-----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, ARZn6ztoV0M5C19e8+9YcLQ4Gf53SPAiDmN2YdfVsBNJKvOsEoaH/z07+adfnYv2 wl3Nq0u5jkExym5IuYXvfA== 0000006342-96-000038.txt : 19961220 0000006342-96-000038.hdr.sgml : 19961220 ACCESSION NUMBER: 0000006342-96-000038 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961219 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANCHOR NATIONAL LIFE INSURANCE CO CENTRAL INDEX KEY: 0000006342 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 860198983 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-47472 FILM NUMBER: 96683434 BUSINESS ADDRESS: STREET 1: 1 SUNAMERICA CENTER STREET 2: C/O THOMAS B PHILLIPS CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3107726056 MAIL ADDRESS: STREET 1: 1 SUN AMERICA CENTER CITY: LOS ANGELES STATE: CA ZIP: 90067 FORMER COMPANY: FORMER CONFORMED NAME: ANCHOR LIFE INSURANCE CO DATE OF NAME CHANGE: 19600201 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from to Commission File Number 33-47472 ANCHOR NATIONAL LIFE INSURANCE COMPANY Incorporated in Arizona 86-0198983 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: None 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. X ---- THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON DECEMBER 19, 1996 WAS AS FOLLOWS: Common Stock (par value $1,000.00 per share) 3,511 shares PART I ITEM 1. BUSINESS GENERAL DESCRIPTION Anchor National Life Insurance Company (the "Company"), is an indirect wholly owned subsidiary of SunAmerica Inc. (the "Parent"), a diversified financial services company specializing in retirement savings and investment products and services. The Company ranks among the largest U.S. issuers of variable annuities. Complementing these annuity operations are the Company's asset management operations and broker-dealer operations. At September 30, 1996, the Company held $11.34 billion of assets, consisting of $9.20 billion of assets owned by the Company and $2.14 billion of assets managed in mutual funds. 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 ages 45 to 64 will grow from 46 million to 60 million during the 1990s, making this age group the fastest-growing segment of the U.S. population. Between 1985 and 1995, annual industry premiums from annuities and fund deposits increased from $53 billion to $159 billion. During the same period, annual industry sales of mutual funds, excluding money market accounts, rose from $114 billion to $477 billion. Focusing its operations on this expanding market, the Company specializes in the sale of tax-deferred long-term savings products and investments through its life insurance operations and its asset management and broker-dealer subsidiaries. The Company markets fee-generating variable annuities, guaranteed investment contracts ("GICs") and mutual funds. Its annuity products are distributed through a broad spectrum of financial services distribution channels, including independent registered representatives of the Company's broker-dealer subsidiary, affiliated and unaffiliated broker-dealers and banks and financial institutions. The Company maintains its principal executive offices at 1 SunAmerica Center, Los Angeles, California 90067-6022, telephone (310) 772-6000. The Company has no employees; however, employees of the Parent and its other subsidiaries perform various services for the Company. The Parent has approximately 1,600 employees, approximately 880 of whom perform services for the Company as well as for certain of its affiliates. 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 and mutual funds. Fee income has also expanded through the receipt of broker-dealer net retained commissions. 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. 1 For the year ended September 30, 1996, the Company's net investment income (including net realized investment losses) and fee income by primary product line or service are as follows: NET INVESTMENT AND FEE INCOME Primary product or Amount Percent service --------- --------- ------------------------- (In thousands) Net investment income (including net realized investment losses) $ 43,488 21.3% Fixed-rate products --------- ----- Fee income: Variable annuity fees 103,970 50.9 Variable annuities Net retained commissions 31,548 15.4 Broker-dealer sales Asset management fees 25,413 12.4 Mutual funds --------- ----- Total fee income 160,931 78.7 --------- ----- Total $ 204,419 100.0% ========= ===== For financial information on the Company's business segments, see Part IV - "Notes to Consolidated Financial Statements - Note 10 - Business Segments." LIFE INSURANCE OPERATIONS Founded in 1965, the Company is an Arizona-chartered company licensed in 49 states and the District of Columbia, the Company specializes in the sale of flexible premium variable annuities and GICs. It has a "AA-" (Excellent) claims-paying ability rating from Standard & Poor's Corporation ("S&P"), a "AA" (Very High) rating from Duff & Phelps, Inc. ("D&P") and an "A2" (Good) rating from Moody's Investors Service ("Moody's"). It also has an "A+" (Superior) rating from industry analyst A.M. Best Company. The Company specializes in the sale of flexible premium variable annuities, including Polaris, the Company's flagship variable annuity, which offers investors nine money management groups, 22 variable annuity portfolios and five fixed-rate account options. The Company ranks among the largest issuers of variable annuities in the nation, according to the latest published industry data. Benefitting from continued strong demographic growth of the retirement savings market, industry sales of tax-deferred savings products have represented, for a number of years, a significantly larger source of new premiums for the U.S. life insurance industry than have traditional life insurance products. Recognizing the growth potential of this market, the Company focuses its life insurance operations on the sale of annuities and GICs. Because of its focus on annuity products, which generally have more contractholder transactions than traditional life insurance products, the Company utilizes computer-driven systems that employ optical disk imaging and artificial intelligence, in lieu of paper-intensive life insurance processing 2 procedures. The Company believes its service support and associated cost structure to be among the most competitive in the industry. The Company markets its variable annuities through the following distribution channels: (i) independent registered representatives of SunAmerica Securities, Inc. and Advantage Capital Corp., which are indirect wholly owned subsidiaries of the Parent, and Royal Alliance Associates, Inc. ("Royal Alliance"), which is an indirect wholly owned subsidiary of the Company; and (ii) approximately 600 other securities firms and financial institutions. Approximately 30,000 independent sales representatives nationally are licensed to sell the Company's variable 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 The Company services a number of fixed-rate products, including fixed- rate annuities issued in prior years and fixed-rate account options of its variable annuity contracts. Although the Company's contracts remain in force an average of seven to ten years, a majority (approximately 81% at September 30, 1996) reprice annually at discretionary rates determined by the Company. In repricing, the Company takes into account yield characteristics of its investment portfolio, annuity surrender assumptions and competitive industry pricing. During 1995 the Company began augmenting its retail annuity sales effort with the marketing of institutional products. At September 30, 1996, the Company had $410.2 million of fixed-maturity, variable-rate GIC obligations that reprice periodically based upon certain defined indexes. Of the total GIC portfolio at September 30, 1996, approximately 83% was sold to asset management firms, including bank trust departments, and 17% was sold to banks. The one new GIC contract sold by the Company in 1996 amounted to $75.0 million, compared to an average new GIC contract size of $34.4 million in 1995. The Company designs its fixed-rate products and conducts its investment operations in order to closely match the duration of the assets in its investment portfolio to its annuity and GIC obligations. The Company seeks to achieve a predictable spread between what it earns on its assets and what it pays on its liabilities by investing principally in fixed-rate securities. The Company's fixed-rate products incorporate surrender charges or other limitations on when contracts can be surrendered for cash to encourage persistency. Approximately 63% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1996. VARIABLE ANNUITIES The variable annuity products of the Company offer investors a broad spectrum of fund alternatives, with a choice of investment managers, as well as guaranteed fixed-rate account options. The Company earns fee income through the sale, administration and management of the variable account options of its variable annuity products. The Company also earns investment income on monies allocated to the fixed-rate account options of these products. Variable 3 annuities offer retirement planning features and surrender charges similar to those offered by fixed annuities, but differ in that the annuity holder's rate of return is generally dependent upon the investment performance of the particular equity, fixed-income, money market or asset allocation funds selected by the contractholder. Because the investment risk is borne by the customer in all but the fixed-rate account options, these products require significantly less capital support than fixed annuities. The average new variable annuity contract sold by the Company amounted to approximately $37,000 in 1996. INVESTMENT OPERATIONS The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed maturities that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed maturities are priced over the yield curve and general competitive conditions within the industry. The Company manages most of its invested assets internally. Its portfolio strategy is designed to achieve adequate risk- adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-maturity assets and liabilities under commonly used stress-test interest rate scenarios. Based on the results of these computer simulations, the investment portfolio has been constructed with a view to maintaining a desired investment spread between the yield on portfolio assets and the rate paid on its reserves under a variety of possible future interest rate scenarios. For the years ended September 30, 1996, 1995 and 1994, the Company's yields on average invested assets were 7.50%, 7.62% and 8.20%, respectively, before net realized investment losses, and it realized net investment spreads of 2.59%, 2.95% and 3.78%, respectively, on average invested assets. At September 30, 1996, the weighted average life of the Company's investments was approximately five years and the duration was approximately three. Weighted average life is the average time to receipt of all principal, incorporating the effects of scheduled amortization and expected prepayments, weighted by book value. Duration is a common option-adjusted measure for the price sensitivity of a fixed-income portfolio to changes in interest rates. It is the calculation of the relative percentage change in market value resulting from shifts in interest rates, and recognizes the changes in portfolio cashflows resulting from embedded options such as prepayments and bond calls. The Company's general investment philosophy is to hold fixed maturity assets for long-term investment. Thus, it does not have a trading portfolio. Effective December 1, 1995, pursuant to guidelines issued by the Financial Accounting Standards Board, the Company determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in prepayment risk, the Company's need for liquidity and other similar factors. Accordingly, the Company no longer classifies a portion of its Bond Portfolio as held for investment. 4 The following table summarizes the Company's investment portfolio at September 30, 1996: SUMMARY OF INVESTMENTS Amortized Percent of cost portfolio --------------- ---------- (In thousands) Fixed maturities: Cash and short-term investments $ 122,058 5.2% U.S. Government securities 311,458 13.3 Mortgage-backed securities 747,653 32.0 Other bonds, notes and redeemable preferred stocks 941,913 40.2 Mortgage loans 98,284 4.2 --------------- ---------- Total 2,221,366 94.9 Real estate 39,724 1.7 Equity securities 2,911 0.1 Other invested assets 77,925 3.3 --------------- ---------- Total investments $ 2,341,926 100.0% =============== ========== All of the Bond Portfolio (at amortized cost, excluding $9.1 million of redeemable preferred stock) at September 30, 1996 was rated by S&P, Moody's, D&P, Fitch Investor Service, Inc. ("Fitch") or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the Company. At September 30, 1996, approximately $1.83 billion (at amortized cost) of the Bond Portfolio was rated investment grade by one or more of these agencies or by the Company or the NAIC, pursuant to applicable NAIC guidelines, including $1.05 billion of U.S. government/agency securities and mortgage-backed securities ("MBSs"). At September 30, 1996, the Bond Portfolio included $160.8 million (fair value, $160.2 million) of bonds not rated investment grade by S&P, Moody's, D&P, Fitch or the NAIC. Based on their September 30, 1996 amortized cost, these non-investment-grade bonds accounted for 1.8% of the Company's total assets and 6.9% of its invested assets. Senior secured loans ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $200.8 million at September 30, 1996. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1996, Secured Loans consisted of loans to 52 borrowers spanning 20 industries. Mortgage loans aggregated $98.3 million at September 30, 1996 and consisted of 17 first mortgage loans with an average loan balance of approximately $5.8 million, collateralized by properties located in 11 states. 5 At September 30, 1996, the amortized cost of all investments in default as to the payment of principal or interest totaled $3.1 million (fair value, $2.9 million), which constituted 0.1% 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 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. These mutual funds offer investors an array of equity, fixed-income, money market and tax-exempt portfolios. In November 1996, SunAmerica Asset Management introduced its new "Style Select Series," which combines the expertise of three well-respected advisors with similar investment styles in each available portfolio. Founded in 1983 and acquired by the Company in January 1990, SunAmerica Asset Management managed approximately $2.43 billion of assets at September 30, 1996, including mutual fund assets and certain of the variable annuity assets of the Company and its affiliates. The SunAmerica mutual funds are distributed nationally through a network of approximately 350 financial institutions and affiliated and unaffiliated broker-dealers, as well as by the Company's broker-dealer subsidiary. BROKER-DEALER The Company owns a broker-dealer, 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 2,800 at September 30, 1995 to approximately 3,000 at September 30, 1996. The Company believes that, through its ownership of Royal Alliance and marketing arrangements with two affiliated broker-dealers, SunAmerica Securities, Inc. and Advantage Capital Corp., it has the largest network of independent registered representatives in the nation, based on industry data. REGULATION The Company is subject to regulation and supervision by the states in which it is authorized to transact business. State insurance laws establish supervisory agencies with broad administrative and supervisory powers related to granting and revoking licenses to transact business, regulating marketing and other trade practices, operating guaranty associations, licensing agents, approving policy forms, regulating certain premium rates, regulating insurance holding company systems, establishing reserve requirements, prescribing the form and content of required financial statements and reports, performing financial and other examinations, determining the reasonableness and adequacy of statutory capital and surplus, regulating the type, valuation and amount of 6 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 and market conduct violations. These initiatives include 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 relating to product design and illustrations for annuity products. Current proposals are still being debated and the Company is monitoring developments in this area and the effects any changes would have on the Company. SunAmerica Asset Management is registered with the Securities and Exchange Commission (the "Commission") as a registered investment 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 are subject to regulation by the Commission under the Securities Act of 1933 and the Investment Company Act of 1940. The Company's broker-dealer subsidiary is subject to regulation and supervision by the states in which it transacts 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 subsidiary's business and accounts at any time. COMPETITION The businesses conducted by the Company are highly competitive. The Company's life insurance operations compete with other life insurers, and also compete for customers' funds with a variety of investment products offered by financial services companies other than life insurance companies, such as banks, investment advisors, mutual fund companies and other financial institutions. Within the U.S. life insurance industry, the 100 largest writers of individual and group annuities account for approximately 97% of total net premiums written. Net annuity premiums written among the top 100 companies range from less than $200 million to more than $9 billion annually. The Company ranks in the top quartile of this group. Certain of these companies and other life insurers with which the Company competes are significantly larger and have available to them much greater financial and other resources. The Company believes the primary competitive factors among life insurance companies for investment-oriented insurance products, such as annuities and GICs, include product flexibility, product pricing, innovation in product design, the claims-paying ability rating and the name recognition of the issuing company, the availability of distribution channels and service rendered to the customer before and after a contract is issued. Other factors affecting 7 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. The Company's broker-dealer faces competition from regional firms and large, national full service and discount brokerage firms. ITEM 2. PROPERTIES The Company's principal office is in leased premises at 1 SunAmerica Center, Los Angeles, California. The Company, through an affiliate, also leases office space in Torrance, California which is utilized for certain recordkeeping and data processing functions. The Company's broker-dealer and asset management subsidiaries lease offices in New York, New York. The Company believes that such properties, including the equipment located therein, are suitable and adequate to meet the requirements of its businesses. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various kinds of litigation common to its businesses. These cases are in various stages of development and, based on reports of counsel, management believes that provisions made for potential losses are adequate and any further liabilities and costs will not have a material adverse impact upon the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted during the fourth quarter 1996 to a vote of security-holders, through the solicitation of proxies or otherwise. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Not applicable. 8 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.
Years ended September 30, ---------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (In thousands) RESULTS OF OPERATIONS Net investment income $ 56,843 $ 50,083 $ 58,996 $ 48,912 $ 36,499 Net realized investment losses (13,355) (4,363) (33,713) (22,247) (22,749) Fee income 160,931 135,214 131,225 118,247 97,220 General and administrative expenses (80,048) (61,629) (52,636) (55,142) (55,615) Provision for future guaranty fund assessments --- --- --- (4,800) --- Amortization of deferred acquisition costs (57,520) (58,713) (44,195) (30,825) (18,224) Annual commissions (4,613) (2,658) (1,158) (312) (215) Other income and expenses, net 7,070 7,063 8,801 9,679 9,218 -------- -------- -------- -------- -------- Pretax income 69,308 64,997 67,320 63,512 46,134 Income tax expense (24,252) (25,739) (22,705) (21,794) (15,361) -------- -------- -------- -------- -------- INCOME FROM CONTINUING OPERATIONS 45,056 39,258 44,615 41,718 30,773 Net income of subsidiaries sold to affiliates ------------ 1,312 -------- -------- -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 45,056 39,258 44,615 41,718 32,085 Cumulative effect of change in accounting for income taxes --- --- (20,463) --- --- -------- -------- -------- -------- -------- NET INCOME $ 45,056 $ 39,258 $ 24,152 $ 41,718 $ 32,085 ======== ======== ======== ======== ========
9 ITEM. 6 SELECTED CONSOLIDATED FINANCIAL DATA (continued)
At September 30, --------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- (In thousands) FINANCIAL POSITION Investments $2,329,232 $2,114,908 $1,632,072 $2,093,100 $2,126,899 Variable annuity assets 6,311,557 5,230,246 4,486,703 4,170,275 3,284,507 Deferred acquisition costs 443,610 383,069 416,289 336,677 288,264 Other assets 120,136 55,474 67,062 71,337 91,588 ----------- ----------- ----------- ----------- ----------- TOTAL ASSETS $9,204,535 $7,783,697 $6,602,126 $6,671,389 $5,791,258 =========== =========== =========== =========== =========== Reserves for fixed annuity contracts $1,789,962 $1,497,052 $1,437,488 $1,562,136 $1,735,565 Reserves for guaranteed investment contracts 415,544 277,095 --- --- --- Variable annuity liabilities 6,311,557 5,230,246 4,486,703 4,170,275 3,284,507 Other payables and accrued liabilities 96,196 227,953 195,134 495,308 398,045 Subordinated notes payable to Parent 35,832 35,832 34,712 34,432 15,500 Deferred income taxes 70,189 73,459 64,567 38,145 35,163 Shareholder's equity 485,255 442,060 383,522 371,093 322,478 ----------- ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $9,204,535 $7,783,697 $6,602,126 $6,671,389 $5,791,258 =========== =========== =========== =========== ===========
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations of Anchor National Life Insurance Company (the "Company") for the three years in the period ended September 30, 1996 follows. In connection with, and because it desires to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in the following discussion and elsewhere in this report and in any other statements made by or on behalf of the Company, whether or not in future filings with the Securities and Exchange Commission ("SEC"). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. In particular, statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements contained in this report which represent the Company's beliefs concerning future or projected levels of sales of the Company's products, investment spreads or yields, or the earnings or profitability of the Company's activities. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from the forward- looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be national in scope, such as general economic conditions and interest rates, some of which may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation, and others of which may relate to the Company specifically, such as credit, volatility, and other risks associated with the Company's investment portfolio, and other factors. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligation to update forward-looking information. RESULTS OF OPERATIONS INCOME BEFORE CUMULATIVE EFFECTIVE OF CHANGE IN ACCOUNTING FOR INCOME TAXES totaled $45.1 million in 1996, compared with $39.3 million in 1995 and $44.6 million in 1994. 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 $20.5 million. Accordingly, net income amounted to $24.1 million in 1994. PRETAX INCOME totaled $69.3 million in 1996, $65.0 million in 1995, and $67.3 million in 1994. The $4.3 million improvement in 1996 over 1995 primarily resulted from increased net investment income and significantly increased fee income partially offset by increased net realized investment losses and additional general and administrative expenses. The $2.3 million decline in 1995 over 1994 primarily resulted from additional amortization of 11 deferred acquisition costs, increased general and administrative expenses and decreased net investment income, partially offset by decreased net realized investment losses. NET INVESTMENT INCOME, which is the spread between the income earned on invested assets and the interest paid on fixed annuities and other interest-bearing liabilities, totaled $56.8 million in 1996, $50.1 million in 1995 and $59.0 million in 1994. These amounts represent 2.59% on average invested assets (computed on a daily basis) of $2.19 billion in 1996, 2.95% on average invested assets of $1.70 billion in 1995 and 3.78% on average invested assets of $1.56 billion in 1994. Net investment income also includes the effect of income earned on the excess of average invested assets over average interest-bearing liabilities. This excess amounted to $142.9 million in 1996, $108.4 million in 1995 and $49.5 million in 1994. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities was 2.25% in 1996, 2.63% in 1995 and 3.64% in 1994. Investment income and the related yields on average invested assets totaled $164.6 million or 7.50% in 1996, compared with $129.5 million or 7.62% in 1995 and $127.8 million or 8.20% in 1994. Investment income rose during 1996 as a result of higher levels of average invested assets, partially offset by reduced investment yields. Investment yields were lower in 1996 because of a generally declining interest rate environment since early 1995 and lower contributions from the Company's investments in partnerships. Partnership income totaled $4.1 million in 1996, $5.1 million in 1995 and $9.5 million in 1994. This income represents a yield of 10.12% on average investments in partnerships of $40.2 million in 1996, compared with 10.60% on average investments in partnerships of $48.4 million in 1995 and 23.78% on average investments in partnerships of $39.9 million in 1994. Partnership income is based upon cash distributions received from limited partnerships, the operations of which the Company does not significantly influence. Consequently, such income is not predictable and there can be no assurance that the Company will realize comparable levels of such income in the future. The decline in investment yield in 1995 compared with 1994 is primarily due to lower contributions from the Company's investments in partnerships and a significant decline from the $3.7 million of yield enhancement recorded in 1994 through the Company's use of dollar roll transactions ("Dollar Rolls"). Although the Company continues to use Dollar Rolls, their use did not have a significant impact on investment income in 1995 or 1996. Total interest expense aggregated $107.8 million in 1996, $79.4 million in 1995 and $68.8 million in 1994. The average rate paid on all interest- bearing liabilities increased to 5.25% (5.11% on fixed annuity contracts and 5.87% on guaranteed investment contracts ("GICs")) in 1996, compared with 4.99% (4.90% on fixed annuity contracts and 6.14% on GICs) in 1995 and 4.56% (4.50% on fixed annuity contracts) in 1994. Interest-bearing liabilities averaged $2.05 billion during 1996, compared with $1.59 billion during 1995 and $1.51 billion during 1994. The increase in the average rates paid on all interest-bearing liabilities during 1996 primarily resulted from the growth in average reserves for GICs, which credit at higher rates of interest than fixed annuity contracts. Average GIC reserves were $340.5 million in 1996 and $60.8 million 12 in 1995. The increase in average crediting rates in 1995 resulted from higher crediting rates on fixed annuity contracts as interest rates rose from the low levels experienced in 1994. The growth in average invested assets since 1994 primarily reflects sales of the Company's fixed-rate products, consisting of both fixed accounts of variable annuity products and GICs. Fixed annuity premiums totaled $741.8 million in 1996, compared with $284.4 million in 1995 and $140.7 million in 1994. These increased premiums resulted from greater inflows into the one-year fixed account of the Company's Polaris variable annuity product. GIC premiums totaled $135.0 million in 1996 and $275.0 million in 1995. In 1995, the Company began to issue GICs, which guarantee the payment of principal and interest at fixed or variable rates for a term of one year. The Company's GICs that are purchased by asset management firms permit withdrawals with notice of 90 days. Contracts that are purchased by banks or state and local governmental authorities may permit scheduled book value withdrawals subject to terms of the underlying indenture or agreement. 