SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
--------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________to__________________
Commission file number 1-4618
SUNAMERICA INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland 86-0176061
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1 SunAmerica Center, Los Angeles, California 90067-6022
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (310) 772-6000
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 the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date:
Common Stock, par value $1.00 per share, 108,598,988 shares outstanding
Nontransferable Class B Stock, par value $1.00 per share, 10,848,468
shares outstanding
SUNAMERICA INC.
INDEX
Page
Number(s)
---------
Part I - Financial Information
Consolidated Balance Sheet (Unaudited) -
March 31, 1997 and September 30, 1996 3-4
Consolidated Income Statement (Unaudited) -
Three Months and Six Months Ended March 31, 1997 and 1996 5
Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended March 31, 1997 and 1996 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-13
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-32
Part II - Other Information 33-35
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
March 31, September 30,
1997 1996
------------ -------------
ASSETS
Investments:
Cash and short-term investments $ 1,267,977 $ 529,363
Bonds, notes and redeemable preferred stocks:
Available for sale, at fair value
(amortized cost: March 31, 1997,
$17,351,071; September 30, 1996,
$12,657,620) 17,197,591 12,582,024
Mortgage loans 3,086,249 1,652,257
Common stocks, at fair value
(cost: March 31, 1997 $42,119;
September 30, 1996, $44,871) 87,214 81,385
Partnerships 1,083,253 1,071,857
Real estate 84,995 105,321
Other invested assets 273,164 177,577
------------ -------------
Total investments 23,080,443 16,199,784
Variable annuity assets 7,100,517 6,380,458
Accrued investment income 253,057 186,803
Deferred acquisition costs 1,257,842 782,300
Other assets 225,289 177,476
------------ -------------
TOTAL ASSETS $ 31,917,148 $ 23,726,821
============ =============
See accompanying notes
SUNAMERICA INC.
CONSOLIDATED BALANCE SHEET (Continued)
(In thousands - unaudited)
March 31, September 30,
1997 1996
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts $ 14,978,948 $ 9,654,674
Reserves for guaranteed investment contracts 5,151,894 4,169,028
Trust deposits 457,335 436,048
Payable to brokers for purchases of securities 175,929 42,518
Income taxes currently payable 8,974 18,436
Other liabilities 728,940 428,718
------------ -------------
Total reserves, payables
and accrued liabilities 21,502,020 14,749,422
------------ -------------
Variable annuity liabilities 7,100,517 6,380,458
------------ -------------
Long-term notes and debentures 1,004,585 573,335
------------ -------------
Deferred income taxes 115,220 125,417
------------ -------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary grantor
trusts whose sole assets are junior
subordinated debentures of the Company 547,631 237,631
------------ -------------
Shareholders' equity:
Preferred Stock 335,869 384,549
Nontransferable Class B Stock 10,848 10,848
Common Stock 108,599 108,604
Additional paid-in capital 247,933 304,295
Retained earnings 1,001,896 869,215
Net unrealized losses on debt and
equity securities available for sale (57,970) (16,953)
------------ -------------
Total shareholders' equity 1,647,175 1,660,558
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 31,917,148 $ 23,726,821
============ =============
See accompanying notes
<TABLE>
SUNAMERICA INC.
CONSOLIDATED INCOME STATEMENT
For the three months and six months ended March 31, 1997 and 1996
(In thousands, except per-share amounts - unaudited)
<CAPTION>
Three months Six months
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Investment income $ 393,676 $ 287,538 $ 764,221 $ 541,528
--------- --------- --------- ---------
Interest expense on:
Fixed annuity contracts (128,104) (89,588) (256,999) (157,684)
Guaranteed investment contracts (76,316) (59,918) (143,495) (121,342)
Trust deposits (2,538) (2,552) (4,960) (5,123)
Senior indebtedness (23,109) (18,014) (42,900) (33,066)
--------- --------- --------- ---------
Total interest expense (230,067) (170,072) (448,354) (317,215)
--------- --------- --------- ---------
Dividends paid on preferred
securities of grantor trusts (11,605) (5,172) (20,194) (9,893)
--------- --------- --------- ---------
NET INVESTMENT INCOME 152,004 112,294 295,673 214,420
--------- --------- --------- ---------
NET REALIZED INVESTMENT LOSSES (9,442) (3,589) (18,746) (2,185)
--------- --------- --------- ---------
Fee income:
Variable annuity fees 32,702 25,337 63,600 49,753
Net retained commissions 15,792 13,340 29,114 22,501
Asset management fees 6,305 6,361 12,723 12,864
Loan servicing fees 6,238 6,203 12,007 11,773
Trust fees 4,432 4,126 8,887 8,321
--------- --------- --------- ---------
TOTAL FEE INCOME 65,469 55,367 126,331 105,212
--------- --------- --------- ---------
Other income and expenses:
Surrender charges 6,372 5,025 13,007 7,613
General and administrative expenses (61,820) (50,242) (120,872) (94,340)
Amortization of deferred acquisition costs (30,003) (24,216) (60,413) (45,287)
Other, net 1,454 2,802 3,822 4,594
--------- --------- --------- ---------
TOTAL OTHER INCOME AND EXPENSES (83,997) (66,631) (164,456) (127,420)
--------- --------- --------- ---------
PRETAX INCOME 124,034 97,441 238,802 190,027
Income tax expense (37,200) (29,200) (71,600) (57,000)
--------- --------- --------- ---------
NET INCOME $ 86,834 $ 68,241 $ 167,202 $ 133,027
========= ========= ========= =========
EARNINGS PER SHARE $ 0.62 $ 0.48 $ 1.20 $ 0.95
========= ========= ========= =========
NET EARNINGS APPLICABLE TO COMMON STOCK
(used in the computation of earnings
per share) $ 84,803 $ 65,358 $ 163,112 $ 127,261
========= ========= ========= =========
AVERAGE SHARES OUTSTANDING 136,196 135,929 135,566 133,710
========= ========= ========= =========
See accompanying notes
</TABLE>
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended March 31, 1997 and 1996
(In thousands - unaudited)
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 167,202 $ 133,027
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to:
Fixed annuity contracts 256,999 157,684
Guaranteed investment contracts 143,495 121,342
Trust deposits 4,960 5,123
Net realized investment losses 18,746 2,185
Accretion of net discounts on investments (15,272) (12,355)
Provision for deferred income taxes 2,900 (41,005)
Change in:
Accrued investment income (16,350) (6,917)
Deferred acquisition costs (51,555) (28,677)
Other assets (17,736) (6,455)
Income taxes currently payable (30,076) 51,350
Other liabilities 66,456 (6,551)
Other, net (5,257) 4,393
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 524,512 373,144
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred
stocks (8,434,061) (5,656,418)
Mortgage loans (324,774) (150,319)
Partnerships (450,310) (320,969)
Other investments, excluding short-term
investments (124,631) (66,755)
Net assets of CalFarm Life Insurance Company -- (168,665)
Net assets of Ford Life Insurance Company -- 6,677
The annuity business of John Alden Financial
Corporation 178,803 --
Sales of:
Bonds, notes and redeemable preferred
stocks 5,653,174 4,092,761
Partnerships 273,109 97,657
Other investments, excluding short-term
investments 102,019 41,155
Redemptions and maturities of:
Bonds, notes and redeemable preferred
stocks 1,529,071 1,184,301
Mortgage loans 137,718 60,706
Partnerships 312,063 114,294
Other investments, excluding short-term
investments 3,738 21,706
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (1,144,081) (743,869)
------------ ------------
SUNAMERICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the six months ended March 31, 1997 and 1996
(In thousands - unaudited)
1997 1996
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends to shareholders $ (34,521) $ (32,011)
Premium receipts on:
Fixed annuity contracts 824,103 518,375
Guaranteed investment contracts 1,232,586 514,916
Net exchanges from the fixed accounts
of variable annuity contracts (247,286) (104,628)
Receipts of trust deposits 392,526 250,573
Withdrawal payments on:
Fixed annuity contracts (510,413) (310,279)
Guaranteed investment contracts (393,218) (376,833)
Trust deposits (376,198) (225,425)
Claims and annuity payments on fixed
annuity contracts (150,081) (97,755)
Net proceeds from issuances of long-term
notes 429,383 47,478
Net increase in other senior indebtedness -- 63,359
Net repayments of other short-term financings (14,197) (275,704)
Net proceeds from issuances of preferred
securities of a subsidiary grantor trusts 299,541 179,532
Net payment for redemption of Series C
Preferred Stock (48,680) --
Net proceeds from issuance of Series E
Preferred Stock -- 240,556
Payment of issuance costs of 8-1/2% Premium
Equity Redemption Cumulative Security Units (45,362) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,358,183 392,154
------------ ------------
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS 738,614 21,429
CASH AND SHORT-TERM
INVESTMENTS AT BEGINNING OF PERIOD 529,363 855,350
------------ ------------
CASH AND SHORT-TERM
INVESTMENTS AT END OF PERIOD $ 1,267,977 $ 876,779
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness $ 52,168 $ 30,855
============ ============
Income taxes paid, net of refunds received $ 98,776 $ 46,655
============ ============
See accompanying notes
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Company's
consolidated financial position as of March 31, 1997 and September 30,
1996, the results of its consolidated operations for the three months and
six months ended March 31, 1997 and 1996 and its consolidated cash flows
for the six months ended March 31, 1997 and 1996. The results of
operations for the three months and six months ended March 31, 1997 are
not necessarily indicative of the results to be expected for the full
year. The accompanying unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements for the fiscal year ended September 30, 1996, contained in the
Company's 1996 Annual Report to Shareholders.
2. Acquisitions
------------
The Company acquired all of the outstanding stock of CalFarm Life
Insurance Company ("CalFarm") and of Ford Life Insurance Company ("Ford
Life") on December 29, 1995 and February 29, 1996, respectively. On
April 1, 1996, the Company completed the acquisition of a block of
annuity contracts (the "Central National Annuity Contracts") from The
Central National Life Insurance Company of Omaha, a subsidiary of
Beneficial Corp. These acquisitions have been accounted for by using the
purchase method of accounting. Accordingly, the income statements for
the three months and six months ended March 31, 1996 include the results
of CalFarm's operations for only the period from January 1, 1996 through
March 31, 1996; Ford Life's operations for only the period from March 1,
1996 through March 31, 1996; and do not include the results of operations
associated with the Central National Annuity Contracts. On a pro forma
basis, assuming these acquisitions occurred on October 1, 1995, the
beginning of the earliest period presented herein, revenues (investment
income, net realized investment losses and fee income) would have been
$391,113,000 and $777,416,000 for the three months and six months ended
March 31, 1996, respectively, and net income would have been $73,290,000
($0.52 per share) and $144,129,000 ($1.03 per share) for the three months
and six months ended March 31, 1996, respectively.
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Acquisitions (Continued)
------------
On March 31, 1997, the Company completed the acquisition of 1) a block
of annuity contracts from John Alden Life Insurance Company, a subsidiary
of John Alden Financial Corporation, and 2) all of the outstanding common
stock of John Alden Life Insurance Company of New York, for a total cash
purchase price of approximately $238,000,000. These acquisitions have
been accounted for by using the purchase method of accounting.
Accordingly, the income statements for the three months and six months
ended March 31, 1997 and 1996 do not include the results of operations
of these acquired businesses. The Company has acquired assets having an
aggregate fair value of $5,041,313,000, composed primarily of invested
assets totaling $4,990,574,000. Liabilities assumed in this transaction
totaled $5,218,044,000, including $5,161,294,000 of fixed annuity
reserves. An amount equal to the sum of the purchase price and the fair
value of the net liabilities assumed, amounting to $414,731,000 at March
31, 1997, is included in Deferred Acquisition Costs in the balance sheet,
and will be amortized, with interest, over the estimated lives of the
assumed annuity contracts in proportion to the present value of estimated
future profits. This acquisition cost is substantially less than a
computation of the present value of estimated future profits discounted
at the weighted average crediting rate.
