<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 9, 1995
AMERICAN GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 1-7981 74-0483432
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification Number)
</TABLE>
2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 522-1111
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<PAGE> 2
AMERICAN GENERAL CORPORATION
TABLE OF CONTENTS TO FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Item 7. Financial Statements, Pro Forma Financial Information, and Exhibits........... 3
(b) Pro Forma Financial Information.
Pro Forma Financial Information of American General Corporation.......... 3
Pro Forma Consolidated Balance Sheet at March 31, 1995 (Unaudited)....... 4
Pro Forma Consolidated Statement of Income for the year ended December
31, 1994 (Unaudited)................................................... 5
Pro Forma Consolidated Statement of Income for the three months ended
March 31, 1995 (Unaudited)............................................. 6
Notes to Pro Forma Consolidated Financial Statements (Unaudited)......... 7
Signature..................................................................... 13
</TABLE>
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION, AND EXHIBITS.
(b) Pro Forma Financial Information of American General Corporation.
On January 31, 1995, American General Corporation ("American General")
through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"),
acquired American Franklin Company ("AFC"), the holding company of The Franklin
Life Insurance Company ("Franklin Life"), pursuant to a Stock Purchase Agreement
dated as of November 29, 1994, between American General and American Brands,
Inc. ("American Brands"). The purchase price was $1.17 billion, consisting of
$920 million in cash paid at closing and a $250 million cash dividend paid by
AFC to American Brands prior to closing. The dividend was paid on January 30,
1995.
On December 23, 1994, American General, through AGC Life, acquired a 40%
interest in Western National Corporation ("WNC"), the holding company of Western
National Life Insurance Company, through the acquisition of 24,947,500 shares of
WNC common stock from Conseco, Inc. for $274 million in cash.
American General filed Current Reports on Form 8-K on February 15, 1995 and
April 14, 1995 that included 1993 and 1994 audited consolidated financial
statements of AFC and various pro forma consolidated financial statements of
American General.
This Current Report on Form 8-K, updating the previously filed financial
statements, includes the pro forma consolidated financial statements of American
General as of and for the three months ended March 31, 1995 and for the year
ended December 31, 1994, as follows:
Balance Sheet The unaudited pro forma consolidated balance sheet as of
March 31, 1995 presents the historical consolidated balance sheet of American
General, as adjusted to reflect the permanent financing of the AFC acquisition
(see Note C of notes to pro forma consolidated financial statements).
Statement of Income for the Year Ended December 31, 1994 The unaudited pro
forma consolidated statement of income for the year ended December 31, 1994
presents the consolidated results of operations of American General and AFC and
reflects American General's 40% equity in the earnings of WNC as if the
acquisitions had been effective January 1, 1994, after giving effect to the
purchase accounting and other pro forma adjustments described in the related
notes.
Statement of Income for the Three Months Ended March 31, 1995 The
unaudited pro forma consolidated statement of income for the three months ended
March 31, 1995 presents the consolidated results of operations of i) American
General, which includes the operations of AFC for February and March 1995 and
American General's 40% equity in the earnings of WNC, and ii) AFC, for January
1995. The purchase accounting and other pro forma adjustments, as described in
the related notes, are calculated as if the AFC acquisition had been effective
January 1, 1994.
