $250.4 million. In connection with the issuance of the Grantor Trust Preferred Securities, and the related purchase by the Parent of the common securities of SunAmerica Capital Trust I (the "Grantor Trust"), the Parent issued $54.3 million of 9.95% junior subordinated debentures, due 2044 (the "Debentures"), to the Grantor Trust. The Parent's annual debt service with respect to its senior indebtedness, GIC obligations and Debentures totals $79.9 million for fiscal 1996, $79.5 million for fiscal 1997, $99.6 million for fiscal 1998, $208.1 million for fiscal 1999, $72.9 million for fiscal 2000 and $1.23 billion, in the aggregate, thereafter. The Parent received dividends from its regulated life insurance subsidiaries of $69.2 million in March 1995, $43.0 million in December 1993 and $30.0 million in December 1992. The Parent also received dividends of $2.4 million in fiscal 1994 and $4.7 million in fiscal 1993 from its other directly owned subsidiaries. The Parent and a subsidiary, SunAmerica Financial, Inc., have transferred certain of their interests in various partnerships that make tax-advantaged affordable housing investments to third-party investors. As part of the transactions, the Parent has guaranteed a minimum defined yield and funding of certain defined operating deficits in return for a fee. A portion of the fees received has been deferred to absorb any required payments with respect to these guarantees. Based on an evaluation of the underlying housing projects, it is management's belief that such deferrals are ample for this purpose. Accordingly, management does not anticipate any material future losses with respect to these guarantees. The Parent has guaranteed that its life insurance subsidiaries will receive the statutory carrying value of certain invested assets, primarily bonds and real estate, aggregating $176.5 million. 23 26 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 1996 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 9. 24 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 page F-1 and S-1 of this report. EXHIBITS
Exhibit No. Description - ------ ----------- 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. 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. 3(i) Articles of Amendment, dated October 30, 1995. 3(j) Bylaws, as revised on October 23, 1987, are incorporated herein by reference to Exhibit 3(b) to the Company's 1987 Annual Report on Form 10-K, filed February 26, 1988. 4(a) Restated Charter, dated October 3, 1991. See Exhibit 3(a). 4(b) Bylaws, as revised on October 23, 1987. See Exhibit 3(j). 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) Senior Debt 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 Annual Report on Form 10-K, filed December 16, 1993. 4(g) Junior Subordinated Indenture, dated as of March 15, 1995, as supplemented by the First Supplemental Indenture, dated as of March 15, 1995, 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 28, 1995.
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Exhibit No. Description - ------ ----------- 4(h) 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 Annual Report on Form 10-K, filed December 16, 1993. 4(i) Declaration of Trust of SunAmerica Capital Trust I, incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement No. 33-56961 and 33-56961-01 on Form S-4, filed April 12, 1995. 4(j) Declaration of Trust of SunAmerica Capital Trust II, incorporated herein by reference to Exhibit 4.4 to the Company's Registration Statement No. 33-62405 on Form S-3, filed September 6, 1995. 10(a) Employment Agreement, dated July 30, 1992, between the Company and Gary W. Krat, is incorporated herein by reference to Exhibit 10(e) to the Company's 1992 Annual Report on Form 10-K, filed November 30, 1992. 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) $90,000,000 Credit Agreement, dated as of February 1, 1993, among the Company, SunAmerica Corporation 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(k) to the Company's 1994 Annual Report on Form 10-K, filed December 1, 1994.
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Exhibit No. Description - ------ ----------- 10(o) $60,000,000 Credit Agreement, dated as of February 1, 1993, among the Company, SunAmerica Corporation 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(l) to the Company's 1994 Annual Report on Form 10-K, filed December 1, 1994. 10(p) First Amendment to $90,000,000 Credit Agreement, dated as of January 30, 1994, among the Company, SunAmerica Financial, Inc. and Citibank, N.A., amending the Credit Agreement of February 1, 1993 is incorporated herein by reference to Exhibit 10(m) to the Company's 1994 Annual Report on Form 10-K, filed December 1, 1994. 10(q) First Amendment to $60,000,000 Credit Agreement, dated as of January 30, 1994, among the Company, SunAmerica Financial, Inc. and Citibank, N.A., amending the Credit Agreement of February 1, 1993 is incorporated herein by reference to Exhibit 10(n) to the Company's 1994 Annual Report on Form 10-K, filed December 1, 1994. 10(r) Second Amendment to $90,000,000 Credit Agreement, dated December 12, 1994, among the Company, SunAmerica Financial, Inc. and Citibank, N.A., amending the Credit Agreement of February 1, 1993. 10(s) Second Amendment to $60,000,000 Credit Agreement, dated December 12, 1994, among the Company, SunAmerica Financial, Inc. and Citibank, N.A., amending the Credit Agreement of February 1, 1993. 10(t) 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.
REPORTS ON FORM 8-K On July 14, 1995, the Company filed a current report on Form 8-K announcing that the name of its subsidiary, Sun Life Insurance Company of America, had been changed to "SunAmerica Life Insurance Company." On July 28, 1995, the Company filed a current report on Form 8-K announcing its third quarter 1995 earnings. On September 6, 1995, the Company filed a current report on Form 8-K announcing various ratings of its insurance companies. On October 6, 1995, the Company filed a current report on Form 8-K to file exhibits in connection with the issuance by SunAmerica Capital Trust II (the "Trust") of its 8.35% Trust Originated Preferred Securities pursuant to Registration Statement Nos. 33-62405 and 33-62405-01 filed by the Company and the Trust. On October 19, 1995, the Company filed a current report on Form 8-K to file exhibits in connection with the Registration Statement on Form S-3 (File No. 33-62405) filed by the Company relating to the Company's Debt Securities, Common Stock, Preferred Stock and Warrants to Purchase Debt Securities, Common Stock and Preferred Stock. On October 31, 1995, the Company filed a current report on Form 8-K to file exhibits in connection with the issuance of its $3.10 Depositary Shares, each representing one-fiftieth of a share of Series E Mandatory Conversion Premium Dividend Preferred Stock, pursuant to the Company's Registration Statement on Form S-3 (File No. 33-62405). On November 9, 1995, the Company filed a current report on Form 8-K announcing its fourth quarter 1995 earnings. 27 30 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: 1995 November 29, 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 November 29, 1995 - ---------------------------------------- Executive Officer (Principal Eli Broad Executive Officer) JAMES R. BELARDI Executive Vice President November 29, 1995 - ---------------------------------------- (Principal Financial Officer) James R. Belardi SCOTT L. ROBINSON Senior Vice President and November 29, 1995 - ---------------------------------------- Controller (Principal Scott L. Robinson Accounting Officer) RONALD J. ARNAULT Director November 29, 1995 - ---------------------------------------- Ronald J. Arnault KAREN HASTIE-WILLIAMS Director November 29, 1995 - ---------------------------------------- Karen Hastie-Williams DAVID O. MAXWELL Director November 29, 1995 - ---------------------------------------- David O. Maxwell BARRY MUNITZ Director November 29, 1995 - ---------------------------------------- Barry Munitz LESTER POLLACK Director November 29, 1995 - ---------------------------------------- Lester Pollack CARL E. REICHARDT Director November 29, 1995 - ---------------------------------------- Carl E. Reichardt RICHARD D. ROHR Director November 29, 1995 - ---------------------------------------- Richard D. Rohr SANFORD C. SIGOLOFF Director November 29, 1995 - ---------------------------------------- Sanford C. Sigoloff HAROLD M. WILLIAMS Director November 29, 1995 - ---------------------------------------- Harold M. Williams
28 31 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
Page(s) ----------------- Report of Independent Accountants......................................... F-2 Consolidated Balance Sheet as of September 30, 1995 and 1994.............. F-3 Consolidated Income Statement for the years ended September 30, 1995, 1994 and 1993................................................................. F-4 Consolidated Statement of Cash Flows for the years ended September 30, 1995, 1994 and 1993...................................................... F-5 through F-6 Notes to Consolidated Financial Statements................................ F-7 through F-24
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 32 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 8, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in fiscal 1994. Price Waterhouse LLP Los Angeles, California November 6, 1995, except as to Notes 7 and 11 which are as of November 28, 1995. F-2 33 SUNAMERICA INC. CONSOLIDATED BALANCE SHEET
September 30, -------------------------- 1995 1994 ----------- ----------- (In thousands) ASSETS Investments: Cash and short-term investments................................ $ 855,350 $ 569,382 Bonds, notes and redeemable preferred stocks: Available for sale, at fair value (amortized cost: 1995, $6,615,620,000; 1994, $5,599,780,000)....................... 6,584,488 5,270,738 Held for investment, at amortized cost (fair value: 1995, $736,835,000; 1994, $1,072,222,000)......................... 718,283 1,064,132 Mortgage loans................................................. 1,543,285 1,426,924 Common stocks, at fair value (cost: 1995, $21,403,000; 1994, $49,336,000)................................................ 39,906 61,660 Partnerships................................................... 774,417 593,854 Real estate.................................................... 105,637 107,053 Other invested assets.......................................... 187,593 186,647 ----------- ----------- Total investments.............................................. 10,808,959 9,280,390 Variable annuity assets.......................................... 5,263,006 4,513,093 Accrued investment income........................................ 95,038 105,686 Deferred acquisition costs....................................... 526,415 581,874 Other assets..................................................... 150,749 175,182 ----------- ----------- TOTAL ASSETS..................................................... $16,844,167 $14,656,225 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Reserves, payables and accrued liabilities: Reserves for fixed annuity contracts........................... $ 4,862,250 $ 4,519,623 Reserves for guaranteed investment contracts................... 3,607,192 2,783,522 Trust deposits................................................. 426,595 442,320 Payable to brokers for purchases of securities................. 473,728 643,734 Income taxes currently payable................................. 2,465 4,600 Other liabilities.............................................. 271,540 212,429 ----------- ----------- Total reserves, payables and accrued liabilities............... 9,643,770 8,606,228 ----------- ----------- Variable annuity liabilities..................................... 5,263,006 4,513,093 ----------- ----------- Senior indebtedness: Long-term notes and debentures................................. 524,835 472,835 Collateralized mortgage obligations............................ -- 28,662 ----------- ----------- Total senior indebtedness...................................... 524,835 501,497 ----------- ----------- Deferred income taxes............................................ 146,847 74,319 ----------- ----------- Company-obligated preferred securities of grantor trust whose sole asset is $54,259,000 principal amount of 9.95% junior subordinated debentures, due 2044, of the Company............... 52,631 -- ----------- ----------- Shareholders' equity: Preferred Stock................................................ 321,642 374,273 Nontransferable Class B Stock.................................. 10,240 6,826 Common Stock................................................... 44,175 28,977 Additional paid-in capital..................................... 185,211 188,667 Retained earnings.............................................. 656,509 512,571 Net unrealized losses on debt and equity securities available for sale............................................ (4,699) (150,226) ----------- ----------- Total shareholders' equity..................................... 1,213,078 961,088 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................... $16,844,167 $14,656,225 =========== ===========
See accompanying notes F-3 34 SUNAMERICA INC. CONSOLIDATED INCOME STATEMENT
Years ended September 30, -------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (In thousands, except per-share amounts) Investment income........................................ $ 905,802 $ 758,150 $ 754,369 --------- --------- --------- Interest expense on: Fixed annuity contracts................................ (258,730) (254,464) (308,910) Guaranteed investment contracts........................ (213,340) (150,424) (136,984) Trust deposits......................................... (10,519) (8,516) (8,438) Senior indebtedness.................................... (55,985) (50,292) (36,246) --------- --------- --------- Total interest expense................................. (538,574) (463,696) (490,578) --------- --------- --------- Dividends paid on preferred securities of grantor trust.................................................. (1,673) -- -- --------- --------- --------- NET INVESTMENT INCOME.................................... 365,555 294,454 263,791 --------- --------- --------- NET REALIZED INVESTMENT LOSSES........................... (33,012) (21,124) (21,287) --------- --------- --------- Fee income: Variable annuity fees.................................. 84,583 79,483 67,461 Net retained commissions............................... 32,584 28,009 23,658 Asset management fees.................................. 26,935 31,302 32,293 Loan servicing fees.................................... 19,792 -- -- Trust fees............................................. 15,394 11,942 10,893 --------- --------- --------- TOTAL FEE INCOME......................................... 179,288 150,736 134,305 --------- --------- --------- Other income and expenses: Surrender charges...................................... 11,885 10,716 9,766 General and administrative expenses.................... (166,540) (132,743) (135,790) Provision for future guaranty fund assessments......... -- -- (22,000) Amortization of deferred acquisition costs............. (80,829) (66,925) (51,860) Other, net............................................. 3,259 4,887 7,086 --------- --------- --------- TOTAL OTHER INCOME AND EXPENSES.......................... (232,225) (184,065) (192,798) --------- --------- --------- PRETAX INCOME............................................ 279,606 240,001 184,011 Income tax expense....................................... (85,400) (74,700) (57,000) --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES........................................ 194,206 165,301 127,011 Cumulative effect of change in accounting for income taxes.................................................. -- (33,500) -- --------- --------- --------- NET INCOME............................................... $ 194,206 $ 131,801 $ 127,011 ========= ========= ========= EARNINGS PER SHARE: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES........................................ $ 2.84 $ 2.39 $ 1.83 Cumulative effect of change in accounting for income taxes.................................................. -- (0.54) -- --------- --------- --------- NET INCOME............................................... $ 2.84 $ 1.85 $ 1.83 ========= ========= ========= NET EARNINGS APPLICABLE TO COMMON STOCK (used in the computation of earnings per share)...................... $ 179,223 $ 115,381 $ 110,537 ========= ========= ========= AVERAGE SHARES OUTSTANDING............................... 63,114 62,415 60,383 ========= ========= =========
See accompanying notes F-4 35 SUNAMERICA INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended September 30, -------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................. $ 194,206 $ 131,801 $ 127,011 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to: Fixed annuity contracts........................... 258,730 254,464 308,910 Guaranteed investment contracts................... 213,340 150,424 136,984 Trust deposits.................................... 10,519 8,516 8,438 Net realized investment losses....................... 33,012 21,124 21,287 Accretion of net discounts on investments............ (28,835) (2,949) (22,289) Provision for deferred income taxes.................. (5,834) 78,285 8,433 Cumulative effect of change in accounting for income taxes............................................... -- 33,500 -- Change in: Deferred acquisition costs........................... (24,741) (20,357) (39,708) Other assets......................................... (4,731) 365 8,140 Income taxes currently payable....................... 52,433 (61,211) (1,817) Other liabilities.................................... 20,602 (18,964) 74,165 Other, net............................................. 23,322 4,330 27,317 ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 742,023 579,328 656,871 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Bonds, notes and redeemable preferred stocks available for sale.................................. (6,765,134) (6,657,431) (5,332,008) Bonds, notes and redeemable preferred stocks held for investment.......................................... (86,995) (81,975) (561,372) Mortgage loans....................................... (250,547) (333,384) (199,106) Partnerships......................................... (410,299) (406,171) (274,776) Other investments, excluding short-term investments....................................... (92,516) (143,279) (67,418) Net assets of Imperial Premium Finance, Inc.......... (442,804) -- -- Sales of: Bonds, notes and redeemable preferred stocks available for sale.................................. 4,496,801 4,300,252 4,185,951 Bonds, notes and redeemable preferred stocks held for investment.......................................... 2,052 17,027 211,348 Kaufman and Broad Home Corporation warrants.......... -- 28,618 -- Partnerships......................................... 165,710 140,459 193,071 Other investments, excluding short-term investments....................................... 71,442 63,565 144,004 Redemptions and maturities of: Bonds, notes and redeemable preferred stocks available for sale.................................. 1,697,841 1,007,680 865,201 Bonds, notes and redeemable preferred stocks held for investment.......................................... 436,668 456,252 260,692 Mortgage loans....................................... 107,102 157,304 173,327 Partnerships......................................... 104,734 230,106 2,401 Other investments, excluding short-term investments......................................... 53,928 83,201 11,450 ---------- ---------- ---------- NET CASH USED BY INVESTING ACTIVITIES.................. (912,017) (1,137,776) (387,235) ---------- ---------- ----------