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
3. Company-Obligated Preferred Securities of Subsidiary Grantor Trusts
-------------------------------------------------------------------
Preferred securities of subsidiary grantor trusts comprise $52,630,875
liquidation amount of 9.95% Trust Originated Preferred Securities issued
by SunAmerica Capital Trust I in June 1995, $185,000,000 liquidation
amount of 8.35% Trust Originated Preferred Securities issued by
SunAmerica Capital Trust II in October 1995 and $310,000,000 liquidation
amount of 8.30% Trust Originated Preferred Securities issued by
SunAmerica Capital Trust III in November 1996.
In connection with the issuance of the 9.95% Trust Originated Preferred
Securities and the related purchase by the Company of the grantor trust's
common securities, the Company issued to the grantor trust $54,258,650
principal amount of 9.95% junior subordinated debentures, due 2044, which
are redeemable at the option of the Company on or after June 15, 1997 at
a redemption price of $25 per debenture plus accrued and unpaid interest.
In connection with the issuance of the 8.35% Trust Originated Preferred
Securities and the related purchase by the Company of the grantor trust's
common securities, the Company issued to the grantor trust $191,224,250
principal amount of 8.35% junior subordinated debentures, due 2044, which
are redeemable at the option of the Company on or after September 30,
2000 at a redemption price of $25 per debenture plus accrued and unpaid
interest.
In connection with the issuance of the 8.30% Trust Originated Preferred
Securities and the related purchase by the Company of the grantor trust's
common securities, the Company issued to the grantor trust $320,670,000
principal amount of 8.30% junior subordinated debentures, due 2045, which
are redeemable at the option of the Company on or after November 13, 2001
at a redemption price of $25 per debenture plus accrued and unpaid
interest.
The grantor trusts are wholly owned subsidiaries of the Company. The
debentures issued to the grantor trusts and the common securities
purchased by the Company from the grantor trusts are eliminated in the
balance sheet.
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
4. Earnings per Share
------------------
The calculation of earnings per share is made by dividing applicable
earnings by the weighted average number of shares of Common Stock and
Nontransferable Class B Stock (collectively referred to as "Common
Stock") outstanding during each period, adjusted for the incremental
shares attributed to common stock equivalents. Common stock equivalents
include outstanding employee stock options, phantom shares arising from
other employee stock plans, Premium Equity Redemption Cumulative Security
Units issued in November 1996 and convertible preferred stock, which
includes the Series D and E Depositary Shares issued in March 1993 and
November 1995, respectively. Common stock equivalents are included in
the computation only if their effect is dilutive. Net Earnings Applicable
to Common Stock are reduced by preferred stock dividend requirements,
which amounted to $2,031,000 and $2,883,000 for the three months ended
March 31, 1997 and 1996, respectively, and $4,090,000 and $5,766,000 for
the six months ended March 31, 1997 and 1996, respectively. These
preferred stock dividend requirements do not include dividends paid on
the convertible issues, which amounted to $3,100,000 and $4,336,000 in
the three months ended March 31, 1997 and 1996, respectively, and
$6,200,000 and $9,328,000 in the six months ended March 31, 1997 and
1996, respectively.
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
<TABLE>
5. Ratios of Earnings to Fixed Charges
-----------------------------------
The ratios of earnings to fixed charges for the three months and six months ended
March 31, 1997 and 1996 are as follows:
<CAPTION>
Three months Six months
--------------- ---------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Ratio of earnings to fixed charges
(which include dividends paid on
preferred securities of grantor trusts
and interest incurred on senior debt,
but exclude interest incurred on fixed
annuities, guaranteed investment
contracts and trust deposits) 4.6x 5.2x 4.8x 5.4x
===== ===== ===== =====
Ratio of earnings to fixed charges
(which include dividends paid on
preferred securities of grantor
trusts and interest incurred on
senior debt, fixed annuities,
guaranteed investment contracts
and trust deposits) 1.5x 1.6x 1.5x 1.6x
===== ===== ===== =====
Ratio of earnings to combined fixed
charges and preferred stock dividends
(which include dividends paid on
preferred securities of grantor trusts
and interest incurred on senior debt,
but exclude interest incurred on fixed
annuities, guaranteed investment
contracts and trust deposits) 3.8x 3.6x 3.9x 3.6x
==== ==== ==== ====
Ratio of earnings to combined fixed
charges and preferred stock dividends
(which include dividends paid on
preferred securities of grantor trusts
and interest incurred on senior debt,
fixed annuities, guaranteed investment
contracts and trust deposits) 1.5x 1.5x 1.5x 1.5x
==== ==== ==== ====
</TABLE>
SUNAMERICA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
6. Subsequent Event
----------------
In April 1997, the Company announced that it will redeem all 3,514,765
shares of its outstanding 9-1/4% Preferred Stock, Series B, for a cash
payment equal to the liquidation amount of $25 plus accrued and unpaid
dividends to the redemption date of $0.578125 per share. It also
announced that SunAmerica Capital Trust I will redeem $52,630,875
liquidation amount of the 9.95% Trust Originated Preferred Securities
(concurrent with the Company's redemption of the related 9.95% junior
subordinated debentures) for a cash payment equal to the liquidation
amount of $25 plus accrued and unpaid dividends to the redemption date
of $0.52513889 per share. Both redemptions will occur on June 16, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations of SunAmerica Inc. (the "Company") for the three months and six
months ended March 31, 1997 and 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 in any other statements made by, or on behalf of, the Company,
whether or not in future filings with the Securities and Exchange Commission
(the "SEC"). Forward-looking statements are statements not based on historical
information and which relate to future operations, strategies, financial
results, or other developments. In particular, statements using verbs such as
"expect," "anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future or projected levels of sales and redemptions of the Company's products,
investment spreads and yields, or the earnings and profitability of the
Company's activities.
Forward-looking statements are necessarily based upon estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable events or
developments, some of which may be national in scope, such as general economic
conditions and changes in 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
NET INCOME totaled $86.8 million or $0.62 per share in the second quarter
of 1997, up from $68.2 million or $0.48 per share in the second quarter of
1996. For the six months, net income amounted to $167.2 million or $1.20 per
share in 1997, compared with $133.0 million or $0.95 per share in 1996. Net
income reflects the effects of the acquisitions (the "Acquisitions") of CalFarm
Life Insurance Company ("CalFarm") on December 29, 1995, Ford Life Insurance
Company ("Ford Life") on February 29, 1996 and certain annuity contracts
purchased from The Central National Life Insurance Company of Omaha (the
"Central National Annuity Contracts") on April 1, 1996. While operating
results in fiscal 1997 include those of the Acquisitions, the Acquisitions were
accounted for under the purchase method of accounting, and, therefore, results
of operations in fiscal 1996 include those of the Acquisitions only from their
respective dates of acquisition. If the Acquisitions had been consummated at
the beginning of the prior-year periods discussed herein, net income would have
been $73.3 million ($0.52 per share) and $144.1 million ($1.03 per share) for
the second quarter and the six months of 1996, respectively.
PRETAX INCOME totaled $124.0 million in the second quarter of 1997 and
$97.4 million in the second quarter of 1996. For the six months, pretax income
totaled $238.8 million in 1997, compared with $190.0 million in 1996. These
improvements primarily resulted from increased net investment income and fee
income, partially offset by additional general and administrative expenses,
amortization of deferred acquisition costs and 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, increased to $152.0 million in the second quarter
of 1997 from $112.3 million in the second quarter of 1996. These amounts
represent 3.33% on average invested assets (computed on a daily basis) of
$18.26 billion in the second quarter of 1997 and 3.40% on average invested
assets of $13.23 billion in the second quarter of 1996. For the six months,
net investment income increased to $295.7 million in 1997 from $214.4 million
in 1996, representing 3.35% on average invested assets of $17.66 billion in
1997 and 3.54% on average invested assets of $12.12 billion in 1996. The
invested assets associated with the Acquisitions were primarily high-grade
corporate, government and government/agency bonds and cash and short-term
investments, which are generally lower yielding than a significant portion of
the invested assets that comprise the remainder of the Company's portfolio.
As a result of the Acquisitions, net investment income as a percent of average
invested assets in the 1997 periods has declined. However, if the Acquisitions
had been consummated at the beginning of the prior-year periods, net investment
income would have represented 3.05% on related average invested assets for the
second quarter and for the six months of 1996.
Net investment income also includes the effect of income earned on the
excess of average invested assets over average interest-bearing liabilities.
This excess amounted to $1.22 billion in the second quarter of 1997, $1.08
billion in the second quarter of 1996, $1.19 billion in the six months of 1997
and $1.04 billion in the six months of 1996. The difference between the
Company's yield on average invested assets and the rate paid on average
interest-bearing liabilities was 2.95% in the second quarter of 1997, 2.92% in
the second quarter of 1996, 2.96% in the six months of 1997 and 3.03% in the
six months of 1996. If the Acquisitions had been consummated at the beginning
of the prior-year periods, the difference between the Company's yield on
average invested assets and the rate paid on average interest-bearing
liabilities would have been 2.72% and 2.73% for the second quarter and six
months of 1996, respectively.
Investment income totaled $393.7 million in the second quarter of 1997,
up from $287.5 million in the second quarter of 1996. For the six months,
investment income amounted to $764.2 million in 1997, up $222.7 million from
the $541.5 million recorded in 1996. These amounts represent yields on average
invested assets of 8.62% and 8.69% in the second quarters of 1997 and 1996,
respectively, and 8.65% and 8.94% in the six months of 1997 and 1996,
respectively. Increases in income and decreases in yields reflect the effects
of the Acquisitions. However, if the Acquisitions had been consummated at the
beginning of the prior-year periods, the yields on average invested assets
would have been 8.43% and 8.54% for the second quarter and the six months of
1996, respectively. The increases in investment income in 1997 also reflect
increases in average invested assets (in excess of those contributed by the
Acquisitions), higher prevailing interest rates and an increase in partnership
investments.
Partnership income increased to $68.8 million (representing a yield of
25.41% on related average assets of $1.08 billion) in the second quarter of
1997, compared with $29.8 million (representing a yield of 13.80% on related
average assets of $863.5 million) in the second quarter of 1996. For the six
months, partnership income amounted to $126.6 million (representing a yield of
22.60% on related average assets of $1.12 billion) in 1997, compared with $66.0
million (representing a yield of 15.84% on related average assets of $833.9
million). Partnership income includes income recognized by using the cost
method of accounting, which amounted to $33.1 million in the second quarter of
1997, $8.4 million in the second quarter of 1996, $50.1 million in the six
months of 1997 and $26.7 million in the six months of 1996. Such income is
based upon cash distributions received from limited partnerships, the
operations of which the Company does not significantly influence.
Consequently, such income is not predictable and there can be no assurance that
the Company will realize comparable levels of such income in the future.
The Company has enhanced investment yield from time to time through total
return bond swap agreements (the "Total Return Agreements"). The Company
recorded losses of $0.5 million on the Total Return Agreements in the second
quarter of 1997, compared with $14.3 million of income recorded in the second
quarter of 1996. For the six months, the Company recorded income of $7.7
million on the Total Return Agreements in 1997, compared with $19.2 million in
1996. The reduced income recorded on the Total Return Agreements during 1997
principally resulted from the higher relative prevailing interest rates at
March 31, 1997, and their corresponding effect on the fair value of the
underlying assets, and poor general performance in the non-investment grade
bond sector during the second quarter of 1997. (See "Asset-Liability Matching"
for additional discussion of Total Return Agreements.)