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 $13.4 million in 1996, $4.4 million in 1995 and $33.7 million in 1994 and represent 0.61%, 0.26% and 2.16%, respectively, of average invested assets. Net realized investment losses include impairment writedowns of $16.0 million in 1996, $4.8 million in 1995 and $14.2 million in 1994. Therefore, net gains from sales of investments totaled $2.6 million in 1996 and $0.4 million in 1995. In 1994, the Company incurred $19.5 million of net losses from sales of investments. Net gains from sales of investments in 1996 include $4.1 million of net gains realized on $1.27 billion of sales of bonds and $288.6 million of redemptions of bonds. Net gains from sales of investments in 1995 include a $4.4 million gain on sales of real estate, common stock and other invested assets offset by $4.0 million of net losses realized on $1.11 billion of sales of bonds. Net losses from sales of investments in 1994 include $17.3 million of net losses realized on $673.6 million of sales of bonds. These bond sales include approximately $289.3 million of sales of MBSs made primarily to acquire other MBSs that were then used in dollar roll transactions ("Dollar Rolls"). Sales of investments are generally made to maximize total return. Impairment writedowns in 1996 include $13.4 million of provisions applied to certain real estate owned in Arizona on December 31, 1995. Prior to that date, the statutory carrying value of this real estate had been guaranteed by the Company's ultimate parent, SunAmerica Inc. On December 31, 1995, the Parent made a $27.4 million capital contribution to the company through the company's direct parent in exchange for the termination of its guaranty with respect to this real estate. Accordingly, the Company reduced the carrying value of this real estate to estimated fair value to reflect the termination of the guaranty. The Parent continues to guarantee the statutory carrying value of the Company's other real estate owned in Arizona. Impairment writedowns in 1995 include $2.0 million of additional provisions applied to defaulted bonds and $1.8 million of additional provisions applied to certain interest-only strips ("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. At September 30, 13 1996, the amortized cost of the IOs held by the Company was $2.6 million and their fair value was $3.7 million. Impairment writedowns in 1994 of $14.2 million reflect additional provisions applied to bonds, primarily made in response to the adverse impact of declining interest rates on certain MBSs. VARIABLE ANNUITY FEES are based on the market value of assets supporting variable annuity contracts in separate accounts. Such fees totaled $104.0 million in 1996, $84.2 million in 1995 and $79.1 million in 1994. Increases in variable annuity fees in 1996 and 1995 reflect growth in average variable annuity assets, principally due to increased market values and the receipt of variable annuity premiums, partially offset by surrenders. Variable annuity assets averaged $5.70 billion during 1996, $4.65 billion during 1995 and $4.40 billion during 1994. Variable annuity premiums, which exclude premiums allocated to the fixed accounts of variable annuity products, totaled $919.8 million in 1996, $577.2 million in 1995 and $769.6 million in 1994. The increase in premiums in 1996 may be attributed, in part, to a heightened demand for equity investments, principally as a result of generally improved market performance. The decline in premiums in 1995 may be attributed, in part, to a heightened demand for fixed-rate investment options, including the fixed accounts of variable annuities. The Company has encountered increased competition in the variable annuity marketplace during recent years and anticipates that the market will remain highly competitive for the foreseeable future. ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1 distribution fees, are based on the market value of assets managed in mutual funds by SunAmerica Asset Management Corp. Such fees totaled $25.4 million on average assets managed of $2.14 billion in 1996, $26.9 million on average assets managed of $2.07 billion in 1995 and $31.3 million on average assets managed of $2.39 billion in 1994. Asset management fees decreased slightly in 1996, despite a modest increase in average assets managed, principally due to changes in product mix. The decrease in asset management fees during 1995 principally resulted from the decline in average assets managed, primarily due to an excess of redemptions over sales. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $379.9 million in 1996, compared with $426.5 million in 1995 and $561.0 million in 1994. Sales of mutual funds, excluding sales of money market accounts, amounted to $223.4 million in 1996, compared with $140.2 million in 1995 and $342.6 million in 1994. Higher mutual fund sales and lower redemptions in 1996 both reflect the combined effects of additional advertising, the favorable performance records of certain of the Company's mutual funds and heightened demand for equity investments, principally as a result of improved market performance. NET RETAINED COMMISSIONS are primarily derived from commissions on the sales of nonproprietary investment products by the Company's broker-dealer subsidiary, after deducting the substantial portion of such commissions that is passed on to registered representatives. Net retained commissions totaled $31.5 million in 1996, $24.1 million in 1995 and $20.8 million in 1994. Broker-dealer sales (mainly sales of general securities, mutual funds, and annuities) totaled $8.75 billion in 1996, $5.67 billion in 1995 and $5.21 billion in 1994. The significant increases in sales and net retained commissions during 1996 reflect a greater number of registered representatives and higher average production, combined with generally favorable market conditions. Increases in net retained commissions are not proportionate to increases in sales primarily due to differences in sales mix. 14 SURRENDER CHARGES on fixed and variable annuities totaled $5.2 million in 1996, $5.9 million in 1995 and $5.0 million in 1994. Surrender charges generally are assessed on annuity withdrawals at declining rates during the first five to seven years of the contract. Withdrawal payments, which include surrenders and lump-sum annuity benefits, totaled $898.0 million in 1996, $908.9 million in 1995 and $723.9 million in 1994. These payments represent 12.4%, 15.1% and 12.5%, respectively, of average fixed and variable annuity reserves. Withdrawals include variable annuity payments from the separate accounts totaling $634.1 million in 1996, $646.4 million in 1995 and $459.1 million in 1994. Such variable annuity surrenders represent 11.2%, 14.0% and 10.5%, respectively, of average variable annuity liabilities in 1996, 1995 and 1994. Variable annuity surrender rates increased in 1995 primarily due to surrenders on a closed block of business, policies coming off surrender charge restrictions and increased competition in the marketplace. Fixed annuity surrenders have remained relatively constant, totaling $263.8 million in 1996, $262.4 million in 1995 and $264.8 million in 1994. Management anticipates that withdrawal rates will remain relatively stable for the foreseeable future. GENERAL AND ADMINISTRATIVE EXPENSES totaled $80.0 million in 1996, compared with $61.6 million in 1995 and $52.6 million in 1994. General and administrative expenses in 1996 include expenses related to a national advertising campaign, as well as additional administrative expenses related to a growing block of business. General and administrative expenses remain closely controlled through a company-wide cost containment program and represent approximately 1% of average total assets. AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $57.5 million in 1996, $58.7 million in 1995 and $44.2 million in 1994. The decline in amortization for 1996 is due to lower redemptions of mutual funds from the rate experienced in 1995, partially offset by additional fixed and variable annuity and mutual fund sales in recent years and the subsequent amortization of related deferred commissions and other acquisition costs. The increase in amortization in 1995 was primarily caused by the substantial reduction in net realized capital losses from the level experienced in 1994. ANNUAL COMMISSIONS represent renewal commissions paid quarterly in arrears to maintain the persistency of certain of the Company's variable annuity contracts. Substantially all of the Company's currently available variable annuity products allow for an annual commission payment option in return for a lower immediate commission. Annual commissions totaled $4.6 million in 1996, $2.7 million in 1995 and $1.2 million in 1994. The increase in annual commissions since 1994 reflects increased sales of annuities that offer this commission option. The company estimates that approximately 35% of the average balances of its variable annuity products are currently subject to such annual commissions. Based on current sales, this percentage is expected to increase in future periods. INCOME TAX EXPENSE totaled $24.3 million in 1996, $25.7 million in 1995 and $22.7 million in 1994, representing effective tax rates of 35% in 1996, 40% in 1995 and 34% in 1994. The increase in the effective tax rate in 1995 was due to a prior year tax settlement. Without such payment, the effective tax rate would have been 33%. 15 FINANCIAL CONDITION AND LIQUIDITY SHAREHOLDER'S EQUITY increased by $43.2 million to $485.3 million at September 30, 1996 from $442.1 million at September 30, 1995, primarily as a result of the $45.1 million of net income recorded in 1996 and a $0.2 million reduction of net unrealized losses on debt and equity securities available for sale charged directly to shareholder's equity. In addition, the Company received a contribution of capital of $27.4 million in December 1995 and paid a dividend of $29.4 million in March 1996. TOTAL ASSETS increased by $1.42 billion to $9.20 billion at September 30, 1996 from $7.78 billion at September 30, 1995, principally due to a $1.08 billion increase in the separate accounts for variable annuities and a $214.3 million increase in invested assets. INVESTED ASSETS at year end totaled $2.33 billion in 1996, compared with $2.11 billion in 1995. This $214.3 million increase primarily resulted from a $208.2 million increase in amounts receivable from brokers for sales of securities. 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. Effective December 1, 1995, pursuant to guidelines issued by the Financial Accounting Standards Board, the Company determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in prepayment risk, the Company's need for liquidity and other similar factors. Accordingly, the Company no longer classifies a portion of its Bond Portfolio as held for investment. THE BOND PORTFOLIO had an aggregate amortized cost that exceeded its fair value by $13.8 million at September 30, 1996, compared with $3.7 million at September 30, 1995 (including net unrealized losses of $10.8 million on the portion of the portfolio that was designated as available for sale at September 30, 1995). The increase in net unrealized losses on the Bond Portfolio since September 30, 1995, principally reflects the higher prevailing interest rates at September 30, 1996 and their corresponding effect on the fair value of the Bond Portfolio. All of the Bond Portfolio ($1.99 billion at amortized cost, excluding $9.1 million of redeemable preferred stocks) at September 30, 1996 was rated by Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff and Phelps Credit Rating Co. ("D&P"), Fitch Investor Service, Inc. ("Fitch") or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC") and implemented by either the NAIC or the Company. At September 30, 1996, approximately $1.83 billion of the Bond Portfolio (at amortized cost) was rated investment grade by one or more of these agencies or by the Company or the NAIC, pursuant to applicable NAIC guidelines, including $1.05 billion of U.S. government/agency securities and MBSs. At September 30, 1996, the Bond Portfolio included $160.8 million (fair value, $160.2 million) of bonds not rated investment grade by S&P, Moody's, D&P, Fitch or the NAIC. Based on their September 30, 1996 amortized cost, these non-investment-grade bonds accounted for 1.8% of the Company's total assets and 6.9% of its invested assets. 16 Non-investment-grade securities generally provide higher yields and involve greater risks than investment-grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment-grade issuers. In addition, the trading market for these securities is usually more limited than for investment-grade securities. The Company intends that the proportion of its portfolio in such securities not exceed current levels, but its policies may change from time to time, including in connection with any possible acquisition. The Company had no material concentrations of non-investment-grade securities at September 30, 1996. The table on the following page summarizes the Company's rated bonds by rating classification as of September 30, 1996. 17 RATED BONDS BY RATING CLASSIFICATION (dollars in thousands)
Issues not rated by S&P/Moody's/ Issues Rated by S&P/Moody's/D&P/Fitch D&P/Fitch, by NAIC Category Total - ---------------------------------------------- ----------------------------------- ----------------------------------- S&P/(Moody's)/ Estimated NAIC Estimated Percent of Estimated [D&P]/{Fitch} Amortized fair category Amortized fair Amortized invested fair category (1) cost value (2) cost value cost assets(3) value - --------------- ----------- ----------- -------- ----------- ------------ ----------- --------- ----------- AAA+ to A- (Aaa to A3) [AAA to A-] {AAA to A-} $ 1,345,960 $ 1,333,515 1 $ 125,115 $ 125,046 $ 1,471,075 62.81% $ 1,458,561 BBB+ to BBB- (Baal to Baa3) [BBB+ to BBB-] {BBB+ to BBB-} 226,312 226,191 2 133,773 133,698 360,085 15.38 359,889 BB+ to BB- (Ba1 to Ba3) [BB+ to BB-] {BB+ to BB-} 30,023 30,368 3 5,597 5,597 35,620 1.52 35,965 B+ to B- (B1 to B3) [B+ to B-] {B+ to B-} 87,580 90,468 4 17,136 18,089 104,716 4.47 108,557 CCC+ to C (Caa to C) [CCC] {CCC+ to C-} 19,847 15,018 5 --- --- 19,847 0.85 15,018 C1 to D [DD] {D} --- --- 6 618 618 618 0.03 618 ----------- ----------- ----------- ----------- ----------- ----------- Total rated issues $ 1,709,722 $ 1,695,560 $ 282,239 $ 283,048 $ 1,991,961 $ 1,978,608 =========== =========== =========== =========== =========== =========== Footnotes appear on the following page.
18 Footnotes to the table of Rated Bonds by Rating Classification -------------------------------------------------------------- (1) S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody's rates debt securities in rating categories ranging from Aaa (the highest) to C (extremely poor prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt's relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. D&P rates debt securities in rating categories ranging from AAA (the highest) to DD (in payment default). A plus (+) or minus (-) indicates the debt's relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Issues are categorized based on the highest of the S&P, Moody's, D&P and Fitch ratings if rated by multiple agencies. (2) Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for nondefaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody's/D&P/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. A substantial portion of the assets in the NAIC categories were rated by the Company pursuant to applicable of NAIC rating guidelines. (3) At amortized cost. 19 SENIOR SECURED LOANS ("Secured Loans") are included in the Bond Portfolio and their amortized cost aggregated $200.8 million at September 30, 1996. Secured Loans are senior to subordinated debt and equity, and are secured by assets of the issuer. At September 30, 1996, Secured Loans consisted of loans to 52 borrowers spanning 20 industries, with 22% of these assets (at amortized cost) concentrated in the leisure industry. No other industry concentration constituted more than 9% of these assets. While the trading market for Secured Loans is more limited than for publicly traded corporate debt issues, management believes that participation in these transactions has enabled the Company to improve its investment yield. Although, as a result of restrictive financial covenants, Secured Loans involve greater risk of technical default than do publicly traded investment-grade securities, management believes that the risk of loss upon default for its Secured Loans is mitigated by their financial covenants and senior secured positions. The Company's Secured Loans are rated by S&P, Moody's, D&P, Fitch or by the Company or the NAIC, pursuant to comparable statutory rating guidelines established by the NAIC. MORTGAGE LOANS aggregated $98.3 million at September 30, 1996 and consisted of 17 first mortgage loans with an average loan balance of approximately $5.8 million, collateralized by properties located in 11 states. At September 30, 1996, the Company had no concentrations in any single state or in any single type of property that amounted to more than 23% of the mortgage loan portfolio. At September 30, 1996, there were four loans with outstanding balances of $10 million or more, the largest of which had a balance of approximately $21 million, which collectively aggregated approximately 61% of the portfolio. At September 30, 1996, approximately 33% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 1999. At September 30, 1996, loans delinquent by more than 90 days totaled $1.5 million (1.6% of total mortgages). There were no loans foreclosed upon and transferred to real estate in the balance sheet during 1996. At September 30, 1996, mortgage loans having an aggregate carrying value of $21.3 million had been previously restructured. Of this amount, $16.5 million was restructured during 1995 and $4.8 million was restructured during 1992. No mortgage loans were restructured during 1996. Approximately 62% of the mortgage loans in the portfolio at September 30, 1996 were seasoned loans underwritten to the Company's standards and purchased at or near par from another financial institution which was downsizing its portfolio. 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 and its strict underwriting standards, the Company believes that it has reduced the risk attributable to its mortgage loan portfolio while maintaining attractive yields. REAL ESTATE aggregated $39.7 million at September 30, 1996 and consisted of non-income producing land in the Phoenix, Arizona metropolitan area. Of this amount, the Company has undertaken to dispose of $28.4 million during the next year, either to affiliated or nonaffiliated parties, and SunAmerica Inc., the ultimate parent, has guaranteed that the Company will receive its statutory carrying value of these assets. 20 OTHER INVESTED ASSETS aggregated $77.9 million at September 30, 1996, including $45.1 million of investments in limited partnerships and an aggregate of $32.8 million of miscellaneous investments, including collateralized bond obligations, CMO residuals, policy loans, separate account investments, and leveraged leases. The Company's limited partnership interests, accounted for by using the cost method of accounting, invest mainly in equity securities. ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks of interest rate fluctuations and disintermediation. The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed maturities that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed maturities are priced over the yield curve and general competitive conditions within the industry. Its portfolio strategy is designed to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. The Company designs its fixed-rate products and conducts its investment operations in order to closely match the duration of the assets in its investment portfolio to its annuity and GIC obligations. The Company seeks to achieve a predictable spread between what it earns on its assets and what it pays on its liabilities by investing principally in fixed-rate securities. The Company's fixed-rate products incorporate surrender charges or other limitations on when contracts can be surrendered for cash to encourage persistency. Approximately 63% of the Company's fixed annuity and GIC reserves had surrender penalties or other restrictions at September 30, 1996. As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-maturity assets and liabilities under commonly used stress-test interest rate scenarios. Based on the results of these computer simulations, the investment portfolio has been constructed with a view to maintaining a desired investment spread between the yield on portfolio assets and the rate paid on its reserves under a variety of possible future interest rate scenarios. At September 30, 1996 the weighted average life of the Company's investments was approximately 5 years and the duration was approximately 3. The Company also seeks to provide liquidity from time to time by using reverse repurchase agreements ("Reverse Repos"), Dollar Rolls and by investing in MBSs. It also seeks to enhance its spread income by using Reverse Repos and Dollar Rolls. 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. MBSs are generally investment-grade securities collateralized by large pools of mortgage loans. MBSs generally pay principal and interest monthly. The amount of principal and interest payments may fluctuate as a result of prepayments of the underlying mortgage loans. There are risks associated with some of the techniques the Company uses to provide liquidity, enhance its spread income and match its assets and liabilities. The primary risk associated with the Company's Dollar Rolls and Reverse Repos is counterparty risk. The Company believes, however, that the 21 counterparties to its Dollar Rolls and Reverse Repos 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 that are in default as to the payment of principal or interest, totaled $3.1 million at September 30, 1996 (at amortized cost, with a fair value of $2.9 million) including $1.6 million of bonds and notes and $1.5 million of mortgage loans. At September 30, 1996, defaulted investments constituted 0.1% of total invested assets. At September 30, 1995, defaulted investments totaled $5.0 million which constituted 0.2% of total invested assets. SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company's existing portfolio of cash and short-term investments, Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. At September 30, 1996, approximately $936.8 million of the Company's Bond Portfolio had an aggregate unrealized gain of $20.1 million, while approximately $1.06 billion of the Bond Portfolio had an aggregate unrealized loss of $33.9 million. In addition, the Company's investment portfolio currently provides approximately $21.6 million of monthly cash flow from scheduled principal and interest payments. 22 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. 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 23 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS The directors and principal officers of Anchor National Life Insurance Company (the "Company") as of December 19, 1996 are listed below, together with information as to their ages, dates of election and principal business occupation during the last five years (if other than their present business occupation).
Other Positions and Year Other Business Present Assumed Experience Within Name Age Position(s) Position(s) Last Five Years** From-To - ------------- --- ----------- ----------- ------------------ ------- Eli Broad* 63 Chairman, Chief 1994 Cofounded SunAmerica Executive Officer Inc. ("SAI") in 1957 and President of the Company Chairman, Chief 1986 Executive Officer and President of SAI Joseph M. Tumbler* 48 Executive Vice 1996 President and Chief 1989-1995 President Executive Officer, of the Company Providian Vice Chairman 1995 Capital Management of SAI Jay S. Wintrob* 39 Executive Vice 1991 Senior Vice President 1989-1991 President of the (Joined SAI in 1987) Company Vice Chairman of 1995 SAI James R. Belardi* 39 Senior Vice 1992 Vice President and 1989-1992 President of the Treasurer (Joined SAI Company in 1986) Executive Vice 1995 President of SAI Jana Waring Greer* 44 Senior Vice 1991 (Joined SAI in 1974) President of the Company and SAI Peter McMillan, III* 39 Executive Vice 1994 Senior Vice President, 1989-1994 President and SunAmerica Investments, Chief Investment Inc. Officer of SunAmerica Investments, Inc. - -------------------------------------- * Also serves as a director ** Unless otherwise indicated, officers and positions are with SunAmerica Inc. 24 Other Positions and Year Other Business Present Assumed Experience Within Name Age Position(s) Position(s) Last Five Years** From-To - ------------- --- ----------- ----------- ----------------- ------- Scott L. Robinson* 50 Senior Vice 1991 (Joined SAI in 1978) President of the Company Senior Vice President and Controller of SAI Lorin M. Fife* 43 Senior Vice 1994 Vice President and 1994-1995 President, General Counsel- General Counsel Regulatory Affairs and Assistant of SAI Secretary of Vice President and 1989-1994 the Company Associate General Senior Vice 1995 Counsel of SAI President and (Joined SAI in 1989) General Counsel- Regulatory Affairs of SAI Susan L. Harris* 39 Senior Vice 1994 Vice President, 1994-1995 President and General Counsel- Secretary of the Corporate Affairs and Company Secretary of SAI Senior Vice 1995 Vice President, 1989-1994 President, Associate General General Counsel- Counsel and Secretary Corporate Affairs of SAI (Joined SAI and Secretary of in 1985) SAI James Rowan* 34 Senior Vice 1996 Vice President 1993-1995 President of the Assistant to the 1992 Company and SAI Chairman Senior Vice President, 1990-1992 Security Pacific Corp. N. Scott Gillis 43 Senior Vice 1994 Vice President and 1989-1994 President and Controller, SunAmerica Controller of the Life Companies Company (Joined SAI in 1985) Edwin R. Reoliquio 39 Senior Vice 1995 Vice President and 1990-1995 President and Actuary, SunAmerica Chief Actuary Life Companies of the Company - -------------------------------------- * Also serves as a director ** Unless otherwise indicated, officers and positions are with SunAmerica Inc. 25 Other Positions and Year Other Business Present Assumed Experience Within Name Age Position(s) Position(s) Last Five Years** From-To - ------------- --- ----------- ----------- ----------------- ------- Victor E. Akin 32 Senior Vice 1996 Vice President, 1995-1996 President of SunAmerica Life the Company Companies (SLC) Director, SLC 1994-1995 Manager, SLC 1993-1994 Actuary, Milliman 1992-1993 and Robertson Consultant, Chalke 1991-1992 Inc. - -------------------------------------- * Also serves as a director ** Unless otherwise indicated, officers and positions are with SunAmerica Inc.