F-5 36 SUNAMERICA INC. CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Years ended September 30, -------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payments of cash dividends to shareholders............. $ (50,268) $ (50,830) $ (38,760) Premium receipts on: Fixed annuity contracts.............................. 944,742 230,037 223,827 Guaranteed investment contracts...................... 1,766,629 1,038,699 691,639 Net exchanges to (from) the fixed accounts of variable annuity contracts..................................... 10,388 (30,929) (45,435) Receipts of trust deposits............................. 447,398 319,318 217,058 Withdrawal payments on: Fixed annuity contracts.............................. (690,292) (693,618) (515,856) Guaranteed investment contracts...................... (1,156,299) (621,706) (635,567) Trust deposits....................................... (473,611) (264,500) (213,966) Claims and annuity payments on fixed annuity contracts............................................ (178,487) (176,136) (179,792) Net proceeds from issuances of long-term notes and debentures............................................ 51,675 91,711 153,433 Repayments of collateralized mortgage obligations...... (28,662) (83,370) (70,752) Net decrease in other senior indebtedness.............. -- (15,119) (10,800) Net proceeds from issuance of Preferred Stock.......... -- -- 178,983 Net borrowings (repayments) of other short-term financings............................................ (187,251) (413,523) 262,782 ---------- ---------- ---------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES....... 455,962 (669,966) 16,794 ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS........................................... 285,968 (1,228,414) 286,430 CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD................................................ 569,382 1,797,796 1,511,366 ---------- ---------- ---------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD....... $ 855,350 $ 569,382 $1,797,796 ========== ========== ========== Supplemental cash flow information: Interest paid on indebtedness........................ $ 54,899 $ 56,169 $ 42,154 ========== ========== ========== Income taxes paid, net of refunds received........... $ 38,801 $ 57,626 $ 34,971 ========== ========== ========== Non-cash financing activity: Exchange of 2,105,235 shares of 9 1/4% Series B Preferred Stock for preferred securities of grantor trust............................................... $ 52,631 $ -- $ -- ========== ========== ==========
See accompanying notes F-6 37 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The consolidated financial statements include the accounts of SunAmerica Inc. (the "Company") and all significant subsidiaries, including SunAmerica Life Insurance Company; Anchor National Life Insurance Company; First SunAmerica Life Insurance Company; SunAmerica Financial, Inc.; SunAmerica Asset Management Corp.; Resources Trust Company; Royal Alliance Associates, Inc.; SunAmerica Securities, Inc.; Imperial Premium Finance, Inc.; and SunAmerica Capital Trust I. All significant intercompany transactions have been eliminated. On November 10, 1995, the Company paid a three-for-two stock split (effected in the form of a stock dividend) on the Company's Common Stock and Nontransferable Class B Stock (the "Stock Split"). The par value of the shares paid in connection with the Stock Split was charged to Additional Paid-In Capital in the September 30, 1995 balance sheet. Per-share amounts, average shares outstanding, stock option plan data and related prices have been restated, for all periods presented, to reflect the Stock Split. Certain items have been reclassified to conform to the current year's presentation. INVESTMENTS. Cash and short-term investments primarily include cash, commercial paper, money market investments, repurchase agreements and short-term bank participations. All such investments are carried at cost plus accrued interest, which approximates fair value, have maturities of three months or less and are considered cash equivalents for purposes of reporting cash flows. Bonds, 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. It is management's intent, and the Company has the ability, to hold the remainder of bonds, notes and redeemable preferred stocks until maturity, and, therefore, these investments are carried at amortized cost. Bonds, notes and redeemable preferred stocks, whether available for sale or held for investment, are reduced to estimated net realizable value when necessary for declines in value considered to be other than temporary. Estimates of net realizable value are subjective and actual realization will be dependant upon future events. Mortgage loans are carried at amortized unpaid balances, net of provisions for estimated losses. Affordable housing partnerships for which the Company intends to provide credit enhancement services in connection with the transfer of a portion of the interests to third-party investors are accounted for by using the cost method. Other 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. Real estate is carried at the lower of cost or fair value. 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 F-7 38 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 gains or 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 $5,400,000 at September 30, 1995, and $85,600,000 at September 30, 1994 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 $46,882,000 at September 30, 1995, 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). 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 and D Depositary Shares issued in October 1991 and March 1993, 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 $14,983,000 in 1995, $16,420,000 in 1994 and $16,474,000 in 1993. These preferred stock dividend requirements do not include dividends paid on the convertible issues, which amounted to $13,907,000 in 1995, $21,140,000 in 1994 and $13,266,000 in 1993. F-8 39 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- 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, 1995: AVAILABLE FOR SALE: Securities of the United States Government....................... $ 665,412 $ 670,174 Mortgage-backed securities....................................... 3,977,545 3,930,908 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............................................ 237,710 242,335 ---------- ---------- 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....................................... 188,842 190,514 Securities of public utilities................................... 9,492 9,593 Corporate bonds and notes........................................ 403,362 419,208 Other debt securities............................................ 33,164 33,164 ---------- ---------- Total held for investment........................................ $ 718,283 $ 736,835 ========== ========== AT SEPTEMBER 30, 1994: AVAILABLE FOR SALE: Securities of the United States Government....................... $ 419,489 $ 414,592 Mortgage-backed securities....................................... 3,528,761 3,268,199 Securities of public utilities................................... 21,126 20,302 Corporate bonds and notes........................................ 1,450,882 1,384,622 Redeemable preferred stocks...................................... 24,489 26,202 Other debt securities............................................ 155,033 156,821 ---------- ---------- Total available for sale......................................... $5,599,780 $5,270,738 ========== ========== HELD FOR INVESTMENT: Securities of the United States Government....................... $ 78,988 $ 75,322 Mortgage-backed securities....................................... 223,022 221,622 Securities of public utilities................................... 14,485 14,420 Corporate bonds and notes........................................ 717,286 730,507 Other debt securities............................................ 30,351 30,351 ---------- ---------- Total held for investment........................................ $1,064,132 $1,072,222 ========== ==========
F-9 40 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- INVESTMENTS (CONTINUED) The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale and held for investment by contractual maturity, as of September 30, 1995, follow:
Estimated Amortized fair cost value ---------- ---------- (In thousands) AVAILABLE FOR SALE: Due in one year or less........................................... $ 154,204 $ 153,563 Due after one year through five years............................. 979,785 987,318 Due after five years through ten years............................ 1,066,790 1,060,662 Due after ten years............................................... 437,296 452,037 Mortgage-backed securities........................................ 3,977,545 3,930,908 ---------- ---------- Total available for sale.......................................... $6,615,620 $6,584,488 ========== ========== HELD FOR INVESTMENT: Due in one year or less........................................... $ 7,338 $ 7,338 Due after one year through five years............................. 204,555 206,763 Due after five years through ten years............................ 156,091 163,903 Due after ten years............................................... 161,457 168,317 Mortgage-backed securities........................................ 188,842 190,514 ---------- ---------- Total held for investment......................................... $ 718,283 $ 736,835 ========== ==========
Actual maturities of bonds, notes and redeemable preferred stocks will differ from those shown above because of prepayments and redemptions. F-10 41 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- 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, 1995: AVAILABLE FOR SALE: Securities of the United States Government.......................... $ 6,010 $ (1,248) Mortgage-backed securities.......................................... 62,502 (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............................................... 4,744 (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, 1994: AVAILABLE FOR SALE: Securities of the United States Government.......................... $ 3,142 $ (8,039) Mortgage-backed securities.......................................... 13,171 (273,733) Securities of public utilities...................................... 28 (852) Corporate bonds and notes........................................... 6,579 (72,839) Redeemable preferred stocks......................................... 1,854 (141) Other debt securities............................................... 2,129 (341) -------- --------- Total available for sale............................................ $ 26,903 $ (355,945) ======== ========= HELD FOR INVESTMENT: Securities of the United States Government.......................... $ 196 $ (3,862) Mortgage-backed securities.......................................... 2,070 (3,470) Securities of public utilities...................................... -- (65) Corporate bonds and notes........................................... 16,858 (3,637) -------- --------- Total held for investment........................................... $ 19,124 $ (11,034) ======== =========
At September 30, 1995, gross unrealized gains on equity securities aggregated $24,896,000 and gross unrealized losses aggregated $6,393,000. At September 30, 1994, gross unrealized gains on equity securities aggregated $22,619,000 and gross unrealized losses aggregated $10,295,000. 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 F-11 42 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- INVESTMENTS (CONTINUED) $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. Gross realized investment gains and losses on sales of all types of investments are as follows:
Years ended September 30, ------------------------------- 1995 1994 1993 -------- -------- --------- (In thousands) BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Available for sale: Realized gains............................................ $ 61,104 $ 44,124 $ 117,488 Realized losses........................................... (83,308) (69,320) (34,377) Held for investment: Realized gains............................................ 9,262 10,572 11,055 Realized losses........................................... (2,626) (10,008) (24,994) EQUITIES: Realized gains.............................................. 25,863 23,120 20,177 Realized losses............................................. (4,985) (496) (4,232) OTHER INVESTMENTS: Realized gains.............................................. 6,453 41,722 30,432 Realized losses............................................. (2,028) (4,950) (22,592) IMPAIRMENT WRITEDOWNS....................................... (42,747) (55,888) (114,244) -------- -------- --------- Total net realized investment losses........................ $(33,012) $(21,124) $ (21,287) ======== ======== =========
The sources and related amounts of investment income are as follows:
Years ended September 30, ------------------------------ 1995 1994 1993 -------- -------- -------- (In thousands) Short-term investments....................................... $ 43,485 $ 30,900 $ 33,593 Bonds, notes and redeemable preferred stocks................. 555,260 518,215 515,995 Mortgage loans............................................... 146,311 132,297 132,069 Equity-method partnerships................................... 27,148 37,205 21,579 Cost-method partnerships..................................... 106,927 26,451 24,055 Other invested assets........................................ 26,671 13,082 27,078 -------- -------- -------- Total investment income...................................... $905,802 $758,150 $754,369 ======== ======== ========
Expenses incurred to manage the investment portfolio amounted to $19,077,000 for the year ended September 30, 1995; $16,751,000 for the year ended September 30, 1994; and $16,443,000 for the year ended September 30, 1993 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 $256,323,000 at September 30, 1995. At that date, total combined assets of these 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 F-12 43 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- INVESTMENTS (CONTINUED) 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. Investments in unconsolidated partnerships accounted for by using the equity method of accounting totaled $268,102,000 at September 30, 1994. At that date, total combined assets of these partnerships were $447,182,000 (including $442,322,000 of investments) and total combined liabilities were $172,451,000 (including $143,476,000 of nonrecourse notes payable to banks). For the year then ended, total combined revenues and expenses of such partnerships were $131,975,000 and $87,313,000, respectively, resulting in $44,662,000 of total combined pretax income. At September 30, 1995, no investment exceeded 10% of the Company's consolidated shareholders' equity. At September 30, 1995, mortgage loans were collateralized by properties located in 26 states, with loans totaling approximately 28% of the aggregate carrying value of the portfolio secured by properties located in California. At September 30, 1995, bonds, notes and redeemable preferred stocks included $910,106,000 (at amortized cost, with a fair value of $887,337,000) of investments not rated investment grade by either Standard & Poor's Corporation, Moody's Investors Service or under National Association of Insurance Commissioners' guidelines. The Company had no material concentrations of non-investment-grade assets at September 30, 1995. At September 30, 1995, the amortized cost of investments in default as to the payment of principal or interest was $61,801,000, consisting of $34,405,000 of non-investment-grade bonds and $27,396,000 of mortgage loans. Such nonperforming investments had an estimated fair value of $51,329,000. The Company has entered into various Swap Agreements with major brokerage firms and money center banks to reduce the impact of changes in interest rates on certain floating-rate assets and liabilities. At September 30, 1995, the Company had 22 outstanding Swap Agreements with an aggregate notional principal amount of $881,416,000. The Swap Agreements effectively convert certain variable-rate corporate bonds and notes, mortgage loans and guaranteed investment contract liabilities into fixed-rate instruments. These Swap Agreements mature in various years through 2001 and have an average remaining maturity of approximately 25 months. 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. Related net interest receivable of $3,897,000 and $10,675,000 at September 30, 1995 and 1994, respectively, is included in Accrued Investment Income in the balance sheet. Related net interest payable of $3,709,000 and $34,000 at September 30, 1995 and 1994, respectively, is included in Reserves for Guaranteed Investment Contracts in the balance sheet. For investment purposes, the Company also has entered into various Total Return Agreements with an aggregate notional principal amount of $305,825,000 (the "Notional Amount") at September 30, 1995. 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 1995; however, the Company intends to enter into other similar agreements. The Company is exposed to potential loss due to bond market fluctuations equal to the Payment Amount plus any reduction in the aggregate fair value of the F-13 44 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- INVESTMENTS (CONTINUED) 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. Related income of $13,044,000, $1,306,000 and $14,574,000 for the years ended September 30, 1995, 1994 and 1993, respectively, is included in Investment Income in the income statement. NOTE 3 -- 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 fair value equal to current net surrender value. Annuitized contracts are valued based on the present value of future cash flows at current pricing rates. 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. TRUST DEPOSITS: Trust deposits are carried at the fair value of deposits payable upon demand. F-14 45 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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. 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. COLLATERALIZED MORTGAGE OBLIGATIONS: Such obligations are variable-rate obligations for which the carrying value approximates the fair value. The estimated fair values of the Company's financial instruments at September 30, 1995 and 1994, compared with their respective carrying values, are as follows:
Carrying Fair value value ---------- ---------- (In thousands) 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 3,571,698 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 ========== ========== 1994: ASSETS: Cash and short-term investments................................... $ 569,382 $ 569,382 Bonds, notes and redeemable preferred stocks...................... 6,334,870 6,342,960 Mortgage loans.................................................... 1,426,924 1,404,562 Variable annuity assets........................................... 4,513,093 4,513,093 LIABILITIES: Reserves for fixed annuity contracts.............................. 4,519,623 4,415,386 Reserves for guaranteed investment contracts...................... 2,783,522 2,480,086 Trust deposits.................................................... 442,320 442,320 Payable to brokers for purchases of securities.................... 643,734 643,734 Variable annuity liabilities...................................... 4,513,093 4,361,220 Long-term notes and debentures.................................... 472,835 458,692 Collateralized mortgage obligations............................... 28,662 28,662 ========== ==========
F-15 46 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- INDEBTEDNESS Indebtedness consists of the following (interest rates are as of September 30):