Total interest and dividend expense aggregated $241.7 million in the
second quarter of 1997 and $175.2 million in the second quarter of 1996. For
the six months, interest expense aggregated $468.5 million in 1997, compared
with $327.1 million in 1996. The average rate paid on all interest-bearing
liabilities was 5.67% (5.25% on fixed annuity contracts and 6.22% on guaranteed
investment contracts ("GICs")) in the second quarter of 1997, compared with
5.77% (5.44% on fixed annuity contracts and 6.34% on GICs) in the second
quarter of 1996. For the six months, the average rate paid on all interest-
bearing liabilities decreased to 5.69% (5.28% on fixed annuity contracts and
6.27% on GICs) in 1997 from 5.91% (5.51% on fixed annuity contracts and 6.52%
on GICs) in 1996. Interest-bearing liabilities averaged $17.04 billion during
the second quarter of 1997, $12.15 billion during the second quarter of 1996,
$16.48 billion during the six months of 1997 and $11.08 billion during the six
months of 1996. If the Acquisitions had occurred at the beginning of the
prior-year periods, the average rate on all interest-bearing liabilities would
have been 5.72% (5.46% on fixed annuity contracts) and 5.81% (5.52% on fixed
annuity contracts) for the second quarter and six months of 1996, respectively.
The decreases during 1997 in the average rate paid on all interest
bearing liabilities from the rate that would have been reported had the
Acquisitions been consummated at the beginning of the prior-year periods
primarily resulted from decreased average crediting rates on the Company's
annuity liabilities. These decreases were partially offset by the effects of
increases in the percentage of average interest-bearing liabilities composed
of GICs and preferred securities of subsidiary grantor trusts, which generally
bear higher interest rates than the average interest rate on the Company's
other interest-bearing liabilities. The decreased average crediting rate on
the Company's annuity liabilities reflects the lowering of renewal crediting
rates on acquired annuity liabilities, as well as on certain older blocks of
business.
GROWTH IN AVERAGE INVESTED ASSETS since 1996 primarily reflects the
impact of the Acquisitions. As part of the Acquisitions, the Company acquired
$722.5 million of invested assets of CalFarm on December 29, 1995, $3.10
billion of invested assets of Ford Life on February 29, 1996 and the $908.8
million of invested assets associated with the Central National Annuity
Contracts on April 1, 1996. The Company intends to continue to pursue a
strategy of enhancing its internal growth with complementary acquisitions. (See
"Financial Condition and Liquidity" and Note 2 of Notes to Consolidated
Financial Statements regarding the March 31, 1997 acquisition of the annuity
business of John Alden Financial Corporation (the "John Alden Acquisition").)
Average invested assets also increased in 1997 as a result of sales of
the Company's fixed-rate products, consisting of both GICs and fixed annuities
(including the fixed accounts of variable annuity products), and $728.9 million
of net proceeds from the issuance of long-term notes. Since March 31, 1996,
GIC premiums have totaled $1.74 billion and fixed annuity premiums have
aggregated $1.30 billion. GIC premiums more than doubled to $692.0 million in
the second quarter of 1997 from $283.4 million in the second quarter of 1996
and to $1.23 billion in the six months of 1997 from $514.9 million in the six
months of 1996. The increases in GIC premiums reflect an expansion of the GIC
client base due, in part, to a broadening of the Company's distribution
channels and product line, specifically its AAA/Aaa-rated credit-enhanced GIC
product. GIC premiums in 1997 also reflect increased sales of longer-maturity
products to banks and asset management firms.
The GICs issued by the Company generally guarantee the payment of
principal and interest at a fixed rate for a fixed term of three to five years.
In the case of GICs sold to pension plans, certain withdrawals may be made at
book value in the event of circumstances specified in the plan document, such
as employee retirement, death, disability, hardship withdrawal or employee
termination. The Company generally imposes surrender penalties in the event
of other withdrawals prior to maturity. GICs purchased by banks or state and
local governmental entities either prohibit withdrawals or permit scheduled
book value withdrawals subject to the terms of the underlying indenture or
agreement. GICs purchased by asset management firms either prohibit
withdrawals or permit withdrawals with notice ranging from 90 to 270 days. In
pricing GICs, the Company analyzes cash flow information and prices accordingly
so that it is compensated for possible withdrawals prior to maturity.
Fixed annuity premiums totaled $396.7 million in the second quarter of
1997, $371.0 million in the second quarter of 1996, $824.1 million in the six
months of 1997 and $518.4 million in the six months of 1996. These premiums
include premiums for the fixed accounts of variable annuities totaling $346.1
million, $329.9 million, $734.5 million and $394.1 million, respectively. The
increases in premiums for the fixed accounts of variable annuities resulted
primarily from greater inflows into the one-year fixed account of the Company's
Polaris product. The Company has observed that many purchasers of its variable
annuity contracts allocate new premiums to the one-year fixed account and
concurrently elect the option to dollar cost average into one or more variable
funds. Accordingly, the Company anticipates that it will see a large portion
of these premiums transferred into the variable funds.
NET REALIZED INVESTMENT LOSSES totaled $9.4 million in the second quarter
of 1997, compared with $3.6 million in the second quarter of 1996. Net
realized investment losses include impairment writedowns of $12.5 million in
the second quarter of 1997 and $8.5 million in the second quarter of 1996.
Therefore, net gains from sales of investments totaled $3.1 million in the
second quarter of 1997, compared with $4.9 million in the second quarter of
1996. For the six months, net realized investment losses totaled $18.7 million
in 1997, compared with $2.2 million in 1996 and include impairment writedowns
of $20.1 million and $15.4 million, respectively. Therefore, for the six
months, net gains from sales of investments totaled $1.4 million in 1997 and
$13.2 million in 1996.
Net gains from sales of investments in 1997 include $11.7 million of net
losses ($5.2 million in the second quarter) realized on sales of bonds and
notes and $13.2 million of net gains ($9.0 million in the second quarter)
realized on sales of common stocks. Net gains from sales of investments in
1996 include $11.8 million of net gains ($5.3 million in the second quarter)
realized on sales of other invested assets, principally leveraged leases, $1.8
million of net losses ($2.0 million in the second quarter) realized on sales
of bonds and $3.3 million of net gains ($2.0 million in the second quarter)
realized on sales of common stocks. Sales of investments are generally made
to maximize total return.
Impairment writedowns in 1997 include provisions of $10.6 million applied
to defaulted bonds ($8.0 million in the second quarter), $5.8 million applied
to real estate ($2.0 million in the second quarter), $2.5 million applied to
mortgage loans during the second quarter and $1.2 million applied to common
stocks in the first quarter. Impairment writedowns in 1996 include
$10.7 million ($5.0 million in the second quarter) of provisions applied to
defaulted bonds. Impairment writedowns, on an annualized basis, represent
0.28%, 0.26%, 0.23% and 0.25% of average invested assets for the second
quarters of 1997 and 1996 and the six months of 1997 and 1996, respectively.
Such writedowns are based upon estimates of the net realizable value of the
applicable assets. Actual realization will be dependent upon future events.
VARIABLE ANNUITY FEES are based on the market value of assets supporting
variable annuity contracts in separate accounts. Such fees totaled $32.7
million in the second quarter of 1997 and $25.3 million in the second quarter
of 1996. For the six months, variable annuity fees totaled $63.6 million in
1997, compared with $49.8 million in 1996. These increases reflect growth in
average variable annuity assets, due to increased market values, net exchanges
into the separate accounts from the fixed accounts of variable annuity
contracts and the receipt of variable annuity premiums, partially offset by
surrenders. Variable annuity assets averaged $7.20 billion during the second
quarter of 1997 and $5.63 billion during the second quarter of 1996. For the
six months, variable annuity assets averaged $6.94 billion in 1997, compared
with $5.48 million in 1996. Variable annuity premiums, which exclude premiums
allocated to the fixed accounts of variable annuity products, have aggregated
$1.04 billion since March 31, 1996. Variable annuity premiums increased to
$314.0 million in the second quarter of 1997 from $224.5 million in the second
quarter of 1996. For the six months, variable annuity premiums totaled $545.7
million in 1997, compared with $434.5 million in 1996. These increases may be
attributed, in part, to market share gains through enhanced distribution, as
well as strong demand for equity investments, principally as a result of
generally favorable market conditions. 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.
NET RETAINED COMMISSIONS are primarily derived from commissions on the
sales of nonproprietary investment products by the Company's broker-dealer
subsidiaries, after deducting the substantial portion of such commissions that
is passed on to registered representatives. Net retained commissions totaled
$15.8 million in the second quarter of 1997 and $13.3 million in the second
quarter of 1996. For the six months, net retained commissions totaled $29.1
million in 1997, compared with $22.5 million in 1996. Broker-dealer sales
(mainly sales of general securities, mutual funds and annuities) totaled $4.32
billion in the second quarter of 1997 and $3.73 billion in the second quarter
of 1996. For the six months, such sales totaled $7.60 billion in 1997 and
$5.99 billion in 1996. The increases in sales and net retained commissions
during 1997 reflect a greater number of registered representatives (largely due
to the January 3, 1996 acquisition of Advantage Capital Corporation, a Houston-
based broker-dealer, which licenses 1,000 independent registered
representatives, and the January 22, 1997 acquisition of The Financial Group,
Inc., which, through its subsidiary, Keogler Morgan & Company, licenses over
400 independent registered representatives), and higher average production,
combined with generally favorable market conditions. Increases in net retained
commissions may not be proportionate to increases in sales primarily due to
differences in sales mix.
ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed in mutual
funds by SunAmerica Asset Management Corp. Such fees totaled $6.3 million on
average assets managed of $2.31 billion in the second quarter of 1997 and
$6.4 million on average assets managed of $2.15 billion in the second quarter
of 1996. For the six months, asset management fees totaled $12.7 million on
average assets managed of $2.26 billion in 1997, compared with $12.9 million
on average assets managed of $2.15 billion in 1996. Asset management fees
decreased slightly in 1997, despite increases in average assets managed,
principally due to changes in product mix. Sales of mutual funds, excluding
sales of money market accounts, have aggregated $305.7 million since March 31,
1996. Mutual fund sales totaled $119.9 million in the second quarter of 1997,
up $56.3 million from the $63.6 million recorded in the second quarter of 1996.
For the six months, such sales totaled $182.3 million in 1997, up from $99.9
million in 1996. The significant increases in sales in the 1997 periods
principally resulted from the introduction in November 1996 of the Company's
"Style Select Series" product. Redemptions of mutual funds, excluding
redemptions of money market accounts, amounted to $110.4 million in the second
quarter of 1997 and $102.1 million in the second quarter of 1996. For the six
months, such redemptions amounted to $214.1 million in 1997 and $199.6 million
in 1996.
LOAN SERVICING FEES are earned by the Company's subsidiary, Imperial
Premium Finance, Inc. ("Imperial"). Imperial provides short-term installment
loans for borrowers to fund their property and casualty insurance premiums.
These loans are secured by the unearned premium associated with the underlying
insurance policies. Currently, Imperial sells most of the short-term loans it
originates and earns fee income by servicing these sold loans. Such fee income
totaled $6.2 million on average loans serviced of $488.6 million in the second
quarter of 1997, compared with $6.2 million on average loans serviced of
$455.7 million in the second quarter of 1996. For the six months, loan
servicing fees totaled $12.0 million on average loans serviced of $483.3
million in 1996, compared with $11.8 million on average loans serviced of
$448.2 million in 1996. Though average loans serviced have increased during
1997, loan servicing fees have remained relatively constant, largely due to
increased competition in the premium finance marketplace.
TRUST FEES are earned by Resources Trust Company for providing
administrative and custodial services primarily for individual retirement
accounts, as well as for other qualified pension plans. Trust fees increased
to $4.4 million in the second quarter of 1997 (on an average of 203,000 trust
accounts) from $4.1 million in the second quarter of 1996 (on an average of
201,000 trust accounts). For the six months, trust fees increased to $8.9
million (on an average of 203,000 trust accounts) from $8.3 million (on an
average of 200,000 trust accounts).