26 ITEM 11. EXECUTIVE COMPENSATION All of the executive officers of the Company also serve as employees of SunAmerica Inc. or its affiliates and receive no compensation directly from the Company. Some of the officers also serve as officers of other companies affiliated with the Company. Allocations have been made as to each individual's time devoted to his or her duties as an executive officer of the Company. The following table shows the cash compensation paid or earned, based on these allocations, to the chief executive officer and top four executive officers of the Company whose allocated compensation exceeds $100,000 and to all executive officers of the Company as a group for services rendered in all capacities to the Company during 1996: Name of Individual or Capacities In Allocated Cash Number in Group Which Served Compensation --------------------- ------------------------- -------------- Eli Broad Chairman, Chief Executive $1,444,146 Officer and President Joseph M. Tumbler Executive Vice President 834,708 Jay S. Wintrob Executive Vice President 836,327 James R. Belardi Senior Vice President 341,329 Jana Waring Greer Senior Vice President 420,171 All Executive Officers as a Group (12) $5,056,560 =========== Directors of the Company who are also employees of SunAmerica Inc. or its affiliates receive no compensation in addition to their compensation as employees of SunAmerica Inc. or its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT No shares of the Company are owned by any executive officer or director. The Company is an indirect wholly owned subsidiary of SunAmerica Inc. Except for Mr. Broad, the percentage of shares of SunAmerica Inc. beneficially owned by any director does not exceed one percent of the class outstanding. At November 30, 1996, Mr. Broad was the beneficial owner of 5,930,156 shares of Common Stock (approximately 5.3% of the class outstanding) and 9,160,294 shares of Class B Common Stock (approximately 84.4% of the class outstanding). Of the Common Stock, 715,872 shares represent restricted shares granted under the Company's employee stock plans as to which Mr. Broad has no investment power; and 3,605,700 shares represent employee stock options held by Mr. Broad which are or will become exercisable on or before February 28, 1997 and as to which he has no voting or investment power. Of the Class B Stock, 8,456,140 shares are held directly by Mr. Broad; and 704,154 shares are registered in the name of a corporation as to which Mr. Broad exercises sole voting and dispositive powers. At November 30, 1996, all directors and officers as a group beneficially owned 9,197,722 shares of Common Stock (approximately 8.1% of the class outstanding) and 9,160,294 shares of Class B Common Stock (approximately 84.4% of the class outstanding). Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 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 index set forth on page F-1 of this report. EXHIBITS Exhibit No. Description - ------- ----------- 3(a) Amended and Restated Articles of Incorporation and Articles of Redomestication, filed with the Arizona Department of Insurance on December 22, 1995, is incorporated herein by reference to Exhibit 3(a) to the Company's quarterly report on Form 10-Q for quarter ended December 31, 1995, filed February 14, 1996. 3(b) Amended and Restated Bylaws, as adopted January 1, 1996, is incorporated herein by reference to Exhibit 3(b) to the Company's quarterly report on Form 10-Q for quarter ended December 31, 1995, filed February 14, 1996. 4(a) Amended and Restated Articles of Incorporation and Articles of Redomestication, filed with the Arizona Department of Insurance on December 12, 1996. See Exhibit 3(a). 4(b) Amended and Restated Bylaws as adopted January 1, 1996. See Exhibit 3(b). 10(a) Subordinated Loan Agreement for Equity Capital, dated as of August 23, 1993, between the Company's subsidiary, Royal Alliance, and SAI, defining SAI's rights with respect to the 7% notes due August 22, 1996, is incorporated herein by reference to Exhibit 10(b) to the Company's Form 10-K, filed December 21, 1993. 10(b) Subordinated Loan Agreement for Equity Capital, dated as of June 30, 1992, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 7% notes due June 29, 1996, is incorporated herein by reference to Exhibit 10(d) to the Company's Form 10-K, filed December 21, 1993. 10(c) Subordinated Loan Agreement for Equity Capital, dated as of May 29, 1992, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 7% notes due May 28, 1996, is incorporated herein by reference to Exhibit 10(e) to the Company's Form 10-K, filed December 21, 1993. 10(d) Subordinated Loan Agreement for Equity Capital, dated as of March 16, 1992, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 7% notes due March 15, 1996, is incorporated herein by reference to Exhibit 10(f) to the Company's Form 10-K, filed December 21, 1993. 10(e) Subordinated Loan Agreement for Equity Capital, dated as of January 14, 1992, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 7% notes due January 13, 1996, is incorporated herein by reference to Exhibit 10(g) to the Company's Form 10-K, filed December 21, 1993. 10(f) Amendment to the Subordinated Loan Agreement for Equity Capital, dated as of August 22, 1996, between the Company's subsidiary, SACS, and SAI, extending the maturity date to September 30, 1999, of a Subordinated Loan Agreement for Equity Capital, dated as of September 30, 1992, which defined SAI's rights of the 9% notes due September 29, 1996. 28 Exhibit No. Description - ------- ----------- 10(g) Subordinated Loan Agreement for Equity Capital, dated as of December 14, 1994, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 9% notes due January 13, 1998. 10(h) Subordinated Loan Agreement for Equity Capital, dated as of April 20, 1995, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 9% notes due May 27, 1998. 10(i) Subordinated Loan Agreement for Equity Capital, dated as of May 30, 1996, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 9% notes due June 29, 1998. 10(j) Subordinated Loan Agreement for Equity Capital, dated as of February 24, 1992, between the Company's subsidiary, SACS, and SAI, defining SAI's rights with respect to the 7% notes due March 15, 1997. 10(k) Subordinated Loan Agreement for Equity Capital, dated as of July 24, 1996, between the Company's subsidiary, Royal Alliance, and SAI, defining SAI's rights with respect to the 9% notes due August 23, 1999. 10(l) Amendment to the Subordinated Loan Agreement for Equity Capital, dated as of September 3, 1996, between the Company's subsidiary, SunAmerica Asset Management, and SAI, extending the maturity date to September 13, 1999 of a Subordinated Loan Agreement for Equity Capital, dated as of September 3, 1993, which defined SAI's rights of the 7% notes due September 13, 1996. 21 Subsidiaries of the Company. 27 Financial Data Schedule REPORTS ON FORM 8-K No Current Report on Form 8-K was filed during the three months ended September 30, 1996. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANCHOR NATIONAL LIFE INSURANCE COMPANY By/s/ SCOTT L. ROBINSON -------------------------------------- Scott L. Robinson December 19, 1996 Senior Vice President and Director Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ ELI BROAD Chairman, Chief Executive December 19, 1996 - ------------------------------ Officer and President ----------------- Eli Broad (Principal Executive Officer) /s/ SCOTT L. ROBINSON Senior Vice President and December 19, 1996 - - ----------------------------- Director (Principal ----------------- Scott L. Robinson Financial Officer) /s/ N. SCOTT GILLIS Senior Vice President and December 19, 1996 - ------------------------------ Controller (Principal ----------------- N. Scott Gillis Accounting Officer) /s/ JOSEPH M. TUMBLER Executive Vice President December 19, 1996 - ------------------------------ and Director ----------------- Joseph M. Tumbler /s/ JAY S. WINTROB Executive Vice President December 19, 1996 - ------------------------------ and Director ----------------- Jay S. Wintrob /s/ JAMES R. BELARDI Senior Vice President, December 19, 1996 - ------------------------------ Treasurer and Director ----------------- James R. Belardi /s/ LORIN M. FIFE Senior Vice President, December 19, 1996 - ------------------------------ General Counsel, Assistant ----------------- Lorin M. Fife Secretary and Director /s/ JANA W. GREER Senior Vice President December 19, 1996 - ------------------------------ and Director ----------------- Jana W. Greer /s/ SUSAN L. HARRIS Senior Vice President, December 19, 1996 - ------------------------------ Secretary and Director ----------------- Susan L. Harris 30 Signature Title Date --------- ----- ---- /s/ JAMES W. ROWAN Senior Vice President December 19, 1996 - ------------------------------ and Director ----------------- James W. Rowan /s/ EDWIN R. REOLIQUIO Senior Vice President December 19, 1996 - ------------------------------ and Chief Actuary ----------------- Edwin R. Reoliquio. /s/ PETER McMILLAN Director December 19, 1996 - ------------------------------ ----------------- Peter McMillan
ANCHOR NATIONAL LIFE INSURANCE COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page(s) ------- Report of Independent Accountants F-2 Consolidated Balance Sheet as of September 30, 1996 and 1995 F-3 through F-4 Consolidated Income Statement for the years ended September 30, 1996, 1995 and 1994 F-5 Consolidated Statement of Cash Flows for the years ended September 30, 1996, 1995 and 1994 F-6 through F-7 Notes to Consolidated Financial Statements F-8 through F-26 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of Anchor National Life Insurance Company 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 Anchor National Life Insurance Company and its subsidiaries at September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in fiscal 1994. Price Waterhouse LLP Los Angeles, California November 8, 1996 F-2 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET
September 30, ------------------------------ 1996 1995 -------------- -------------- ASSETS Investments: Cash and short-term investments $ 122,058,000 $ 249,209,000 Bonds, notes and redeemable preferred stocks: Available for sale, at fair value (amortized cost: 1996, $2,001,024,000; 1995, $1,500,062,000) 1,987,271,000 1,489,213,000 Held for investment, at amortized cost (fair value: 1995, $165,004,000) --- 157,901,000 Mortgage loans 98,284,000 94,260,000 Common stocks, at fair value (cost: 1996, $2,911,000; 1995, $6,576,000) 3,970,000 4,097,000 Real estate 39,724,000 55,798,000 Other invested assets 77,925,000 64,430,000 -------------- -------------- Total investments 2,329,232,000 2,114,908,000 Variable annuity assets 6,311,557,000 5,230,246,000 Receivable from brokers for sales of securities 52,348,000 --- Accrued investment income 19,675,000 14,192,000 Deferred acquisition costs 443,610,000 383,069,000 Other assets 48,113,000 41,282,000 -------------- -------------- TOTAL ASSETS $9,204,535,000 $7,783,697,000 ============== ============== F-3 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (Continued) September 30, ------------------------------ 1996 1995 -------------- -------------- LIABILITIES AND SHAREHOLDER'S EQUITY Reserves, payables and accrued liabilities: Reserves for fixed annuity contracts $1,789,962,000 $1,497,052,000 Reserves for guaranteed investment contracts 415,544,000 277,095,000 Payable to brokers for purchases of securities --- 155,861,000 Income taxes currently payable 21,486,000 15,720,000 Other liabilities 74,710,000 56,372,000 -------------- -------------- Total reserves, payables and accrued liabilities 2,301,702,000 2,002,100,000 -------------- -------------- Variable annuity liabilities 6,311,557,000 5,230,246,000 -------------- -------------- Subordinated notes payable to Parent 35,832,000 35,832,000 -------------- -------------- Deferred income taxes 70,189,000 73,459,000 -------------- -------------- Shareholder's equity: Common Stock 3,511,000 3,511,000 Additional paid-in capital 280,263,000 252,876,000 Retained earnings 207,002,000 191,346,000 Net unrealized losses on debt and equity securities available for sale (5,521,000) (5,673,000) -------------- -------------- Total shareholder's equity 485,255,000 442,060,000 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $9,204,535,000 $7,783,697,000 ============== ==============
See accompanying notes F-4 ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED INCOME STATEMENT
Years ended September 30, ------------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- Investment income $ 164,631,000 $ 129,466,000 $ 127,758,000 ------------- ------------- ------------- Interest expense on: Fixed annuity contracts (82,690,000) (72,975,000) (66,311,000) Guaranteed investment contracts (19,974,000) (3,733,000) --- Senior indebtedness (2,568,000) (227,000) (71,000) Subordinated notes payable to Parent (2,556,000) (2,448,000) (2,380,000) ------------- ------------ ------------- Total interest expense (107,788,000) (79,383,000) (68,762,000) ------------- ------------ ------------- NET INVESTMENT INCOME 56,843,000 50,083,000 58,996,000 ------------- ------------ ------------- NET REALIZED INVESTMENT LOSSES (13,355,000) (4,363,000) (33,713,000) ------------- ------------ ------------- Fee income: Variable annuity fees 103,970,000 84,171,000 79,101,000 Asset management fees 25,413,000 26,935,000 31,302,000 Net retained commissions 31,548,000 24,108,000 20,822,000 ------------- ------------ ------------- TOTAL FEE INCOME 160,931,000 135,214,000 131,225,000 ------------- ------------- ------------- Other income and expenses: Surrender charges 5,184,000 5,889,000 5,034,000 General and administrative expenses (80,048,000) (61,629,000) (52,636,000) Amortization of deferred acquisition costs (57,520,000) (58,713,000) (44,195,000) Annual commissions (4,613,000) (2,658,000) (1,158,000) Other, net 1,886,000 1,174,000 3,767,000 ------------- ------------- ------------- TOTAL OTHER INCOME AND EXPENSES (135,111,000) (115,937,000) (89,188,000) ------------- ------------- ------------- PRETAX INCOME 69,308,000 64,997,000 67,320,000 Income tax expense (24,252,000) (25,739,000) (22,705,000) ------------- ------------- ------------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 45,056,000 39,258,000 44,615,000 Cumulative effect of change in accounting for income taxes --- --- (20,463,000) ------------- ------------- ------------- NET INCOME $ 45,056,000 $ 39,258,000 $ 24,152,000 ============= ============= ============= See accompanying notes F-5
ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended September 30, ------------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 45,056,000 $ 39,258,000 $ 24,152,000 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to: Fixed annuity contracts 82,690,000 72,975,000 66,311,000 Guaranteed investment contracts 19,974,000 3,733,000 --- Net realized investment losses 13,355,000 4,363,000 33,713,000 Accretion of net discounts on investments (8,976,000) (6,865,000) (2,050,000) Amortization of goodwill 1,169,000 1,168,000 1,169,000 Provision for deferred income taxes (3,351,000) (1,489,000) 19,395,000 Cumulative effect of change in accounting for income taxes --- --- 20,463,000 Change in: Accrued investment income (5,483,000) 3,373,000 (1,310,000) Deferred acquisition costs (60,941,000) (7,180,000) (34,612,000) Other assets (8,000,000) 7,047,000 5,133,000 Income taxes currently payable 5,766,000 3,389,000 6,559,000 Other liabilities 5,474,000 4,063,000 46,000 Other, net (129,000) 7,000 360,000 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 86,604,000 123,842,000 139,329,000 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Premium receipts on: Fixed annuity contracts 651,649,000 245,320,000 138,526,000 Guaranteed investment contracts 134,967,000 275,000,000 --- Net exchanges to (from) the fixed accounts of variable annuity contracts (236,705,000) 10,475,000 (29,286,000) Withdrawal payments on: Fixed annuity contracts (173,489,000) (237,977,000) (269,412,000) Guaranteed investment contracts (16,492,000) (1,638,000) --- Claims and annuity payments on fixed annuity contracts (31,107,000) (31,237,000) (31,146,000) Net receipts from (repayments of) other short-term financings (119,712,000) 3,202,000 (166,685,000) Capital contribution received 27,387,000 --- --- Dividend paid (29,400,000) --- --- ------------- ------------ ------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 207,098,000 263,145,000 (358,003,000) ------------- ------------ ------------- F-6
ANCHOR NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Years ended September 30, --------------------------------------------------- 1996 1995 1994 --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Bonds, notes and redeemable preferred stocks $(1,937,890,000) $(1,556,586,000) $(1,197,743,000) Mortgage loans (15,000,000) --- (10,666,000) Other investments, excluding short-term investments (36,770,000) (13,028,000) (26,317,000) Sales of: Bonds, notes and redeemable preferred stocks 1,241,928,000 1,026,078,000 877,068,000 Real estate 900,000 36,813,000 33,443,000 Other investments, excluding short-term investments 4,937,000 5,130,000 2,353,000 Redemptions and maturities of: Bonds, notes and redeemable preferred stocks 288,969,000 178,688,000 173,763,000 Mortgage loans 11,324,000 14,403,000 10,087,000 Other investments, excluding short-term investments 20,749,000 13,286,000 13,500,000 ------------- ------------- ------------- NET CASH USED BY INVESTING ACTIVITIES (420,853,000) (295,216,000) (124,512,000) ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (127,151,000) 91,771,000 (343,186,000) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 249,209,000 157,438,000 500,624,000 ------------- ------------- ------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 122,058,000 $ 249,209,000 $ 157,438,000 ============= ============= ============= Supplemental cash flow information: Interest paid on indebtedness $ 5,982,000 $ 3,235,000 $ 1,175,000 ============= ============= ============= Net income taxes paid (recovered) $ 22,031,000 $ 23,656,000 $ (3,328,000) ============= ============= ============= See accompanying notes F-7
ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Anchor National Life Insurance Company (the "Company") is a wholly owned indirect subsidiary of SunAmerica, Inc. (the "Parent"). The Company is an Arizona-domiciled life insurance company and, on a consolidated basis, conducts its business through three segments: annuity operations, asset management operations and broker-dealer operations. Annuity operations include the sale and administration of fixed and variable annuities and guaranteed investment contracts. Asset management operations, which include the sale and management of mutual funds, is conducted by SunAmerica Asset Management Corp. Broker-dealer operations include the sale of securities and financial services products, and is conducted by Royal Alliance Associates, Inc. The operations of the Company are influenced by many factors, including general economic conditions, monetary and fiscal policies of the federal government, and policies of state and other regulatory authorities. The level of sales of the Company's financial products is influenced by many factors, including general market rates of interest; strength, weakness and volatility of equity market; and terms and conditions of competing financial products. The Company is exposed to the typical risks normally associated with a portfolio of fixed-income securities, namely interest rate, option, liquidity and credit risks. The Company controls its exposure to these risks by, among other things, closely monitoring and matching the duration of its assets and liabilities, monitoring and limiting prepayment and extension risk in its portfolio, maintaining a large percentage of its portfolio in highly liquid securities, and engaging in a disciplined process of underwriting, reviewing and monitoring credit risk. The Company also is exposed to market risk, as market volatility may result in reduced fee income in the case of assets managed in mutual funds and held in separate accounts. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company and all of its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Certain 1995 and 1994 amounts have been reclassified to conform with the 1996 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. F-8 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) RECENTLY ISSUED ACCOUNTING STANDARDS: Effective October 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly, the cumulative effect of this change in accounting for income taxes was recorded on October 1, 1993 to increase the liability for Deferred Income Taxes by $20,463,000. INVESTMENTS: Cash and short-term investments primarily include cash, commercial paper, money market investments, repurchase agreements and short-term bank participations. All such investments are carried at cost plus accrued interest, which approximates fair value, have maturities of three months or less and are considered cash equivalents for purposes of reporting cash flows. Bonds, notes and redeemable preferred stocks available for sale and common stocks are carried at aggregate fair value and changes in unrealized gains or losses, net of tax, are credited or charged directly to shareholder's equity. Bonds, notes and redeemable preferred stocks held for investment (the "Held for Investment Portfolio") are carried at amortized cost. On December 1, 1995, the Company reassessed the appropriateness of classifying a portion of its portfolio of bonds, notes and redeemable preferred stocks as held for investment. This reassessment was made pursuant to the provisions of "Special Report: A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," issued by the Financial Accounting Standards Board in November 1995. As a result of its reassessment, the Company reclassified all of its Held for Investment Portfolio as available for sale. At December 1, 1995, the amortized cost of the Held for Investment Portfolio aggregated $157,830,000 and its fair value was $166,215,000. Upon reclassification, the resulting net unrealized gain of $8,385,000 was credited to Net Unrealized Losses on Debt and Equity Securities Available for Sale in the shareholder's equity section of the balance sheet. Bonds, notes and redeemable preferred stocks are reduced to estimated net realizable value when necessary for declines in value considered to be other than temporary. Estimates of net realizable value are subjective and actual realization will be dependent upon future events. Mortgage loans are carried at amortized unpaid balances, net of provisions for estimated losses. Real estate is carried at the lower of cost or fair value. Other invested assets include investments in limited partnerships, which are accounted for by using the cost method of accounting; separate account investments; leveraged leases; policy loans, which are carried at unpaid balances; and collateralized mortgage obligation residuals. 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. F-9 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) DEFERRED ACQUISITION COSTS: Policy acquisition costs are deferred and amortized, with interest, over the estimated lives of the contracts in relation to the present value of estimated gross profits, which are composed of net interest income, net realized investment gains and losses, variable annuity fees, surrender charges and direct administrative expenses. Costs incurred to sell mutual funds are also deferred and amortized over the estimated lives of the funds obtained. Deferred acquisition costs consist of commissions and other costs that vary with, and are primarily related to, the production or acquisition of new business. As debt and equity securities available for sale are carried at aggregate fair value, an adjustment is made to deferred acquisition costs equal to the change in amortization that would have been recorded if such securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. The change in this adjustment, net of tax, is included with the change in net unrealized gains or losses on debt and equity securities available for sale that is credited or charged directly to shareholder's equity. Deferred Acquisition Costs have been increased by $4,200,000 at September 30, 1996, and by $4,600,000 at September 30, 1995 for this adjustment. VARIABLE ANNUITY ASSETS AND LIABILITIES: The assets and liabilities resulting from the receipt of variable annuity premiums are segregated in separate accounts. The Company receives administrative fees for managing the funds and other fees for assuming mortality and certain expense risks. Such fees are included in Variable Annuity Fees in the income statement. GOODWILL: Goodwill, amounting to $19,478,000 at September 30, 1996, is amortized by using the straight-line method over periods averaging 25 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 and asset management fees are recorded in income as earned. Net retained commissions are recognized as income on a trade-date basis. F-10 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) INCOME TAXES: The Company is included in the consolidated federal income tax return of the Parent and files as a "life insurance company" under the provisions of the Internal Revenue Code of 1986. Income taxes have been calculated as if the Company filed a separate return. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. F-11 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. 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 -------------- -------------- AT SEPTEMBER 30, 1996: AVAILABLE FOR SALE: Securities of the United States Government $ 311,458,000 $ 304,538,000 Mortgage-backed securities 747,653,000 741,876,000 Securities of public utilities 3,684,000 3,672,000 Corporate bonds and notes 590,071,000 591,148,000 Redeemable preferred stocks 9,064,000 8,664,000 Other debt securities 339,094,000 337,373,000 -------------- -------------- Total available for sale $2,001,024,000 $1,987,271,000 ============== ============== AT SEPTEMBER 30, 1995: AVAILABLE FOR SALE: Securities of the United States Government $ 59,756,000 $ 60,258,000 Mortgage-backed securities 1,121,064,000 1,110,676,000 Securities of public utilities 792,000 774,000 Corporate bonds and notes 290,924,000 288,883,000 Redeemable preferred stocks 3,945,000 4,937,000 Other debt securities 23,581,000 23,685,000 -------------- -------------- Total available for sale $1,500,062,000 $1,489,213,000 ============== ============== HELD FOR INVESTMENT: Securities of the United States Government $ 10,379,000 $ 10,797,000 Mortgage-backed securities 8,378,000 8,378,000 Corporate bonds and notes 105,980,000 112,665,000 Other debt securities 33,164,000 33,164,000 -------------- -------------- Total held for investment $ 157,901,000 $ 165,004,000 ============== ============== F-12 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. INVESTMENTS (continued) The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks available for sale by contractual maturity, as of September 30, 1996, follow: Estimated Amortized fair cost value -------------- -------------- AVAILABLE FOR SALE: Due in one year or less $ 18,792,000 $ 19,357,000 Due after one year through five years 505,564,000 499,163,000 Due after five years through ten years 378,249,000 378,250,000 Due after ten years 350,766,000 348,625,000 Mortgage-backed securities 747,653,000 741,876,000 -------------- -------------- Total available for sale $2,001,024,000 $1,987,271,000 ============== ============== Actual maturities of bonds, notes and redeemable preferred stocks will differ from those shown above due to prepayments and redemptions. F-13 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. 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 ------------- ------------- AT SEPTEMBER 30, 1996: AVAILABLE FOR SALE: Securities of the United States Government $ 284,000 $ (7,204,000) Mortgage-backed securities 7,734,000 (13,511,000) Securities of public utilities 1,000 (13,000) Corporate bonds and notes 11,709,000 (10,632,000) Redeemable preferred stocks 16,000 (416,000) Other debt securities 431,000 (2,152,000) ------------- ------------- Total available for sale $ 20,175,000 $ (33,928,000) ============= ============= AT SEPTEMBER 30, 1995: AVAILABLE FOR SALE: Securities of the United States Government $ 553,000 $ (51,000) Mortgage-backed securities 12,013,000 (22,401,000) Securities of public utilities --- (18,000) Corporate bonds and notes 5,344,000 (7,385,000) Redeemable preferred stocks 992,000 --- Other debt securities 104,000 --- ------------- ------------- Total available for sale $ 19,006,000 $ (29,855,000) ============= ============= HELD FOR INVESTMENT: Securities of the United States Government $ 432,000 $ (14,000) Corporate bonds and notes 6,685,000 --- ------------- ------------- Total held for investment $ 7,117,000 $ (14,000) ============= =============
F-14 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. INVESTMENTS (continued) At September 30, 1996, gross unrealized gains on equity securities aggregated $1,368,000 and gross unrealized losses aggregated $309,000. At September 30, 1995, gross unrealized gains on equity securities aggregated $1,082,000 and gross unrealized losses aggregated $3,561,000. Gross realized investment gains and losses on sales of all types of investments are as follows:
Years ended September 30, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Available for sale: Realized gains $ 14,532,000 $ 15,983,000 $ 12,760,000 Realized losses (10,432,000) (21,842,000) (31,066,000) Held for investment: Realized gains --- 2,413,000 890,000 Realized losses --- (586,000) (1,913,000) EQUITIES: Realized gains 511,000 994,000 467,000 Realized losses (3,151,000) (114,000) (303,000) OTHER INVESTMENTS: Realized gains 1,135,000 3,561,000 --- Realized losses (1,729,000) (12,000) (358,000) IMPAIRMENT WRITEDOWNS (14,221,000) (4,760,000) (14,190,000) ------------ ------------ ------------ Total net realized investment losses $(13,355,000) $ (4,363,000) $(33,713,000) ============ ============ ============
F-15 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. INVESTMENTS (continued) The sources and related amounts of investment income are as follows:
Years ended September 30, ------------------------------------------ 1996 1995 1994 -------------- ------------- ------------- Short-term investments $ 10,647,000 $ 8,308,000 $ 4,648,000 Bonds, notes and redeemable preferred stocks 140,387,000 107,643,000 98,935,000 Mortgage loans 8,701,000 7,419,000 12,133,000 Common stocks 8,000 3,000 1,000 Real estate (196,000) (51,000) 1,379,000 Limited partnerships 4,073,000 5,128,000 9,487,000 Other invested assets 1,011,000 1,016,000 1,175,000 -------------- ------------- ------------- Total investment income $164,631,000 $129,466,000 $127,758,000 ============== ============= ============= Expenses incurred to manage the investment portfolio amounted to $1,737,000 for the year ended September 30, 1996, $1,983,000 for the year ended September 30, 1995, and $1,714,000 for the year ended September 30, 1994 and are included in General and Administrative Expenses in the income statement. At September 30, 1996, no investment exceeded 10% of the Company's consolidated shareholder's equity. At September 30, 1996, mortgage loans were collateralized by properties located in 11 states, with loans totaling approximately 21% of the aggregate carrying value of the portfolio secured by properties located in Colorado, approximately 17% by properties located in New Jersey and approximately 14% by properties located in California. No more than 12% of the portfolio was secured by properties in any other single state. At September 30, 1996, bonds, notes and redeemable preferred stocks included $160,801,000 (fair value, $160,158,000) of bond and notes not rated investment grade by either Standard & Poor's Corporation, Moody's Investors Service, Duff and Phelps Credit Rating Co., Fitch Investor Service, Inc. or under National Association of Insurance Commissioners' guidelines. The Company had no material concentrations of non-investment-grade assets at September 30, 1996. At September 30, 1996, the amortized cost of investments in default as to the payment of principal or interest was $3,115,000, consisting of $1,580,000 of non- investment-grade bonds and $1,535,000 of mortgage loans. Such nonperforming investments had an estimated fair value of $2,935,000. F-16 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. INVESTMENTS (continued) At September 30, 1996, $6,486,000 of bonds, at amortized cost, were on deposit with regulatory authorities in accordance with statutory requirements. The Company has undertaken to dispose of certain real estate investments, having an aggregate carrying value of $28,410,000, during the next year, to affiliated or nonaffiliated parties, and the Parent has guaranteed that the Company will receive its current carrying value for these assets. 4. 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 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. MORTGAGE LOANS: Fair values are primarily determined by discounting future cash flows to the present at current market rates, using expected prepayment rates. VARIABLE ANNUITY ASSETS: Variable annuity assets are carried at the market value of the underlying securities. RECEIVABLE FROM (PAYABLE TO) BROKERS FOR SALES (PURCHASES) OF SECURITIES: Such obligations represent net transactions of a short-term nature for which the carrying value is considered a reasonable estimate of fair value. F-17 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts and single premium life contracts are assigned a fair value equal to current net surrender value. Annuitized contracts are valued based on the present value of future cash flows at current pricing rates. RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the present value of future cash flows at current pricing rates. VARIABLE ANNUITY LIABILITIES: Fair values of contracts in the accumulation phase are based on net surrender values. Fair values of contracts in the payout phase are based on the present value of future cash flows at assumed investment rates. SUBORDINATED NOTES PAYABLE TO PARENT: Fair value is estimated based on the quoted market prices for similar issues.