September 30, ------------------- 1995 1994 -------- -------- (In thousands) LONG-TERM NOTES AND DEBENTURES: Medium-term notes due 1998 through 2005 (5 3/8% to 7 3/8% in 1995 and 5 3/8% to 6 3/4% in 1994)........................................... $199,835 $147,835 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 long-term notes and debentures................................... 524,835 472,835 COLLATERALIZED MORTGAGE OBLIGATIONS redeemed in 1995 (5 5/8% in 1994)................................................................ -- 28,662 -------- -------- Total indebtedness..................................................... $524,835 $501,497 ======== ========
On October 19, 1995, the Company registered, but has not yet issued, $300,000,000 of medium-term notes. Principal payments on long-term borrowings are due as follows: 1998, $20,000,000; 1999, $142,775,000; 2000, $14,000,000; and thereafter, $348,060,000. NOTE 5 -- 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, the Company sold, through a 100% coinsurance transaction, the general agency division of SunAmerica Life Insurance Company. With respect to the coinsurance transaction, SunAmerica Life Insurance Company could become liable for in-force amounts ceded if the coinsurer were to become unable to meet the obligations assumed under the coinsurance agreement. In-force amounts ceded approximated $1,262,777,000 at September 30, 1995. As part of the 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 certain of its interests in various partnerships that make tax-advantaged affordable housing investments to third-party investors. As part of the transactions, the Company has guaranteed a minimum defined yield and funding of certain defined operating deficits in return for a fee. A portion of the fees received has been deferred to absorb any required payments with respect to these guarantees. Based on an evaluation of the underlying housing projects, it is management's belief that such deferrals are ample for this purpose. Accordingly, management does not anticipate any material future losses with respect to these guarantees. F-16 47 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- COMPANY-OBLIGATED PREFERRED SECURITIES OF GRANTOR TRUSTS On June 13, 1995, pursuant to an exchange offer, SunAmerica Capital Trust I, a grantor trust and a consolidated wholly owned subsidiary of the Company, issued $52,630,875 liquidation amount of its 9.95% Trust Originated Preferred Securities to holders of 2,105,235 shares of the Company's 9 1/4% Series B Preferred Stock, also having a liquidation preference of $52,630,875. 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 $54,258,650 principal amount of 9.95% junior subordinated debentures, due 2044. The debentures 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. The preferred and common securities will be redeemed on a pro rata basis, to the same extent as the debentures are repaid, at $25 per security plus accumulated and unpaid distributions. The debentures issued to the grantor trust and the common securities purchased by the Company from the grantor trust are eliminated in the accompanying balance sheet. In October 1995, subsequent to the Company's fiscal year end, SunAmerica Capital Trust II, a grantor trust and a consolidated wholly owned subsidiary of the Company, issued $185,000,000 liquidation amount of its 8.35% 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 $191,224,250 principal amount of 8.35% junior subordinated debentures, due 2044. The debentures 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. The preferred and common securities will be redeemed on a pro rata basis, to the same extent as the debentures are repaid, at $25 per security plus accumulated and unpaid distributions. The interest and other payment dates on the debentures correspond to the distribution and other payment dates on the preferred and common securities. 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. 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. NOTE 7 -- SHAREHOLDERS' EQUITY The Company is authorized to issue 20,000,000 shares of preferred stock ("Preferred Stock"). On November 1, 1995, subsequent to the Company's fiscal year end, 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 one-and-one-half 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 one-and-one-half times the current market price, as defined, of the Common Stock over $74.40, payable in shares of Common Stock. F-17 48 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- SHAREHOLDERS' EQUITY (CONTINUED) 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 November 28, 1995, subsequent to the Company's fiscal year end, the Company announced that it will redeem all of the Series D Depositary Shares on January 2, 1996, thereby redeeming all of the Series D Mandatory Conversion Premium Dividend Preferred Stock. For each Series D Depositary Share, holders will receive 1.021994885 shares of Common Stock (resulting in an aggregate issuance of 5,112,529 shares of Common Stock) and $0.2471 in cash representing accrued and unpaid dividends from December 1, 1995 through and including January 2, 1996. At September 30, 1995, 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. The Series C Preferred Shares are redeemable at the option of the Company at $103 per share, plus accrued and unpaid dividends, until March 1, 1996, when they are redeemable at $100 per share, plus accrued and unpaid dividends. The holders of these shares are entitled to one-tenth of one vote per share on all matters submitted to a vote of the holders of Common Stock. The quarterly dividend rate is 50 basis points below the higher of three defined treasury-rate indexes. However, the dividend rate may not be less than 7% per annum nor greater than 13 1/2% per annum. On September 1, 1995, the dividend rate was 7.0%. 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 6 -- CompanyObligated Preferred Securities of Grantor Trusts). 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. 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. 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, 1995, 44,175,000 shares (adjusted for the Stock Split) were outstanding and at September 30, 1994, 28,977,000 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, 1995, 10,240,000 shares (adjusted for the Stock Split) were outstanding and at September 30, 1994, 6,826,000 shares were outstanding. F-18 49 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- SHAREHOLDERS' EQUITY (CONTINUED) At September 30, 1995, under the Company's 1988 Employee Stock Plan, options to purchase 2,757,825 shares at prices ranging from $2.59 to $36.92 were outstanding (including 1,371,510 exercisable shares at prices ranging from $2.59 to $30.04) and 4,486,376 shares were reserved for future grants. Shares of Common Stock issued in connection with the exercise of employee stock options aggregated 137,351 at prices ranging from $1.65 to $30.04 in 1995; 271,463 at prices ranging from $1.65 to $21.46 in 1994; and 1,149,275 at prices ranging from $0.85 to $13.50 in 1993. Changes in shareholders' equity are as follows:
Years ended September 30, ------------------------------ 1995 1994 1993 -------- -------- -------- (In thousands) PREFERRED STOCK: Beginning balance............................................ $374,273 $452,273 $267,180 Exchange of 2,105,235 Series B Shares for 2,105,235 shares of Trust Originated Preferred Securities....................... (52,631) -- -- Redemption of 6,000,000 Series A Depositary Shares........... -- (78,000) -- Issuance of 5,002,500 Series D Depositary Shares............. -- -- 185,093 -------- -------- -------- Ending balance............................................... $321,642 $374,273 $452,273 ======== ======== ======== NONTRANSFERABLE CLASS B STOCK: Beginning balance............................................ $ 6,826 $ 6,828 $ 6,834 Conversion of 2,000 and 6,500 shares to Common Stock......... -- (2) (6) Stock Split.................................................. 3,414 -- -- -------- -------- -------- Ending balance............................................... $ 10,240 $ 6,826 $ 6,828 ======== ======== ======== COMMON STOCK: Beginning balance............................................ $ 28,977 $ 26,335 $ 25,179 Issuance of 2,476,000 shares to redeem the Series A Depositary Shares........................................... -- 2,476 -- Conversion of Nontransferable Class B Stock to 2,000 and 6,500 shares................................................ -- 2 6 Stock options and other employee benefit plans............... 473 164 1,150 Stock Split.................................................. 14,725 -- -- -------- -------- -------- Ending balance............................................... $ 44,175 $ 28,977 $ 26,335 ======== ======== ======== ADDITIONAL PAID-IN CAPITAL: Beginning balance............................................ $188,667 $110,120 $ 97,295 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 -- Cost of issuance of 5,002,500 Series D Depositary Shares..... -- -- (6,110) Stock options and other employee benefit plans............... 17,183 3,023 18,935 Stock Split.................................................. (18,139) -- -- -------- -------- -------- Ending balance............................................... $185,211 $188,667 $110,120 ======== ======== ========
F-19 50 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- SHAREHOLDERS' EQUITY (CONTINUED)
Years ended September 30, --------------------------------- 1995 1994 1993 --------- --------- --------- (In thousands) RETAINED EARNINGS: Beginning balance......................................... $ 512,571 $ 413,770 $ 325,227 Net income................................................ 194,206 131,801 127,011 Dividends on: Preferred Stock......................................... (29,112) (37,556) (29,456) Nontransferable Class B Stock........................... (3,686) (2,458) (1,721) Common Stock............................................ (17,470) (10,816) (7,291) Gain on sale of KBH Warrants, net of income taxes of $9,600,000.............................................. -- 17,830 -- --------- --------- --------- Ending balance............................................ $ 656,509 $ 512,571 $ 413,770 ========= ========= ========= NET UNREALIZED GAINS (LOSSES) ON DEBT AND EQUITY SECURITIES AVAILABLE FOR SALE: Beginning balance......................................... $(150,226) $ 100,701 $ 8,353 Change in net unrealized gains/losses on debt securities available for sale...................................... 297,910 (420,966) 91,924 Change in net unrealized gains/losses on equity securities available for sale...................................... 6,179 (49,627) 47,830 Change in adjustment to deferred acquisition costs........ (80,200) 85,600 -- Tax effects of net changes................................ (78,362) 134,066 (47,406) --------- --------- --------- Ending balance............................................ $ (4,699) $(150,226) $ 100,701 ========= ========= =========
Dividends that the Company may receive from its life insurance subsidiaries in any year without prior approval of the California, Arizona or New York insurance commissioners are limited by statute. At September 30, 1995, restricted net assets of these consolidated life insurance subsidiaries totaled approximately $962,529,000, none of which is available for the payment of dividends until calendar year 1996. The combined statutory equity of the Company's three life insurance subsidiaries totaled $761,775,000 at September 30, 1995; $698,236,000 at December 31, 1994; and $578,643,000 at December 31, 1993. The combined statutory net income of these subsidiaries totaled $71,077,000 for the nine months ended September 30, 1995; $149,824,000 for the year ended December 31, 1994; and $192,466,000 for the year ended December 31, 1993. F-20 51 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- INCOME TAXES The components of the provisions for income taxes on pretax income consist of the following:
Federal State Total ------- ------- ------- (In thousands) 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 ======= ======= ======= 1993: Currently payable................................................ $44,049 $ 4,518 $48,567 Deferred......................................................... 9,462 (1,029) 8,433 ------- ------- ------- Total income tax expense......................................... $53,511 $ 3,489 $57,000 ======= ======= =======
Income taxes computed at the United States federal income tax rate of 35% for 1995 and 1994 and 34.75% for 1993 and income taxes provided differ as follows:
Years ended September 30, --------------------------- 1995 1994 1993 ------- ------- ------- (In thousands) Amount computed at statutory rate................................ $97,862 $84,000 $63,944 Increases (decreases) resulting from: Affordable housing tax credits................................. (17,579) (9,619) (7,484) State income taxes, net of federal tax benefit................. 3,686 (317) 1,589 Other, net..................................................... 1,431 636 (1,049) ------- ------- ------- Total income tax expense......................................... $85,400 $74,700 $57,000 ======= ======= =======
Effective October 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly, the cumulative effect of this change in accounting for income taxes was recorded during the quarter ended December 31, 1993 to increase the liability for Deferred Income Taxes by $33,500,000. F-21 52 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. The significant components of the liability for Deferred Income Taxes are as follows:
September 30, September 30, 1995 1994 ------------- ------------- (In thousands) DEFERRED TAX LIABILITIES: Investments........................................................ $ 85,036 $ 102,175 Deferred acquisition costs......................................... 163,973 159,471 State income taxes................................................. 3,660 3,978 Deferred income.................................................... 7,780 3,327 --------- --------- Total deferred tax liabilities..................................... 260,449 268,951 --------- --------- DEFERRED TAX ASSETS: Contractholder reserves............................................ (99,107) (97,944) Guaranty fund assessments.......................................... (4,392) (5,144) Deferred expenses.................................................. (7,573) (10,652) Net unrealized losses on certain debt and equity securities........ (2,530) (80,892) --------- --------- Total deferred tax assets.......................................... (113,602) (194,632) --------- --------- Deferred income taxes.............................................. $ 146,847 $ 74,319 ========= =========
F-22 53 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for the years ended September 30, 1995 and 1994 follow:
First Second Third Fourth -------- -------- -------- -------- (In thousands, except per-share amounts) 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......................................... 39,826 43,810 46,394 49,258 General and administrative expenses................ (33,108) (41,116) (44,358) (47,958) Amortization of deferred acquisition costs......... (18,674) (18,740) (21,783) (21,632) Other income and expenses, net..................... 4,612 4,428 3,383 2,721 -------- -------- -------- -------- 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.......................................... $ 0.65 $ 0.68 $ 0.70 $ 0.80 ======== ======== ======== ======== 1994: Net investment income.............................. $ 70,714 $ 70,736 $ 74,241 $ 78,763 Net realized investment losses..................... (5,367) (5,887) (5,312) (4,558) Fee income......................................... 37,627 37,837 37,640 37,632 General and administrative expenses................ (33,457) (32,500) (32,198) (34,588) Amortization of deferred acquisition costs......... (15,243) (16,090) (17,241) (18,351) Other income and expenses, net..................... 2,990 3,711 4,033 4,869 -------- -------- -------- -------- Pretax income...................................... 57,264 57,807 61,163 63,767 Income tax expense................................. (17,700) (17,800) (19,100) (20,100) -------- -------- -------- -------- Income before cumulative effect of change in accounting for income taxes....................... 39,564 40,007 42,063 43,667 Cumulative effect of change in accounting for income taxes...................................... (33,500) -- -- -- -------- -------- -------- -------- Net income......................................... $ 6,064 $ 40,007 $ 42,063 $ 43,667 ======== ======== ======== ======== Per share: Income before cumulative effect of change in accounting for income taxes..................... $ 0.57 $ 0.58 $ 0.61 $ 0.63 Cumulative effect of change in accounting for income taxes.................................... (0.54) -- -- -- -------- -------- -------- -------- Net income....................................... $ 0.03 $ 0.58 $ 0.61 $ 0.63 ======== ======== ======== ========
F-23 54 SUNAMERICA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- BUSINESS SEGMENTS The Company has five business segments: annuity operations, asset management, retirement trust services, broker-dealer operations and premium financing. Respectively, these include the sale of fixed and variable annuities and guaranteed investment contracts; the marketing and management of mutual funds; custodial and administrative services for self-directed retirement plans; the sale of securities and financial services products; and the origination and servicing of short-term premium finance loans. Summarized data for the years ended September 30, 1995, 1994 and 1993 follow:
Total depreciation and Total amortization Pretax Total revenues expense income assets ---------- ------------ -------- ----------- (In thousands) 1995: Annuity operations............................ $ 921,289 $64,276 $246,037 $16,172,140 Asset management.............................. 30,253 24,069 510 86,510 Retirement trust services..................... 46,622 1,461 15,268 484,456 Broker-dealer operations...................... 33,142 868 12,017 42,441 Premium financing............................. 20,772 713 5,774 58,620 ---------- ------- -------- ----------- Total......................................... $1,052,078 $91,387 $279,606 $16,844,167 ========== ======= ======== =========== 1994: Annuity operations............................ $ 790,211 $55,724 $211,419 $14,034,879 Asset management.............................. 32,803 19,330 7,916 102,192 Retirement trust services..................... 36,412 838 10,210 478,805 Broker-dealer operations...................... 28,336 853 10,456 40,349 ---------- ------- -------- ----------- Total......................................... $ 887,762 $76,745 $240,001 $14,656,225 ========== ======= ======== =========== 1993: Annuity operations............................ $ 775,072 $53,688 $150,109 $14,693,701 Asset management.............................. 33,826 8,853 14,806 98,137 Retirement trust services..................... 33,562 806 10,213 433,889 Broker-dealer operations...................... 24,927 821 8,883 41,694 ---------- ------- -------- ----------- Total......................................... $ 867,387 $64,168 $184,011 $15,267,421 ========== ======= ======== ===========
NOTE 11 -- SUBSEQUENT EVENT On November 10, 1995, the Company entered into a definitive agreement to acquire Ford Life Insurance Company ("Ford Life") from a subsidiary of Ford Motor Company ("Ford") for approximately $172,500,000 in cash. Under the agreement, Ford will retain Ford Life's credit life insurance business. Completion of this acquisition is expected in early calendar year 1996 and is subject to customary conditions and required regulatory approvals. At September 30, 1995, Ford Life had reserves for fixed annuity contracts of approximately $3,000,000,000. F-24 55 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 56 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 6, 1995, except as to Notes 7 and 11, which are as of November 28, 1995, 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 8 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 6, 1995, except as to Notes 7 and 11 to the consolidated financial statements which are as of November 28, 1995. S-2 57 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET
September 30, September 30, 1995 1994 -------------- -------------- ASSETS Investment in and advances to subsidiaries................... $1,258,116,000 $ 840,067,000 Other investments............................................ 789,746,000 944,427,000 Other assets................................................. 100,454,000 112,787,000 -------------- -------------- Total assets................................................. $2,148,316,000 $1,897,281,000 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Senior notes and debentures................................ $ 524,835,000 $ 472,835,000 Reserves for guaranteed investment contracts............... 250,365,000 265,354,000 9.95% junior subordinated debentures, series A, due 2044... 54,259,000 -- Payable to brokers for purchases of securities............. 27,208,000 136,238,000 Other liabilities.......................................... 78,571,000 61,766,000 -------------- -------------- Total liabilities.......................................... 935,238,000 936,193,000 Shareholders' equity......................................... 1,213,078,000 961,088,000 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $2,148,316,000 $1,897,281,000 ============== ==============
CONDENSED INCOME STATEMENT
Years ended September 30, ------------------------------------------ 1995 1994 1993 ------------ ------------ ------------ Dividends received from subsidiary corporations... $ 69,287,000 $ 45,400,000 $ 34,700,000 Investment income................................. 158,228,000 104,299,000 75,710,000 Net realized investment gains (losses)............ (25,459,000) 7,231,000 (6,989,000) Other income and (expenses)....................... 3,636,000 3,518,000 (444,000) ------------ ------------ ------------ TOTAL INCOME...................................... 205,692,000 160,448,000 102,977,000 ------------ ------------ ------------ Interest expense on senior notes and debentures... (44,729,000) (45,989,000) (28,846,000) Interest expense on guaranteed investment contracts....................................... (21,482,000) (25,624,000) (25,677,000) Interest expense on junior subordinated debentures...................................... (2,854,000) -- -- General and administrative expenses, net of reimbursement from subsidiaries of $19,095,000 in 1995, $11,374,000 in 1994 and $9,009,000 in 1993............................................. (2,354,000) 417,000 449,000 ------------ ------------ ------------ TOTAL EXPENSES.................................... (71,419,000) (71,196,000) (54,074,000) ------------ ------------ ------------ PRETAX INCOME..................................... 134,273,000 89,252,000 48,903,000 Income tax expense................................ (21,116,000) (9,607,000) (3,150,000) ------------ ------------ ------------ INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF UNCONSOLIDATED SUBSIDIARIES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES............................................ 113,157,000 79,645,000 45,753,000 Equity in undistributed net income of unconsolidated subsidiaries...................... 81,049,000 30,931,000 81,258,000 Cumulative effect of change in accounting for income taxes..................................... -- 21,225,000 -- ------------ ------------ ------------ NET INCOME........................................ $194,206,000 $131,801,000 $127,011,000 ============ ============ ============
S-3 58 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS
Years ended September 30, --------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................... $ 194,206,000 $ 131,801,000 $ 127,011,000 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of unconsolidated subsidiaries................. (81,049,000) (30,931,000) (81,258,000) Net realized investment (gains) losses....... 25,459,000 (7,231,000) 6,989,000 Cumulative effect of change in accounting for income taxes................................ -- (21,225,000) -- Other, net................................... 46,736,000 (6,532,000) (6,902,000) ------------- ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES...... 185,352,000 65,882,000 45,840,000 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net sales (purchases) of investments........... 24,505,000 (63,883,000) (246,956,000) Contributions of capital to subsidiary corporations................................. (203,476,000) (45,539,000) -- ------------- ------------- ------------- Net cash used by investing activities.......... (178,971,000) (109,422,000) (246,956,000) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of cash dividends..................... (50,268,000) (50,830,000) (38,760,000) Proceeds from issuances of guaranteed investment contracts.......................... -- 110,000,000 158,372,000 Withdrawal payments on guaranteed investment contracts..................................... (36,472,000) (299,330,000) -- Net proceeds from issuances of senior notes and debentures.................................... 51,675,000 91,711,000 153,433,000 Repayments of senior notes..................... -- (15,119,000) (10,800,000) Net proceeds from issuance of Preferred Stock........................................ -- -- 178,983,000 ------------- ------------- ------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES.................................... (35,065,000) (163,568,000) 441,228,000 ------------- ------------- ------------- NET (DECREASE) INCREASE IN CASH AND SHORT-TERM INVESTMENTS................................... (28,684,000) (207,108,000) 240,112,000 CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD........................................ 149,643,000 356,751,000 116,639,000 ------------- ------------- ------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD........................................ $ 120,959,000 $ 149,643,000 $ 356,751,000 ============= ============= ============= 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 59 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, September 30, 1995 1994 ------------- ------------- SENIOR NOTES AND DEBENTURES: Medium-term notes due 1998 through 2005 (5 3/8% to 7 3/8% in 1995 and 5 3/8% to 6 3/4% in 1994)............................. $199,835,000 $147,835,000 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............................... 524,835,000 472,835,000 9.95% junior subordinated debentures, series A, due 2004............................................ 54,259,000 -- ------------ ------------ Total indebtedness.............................................. $579,094,000 $472,835,000 ============ ============
Aggregate debt service payments are due as follows: 1996, $48,215,000; 1997, $47,798,000; 1998, $67,989,000; 1999, $183,248,000; 2000, $48,086,000 and $991,822,000, in the aggregate, thereafter. In addition, the Company is the issuer of the following guaranteed investment contracts ("GICs") (interest rates are as of September 30):
September 30, September 30, 1995 1994 ------------- ------------- 8 1/2% GIC due serially through 2002 (including interest credited of $1,363,000 in 1995 and $1,382,000 in 1994)......... $193,723,000 $196,497,000 8 3/8% GIC due serially through 2003 (including interest credited of $330,000 in 1995 and $416,000 in 1994)............. 47,625,000 59,986,000 7 3/8% GIC due in 2018 (including interest credited of $132,000 in 1995 and $267,000 in 1994).................................. 9,017,000 8,871,000 ------------ ------------ Total guaranteed investment contracts........................... $250,365,000 $265,354,000 ============ ============
Aggregate debt service payments are due as follows: 1996, $31,732,000; 1997, $31,678,000; 1998, $31,632,000; 1999, $24,841,000; 2000, $24,812,000; and $233,246,000, in the aggregate, thereafter. S-5 60 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- GUARANTEES The Parent and a subsidiary, SunAmerica Financial, Inc., have transferred certain of their interests in various partnerships that make tax-advantaged affordable housing investments to third-party investors. As a part of the transactions, the Parent has guaranteed a minimum defined yield and funding of certain defined operating deficits in return for a fee. A portion of the fees received has been deferred to absorb any required payments with respect to these guarantees. Based on an evaluation of the underlying housing projects, it is management's belief that such deferrals are ample for this purpose. Accordingly, management does not anticipate any material future losses with respect to these 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 $176,516,000. 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 61 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE IV -- REINSURANCE AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
Ceded to other Gross amount companies Net amount -------------- -------------- ------------ 1995: Life insurance in force........................ $1,907,878,000 $1,592,650,000 $315,228,000 ============== ============== ============ Premiums: Annuities and other single premiums.......... $ 944,742,000 $ -- $944,742,000 Annual life insurance premiums............... 14,238,000 14,238,000 -- -------------- -------------- ------------ Total premiums............................... $ 958,980,000 $ 14,238,000 $944,742,000 ============== ============== ============ 1994: Life insurance in force........................ $2,140,257,000 $1,822,112,000 $318,145,000 ============== ============== ============ Premiums: Annuities and other single premiums.......... $ 230,037,000 $ -- $230,037,000 Annual life insurance premiums............... 9,591,000 9,591,000 -- -------------- -------------- ------------ Total premiums............................... $ 239,628,000 $ 9,591,000 $230,037,000 ============== ============== ============ 1993: Life insurance in force........................ $2,459,830,000 $2,139,123,000 $320,707,000 ============== ============== ============ Premiums: Annuities and other single premiums.......... $ 223,827,000 $ -- $223,827,000 Annual life insurance premiums............... 14,144,000 14,144,000 -- -------------- -------------- ------------ Total premiums............................... $ 237,971,000 $ 14,144,000 $223,827,000 ============== ============== ============
S-7 62 1 SunAmerica Center Los Angeles, California 90067-6022 (310) 772-6000 63 SUNAMERICA INC. AND CONSOLIDATED SUBSIDIARIES LIST OF EXHIBITS FILED Exhibit Number Description - ------ ----------- 3(g) Articles Supplementary, dated January 27, 1995, which define the reacquisition of the Company's Series A Mandatory Conversion Premium Dividend Preferred Stock. 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. 3(i) Articles of Amendment, dated October 30, 1995. 10(r) Second Amendment to $90,000,000 Credit Agreement, dated December 12, 1994, among the Company, SunAmerica Financial, Inc. and Citibank, N.A., amending the Credit Agreement of February 1, 1993. 10(s) Second Amendment to $60,000,000 Credit Agreement, dated December 12, 1994, among the Company, SunAmerica Financial, Inc. and Citibank, N.A., amending the Credit Agreement of February 1, 1993. 10(t) 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. EX-3.(G) 2 EXHIBIT 3.(G) 1 EXHIBIT 3(g) SUNAMERICA INC. ARTICLES SUPPLEMENTARY SunAmerica Inc., a Maryland corporation, having its principal office in Baltimore City, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessment and Taxation of Maryland that: FIRST: Pursuant to the authority expressly vested in the Board of Directors of the Corporation by the Article Fifth of the Charter of the Corporation, the Board of Directors divided and classified 1,380,000 shares of the Preferred Stock of the Corporation into a class designated Series A Mandatory Conversion Premium Preferred Stock (the "Series A Preferred Stock") and provided for the issuance of such Series A Preferred Stock. SECOND: The Corporation filed Articles Supplementary on October 21, 1991 with the Maryland State Department of Assessment and Taxation, which Articles Supplementary set forth a description of the Series A Preferred Stock. THIRD: The Corporation has reacquired all the issued and outstanding shares of Series A Preferred Stock in accordance with the terms of Articles 3(c) of the Articles Supplementary. FOURTH: Pursuant to the authority expressly vested in the Board of Directors of the Corporation by Article Fifth of the Charter of the Corporation and in accordance with Article Second, Section 3(g) of the Articles Supplementary, such shares of Series A Preferred Stock are hereby restored to the status of authorized but unissued shares of Preferred Stock of the Corporation. IN WITNESS WHEREOF, SUNAMERICA INC. has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary on this 27th day of January, 1995. WITNESS: SUNAMERICA INC. /s/ SUSAN L. HARRIS By: /s/ ELI BROAD - --------------------- --------------------- Susan L. Harris Eli Broad, Chairman, Vice President & Secretary President & Chief Executive Officer 2 THE UNDERSIGNED, President of SunAmerica Inc., who executed on behalf of the Corporation the Articles Supplementary of which this Certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Articles Supplementary to be the corporate act of said Corporation and hereby certifies that the matters and facts set forth herein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. By: /s/ ELI BROAD --------------------------- Eli Broad, Chairman, President & Chief Executive Officer EX-3.(H) 3 EXHIBIT 3.(H) 1 EXHIBIT 3(h) SunAmerica Inc. ARTICLES SUPPLEMENTARY SunAmerica Inc., a Maryland corporation, having its principal office in Baltimore City, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessment and Taxation of Maryland that: FIRST: Pursuant to authority expressly vested in the Board of Directors of the Corporation by Article Fifth of the Charter of the Corporation, the Board of Directors has duly divided and classified 92,000 shares of the Preferred Stock of the Corporation into a class designated Series E Mandatory Conversion Premium Dividend Preferred Stock and provided for the issuance of such Preferred Stock. SECOND: The terms of the Series E Mandatory Conversion Premium Dividend Preferred Stock established by the Board of Directors, in addition to those set forth in Article Fifth of the Charter of the Corporation applicable to all classes of Preferred Stock, are as follows: Section 1. Designation and Amount. The class of Preferred Stock shall be designated "Series E Mandatory Conversion Premium Dividend Preferred Stock" and the authorized number of shares constituting such class shall be 92,000. Section 2. Dividends. (a) In respect of the period beginning on the date of issuance of the Series E Mandatory Conversion Premium Dividend Preferred Stock and ending on and including November 1, 1998 (the "Preferred Period"), the holders of outstanding shares of the Series E Mandatory Conversion Premium Dividend Preferred Stock will be entitled to receive, subject to the rights of holders of any class of Preferred Stock or other class of stock which the Corporation may in the future issue which ranks senior to, or on a parity with, the Series E Mandatory Conversion Premium Dividend Preferred Stock in respect of dividends, and when, as and if declared by the Board of Directors out of funds legally available therefor, cumulative preferential cash dividends at the per share rate of $38.75 per quarter for each of the quarters ending on March 14, June 14, September 14 and December 14 of each year and no more, payable in arrears on the fifteenth day of March, June, September and December, respectively (each such date being hereinafter referred to as a "Preferred Dividend Payment Date"), commencing December 15, 1995. If any Preferred Dividend Payment Date shall not be a business day (as defined in clause (i) of paragraph (h) of Section 3), then the Preferred Dividend Payment Date shall be on the next succeeding business day. Each such dividend will be payable to holders of record as they appear on the books of the Corporation or any transfer agent for the Series E Mandatory Conversion Premium Dividend Preferred Stock on such record dates, not less than 10 nor more than 50 days preceding the payment dates thereof, as shall be fixed by the Board of Directors. Dividends on the Series E Mandatory Conversion Premium Dividend Preferred Stock in respect of the Preferred Period shall accrue on a daily basis commencing on the date of issuance of the Series E Mandatory Conversion Premium Dividend Preferred Stock and accrued dividends for each quarterly dividend period shall accumulate, to the extent not paid, on the Preferred Dividend Payment Date first following the quarter for which they accrue. Accumulated unpaid dividends shall not bear interest. Dividends on the Series E Mandatory Conversion Premium Dividend Preferred Stock shall accrue whether or not the Corporation has earnings, whether or not there are funds legally available for the payment of such dividends and whether or not such dividends are declared. Dividends (or cash amounts equal to accrued and unpaid dividends) payable on the Series E Mandatory Conversion Premium Dividend Preferred Stock for any period shorter than a quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. (b) Holders of the shares of Series E Mandatory Conversion Premium Dividend Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided. 2 Section 3. Redemptions or Conversions. (a) Automatic Conversion on Mandatory Conversion Date. Unless earlier called for redemption in accordance with the provisions hereof, on November 1, 1998 (the "Mandatory Conversion Date"), each outstanding share of Series E Mandatory Conversion Premium Dividend Preferred Stock shall automatically convert into: (i) fully paid and non-assessable shares of Common Stock at the Common Equivalent Rate (determined as provided in paragraph (d) of this Section 3) in effect on the Mandatory Conversion Date; and (ii) the right to receive an amount in cash equal to all accrued and unpaid dividends on such share of Series E Mandatory Conversion Premium Dividend Preferred Stock to and including the Mandatory Conversion Date, whether or not earned or declared, out of funds legally available therefor (and dividends shall cease to accrue as of the Mandatory Conversion Date). At the option of the Corporation and provided that the Corporation has sufficient authorized and reserved shares of Common Stock, it may deliver on the Mandatory Conversion Date in lieu of some or all of the cash consideration described in clause (ii) above, fully paid and non-assessable shares of Common Stock. The number of shares of Common Stock to be delivered in lieu of any cash consideration described in such clause (ii) shall be determined by dividing the amount of cash consideration that the Corporation has elected to deliver in Common Stock by the Current Market Price (as defined in clause (v) of paragraph (d) of this Section 3) of the Common Stock determined on the second Trading Date (as defined in clause (vi) of paragraph (h) of this Section 3) immediately preceding the Mandatory Conversion Date. (b) Automatic Conversion Upon the Occurrence of Certain Events. Immediately prior to the effectiveness of a merger or consolidation of, or a statutory share exchange involving, the Corporation that results in the conversion or exchange of the Common Stock into, or the right to receive, other securities or other property (whether of the Corporation or any other entity) (any such merger, consolidation or share exchange being referred to herein as a "Merger or Consolidation"), each outstanding share of Series E Mandatory Conversion Premium Dividend Preferred Stock shall automatically convert into: (i) fully paid and non-assessable shares of Common Stock at the Common Equivalent Rate in effect on the Effective Date (as defined in clause (v) of paragraph (h) of this Section 3); plus (ii) the right to receive an amount in cash equal to all accrued and unpaid dividends on such share of Series E Mandatory Conversion Premium Dividend Preferred Stock to but excluding the Effective Date, whether or not earned or declared, out of funds legally available therefor (and dividends shall cease to accrue as of the Effective Date); plus (iii) the right to receive an amount in cash initially equal to $330.00, declining by $.305550 on each day following November 1, 1995 (computed on the basis of a 360-day year of twelve 30-day months) to $18.35 on September 1, 1998 and equal to zero thereafter, in each case determined with reference to the Effective Date, unless sooner redeemed. At the option of the Corporation and provided that the Corporation has sufficient authorized and reserved shares of Common Stock, it may deliver on the Effective Date in lieu of some or all of the cash consideration described in clauses (ii) and (iii) above, fully paid and non-assessable shares of Common Stock. The number of shares of Common Stock to be delivered in lieu of any cash consideration described in such clauses (ii) and (iii) shall be determined by dividing the amount of cash consideration that the Corporation has elected to deliver in Common Stock by the Current Market Price (as defined in clause (v) of paragraph (d) of this Section 3) of the Common Stock determined as of the second Trading Date (as defined in clause (vi) of paragraph (h) of this Section 3) immediately preceding the Notice Date (as defined in clause (iv) of paragraph (h) of this Section 3). 