SURRENDER CHARGES on fixed and variable annuities totaled $6.4 million
in the second quarter of 1997, $5.0 million in the second quarter of 1996,
$13.0 million in the six months of 1997 and $7.6 million in six months of 1996
and include surrender charges attributable to the Acquisitions of $4.0 million,
$2.3 million, $7.8 million and $2.3 million, respectively. Surrender charges
generally are assessed on annuity withdrawals at declining rates during the
first seven years of an annuity contract. Withdrawal payments, which include
surrenders and lump-sum annuity benefits, totaled $492.5 million (including
$144.1 million attributable to the Acquisitions) in the second quarter of 1997
and $332.5 million (including $23.2 million attributable to the Acquisitions)
in the second quarter of 1996. These payments represent 12.1% (13.3% of
average fixed annuity reserves associated with the Acquisitions) and 11.5%
(5.9% of average fixed annuity reserves associated with the Acquisition),
respectively, of the aggregate of average fixed and variable annuity reserves.
For the six months, withdrawal payments totaled $902.9 million (including
$260.0 million attributable to the Acquisitions) in 1997 and $617.0 million
(including $23.2 million attributable to the Acquisitions) in 1996 and,
annualized, represent 11.3% (11.9% of average fixed annuity reserves associated
with the Acquisitions) and 11.6% (5.9% of average fixed annuity reserves
associated with the Acquisitions), respectively, of average fixed and variable
annuity reserves. Excluding the effects of the Acquisitions, withdrawal
payments represented 12.4% of related average fixed and variable annuity
reserves in the second quarter of 1997, 13.8% in the second quarter of 1996,
12.1% in the six months of 1997 and 13.1% in the six months of 1996.
Withdrawals include variable annuity payments from the separate accounts
totaling $216.5 million in the second quarter of 1997, $152.2 million in the
second quarter of 1996, $393.8 million in the six months of 1997 and $307.6
million in the six months of 1996. Consistent with the assumptions used in
connection with the John Alden Acquisition, management anticipates that
withdrawal rates and surrender charges on fixed annuity contracts likely will
increase in the near future as a result of surrenders on the annuity business
acquired as part of the John Alden Acquisition.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $61.8 million in the second
quarter of 1997 and $50.2 million in the second quarter of 1996. For the six
months, general and administrative expenses totaled $120.9 million in 1997,
compared with $94.3 million in 1996. Expenses in the six months of 1997
include a $3.0 million provision for estimated programming costs associated
with the year 2000, which was recorded in the first quarter. Expenses in 1997
also reflect the impact of the Acquisitions, including Advantage Capital
Corporation and The Financial Group, Inc., and an 18% increase in the total
number of employees since March 1996. Expenses remain closely controlled
through a company-wide cost containment program and continue to represent
approximately 1% of average total assets on an annualized basis.
AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $30.0 million in the
second quarter of 1997 and $24.2 million in the second quarter of 1996. For
the six months, such amortization totaled $60.4 million in 1997, compared with
$45.3 million in 1996. The increase in amortization during 1997 primarily
reflects the amortization of the deferred acquisition costs attributable to the
Acquisitions, which aggregated $15.9 million in 1997 ($8.1 million in the
second quarter), compared with the $2.5 million recorded in 1996 during the
second quarter. Amortization has also increased due to additional fixed and
variable annuity and mutual fund sales and the subsequent amortization of
related deferred commissions and other acquisition costs.
INCOME TAX EXPENSE totaled $37.2 million in the second quarter of 1997,
$29.2 million in the second quarter of 1996, $71.6 million in the six months
of 1997 and $57.0 million in the six months of 1996, representing effective
annualized tax rates of 30% in all periods presented. These tax rates reflect
the favorable impact of affordable housing tax credits.
FINANCIAL CONDITION AND LIQUIDITY
SHAREHOLDERS' EQUITY decreased by $55.9 million to $1.65 billion at March
31, 1997 from $1.70 billion at December 31, 1996, primarily as a result of the
$58.0 million net unrealized loss on debt and equity securities available for
sale recorded at March 31, 1997, a $114.1 million decrease from the $56.1
million of net gain on such securities recorded at December 31, 1996, and the
$17.2 million of dividends paid to shareholders. These reductions were
partially offset by the $86.8 million of net income recorded in the second
quarter of 1997.
BOOK VALUE PER SHARE amounted to $12.01 at March 31, 1997, compared with
$12.46 at December 31, 1996. Excluding net unrealized gains and losses on debt
and equity securities available for sale, book value per share amounted to
$12.46 at March 31, 1997 and $12.03 at December 31, 1996. On a pro forma
basis, assuming that the Premium Equity Redemption Cumulative Security Units
were converted to Common Stock, book value per share would have been $14.09 at
March 31, 1997, compared with $14.50 at December 31, 1996 and, excluding net
unrealized gains and losses on debt and equity securities available for sale,
such book value would have been $14.50 at March 31, 1997 and $14.10 at December
31, 1996.
TOTAL ASSETS increased by $5.93 billion to $31.92 billion at March 31,
1997 from $25.99 billion at December 31, 1996, principally as a result of the
John Alden Acquisition, which contributed $5.22 billion to total assets. In
addition, total assets increased as a result of a $230.7 million increase in
the separate accounts for variable annuities.
INVESTED ASSETS at March 31, 1997 totaled $23.08 billion, compared with
$17.94 billion at December 31, 1996. This $5.14 billion increase primarily
resulted from the John Alden Acquisition, which contributed $4.75 billion to
invested assets at March 31, 1997, and increases in reserves for fixed annuity
contracts and GICs. These favorable factors were partially offset by the
$108.4 million net unrealized loss recorded on debt and equity securities
available for sale at March 31, 1997, a $213.0 million decrease from the $104.6
million net unrealized gain recorded on such securities at December 31, 1996.
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. However,
the Company has 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.
THE BOND PORTFOLIO had an aggregate amortized cost that exceeded its fair
value by $153.5 million at March 31, 1997. At December 31, 1996, the fair
value of the Bond Portfolio exceeded its amortized cost by $45.9 million. The
net unrealized loss on the Bond Portfolio since December 31, 1996 principally
reflects the higher relative prevailing interest rates at March 31, 1997 and
their corresponding effect on the fair value of the Bond Portfolio.
All of the Bond Portfolio ($17.14 billion at amortized cost, excluding
$210.3 million of redeemable preferred stocks) at March 31, 1997 was rated by
Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"),
Duff & Phelps Credit Rating Co. ("DCR"), Fitch Investors Service, L.P.
("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 March 31, 1997, approximately
$15.78 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 $7.89 billion of U.S.
government/agency securities and mortgage-backed securities ("MBSs").
At March 31, 1997, the Bond Portfolio included $1.36 billion of bonds,
with a fair value approximately equal to their amortized cost, that were not
rated investment grade by S&P, Moody's, DCR, Fitch or the NAIC. Based on their
March 31, 1997 amortized cost, these non-investment-grade bonds accounted for
4.2% of the Company's total assets and 5.9% of its invested assets. In
addition to its direct investment in non-investment-grade bonds, the Company
has entered into Total Return Agreements with an aggregate notional principal
amount of $354.0 million at March 31, 1997 (see "Asset-Liability Matching").
Non-investment-grade securities generally provide higher yields and
involve greater risks than investment-grade securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment-grade issuers. In addition, the trading market for
these securities is usually more limited than for investment-grade securities.
The Company intends that the proportion of its portfolio invested in such
securities not exceed current levels, but its policies may change from time to
time, including in connection with any possible acquisition. The Company had
no material concentrations of non-investment-grade securities at March 31,
1997. The table on the following page summarizes the Company's rated bonds by
rating classification.
<TABLE>
RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)
<CAPTION>
Issues not rated by S&P/Moody's/
Issues rated by S&P/Moody's/DCR/Fitch DCR/Fitch, by NAIC category Total
- ---------------------------------------------- ----------------------------------- ----------------------------------
S&P/(Moody's)/ Estimated NAIC Estimated Percent of Estimated
[DCR]/{Fitch} Amortized fair category Amortized fair Amortized invested fair
category(1) cost value (2) cost value cost assets(3) value
- --------------- ---------- ---------- -------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA to A-
(Aaa to A3)
[AAA to A-]
{AAA to A-} $11,234,066 $11,110,128 1 $1,514,672 $1,511,634 $12,748,738 54.98% $12,621,762
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} 2,594,358 2,573,129 2 437,614 438,131 3,031,972 13.08 3,011,260
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-} 155,048 156,800 3 125,967 130,097 281,015 1.21 286,897
B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-} 678,283 682,074 4 238,142 235,483 916,425 3.95 917,557
CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-} 59,975 59,592 5 90,912 80,916 150,887 0.65 140,508
CI to D
[DD]
{D} -- -- 6 11,721 11,027 11,721 0.05 11,027
----------- ----------- ---------- ---------- ----------- -----------
TOTAL RATED ISSUES $14,721,730 $14,581,723 $2,419,028 $2,407,288 $17,140,758 $16,989,011
=========== =========== ========== ========== =========== ===========
Footnotes appear on the following page.
</TABLE>
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. DCR 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, DCR 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/DCR/Fitch
rating groups listed above, with categories 1 and 2 considered investment
grade. A substantial portion of the assets in the NAIC categories were
rated by the Company pursuant to applicable NAIC rating guidelines.
(3) At amortized cost.
Senior Secured Loans ("Secured Loans") are included in the Bond Portfolio
and their amortized cost aggregated $2.19 billion at March 31, 1997. Secured
Loans are senior to subordinated debt and equity, and are secured by assets of
the issuer. At March 31, 1997, Secured Loans consisted of loans to
approximately 317 borrowers spanning 41 industries, with 21% of these assets
(at amortized cost) concentrated in financial institutions, 16% concentrated
in utilities and 8% concentrated in the leisure industry. No other industry
concentration constituted more than 6% 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, DCR, Fitch
or by the Company or the NAIC, pursuant to comparable statutory ratings
guidelines established by the NAIC.
MORTGAGE LOANS aggregated $3.09 billion at March 31, 1997, including
$2.74 billion of commercial mortgage loans and $343.6 million of single-family
residential mortgage loans. All of the single-family residential mortgage
loans and $908.3 million of the commercial mortgage loan portfolio were
obtained as part of the John Alden Acquisition.
The single-family residential mortgage loans consisted of approximately
1,600 loans that are primarily 15- and 30-year fixed-rate first mortgage loans
with an average balance of approximately $213.0 thousand, collateralized by
properties located in 44 states.
The commercial mortgage loan portfolio consisted of 1,325 first
mortgage loans with an average loan balance of approximately $2.1 million,
collateralized by properties located in 45 states. Approximately 32% of this
portfolio was multifamily residential, 32% was retail, 11% was office, 8% was
manufactured housing, 7% was industrial and 10% was other types. At March 31,
1997, approximately 20% and 10% of this portfolio was secured by properties
located in California and Florida, respectively, and no more than 9% of this
portfolio was secured by properties located in any other single state. At
March 31, 1997, there were 33 commercial mortgage loans with outstanding
balances of $10 million or more, which loans collectively aggregated
approximately 18% of this portfolio. At the time of their origination or
purchase by the Company, virtually all commercial mortgage loans had
loan-to-value ratios of 75% or less. At March 31, 1997, approximately 27% of
the commercial mortgage loan portfolio consisted of loans with balloon payments
due before April 1, 2000.
At March 31, 1997, approximately 46% of the commercial mortgage loans
were seasoned loans underwritten to the Company's standards and purchased at
or near par from other financial institutions. Such loans generally have
higher average interest rates than loans that could be originated today. The
balance of the commercial 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 commercial
mortgage loan portfolio, its emphasis on multifamily loans and its strict
underwriting standards, the Company believes that it has reduced the risk
attributable to its commercial mortgage loan portfolio while maintaining
attractive yields.
During the second quarter and six months of 1997 and 1996, loans
delinquent by more than 90 days, foreclosed loans and restructured loans have
not been significant in relation to the total mortgage loan portfolio.