F-18 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) The estimated fair values of the Company's financial instruments at September 30, 1996 and 1995, compared with their respective carrying values, are as follows:
Carrying Fair value value -------------- -------------- 1996: ASSETS: Cash and short-term investments $ 122,058,000 $ 122,058,000 Bonds, notes and redeemable preferred stocks 1,987,271,000 1,987,271,000 Mortgage loans 98,284,000 102,112,000 Receivable from brokers for sales of securities 52,348,000 52,348,000 Variable annuity assets 6,311,557,000 6,311,557,000 LIABILITIES: Reserves for fixed annuity contracts 1,789,962,000 1,738,784,000 Reserves for guaranteed investment contracts 415,544,000 416,695,000 Variable annuity liabilities 6,311,557,000 6,117,508,000 Subordinated notes payable to Parent 35,832,000 37,339,000 ============== ============== 1995: ASSETS: Cash and short-term investments $ 249,209,000 $ 249,209,000 Bonds, notes and redeemable preferred stocks 1,647,114,000 1,654,217,000 Mortgage loans 94,260,000 95,598,000 Variable annuity assets 5,230,246,000 5,230,246,000 LIABILITIES: Reserves for fixed annuity contracts 1,497,052,000 1,473,757,000 Reserves for guaranteed investment contracts 277,095,000 277,095,000 Payable to brokers for purchases of securities 155,861,000 155,861,000 Variable annuity liabilities 5,230,246,000 5,077,257,000 Subordinated notes payable to Parent 35,832,000 34,620,000 ============== ==============
F-19 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. SUBORDINATED NOTES PAYABLE TO PARENT Subordinated notes payable to Parent averaged $35,832,000 at a weighted average interest rate of 8.71% (with rates ranging from 7% to 9%) at September 30, 1996 and require principal payments of $5,272,000 in 1997, $7,500,000 in 1998 and $23,060,000 in 1999. 6. CONTINGENT LIABILITIES The Company has entered into two agreements in which it has guaranteed the liquidity of certain short-term securities of two municipalities by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. These guarantees total up to $182,600,000. Management does not anticipate any material future losses with respect to these guarantees. 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. 7. SHAREHOLDER'S EQUITY The Company is authorized to issue 4,000 shares of its $1,000 par value Common Stock. At September 30, 1996, 1995 and 1994, 3,511 shares are outstanding. Changes in shareholder's equity are as follows:
Years ended September 30, --------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- ADDITIONAL PAID-IN CAPITAL: Beginning balance $ 252,876,000 $ 252,876,000 $ 252,876,000 Capital contributions received 27,387,000 --- --- ------------- ------------- ------------- Ending balance $ 280,263,000 $ 252,876,000 $ 252,876,000 ============= ============= ============= RETAINED EARNINGS: Beginning balance 191,346,000 152,088,000 127,936,000 Net income 45,056,000 39,258,000 24,152,000 Dividend paid (29,400,000) --- --- ------------- ------------- ------------- Ending balance $ 207,002,000 $ 191,346,000 $ 152,088,000 ============= ============= =============
F-20 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. SHAREHOLDER'S EQUITY (continued)
Years ended September 30, --------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- NET UNREALIZED LOSSES ON DEBT AND EQUITY SECURITIES AVAILABLE FOR SALE: Beginning balance $ (5,673,000) $ (24,953,000) $ (13,230,000) Change in net unrealized gains/losses on debt securities available for sale (2,904,000) 71,302,000 (69,407,000) Change in net unrealized gains/losses on equity securities available for sale 3,538,000 (1,240,000) (753,000) Change in adjustment to deferred acquisition costs (400,000) (40,400,000) 45,000,000 Tax effects of net changes (82,000) (10,382,000) 13,437,000 ------------- ------------- ------------- Ending balance $ (5,521,000) $ (5,673,000) $ (24,953,000) ============= ============= ============= Dividends that the Company may pay to its shareholder in any year without prior approval of the Arizona Department of Insurance are limited by statute. The maximum amount of dividends which can be paid to shareholders of insurance companies domiciled in the state of Arizona without obtaining the prior approval of the Insurance Commissioner is limited to the lesser of either 10% of the preceding year's Statutory Surplus or the preceding year's statutory net gain from operations. A dividend in the amount of $29,400,000 was paid on March 18, 1996. No dividends were paid in fiscal years 1995 or 1994. Under statutory accounting principles utilized in filings with insurance regulatory authorities, the Company's net income for the nine months ended September 30, 1996 was $21,898,000. The statutory net income for the year ended December 31, 1995 was $30,673,000 and for the year ended December 31, 1994 was $35,060,000. The Company's statutory capital and surplus was $282,275,000 at September 30, 1996, $294,767,000 at December 31, 1995 and $219,577,000 at December 31, 1994.
F-21 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. INCOME TAXES The components of the provisions for federal income taxes on pretax income consist of the following:
Net realized investment gains (losses) Operations Total ------------- ------------ ------------ 1996: Currently payable $ 5,754,000 $ 21,849,000 $ 27,603,000 Deferred (10,347,000) 6,996,000 (3,351,000) ------------- ------------ ------------ Total income tax expense $ (4,593,000) $ 28,845,000 $ 24,252,000 ============= ============ ============ 1995: Currently payable $ 4,248,000 $ 22,980,000 $ 27,228,000 Deferred (6,113,000) 4,624,000 (1,489,000) ------------- ------------ ------------ Total income tax expense $ (1,865,000) $ 27,604,000 $ 25,739,000 ============= ============ ============ 1994: Currently payable $ (6,825,000) $ 10,135,000 $ 3,310,000 Deferred (1,320,000) 20,715,000 19,395,000 ------------- ------------ ------------ Total income tax expense $ (8,145,000) $ 30,850,000 $ 22,705,000 ============= ============ ============
F-22 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. INCOME TAXES (continued) Income taxes computed at the United States federal income tax rate of 35% and income taxes provided differ as follows:
Years ended September 30, ------------------------------------------ 1996 1995 1994 ------------ ----------- ------------ Amount computed at statutory rate $ 24,258,000 $ 22,749,000 $ 23,562,000 Increases (decreases) resulting from: Amortization of differences between book and tax bases of net assets acquired 464,000 3,049,000 465,000 State income taxes, net of federal tax benefit 2,070,000 437,000 (662,000) Dividends-received deduction (2,357,000) --- --- Tax credits (257,000) (168,000) (612,000) Other, net 74,000 (328,000) (48,000) ------------ ------------ ------------ Total income tax expense $ 24,252,000 $ 25,739,000 $ 22,705,000 ============ ============ ============ For United States federal income tax purposes, certain amounts from life insurance operations are accumulated in a memorandum policyholders' surplus account and are taxed only when distributed to shareholders or when such account exceeds prescribed limits. The accumulated policyholders' surplus was $14,300,000 at September 30, 1996. The Company does not anticipate any transactions which would cause any part of this surplus to be taxable. F-23 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. INCOME TAXES (continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. The significant components of the liability for Deferred Income Taxes are as follows: September 30, ---------------------------- 1996 1995 ------------- ------------- DEFERRED TAX LIABILITIES: Investments $ 15,036,000 $ 14,181,000 Deferred acquisition costs 136,747,000 118,544,000 State income taxes 1,466,000 1,847,000 ------------- ------------- Total deferred tax liabilities 153,249,000 134,572,000 ------------- ------------- DEFERRED TAX ASSETS: Contractholder reserves (77,522,000) (55,910,000) Guaranty fund assessments (1,031,000) (1,123,000) Other assets (1,534,000) (1,025,000) Net unrealized losses on certain debt and equity securities (2,973,000) (3,055,000) ------------- ------------- Total deferred tax assets (83,060,000) (61,113,000) ------------- ------------- Deferred income taxes $ 70,189,000 $ 73,459,000 ============= =============
F-24 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. RELATED PARTY MATTERS The Company pays commissions to two affiliated companies, SunAmerica Securities, Inc. and Advantage Capital Corp. These broker-dealers represent a significant portion of the Company's business, amounting to approximately 15.6%, 14.1% and 14.5% of premiums in 1996, 1995 and 1994, respectively. Commissions paid to these broker- dealers totaled $16,906,000 in 1996, $9,435,000 in 1995 and $9,725,000 in 1994. The Company purchases administrative, investment management, accounting, marketing and data processing services from SunAmerica Financial, Inc., whose purpose is to provide services to the SunAmerica companies. Amounts paid for such services totaled $65,351,000 for the year ended September 30, 1996, $42,083,000 for the year ended September 30, 1995 and $36,934,000 for the year ended September 30, 1994. Such amounts are included in General and Administrative Expenses in the income statement. On December 31, 1995, the Parent made a $27,387,000 capital contribution to the Company, through the Company's direct parent, in exchange for the termination of its guaranty with respect to certain real estate owned in Arizona. Accordingly, the Company reduced the carrying value of this real estate to estimated fair value to reflect the termination of the guaranty. During the year ended September 30, 1995, the Company sold to the Parent real estate for cash equal to its carrying value of $29,761,000. During the year ended September 30, 1996, the Company sold various invested assets to the Parent, SunAmerica Life Insurance Company and Ford Life Insurance Company ("Ford") for cash equal to their current market values of $274,000, $8,968,000 and $38,353,000, respectively. The Company recorded net losses of $3,000 on such transactions. During the year ended September 30, 1996, the Company also purchased certain invested assets from SunAmerica Life Insurance Company and Ford for cash equal to their current market values of $5,159,000 and $23,220,000, respectively. F-25 ANCHOR NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. BUSINESS SEGMENTS Summarized data for the Company's business segments follow:
Total depreciation and Total amortization Pretax Total revenues expense income assets ------------- ------------ ------------ -------------- 1996: Annuity operations $ 250,645,000 $ 43,974,000 $ 53,827,000 $9,092,770,000 Asset management 29,711,000 18,295,000 2,448,000 74,410,000 Broker-dealer operations 31,851,000 449,000 13,033,000 37,355,000 ------------- ------------ ------------ -------------- Total $ 312,207,000 $ 62,718,000 $ 69,308,000 $9,204,535,000 ============= ============ ============ ============== 1995: Annuity operations $ 205,698,000 $ 38,350,000 $ 55,462,000 $7,667,946,000 Asset management 30,253,000 24,069,000 510,000 86,510,000 Broker-dealer operations 24,366,000 411,000 9,025,000 29,241,000 ------------- ------------ ------------ -------------- Total $ 260,317,000 $ 62,830,000 $ 64,997,000 $7,783,697,000 ============= ============ ============ ============== 1994: Annuity operations $ 171,553,000 $ 26,501,000 $ 52,284,000 $6,473,065,000 Asset management 32,803,000 19,330,000 7,916,000 102,192,000 Broker-dealer operations 20,914,000 408,000 7,120,000 26,869,000 ------------- ------------ ------------ -------------- Total $ 225,270,000 $ 46,239,000 $ 67,320,000 $6,602,126,000 ============= ============ ============ ==============
F-26 ANCHOR NATIONAL LIFE INSURANCE COMPANY AND CONSOLIDATED SUBSIDIARIES LIST OF EXHIBITS FILED Exhibit No. Description - ------- ----------- 10(f) Amendment to the Subordinated Loan Agreement for Equity Capital. 10(g) Subordinated Loan Agreement for Equity Capital. 10(h) Subordinated Loan Agreement for Equity Capital. 10(i) Subordinated Loan Agreement for Equity Capital. 10(j) Subordinated Loan Agreement for Equity Capital. 10(k) Subordinated Loan Agreement for Equity Capital. 10(l) Amendment to the Subordinated Loan Agreement for Equity Capital. 21 Subsidiaries of the Company. 27 Financial Data Schedule. EX-10.(F) 2 NASD EXHIBIT 10(f) SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL SL-5 AGREEMENT BETWEEN: Lender SunAmerica Inc. (Name) 1999 Avenue of the Stars, 38th Floor (Street Address) Los Angeles California 90067- 6002 (City) (State) (Zip) AND Broker-Dealer SunAmerica Capital Services, Inc. (Name) 733 Third Avenue, 3rd Floor (Street Address) New York New York 10017 (City) (State) (Zip) NASD ID No.: 13158 Date Filed: August 30, 1996 NASD NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL AGREEMENT dated August 22, 1996 to be effective September 298 1996 between SunAmerica Inc. (the "Lender") and SunAmerica Capital Services, Inc. (the "Broker-Dealer"). In consideration of the sum of $4,560,000 and subject to the terms and conditions hereinafter set forth, the Broker- Dealer promise to pay to the Lender or assigns on September 28, 1999 (the "Scheduled Maturity Date") (the last day of the month at least three years from the effective date of this Agreement) at the principal office of the Broker-Dealer the aforedescribed sum and interest thereon payable at the rate of 9.0 percent per annum from the effective date of this Agreement, which date shall be the date so agreed upon by the Lender and the Broker-Dealer unless otherwise determined by the National Association of Securities Dealers, Inc. (the "NASD"). This Agreement shall not be considered a satisfactory subordination agreement pursuant to the provisions of 17 CFR 240.15c3-1d unless and until the NASD has found the Agreement acceptable and such Agreement has become effective in the form found acceptable. The cash proceeds covered by this Agreement shall be used and dealt with by the Broker-Dealer as part of its capital and shall be subject to the risks of the business. The Broker-Dealer shall have the right to deposit any cash proceeds of the Subordinated Loan Agreement in an account or accounts in its own name in any bank or trust company. The Lender irrevocably agrees that the obligations of the Broker-Dealer under this Agreement with respect to the payment of principal and interest shall be and are subordinate in right of payment and subject to the prior payments or provisions for payment in full of all claims of all other present and future creditors of the Broker-Dealer arising out of any matter occurring prior to the date on which the related Payment Obligation (as defined herein) matures consistent with the provisions of 17 CFR 240.15c3-1 and 240.15c3-1d, except for claims which are the subject of subordination agreements which rank on the same priority as or are junior to the claim of the Lender under such subordination agreements. I. PERMISSIVE PREPAYMENTS At the option of the Broker-Dealer, but not at the option of the Lender, payment of all or any part of the "Payment Obligation" amount hereof prior to the maturity date may be made by the Broker-Dealer only upon receipt of the prior written approval of the NASD, but in no event may any prepayment be mad before the expiation of one year from the date this Agreement became effective. No prepayment shall be made if, after given effect thereto (and to all payments of Payment Obligations under any other subordination agreements then outstanding, the maturity of which are scheduled to fall due either within six months after the date such prepayment is to occur or on or prior to the date on which the Payment Obligation hereof is scheduled to mature, whichever date is earlier), without reference to any projected profit or loss of the Broker-Dealer, either aggregate indebtedness of the Broker-Dealer would exceed 1000 percent of its net capital or such lesser percent as may be made applicable to the Broker- Dealer from time to time by the NASD, or a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than five percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. II. SUSPENDED REPAYMENTS (a) The Payment Obligation of the Broker-Dealer shall be suspended and shall not mature if after giving effect to such payment (together with the payment of any Payment Obligation of the Broker-Dealer under any other subordination agreement scheduled to mature on or before such Payment Obligation) the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital or such lesser percent as may be made applicable to the Broker-Dealer from time to time by the NASD, or a governmental agency or self- regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. III. NOTICE OF MATURITY The Broker-Dealer shall immediately notify the NASD if, after giving effect to all payments of Payment Obligations under subordination agreements then outstanding which are then due or mature within six months without reference to any projected profit or loss of the Broker-Dealer, either the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchase by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self- regulatory body having appropriate authority. IV. BROKER-DEALERS CARRYING THE ACCOUNTS OF SPECIALISTS AND MARKET MAKERS IN LISTED OPTIONS A Broker-Dealer who guarantees, endorses, carries or clears specialist or market-maker transactions in options listed on a national securities exchange or facility of a national securities association shall not permit a reduction, prepayment, or repayment of the unpaid principal amount if the effect would cause the equity required in such specialist or market-maker accounts to exceed 1000 percent of the Broker- Dealer's net capital or such percent as may be made applicable to the Broker-Dealer form time to time by the NASD or a governmental agency or self-regulatory body having appropriate authority. V. LIMITATION ON WITHDRAWAL OF EQUITY CAPITAL The proceeds covered by this Agreement shall in all respects be subject to the provisions of paragraph (e) of 17 CFR 240.15c3-1. Pursuant thereto no equity capital of the Broker-Dealer or a subsidiary or affiliate consolidated pursuant to 17 CFR 240.15c3-1c, whether in the form of capital contributions by partners, par or stated value of capital stock, paid-in capital in excess of par, retained earnings or other capital accounts, may be withdrawn by action of a stockholder or partner, or by redemption or repurchase of shares of stock by any of the consolidated entities or through the payment of dividends or any similar distribution, nor may any unsecured advance or loan be made to a stockholder, partner, sole proprietor, or employee if, after giving effect thereto and to any other such withdrawals, advances or loans any payments of Payment Obligations under satisfactory subordination agreements which are scheduled to occur within six months following such withdrawal, advances or loan, either aggregate indebtedness of any of the consolidated entities exceed 1000 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act, and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority; or should the Broker-Dealer be included within such consolidation, if the total outstanding principal amounts of satisfactory subordination agreements of the Broker-Dealer (other than such agreements which qualify as equity under paragraph (d) of 17 CFR 240.15c3-1) would exceed 70 percent of its debt/equity total, as this term is defined in paragraph (d) of 17 CFR 240.15c3-1, for a period in excess of 90 days, or for such longer period which the Commission may upon application of the Broker-Dealer grant in the public interest or for the protection of investors. VI. BROKER-DEALER REGISTERED WITH CFTC If the Broker-Dealer is a futures commission merchant or introductory broker as that term is defined in the commodity Exchange Act, the Organization agrees, consistent with the requirements of Section 1.17(h) of the regulations of the CFTC (17 CFR 1.17(h)), that: (a) Whenever prior written notice by the Broker-Dealer to the NASD is required pursuant to the provisions of this Agreement, the same prior written notice shall be given by the Broker-Dealer to (i) the CFTC at its principal office in Washington, D.C., attention Chief Account of Division of Trading and Markets, and/or (ii) the commodity exchange of which the Organization is a member and which is then designated by the CFTC as the Organization's designated self- regulatory organization (the DSRO); (b) Whenever prior written consent, permission or approval of the NASD is required pursuant to the provisions of this Agreement, the Broker-Dealer shall also obtain the prior written consent, permission or approval of the CFTC and/or of the DSRO; and, (c) Whenever the Broker-Dealer receives written notice of acceleration of maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall promptly give written notice thereof to the CFTC at the address above stated and/or to the DSRO. VII. GENERAL In the event of the appointment of a receiver or trustee of the Broker-Dealer or in the event of its insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganizations whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of the Broker-Dealer, the Payment Obligation of the Broker-Dealer shall mature, and the holder hereof shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of the Broker-Dealer until all claims of all other present and future creditors of the Broker-Dealer, whose claims are senior hereto, have been fully satisfied. This Agreement shall not be subject to cancellation by either the Lender or the Broker-Dealer, and no payment shall be made, nor the Agreement terminated, rescinded or modified by mutual consent or otherwise if the effect thereof would be insistent with the requirements of 17 CFR 240.15c3-1 and 240.15c3-1d. This Agreement may not be transferred, sold, assigned, pledged, or otherwise encumbered or otherwise disposed of, and no lien, charge, or other encumbrance may be created or permitted to be created thereof without the prior written consent of the NASD. The Lender irrevocably agrees that the loan evidenced hereby is not being made in reliance upon the standing of the Broker-Dealer as a member organization of the NASD or upon the NASD surveillance of the Broker-Dealer's financial position or its compliance with the By-Laws, rules and practices of the NASD. The Lender has made such investigation of the Broker- Dealer and its partners, officers, directors, and stockholders as the Lender deems necessary and appropriate under the circumstances. The Lender is not relying upon the NASD to provide any information concerning or relating to the Broker-Dealer and agrees that the NASD has no responsibility to disclose to the Lender any information concerning or relating to the Broker- Dealer which it may now, or at any future time, have. The term "Broker-Dealer," as used in this Agreement, shall include the broker-dealer, its heirs, executors, administrators, successors and assigns. The term "Payment Obligation" shall mean the obligation of the Broker-Dealer to repay cash loaned to it pursuant to this Subordinated Loan Agreement. The provisions of this Agreement shall be binding upon the Broker-Dealer and the Lender, and their respective heirs, executors, administrators, successors, and assigns. Any controversy arising out of or relating to this Agreement may be submitted to and settled by arbitration pursuant to the By-Laws and rules of the NASD. The Broker- Dealer and the Lender shall be conclusively bound by such arbitration. This instrument embodies the entire agreement between the Broker-Dealer and the Lender and no other evidence of such agreement has been or will be executed without prior written consent of the NASD. This Agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of California in all respects. IN WITNESS WHEREOF the parties have set their hands and seal this 22nd day of August, 1996. SunAmerica Capital Services, Inc. (Name of Broker-Dealer) By: /s/ Steve Rothstein L.S. (Authorized Person) SunAmerica Inc. L.S. (Lender) By: /s/ James R. Belardi (Authorized Person) . FOR NASD USE ONLY ACCEPTED BY: (Name) (Title) SUBORDINATED LOAN AGREEMENT LENDER'S ATTESTATION It is recommended that you discuss the merits of this investment with an attorney, accountant or some other person who has knowledge and experience in financial and business matters prior to executing this Agreement. 1. I have received and reviewed NASD Form SLD, which is a reprint of Appendix D of 17 CFR 240.15c3-1, and am familiar with its provisions. 2. I am aware that the funds or securities subject to this Agreement are not covered by the Securities Investor Protection Act of 1970. 3. I understand that I will be furnished financial statements pursuant to SEC Rule 17a-5(c). 