2 3 (c) Right to Call for Redemption. At any time and from time to time prior to the Mandatory Conversion Date and provided that the Corporation has sufficient authorized and reserved shares of Common Stock, the Corporation shall have the right to call, in whole or in part, the outstanding shares of Series E Mandatory Conversion Premium Dividend Preferred Stock for redemption (subject to the notice provisions set forth in paragraph (i) of this Section 3). Upon such call, the Corporation shall deliver to the holders thereof in exchange for each such share called for redemption: (i) a number of fully paid and non-assessable shares of Common Stock determined by dividing the Call Price (as defined in clause (ii) of paragraph (h) of this Section 3) in effect on the date established for redemption by the Current Market Price of the Common Stock determined as of the second Trading Date immediately preceding the Notice Date; and (ii) an amount in cash equal to all accrued and unpaid dividends on such share to but excluding such redemption date out of funds legally available therefor (and dividends shall cease to accrue on each share called for redemption as of such date). At the option of the Corporation and provided that the Corporation has sufficient authorized and reserved shares of Common Stock, it may deliver on the redemption date in lieu of some or all of the cash consideration described in clause (ii) above, fully paid and non-assessable shares of Common Stock. The number of shares of Common Stock to be delivered in lieu of any cash consideration described in such clause (ii) shall be determined by dividing the amount of cash consideration that the Corporation has elected to deliver in Common Stock by the Current Market Price (as defined in clause (v) of paragraph (d) of this Section 3) of the Common Stock determined on the second Trading Date (as defined in clause (vi) of paragraph (h) of this Section 3) immediately preceding the redemption date. (d) Common Equivalent Rate; Adjustments. The Common Equivalent Rate to be used to determine the number of shares of Common Stock to be delivered on the conversion of the Series E Mandatory Conversion Premium Dividend Preferred Stock into shares of Common Stock pursuant to paragraphs (a) and (b) of this Section 3 shall be initially 50 shares of Common Stock for each share of Series E Mandatory Conversion Premium Dividend Preferred Stock; provided, however, that such Common Equivalent Rate shall be subject to adjustment from time to time as provided below in this paragraph (d). All adjustments to the Common Equivalent Rate shall be calculated to the nearest 1/100th of a share of Common Stock (with 5/1000th of a share being rounded to the next lower 1/100th of a share). Such rate in effect at any time is herein called the "Common Equivalent Rate." (i) If the Corporation shall either: (1) pay a dividend or make a distribution with respect to Common Stock in shares of Common Stock, (2) subdivide or split its outstanding shares of Common Stock, (3) combine its outstanding shares of Common Stock into a smaller number of shares, or (4) issue by reclassification of its shares of Common Stock any shares of Common Stock of the Corporation then, in any such event, the Common Equivalent Rate in effect immediately prior thereto shall be adjusted so that the holder of a share of Series E Mandatory Conversion Premium Dividend Preferred Stock shall be entitled to receive on the conversion of such share of Series E Mandatory Conversion Premium Dividend Preferred Stock, the number of shares of Common Stock of the Corporation which such holder would have owned or been 3 4 entitled to receive after the happening of any of the events described above had such share of Series E Mandatory Conversion Premium Dividend Preferred Stock been surrendered for conversion at the Common Equivalent Rate in effect immediately prior to such time. Such adjustment shall become effective at the opening of business on the business day next following the record date for determination of stockholders entitled to receive such dividend or distribution in the case of a dividend or distribution and shall become effective immediately after the effective time in case of a subdivision, split, combination or reclassification. Any shares of Common Stock issuable in payment of a dividend or distribution shall be deemed to have been issued immediately prior to the close of business on the record date for such dividend or distribution for purposes of calculating the number of outstanding shares of Common Stock under clauses (ii) and (iii) below. (ii) If the Corporation shall issue rights or warrants to all holders of its Common Stock entitling them (for a period not exceeding 45 days from the date of such issuance) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price per share of the Common Stock on the record date for the determination of stockholders entitled to receive such rights or warrants, then in each case the Common Equivalent Rate shall be adjusted by multiplying the Common Equivalent Rate in effect immediately prior thereto by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus the number of shares which the aggregate offering price of the total number of shares so offered for subscription or purchase would purchase at the Current Market Price per share of the Common Stock on the record date for determining stockholders entitled to receive such right or warrants (determined by multiplying such total number of shares by the exercise price of such rights or warrants and dividing the product so obtained by such Current Market Price). Shares of Common Stock owned by or held for the account of the Corporation or another company of which a majority of the shares entitled to vote in the election of directors are held, directly or indirectly, by the Corporation shall not be deemed to be outstanding for purposes of such computation. Such adjustment shall become effective at the opening of business on the business day next following the record date for the determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Common Equivalent Rate shall be readjusted to the Common Equivalent Rate which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock actually delivered. (iii) If the Corporation shall pay a dividend or make a distribution to all holders of its Common Stock of evidences of its indebtedness or other assets (including shares of capital stock of the Corporation but excluding any cash dividends or any distributions and dividends referred to in clause (i) above), or shall distribute to all holders of its Common Stock rights or warrants to subscribe for or purchase securities of the Corporation or any of its subsidiaries (other than those referred to in clause (ii) above), then in each such case the Common Equivalent Rate shall be adjusted by multiplying the Common Equivalent Rate in effect immediately prior to the date of such dividend or 4 5 distribution by a fraction, of which the numerator shall be the Current Market Price per share of Common Stock on the record date for the determination of stockholders entitled to receive such dividend or distribution, and of which the denominator shall be such Current Market Price per share of Common Stock less the fair market value (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) as of such record date of the portion of the assets or evidences of indebtedness so distributed, or of such subscription rights or warrants, applicable to one share of Common Stock. Such adjustment shall become effective on the opening of business on the business day next following the record date for the determination of stockholders entitled to receive such dividend or distribution. (iv) Anything in this Section 3 notwithstanding, the Corporation shall be entitled to make such upward adjustments in the Common Equivalent Rate, in addition to those required by this Section 3, as the Corporation in its discretion shall determine to be advisable, in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or a distribution of securities convertible into or exchangeable for stock (or any transactions which could be treated as any of the foregoing transactions pursuant to Section 305 of the Internal Revenue Code of 1986, as amended) hereafter made by the Corporation to its stockholders shall not be taxable. (v) As used in this Section 3, the Current Market Price per share of Common Stock on any date of determination shall be the average of the daily Closing Prices for the five consecutive Trading Dates ending on and including the date of determination of the Current Market Price (appropriately adjusted to take into account the occurrence during such five-day period of any event that results in an adjustment of the Common Equivalent Rate); provided, however, that if the Closing Price for the Trading Date next following such five-day period (the "next-day closing price") is less than 95% of such average, then the Current Market Price per share of Common Stock on such date of determination shall be the next-day closing price; and provided, further, that, for the purposes of calculating the Current Market Price in connection with any redemption or conversion of Series E Mandatory Conversion Premium Dividend Preferred Stock or any determination of an amount in cash payable in lieu of a fraction of a share of Common Stock, if any adjustment of the Common Equivalent Rate pursuant to this paragraph (d) is effective as of any date during the period beginning on the day after the date of determination of the Current Market Price and ending on the date on which shares of Series E Mandatory Conversion Premium Dividend Preferred Stock are to be redeemed or converted into Common Stock, then the Current Market Price as determined pursuant to the foregoing will be appropriately adjusted to reflect such adjustment. If the Current Market Price is adjusted pursuant to the immediately preceding proviso as a result of the effectiveness of an adjustment to the Common Equivalent Rate but the event requiring an adjustment of the Common Equivalent Rate does not occur prior to the redemption or conversion of Series E Mandatory Conversion Premium Dividend Preferred Stock, then the Corporation may in its sole discretion elect to defer the following until after the occurrence of such event: (1) issuing to the holder of any shares of Series E Mandatory Conversion Premium Dividend Preferred Stock surrendered for conversion or redemption the additional shares of Common Stock issuable upon such conversion or redemption over and above the shares of Common Stock issuable upon such conversion or redemption on the basis of the Current Market Price prior to adjustment; and 5 6 (2) paying to such holder any amount in cash in lieu of a fractional share of Common Stock pursuant to paragraph (f) of this Section 3. (vi) In any case in which paragraph (d) of this Section 3 shall require that an adjustment in the Common Equivalent Rate as a result of any event become effective at the opening of business on the business day next following a record date and the date fixed for conversion pursuant to paragraph (a) or (b) of this Section 3 occurs after such record date, but before the occurrence of such event, the Corporation may in its sole discretion elect to defer the following until after the occurrence of such event: (1) issuing to the holder of any shares of Series E Mandatory Conversion Premium Dividend Preferred Stock surrendered for conversion the additional shares of Common Stock issuable upon such conversion over and above the shares of Common Stock issuable upon such conversion on the basis of the Common Equivalent Rate prior to adjustment; and (2) paying to such holder any amount in cash in lieu of a fractional share of Common Stock pursuant to paragraph (f) of this Section 3. (e) Notice of Adjustments. Whenever the Common Equivalent Rate is adjusted as herein provided, the Corporation shall: (i) forthwith compute the adjusted Common Equivalent Rate in accordance with this Section 3 and prepare a certificate signed by the Chief Executive Officer, the Chairman, the President, any Vice President or the Treasurer of the Corporation setting forth the adjusted Common Equivalent Rate, the method of calculation thereof in reasonable detail and the facts requiring such adjustment and upon which such adjustment is based, and file such certificate forthwith with the transfer agent or agents for the Series E Mandatory Conversion Premium Dividend Preferred Stock and the Common Stock; and (ii) mail a notice stating that the Common Equivalent Rate has been adjusted, the facts requiring such adjustment and upon which such adjustment is based and setting forth the adjusted Common Equivalent Rate to the holders of record of the outstanding shares of the Series E Mandatory Conversion Premium Dividend Preferred Stock at or prior to the time the Corporation mails an interim statement to its stockholders covering the quarter-yearly period during which the facts requiring such adjustment occurred, but in any event within 45 days of the end of such quarter-yearly period. (f) No Fractional Shares. No fractional shares of Common Stock shall be issued upon redemption or conversion of shares of Series E Mandatory Conversion Premium Dividend Preferred Stock but, in lieu of any fraction of a share of Common Stock which would otherwise be issuable in respect of the aggregate number of shares of Series E Mandatory Conversion Premium Dividend Preferred Stock surrendered by the same holder for redemption or conversion on any redemption or conversion date, the holders shall have the right to receive an amount in cash, out of funds of the Corporation legally available therefor, equal to the same fraction of the Current Market Price of the Common Stock determined as of the second Trading Date immediately preceding the relevant Notice Date. (g) Cancellation. All shares of Series E Mandatory Conversion Premium Dividend Preferred Stock which shall have been issued and reacquired in any manner by the Corporation (including shares redeemed, shares purchased and retired and shares converted into shares of Common Stock or exchanged for shares of any other class of stock) shall have the status of authorized but unissued shares of Preferred Stock and may be reissued as part of the class of which they were originally a part or may 6 7 be reclassified and reissued as part of a new class of Preferred Stock to be created by resolution or resolutions of the Board of Directors or as part of any other class of Preferred Stock. (h) Definitions. As used herein, (i) the term "business day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the State of New York or State of California are authorized or obligated by law or executive order to close or a day which is or is declared a national or New York or California state holiday; (ii) the term "Call Price" shall mean the per share price (payable in shares of Common Stock) at which the Corporation may redeem shares of Series E Mandatory Conversion Premium Dividend Preferred Stock, which Call Price is equal to fifty (50) times the sum of (i) an amount initially equal to $81.00, declining by $.006111 on each day following November 1, 1995 (computed on the basis of a 360-day year of twelve 30-day months) to $74.767 on September 1, 1998 and equal to $74.40 thereafter, if not sooner redeemed, and (ii) 50% of the excess, if any, of (a) the Current Market Price (as defined in clause (v) of paragraph (d) of this Section 3) of the Common Stock on the second Trading Date (as defined in clause (vi) of paragraph (h) of this Section 3) preceding the Notice Date (as defined in clause (iv) of paragraph (h) of this Section 3) relating to such redemption multiplied by one-fiftieth (1/50th) of the Common Equivalent Rate, over (b) $74.40; (iii) the term "Closing Price" on any day shall mean the closing sales price regular way on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices regular way, in each case on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices of the Common Stock on the over- the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similarly generally accepted reporting service, or if not so available in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors of the Corporation for that purpose; (iv) the term "Notice Date" with respect to any notice given by the Corporation in connection with a redemption or conversion of any of the Series E Mandatory Conversion Premium Dividend Preferred Stock shall be the earlier of the commencement of the mailing of such notice to the holders of Series E Mandatory Conversion Premium Dividend Preferred Stock or the date such notice is first published in accordance with paragraph (i) of this Section 3; (v) the term "Effective Date" shall mean the effective time on the date of any Merger or Consolidation; and (vi) the term "Trading Date" shall mean a date on which the New York Stock Exchange (or any successor to such Exchange) is open for the transaction of business. (i) Notice of Redemption or Conversion. The Corporation will provide notice of any redemption or conversion (including any conversion upon the effectiveness of a Merger or Consolidation, but excluding the Mandatory Conversion Date, unless the Corporation elects to pay any accrued and unpaid dividends in Common Stock, in which case such notice shall be required) of shares of Series E Mandatory Conversion Premium Dividend Preferred Stock to holders of record of the Series E 7 8 Mandatory Conversion Premium Dividend Preferred Stock to be redeemed or converted not less than 30 nor more than 60 days prior to the date fixed for such redemption or conversion, as the case may be; provided, however, that if the effectiveness of a Merger or Consolidation makes it impracticable to provide at least 30 days' notice, the Corporation shall provide such notice as soon as practicable prior to such effectiveness. Such notice shall be provided by mailing notice of such redemption or conversion first class postage prepaid, to each holder of record of the Series E Mandatory Conversion Premium Dividend Preferred Stock to be redeemed or converted, at such holder's address as it appears on the stock register of the Corporation, and by publishing notice thereof in The Wall Street Journal or The New York Times or, if neither such newspaper is then being published, any other daily newspaper of national circulation (each, an "Authorized Newspaper"). Each such mailed or published notice shall state, as appropriate, the following: (i) the redemption or conversion date; (ii) the number of shares of Series E Mandatory Conversion Premium Dividend Preferred Stock to be redeemed or