PARTNERSHIP investments totaled $1.08 billion at March 31, 1997,
constituting investments in approximately 550 separate partnerships with an
average size of approximately $2.0 million. This portfolio includes:
(i) $474.8 million of partnerships managed by independent money managers that
invest in a broad selection of equity and fixed-income securities, currently
including approximately 2,800 separate issuers; (ii) $520.7 million of partner-
ships that make tax-advantaged investments in affordable housing properties,
currently involving approximately 475 multifamily properties in 40 states; and
(iii) $87.8 million of partnerships that invest in mortgage loans and
income-producing real estate. At March 31, 1997, $553.1 million of the
Company's partnerships was accounted for by using the cost method and $530.2
million by using the equity method. The risks generally associated with
partnerships include those related to their underlying investments (i.e. equity
securities, debt securities and real estate), plus a level of illiquidity,
which is mitigated, to some extent, a) for the affordable housing partnerships
by the marketability of the tax credits they generate; and b) in the case of
many of the other partnerships, by the existence of contractual termination
provisions.
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 economic conditions. 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, two-tiered
interest rate structures or other limitations on when contracts can be
surrendered for cash to encourage persistency. Approximately 87% of the
Company's fixed annuity and GIC reserves had surrender penalties or other
restrictions at March 31, 1997.
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 March 31, 1997, the weighted
average life of the Company's investments was approximately 5.0 years and the
duration was approximately 3.4. 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 measures the approximate percentage change in the
market value of a portfolio if interest rates change by 100 basis points,
recognizing the changes in portfolio cashflows resulting from embedded options
such as prepayments and bond calls.
As a component of its investment strategy, the Company utilizes interest
rate swap agreements ("Swap Agreements") to match assets more closely to
liabilities. Swap Agreements are agreements to exchange with a counterparty
interest rate payments of differing character (for example, variable-rate
payments exchanged for fixed-rate payments) based on an underlying principal
balance (notional principal) to hedge against interest rate changes. The
Company typically utilizes Swap Agreements to create a hedge that effectively
converts floating-rate assets and liabilities into fixed-rate instruments. At
March 31, 1997, the Company had 26 outstanding Swap Agreements with an
aggregate notional principal amount of $1.12 billion. These agreements mature
in various years through 2003 and have an average remaining maturity of 33
months.
The Company also seeks to provide liquidity from time to time by using
reverse repurchase agreements ("Reverse Repos"), dollar roll transactions
("Dollar Rolls") and by investing in MBSs. It also seeks to enhance its spread
income by using Reverse Repos, Dollar Rolls and Total Return Agreements.
Reverse Repos involve a sale of securities and an agreement to repurchase the
same securities at a later date at an agreed upon price and are generally
over-collateralized. Dollar Rolls are similar to Reverse Repos except that the
repurchase involves securities that are only substantially the same as the
securities sold and the arrangement is not collateralized, nor is it governed
by a repurchase agreement. Total Return Agreements effectively exchange a
fixed rate of interest on the notional amount for the coupon income plus or
minus the increase or decrease in the fair value of specified
non-investment-grade bonds. MBSs are generally investment-grade securities
collateralized by large pools of mortgage loans. MBSs generally pay principal
and interest monthly. The amount of principal and interest payments may
fluctuate as a result of prepayments of the underlying mortgage loans.
There are risks associated with some of the techniques the Company uses
to provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risks associated with Total Return Agreements are the
credit risk on the underlying non-investment-grade bonds, the risk of potential
loss due to bond market fluctuations and the risk associated with counterparty
nonperformance. The primary risk associated with the Company's Dollar Rolls,
Reverse Repos and Swap Agreements is counterparty risk. The Company believes,
however, that the counterparties to its Total Return Agreements, Dollar Rolls,
Reverse Repos and Swap Agreements are financially responsible and that the
counterparty risk associated with those transactions is minimal. Counterparty
risk associated with Dollar Rolls is further mitigated by the Company's
participation in an MBS trading clearinghouse. The sell and buy transactions
that are submitted to this clearinghouse are marked to market on a daily basis
and each participant is required to over-collateralize its net loss position
by 30% with either cash, letters of credit or government securities. In
addition to counterparty risk, Swap Agreements also have interest rate risk.
However, the Company's Swap Agreements typically hedge variable-rate assets or
liabilities, and interest rate fluctuations that adversely affect the net cash
received or paid under the terms of a Swap Agreement would be offset by
increased interest income earned on the variable-rate assets or reduced
interest expense paid on the variable-rate liabilities. The primary risk
associated with MBSs is that a changing interest rate environment might cause
prepayment of the underlying obligations at speeds slower or faster than
anticipated at the time of their purchase.
INVESTED ASSETS EVALUATION routinely includes a review by the Company of
its portfolio of debt securities. Management identifies monthly those
investments that require additional monitoring and carefully reviews the
carrying values of such investments at least quarterly to determine whether
specific investments should be placed on a nonaccrual basis and to determine
declines in value that may be other than temporary. In making these reviews
for bonds, management principally considers the adequacy of collateral (if
any), compliance with contractual covenants, the borrower's recent financial
performance, news reports and other externally generated information concerning
the creditor's affairs. In the case of publicly traded bonds, management also
considers market value quotations, if available. For mortgage loans,
management generally considers information concerning the mortgaged property
and, among other things, factors impacting the current and expected payment
status of the loan and, if available, the current fair value of the underlying
collateral.
The carrying values of bonds that are determined to have declines in
value that are other than temporary are reduced to net realizable value and no
further accruals of interest are made. The valuation allowances on mortgage
loans are based on losses expected by management to be realized on transfers
of mortgage loans to real estate, on the disposition and settlement of mortgage
loans and on mortgage loans that management believes may not be collectible in
full. Accrual of interest is suspended when principal and interest payments
on mortgage loans are past due more than 90 days.
DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $54.5 million at March 31,
1997 (at amortized cost, with a fair value of $51.5 million), including $19.1
million of bonds and notes and $35.4 million of mortgage loans. At March 31,
1997, defaulted investments constituted 0.2% of total invested assets. At
December 31, 1996, defaulted investments totaled $55.2 million and constituted
0.3% 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 March 31, 1997, approximately $7.91 billion of the Company's Bond
Portfolio had an aggregate unrealized gain of $128.0 million, while
approximately $9.44 billion of the Bond Portfolio had an aggregate unrealized
loss of $281.5 million. In addition, $577.5 million remains available to the
Company to issue securities under a shelf registration statement filed in
October 1996. Further, the Company's investment portfolio currently provides
approximately $163.3 million of monthly cash flow from scheduled principal and
interest payments.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing annuities and GICs to maintain a generally competitive market
rate. Management would seek to place new funds in investments that were
matched in duration to, and higher yielding than, the liabilities assumed. The
Company believes that liquidity to fund withdrawals would be available through
incoming cash flow, the sale of short-term or floating-rate instruments or
Reverse Repos on the Company's substantial MBS segment of the Bond Portfolio,
thereby avoiding the sale of fixed-rate assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed
annuities and GICs. Should increased liquidity be required for withdrawals,
the Company believes that a significant portion of its investments could be
sold without adverse consequences in light of the general strengthening that
would be expected in the bond market.
On a parent company stand-alone basis, SunAmerica Inc. (the "Parent"),
at March 31, 1997, had invested assets with a fair value of $1.67 billion and
outstanding senior indebtedness of $1.00 billion, comprising all of the
Company's outstanding senior indebtedness. Additionally, as of March 31, 1997,
the Parent had three GICs purchased by local government entities which
aggregated $227.0 million.
During November 1996, October 1995 and June 1995, respectively, the
Parent purchased the common securities of SunAmerica Capital Trust III,
SunAmerica Capital Trust II and SunAmerica Capital Trust I (the "Grantor
Trusts") and issued an aggregate of $566.2 million of junior subordinated
debentures (the "Debentures") to the Grantor Trusts in connection with the
public issuance of the preferred securities of the Grantor Trusts. On April
16, 1997, the Company announced that SunAmerica Capital Trust I will redeem all
of the $52.6 million of its preferred securities, and, therefore, the Company
will concurrently redeem the related junior subordinated debentures. (See Notes
3 and 6 of Notes to Consolidated Financial Statements.)
The Parent's annual debt service with respect to its senior indebtedness,
GIC obligations and Debentures, taking into account the announced redemption,
totals $102.5 million for the remainder of fiscal 1997, $163.7 million for
fiscal 1998, $275.3 million for fiscal 1999, $558.0 million for fiscal 2000,
$122.4 million for fiscal 2001 and $3.32 billion, in the aggregate, thereafter.
On or before October 31, 1999, the Company is contractually scheduled to
receive $431.3 million upon delivery of 11.5 million or fewer shares of the
Company's Common Stock in accordance with the terms of the Company's Premium
Equity Redemption Cumulative Security Units.
The Parent received dividends from its regulated life insurance
subsidiaries of $118.7 million in April 1997, $94.3 million in March 1996 and
$69.2 million in March 1995. The Parent also received dividends of
$1.9 million during fiscal 1997 and $16.0 million in the 1996 fiscal year from
its other directly owned subsidiaries. On April 1, 1997, there were no
dividends available to the Parent from its regulated life insurance
subsidiaries for the remainder of calendar year 1997.
The Company has transferred to third-party investors certain of its
interests in various partnerships that make tax-advantaged affordable housing
investments. As part of these transactions, the Parent has agreed to advance
monies to support the operations of the underlying housing projects, if
required, and has guaranteed that the transferred partnerships will provide,
as of the transfer date and under then current tax laws, a specified level of
associated tax credits and deductions to the third-party investors. Based on
an evaluation of the underlying housing projects, management does not
anticipate any material cash payments with respect to the guarantees.
REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision by the states in which they are authorized to transact business.
State insurance laws establish supervisory agencies with broad administrative
and supervisory powers related to granting and revoking licenses to transact
business, regulating marketing and other trade practices, operating guaranty
associations, licensing agents, approving policy forms, regulating certain
premium rates, regulating insurance holding company systems, establishing
reserve requirements, prescribing the form and content of required financial
statements and reports, performing financial and other examinations,
determining the reasonableness and adequacy of statutory capital and surplus,
regulating the type, valuation and amount of investments permitted, limiting
the amount of dividends that can be paid and the size of transactions that can
be consummated without first obtaining regulatory approval and other related
matters.
During the last decade, the insurance regulatory framework has been
placed under increased scrutiny by various states, the federal government and
the NAIC. Various states have considered or 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 or allowing combinations between insurance companies, banks
and other entities. In recent years, the NAIC has approved and recommended to
the states for adoption and implementation several regulatory initiatives
designed to reduce the risk of insurance company insolvencies and market
conduct violations. These initiatives include investment reserve requirements,
risk-based capital standards, new investment standards and restrictions on an
insurance company's ability to pay dividends to its stockholders. The NAIC is
also currently developing model laws relating to product design and
illustrations for annuity products. Current proposals are still being debated
and the Company is monitoring developments in this area and the effects any
changes would have on the Company.
SunAmerica Asset Management Corp. is registered with the SEC as a
registered investment advisor under the Investment Advisors Act of 1940. The
mutual funds that it markets are subject to regulation under the Investment
Company Act of 1940. SunAmerica Asset Management Corp. and the mutual funds are
subject to regulation and examination by the SEC. In addition, variable
annuities and the related separate accounts of the Company's life insurance
subsidiaries are subject to regulation by the SEC under the Securities Act of
1933 and the Investment Company Act of 1940.
Resources Trust Company is subject to regulation by the Colorado State
Banking Board and the Federal Deposit Insurance Corporation.
The Company's broker-dealer subsidiaries are subject to regulation and
supervision by the states in which they transact business, as well as by the
National Association of Securities Dealers, Inc. (the "NASD"). The NASD has
broad administrative and supervisory powers relative to all aspects of business
and may examine the subsidiaries' business and accounts at any time.
The Company's premium finance business is subject to regulation and
supervision by substantially all of the states in which it is authorized to
transact business. State premium finance laws establish supervisory agencies
with broad administrative and supervisory powers related to granting and
revoking licenses to transact business, approving finance agreement forms,
regulating certain finance charge rates, regulating marketing and other trade
practices (including the procedures to cancel financed insurance policies for
non-payment), prescribing the form and content of required financial statements
and reports, performing financial and other examinations and other related
matters.