3
<PAGE> 4
AMERICAN GENERAL CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
HISTORICAL -----------
-------- RELATING
AMERICAN TO AFC PRO FORMA
GENERAL FINANCING CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
Assets
Investments
Fixed maturity securities............................ $ 32,531 $ - $ 32,531
Mortgage loans on real estate........................ 3,187 - 3,187
Equity securities.................................... 248 - 248
Policy loans......................................... 1,538 - 1,538
Investment real estate............................... 553 - 553
Other long-term investments.......................... 199 - 199
Short-term investments............................... 241 - 241
-------- ------- --------
Total investments............................... 38,497 - 38,497
Cash.................................................... 21 - 21
Finance receivables, net................................ 7,930 - 7,930
Investment in WNC....................................... 297 - 297
Deferred policy acquisition costs....................... 2,371 - 2,371
Cost of insurance purchased............................. 745 - 745
Acquisition-related goodwill............................ 592 - 592
Other assets............................................ 1,648 - 1,648
Assets held in Separate Accounts........................ 3,566 - 3,566
-------- -------- --------
Total assets.................................... $ 55,667 $ - $ 55,667
======== ======== ========
Liabilities
Insurance and annuity liabilities....................... $ 36,046 $ - $ 36,046
Debt (short-term)
Corporate:
Short-term......................................... 1,375 (920)(C) 685
220 (C)
10 (D)
Long-term.......................................... 984 450 (C) 1,432
(2)(D)
Real Estate ($349)................................... 349 - 349
Consumer Finance ($2,498)............................ 7,261 - 7,261
Income tax liabilities.................................. 793 - 793
Other liabilities....................................... 824 - 824
Liabilities related to Separate Accounts................ 3,566 - 3,566
-------- ------- --------
Total liabilities............................... 51,198 (242) 50,956
-------- ------- --------
Preferred stock of subsidiary............................. - 250 (C) 242
(8)(D)
Common stock subject to put contracts..................... 47 - 47
Shareholders' equity
Common stock............................................ 365 - 365
Net unrealized gains (losses) on securities............. (84) - (84)
Retained earnings....................................... 4,606 - 4,606
Cost of treasury stock.................................. (465) - (465)
-------- ------- --------
Total shareholders' equity...................... 4,422 - 4,422
-------- ------- --------
Total liabilities and equity.................... $ 55,667 $ - $ 55,667
======== ======= ========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
4
<PAGE> 5
AMERICAN GENERAL CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
HISTORICAL -----------------------
----------------- RELATING TO RELATING TO
AMERICAN AFC WNC PRO FORMA
GENERAL AFC ACQUISITION ACQUISITION CONSOLIDATED
------- ------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Premiums and other considerations............... $ 1,210 $ 503 $ - $ - $ 1,713
Net investment income........................... 2,493 479 9 (E) (4)(M) 2,978
(7)(F)
8 (F)
Finance charges................................. 1,248 - - - 1,248
Realized investment gains (losses).............. (172) (14) 14 (G) - (172)
Equity in earnings of WNC....................... - - - 27 (N) 27
Other........................................... 62 68 - - 130
------- ------ ----------- ----------- ------------
Total revenues.......................... 4,841 1,036 24 23 5,924
------- ------ ----------- ----------- ------------
Benefits and expenses
Insurance and annuity benefits.................. 2,224 721 5 (H) - 2,950
Operating costs and expenses.................... 1,013 108 (3)(I) - 1,118
Commission expense.............................. 400 126 - - 526
Change in deferred policy acquisition costs..... (142) (40) (71)(I) - (253)
Amortization of cost of insurance purchased..... 18 9 (9)(I) - 59
41 (J)
Interest expense
Corporate.................................... 110 - 47 (K) 11 (M) 168
Consumer Finance............................. 416 - - - 416
------- ------ ----------- ----------- ------------
Total benefits and expenses............. 4,039 924 10 11 4,984
------- ------ ----------- ----------- ------------
Earnings
Income before income tax expense................ 802 112 14 12 940
Income tax expense.............................. 289 44 5 (L) (5)(L) 341
8 (N)
------- ------ ----------- ----------- ------------
Income before net dividends on preferred stock
of subsidiary................................ 513 68 9 9 599
Net dividends on preferred stock of
subsidiary................................... - - (14)(K) - (14)
------- ------ ----------- ----------- ------------
Net income.............................. $ 513 $ 68 $ (5) $ 9 $ 585
======= ====== ======== ======== =========
Earnings per share and average shares outstanding:
Primary:
Net income................................... $ 2.45 $ 2.79
======= =========
Average shares outstanding (in thousands).... 209,403 209,403
======= =========
Fully diluted:
Net income................................... $ 2.45 $ 2.79
======= =========
Average shares outstanding (in thousands).... 209,420 209,420
======= =========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
5
<PAGE> 6
AMERICAN GENERAL CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
------------------------
THREE ONE
MONTHS MONTH
ENDED ENDED PRO FORMA
MARCH 31, JANUARY 31, ADJUSTMENTS
1995 1995 ----------
--------- --------- RELATING TO
AMERICAN AFC PRO FORMA
GENERAL AFC ACQUISITION CONSOLIDATED
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations....................... $ 403 $ 35 $ - $ 438
Net investment income................................... 722 41 1 (E) 764
(1)(F)
1 (F)
Finance charges......................................... 359 - - 359
Realized investment gains (losses)...................... 2 1 (1)(G) 2
Equity in earnings of WNC............................... 9 - - 9