converted and, if less than all the shares held by any holder are to be redeemed, the number of such shares to be redeemed; (iii) the Call Price (in the case of a call for redemption pursuant to paragraph (c) of this Section 3) and the Current Market Price to be used to calculate the number of shares of Common Stock deliverable upon redemption; (iv) whether the Corporation is exercising any option to deliver shares of Common Stock in lieu of any cash and the Current Market Price to be used to calculate the number of such shares of Common Stock; (v) the place or places where certificates for such shares are to be surrendered for redemption or conversion; (vi) whether the Corporation is depositing with a bank or trust company on or before the redemption or conversion date, the shares of Common Stock, and cash, if any, payable by the Corporation pursuant to this Section 3 and the proposed date of such deposit; and (vii) the amount of accrued and unpaid dividends payable per share of Series E Mandatory Conversion Premium Dividend Preferred Stock to be redeemed or converted to and including such redemption or conversion date, as the case may be, and that dividends on shares of Series E Mandatory Conversion Premium Dividend Preferred Stock to be redeemed or converted will cease to accrue on such redemption or conversion date unless the Corporation shall default in delivering the shares of Common Stock and cash, if any, payable by the Corporation pursuant to this Section 3, at the time and place specified in such notice. The Corporation's obligation to deliver shares of Common Stock and provide funds in accordance with this Section 3 shall be deemed fulfilled if, on or before a redemption or conversion date, the Corporation shall deposit, with a bank or trust company having an office or agency and doing business in the Borough of Manhattan in New York City and having a capital and surplus of at least $50,000,000, such number of shares of Common Stock and funds as are required to be delivered by the Corporation pursuant to this Section upon the occurrence of the related redemption or conversion (including the payment of fractional share amounts), together with funds sufficient to pay all accrued and unpaid dividends on the shares to be redeemed or converted as required by this Section 3, in trust for the account of the holders of the shares to be redeemed or converted (and so as to be and continue to be available therefor), with irrevocable instructions and authority to such bank or trust company that such shares and funds be delivered upon redemption or conversion of the shares of Series E Mandatory Conversion Premium Dividend Preferred Stock so called for redemption or 8 9 subject to conversion. Any shares of Common Stock and funds so deposited and unclaimed by the holders of shares of Series E Mandatory Conversion Premium Dividend Preferred Stock at the end of six years after such redemption or conversion date (together with any interest thereon which shall be allowed by the bank or trust company with which such deposit was made) shall be paid by such bank or trust company to the Corporation, after which the holder or holders of such shares of Series E Mandatory Conversion Premium Dividend Preferred Stock so called for redemption or subject to conversion shall look only to the Corporation for delivery of such shares of Common Stock or funds. Each holder of shares of Series E Mandatory Conversion Premium Dividend Preferred Stock to be redeemed or converted shall surrender the certificates evidencing such shares to the Corporation at the place designated in the notice of such redemption or conversion and shall thereupon be entitled to receive certificates evidencing shares of Common Stock, and cash, if any, payable pursuant to this Section 3, following such surrender and following the date of such redemption or conversion. In case fewer than all the shares represented by any such surrendered certificate are called for redemption, a new certificate shall be issued at the expense of the Corporation representing the unredeemed shares. If such notice of call for redemption or conversion shall have been duly given, and if on the date fixed for redemption or conversion shares of Common Stock and funds, if any, necessary for the redemption or conversion shall have been either set aside by the Corporation separate and apart from its other funds or assets in trust for the account of the holders of the shares so to be redeemed or converted (and so as to be and continue to be available therefor) or deposited with a bank or trust company as provided above, then, notwithstanding that the certificates evidencing any shares of Series E Mandatory Conversion Premium Dividend Preferred Stock so called for redemption or subject to conversion shall not have been surrendered, the shares represented thereby so called for redemption or subject to conversion shall be deemed no longer outstanding, dividends with respect to the shares so called for redemption or subject to conversion shall cease to accrue after the date fixed for redemption or conversion and all rights with respect to the shares so called for redemption or subject to conversion shall forthwith after such date cease and terminate, except for the right of the holders to receive the shares of Common Stock and cash, if any, payable pursuant to this Section 3, without interest upon surrender of their certificates therefor. (j) Reservation of Shares. The Corporation shall at all times reserve and keep available out of authorized but unissued shares of Common Stock, the maximum number of shares of Common Stock into which all shares of Series E Mandatory Conversion Premium Dividend Preferred Stock from time to time outstanding are convertible. (k) Issuance of Common Stock. The shares of Common Stock issuable upon redemption or conversion of the shares of Series E Mandatory Conversion Premium Dividend Preferred Stock, when the same shall be issued in accordance with the terms hereof, are hereby declared to be and shall be fully paid and non-assessable shares of Common Stock in the hands of the holders thereof. Section 4. Voting Rights. (a) Except as otherwise provided by paragraph (b) of this Section 4 or as required by law, the holders of shares of Series E Mandatory Conversion Premium Dividend Preferred Stock shall not be entitled to vote on any matter on which the holders of any voting securities of the Corporation shall be entitled to vote. (b) In the event that dividends payable on the Series E Mandatory Conversion Premium Dividend Preferred Stock shall be in arrears in an aggregate amount equivalent to six full quarterly dividends (a "Preferred Dividend Default"), the holders of Series E Mandatory Conversion Premium Dividend Preferred Stock shall have the exclusive right, voting separately as a class with holders of shares of any one or more other classes of preferred stock ranking on a parity with Series E Mandatory Conversion Premium Dividend Preferred Stock either as to dividends or on the distribution of assets upon liquidation, dissolution or winding up of the affairs of the Corporation (any such class of preferred stock being herein referred to as a "Parity Stock") and upon which like voting rights have been conferred and are exercisable, to elect two directors of the Corporation until such right is terminated as provided herein. Upon the 9 10 occurrence of a Preferred Dividend Default, the Board of Directors of the Company shall within a reasonable period call a special meeting of the holders of shares of Series E Mandatory Conversion Premium Dividend Preferred Stock and all other holders of shares of Parity Stock who are then entitled to participate in the election of such directors for the purpose of electing the additional directors provided by the foregoing provisions; provided that, in lieu of holding such meeting, the holders of record of Series E Mandatory Conversion Premium Dividend Preferred Stock and such Parity Stock may, by action taken by written consent as permitted by law and the Charter and By-laws of the Corporation elect such additional directors. At elections for such directors, each holder of Series E Mandatory Conversion Premium Dividend Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any Parity Stock being entitled to such number of votes, if any, for each share of stock held as may be applicable to them). Upon the vesting of such voting right in the holders of Series E Mandatory Conversion Premium Dividend Preferred Stock, the maximum authorized number of members of the Board of Directors shall automatically be increased by two. The two vacancies so created shall be filled by vote of the holders of Series E Mandatory Conversion Premium Dividend Preferred Stock (with the holders of shares of Parity Stock who are then entitled to participate in the election of such directors). The right of the holders of Series E Mandatory Conversion Premium Dividend Preferred Stock, voting separately as a class with the holders of shares of Parity Stock, to elect members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on Series E Mandatory Conversion Premium Dividend Preferred Stock shall have been paid in full, at which time such right shall terminate, except as required by law, subject to vesting in the event of each and every subsequent Preferred Dividend Default. Upon any termination of the right of the holders of Series E Mandatory Conversion Premium Dividend Preferred Stock and any Parity Stock to vote as a class for directors as herein provided, the term of office of all directors then in office elected by holders of Series E Mandatory Conversion Premium Dividend Preferred Stock and any Parity Stock voting as a class (hereinafter referred to as a "Preferred Stock Director") shall terminate immediately. Any Preferred Stock Director may be removed by, and shall not be removed otherwise than by, the vote of the holders of record of Series E Mandatory Conversion Premium Dividend Preferred Stock and any Parity Stock the holders of which were entitled to participate in such Preferred Stock Director's election, voting as a separate class, at a meeting called for such purpose or by written consent as permitted by law and the Charter and By-laws of the Corporation. If the office of any Preferred Stock Director becomes vacant by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, the remaining Preferred Stock Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred or, if none remains in office, such successor may be chosen by vote of the holders of record of Series E Mandatory Conversion Premium Dividend Preferred Stock and any Parity Stock who are then entitled to participate in the election of Preferred Stock Directors as provided above. As long as a Preferred Dividend Default shall continue, holders of Series E Mandatory Conversion Premium Dividend Preferred Stock shall not, as such stockholders, be entitled to vote on the election or removal of directors other than Preferred Stock Directors. Whenever the special voting powers vested in the holders of Series E Mandatory Conversion Premium Dividend Preferred Stock as provided herein shall have expired, the number of directors shall become such number as may be provided for in the By-Laws, irrespective of any increase made pursuant to the provisions hereof. So long as any shares of the Series E Mandatory Conversion Premium Dividend Preferred Stock remain outstanding, the consent of the holders of at least two-thirds thereof (voting separately as a class) given in person or by proxy, at any special or annual meeting called for such purpose, or by written consent as permitted by law and the Charter and By-laws of the Corporation, shall be necessary to amend, alter or repeal any of the provisions of the Charter of the Corporation which would materially and adversely affect any right, preference, privilege or voting power of Series E Mandatory Conversion Premium Dividend Preferred Stock or of the holders thereof, provided, however, that any such amendment, alteration or repeal, that would authorize, create or issue any additional shares of 10 11 Preferred Stock or any other shares of stock (whether or not already authorized) ranking senior to, on a parity with or junior to the Series E Mandatory Conversion Premium Dividend Preferred Stock as to dividends or on the distribution of assets upon liquidation, dissolution or winding up of the affairs of the Corporation, shall be deemed not to materially and adversely affect such rights, preferences, privileges or voting powers. The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of the Series E Mandatory Conversion Premium Dividend Preferred Stock shall have been redeemed or converted or Common Stock and funds, if any, necessary for such redemption or conversion shall have been deposited in trust to effect such redemption or conversion. Section 5. Liquidation Rights. (a) Subject to the rights of holders of any class of Preferred Stock or other class of stock which the Corporation may in the future issue which ranks senior to, or on a parity with, the Series E Mandatory Conversion Premium Dividend Preferred Stock, upon any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary (any such event, a "Liquidation"), the holders of shares of Series E Mandatory Conversion Premium Dividend Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, whether from capital, surplus or earnings, before any distribution or payment is made to holders of Common Stock or Class B Stock of the Corporation or on any other class of stock of the Corporation ranking junior as to dividends or assets distributable upon Liquidation to the shares of Series E Mandatory Conversion Premium Dividend Preferred Stock, liquidating distributions in the amount of $3,100 per share, plus an amount equal to all dividends accrued and unpaid thereon (including dividends accumulated and unpaid) to the date of Liquidation, and no more. (b) Written notice of any Liquidation, stating the payment date or dates when and the place or places where the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage prepaid, not less than 30 days prior to any payment date stated therein, to the holders of record of the Series E Mandatory Conversion Premium Dividend Preferred Stock at their respective addresses as the same shall appear on the books of the Corporation or any transfer agent for the Series E Mandatory Conversion Premium Dividend Preferred Stock. Section 6. Defined Terms. Terms used but not otherwise defined herein shall have the meanings set forth in the Charter of the Corporation. IN WITNESS WHEREOF, SunAmerica Inc. has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary on October 30, 1995. SunAmerica Inc. WITNESS: /s/ Susan Harris By /s/ Eli Broad - ------------------------ ---------------------------- Susan Harris, Secretary Eli Broad, President 11 12 THE UNDERSIGNED, President of SunAmerica Inc., who executed on behalf of the Corporation Articles Supplementary of which this Certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Articles Supplementary to be the corporate act of said Corporation and hereby certifies that the matters and facts set forth herein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. By: /s/ Eli Broad ------------------------ Eli Broad, President 12 EX-3.(I) 4 EXHIBIT 3.(I) 1 EXHIBIT 3(i) 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 the first paragraph of Article Fifth of the Charter and inserting in lieu thereof the following: ARTICLE FIFTH: The total number of shares of stock of all classes which the Corporation has authority to issue is 235,000,000 shares, which consists of 175,000,000 shares of Common Stock of the par value of One Dollar ($1) each for an aggregate par value of One Hundred Seventy-Five Million Dollars ($175,000,000), 25,000,000 shares of Nontransferable Class B Stock of the par value of One Dollar ($1) each for an aggregate par value of Twenty-Five Million Dollars ($25,000,000), 15,000,000 shares of Transferable Class B Stock of the par value of One Dollar ($1) each for an aggregate par value of Fifteen Million Dollars ($15,000,000), and 20,000,000 shares of Preferred Stock without par value. SECOND: (a) As of immediately before this amendment, the total number of shares of stock of all classes which the Corporation has authority to issue is 100,000,000 shares, of which 50,000,000 shares are Common Stock (par value $1.00 per share), 15,000,000 shares are Nontransferable Class B Stock (par value $1.00 per share) and 20,000,000 shares are Preferred Stock (without par value). (b) As amended, the total number of shares of stock of all classes which the Corporation has authority to issue is 235,000,000 shares, of which 175,000,000 shares are Common Stock (par value $1.00 per share), 25,000,000 shares are Nontransferable Class B Stock (par value $1.00 per share), 15,000,000 shares are Nontransferable Class B Stock (par value $1.00 per share) and 20,000,000 shares are Preferred Stock (without par value). (c) The aggregate par value of all shares having a par value is $80,000,000 before the amendment ant $215,000,000 as amended. (d) The shares of stock of the Corporation are divided into classes, but the descriptions of each class of stock of the Corporation are not changed by the amendment. 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 Chairman, President and CEO and witnessed by its Secretary on October 30, 1995. WITNESS: SunAmerica Inc. /s/ SUSAN L. HARRIS By: /s/ ELI BROAD - --------------------------- ----------------------------- Secretary Chairman, President & CEO 2 THE UNDERSIGNED. Chairman, President and CEO of SunAmerica Inc., who executed on behalf of the Corporation the foregoing Articles of Amendment of which this certificate is made a party, 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/ ELI BROAD -------------------------- Eli Broad Chairman, President & CEO EX-10.(R) 5 EXHIBIT 10.(R) 1 EXHIBIT 10(r) [3-year] SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of December 12, 1994, among SUNAMERICA INC., a Maryland corporation ("SunAmerica"), and SUNAMERICA FINANCIAL, INC., a Georgia corporation (together with SunAmerica, the "Borrowers"), the banks listed on the signature pages hereof (the "Lenders") and CITIBANK, N.A., as agent (the "Agent") for the Lenders. WHEREAS, the parties hereto (other than NationsBank of Georgia, N.A.("NationsBank") are parties to the Credit Agreement, dated as of February 1, 1993, originally providing for a $90,000,000 revolving credit facility, as amended by a First Amendment to Credit Agreement dated as of January 30, 1994 (as so amended, the "Credit Agreement"; capitalized terms used herein without definition shall have the meanings specified in the Credit Agreement); and WHEREAS, the parties hereto desire to amend the Credit Agreement as described below; NOW, THEREFORE, the parties hereto agree as follows, effective on the Second Amendment Effective Date (as hereinafter defined): 1. AMENDMENTS. The Credit Agreement is amended as follows: (a) Section 1.01. (i) The definitions of "Commitment" and "Level I Status" contained in Section 1.01 of the Credit Agreement are amended and restated in their entirety to read as follows: "Commitment" means the amount set forth opposite each Lender's name on Schedule 1 hereto (or in an Assignment and Acceptance entered into by it) as its Commitment, as such amount may be adjusted from time to time to give effect to Money Market Reductions pursuant to Section 2.01 or reduced from time to time pursuant to Section 2.10. "Level I Status" means that, at 8:30 a.m. New York City time at any date of determination, SunAmerica's senior unsecured long term debt is rated "A+" or better by Standard & Poor's and "A3" or better by Moody's. (ii) The definition of "Other Agreement" contained in Section 1.01 of the Credit Agreement is amended by replacing the phrase ", as amended by the First Amendment to Credit Agreement, dated as of January 30, 1994, providing a $160,000,000 revolving credit facility, and as the same may be further amended from time to time" by the phrase ", as amended by the First Amendment to Credit Agreement, dated as of January 30, 1994, and the Second Amendment to Credit Agreement, dated as of December 12, 1994, providing, as so amended, for a $100,000,000 revolving credit facility, and as the same may be further amended from time to time". (iii) The definition of "Termination Date" contained in Section 1.01 of the Credit Agreement is amended by changing "January 31, 1996" to "December 15, 1997". (b) Section 2.07. (i) Section 2.07(b) of the Credit Agreement is amended by replacing the second paragraph thereof with the following: "CD Margin" means (i) 0.35% for any day on which Level I Status exists, (ii) 0.375% for any day on which Level II Status, (iii) 0.425% for any day on which Level III Status exists, and (iv) 0.575% for any day on which Level IV Status exists. 