SUNAMERICA INC.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
- -------------------------------------------------------------
On February 14, 1997, the Company held its annual meeting of shareholders.
The shareholders voted upon the following matters: (1) the election of ten
directors, which comprise the entire Board of Directors; (2) approval of an
amendment to the Company's charter to increase the Company's authorized Common
Stock from 175,000,000 shares to 350,000,000 shares (the "Charter Amendment");
(3) approval of the SunAmerica 1997 Employee Incentive Stock Plan (the
"Employee Plan"); (4) approval of the SunAmerica Long-Term Incentive Plan
("Long-Term Plan"); (5) approval of an amendment to the Long-Term Performance-
Based Incentive Plan for the Chief Executive Officer (the "Incentive Plan
Amendment"), and (6) approval of the Non-Employee Directors' Stock Option Plan
(the "Director Plan"),
Each matter was approved. The votes cast for, against or withheld, as well as
the number of abstentions and broker non-votes as to each such matter were as
follows:
Votes
Votes Against or Broker
For Withheld Abstentions Non-Votes
---------- ---------- ----------- ---------
ELECTION OF DIRECTORS:
Eli Broad 202,050,225 189,930
William F. Aldinger, III 202,044,788 195,367
Karen Hastie-Williams 201,939,432 300,723
David O. Maxwell 202,054,742 185,413
Barry Munitz 202,057,472 182,683
Lester Pollack 202,046,950 193,205
Carl E. Reichardt 202,050,034 190,121
Sanford C. Sigoloff 202,048,636 191,519
Harold M. Williams 202,046,078 194,077
Jay S. Wintrob 202,052,772 187,383
CHARTER AMENDMENT 193,948,048 8,038,536 253,571
EMPLOYEE PLAN 188,805,325 4,539,231 423,427 8,472,172
LONG-TERM PLAN 199,863,011 1,905,764 471,380
INCENTIVE PLAN
AMENDMENT 171,834,459 21,404,721 528,803 8,472,172
DIRECTOR PLAN 187,761,121 5,369,994 636,868 8,472,172
SUNAMERICA INC.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
EXHIBITS
10(a) SunAmerica 1997 Employee Incentive Stock Plan is incorporated herein by
reference to Appendix A to the Company's Notice of 1997 Annual Meeting
and Proxy Statement, filed December 30, 1996.
10(b) SunAmerica Long-Term Incentive Plan is incorporated herein by reference
to Appendix B to the Company's Notice of 1997 Annual Meeting and Proxy
Statement, filed December 30, 1996.
10(c) Long-Term Performance-Based Incentive Plan, Amended and Restated 1997,
is incorporated herein by reference to Appendix C to the Company's Notice
of 1997 Annual Meeting and Proxy Statement, filed December 30, 1996.
10(d) Non-Employee Directors' Stock Option Plan is incorporated herein by
reference to Appendix D to the Company's Notice of 1997 Annual Meeting
and Proxy Statement, filed December 30, 1996.
10(e) 1995 Performance Stock Plan as amended and restated.
11 Statement re computation of per-share earnings.
27 Financial Data Schedule.
REPORTS ON FORM 8-K
On January 27, 1997, the Company filed a Current Report on Form 8-K
announcing its first quarter 1997 earnings and its financial position at
December 31, 1996.
On April 15, 1997, the Company filed a Current Report on Form 8-K
concerning the completion of its acquisition of the annuity business of
John Alden Financial Corporation.
SUNAMERICA INC.
PART II - OTHER INFORMATION
(Continued)
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNAMERICA INC.
-----------------------------------
Registrant
Dated May 14, 1997 /s/ JAY S. WINTROB
---------------------------- -----------------------------------
Jay S. Wintrob
Vice Chairman
Dated May 14, 1997 /s/ SCOTT L. ROBINSON
---------------------------- -----------------------------------
Scott L. Robinson
Senior Vice President and Controller
SUNAMERICA INC.
LISTS OF EXHIBITS FILED
- -----------------------
11 Statement re computation of per-share earnings.
27 Financial Data Schedule.
10(e) 1995 Performance Stock Plan as amended and restated.
<TABLE>
EXHIBIT 11
SUNAMERICA INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the three months and six months ended March 31, 1997 and 1996
(In thousands, except per-share amounts)
<CAPTION>
Three months Six months
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Average number of common and common stock
equivalent shares outstanding during
the period:
Common Stock issued and outstanding at
beginning of period 119,910 109,080 119,452 108,830
Average number of common shares issued
(cancelled) upon exercise of employee
stock options or under other employee
stock plans (233) 25 183 216
Average number of common stock equivalent
shares arising from outstanding employee
stock options 3,755 4,148 3,668 3,988
Average number of common stock equivalent
units arising from other employee stock
plans 877 450 782 450
Average number of common shares issuable
upon conversion of convertible preferred
stock:
Series D Mandatory Conversion
Premium Dividend Preferred Stock -- 110 -- 5,168
Series E Mandatory Conversion
Premium Dividend Preferred Stock 9,819 12,000 9,974 10,000
Average number of shares issued upon
redemption of Series D Depositary Shares
on January 2, 1996 -- 10,116 -- 5,058
Average number of common stock equivalent
shares arising from outstanding Premium
Equity Redemption Cumulative Security
Units 2,068 -- 1,507 --
-------- -------- -------- --------
Average number of common and common stock
equivalent shares outstanding during
the period 136,196 135,929 135,566 133,710
======== ======== ======== ========
Earnings applicable to common stock:
Net income $ 86,834 $ 68,241 $167,202 $133,027
Less preferred dividend requirements other
than those related to convertible issues:
9-1/4% Preferred Stock, Series B (2,031) (2,031) (4,062) (4,062)
SunAmerica Adjustable Rate Cumulative
Preferred Stock, Series C -- (852) (28) (1,704)
-------- -------- -------- --------
Net earnings applicable to common stock $ 84,803 $ 65,358 $163,112 $127,261
======== ======== ======== ========
Net earnings per common and common
equivalent shares $ 0.62 $ 0.48 $ 1.20 $ 0.95
======== ======== ======== ========
Note: The share amounts for the three months and six months ended March 31, 1996 have been
adjusted to reflect a two-for-one stock split paid in form of a stock dividend on
August 30, 1996 to holders of record on August 21, 1996.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND INCOME STATEMENT OF SUNAMERICA INC.'S FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 17,197,591
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 87,214
<MORTGAGE> 3,086,249
<REAL-ESTATE> 84,995
<TOTAL-INVEST> 23,080,443
<CASH> 1,267,977
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,257,842
<TOTAL-ASSETS> 31,917,148
<POLICY-LOSSES> 20,130,842
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,004,585
0
335,869
<COMMON> 119,447
<OTHER-SE> 1,191,859
<TOTAL-LIABILITY-AND-EQUITY> 31,917,148
0
<INVESTMENT-INCOME> 696,167
<INVESTMENT-GAINS> (18,746)
<OTHER-INCOME> 126,331
<BENEFITS> 400,494
<UNDERWRITING-AMORTIZATION> 60,413
<UNDERWRITING-OTHER> (16,829)
<INCOME-PRETAX> 238,802
<INCOME-TAX> 71,600
<INCOME-CONTINUING> 167,202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167,202
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
SUNAMERICA
1995 PERFORMANCE STOCK PLAN
Amended and Restated 1996
1. PURPOSE.
The purpose of the SunAmerica 1995 Performance Stock Plan is to
promote the success of SunAmerica Inc. by providing a method whereby
officers and other key employees of the Company may increase their
proprietary interest in its business, be encouraged to remain in the employ
of the Company and increase their personal interests in the continued
success and progress of the Company.
2. DEFINITIONS.
As used in this Plan or a Stock Agreement under this Plan, the
following terms shall have the indicated meanings:
Award: An award under this Plan which consists of Restricted Shares or
Restricted Share Units and an opportunity to earn Super Shares.
Award Agreement: With reference to a particular Award, the agreement
between the Company and the Participant containing, among other provisions,
(i) the restrictions set forth in or pursuant to Section 7, the Lapsing
Formula, if any, and the Performance Objectives which, if achieved during
the Performance Period with respect to which they were awarded, shall
cause, or accelerate the timing of, the lapsing of restrictions imposed
upon all or part of the Restricted Shares covered by an Award or the
payment of the Restricted Share Units covered by an Award, and (ii) the
Super Performance Objectives which, if achieved during the Performance
Period with respect to which they were awarded, shall cause, or accelerate
the timing of, the issuance of Super Shares.
Beginning Market Value: The average closing price of the Stock for
each of the twenty trading days commencing ten trading days prior to the
first trading day of the Performance Period multiplied by the Weighted
Average Shares.
Board: The board of directors of SunAmerica Inc.
Code: The Internal Revenue Code of 1986, as amended.
Committee: The Personnel, Compensation and Stock Plan Committee of the
Board, or such successor committee as the Board may appoint to administer
this Plan. The Committee shall consist of two or more directors, each of
whom is a "disinterested person" or "non-employee director" as such terms
are defined in Rule 16b-3 of the Securities Exchange Act of 1934, as
amended (the "Act").
Company: SunAmerica Inc. and its Subsidiaries.
Earnings Per Share: The Company's aggregate earnings per share from
continuing operations before the cumulative effect of a change in
accounting principles and before extraordinary items, as reported in the
Company's consolidated financial statements.
Ending Market Value: The average closing price of the Stock for each
of the twenty trading days commencing nine trading days prior to the last
trading day of the Performance Period multiplied by the Weighted Average
Shares. Ending Market Value shall be adjusted for the payment of cash
dividends during the Performance Period, assuming such dividends had been
reinvested in Stock on the date paid to Shareholders using the methodology
consistent with the determination of the S&P 500 Index Total Return to
Shareholders.
Lapsing Formula: With reference to Restricted Shares or Restricted
Share Units, a schedule which is a basis for establishing the number of
shares of Stock or Restricted Share Units which may be released from the
restrictions of an Award or paid pursuant to the satisfaction of payment
conditions thereunder, unless such restrictions are earlier released or
such payment conditions are earlier satisfied due to the achievement of
Performance Objectives or as otherwise provided in the Plan or in the
applicable Award Agreement. Restricted Shares or Restricted Share Units
need not be subject to a Lapsing Formula if, in the discretion of the
Committee, it furthers the purposes of the Committee in the case of an
Award or Awards intended to satisfy the requirements for performance-based
compensation under Section 162(m) of the Code.
Participant: An officer or other key employee of the Company selected
to participate in this Plan pursuant to its terms.
Performance Objectives: Performance Objectives shall be stated as
specified levels of Earnings Per Share or Total Return to Shareholders as
measured against the S&P Index Total Return to Shareholders, or a
combination thereof as determined by the Committee, or in the case of
Participants who are not considered at the time of an Award to be
"executive officers" (as such term is defined in Rule 3b-7 under the
Securities Exchange Act of 1934) of SunAmerica Inc., such other criteria as
the Committee may determine in its discretion as the appropriate other
performance measure for the Award based on other performance criteria for
the Company or for any subsidiary or division, department or operation of
the Company. With reference to a particular Award of Restricted Shares or
Restricted Share Units, the threshold and target Performance Objectives are
the criteria established by the Committee which, if achieved, accelerate or
cause the release from restrictions of a specific percentage of the
Restricted Shares or the payment of a specified percentage of Restricted
Share Units. With reference to a particular Award of Super Shares, the
Super Performance Objective is the criteria established by the Committee
which causes, or accelerates the timing of, the issuance of Super Shares.
The Performance Objectives shall be specified in an Award Agreement and may
differ from Participant to Participant and from Award to Award.
Performance Period: The Performance Period shall be October 1, 1994
through September 30, 1999, or a portion thereof as established by the
Committee.