4. On the date this Agreement was entered into, the broker-dealer carried funds or securities for my account. (State Yes or No) No. 5. Lender's business relationship to the broker-dealer is: Lender is the ultimate parent company of broker-dealer, and Lender continuously monitors the fiscal status and reports of Broker-Dealer. 6. If not a partner or stockholder actively engaged in the business of the broker-dealer, acknowledge receipt of the following: a. Certified audit and accountant's certificate dated . b. Disclosure of financial and/or operational problems since the last certified audit which required reporting pursuant to SEC Rule 17a-11. (If no such reporting was required, state "none") c. Balance sheet and statement of ownership equity dated . d. Most recent computation of net capital and aggregate indebtedness or aggregate debit items dated , reflecting a net capital of $ and a ratio of . e. Debt/equity ratio as of of . f. Other disclosures: SunAmerica Inc. Dated: August 22, 1996 /s/ JAMES R. BELARDI L.S. CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation (this "Corporation"), do hereby certify that the Executive Committee of Board of Directors of this Corporation as of August 22, 1996 adopted the following resolutions, (2) that such resolutions have not been amended or rescinded from the date of their resolution and are in full force and effect as of the date hereof, and (3) the principal amount limits set forth in the following resolutions are not exceeded by that certain $4,560,000 Subordinated Loan Agreement for Equity Capital dated August 22, 1996, and effective as of September 29, 1996 between this Corporation and SunAmerica Capital Services, Inc.: Blanket Authorization of Subordinated Loan Agreement for Equity Capital WHEREAS, this Corporation, from time to time, reviews the net capital infusion needs of its wholly-owned subsidiaries which are broker-dealers registered with the Securities and Exchange Commission and members of the National Association of Securities Dealers, Inc., including SunAmerica Capital Services, Inc, Advantage Capital Corporation, SunAmerica Securities, Inc. and Royal Alliance Associates, Inc., and in conjunction with such review, has provided subordinated loans to such subsidiaries pursuant to Subordinated Loan Agreements for Equity Capital; WHEREAS, it is in the best interests of this Corporation to provide blanket authorization for such subordinated loan transactions; NOW, THEREFORE, BE IT RESOLVED that the Chairman, any Vice Chairman, any Executive Vice President, or the Treasurer (the "Designated Officers"), acting alone, be, and each hereby is authorized to effect subordinated loans to the wholly-owned broker-dealer subsidiaries of the Corporation, in an aggregate principal amount not to exceed Fifty Million Dollars ($50,000,000), and to make, execute and deliver such loan agreements and other documents evidencing such loans, including any Subordinated Loan Agreement for Equity Capital, as deemed necessary or appropriate; RESOLVED FURTHER that each of the Designated Officers are hereby authorized to make such changes in the terms and conditions of such Subordinated Loan Agreements as may be necessary to conform to the requirements of Title 17 CFR S240.15c 3-1d and the rules of the National Association of Securities Dealers; RESOLVED FURTHER that the Executive Committee hereby ratifies any and all action that may have been taken by the officers of this Corporation in connection with the foregoing resolutions and authorizes the officers of this Corporation to take any and all such further actions as may be deemed appropriate to reflect these resolutions and to carry out their tenor, effect and intent. IN WITNESS WHEREOF, the undersigned has executed this Certificate and affixed the seal of this Corporation this 3rd day of September, 1996. /s/ Susan L. Harris, Secretary (SEAL) EX-10.(G) 3 EXHIBIT 10(g) January 12, 1995 Ms. Evie Kelly SunAmerica Capital Services, Inc. 733 Third Avenue, 3rd Floor New York, New York 10017 Re: Subordinated Loan Agreement Equity Capital File No.: 10-E-SLA-0140 Lender: SunAmerica Inc. Amount: $3,000,000 Expiration: 01/13/98 Dear Ms. Kelly: The National Association of Securities Dealers, Inc. has found the above referenced Agreement acceptable as a satisfactory subordination agreement effective as of January 14, 1995. Appendix D of SEC Rule 15c3-1 requires the prior written approval of the NASD before any repayment of a subordination agreement can be made. Accordingly, unsecured advances to the lender during the term of the Agreement are not permitted, since such advances would constitute unauthorized prepayments. All unauthorized prepayment matters are presented to the District Business Conduct Committee for disciplinary review. Please bear in mind that all notifications to the Association required by the provisions of this Agreement must be made by telegraphic notice and filed with the District Office. If you have any questions regarding this Agreement or our acceptance thereof, please contact me at (212) 858-4194. Very truly yours, /s/ John J. Lafond Assistant Director JJL:pp Enclosure cc: Frances Giardina NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL SL-5 AGREEMENT BETWEEN: Lender SunAmerica Inc. (Name) 1999 Avenue of the Stars, 38th Floor (Street Address) Los Angeles California 90067- 6002 (City) (State) (Zip) AND Broker-Dealer SunAmerica Capital Services, Inc. (Name) 733 Third Avenue, 3rd Floor (Street Address) New York New York 10017 (City) (State) (Zip) NASD ID No.: 13158 Date Filed: December 19, 1996 NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL AGREEMENT dated December 14, 1994 to be effective January 14, 1995 between SunAmerica Inc. (the "Lender") and SunAmerica Capital Services, Inc. (the "Broker-Dealer"). In consideration of the sum of $3,000,000.00 and subject to the terms and conditions hereinafter set forth, the Broker-Dealer promise to pay to the Lender or assigns on January 13, 1998 (the "Scheduled Maturity Date") (the last day of the month at least three years from the effective date of this Agreement) at the principal office of the Broker-Dealer the aforedescribed sum and interest thereon payable at the rate of 9.0 percent per annum from the effective date of this Agreement, which date shall be the date so agreed upon by the Lender and the Broker-Dealer unless otherwise determined by the National Association of Securities Dealers, Inc. (the "NASD"). This Agreement shall not be considered a satisfactory subordination agreement pursuant to the provisions of 17 CFR 240.15c3-1d unless and until the NASD has found the Agreement acceptable and such Agreement has become effective in the form found acceptable. The cash proceeds covered by this Agreement shall be used and dealt with by the Broker-Dealer as part of its capital and shall be subject to the risks of the business. The Broker-Dealer shall have the right to deposit any cash proceeds of the Subordinated Loan Agreement in an account or accounts in its own name in any bank or trust company. The Lender irrevocably agrees that the obligations of the Broker-Dealer under this Agreement with respect to the payment of principal and interest shall be and are subordinate in right of payment and subject to the prior payments or provisions for payment in full of all claims of all other present and future creditors of the Broker-Dealer arising out of any matter occurring prior to the date on which the related Payment Obligation (as defined herein) matures consistent with the provisions of 17 CFR 240.15c3-1 and 240.15c3-1d, except for claims which are the subject of subordination agreements which rank on the same priority as or are junior to the claim of the Lender under such subordination agreements. I. PERMISSIVE PREPAYMENTS At the option of the Broker-Dealer, but not at the option of the Lender, payment of all or any part of the "Payment Obligation" amount hereof prior to the maturity date may be made by the Broker-Dealer only upon receipt of the prior written approval of the NASD, but in no event may any prepayment be mad before the expiation of one year from the date this Agreement became effective. No prepayment shall be made if, after given effect thereto (and to all payments of Payment Obligations under any other subordination agreements then outstanding, the maturity of which are scheduled to fall due either within six months after the date such prepayment is to occur or on or prior to the date on which the Payment Obligation hereof is scheduled to mature, whichever date is earlier), without reference to any projected profit or loss of the Broker-Dealer, either aggregate indebtedness of the Broker-Dealer would exceed 1000 percent of its net capital or such lesser percent as may be made applicable to the Broker- Dealer from time to time by the NASD, or a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than five percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. II. SUSPENDED REPAYMENTS (a) The Payment Obligation of the Broker-Dealer shall be suspended and shall not mature if after giving effect to such payment (together with the payment of any Payment Obligation of the Broker-Dealer under any other subordination agreement scheduled to mature on or before such Payment Obligation) the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital or such lesser percent as may be made applicable to the Broker-Dealer from time to time by the NASD, or a governmental agency or self- regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. III. NOTICE OF MATURITY The Broker-Dealer shall immediately notify the NASD if, after giving effect to all payments of Payment Obligations under subordination agreements then outstanding which are then due or mature within six months without reference to any projected profit or loss of the Broker- Dealer, either the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchase by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. IV. BROKER-DEALERS CARRYING THE ACCOUNTS OF SPECIALISTS AND MARKET MAKERS IN LISTED OPTIONS A Broker-Dealer who guarantees, endorses, carries or clears specialist or market-maker transactions in options listed on a national securities exchange or facility of a national securities association shall not permit a reduction, prepayment, or repayment of the unpaid principal amount if the effect would cause the equity required in such specialist or market-maker accounts to exceed 1000 percent of the Broker- Dealer's net capital or such percent as may be made applicable to the Broker-Dealer form time to time by the NASD or a governmental agency or self-regulatory body having appropriate authority. V. LIMITATION ON WITHDRAWAL OF EQUITY CAPITAL The proceeds covered by this Agreement shall in all respects be subject to the provisions of paragraph (e) of 17 CFR 240.15c3-1. Pursuant thereto no equity capital of the Broker-Dealer or a subsidiary or affiliate consolidated pursuant to 17 CFR 240.15c3-1c, whether in the form of capital contributions by partners, par or stated value of capital stock, paid-in capital in excess of par, retained earnings or other capital accounts, may be withdrawn by action of a stockholder or partner, or by redemption or repurchase of shares of stock by any of the consolidated entities or through the payment of dividends or any similar distribution, nor may any unsecured advance or loan be made to a stockholder, partner, sole proprietor, or employee if, after giving effect thereto and to any other such withdrawals, advances or loans any payments of Payment Obligations under satisfactory subordination agreements which are scheduled to occur within six months following such withdrawal, advances or loan, either aggregate indebtedness of any of the consolidated entities exceed 1000 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act, and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority; or should the Broker-Dealer be included within such consolidation, if the total outstanding principal amounts of satisfactory subordination agreements of the Broker-Dealer (other than such agreements which qualify as equity under paragraph (d) of 17 CFR 240.15c3-1) would exceed 70 percent of its debt/equity total, as this term is defined in paragraph (d) of 17 CFR 240.15c3-1, for a period in excess of 90 days, or for such longer period which the Commission may upon application of the Broker-Dealer grant in the public interest or for the protection of investors. VI. BROKER-DEALER REGISTERED WITH CFTC If the Broker-Dealer is a futures commission merchant or introductory broker as that term is defined in the commodity Exchange Act, the Organization agrees, consistent with the requirements of Section 1.17(h) of the regulations of the CFTC (17 CFR 1.17(h)), that: (a) Whenever prior written notice by the Broker-Dealer to the NASD is required pursuant to the provisions of this Agreement, the same prior written notice shall be given by the Broker-Dealer to (i) the CFTC at its principal office in Washington, D.C., attention Chief Account of Division of Trading and Markets, and/or (ii) the commodity exchange of which the Organization is a member and which is then designated by the CFTC as the Organization's designated self- regulatory organization (the DSRO); (b) Whenever prior written consent, permission or approval of the NASD is required pursuant to the provisions of this Agreement, the Broker-Dealer shall also obtain the prior written consent, permission or approval of the CFTC and/or of the DSRO; and, (c) Whenever the Broker-Dealer receives written notice of acceleration of maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall promptly give written notice thereof to the CFTC at the address above stated and/or to the DSRO. VII. GENERAL In the event of the appointment of a receiver or trustee of the Broker-Dealer or in the event of its insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganizations whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of the Broker-Dealer, the Payment Obligation of the Broker-Dealer shall mature, and the holder hereof shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of the Broker- Dealer until all claims of all other present and future creditors of the Broker-Dealer, whose claims are senior hereto, have been fully satisfied. This Agreement shall not be subject to cancellation by either the Lender or the Broker-Dealer, and no payment shall be made, nor the Agreement terminated, rescinded or modified by mutual consent or otherwise if the effect thereof would be insistent with the requirements of 17 CFR 240.15c3-1 and 240.15c3-1d. This Agreement may not be transferred, sold, assigned, pledged, or otherwise encumbered or otherwise disposed of, and no lien, charge, or other encumbrance may be created or permitted to be created thereof without the prior written consent of the NASD. The Lender irrevocably agrees that the loan evidenced hereby is not being made in reliance upon the standing of the Broker-Dealer as a member organization of the NASD or upon the NASD surveillance of the Broker-Dealer's financial position or its compliance with the By-Laws, rules and practices of the NASD. The Lender has made such investigation of the Broker-Dealer and its partners, officers, directors, and stockholders as the Lender deems necessary and appropriate under the circumstances. The Lender is not relying upon the NASD to provide any information concerning or relating to the Broker-Dealer and agrees that the NASD has no responsibility to disclose to the Lender any information concerning or relating to the Broker-Dealer which it may now, or at any future time, have. The term "Broker-Dealer," as used in this Agreement, shall include the broker-dealer, its heirs, executors, administrators, successors and assigns. The term "Payment Obligation" shall mean the obligation of the Broker-Dealer to repay cash loaned to it pursuant to this Subordinated Loan Agreement. The provisions of this Agreement shall be binding upon the Broker-Dealer and the Lender, and their respective heirs, executors, administrators, successors, and assigns. Any controversy arising out of or relating to this Agreement may be submitted to and settled by arbitration pursuant to the By-Laws and rules of the NASD. The Broker- Dealer and the Lender shall be conclusively bound by such arbitration. This instrument embodies the entire agreement between the Broker-Dealer and the Lender and no other evidence of such agreement has been or will be executed without prior written consent of the NASD. This Agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of California in all respects. IN WITNESS WHEREOF the parties have set their hands and seal this 14th day of December, 1994. SunAmerica Capital Services, Inc. (Name of Broker-Dealer) By: /s/ Steve Rothstein L.S. (Authorized Person) SunAmerica Inc. L.S. (Lender) By: /s/ James R. Belardi (Authorized Person) . FOR NASD USE ONLY ACCEPTED BY: /s/ J. Lafond (Name) Assistant Director (Title) EFFECTIVE DATE: January 14, 1995 LOAN NUMBER: 10-E-SLA-0140 SUBORDINATED LOAN AGREEMENT LENDER'S ATTESTATION It is recommended that you discuss the merits of this investment with an attorney, accountant or some other person who has knowledge and experience in financial and business matters prior to executing this Agreement. 1. I have received and reviewed NASD Form SLD, which is a reprint of Appendix D of 17 CFR 240.15c3-1, and am familiar with its provisions. 2. I am aware that the funds or securities subject to this Agreement are not covered by the Securities Investor Protection Act of 1970. 3. I understand that I will be furnished financial statements pursuant to SEC Rule 17a-5(c). 4. On the date this Agreement was entered into, the broker-dealer carried funds or securities for my account. (State Yes or No) No. 5. Lender's business relationship to the broker- dealer is: Lender is the ultimate parent company of broker- dealer, and Lender continuously monitors the fiscal status and reports of Broker-Dealer. 6. If not a partner or stockholder actively engaged in the business of the broker-dealer, acknowledge receipt of the following: a. Certified audit and accountant's certificate dated . b. Disclosure of financial and/or operational problems since the last certified audit which required reporting pursuant to SEC Rule 17a-11. (If no such reporting was required, state "none") c. Balance sheet and statement of ownership equity dated . d. Most recent computation of net capital and aggregate indebtedness or aggregate debit items dated , reflecting a net capital of $ and a ratio of . e. Debt/equity ratio as of of . f. Other disclosures: SunAmerica Inc. Dated: December 14, 1994 /s/ JAMES R. BELARDI L.S. CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation (this "Corporation"), do hereby certify that the Executive Committee of Board of Directors of this Corporation, by unanimous written consent dated December 14, 1994, adopted the following resolutions and that said resolutions have not been modified, amended, repealed or rescinded and are in full force and effect: Authorization of Subordinated Loan Agreement for Equity Capital with SunAmerica CApital Services, Inc. BE IT RESOLVED, that the Executive Committee of this Corporation after review of the net capital infusion needs of SunAmerica CApital Services, Inc. hereby authorizes a $3 million subordinated loan to said subsidiary in conformance with the Subordinated Loan Agreement for Equity Capital dated as of December 14, 1994, to be effective on January 14, 1995 ("Subordinated Loan Agreement"); RESOLVED FURTHER that James R. Belardi, Senior Vice President of this Corporation, is hereby authorized to execute said Subordinated Loan Agreement on behalf of this Corporation, and further, to make such changes in the terms and conditions of such Subordinated Loan Agreement as may be necessary to conform to the requirements of Title 17 CFR Section 240.15c 3-1d and the rules of the National Association of Securities Dealers; and RESOLVED FURTHER that the Executive Committee hereby ratifies any and all actions that may have previously been taken by the officers of this COrporation in connection with the foregoing resolution and authorized the officers of this Corporation to take any and all such further actions as may be appropriate to reflect these resolutions and to carry out their tenor, effect and intent. IN WITNESS WHEREOF, the undersigned has executed this Certificate and affixed the seal of this Corporation this 15th day of December, 1994. /s/ Susan L. Harris, Secretary (SEAL) SUNAMERICA CAPITAL SERVICES, INC. FOCUS REPORT AS OF NOVEMBER 30, 1994 ALLOWABLE NON-ALLOWABLE TOTAL PAGE 1 CASH 16,004,374.69 16,004,374.69 PROPERTY, FURNITURE & EQUIP. 0.00 0.00 INVESTS&REC- INTERCOMPANY 0.00 0.00 0.00 OTHER ASSETS 1,624,212.09 38,644,682.00 40,268,894.09 TOTAL ASSETS 17,628,586.78 38,644,682.00 56,273,268.78 RECONCILIATION TOTAL ASSETS PER ABOVE 56,273,268.78 TOTAL ASSETS PER G/L 56,273,268.78 DIFFERENCE 0.00 ADJUSTMENTS 0.00 ADJUSTED DIFFERENCE 0.00 PAGE 2 AGGREGATE NON-AGGREGATE INDEBTNESS INDEBTNESS TOTAL TOTAL LIABILITIES (5,529,046.82)(12,497,613.00) (18,026,659.82) OWNERSHIP EQUITY COMMON STOCK (25,000.00) ADDITIONAL PAID IN CAPITAL (19,482,783.70) RETAINED EARNINGS (497,119.26) SUBORDINATED DEBT (18,241,706.00) TOTAL (38,246,608.96) TOTAL LIABILITIES & S/H EQUITY (56,273,268.78) RECONCILIATION: TOTAL PER ABOVE (56,273,268.78) TOTAL PER G/L (56,273,268.78) TOTAL 0.00 ADJUSTMENTS 0.00 DIFFERENCE 0.00 PAGE 3 LINE 1 TOTAL OWNERSHIP EQUITY 20,004,902.96 LINE 3 SAME AS ABOVE 20,004,902.96 LINE 4A SUBORDINATED LIABILITY 18,241,706.00 LINE 4B DEFERRED TAX LIABILITY 12,497,613.00 LINE 5 TOTAL CAPITAL AND ALLOWABLE SUBLOANS 50,744,221.96 LINE 6A TOTAL NON-ALLOW. ASSETS (38,644,682.00) LINE 6D OTHER DEDUCTIONS - FIDELITY BOND 0.00 LINE 8 NET CAPITAL BEFORE ... 12,099,539.96 LINE 10 SAME AS ABOVE 12,099,539.96 HAIRCUT 425,768.78 PAGE 4 11,673,771.18 LINE 11 MINIMUM NET CAPITAL REQ. 6.667 PERCENT OF LINE 19 368,603.12 LINE 12 MINIMUM DOLLAR NET CAPITAL 25,000.00 LINE 13 NET CAPITAL REQ. (GREATER OF LINE 11 OR 12) 368,603.12 LINE 14 EXCESS NET CAPITAL (LINE 10 LESS 13) 11,305,168.06 LINE 15 EXCESS NET CAPITAL AT 1000 PERCENT (LINE 10-10 PERCENT OF LINE 19) 11,120,866.50 LINE 16 TOTAL LIABILITIES 18,026,659.82 LINE 19 TOTAL AGGREGATE INDEBTEDNESS 5,529,046.82 LINE 20 PERCENT OF AGGREGATE INDEBT. TO NET CAPITAL 0.47 LINE 21 N/A EX-10.