2 (ii) Section 2.07(c) of the Credit Agreement is amended by replacing the second paragraph of subsection (i) thereof with the following: "Eurodollar Margin" means (1) 0.225% for any day on which Level I Status exists, (2) 0.25% for any day on which Level II Status exists, (3) 0.30% for any day on which Level III Status exists and (4) 0.45% for any day on which Level IV Status exists. (c) Section 2.08. (i) Clause (a) of Section 2.08 is deleted and shall be left blank. (ii) Section 2.08(b) of the Credit Agreement is amended by replacing the first sentence thereof with the following: "The Borrowers shall pay to the Agent for the account of the Lenders ratably a facility fee at the following rates per annum: (i) 0.11% for any day on which Level I Status exists, (ii) 0.125% for any day on which Level II Status exists and (iii) 0.1875% for any day on which Level III Status exists, (iv) 0.25% for any day on which Level IV Status exists." (iii) Section 2.08(c) of the Credit Agreement is amended by deleting the words "at the rate of 0.0625% per annum" and by adding the following new sentence at the end thereof: "Such additional utilization fee shall be at the following rates per annum: (i) 0.05% for any day on which Level I Status or Level II Status exists, (ii) 0.0625% for any day on which Level III Status exists, and (iii) 0.125% for any day on which Level IV Status exists." (iv) Section 5.06(a) of the Credit Agreement is amended (A) by replacing the phrase ", 1991 and 1992" in subsection (i) thereof with the phrase ", 1991, 1992 and 1993", and (B) inserting at the end of subsection (ii) thereof the following: "As of September 30, 1994, the Risk-Based Capital Ratio of Anchor and Sun Life were, respectively, 307% and 210%, and as of the Second Amendment Effective Date as defined in the Second Amendment to Credit Agreement dated as of December 12, 1994 there has been no material reduction in the Risk-Based Capital Ratio of Anchor or Sun Life." (v) Subsection (ii) of Section 5.06(b) of the Credit Agreement is amended and restated in its entirety to read as follows: "(ii) The projected financial statements of SunAmerica and its Subsidiaries, including the cash flow projections of the Borrowers, which are set forth in the Information Memorandum, dated October 1992, prepared for use in connection with this revolving credit facility (the "Information Memorandum"), and the projected financial statements of SunAmerica and its Subsidiaries for the fiscal year ending September 30, 1995 set forth in the materials titled 'SunAmerica Inc. Bank Meeting, dated November 9, 1994' prepared for use in connection with the Second Amendment to Credit Agreement dated as of December 12, 1994 (the "Bank Presentation Materials"), are based on good faith estimates and assumptions made by the management of SunAmerica, it being recognized, however, that projections are subject to significant uncertainties and contingencies, many of which are beyond the Borrowers' control, and that the actual results during the period or periods covered by such projections may differ from the projected results and that the differences may be material. Notwithstanding the foregoing, as of the Effective Date, in the case of the projections contained in the Information Memorandum, and as of the Second Amendment Effective Date as defined in said Second Amendment to Credit Agreement, in the case of the projections contained in the Bank Presentation Materials, management of SunAmerica believes that such projections were, taken as a whole, reasonable and attainable." 3 (d) Section 8.03. Section 8.03 of the Credit Agreement is amended by changing the figure "100%" to read "125%". (e) Schedule 1. Schedule 1 to the Credit Agreement is amended to read in its entirety as set forth in Exhibit A hereto. (f) Exhibits B, C, D, E and G. Exhibits B, C, D, E and G to the Credit Agreement are each amended by replacing the word "$90,000,000" in each paragraph of such exhibit with the word "150,000,000" and by replacing the phrase "as amended by the First Amendment to Credit Agreement, dated as of January 30, 1994, and as the same may be further amended from time to time," by the phrase "as amended by the First Amendment to Credit Agreement, dated as of January 30, 1994, and by the Second Amendment to Credit Agreement, dated as of December 12, 1994, and as the same may be further amended from time to time". (g) Additional Lender. NationsBank is hereby added (effective on the Second Amendment Effective Date) as a party to the Credit Agreement and shall be deemed to be a Lender for all purposes hereof having the Commitment stated on Schedule 1 to the Credit Agreement as amended hereby and having all the rights and obligations of a Lender thereunder as if it were a direct signatory to the Credit Agreement; provided, that NationsBank shall be deemed to be a Lender for purposes of Section 10.05 of the Credit Agreement only in respect of events occurring after the Second Amendment Effective Date. 2. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Second Amendment to Credit Agreement shall become effective on December 15, 1994 (the "Second Amendment Effective Date"), provided, that as of such date this Second Amendment to Credit Agreement has been executed and delivered by each of the parties hereto and the following conditions precedent shall have been satisfied (or waived in accordance with Section 11.01 of the Credit Agreement): (a) receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any Lender as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such Lender of execution of a counterpart hereof by such Lender); (b) receipt by the Agent of an opinion of Susan L. Harris, the Vice President, General Counsel - Corporate Affairs and Secretary of SunAmerica, dated the Second Amendment Effective Date, covering such matters relating to the transactions contemplated hereby as the Agent may reasonably request; (c) receipt by the Agent of a certificate of a Responsible Officer of each Borrower, dated as of the Second Amendment Effective Date, to the effect that (i) the representations and warranties of such Borrower contained in Article V of the Credit Agreement (as amended by this Second Amendment to Credit Agreement) are true and correct in all material respects on the date of such certificate with the same effect as though made on and as of the date of such certificate except to the extent they expressly relate to a prior date and (ii) no Default exists or results from the execution and delivery by such Borrower of this Second Amendment to Credit Agreement; and (d) receipt by the Agent of all documents reasonably requested by the Agent relating to the existence and good standing of the Borrowers, the corporate authority for and validity of the Credit Agreement as amended by this Second Amendment to Credit Agreement, and any other matters relevant hereto, all in form and substance satisfactory to the Agent and the Agent's counsel. 3. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers jointly and severally represents and warrants to the Agent and each of the Lenders that: (i) the representations and warranties of the Borrowers contained in Article V of the Credit Agreement (as amended by this Second Amendment to Credit Agreement) are true and correct in all material respects on the date hereof with the same effect as though made on and as of the date 4 hereof except to the extent they expressly relate to a prior date and (ii) no Default exists or results from the execution and delivery by the Borrowers of this Second Amendment to Credit Agreement. 4. FULL FORCE AND EFFECT. All of the terms and provisions of the Credit Agreement, as amended hereby, are and shall continue to be in full force and effect and the Agent and the Lenders shall be entitled to all the benefits thereof. 5. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 6. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 5 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Credit Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. SUNAMERICA INC. By: /s/ James R. Belardi --------------------------- Title: Senior Vice President and Treasurer SUNAMERICA FINANCIAL, INC. By: /s/ James R. Belardi --------------------------- Title: Authorized Agent CITIBANK, N.A., in its capacity as Agent and Lender By: /s/ Kelley T. Hebert, V.P. --------------------------- Name: Kelley T. Hebert Title: Attorney-in-fact Citibank, N.A. Lenders ------- BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: /s/ John R. Wolak -------------------------- Name: John R. Wolak Title: Vice President THE BANK OF NEW YORK By: /s/ Stratton Heath -------------------------- Name: Stratton Heath Title: Vice President 6 THE CHASE MANHATTAN BANK, N.A. By: /s/ R. Michael Brettell -------------------------- Name: R. Michael Brettell Title: Vice President CHEMICAL BANK By: /s/ Peter W. Platten -------------------------- Name: Peter W. Platten Title: Vice President FIRST INTERSTATE BANK OF CALIFORNIA By: /s/ Robert C. Meyer -------------------------- Name: Robert C. Meyer Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Harriet K. Bailey -------------------------- Name: Harriet K. Bailey Title: Vice President THE INDUSTRIAL BANK OF JAPAN, LIMITED By: /s/ Kazutaka Kiyoto ---------------------------- Name: Kazutaka Kiyoto Title: Senior Vice President NATIONSBANK OF GEORGIA, N.A. By: /s/ Frank R. Callison -------------------------- Name: Frank R. Callison Title: Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Patricia Merritt -------------------------- Name: Patricia Merritt Title: Vice President WESTDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK AND CAYMAN ISLANDS BRANCHES By: /s/ Elie Khoury -------------------------- Name: Elie Khoury Title: Vice President 7 By: /s/ Matthew F. Tallo -------------------------- Name: Matthew F. Tallo Title: Associate 8 [3-year] EXHIBIT A TO SECOND AMENDMENT TO CREDIT AGREEMENT SCHEDULE 1 TO CREDIT AGREEMENT
Name of Lender Commitment CITIBANK, N.A. $ 14,400,000 BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION $ 14,400,000 THE BANK OF NEW YORK $ 14,400,000 THE CHASE MANHATTAN BANK, N.A. $ 14,400,000 CHEMICAL BANK $ 14,400,000 FIRST INTERSTATE BANK OF CALIFORNIA $ 14,400,000 THE FIRST NATIONAL BANK OF CHICAGO $ 14,400,000 THE INDUSTRIAL BANK OF JAPAN, LIMITED $ 14,400,000 NATIONSBANK OF GEORGIA, N.A. $ 14,400,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK $ 10,200,000 WESTDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK AND CAYMAN ISLANDS BRANCHES $ 10,200,000 ------------ $150,000,000
EX-10.(S) 6 EXHIBIT 10.(S) 1 EXHIBIT 10(s) [364-day] SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of December 12, 1994, among SUNAMERICA INC., a Maryland corporation ("SunAmerica"), and SUNAMERICA FINANCIAL, INC., a Georgia corporation (together with SunAmerica, the "Borrowers"), the banks listed on the signature pages hereof (the "Lenders") and CITIBANK, N.A., as agent (the "Agent") for the Lenders. WHEREAS, the parties hereto (other than NationsBank of Georgia, N.A. ("NationsBank") are parties to the Credit Agreement, dated as of February 1, 1993, originally providing for a $60,000,000 revolving credit facility, as amended by a First Amendment to Credit Agreement dated as of January 30, 1994 (as so amended, the "Credit Agreement"; capitalized terms used herein without definition shall have the meanings specified in the Credit Agreement); and WHEREAS, the parties hereto desire to amend the Credit Agreement as described below; NOW, THEREFORE, the parties hereto agree as follows, effective on the Second Amendment Effective Date (as hereinafter defined): 1. AMENDMENTS. The Credit Agreement is amended as follows: a. Section 1.01. (i) The definitions of "Commitment", "Level I Status" and "Termination Date" contained in Section 1.01 of the Credit Agreement are amended and restated in their entirety to read as follows: "Commitment" means the amount set forth opposite each Lender's name on Schedule 1 hereto (or in an Assignment and Acceptance entered into by it) as its Commitment, as such amount may be adjusted from time to time to give effect to Money Market Reductions pursuant to Section 2.01 or reduced from time to time pursuant to Section 2.10. "Level I Status" means that, at 8:30 a.m. New York City time at any date of determination, SunAmerica's senior unsecured long term debt is rated "A+" or better by Standard & Poor's and "A3" or better by Moody's. "Termination Date" means December 14, 1995 or any extension thereof pursuant to Section 2.09 or the earlier date of termination in whole of the Commitments pursuant to Sections 2.10 or 9.01. (ii) The definition of "Other Agreement" contained in Section 1.01 of the Credit Agreement is amended by inserting immediately before the word "providing" the word "originally" and by inserting immediately after the words "dated as of January 30, 1994," the words "and by the Second Amendment to Credit Agreement, dated as of December 12, 1994, providing, as so amended, for a $150,000,000 revolving credit facility, and as the same may be further amended from time to time". (b) Section 2.07. (i) Section 2.07(b) of the Credit Agreement is amended by replacing the second paragraph thereof with the following: "CD Margin" means (i) 0.37% for any day on which Level I Status exists, (ii) 0.40% for any day on which Level II Status exists, (iii) 0.4625% for any day on which Level III Status exists and (iv) 0.625% for any day on which Level IV Status exists. 2 (ii) Section 2.07(c) of the Credit Agreement is amended by replacing the second paragraph of subsection (i) thereof with the following: "Eurodollar Margin" means (1) 0.245% for any day on which Level I Status exists, (2) 0.275% for any day on which Level II Status exists, (3) 0.3375% for any day on which Level III Status exists and (4) 0.50% for any day on which Level IV Status exists. (c) Section 2.08. (i) Clause (a) of Section 2.08 is deleted (and shall be left blank). (ii) Section 2.08(b) of the Credit Agreement is amended by replacing the first sentence thereof with the following: "The Borrowers shall pay to the Agent for the account of the Lenders ratably a facility fee at the following rates per annum: (i) 0.09% for any day on which Level I Status exists, (ii) 0.10% for any day on which Level II Status exists, (iii) 0.15% for any day on which Level III Status exists and (iv) 0.20% for any day on which Level IV Status exists." (iii) Section 2.08(c) of the Credit Agreement is amended by deleting the words "at the rate of 0.0625% per annum" and by adding the following new sentence at the end thereof: "Such additional utilization fee shall be at the following rates per annum: (i) 0.05% for any day on which Level I Status or Level II Status exists, (ii) 0.0625% for any day on which Level III Status exists, and (iii) 0.125% for any day on which Level IV Status exists." (d) Section 2.09. Section 2.09(c) of the Credit Agreement is amended and restated in its entirety to read as follows: "(c) The Agent will promptly, and in any event within 5 Domestic Business Days of the receipt of each Notice of Extension, provide the Lenders with a copy of each such Notice of Extension. Each Lender will in its sole discretion determine whether to consent to such Notice of Extension and will use its best efforts to respond to such Notice of Extension on a date not earlier than 30 days prior to the Existing Termination Date but in any event not later than 20 days prior to the Existing Termination Date. Each consent of a Lender to a Notice of Extension shall be in writing and shall become effective and binding only if each other Lender (or an assignee as contemplated by this subsection (c)) has consented in writing to such Notice of Extension and such Notice of Extension has become effective in accordance with this Section 2.09(c). The Agent shall notify the Borrowers promptly after the date 20 days prior to the Existing Termination Date as to which Lenders have consented to the extension. If less than all Lenders consent to such extension within such period, the Borrowers may require that the Lenders that do not consent to such extension assign, and such Lenders shall assign, their Commitments in their entirety pursuant to Section 11.07, no later than 15 days prior to the Existing Termination Date, to one or more Eligible Assignees (which may be one or more of the Lenders), if any, identified by the Borrowers pursuant to Section 3.05 who will consent to such extension. The Agent shall notify the Borrowers and the Lenders at least 15 days prior to the Existing Termination Date of the consent or failure to consent of the Lenders to the Notice of Extension. A Notice of Extension shall become effective, and the Existing Termination Date shall become the extended Existing Termination Date specified in such Notice of Extension, upon the receipt by the Agent of written consents signed by each of the Lenders to such Notice of Extension." (e) Section 5.06. (i) Section 5.06(a) of the Credit Agreement is amended (A) by replacing the phrase ", 1991 and 1992" in subsection (i) thereof with the phrase ", 1991, 1992 and 1993", and (B) inserting at the end of subsection (ii) thereof the following: 3 "As of September 30, 1994, the Risk-Based Capital Ratio of Anchor and Sun Life were, respectively, 307% and 210%, and as of the Second Amendment Effective Date as defined in the Second Amendment to Credit Agreement dated as of December 12, 1994 there has been no material reduction in the Risk-Based Capital Ratio of Anchor or Sun Life." (ii) Subsection (ii) of Section 5.06(b) of the Credit Agreement is amended and restated in its entirety to read as follows: "(ii) The projected financial statements of SunAmerica and its Subsidiaries, including the cash flow projections of the Borrowers, which are set forth in the Information Memorandum, dated October 1992, prepared for use in connection with this revolving credit facility (the "Information Memorandum"), and the projected financial statements of SunAmerica and its Subsidiaries for the fiscal year ending September 30, 1995 set forth in the materials titled 'SunAmerica Inc. Bank Meeting, dated November 9, 1994' prepared for use in connection with the Second Amendment to Credit Agreement dated as of December 12, 1994 (the "Bank Presentation Materials"), are based on good faith estimates and assumptions made by the management of SunAmerica, it being recognized, however, that projections are subject to significant uncertainties and contingencies, many of which are beyond the Borrowers' control, and that the actual results during the period or periods covered by such projections may differ from the projected results and that the differences may be material. Notwithstanding the foregoing, as of the Effective Date, in the case of the projections contained in the Information Memorandum, and as of the Second Amendment Effective Date as defined in said Second Amendment to Credit Agreement, in the case of the projections contained in the Bank Presentation Materials, management of SunAmerica believes that such projections were, taken as a whole, reasonable and attainable." (f) Section 8.03. Section 8.03 of the Credit Agreement is amended by changing the figure "100%" to read "125%". (g) Schedule 1. Schedule 1 to the Credit Agreement is amended to read in its entirety as set forth in Exhibit A hereto. (h) Exhibits B, C, D, E, F and H. Exhibits B, C, D, E, F and H to the Credit Agreement are each amended by (i) replacing the word "$160,000,000" in the first paragraph of each such exhibit with the word "$100,000,000", and (ii) inserting before the words "the `Credit Agreement'" in the first parenthetical of the first paragraph of each such exhibit the following: "as amended by the First Amendment to Credit Agreement, dated as of January 30, 1994, and by the Second Amendment to Credit Agreement, dated as of December 12, 1994, and as the same may be further amended from time to time,". (i) Additional Lender. NationsBank is hereby added (effective on the Second Amendment Effective Date) as a party to the Credit Agreement and shall be deemed to be a Lender for all purposes hereof having the Commitment stated on Schedule 1 to the Credit Agreement as amended hereby and having all the rights and obligations of a Lender thereunder as if it were a direct signatory to the Credit Agreement; provided, that NationsBank shall be deemed to be a Lender for purposes of Section 10.05 of the Credit Agreement only in respect of events occurring after the Second Amendment Effective Date. 2. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Second Amendment to Credit Agreement shall become effective on December 15, 1994 (the "Second Amendment Effective Date"), provided, that as of such date this Second Amendment to Credit Agreement has been executed and delivered by each of the parties hereto and the following conditions precedent shall have been satisfied (or waived in accordance with Section 11.01 of the Credit Agreement): (a) receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any Lender as to which an executed counterpart shall not have been received, receipt by the Agent in 4 form satisfactory to it of telegraphic, telex or other written confirmation from such Lender of execution of a counterpart hereof by such Lender); (b) receipt by the Agent of an opinion of Susan L. Harris, the Vice President, General Counsel - Corporate Affairs and Secretary of SunAmerica, dated the Second Amendment Effective Date, covering such matters relating to the transactions contemplated hereby as the Agent may reasonably request; (c) receipt by the Agent of a certificate of a Responsible Officer of each Borrower, dated as of the Second Amendment Effective Date, to the effect that (i) the representations and warranties of such Borrower contained in Article V of the Credit Agreement (as amended by this Second Amendment to Credit Agreement) are true and correct in all material respects on the date of such certificate with the same effect as though made on and as of the date of such certificate except to the extent they expressly relate to a prior date and (ii) no Default exists or results from the execution and delivery by such Borrower of this Second Amendment to Credit Agreement; and (d) receipt by the Agent of all documents reasonably requested by the Agent relating to the existence and good standing of the Borrowers, the corporate authority for and validity of the Credit Agreement as amended by this Second Amendment to Credit Agreement, and any other matters relevant hereto, all in form and substance satisfactory to the Agent and the Agent's counsel. 3. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers jointly and severally represents and warrants to the Agent and each of the Lenders that: (i) the representations and warranties of the Borrowers contained in Article V of the Credit Agreement (as amended by this Second Amendment to Credit Agreement) are true and correct in all material respects on the date hereof with the same effect as though made on and as of the date hereof except to the extent they expressly relate to a prior date and (ii) no Default exists or results from the execution and delivery by the Borrowers of this Second Amendment to Credit Agreement. 4. FULL FORCE AND EFFECT. All of the terms and provisions of the Credit Agreement, as amended hereby, are and shall continue to be in full force and effect and the Agent and the Lenders shall be entitled to all the benefits thereof. 5. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 6. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Credit Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. SUNAMERICA INC. By: /s/ James R. Belardi ---------------------------- Title: Senior Vice President and Treasurer SUNAMERICA FINANCIAL, INC. By: /s/ James R. Belardi ---------------------------- Title: Authorized Agent 5 CITIBANK, N.A., in its capacity as Agent and Lender By: /s/ Kelley T. Hebert, V.P. --------------------------- Name: Kelly T. Hebert Title: Attorney-in-Fact Citibank, N.A. Lenders ------- BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: /s/ John R. Wolak ---------------------------- Name: John R. Wolak Title: Vice President THE BANK OF NEW YORK By: /s/ Stratton Heath --------------------------- Name: Stratton Heath Title: Vice President THE CHASE MANHATTAN BANK, N.A. By: /s/ R. Michael Brettell ---------------------------- Name: R. Michael Brettell Title: Vice President CHEMICAL BANK By: /s/ Peter W. Platten ---------------------------- Name: Peter W. Platten Title: Vice President FIRST INTERSTATE BANK OF CALIFORNIA By: /s/ Robert C. Meyer ---------------------------- Name: Robert C. Meyer Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Harriet K. Bailey ---------------------------- Name: Harriet K. Bailey Title: Vice President THE INDUSTRIAL BANK OF JAPAN, LIMITED By: /s/ Kazutaka Kiyoto ---------------------------- Name: Kazutaka Kiyoto Title: Senior Vice President 6 NATIONSBANK OF GEORGIA, N.A. By: /s/ Frank R. Callison ---------------------------- Name: Frank R. Callison Title: Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Patricia Merritt ---------------------------- Name: Patricia Merritt Title: Vice President WESTDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK AND CAYMAN ISLANDS BRANCHES By: /s/ Elie Khoury ---------------------------- Name: Elie Khoury Title: Vice President By: /s/ Matthew F. Tallo ---------------------------- Name: Matthew F. Tallo Title: Associate 7 [364-day] EXHIBIT A TO SECOND AMENDMENT TO CREDIT AGREEMENT SCHEDULE 1 TO CREDIT AGREEMENT
Name of Lender Commitment CITIBANK, N.A. $ 9,600,000 BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION $ 9,600,000 THE BANK OF NEW YORK $ 9,600,000 THE CHASE MANHATTAN BANK, N.A. $ 9,600,000 CHEMICAL BANK $ 9,600,000 FIRST INTERSTATE BANK OF CALIFORNIA $ 9,600,000 THE FIRST NATIONAL BANK OF CHICAGO $ 9,600,000 THE INDUSTRIAL BANK OF JAPAN, LIMITED $ 9,600,000 NATIONSBANK OF GEORGIA, N.A. $ 9,600,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK $ 6,800,000 WESTDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK AND CAYMAN ISLANDS BRANCHES $ 6,800,000 ------------ $100,000,000
EX-10.(T) 7 EXHIBIT 10.(T) 1 EXHIBIT 10(t) LIST OF EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS Exhibit No. Description - ----------- ----------- 10(a) Employment Agreement, dated July 30, 1992, between the Company and Gary W. Krat, is incorporated herein by reference to Exhibit 10(e) of the Company's 1992 Annual Report on Form 10-K, filed November 30, 1992. 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, filed January 24, 1989. 10(f) Amended and Restated 1978 Employee Stock Option Plan Program, is incorporated herein by reference to Appendix A to the Company's Notice of 1987 Annual Meeting of Shareholders and Proxy Statement, filed March 24, 1987. 10(g) Executive Deferred Compensation Plan is incorporated herein by reference to Exhibit 10(l) 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. EX-11 8 EXHIBIT 11 1 EXHIBIT 11 SUNAMERICA INC. STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS (In thousands, except per-share amounts)
Years ended September 30, ------------------------------------------------ 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Average number of common and common stock equivalent shares outstanding during the period: Common Stock issued and outstanding at beginning of period 53,705 49,745 48,020 47,181 47,994 Average number of common shares issued upon exercise of employee stock options or under other employee stock plans 542 124 1,196 507 489 Average number of common stock equivalent shares arising from outstanding employee stock options 1,530 1,326 1,400 1,395 719 Average number of shares issuable upon conversion of convertible preferred stock: Series A Mandatory Conversion Premium Dividend Preferred Stock -- 3,245 5,591 8,430 -- Series D Mandatory Conversion Premium Dividend Preferred Stock 7,337 7,505 4,176 -- -- Average number of shares issued upon redemption of Series A Depositary Shares on August 16, 1994 -- 470 -- -- -- Average number of shares repurchased -- -- -- -- (1,475) -------- -------- -------- -------- -------- Average number of common and common stock equivalent shares outstanding during the period 63,114 62,415 60,383 57,513 47,727 ======== ======== ======== ======== ======== Earnings applicable to common stock: Income before cumulative effect of change in accounting for income taxes $194,206 $165,301 $127,011 $ 76,791 $ 47,481 Less preferred dividend requirements other than those related to convertible issues: 9-1/4% Preferred Stock, Series B (11,440) (12,996) (12,996) (3,249) -- SunAmerica Adjustable Rate Cumulative Preferred Stock, Series C (3,543) (3,424) (3,478) (4,630) (5,415) -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting for income taxes applicable to common stock 179,223 148,881 110,537 68,912 42,066 Cumulative effect of change in accounting for income taxes -- (33,500) -- -- -- -------- -------- -------- -------- -------- Net income applicable to common stock $179,223 $115,381 $110,537 $ 68,912 $ 42,066 ======== ======== ======== ======== ======== Earnings per common and common equivalent share: Income before cumulative effect of change in accounting for income taxes $ 2.84 $ 2.39 $ 1.83 $ 1.20 $ 0.88 Cumulative effect of change in accounting for income taxes -- (0.54) -- -- -- -------- -------- -------- -------- -------- Net income $ 2.84 $ 1.85 $ 1.83 $ 1.20 $ 0.88 ======== ======== ======== ======== ========
EX-12.(A) 9 EXHIBIT 12.(A) 1 EXHIBIT 12(a) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (EXCLUDING INTEREST INCURRED ON FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, --------------------------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (In thousands, except ratios) Earnings: Pretax income $ 279,606 $ 240,001 $ 184,011 $ 111,091 $ 73,381 --------- --------- --------- --------- --------- Add: Interest incurred on: Senior indebtedness 55,985 50,292 36,246 33,224 33,072 Subordinated notes -- -- -- 3,941 10,473 --------- --------- --------- --------- --------- Total interest incurred 55,985 50,292 36,246 37,165 43,545 --------- --------- --------- --------- --------- Dividends paid on preferred securities of grantor trust 1,673 -- -- -- -- --------- --------- --------- --------- --------- Total earnings $ 337,264 $ 290,293 $ 220,257 $ 148,256 $ 116,926 ========= ========= ========= ========= ========= Fixed charges: Interest incurred on: Senior indebtedness $ 55,985 $ 50,292 $ 36,246 $ 33,224 $ 33,072 Subordinated notes -- -- -- 3,941 10,473 --------- --------- --------- --------- --------- Total interest incurred 55,985 50,292 36,246 37,165 43,545 --------- --------- --------- --------- --------- Dividends paid on preferred securities of grantor trust 1,673 -- -- -- -- --------- --------- --------- --------- --------- Total fixed charges $ 57,658 $ 50,292 $ 36,246 $ 37,165 $ 43,545 ========= ========= ========= ========= ========= Ratio of earnings to fixed charges (excluding interest incurred on fixed annuities, guaranteed investment contracts and trust deposits) 5.8x 5.8x 6.1x 4.0x 2.7x ========= ========= ========= ========= =========
2 EXHIBIT 12(a) (CONTINUED) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (INCLUDING INTEREST INCURRED ON FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, ----------------------------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (In thousands, except ratios) Earnings: Pretax income $ 279,606 $ 240,001 $ 184,011 $ 111,091 $ 73,381 --------- --------- --------- --------- --------- Add: Interest incurred on: Fixed annuity contracts 258,730 254,464 308,910 362,094 411,084 Guaranteed investment contracts 213,340 150,424 136,984 140,114 124,381 Trust deposits 10,519 8,516 8,438 4,256 -- Senior indebtedness 55,985 50,292 36,246 33,224 33,072 Subordinated notes -- -- -- 3,941 10,473 --------- --------- --------- --------- --------- Total interest incurred 538,574 463,696 490,578 543,629 579,010 --------- --------- --------- --------- --------- Dividends paid on preferred securities of grantor trust 1,673 -- -- -- -- --------- --------- --------- --------- --------- Total earnings $ 819,853 $ 703,697 $ 674,589 $ 654,720 $ 652,391 ========= ========= ========= ========= ========= Fixed charges: Interest incurred on: Fixed annuity contracts $ 258,730 $ 254,464 $ 308,910 $ 362,094 $ 411,084 Guaranteed investment contracts 213,340 150,424 136,984 140,114 124,381 Trust deposits 10,519 8,516 8,438 4,256 -- Senior indebtedness 55,985 50,292 36,246 33,224 33,072 Subordinated notes -- -- -- 3,941 10,473 --------- --------- --------- --------- --------- Total interest incurred 538,574 463,696 490,578 543,629 579,010 Dividends paid on preferred securities of grantor trust 1,673 -- -- -- -- --------- --------- --------- --------- --------- Total fixed charges $ 540,247 $ 463,696 $ 490,578 $ 543,629 $ 579,010 ========= ========= ========= ========= ========= Ratio of earnings to fixed charges (including interest incurred on fixed annuities, guaranteed investment contracts and trust deposits) 1.5x 1.5x 1.4x 1.2x 1.1x ========= ========= ========= ========= =========
EX-12.(B) 10 EXHIBIT 12.(B) 1 EXHIBIT 12(b) SUNAMERICA INC. COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (EXCLUDING INTEREST INCURRED ON FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, ----------------------------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (In thousands, except ratios) Earnings: Pretax income $ 279,606 $ 240,001 $ 184,011 $ 111,091 $ 73,381 --------- --------- --------- --------- --------- Add: Interest incurred on: Senior indebtedness 55,985 50,292 36,246 33,224 33,072 Subordinated notes -- -- -- 3,941 10,473 --------- --------- --------- --------- --------- Total interest incurred 55,985 50,292 36,246 37,165 43,545 --------- --------- --------- --------- --------- Dividends paid on preferred securities of grantor trust 1,673 -- -- -- -- --------- --------- --------- --------- --------- Total earnings $ 337,264 $ 290,293 $ 220,257 $ 148,256 $ 116,926 ========= ========= ========= ========= ========= Combined fixed charges and preferred stock dividends: Interest incurred on: Senior indebtedness $ 55,985 $ 50,292 $ 36,246 $ 33,224 $ 33,072 Subordinated notes -- -- -- 3,941 10,473 --------- --------- --------- --------- --------- Total interest incurred 55,985 50,292 36,246 37,165 43,545 Dividends paid on preferred securities of grantor trust 1,673 -- -- -- -- Dividends paid on preferred stock of SunAmerica Inc., on a tax equivalent basis 41,914 54,528 42,675 17,733 8,369 --------- --------- --------- --------- --------- Total combined fixed charges and preferred stock dividends $ 99,572 $ 104,820 $ 78,921 $ 54,898 $ 51,914 ========= ========= ========= ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends (excluding interest incurred on fixed annuities, guaranteed investment contracts and trust deposits) 3.4x 2.8x 2.8x 2.7x 2.3x ========= ========= ========= ========= =========
2 EXHIBIT 12(b) (CONTINUED) COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (INCLUDING INTEREST INCURRED ON FIXED ANNUITIES, GUARANTEED INVESTMENT CONTRACTS AND TRUST DEPOSITS)
Years ended September 30, --------------------------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (In thousands, except ratios) Earnings: Pretax income $ 279,606 $ 240,001 $ 184,011 $ 111,091 $ 73,381 --------- --------- --------- --------- --------- Add: Interest incurred on: Fixed annuity contracts 258,730 254,464 308,910 362,094 411,084 Guaranteed investment contracts 213,340 150,424 136,984 140,114 124,381 Trust deposits 10,519 8,516 8,438 4,256 -- Senior indebtedness 55,985 50,292 36,246 33,224 33,072 Subordinated notes -- -- -- 3,941 10,473 --------- --------- --------- --------- --------- Total interest incurred 538,574 463,696 490,578 543,629 579,010 --------- --------- --------- --------- --------- Dividends paid on preferred securities of grantor trust 1,673 -- -- -- -- --------- --------- --------- --------- --------- Total earnings $ 819,853 $ 703,697 $ 674,589 $ 654,720 $ 652,391 ========= ========= ========= ========= ========= Combined fixed charges and preferred stock dividends: Interest incurred on: Fixed annuity contracts $ 258,730 $ 254,464 $ 308,910 $ 362,094 $ 411,084 Guaranteed investment contracts 213,340 150,424 136,984 140,114 124,381 Trust deposits 10,519 8,516 8,438 4,256 -- Senior indebtedness 55,985 50,292 36,246 33,224 33,072 Subordinated notes -- -- -- 3,941 10,473 --------- --------- --------- --------- --------- Total interest incurred 538,574 463,696 490,578 543,629 579,010 Dividends paid on preferred securities of grantor trust 1,673 -- -- -- -- Dividends paid on preferred stock of SunAmerica Inc. on a tax equivalent basis 41,914 54,528 42,675 17,733 8,369 --------- --------- --------- --------- --------- Total combined fixed charges and preferred stock dividends $ 582,161 $ 518,224 $ 533,253 $ 561,362 $ 587,379 ========= ========= ========= ========= ========= Ratios of earnings to combined fixed charges and preferred stock dividends (including interest incurred on fixed annuities, guaranteed investment contracts and trust deposits) 1.4x 1.4x 1.3x 1.2x 1.1x ========= ========= ========= ========= =========
EX-21 11 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 THE COMPANY OR THE COMPANY'S SUBSIDIARY WHICH IS THE IMMEDIATE NAME OF COMPANY PARENT - ---------------- ---------------------- ARIZONA CORPORATIONS: % SunAmerica Life Insurance Company 100 (f/k/a Sun Life Insurance Company of America) SunAmerica National Life Insurance Company 100 CALIFORNIA CORPORATIONS: Anchor National Life Insurance Company 100 Imperial Premium Finance, Inc. 100 (f/k/a SunAmerica Premium Finance of California, Inc.) COLORADO CORPORATION: Resources Trust Company 100 DELAWARE CORPORATIONS: Imperial Premium Finance, Inc. 100 (f/k/a SunAmerica Premium Finance, Inc.) Imperial Premium Funding, Inc. 100 SunAmerica Financial Resources, Inc. 100 SunAmerica Capital Trust I 100 SunAmerica Capital Trust II 100 SunAmerica Capital Trust III 100 SunAmerica Capital Trust IV 100 Capitol Life Mortgage Corp. 100 Royal Alliance Associates, Inc. 100 SunAmerica Asset Management Corp. 100 SunAmerica Capital Services, Inc. 100 SunAmerica Investments, Inc. 100 SunAmerica Securities, Inc. 100 GEORGIA CORPORATION: SunAmerica Financial, Inc. 100 MARYLAND CORPORATIONS: Anchor Investment Adviser, Inc. 100 SunAmerica Marketing, Inc. 100 MASSACHUSSETTS BUSINESS TRUSTS: Anchor Pathway Fund* 100 Anchor Series Trust* 100 SunAmerica Series Trust* 100 NEW YORK CORPORATION: First SunAmerica Life Insurance Company 100
* Shares of these entities are owned by a separate account of Anchor National Life Insurance Company. EX-23 12 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 and Warrants to Purchase Debt Securities, Preferred Stock and Common Stock (No. 33-62405) of SunAmerica Inc. of our report dated November 6, 1995, except as to Notes 7 and 11 which are as of November 28, 1995, 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 November 29, 1995 EX-27 13 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, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1995 SEP-30-1995 6,584,488 718,283 736,835 39,906 1,543,285 105,637 10,808,959 855,350 0 526,415 16,844,167 8,469,442 0 0 0 524,835 54,415 0 321,642 837,021 16,844,167 0 837,625 (33,012) 179,288 472,070 80,829 (15,144) 279,606 85,400 194,206 0 0 0 194,206 2.84 2.84 0 0 0 0 0 0 0
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