Plan: The SunAmerica 1995 Performance Stock Plan, as it may be amended
from time to time.
Restricted Shares: A portion of an Award represented by shares of
Stock, which are issued and outstanding, but which remain subject to the
risk of forfeiture and restrictions on transfer, until the achievement of
specified Performance Objectives or, for certain Awards, the passage of
time pursuant to a Lapsing Formula, or the occurrence of other events
resulting in the lapse of restrictions applicable to such Award under the
Plan or under the applicable Award Agreement.
Restricted Share Units: A portion of an Award represented by units,
each of which represents the unfunded and unsecured right to receive one
share of Stock upon the specified date or dates set forth in the applicable
Award Agreement or, if earlier, upon the achievement of Performance
Objectives specified in the applicable Award Agreement.
S&P Index Total Return to Shareholders: The Standard & Poor's 500
Index Total Return to Shareholders as determined by Standard & Poor's
Compustat (or its successor), measured from the first day of the
Performance Period to the last day of the Performance Period.
Stock: Common Stock, par value $1.00 per share, of SunAmerica Inc.
Stock Agreement: An Award Agreement pertaining to an award of
Restricted Shares under the Plan.
Super Performance Objectives: With reference to a particular Award of
Super Shares, the Super Performance Objectives and the criteria established
by the Committee which exceed the target Performance Objectives, the
achievement of which will cause the issuance of Super Shares. The Super
Performance Objectives shall be specified in an Award Agreement and may
differ from Participant to Participant and from Award to Award.
Super Shares: A portion of an Award represented by shares of Stock
issued free of restrictions at such times or upon the achievement of such
Super Performance Objectives as are specified in the applicable Award
Agreement.
Subsidiary: A subsidiary of SunAmerica Inc. within the meaning of
Section 425(f) of the Code.
Tax Date: The date on which taxes of any kind are required by law to
be withheld with respect to shares of Stock subject to an Award.
Total Return to Shareholders: The amount (expressed as a percentage)
by which the Ending Market Value of the Stock exceeds its Beginning Market
Value.
Weighted Average Shares: The weighted average number of shares of
Stock outstanding during the Performance Period, computed in the manner
used to determine primary earnings per common share in the Company's
financial statements.
3. EFFECTIVE DATE AND TERM.
This Plan, as amended and restated, shall become effective upon its
adoption by the Committee on November 9, 1996, and shall continue in effect
until all shares of Stock reserved for issuance hereunder have been issued
and all restrictions on transfer of such shares have lapsed or the
applicable Awards have otherwise terminated. Notwithstanding the
foregoing, no Award shall be granted under the Plan after the date that is
five (5) years after January 27, 1995 or after such earlier date as the
Committee or the Board may decide, in its sole discretion.
4. SHARES RESERVED UNDER PLAN.
The aggregate number of shares of Stock which may be awarded under
this Plan shall not exceed 1,950,000 shares, subject to adjustment as
provided in this Plan. The shares of Stock which may be granted pursuant
to Awards shall consist of either authorized but unissued shares of Stock
or shares of Stock which have been issued and which shall have been
heretofore or hereafter reacquired by the Company. The total number of
shares authorized under this Plan shall be subject to increase or decrease
in order to give effect to the adjustment provisions of Section 16.A and to
give effect to any amendment adopted as provided in Section 14. If any
Award granted under this Plan shall expire, terminate or be canceled for
any reason without the shares subject to such Award having been issued or
paid and freed of restrictions in full, the corresponding number of shares
shall again be available for purposes of this Plan.
The maximum number of shares of Stock which may be awarded under
this Plan to any individual shall not exceed 450,000, subject to adjustment
as provided in this Plan.
5. ELIGIBILITY.
Participation in this Plan is limited to officers and other key
employees of the Company and other individuals who, in the Committee's
judgment, can make substantial contributions to the Company's long-term
profitability and value. Nothing in this Plan or in any Award Agreement
shall in any manner be construed (i) to limit in any way the right of the
Company to terminate a Participant's employment at any time, without regard
to the effect of such termination or any rights such Participant would
otherwise have under this Plan, or (ii) to give any right to such
Participant to remain employed by the Company in any particular position or
at any particular rate of compensation.
6. GRANT OF AWARDS.
A. Selection of Participants. Subject to the terms of this Plan, the
Committee shall select those Participants to whom Awards shall be granted.
Awards shall generally be made at the beginning of the Performance Period
but may, in the Committee's discretion, be made from time to time during
the term of the Performance Period.
B. Award of Shares. Each Award shall be composed of Restricted
Shares or Restricted Share Units and an opportunity to earn Super Shares.
An Award shall not require payment of any consideration by the Participant,
other than continued service with the Company as set forth in this Plan or
any Award Agreement.
C. Form of Instrument. Each Award shall be made pursuant to an Award
Agreement in a form prescribed by the Committee. Such instrument shall
specify the restrictions or conditions to payment set forth in or pursuant
Section 7.C, a Lapsing Formula, if applicable, and the applicable
Performance Objectives and any other circumstances or events not otherwise
set forth in the Plan resulting in the lapsing of restrictions, vesting or
payment of benefits under an Award.
7. RESTRICTED SHARES AND RESTRICTED SHARE UNITS.
A. Lapsing Formula. Generally, Restricted Shares and Restricted
Share Units shall be subject to a Lapsing Formula pursuant to which the
restrictions or conditions to payment set forth in or pursuant to Section
7.C shall lapse or be satisfied, unless such restrictions have earlier
lapsed or such payment conditions have earlier been satisfied as to all or
part of the shares due to achievement of Performance Objectives during the
Performance Period or pursuant to this Plan or the applicable Award
Agreement. The Committee may grant Restricted Shares or Restricted Share
Units which are not subject to a Lapsing Formula.
B. Performance Objectives. Each Award of Restricted Shares or
Restricted Share Units (whether or not subject to a Lapsing Formula) shall
be subject to the achievement by the Company of Performance Objectives
during the Performance Period.
C. Rights with Respect to Restricted Shares and Restricted Share
Units. Each Participant to whom an Award of Restricted Shares has been
made shall have beneficial ownership of such shares including the right to
vote the same and to receive dividends thereon. Restricted Shares and
Restricted Share Units shall be subject to the following terms, conditions
and restrictions and such additional terms, conditions and restrictions as
may be determined by the Committee and included in the Stock Agreement or
Award Agreement.
Until the restrictions set forth in or pursuant to this Section
7.C shall lapse pursuant to Sections 9, 10, 11 or the terms of a particular
Stock Agreement, Restricted Shares shall be held in escrow by the Company
and until the conditions to payment set forth in this Section 7.C shall be
satisfied pursuant to Sections 9, 10, 11 or the terms of a particular Award
Agreement, Restricted Share Units shall represent the unfunded and
unsecured right to receive payment of the Restricted Share Units in
accordance with the terms of the applicable Award Agreement. Prior to such
lapse or satisfaction, Restricted Shares and Restricted Share Units (i)
shall not be sold, assigned, transferred, pledged, hypothecated or
otherwise disposed of, and (ii) except as set forth in Sections 9, 10, 11
or the terms of a particular Stock Agreement or Award Agreement, shall be
returned to the Company or canceled, and all rights of the Participant to
such shares or in respect of such units shall terminate without any payment
of consideration by the Company, if the Participant's continuous employment
with the Company shall terminate with or without cause or as a result of
any event or otherwise for any reason.
8. SUPER SHARES.
A. Performance Objectives. Super Shares shall be issued upon the
Committee's certification of the achievement of the Super Performance
Objectives or otherwise in accordance with the applicable Award Agreement.
Super Performance Objectives shall be measured over the Performance Period
unless otherwise provided in an Award Agreement.
B. Rights with Respect to Super Shares. No Participant shall have
any right, title or interest in Super Shares until such shares have been
issued. All Awards of Super Shares shall, prior to issuance of such
Shares, be nontransferable except by will or laws of descent and
distribution or other permissible exception expressly authorized by the
Committee in the Award Agreement or any written amendment thereto.
9. DETERMINATION OF AWARDS.
A. Determination at End of Performance Period. As soon as
practicable after the close of Performance Period, or prior thereto if the
Committee in its discretion deems it appropriate, the Committee shall
determine whether the Performance Objectives and the Super Performance
Objectives have been achieved. Each Participant who has received an Award
shall be notified as to whether the Performance Objectives and Super
Performance Objectives established for the Performance Period have been
achieved and the number of Restricted Shares or Restricted Share Units, if
any, with respect to which the restrictions or payment conditions of
Section 7.C have lapsed or been satisfied and the number of Super Shares,
if any, to be issued.
B. Treatment of Restricted Shares, Restricted Share Units and Super
Shares After Performance Period. As to any Restricted Shares or Restricted
Share Units covered by an Award which have not had the restrictions or
payment conditions imposed by Section 7.C removed or satisfied, and as to
Super Shares which have not been earned, as of the last day of the
Performance Period, if such shares, Restricted Share Units or Super Shares
are subject to a Lapsing Formula, such restrictions shall lapse or such
payment conditions shall be satisfied in accordance with such Lapsing
Formula and, if such shares, Restricted Share Units or Super Shares are not
subject to a Lapsing Formula, all right, title and interest of the
Participant in such shares, Restricted Share Units and Super Shares shall
thereupon terminate.
10. CHANGE OF OWNERSHIP.
Notwithstanding any provision of Section 7 or any other provision of
this Plan or any provision in any grant or award hereunder to the contrary,
all of the restrictions on the Restricted Shares granted under this Plan
shall lapse, and all conditions to payment of Restricted Share Units shall
be satisfied, upon the occurrence of a Change of Ownership. A "Change of
Ownership" shall be deemed to have occurred if either (A) individuals who,
as of the initial effective date of this Plan, constitute the Board (as of
such initial effective date the "Incumbent Board") cease for any reason to
constitute at least a majority of the directors constituting the Board,
provided that any person becoming a director subsequent to the initial
effective date of this Plan whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least three-
quarters (3/4) of the directors comprising the Incumbent Board (other than
an election or nomination of an individual whose initial assumption of
office is (1) in connection with the acquisition by a third person,
including a "group" as such term is used in Section 13(d)(3) of the Act, of
beneficial ownership, directly or indirectly, of 20% or more of the
combined voting power of the Company's outstanding voting securities
ordinarily having the right to vote for the election of directors of the
Company (unless such acquisition of beneficial ownership was approved by a
majority of the Incumbent Board), or (2) in connection with an actual or
threatened election contest relating to the election of the directors of
the Company as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Act) shall be, for purposes of this Plan, considered
as though such person were a member of the Incumbent Board, or (B) the
Board (a majority of which should consist of directors who are members of
the Incumbent Board) has determined that a Change of Ownership triggering
the lapse of restrictions or satisfaction of conditions as described in
this Section 10 shall have occurred.
11. EFFECT OF CERTAIN TERMINATION OF EMPLOYMENT OR OTHER SERVICES.
A. Termination Due to Death or Retirement. Unless the Committee
otherwise provides in the applicable Award Agreement, where a Participant's
employment with the Company upon which an Award is based terminates at any
time because of death, or retirement on or after such Participant's normal
retirement date (as defined in accordance with the Company's retirement
policies), a proportionate number of the Restricted Shares as to which the
restrictions shall not have lapsed or Restricted Share Units as to which
the conditions to payment have not bee satisfied shall be held subject to
the terms and conditions of this Plan and the applicable Award Agreement
and the remaining shares or Restricted Share Units shall be returned to the
Company and all rights of the Participant to such shares or Restricted
Share Units shall terminate without any payment of consideration by the
Company on the date of such event. The number of shares or Restricted
Share Units which shall remain subject to this Plan and the applicable
Stock or Award Agreement shall be a number determined by multiplying the
total number of shares (including Restricted Shares as to which
restrictions shall not have lapsed, Restricted Share Units as to which the
conditions to payment shall not have been satisfied and Super Shares)
originally granted pursuant to any applicable Award by a fraction the
numerator of which is the number of days elapsed in the Performance Period
as of the date of such event and the denominator of which is the total
number of days in the Performance Period; provided, however, that the
Committee may, in its sole discretion, continue a greater number, or all,
of the shares or Restricted Share Units of any particular Award. Unless
otherwise provided in the applicable Award Agreement, the continuing shares
or Restricted Share Units shall continue to vest only upon satisfaction of
the applicable Performance Objectives.