(H) 4 EXHIBIT 10(h) June 2, 1995 Ms. Evie Kelly SunAmerica Capital Services, Inc. 733 Third Avenue, 3rd Floor New York, New York 10017 Re: Subordinated Loan Agreement Equity Capital File No.: 10-E-SLA-0268 Lender: SunAmerica Inc. Amount: $2,000,000 Expiration: 05/27/98 Dear Ms. Kelly: The National Association of Securities Dealers, Inc. has found the above referenced Agreement acceptable as a satisfactory subordination agreement effective as of May 28, 1995. Appendix D of SEC Rule 15c3-1 requires the prior written approval of the NASD before any repayment of a subordination agreement can be made. Accordingly, unsecured advances to the lender during the term of the Agreement are not permitted, since such advances would constitute unauthorized prepayments. All unauthorized prepayment matters are presented to the District Business Conduct Committee for disciplinary review. Please bear in mind that all notifications to the Association required by the provisions of this Agreement must be made by telegraphic notice and filed with the District Office. If you have any questions regarding this Agreement or our acceptance thereof, please contact me at (212) 858-4194. Very truly yours, /s/ John J. Lafond Assistant Director JJL:pp Enclosure cc: Frances Giardina NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL SL-5 AGREEMENT BETWEEN: Lender SunAmerica Inc. (Name) 1999 Avenue of the Stars, 38th Floor (Street Address) Los Angeles California 90067- 6002 (City) (State) (Zip) AND Broker-Dealer SunAmerica Capital Services, Inc. (Name) 733 Third Avenue, 3rd Floor (Street Address) New York New York 10017 (City) (State) (Zip) NASD ID No.: 13158 Date Filed: April 27, 1995 NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL AGREEMENT dated April 20, 1995 to be effective May 28, 1995 between SunAmerica Inc. (the "Lender") and SunAmerica Capital Services, Inc. (the "Broker-Dealer"). In consideration of the sum of $2,000,000.00 and subject to the terms and conditions hereinafter set forth, the Broker-Dealer promise to pay to the Lender or assigns on May 27, 1998 (the "Scheduled Maturity Date") (the last day of the month at least three years from the effective date of this Agreement) at the principal office of the Broker-Dealer the aforedescribed sum and interest thereon payable at the rate of 9.0 percent per annum from the effective date of this Agreement, which date shall be the date so agreed upon by the Lender and the Broker-Dealer unless otherwise determined by the National Association of Securities Dealers, Inc. (the "NASD"). This Agreement shall not be considered a satisfactory subordination agreement pursuant to the provisions of 17 CFR 240.15c3-1d unless and until the NASD has found the Agreement acceptable and such Agreement has become effective in the form found acceptable. The cash proceeds covered by this Agreement shall be used and dealt with by the Broker-Dealer as part of its capital and shall be subject to the risks of the business. The Broker-Dealer shall have the right to deposit any cash proceeds of the Subordinated Loan Agreement in an account or accounts in its own name in any bank or trust company. The Lender irrevocably agrees that the obligations of the Broker-Dealer under this Agreement with respect to the payment of principal and interest shall be and are subordinate in right of payment and subject to the prior payments or provisions for payment in full of all claims of all other present and future creditors of the Broker-Dealer arising out of any matter occurring prior to the date on which the related Payment Obligation (as defined herein) matures consistent with the provisions of 17 CFR 240.15c3-1 and 240.15c3-1d, except for claims which are the subject of subordination agreements which rank on the same priority as or are junior to the claim of the Lender under such subordination agreements. I. PERMISSIVE PREPAYMENTS At the option of the Broker-Dealer, but not at the option of the Lender, payment of all or any part of the "Payment Obligation" amount hereof prior to the maturity date may be made by the Broker-Dealer only upon receipt of the prior written approval of the NASD, but in no event may any prepayment be mad before the expiation of one year from the date this Agreement became effective. No prepayment shall be made if, after given effect thereto (and to all payments of Payment Obligations under any other subordination agreements then outstanding, the maturity of which are scheduled to fall due either within six months after the date such prepayment is to occur or on or prior to the date on which the Payment Obligation hereof is scheduled to mature, whichever date is earlier), without reference to any projected profit or loss of the Broker-Dealer, either aggregate indebtedness of the Broker-Dealer would exceed 1000 percent of its net capital or such lesser percent as may be made applicable to the Broker- Dealer from time to time by the NASD, or a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than five percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. II. SUSPENDED REPAYMENTS (a) The Payment Obligation of the Broker-Dealer shall be suspended and shall not mature if after giving effect to such payment (together with the payment of any Payment Obligation of the Broker-Dealer under any other subordination agreement scheduled to mature on or before such Payment Obligation) the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital or such lesser percent as may be made applicable to the Broker-Dealer from time to time by the NASD, or a governmental agency or self- regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. III. NOTICE OF MATURITY The Broker-Dealer shall immediately notify the NASD if, after giving effect to all payments of Payment Obligations under subordination agreements then outstanding which are then due or mature within six months without reference to any projected profit or loss of the Broker- Dealer, either the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchase by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. IV. BROKER-DEALERS CARRYING THE ACCOUNTS OF SPECIALISTS AND MARKET MAKERS IN LISTED OPTIONS A Broker-Dealer who guarantees, endorses, carries or clears specialist or market-maker transactions in options listed on a national securities exchange or facility of a national securities association shall not permit a reduction, prepayment, or repayment of the unpaid principal amount if the effect would cause the equity required in such specialist or market-maker accounts to exceed 1000 percent of the Broker- Dealer's net capital or such percent as may be made applicable to the Broker-Dealer form time to time by the NASD or a governmental agency or self-regulatory body having appropriate authority. V. LIMITATION ON WITHDRAWAL OF EQUITY CAPITAL The proceeds covered by this Agreement shall in all respects be subject to the provisions of paragraph (e) of 17 CFR 240.15c3-1. Pursuant thereto no equity capital of the Broker-Dealer or a subsidiary or affiliate consolidated pursuant to 17 CFR 240.15c3-1c, whether in the form of capital contributions by partners, par or stated value of capital stock, paid-in capital in excess of par, retained earnings or other capital accounts, may be withdrawn by action of a stockholder or partner, or by redemption or repurchase of shares of stock by any of the consolidated entities or through the payment of dividends or any similar distribution, nor may any unsecured advance or loan be made to a stockholder, partner, sole proprietor, or employee if, after giving effect thereto and to any other such withdrawals, advances or loans any payments of Payment Obligations under satisfactory subordination agreements which are scheduled to occur within six months following such withdrawal, advances or loan, either aggregate indebtedness of any of the consolidated entities exceed 1000 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act, and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority; or should the Broker-Dealer be included within such consolidation, if the total outstanding principal amounts of satisfactory subordination agreements of the Broker-Dealer (other than such agreements which qualify as equity under paragraph (d) of 17 CFR 240.15c3-1) would exceed 70 percent of its debt/equity total, as this term is defined in paragraph (d) of 17 CFR 240.15c3-1, for a period in excess of 90 days, or for such longer period which the Commission may upon application of the Broker-Dealer grant in the public interest or for the protection of investors. VI. BROKER-DEALER REGISTERED WITH CFTC If the Broker-Dealer is a futures commission merchant or introductory broker as that term is defined in the commodity Exchange Act, the Organization agrees, consistent with the requirements of Section 1.17(h) of the regulations of the CFTC (17 CFR 1.17(h)), that: (a) Whenever prior written notice by the Broker-Dealer to the NASD is required pursuant to the provisions of this Agreement, the same prior written notice shall be given by the Broker-Dealer to (i) the CFTC at its principal office in Washington, D.C., attention Chief Account of Division of Trading and Markets, and/or (ii) the commodity exchange of which the Organization is a member and which is then designated by the CFTC as the Organization's designated self- regulatory organization (the DSRO); (b) Whenever prior written consent, permission or approval of the NASD is required pursuant to the provisions of this Agreement, the Broker-Dealer shall also obtain the prior written consent, permission or approval of the CFTC and/or of the DSRO; and, (c) Whenever the Broker-Dealer receives written notice of acceleration of maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall promptly give written notice thereof to the CFTC at the address above stated and/or to the DSRO. VII. GENERAL In the event of the appointment of a receiver or trustee of the Broker-Dealer or in the event of its insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganizations whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of the Broker-Dealer, the Payment Obligation of the Broker-Dealer shall mature, and the holder hereof shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of the Broker- Dealer until all claims of all other present and future creditors of the Broker-Dealer, whose claims are senior hereto, have been fully satisfied. This Agreement shall not be subject to cancellation by either the Lender or the Broker-Dealer, and no payment shall be made, nor the Agreement terminated, rescinded or modified by mutual consent or otherwise if the effect thereof would be insistent with the requirements of 17 CFR 240.15c3-1 and 240.15c3-1d. This Agreement may not be transferred, sold, assigned, pledged, or otherwise encumbered or otherwise disposed of, and no lien, charge, or other encumbrance may be created or permitted to be created thereof without the prior written consent of the NASD. The Lender irrevocably agrees that the loan evidenced hereby is not being made in reliance upon the standing of the Broker-Dealer as a member organization of the NASD or upon the NASD surveillance of the Broker-Dealer's financial position or its compliance with the By-Laws, rules and practices of the NASD. The Lender has made such investigation of the Broker-Dealer and its partners, officers, directors, and stockholders as the Lender deems necessary and appropriate under the circumstances. The Lender is not relying upon the NASD to provide any information concerning or relating to the Broker-Dealer and agrees that the NASD has no responsibility to disclose to the Lender any information concerning or relating to the Broker-Dealer which it may now, or at any future time, have. The term "Broker-Dealer," as used in this Agreement, shall include the broker-dealer, its heirs, executors, administrators, successors and assigns. The term "Payment Obligation" shall mean the obligation of the Broker-Dealer to repay cash loaned to it pursuant to this Subordinated Loan Agreement. The provisions of this Agreement shall be binding upon the Broker-Dealer and the Lender, and their respective heirs, executors, administrators, successors, and assigns. Any controversy arising out of or relating to this Agreement may be submitted to and settled by arbitration pursuant to the By-Laws and rules of the NASD. The Broker- Dealer and the Lender shall be conclusively bound by such arbitration. This instrument embodies the entire agreement between the Broker-Dealer and the Lender and no other evidence of such agreement has been or will be executed without prior written consent of the NASD. This Agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of California in all respects. IN WITNESS WHEREOF the parties have set their hands and seal this 20th day of April, 1994. SunAmerica Capital Services, Inc. (Name of Broker-Dealer) By: /s/ Steve Rothstein L.S. (Authorized Person) SunAmerica Inc. (Lender) By: /s/ James R. Belardi (Authorized Person) . FOR NASD USE ONLY ACCEPTED BY: /s/ J. Lafond (Name) Assistant Director (Title) EFFECTIVE DATE: May 28, 1995 LOAN NUMBER: 10-E-SLA-0268 SUBORDINATED LOAN AGREEMENT LENDER'S ATTESTATION It is recommended that you discuss the merits of this investment with an attorney, accountant or some other person who has knowledge and experience in financial and business matters prior to executing this Agreement. 1. I have received and reviewed NASD Form SLD, which is a reprint of Appendix D of 17 CFR 240.15c3-1, and am familiar with its provisions. 2. I am aware that the funds or securities subject to this Agreement are not covered by the Securities Investor Protection Act of 1970. 3. I understand that I will be furnished financial statements pursuant to SEC Rule 17a-5(c). 4. On the date this Agreement was entered into, the broker-dealer carried funds or securities for my account. (State Yes or No) No. 5. Lender's business relationship to the broker- dealer is: Broker-Dealer is a fifth tier subsidiary of Lender and Lender continuously monitors the fiscal status and reports of Broker-Dealer. 6. If not a partner or stockholder actively engaged in the business of the broker-dealer, acknowledge receipt of the following: a. Certified audit and accountant's certificate dated . b. Disclosure of financial and/or operational problems since the last certified audit which required reporting pursuant to SEC Rule 17a-11. (If no such reporting was required, state "none") c. Balance sheet and statement of ownership equity dated . d. Most recent computation of net capital and aggregate indebtedness or aggregate debit items dated , reflecting a net capital of $ and a ratio of . e. Debt/equity ratio as of of . f. Other disclosures: SunAmerica Inc. Dated: April 20, 1995 /s/ JAMES R. BELARDI L.S. CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation (this "Corporation"), do hereby certify that the Executive Committee of Board of Directors of this Corporation, by unanimous written consent dated April 20, 1995, adopted the following resolutions and that said resolutions have not been modified, amended, repealed or rescinded and are in full force and effect: Authorization of Subordinated Loan Agreement for Equity Capital with SunAmerica Capital Services, Inc. BE IT RESOLVED, that the Executive Committee of this Corporation after review of the net capital infusion needs of SunAmerica Capital Services, Inc. hereby authorizes a $2 million subordinated loan to said subsidiary in conformance with the Subordinated Loan Agreement for Equity Capital dated as of April 20, 1995, to be effective on May 28, 1995 ("Subordinated Loan Agreement"); and RESOLVED FURTHER that James R. Belardi, Senior Vice President of this Corporation, is hereby authorized to execute said Subordinated Loan Agreement on behalf of this Corporation, and further, to make such changes in the terms and conditions of such Subordinated Loan Agreement as may be necessary to conform to the requirements of Title 17 CFR Section 240.15c 3-1d and the rules of the National Association of Securities Dealers; and RESOLVED FURTHER that the Executive Committee hereby ratifies any and all actions that may have previously been taken by the officers of this Corporation in connection with the foregoing resolution and authorized the officers of this Corporation to take any and all such further actions as may be appropriate to reflect these resolutions and to carry out their tenor, effect and intent. IN WITNESS WHEREOF, the undersigned has executed this Certificate and affixed the seal of this Corporation this 20th day of April, 1995. /s/ Susan L. Harris, Secretary (SEAL) EX-10.(I) 5 EXHIBIT 10(i) June 20, 1995 Ms. Evie Kelly SunAmerica Capital Services, Inc. 733 Third Avenue, 3rd Floor New York, New York 10017-3204 Re: Subordinated Loan Agreement Equity Capital File No.: 10-E-SLA-0316 Lender: SunAmerica Inc. Amount: $2,500,000 Expiration: 06/29/98 Dear Ms. Kelly: The National Association of Securities Dealers, Inc. has found the above referenced Agreement acceptable as a satisfactory subordination agreement effective as of June 29, 1995. Appendix D of SEC Rule 15c3-1 requires the prior written approval of the NASD before any repayment of a subordination agreement can be made. Accordingly, unsecured advances to the lender during the term of the Agreement are not permitted, since such advances would constitute unauthorized prepayments. All unauthorized prepayment matters are presented to the District Business Conduct Committee for disciplinary review. Please bear in mind that all notifications to the Association required by the provisions of this Agreement must be made by telegraphic notice and filed with the District Office. If you have any questions regarding this Agreement or our acceptance thereof, please contact me at (212) 858-4194. Very truly yours, /s/ John J. Lafond Assistant Director JJL:pp Enclosure cc: Frances Giardina NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL SL-5 AGREEMENT BETWEEN: Lender SunAmerica Inc. (Name) 1999 Avenue of the Stars, 38th Floor (Street Address) Los Angeles California 90067- 6002 (City) (State) (Zip) AND Broker-Dealer SunAmerica Capital Services, Inc. (Name) 733 Third Avenue, 3rd Floor (Street Address) New York New York 10017 (City) (State) (Zip) NASD ID No.: 13158 Date Filed: June 7, 1995 NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL AGREEMENT dated May 30, 1995 to be effective May 28, 1995 between SunAmerica Inc. (the "Lender") and SunAmerica Capital Services, Inc. (the "Broker-Dealer"). In consideration of the sum of $2,500,000.00 and subject to the terms and conditions hereinafter set forth, the Broker-Dealer promise to pay to the Lender or assigns on June 29, 1998 (the "Scheduled Maturity Date") (the last day of the month at least three years from the effective date of this Agreement) at the principal office of the Broker-Dealer the aforedescribed sum and interest thereon payable at the rate of 9.0 percent per annum from the effective date of this Agreement, which date shall be the date so agreed upon by the Lender and the Broker-Dealer unless otherwise determined by the National Association of Securities Dealers, Inc. (the "NASD"). This Agreement shall not be considered a satisfactory subordination agreement pursuant to the provisions of 17 CFR 240.15c3-1d unless and until the NASD has found the Agreement acceptable and such Agreement has become effective in the form found acceptable. The cash proceeds covered by this Agreement shall be used and dealt with by the Broker-Dealer as part of its capital and shall be subject to the risks of the business. The Broker-Dealer shall have the right to deposit any cash proceeds of the Subordinated Loan Agreement in an account or accounts in its own name in any bank or trust company. The Lender irrevocably agrees that the obligations of the Broker-Dealer under this Agreement with respect to the payment of principal and interest shall be and are subordinate in right of payment and subject to the prior payments or provisions for payment in full of all claims of all other present and future creditors of the Broker-Dealer arising out of any matter occurring prior to the date on which the related Payment Obligation (as defined herein) matures consistent with the provisions of 17 CFR 240.15c3-1 and 240.15c3-1d, except for claims which are the subject of subordination agreements which rank on the same priority as or are junior to the claim of the Lender under such subordination agreements. I. PERMISSIVE PREPAYMENTS At the option of the Broker-Dealer, but not at the option of the Lender, payment of all or any part of the "Payment Obligation" amount hereof prior to the maturity date may be made by the Broker-Dealer only upon receipt of the prior written approval of the NASD, but in no event may any prepayment be mad before the expiation of one year from the date this Agreement became effective. No prepayment shall be made if, after given effect thereto (and to all payments of Payment Obligations under any other subordination agreements then outstanding, the maturity of which are scheduled to fall due either within six months after the date such prepayment is to occur or on or prior to the date on which the Payment Obligation hereof is scheduled to mature, whichever date is earlier), without reference to any projected profit or loss of the Broker-Dealer, either aggregate indebtedness of the Broker-Dealer would exceed 1000 percent of its net capital or such lesser percent as may be made applicable to the Broker- Dealer from time to time by the NASD, or a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than five percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. II. SUSPENDED REPAYMENTS (a) The Payment Obligation of the Broker-Dealer shall be suspended and shall not mature if after giving effect to such payment (together with the payment of any Payment Obligation of the Broker-Dealer under any other subordination agreement scheduled to mature on or before such Payment Obligation) the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital or such lesser percent as may be made applicable to the Broker-Dealer from time to time by the NASD, or a governmental agency or self- regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. III. NOTICE OF MATURITY The Broker-Dealer shall immediately notify the NASD if, after giving effect to all payments of Payment Obligations under subordination agreements then outstanding which are then due or mature within six months without reference to any projected profit or loss of the Broker- Dealer, either the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchase by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. IV. BROKER-DEALERS CARRYING THE ACCOUNTS OF SPECIALISTS AND MARKET MAKERS IN LISTED OPTIONS A Broker-Dealer who guarantees, endorses, carries or clears specialist or market-maker transactions in options listed on a national securities exchange or facility of a national securities association shall not permit a reduction, prepayment, or repayment of the unpaid principal amount if the effect would cause the equity required in such specialist or market-maker accounts to exceed 1000 percent of the Broker- Dealer's net capital or such percent as may be made applicable to the Broker-Dealer form time to time by the NASD or a governmental agency or self-regulatory body having appropriate authority. V. LIMITATION ON WITHDRAWAL OF EQUITY CAPITAL The proceeds covered by this Agreement shall in all respects be subject to the provisions of paragraph (e) of 17 CFR 240.15c3-1. Pursuant thereto no equity capital of the Broker-Dealer or a subsidiary or affiliate consolidated pursuant to 17 CFR 240.15c3-1c, whether in the form of capital contributions by partners, par or stated value of capital stock, paid-in capital in excess of par, retained earnings or other capital accounts, may be withdrawn by action of a stockholder or partner, or by redemption or repurchase of shares of stock by any of the consolidated entities or through the payment of dividends or any similar distribution, nor may any unsecured advance or loan be made to a stockholder, partner, sole proprietor, or employee if, after giving effect thereto and to any other such withdrawals, advances or loans any payments of Payment Obligations under satisfactory subordination agreements which are scheduled to occur within six months following such withdrawal, advances or loan, either aggregate indebtedness of any of the consolidated entities exceed 1000 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act, and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority; or should the Broker-Dealer be included within such consolidation, if the total outstanding principal amounts of satisfactory subordination agreements of the Broker-Dealer (other than such agreements which qualify as equity under paragraph (d) of 17 CFR 240.15c3-1) would exceed 70 percent of its debt/equity total, as this term is defined in paragraph (d) of 17 CFR 240.15c3-1, for a period in excess of 90 days, or for such longer period which the Commission may upon application of the Broker-Dealer grant in the public interest or for the protection of investors. VI. BROKER-DEALER REGISTERED WITH CFTC If the Broker-Dealer is a futures commission merchant or introductory broker as that term is defined in the commodity Exchange Act, the Organization agrees, consistent with the requirements of Section 1.17(h) of the regulations of the CFTC (17 CFR 1.17(h)), that: (a) Whenever prior written notice by the Broker-Dealer to the NASD is required pursuant to the provisions of this Agreement, the same prior written notice shall be given by the Broker-Dealer to (i) the CFTC at its principal office in Washington, D.C., attention Chief Account of Division of Trading and Markets, and/or (ii) the commodity exchange of which the Organization is a member and which is then designated by the CFTC as the Organization's designated self- regulatory organization (the DSRO); (b) Whenever prior written consent, permission or approval of the NASD is required pursuant to the provisions of this Agreement, the Broker-Dealer shall also obtain the prior written consent, permission or approval of the CFTC and/or of the DSRO; and, (c) Whenever the Broker-Dealer receives written notice of acceleration of maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall promptly give written notice thereof to the CFTC at the address above stated and/or to the DSRO. VII. GENERAL In the event of the appointment of a receiver or trustee of the Broker-Dealer or in the event of its insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganizations whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of the Broker-Dealer, the Payment Obligation of the Broker-Dealer shall mature, and the holder hereof shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of the Broker- Dealer until all claims of all other present and future creditors of the Broker-Dealer, whose claims are senior hereto, have been fully satisfied. This Agreement shall not be subject to cancellation by either the Lender or the Broker-Dealer, and no payment shall be made, nor the Agreement terminated, rescinded or modified by mutual consent or otherwise if the effect thereof would be insistent with the requirements of 17 CFR 240.15c3-1 and 240.15c3-1d. This Agreement may not be transferred, sold, assigned, pledged, or otherwise encumbered or otherwise disposed of, and no lien, charge, or other encumbrance may be created or permitted to be created thereof without the prior written consent of the NASD. The Lender irrevocably agrees that the loan evidenced hereby is not being made in reliance upon the standing of the Broker-Dealer as a member organization of the NASD or upon the NASD surveillance of the Broker-Dealer's financial position or its compliance with the By-Laws, rules and practices of the NASD. The Lender has made such investigation of the Broker-Dealer and its partners, officers, directors, and stockholders as the Lender deems necessary and appropriate under the circumstances. The Lender is not relying upon the NASD to provide any information concerning or relating to the Broker-Dealer and agrees that the NASD has no responsibility to disclose to the Lender any information concerning or relating to the Broker-Dealer which it may now, or at any future time, have. The term "Broker-Dealer," as used in this Agreement, shall include the broker-dealer, its heirs, executors, administrators, successors and assigns. The term "Payment Obligation" shall mean the obligation of the Broker-Dealer to repay cash loaned to it pursuant to this Subordinated Loan Agreement. The provisions of this Agreement shall be binding upon the Broker-Dealer and the Lender, and their respective heirs, executors, administrators, successors, and assigns. Any controversy arising out of or relating to this Agreement may be submitted to and settled by arbitration pursuant to the By-Laws and rules of the NASD. The Broker- Dealer and the Lender shall be conclusively bound by such arbitration. This instrument embodies the entire agreement between the Broker-Dealer and the Lender and no other evidence of such agreement has been or will be executed without prior written consent of the NASD. This Agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of California in all respects. IN WITNESS WHEREOF the parties have set their hands and seal this 30th day of May, 1995. SunAmerica Capital Services, Inc. (Name of Broker-Dealer) By: /s/ Steve Rothstein L.S. (Authorized Person) SunAmerica Inc. (Lender) By: /s/ James R. Belardi (Authorized Person) . FOR NASD USE ONLY ACCEPTED BY: /s/ J. Lafond (Name) Assistant Director (Title) EFFECTIVE DATE: June 29, 1995 LOAN NUMBER: 10-E-SLA-0316 SUBORDINATED LOAN AGREEMENT LENDER'S ATTESTATION It is recommended that you discuss the merits of this investment with an attorney, accountant or some other person who has knowledge and experience in financial and business matters prior to executing this Agreement. 1. I have received and reviewed NASD Form SLD, which is a reprint of Appendix D of 17 CFR 240.15c3-1, and am familiar with its provisions. 2. I am aware that the funds or securities subject to this Agreement are not covered by the Securities Investor Protection Act of 1970. 3. I understand that I will be furnished financial statements pursuant to SEC Rule 17a-5(c). 4. On the date this Agreement was entered into, the broker-dealer carried funds or securities for my account. (State Yes or No) No. 5. Lender's business relationship to the broker- dealer is: Broker-Dealer is a fifth tier subsidiary of Lender and Lender continuously monitors the fiscal status and reports of Broker-Dealer. 6. If not a partner or stockholder actively engaged in the business of the broker-dealer, acknowledge receipt of the following: a. Certified audit and accountant's certificate dated . b. Disclosure of financial and/or operational problems since the last certified audit which required reporting pursuant to SEC Rule 17a-11. (If no such reporting was required, state "none") c. Balance sheet and statement of ownership equity dated . d. Most recent computation of net capital and aggregate indebtedness or aggregate debit items dated , reflecting a net capital of $ and a ratio of . e. Debt/equity ratio as of of . f. Other disclosures: SunAmerica Inc. Dated: April 20, 1995 /s/ JAMES R. BELARDI L.S. CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation (this "Corporation"), do hereby certify that the Executive Committee of Board of Directors of this Corporation, by unanimous written consent dated May 30, 1995, adopted the following resolutions and that said resolutions have not been modified, amended, repealed or rescinded and are in full force and effect: Authorization of Subordinated Loan Agreement for Equity Capital with SunAmerica Capital Services, Inc. BE IT RESOLVED, that the Executive Committee of this Corporation after review of the net capital infusion needs of SunAmerica Capital Services, Inc. hereby authorizes a $2 million subordinated loan to said subsidiary in conformance with the Subordinated Loan Agreement for Equity Capital dated as of May 30, 1995, to be effective on June 30, 1995 ("Subordinated Loan Agreement"); and RESOLVED FURTHER that James R. Belardi, Senior Vice President of this Corporation, is hereby authorized to execute said Subordinated Loan Agreement on behalf of this Corporation, and further, to make such changes in the terms and conditions of such Subordinated Loan Agreement as may be necessary to conform to the requirements of Title 17 CFR Section 240.15c 3-1d and the rules of the National Association of Securities Dealers; and RESOLVED FURTHER that the Executive Committee hereby ratifies any and all actions that may have previously been taken by the officers of this Corporation in connection with the foregoing resolution and authorized the officers of this Corporation to take any and all such further actions as may be appropriate to reflect these resolutions and to carry out their tenor, effect and intent. IN WITNESS WHEREOF, the undersigned has executed this Certificate and affixed the seal of this Corporation this 30th day of May, 1995. /s/ Susan L. Harris, Secretary (SEAL) EX-10.(J) 6 Exhibit 10(j) [LOGO] NASD National Association of Securities Dealers, Inc. 1735 K Street, N.W. Washington, D.C. 20006 (202) 728-8000 May 11, 1992 Mr. Anthony J. Da Prato SunAmerica Capital Services, Inc. 733 Third Avenue New York, New York 10017-3204 Re: Subordinated Loan Agreement File No: 10-D-SLA-10833 Lender: Broad Inc. Amount: $4,000,000 Expiration: 03/15/97 Dear Mr. Da Prato: The National Association of Securities Dealers, Inc. has found the above referenced Agreement acceptable as a satisfactory subordination agreement effective as of March 16, 1992. Appendix D of SEC Rule 15c3-1 requires the prior written approval of the NASD before any repayment of a subordination agreement can be made. Accordingly, unsecured advances to the lender during the term of the Agreement are not permitted, since such advances would constitute unauthorized prepayments. All unauthorized prepayment matters are presented to the District Business Conduct Committee for disciplinary review. Please bear in mind that all notifications to the Association required by the provisions of this Agreement must be made by telegraphic notice and filed wit both the District Office in your area and the Executive Office in Washington, D.C. Any questions which you have regarding this Agreement or our acceptance thereof should be addressed to the District Office in New York. Very truly yours, Thomas R. Cassella Vice President Financial Responsibility cc: Mr. William S. Clendenin, Director New York District Office NASD MASTER SUBORDINATED LOAN AGREEMENT SL-1 AGREEMENT BETWEEN: Lender Broad Inc. ------------------------------------------------ - ------------ (Name) 11601 Wilshire Boulevard ------------------------------------------------ - ------------ (Street Address) Los Angeles California 90025-1748 ---------------- ------------- ------------ (City) (State) (Zip) AND Broker-Dealer SunAmerica Capital Services, Inc. ------------------------------------------------ - ------------ (Name) 10 Union Square East ------------------------------------------------ - ------------ (Street Address) New York New York 10003 ------------- ------------- ------ - ------ (City) (State) (Zip) NASD ID NO.: 13158 ------------------------------------------------ - ------------ DATE FILED: February 25, 1992 ------------------------------------------------ - ------------ NASD MASTER SUBORDINATED LOAN AGREEMENT AGREEMENT dated February 24, 1992 to be effective March 16, 1992 ("Effective Date") between BROAD INC. ("Lender") and SUNAMERICA CAPITAL SERVICES, INC. ("Broker-Dealer"). R E C I T A L S A. Broker-Dealer desires to from time to time obtain subordinated loans from Lender in order to meet certain of its financial obligations. B. Lender desires, at its sole discretion, to make such loans to Broker-Dealer subject to the terms and conditions of this Agreement. C. Lender and Broker-Dealer have heretofore entered into a Subordinated Loan Agreement dated January 10, 1992, as amended, pursuant to which $3,000,000 was loaned to Broker-Dealer ("Prior Loan"). The Prior Loan remains in full force and effect, and is not altered or otherwise affected under this Agreement. D. Lender has agreed to make an initial loan pursuant to this Agreement of $4,000,000 ("Initial Loan") on the Effective Date. NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Ia. SUBORDINATED LOANS ------------------ Except for the Initial Loan, Lender is not obligated to make-any loans to Broker-Dealer hereunder. All loans that Lender may determine to make under this Agreement shall be repaid to Lender or its assigns on March 15, 1997 (the "Scheduled Maturity Date") (the last day of the month at least one year from the effective date of this Agreement) at the principal office of Broker-Dealer plus interest thereon payable at the rate of seven (7%) percent per annum from the effective date of this Agreement, which date shall be the date so agreed upon by Lender and the Broker-Dealer unless otherwise determined by the National Association of Securities Dealers, Inc. ("NASD"). This Agreement shall not be considered a satisfactory subordination agreement pursuant to the provisions of 17 CFR 240.15c3-ld unless and until the NASD has found the Agreement acceptable and such Agreement has become effective in the form found acceptable. Broker-Dealer shall comply with the following procedure in requesting loans from Lender: (a) Broker-Dealer will request loans from Lender in such manner as Lender may from time to time prescribe. (b) Lender may make loans to Broker-Dealer in increments of at least $3,000,000 under this Agreement, subject to an aggregate maximum principal amount of $15,000,000 under this Agreement. Except for the Initial Loan, no loans shall be made except when requested in writing by Broker-Dealer, and if Lender, in its sole discretion, shall agree to make such loan. Each such loan shall be evidenced by a Loan Certificate, a copy of which is attached hereto as Exhibit A, which shall describe, among other things (i) the loan amount requested, (ii) the total amount of principal and interest then outstanding under this Agreement, (iii) the total amount of interest which is to be subordinated under the loans outstanding under this Agreement, and (iv) the date of the loan. (c) Within three (3) days following obtaining a loan under this Agreement, Broker-Dealer shall file a manually signed copy of the Loan Certificate with the NASD's Department of Surveillance, and a copy thereof with the NASD District Office for New York. The cash proceeds covered by this Agreement shall be used and dealt with by the Broker-Dealer as part of its capital and shall be subject to the risks of the business. The Broker-Dealer shall have the right to deposit any cash proceeds of this Subordinated Loan Agreement in an account or accounts in its own name in any bank or trust company. The Lender irrevocably agrees that the obligations of the Broker-Dealer under this Agreement with respect to the payment of principal and interest shall be and are subordinate in right of payment and subject to the prior payment or provision for payment in full of all claims or all other present and future creditors of the Broker-Dealer arising out of any matter occurring prior to the date on which the related Payment Obligation (as defined herein) matures consistent with the provisions of 17 CFR 240.15c3-1 and 240.15c31d, except for claims which are the subject of the subordination agreements which rank on the same priority as or are junior to the claim of the Lender under such subordination agreements. I. PERMISSIVE PREPAYMENTS ---------------------- At the Option of the Broker-Dealer, but not at the option of the Lender, payment of all or any part of the "Payment Obligation" amount hereof prior to the Scheduled Maturity Date may be made by the Broker-Dealer only upon receipt of the prior written approval of the NASD, but in no event may any prepayment be made before the expiration of one year from the date this Agreement became effective. No prepayment shall be made if, after giving effect thereto (and all payments of Payment Obligations under any other subordination agreements then outstanding, the maturity or accelerated maturity of which are scheduled to fall due either within six months after the date such prepayment is to occur or on or prior to the date on which the Payment Obligation hereof is scheduled to mature, whichever date is earlier), without reference to any projected profit or loss of the Broker-Dealer, either aggregate indebtedness of the Broker-Dealer would exceed 1000 percent of its net capital or such lesser percent as may be made applicable to the Broker-Dealer from time to time by the NASD, or a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or, if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. II. SUSPENDED REPAYMENTS -------------------- (a) The Payment Obligation of the Broker-Dealer shall be suspended and shall not mature if, after giving effect to such payment (together with the payment of any Payment Obligation of the Broker-Dealer under any other subordination agreement scheduled to mature on or before such Payment Obligation) the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital or such lesser percent as may be made applicable to the Broker-Dealer from time to time by the NASD, or a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or, if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. III. LENDER'S RIGHT TO ACCELERATE THE MATURITY OF THE PAYMENT OBLIGATION (OPTIONAL) -------------------------------------------- This section is intentionally omitted. IV. ACCELERATED MATURITY OF THE SUBORDINATION AGREEMENT UPON THE OCCURENCE OF AN EVENT OF ACCELERATION (OPTIONAL). -------------------------------------------- This section is intentionally omitted. V. ACCELEPATED MATURITY OF THE SUBORDINATION AGREEMENT UPON THE OCCURRENCE OF AN EVENT OF DEFAULT (OPTIONAL) -------------------------------------------- (a) If the liquidation of the business of the Broker-Dealer has not already commenced, the Payment Obligation shall mature, together with accrued interest or compensation, upon the occurrence of an Event of Default, as hereinafter defined. Events of Default shall be: (i) The filing of an application by the Securities Investor Protection Corporation for a decree adjudicating that customers of the Broker-Dealer are in need of protection under the Securities Investor Protection Act of 1970 and the failure of the Broker-Dealer to obtain the dismissal of such application within 30 days; (ii) Intentionally omitted. (iii) Revocation by the Commission of the registration of the Broker-Dealer; (iv) Suspension by the NASD (without reinstatement within 10 days) or revocation of the Broker-Dealer's status as a member thereof; and, (v) Receivership, insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganization whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of the Broker-Dealer. VI. NOTICE OF MATURITY OR ACCELERATED MATURITY ------------------------------------------ The Broker-Dealer shall immediately notify the NASD if, after giving effect to all payments of Payment Obligations under subordination agreements then outstanding which are then due or mature within six months without reference to any projected profit or loss of the Broker-Dealer, either the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or, if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. VII. BROKER-DEALERS CARRYING THE ACCOUNTS OF SPECIALISTS AND MARKET MAKERS IN LISTED OPTIONS ------------------------------------------- A Broker-Dealer who guarantees, endorses, carries or clears specialist or market-maker transactions in options listed on a national securities exchange or facility of a national securities association shall not permit a reduction, prepayment or repayment of the unpaid principal amount if the effect would cause the equity required in such specialist or market-maker accounts to exceed 1000 percent of the Broker-Dealer's net capital or such percent as may be made applicable to the Broker-Dealer from time to time by the NASD or a governmental agency or self-regulatory body having appropriate authority. VIII. BROKER-DEALERS REGISTERED WITH CFTC ----------------------------------- If the Broker-Dealer is a futures commission merchant or introductory broker as that term is defined in the Commodity Exchange Act, the Organization agrees, consistent with the requirements of 1.17(h) of the regulations of the CFTC (17 CFR 1.17(h)), that: (a) Whenever prior written notice by the Broker- Dealer to the NASD is required pursuant to the provisions of this Agreement, the same prior written notice shall be given by the Broker-Dealer to (i) the CFTC at its principal office in Washington, D.C., attention Chief Accountant of Division of Trading and Markets, and/or (ii) the commodity exchange of which the Organization is a member and which is then designated by the CFTC as the organization's designated self-regulatory organization the "DSRO"); (b) Whenever prior written consent, permission or approval of the NASD is required pursuant to the provisions of this Agreement, the Broker-Dealer shall also obtain the prior written consent, permission or approval of the CFTC (and/or of the DSRO); and, (c) Whenever the Broker-Dealer receives written notice of acceleration of maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall promptly give written notice thereof to the CFTC at the address above stated and/or to the DSRO. IX. SUBORDINATION OF ACCRUED INTEREST PAYABLE (OPTIONAL) ------------------------------------------------ The Lender and Broker-Dealer hereby elect to have all eligible accrued interest payable on the loans obtained hereunder considered as additional subordinated capital for purposes of computing net capital, subject to the terms and conditions set forth in the instructions. The aggregate total of accrued interest to be considered as additional subordinated capital provided for hereunder shall be equal to seven percent (7%) per annum on the outstanding principal balance under each Loan Certificate, less an amount equal to interest accrued during the 12 months prior to the Scheduled Maturity Date. /s/ SR 3/2/92 /s/ JRB - ------------------------------------ ------------ (Broker-Dealer's Initials) (Date) (Lender's Initials) (Date) This Agreement shall not be subject to cancellation by either the Lender or the Broker- Dealer, and no payment shall be made, nor the Agreement terminated, rescinded, or modified my mutual consent or otherwise if the effect thereof would be inconsistent with the requirements of 17 CFT 240.15c3- 1 and 240.15c3-1. The Agreement may not be transferred, sold, assigned, pledged, or otherwise encumbered or otherwise disposed of, and no lien, charge or other encumbrance may be created or permitted to be created thereon without the prior written consent of the NASD. In the event of the appointment of a receiver or trustee of the Broker-Dealer or in the event of its insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganization whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of the Broker-Dealer, the Payment Obligation of the Broker-Dealer shall mature, and the holder hereof shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of the Broker-Dealer until all claims of all other present and future creditors of the Broker- Dealer, whose claims are senior hereto, have been fully satisfied. The Leader irrevocably agrees that the loans evidenced hereby are not being made in reliance upon the standing of the Broker-Dealer as a member organization of the NASD or upon the NASD surveillance of the Broker-Dealer's financial position or its compliance with the By-Laws, rules and practices of the NASD. The Lender has made such investigation of the Broker-Dealer and its partners, officers, directors and stockholders as the Lender deems necessary and appropriate under the circumstances. The Lender is not relying upon the NASD to provide any information concerning or relating to the Broker- Dealer and agrees that the NASD has no responsibility to disclose to the Lender any information concerning or relating to the Broker-Dealer which it may now, or at any future time, have. The term "Broker-Dealer" as used in this Agreement shall include the broker-dealer, its heirs, executors, administrators, successors, and assigns. The term "Payment Obligation" shall mean the obligation of the Broker- Dealer to repay cash loaned to it pursuant to this Subordinated Loan Agreement. The provisions of this Agreement shall be binding upon the Broker-Dealer and the Lender and their respective heirs, executors, administrators, successors and assigns. Any controversy arising out of or relating to this Agreement may be submitted to and settled by arbitration pursuant to the By-Laws and rules of the NASD. The Broker-Dealer and the Lender shall be conclusively bound by such arbitration. This instrument embodies the entire agreement between the Broker-Dealer and Lender and no other evidence of such agreement has been or will be executed without the prior written consent of the NASD. This Agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of California in all respects. IN WITNESS WHEREOF the parties have set their hands and seal this 25th day of February, 1992. SUNAMERICA CAPITAL SERVICES, INC. ------------------------------ - ------------ (Name of Broker-Dealer) By: /s/ STEVE ROTHSTEIN L.S. ------------------------ - ------------ (Authorized Person) BROAD INC. By: /s/ JAMES R. BELARDI L.S. ------------------------ - ------------ (Lender) FOR NASD USE ONLY ACCEPTED BY /s/ THOMAS R. CASSELLA ------------------ - --------- (Name) Thomas R. Cassella Vice President Financial Responsibility ------------------ - --------- (Title) *EFFECTIVE DATE: 03-16-92 ------------------------------ LOAN NUMBER: 10-D-SCA.10833 ------------------------------ LOAN CERTIFICATE On February 24, 1992, SunAmerica Capital Services, Inc. ("Broker-Dealer"), and Broad, Inc. ("Lender") entered into a Master Subordinated Loan Agreement ("Agreement"). Pursuant to the terms of the Agreement Lender may from time to time make loans to Broker-Dealer in minimum increments of $3,000,000 up to a maximum aggregate principal amount of $15,000,000 with interest on the outstanding balance at seven percent (7%) per annum. This Loan Certificate evidences a subordinated loan ("this loan") made to Broker-Dealer pursuant to the Agreement. 1. This loan amount: $4,000,000 ------------------ 2. Date of this loan: March 16, 1992 ------------------ 3. Maximum amount of interest to be subordinated under this loan: $1,120,000 ------------------ 4. Aggregate principal amount of this and prior loans pursuant to the Agreement: $4,000,000 ------------------ 5. Aggregate maximum amount of interest to be subordinated under to this and prior loans pursuant to the Agreement: $1,120,000 ------------------ Pursuant to the Agreement, a manually signed copy of this Loan Certificate shall be filed within three days following the above date of this loan with the NASD Department of Surveillance and an additional copy with the NASD District Office for New York. BROKER-DEALER: LENDER: SunAmerica Capital Broad Inc. Service, Inc. /s/ JAMES R. BELARDI By -------------------------------- By ----------------- MASTER SUBORDINATED LOAN AGREEMENT LENDER'S ATTESTATION -------------------- It is recommended that you discuss the merits of this investment with an attorney, accountant or some other person who has knowledge and experience in financial and business matters prior to executing this Agreement. 1. I have received and reviewed NASD Form SLD, which is a reprint of Appendix D of 17 CFR 240.15c3-1. And am familiar with its provisions. 2. I am aware that the funds or securities subject to this Agreement are not covered by the Securities Investor Protection Act of 1970. 3. I understand that I will be furnished financial statements pursuant to SEC Rule 17a-5(c). 