B. Termination for Reasons Other Than Death or Retirement. Unless
the Committee otherwise provides in the applicable Award Agreement, where a
Participant's employment with the Company upon which an Award is based
terminates for any reason other than one set forth in Section 11.A above,
and whether or not the termination is initiated by the Participant or the
Company, any Restricted Shares and Restricted Share Units at the date of
such termination shall be returned to the Company and all rights of the
Participant to such shares and to any Super Shares shall terminate without
any payment of consideration by the Company. Notwithstanding the
foregoing, the Committee may, in its sole discretion, waive automatic
termination as to some or all shares then subject to restrictions or
conditions and to any Super Shares and, to that extent, continue the
restrictions or other vesting or payment conditions in the same manner as
set forth in Section 11.A above.
12. DELIVERY OF SHARES.
A. Delivery. No shares of Common Stock shall be delivered pursuant
to an Award until the requirements of all laws and regulations as may be
deemed by the Committee to be applicable thereto are satisfied.
B. Restrictions Upon Grant of Awards. If the Board in its discretion
determines that the listing upon the New York Stock Exchange, the Pacific
Stock Exchange or any other exchange, or participation in NASDAQ or the
registration or qualification under any Federal or state laws of any shares
of Stock to be granted or delivered pursuant to this Plan (whether to
permit the grant of Awards or the resale or other disposition of any such
shares of Stock by or on behalf of Participants receiving such shares) is
necessary or desirable prior to delivery of the certificates for such
shares of Stock, then delivery shall not be made until such listing,
participation, registration or qualification shall have been completed. In
such connection, the Company agrees that it will use its best efforts to
effect any such listing, participation, registration or qualification;
provided, however, that the Company shall not be required to use its best
efforts to effect such registration under the Securities Act of 1933, as
amended, other than on Form S-8, as presently in effect, or such other
forms as may be in effect from time to time calling for information
comparable to that presently required to be furnished under Form S-8.
C. Restrictions Under Resale of Unregistered Stock. If the shares of
Stock that have been granted or delivered to a Participant pursuant to the
terms of this Plan are not registered under the Securities Act of 1933, as
amended, pursuant to an effective registration statement, such Participant,
if the Committee shall deem it advisable, may be required to represent and
agree in writing (i) that any shares of Stock acquired by such Participant
pursuant to this Plan will not be sold except pursuant to an effective
registration statement under the Securities Act of 1933, as amended, or
pursuant to an exemption from registration under said Act and (ii) that
such Participant is acquiring such shares of Stock for his or her own
account and not with a view to the distribution thereof.
D. Restrictive Legends. Certificates for Restricted Shares delivered
pursuant to Awards shall bear an appropriate legend referring to the terms,
conditions and restrictions described in this Plan and in the Stock
Agreement. Any attempt to dispose of any such shares of Stock in
contravention to the terms, conditions and restrictions described in this
Plan or in the Stock Agreement shall be ineffective. Any shares of Stock
of the Company or other property or rights received by a Participant as a
stock dividend or as a result of any stock split, combination, exchange of
shares, reorganization, merger, consolidation or similar event with respect
to Restricted Shares shall have the same status and bear the same legend
and be held in escrow pursuant to Section 7.C as the Restricted Shares
received pursuant to the Award.
13. FINANCING AND WITHHOLDING.
A. Withholding of Taxes. As a condition to the making of an Award,
the lapse of the restrictions pertaining to Restricted Shares, the payment
of Restricted Share Units or to the issuance of Super Shares, the Company
may require the Participant to pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of, any taxes of any kind
required by law to be withheld or paid with respect to such shares of
Stock.
B. Financing. If requested by a Participant who has received Stock
pursuant to an Award, the Committee may in its discretion provide financing
to the Participant in a principal amount sufficient to pay the amount of
taxes required by law to be withheld with respect to such receipt of shares
of Stock. Any such loan shall be subject to all legal requirements, and
restrictions pertinent thereto, including if applicable, Regulation G
promulgated by the Federal Reserve Board. The grant of an Award shall in
no way obligate the Company or the Committee to provide any financing
whatsoever upon the lapse of restrictions on Restricted Shares, the payment
of Restricted Share Units or upon the issuance of Super Shares.
C. Withholding of Shares.
(i) If requested by Participant who has received shares of Stock
pursuant to an Award or Super Shares, the Committee may in its discretion
permit the Participant to satisfy any tax withholding obligations, in whole
or in part, by having the Company acquire, in the case of Restricted
Shares, or withhold in the case of Restricted Share Units and Super Shares,
a portion of such shares with a value equal to the amount of taxes required
by law to be withheld.
(ii) Requests by a Participant to have shares of Stock so
acquired or withheld shall be (a) made prior to the Tax Date, and (b)
irrevocable. In addition, in the event the Participant is an officer or
director of the Company within the meaning of Section 16 of the Act, the
Committee may impose such other limitations as it deems appropriate for
Section 16 compliance.
14. AMENDMENTS, SUSPENSION OR DISCONTINUANCE.
The Board may amend, suspend, or discontinue the Plan.
Notwithstanding the foregoing, the Board may not, without the prior
approval of the shareholders of the Company, make any amendment that under
applicable law requires shareholder approval.
15. ADMINISTRATION OF PLAN.
A. Powers of the Committee. This Plan shall be administered by the
Committee. Subject to the express provisions of this Plan, the Committee,
in its sole and absolute discretion, shall be authorized and empowered to
do all things necessary or desirable in connection with the administration
of this Plan, including, without limitation, the following:
(i) adopt, amend and rescind rules, regulations and procedures
relating to this Plan and its administration of the Awards granted under
this Plan;
(ii) determine which persons meet the eligibility requirements of
Section 5 under this Plan and to which of such person, if any, Awards will
be granted under this Plan;
(iii) grant Awards to persons determined to be eligible and
determine the terms and conditions of such Awards, including but not
limited to the number of Restricted Shares, Restricted Share Units or Super
Shares, and the times at which and conditions upon which Awards vest, are
paid, expire or terminate, or restrictions thereon will lapse, or
acceleration of the receipt of benefits, or the lapse of restrictions
pursuant to such Award upon the occurrence of specified events deemed
appropriate by the Committee (including, without limitation, a change of
control of the Company) or in other circumstances or upon the occurrence of
other events including those of a personal nature, as deemed appropriate by
the Committee;
(iv) establish criteria for the vesting of Awards, including the
applicable Performance Objectives and Super Performance Objectives and
determine the achievement thereof;
(v) determine whether, and the extent to which, adjustments are
required pursuant to Section 16 hereof or an amendment to an Award is
appropriate;
(vi) interpret and construe this Plan and the terms and
conditions of any Award granted hereunder, whether before or after the
termination of this Plan; and
(vii) determine the circumstances under which, consistent with
the provisions of this Plan, any outstanding Award and the applicable Award
Agreement will be amended; which authority (except as to clause (ii) and,
insofar as an initial grant is made, (iii) above) shall remain in effect so
long as any Award remains outstanding under this Plan.
B. Determinations. Any action taken by, or inaction of, the Company,
the Board or the Committee relating or pursuant to this Plan shall be
within the absolute discretion of that entity or body and shall be
conclusive and binding upon all persons. No member of the Board or officer
of the Company shall be liable for any such action or inaction of the
entity or body, of another person, or except in circumstances involving bad
faith, of himself or herself. In making any determination or in taking or
not taking any action under this Plan, the Board and the Committee may
obtain and may rely upon the advice of experts, including professional
advisors to the Company. No director, officer or agent of the Company shall
be liable for any such action or determination taken or made or omitted in
good faith. The Committee may delegate ministerial, nondiscretionary
functions to individuals who are officers or employees of the Company.
16. MISCELLANEOUS PROVISIONS.
A. Adjustments.
(i) Changes From Material Acquisitions, Dispositions,
Recapitalization, and Other Events. In the event of a change in
capitalization, a material acquisition or disposition of business or
assets, a material reorganization or restructuring, or any extraordinary
gain or loss that affects the Company (on a consolidated basis) or the
applicable business entity and that was not anticipated by the Committee in
setting the specific Performance Objectives and threshold and target Super
Performance Objectives for the Performance Period, the Committee, subject
to Section 16.C, may make adjustments to the Performance Objectives or the
number of shares subject to the Award, applied as of the date of such
event, based solely on objective criteria, so as to neutralize, in the
Committee's best judgment, the effect of the change on the applicable
Performance Objectives and total amount of the Award for the Performance
Period.
(ii) If (A) the outstanding shares of Stock (the "outstanding
shares") (1) are increased, decreased, exchanged or converted as a result
of a stock split (including a split in the form of a stock dividend),
reverse stock split, or the like or (2) are exchanged for or converted into
cash, property or a different number or kind of securities (or if cash,
property or securities are distributed in respect of the outstanding
shares), as a result of a reorganization, merger, consolidation,
recapitalization, restructuring, or reclassification, or (B) substantially
all of the property and assets of the Company are sold, then, unless the
terms of such transaction shall otherwise provide, the Committee shall make
equitable, appropriate and proportionate adjustments in (w) the number of
Restricted Share Units subject to any outstanding Award, (x) the number and
type of shares or other securities or cash or other property that may be
acquired pursuant to an Award of Super Shares previously granted under this
Plan, and (y) the maximum number and type of shares or other securities
that may be issued pursuant to Awards thereafter granted under this Plan,
and (z) such other terms as necessarily are affected by such event.
(iii) Accounting Matters. Similar changes with respect to the
Performance Objectives shall be made in the case of material changes in
accounting policies or practices affecting the Company, to the extent any
thereof was not anticipated at the time the specific performance levels
were set, based on objective criteria so as to neutralize, in the
Committee's best judgment, the effect of the change or event on the
applicable Performance Objectives for the Performance Period.
B. Designation of Beneficiaries. A Participant may designate a
beneficiary or beneficiaries to receive such Participant's Stock hereunder
in the event of such Participant's death, and Participant may, from time to
time, change any such beneficiary designation. All beneficiary
designations and changes therein shall be in writing and shall be effective
only if and when delivered by the Committee during the lifetime of the
Participant.
C. Limitation on Changes Materially Adverse to a Participant. No
amendment or termination of the Plan or change in or affecting any
outstanding Award shall deprive in any material respect the Participant,
without the consent of such Participant, of any of his or her rights or
benefits under or with respect to the Award. Adjustments contemplated by
Section 16.D shall not be deemed to constitute a change requiring such
consent.
D. Plan Construction. It is the intent of the Company that this Plan
and Awards hereunder satisfy and be interpreted in a manner that in the
case of recipients who are or may be subject to Section 16 of the Act
satisfies the applicable requirements of Rule 16b-3 so that such persons
will be entitled to the benefits of Rule 16b-3 or other exemptive rules
under Section 16 of the Act and will not be subjected to avoidable
liability thereunder. It is further the intent of the Company that Awards
under this Plan that are granted to or held by individuals in respect of
whose compensation the Company may be subject to Section 162(m) of the Code
be designed and construed in a manner that satisfies the requirements
thereof in the manner and to the maximum extent deemed desirable by the
Committee. If any provision of this Plan or of any Award would otherwise
frustrate or conflict with the intent expressed above, that provision to
the extent possible shall be interpreted and deemed amended so as to avoid
such conflict.
C. Non-Exclusivity of Plan. Nothing in this Plan shall limit or be
deemed to limit the authority of the Board or the Committee to grant awards
or authorize any other compensation, with or without reference to stock,
under any other plan, agreement or authority.