4. On the date this Agreement was entered into, the broker-dealer carried funds or securities for my account. (State Yes or No) No. 5. Lender's business relationship to the broker-dealer is: Broker-dealer is a fifth tier subsidiary of Lender and Lender continuously monitors the fiscal status and reports of broker- dealer. 6. If not a partner or stockholder actively engaged in the business of the broker-dealer, acknowledge receipt of the following: Not applicable. a. Certified audit and accountant's certificate dated __________. b. Disclosure of financial and/or operational problems since the last certified audit which required reporting pursuant to SEC Rule 17a-11. (If no such reporting was requried, state "none") c. Balance sheet and statement of ownership equity dated _______. d. Most recent computation of net capital and aggregate indebtedness or aggregate debit items dated _______, reflecting a net capital of $__________ and a ratio of _________. e. Debt/equity ratio as of ________ or ___________. f. Other disclosures: ______________________ Dated: February 25, 1992 By: BROAD INC., ------------------ /s/ JAMES R. BELARDI L.S. -------------------- - ------- (Lender) CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of BROAD INC., a Maryland corporation (this "Corporation"), do hereby certify that the Executive Committee of the Board of Directors of this Corporation on February 24, 1992 adopted the following resolutions and that such resolutions have not been amended or rescinded from the date of their adoption and are in full force and effect as of the date hereof: 1. Authorization of Master Subordinated Loan Agreement with SunAmerica capital Services, Inc. ------------------------------------- ----------- BE IT RESOLVED that the Executive committee of this Corporation after review of the net capital infusion needs of SunAmerica Capital Services, Inc. ("SunAmerica"), hereby authorizes this Corporation to enter into a Master Subordinated Loan Agreement ("Agreement") dated as of February 24, 1992, to be effective on March 16, 1992, pursuant to the terms of which this Corporation will make an initial subordinated loan to SunAmerica in the amount of $4,000,000, and, thereafter, has the discretion to make additional loans to SunAmerica in increments of at least $3,000,000, subject to an aggregate maximum principal amount outstanding under the Agreement of $15,000,000; and RESOLVED FURTHER that James R. Belardi, Vice President of this Corporation, is hereby authorized to execute said Agreement on behalf of this Corporation, and further, to make such changes in the terms and conditions of such Agreement as may be necessary to conform to the requirements of Title 17 CFR 240.15c- 3-ld and the rules of the National Association of Securities Dealers; and RESOLVED FURTHER that the Executive Committee hereby ratifies any and all action that may have been taken by the officers of this Corporation in connection with the foregoing resolutions and authorizes the officers of this Corporation to take any and all such further actions as may be deemed appropriate to reflect these resolutions and to carry out their tenor, effect and intent. IN WITNESS WHEREOF, the undersigned has executed this Certificate and affixed the seal of this Corporation, this 10th day of March 1992. /s/ SUSAN L. HARRIS - ------------------------------------ Susan L. Harris, Secretary EXHIBIT A LOAN CERTIFICATE On February 24, 1992, SunAmerica Capital Services, Inc. ("Broker-Dealer"), and Broad Inc. ("Lender") entered into a Master Subordinated Loan Agreement ("Agreement"). Pursuant to the terms of the Agreement Lender may from time to time make loans to Broker-Dealer in minimum increments of $3,000,000 up to a maximum aggregate principal amount of $15,000,000 with interest on the outstanding balance at seven percent (7%) per annum. This Loan Certificate evidences a subordinated loan ("this loan") made to Broker-Dealer pursuant to the Agreement. 1. This loan amount: -------------------- 2. Date of this loan: -------------------- 3. Maximum amount of interest to be subordinated under this loan: -------------------- 4. Aggregate principal amount of this and prior loans pursuant to theAgreement: ----------------- 5. Aggregate maximum amount of interest to be subordinated under to this and prior loans pursuant to the Agreement: -------------------- Pursuant to the Agreement, a manually signed copy of this Loan Certificate shall be filed within three days following the above date of this loan with the NASD Department of Surveillance and an additional copy with the NASD District office for New York. BROKER-DEALER: LENDER: SunAmerica Capital Broad Inc. Services, Inc. By By /s/ JAMES R. BELARDI ------------------------------- --------------------- EX-10.(K) 7 EXHIBIT 10(k) June 20, 1995 Ms. Betty Carr Royal Alliance Associates, Inc. 733 Third Avenue New York, NY 10017 Re: Subordinated Loan Agreement Control #: 10-E-SLA-10263 Lender: SunAmerica, Inc. Maturity Date: August 23, 1999 Amount: $4,500,000 Dear Ms. Carr: The National Association of Securities Dealers, Inc. has found the above referenced Agreement acceptable as a satisfactory subordination agreement effective as of August 24, 1996. Appendix D of SEC Rule 15c3-1 requires the prior written approval of the NASD before any repayment of a subordination agreement can be made. Accordingly, unsecured advances to the lender during the term of the Agreement are not permitted, since such advances would constitute unauthorized prepayments. All unauthorized prepayment matters are presented to the District Business Conduct Committee for disciplinary review. Please bear in mind that all notifications to the Association required by the provisions of this Agreement must be made by telegraphic notice and filed with the District Office. If you have any questions regarding this Agreement or our acceptance thereof, please contact this district office. Very truly yours, /s/ John J. Lafond Assistant Director JJL:pp Enclosure cc: Frances Giardina NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL SL-5 AGREEMENT BETWEEN: Lender SunAmerica Inc. (Name) 1999 Avenue of the Stars, 38th Floor (Street Address) Los Angeles California 90067- 6002 (City) (State) (Zip) AND Broker-Dealer Royal Alliance Associates, Inc. (Name) 733 Third Avenue, 3rd Floor (Street Address) New York New York 10017 (City) (State) (Zip) NASD ID No.: 023131 Date Filed: July 24, 1996 NASD NASD SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL AGREEMENT dated July 24, 1996 to be effective August 24, 1996 between SunAmerica Inc. (the "Lender") and Royal Alliance Associates, Inc. (the "Broker-Dealer"). In consideration of the sum of $4,500,000.00 and subject to the terms and conditions hereinafter set forth, the Broker-Dealer promise to pay to the Lender or assigns on August 23, 1999 (the "Scheduled Maturity Date") (the last day of the month at least three years from the effective date of this Agreement) at the principal office of the Broker-Dealer the aforedescribed sum and interest thereon payable at the rate of 9.0 percent per annum from the effective date of this Agreement, which date shall be the date so agreed upon by the Lender and the Broker-Dealer unless otherwise determined by the National Association of Securities Dealers, Inc. (the "NASD"). This Agreement shall not be considered a satisfactory subordination agreement pursuant to the provisions of 17 CFR 240.15c3-1d unless and until the NASD has found the Agreement acceptable and such Agreement has become effective in the form found acceptable. The cash proceeds covered by this Agreement shall be used and dealt with by the Broker-Dealer as part of its capital and shall be subject to the risks of the business. The Broker-Dealer shall have the right to deposit any cash proceeds of the Subordinated Loan Agreement in an account or accounts in its own name in any bank or trust company. The Lender irrevocably agrees that the obligations of the Broker-Dealer under this Agreement with respect to the payment of principal and interest shall be and are subordinate in right of payment and subject to the prior payments or provisions for payment in full of all claims of all other present and future creditors of the Broker-Dealer arising out of any matter occurring prior to the date on which the related Payment Obligation (as defined herein) matures consistent with the provisions of 17 CFR 240.15c3-1 and 240.15c3-1d, except for claims which are the subject of subordination agreements which rank on the same priority as or are junior to the claim of the Lender under such subordination agreements. I. PERMISSIVE PREPAYMENTS At the option of the Broker-Dealer, but not at the option of the Lender, payment of all or any part of the "Payment Obligation" amount hereof prior to the maturity date may be made by the Broker-Dealer only upon receipt of the prior written approval of the NASD, but in no event may any prepayment be mad before the expiation of one year from the date this Agreement became effective. No prepayment shall be made if, after given effect thereto (and to all payments of Payment Obligations under any other subordination agreements then outstanding, the maturity of which are scheduled to fall due either within six months after the date such prepayment is to occur or on or prior to the date on which the Payment Obligation hereof is scheduled to mature, whichever date is earlier), without reference to any projected profit or loss of the Broker-Dealer, either aggregate indebtedness of the Broker-Dealer would exceed 1000 percent of its net capital or such lesser percent as may be made applicable to the Broker- Dealer from time to time by the NASD, or a governmental agency or self-regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than five percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. II. SUSPENDED REPAYMENTS (a) The Payment Obligation of the Broker-Dealer shall be suspended and shall not mature if after giving effect to such payment (together with the payment of any Payment Obligation of the Broker-Dealer under any other subordination agreement scheduled to mature on or before such Payment Obligation) the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital or such lesser percent as may be made applicable to the Broker-Dealer from time to time by the NASD, or a governmental agency or self- regulatory body having appropriate authority, or if the Broker-Dealer is operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, or its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. III. NOTICE OF MATURITY The Broker-Dealer shall immediately notify the NASD if, after giving effect to all payments of Payment Obligations under subordination agreements then outstanding which are then due or mature within six months without reference to any projected profit or loss of the Broker- Dealer, either the aggregate indebtedness of the Broker-Dealer would exceed 1200 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with CFR 240.15c3-3a, or if registered as a futures commission merchant, 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder, (less the market value of commodity options purchase by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority. IV. BROKER-DEALERS CARRYING THE ACCOUNTS OF SPECIALISTS AND MARKET MAKERS IN LISTED OPTIONS A Broker-Dealer who guarantees, endorses, carries or clears specialist or market-maker transactions in options listed on a national securities exchange or facility of a national securities association shall not permit a reduction, prepayment, or repayment of the unpaid principal amount if the effect would cause the equity required in such specialist or market-maker accounts to exceed 1000 percent of the Broker- Dealer's net capital or such percent as may be made applicable to the Broker-Dealer form time to time by the NASD or a governmental agency or self-regulatory body having appropriate authority. V. LIMITATION ON WITHDRAWAL OF EQUITY CAPITAL The proceeds covered by this Agreement shall in all respects be subject to the provisions of paragraph (e) of 17 CFR 240.15c3-1. Pursuant thereto no equity capital of the Broker-Dealer or a subsidiary or affiliate consolidated pursuant to 17 CFR 240.15c3-1c, whether in the form of capital contributions by partners, par or stated value of capital stock, paid-in capital in excess of par, retained earnings or other capital accounts, may be withdrawn by action of a stockholder or partner, or by redemption or repurchase of shares of stock by any of the consolidated entities or through the payment of dividends or any similar distribution, nor may any unsecured advance or loan be made to a stockholder, partner, sole proprietor, or employee if, after giving effect thereto and to any other such withdrawals, advances or loans any payments of Payment Obligations under satisfactory subordination agreements which are scheduled to occur within six months following such withdrawal, advances or loan, either aggregate indebtedness of any of the consolidated entities exceed 1000 percent of its net capital, or in the case of a Broker-Dealer operating pursuant to paragraph (f) of 17 CFR 240.15c3-1, its net capital would be less than 5 percent of aggregate debit items computed in accordance with 17 CFR 240.15c3-3a, or if registered as a futures commission merchant, 7 percent of the funds required to be segregated pursuant to the Commodity Exchange Act, and the regulations thereunder, (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, provided, however, the deduction for each option customer shall be limited to the amount of customer funds in such option customer's account,) if greater, and in either case, if its net capital would be less than 120 percent of the minimum dollar amount required by 17 CFR 240.15c3-1 including paragraph (f), if applicable, or such greater dollar amount as may be made applicable to the Broker-Dealer by the NASD, or a governmental agency or self-regulatory body having appropriate authority; or should the Broker-Dealer be included within such consolidation, if the total outstanding principal amounts of satisfactory subordination agreements of the Broker-Dealer (other than such agreements which qualify as equity under paragraph (d) of 17 CFR 240.15c3-1) would exceed 70 percent of its debt/equity total, as this term is defined in paragraph (d) of 17 CFR 240.15c3-1, for a period in excess of 90 days, or for such longer period which the Commission may upon application of the Broker-Dealer grant in the public interest or for the protection of investors. VI. BROKER-DEALER REGISTERED WITH CFTC If the Broker-Dealer is a futures commission merchant or introductory broker as that term is defined in the commodity Exchange Act, the Organization agrees, consistent with the requirements of Section 1.17(h) of the regulations of the CFTC (17 CFR 1.17(h)), that: (a) Whenever prior written notice by the Broker-Dealer to the NASD is required pursuant to the provisions of this Agreement, the same prior written notice shall be given by the Broker-Dealer to (i) the CFTC at its principal office in Washington, D.C., attention Chief Account of Division of Trading and Markets, and/or (ii) the commodity exchange of which the Organization is a member and which is then designated by the CFTC as the Organization's designated self- regulatory organization (the DSRO); (b) Whenever prior written consent, permission or approval of the NASD is required pursuant to the provisions of this Agreement, the Broker-Dealer shall also obtain the prior written consent, permission or approval of the CFTC and/or of the DSRO; and, (c) Whenever the Broker-Dealer receives written notice of acceleration of maturity pursuant to the provisions of this Agreement, the Broker-Dealer shall promptly give written notice thereof to the CFTC at the address above stated and/or to the DSRO. VII. GENERAL In the event of the appointment of a receiver or trustee of the Broker-Dealer or in the event of its insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganizations whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of the Broker-Dealer, the Payment Obligation of the Broker-Dealer shall mature, and the holder hereof shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of the Broker- Dealer until all claims of all other present and future creditors of the Broker-Dealer, whose claims are senior hereto, have been fully satisfied. This Agreement shall not be subject to cancellation by either the Lender or the Broker-Dealer, and no payment shall be made, nor the Agreement terminated, rescinded or modified by mutual consent or otherwise if the effect thereof would be insistent with the requirements of 17 CFR 240.15c3-1 and 240.15c3-1d. This Agreement may not be transferred, sold, assigned, pledged, or otherwise encumbered or otherwise disposed of, and no lien, charge, or other encumbrance may be created or permitted to be created thereof without the prior written consent of the NASD. The Lender irrevocably agrees that the loan evidenced hereby is not being made in reliance upon the standing of the Broker-Dealer as a member organization of the NASD or upon the NASD surveillance of the Broker-Dealer's financial position or its compliance with the By-Laws, rules and practices of the NASD. The Lender has made such investigation of the Broker-Dealer and its partners, officers, directors, and stockholders as the Lender deems necessary and appropriate under the circumstances. The Lender is not relying upon the NASD to provide any information concerning or relating to the Broker-Dealer and agrees that the NASD has no responsibility to disclose to the Lender any information concerning or relating to the Broker-Dealer which it may now, or at any future time, have. The term "Broker-Dealer," as used in this Agreement, shall include the broker-dealer, its heirs, executors, administrators, successors and assigns. The term "Payment Obligation" shall mean the obligation of the Broker-Dealer to repay cash loaned to it pursuant to this Subordinated Loan Agreement. The provisions of this Agreement shall be binding upon the Broker-Dealer and the Lender, and their respective heirs, executors, administrators, successors, and assigns. Any controversy arising out of or relating to this Agreement may be submitted to and settled by arbitration pursuant to the By-Laws and rules of the NASD. The Broker- Dealer and the Lender shall be conclusively bound by such arbitration. This instrument embodies the entire agreement between the Broker-Dealer and the Lender and no other evidence of such agreement has been or will be executed without prior written consent of the NASD. This Agreement shall be deemed to have been made under, and shall be governed by, the laws of the State of California in all respects. IN WITNESS WHEREOF the parties have set their hands and seal this 24th day of July, 1996. Royal Alliance Associates, Inc. (Name of Broker-Dealer) By: /s/ Steve Rothstein L.S. (Authorized Person) SunAmerica Inc. (Lender) By: /s/ James R. Belardi (Authorized Person) . FOR NASD USE ONLY ACCEPTED BY: /s/ J. Lafond (Name) Assistant Director (Title) EFFECTIVE DATE: August 24, 1995 LOAN NUMBER: 10-E-SLA-10263 SUBORDINATED LOAN AGREEMENT LENDER'S ATTESTATION It is recommended that you discuss the merits of this investment with an attorney, accountant or some other person who has knowledge and experience in financial and business matters prior to executing this Agreement. 1. I have received and reviewed NASD Form SLD, which is a reprint of Appendix D of 17 CFR 240.15c3-1, and am familiar with its provisions. 2. I am aware that the funds or securities subject to this Agreement are not covered by the Securities Investor Protection Act of 1970. 3. I understand that I will be furnished financial statements pursuant to SEC Rule 17a-5(c). 4. On the date this Agreement was entered into, the broker-dealer carried funds or securities for my account. (State Yes or No) 5. Lender's business relationship to the broker- dealer is: Lender is the ultimate parent company of broker- dealer, and Lender continuously monitors the fiscal status and reports of Broker-Dealer. 6. If not a partner or stockholder actively engaged in the business of the broker-dealer, acknowledge receipt of the following: a. Certified audit and accountant's certificate dated . b. Disclosure of financial and/or operational problems since the last certified audit which required reporting pursuant to SEC Rule 17a-11. (If no such reporting was required, state "none") c. Balance sheet and statement of ownership equity dated . d. Most recent computation of net capital and aggregate indebtedness or aggregate debit items dated , reflecting a net capital of $ and a ratio of . e. Debt/equity ratio as of of . f. Other disclosures: SunAmerica Inc. Dated: July 24, 1996 /s/ JAMES R. BELARDI L.S. CERTIFICATE OF SECRETARY I, Susan L. Harris, Secretary of SunAmerica Inc., a Maryland corporation (this "Corporation"), do hereby certify that the Executive Committee of Board of Directors of this Corporation, by unanimous written consent dated July 24, 1996, adopted the following resolutions and that said resolutions have not been modified, amended, repealed or rescinded and are in full force and effect: Authorization of Subordinated Loan Agreement for Equity Capital with Royal Alliance Associates, Inc. BE IT RESOLVED, that the Executive Committee of this Corporation after review of the net capital infusion needs of Royal Alliance Associates, Inc. hereby authorizes a $4.5 million subordinated loan to said subsidiary in conformance with the Subordinated Loan Agreement for Equity Capital dated as of July 24, 1996, to be effective on August 24, 1996 ("Subordinated Loan Agreement"); and RESOLVED FURTHER that James R. Belardi, Senior Vice President of this Corporation, is hereby authorized to execute said Subordinated Loan Agreement on behalf of this Corporation, and further, to make such changes in the terms and conditions of such Subordinated Loan Agreement as may be necessary to conform to the requirements of Title 17 CFR Section 240.15c 3-1d and the rules of the National Association of Securities Dealers; and RESOLVED FURTHER that the Executive Committee hereby ratifies any and all actions that may have previously been taken by the officers of this Corporation in connection with the foregoing resolution and authorized the officers of this Corporation to take any and all such further actions as may be appropriate to reflect these resolutions and to carry out their tenor, effect and intent. IN WITNESS WHEREOF, the undersigned has executed this Certificate and affixed the seal of this Corporation this 24th day of July, 1996. /s/ Susan L. Harris, Secretary (SEAL) EX-10.(L) 8 EXHIBIT 10(l) SUBORDINATED LOAN AGREEMENT FOR EQUITY CAPITAL AMENDMENT EXTENDING THE MATURITY DATE Amendment dated as of September 3, 1996 between (the "Lender") SunAmerica Inc. and SunAmerica Asset Management Corporation, Inc. (the "Borrower"). In consideration of the sum of $14,000,000.00 (the unpaid principal amount) and subject to the terms and conditions set forth in the Subordinated Loan Agreement for Equity Capital dated as of September 3, 1993 and scheduled to mature on September 13, 1996, the Lender agrees to extend the maturity date of said loan until September 13, 1999. The interest paid on this Subordinated Loan Agreement for Equity Capital is changed from 7% to 9% per annum, effective as of September 13, 1996. IN WITNESS WHEREOF the parties hereto have executed this amendment as of the 3rd day of September 1996. SunAmerica Asset Management Corporation, Inc. By: /s/ Steve Rothstein SVP, CFO SunAmerica Inc. By: /s/ James R. Belardi Executive Vice President EX-21 9 Exhibit 21 ========== ANCHOR NATIONAL LIFE INSURANCE COMPANY AND CONSOLIDATED SUBSIDIARIES LIST OF SUBSIDIARIES List of subsidiaries and certain other affiliates with percentage of voting securities owned by Anchor National Life Insurance Company or Anchor National Life Insurance Company's subsidiary which is the immediate parent. PERCENTAGE OF VOTING SECURITIES OWNED BY THE COMPANY OR COMPANY'S SUBSIDIARY WHICH IS THE NAME OF COMPANY IMMEDIATE PARENT - --------------- ------------------------ CALIFORNIA CORPORATIONS: % SAM Holdings Corporation 100 Sun Royal Holdings Corporation 100 DELAWARE CORPORATIONS: Saamsun Holdings Corp. 100 Royal Alliance Associates, Inc. 100 SunAmerica Asset Management Corp. 100 SunAmerica Capital Services, Inc. 100 SunAmerica Fund Services, Inc. 100 EX-27 10
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT OF ANCHOR NATIONAL LIFE INSURANCE COMPANY'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 12-MOS SEP-30-1996 SEP-30-1996 1,987,271,000 0 0 3,970,000 98,284,000 39,724,000 2,329,232,000 122,058,000 0 443,610,000 9,204,535,000 2,205,506,000 0 0 0 35,832,000 3,511,000 0 0 481,744,000 9,204,535,000 0 159,507,000 (13,355,000) 160,931,000 102,664,000 57,520,000 (2,457,000) 69,308,000 24,252,000 45,056,000 0 0 0 45,056,000 0 0 0 0 0 0 0 0 0
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