Other................................................... 23 4 - 27
--------- ----------- ----------- ------------
Total revenues.................................. 1,518 81 - 1,599
--------- ----------- ----------- ------------
Benefits and expenses
Insurance and annuity benefits.......................... 693 55 - (H) 748
Operating costs and expenses............................ 306 11 - (I) 317
Commission expense...................................... 126 8 - 134
Change in deferred policy acquisition costs............. (54) (3) (6)(I) (63)
Amortization of cost of insurance purchased............. 11 1 (1)(I) 14
3 (J)
Interest expense
Corporate............................................ 39 - 3 (K) 42
Consumer Finance..................................... 125 - - 125
--------- ----------- ----------- ------------
Total benefits and expenses..................... 1,246 72 (1) 1,317
--------- ----------- ----------- ------------
Earnings
Income before income tax expense........................ 272 9 1 282
Income tax expense...................................... 97 3 - (L) 100
--------- ----------- ----------- ------------
Income before net dividends on preferred stock
of subsidiary........................................ 175 6 1 182
Net dividends on preferred stock of subsidiary.......... - - (4)(K) (4)
--------- ----------- ----------- ------------
Net income...................................... $ 175 $ 6 $ (3) $ 178
======== ======== ========= =========
Earnings per share and average shares outstanding:
Primary:
Net income........................................... $ .85 $ .87
======== =========
Average shares outstanding (in thousands)............ 205,192 205,192
======== =========
Fully diluted:
Net income........................................... $ .85 $ .87
======== =========
Average shares outstanding (in thousands)............ 205,244 205,244
======== =========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
6
<PAGE> 7
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A. BASIS OF PRESENTATION
On January 31, 1995, American General through its wholly-owned subsidiary,
AGC Life, acquired AFC, the holding company of Franklin Life, pursuant to a
Stock Purchase Agreement dated as of November 29, 1994, between American General
and American Brands. The purchase price was $1.17 billion, consisting of $920
million in cash paid at closing and a $250 million cash dividend paid by AFC to
American Brands prior to closing. The dividend was paid on January 30, 1995.
On December 23, 1994, American General through AGC Life acquired a 40%
interest in WNC, the holding company of Western National Life Insurance Company,
through the acquisition of 24,947,500 shares of WNC common stock from Conseco,
Inc. for $274 million in cash.
Included on the following pages is information related to these
acquisitions, as follows:
Balance Sheet The unaudited pro forma consolidated balance sheet as of
March 31, 1995 presents the historical consolidated balance sheet of American
General, as adjusted to reflect the permanent financing of the AFC acquisition
(see Note C).
Statement of Income for the Year Ended December 31, 1994 The unaudited pro
forma consolidated statement of income for the year ended December 31, 1994,
presents the consolidated results of operations of American General and AFC and
reflects American General's 40% equity in the earnings of WNC as if these
acquisitions had been effective January 1, 1994, after giving effect to the
purchase accounting and other pro forma adjustments described in the related
notes.
Statement of Income for the Three Months Ended March 31, 1995 The
unaudited pro forma consolidated statement of income for the three months ended
March 31, 1995 presents the consolidated results of operations of i) American
General, which includes the operations of AFC for February and March 1995, and
American General's 40% equity in the earnings of WNC, and ii) AFC, for January
1995. The purchase accounting and other pro forma adjustments, as described in
the related notes, are calculated as if the AFC acquisition had been effective
January 1, 1994.
The unaudited pro forma consolidated financial statements and the related
notes reflect the application of the purchase method of accounting for the AFC
acquisition. Under this method, the purchase price was allocated to the assets
acquired and liabilities assumed based on their respective estimated fair values
at January 31, 1995, the actual acquisition date, including an adjustment for
income tax effects for the difference between the assigned values and the tax
basis of the assets and liabilities (see Note B). The purchase method of
accounting also was applied to the financial statements of WNC before recording
American General's 40% of WNC's earnings using the equity method of accounting.
Prior to completion of accounting for both the AFC and the WNC
acquisitions, changes to the purchase accounting adjustments included in the
unaudited pro forma consolidated financial statements are anticipated as the
valuations of acquired assets and assumed liabilities are finalized.
Accordingly, the actual consolidated financial statements of American General
reflecting the AFC and the WNC acquisitions will differ from the pro forma
financial statements included herein. The unaudited pro forma consolidated
financial statements are intended for informational purposes only and may not
necessarily be indicative of American General's future financial position or
future results of operations.
American General anticipates first year cost savings of $8 million,
primarily associated with centralizing AFC's investment management function at
American General immediately following the acquisition. This expected savings
has been included in the pro forma consolidated financial statements (see Note
F). American General projects additional future cost savings, the extent and
timing of which may vary from management's expectations. No adjustment has been
included in the pro forma consolidated financial statements for these additional
projected cost savings.
7
<PAGE> 8
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE B. ALLOCATION OF PURCHASE PRICE -- AFC
The total acquisition cost of AFC is allocated as follows:
<TABLE>
<CAPTION>
PRO
HISTORICAL FORMA
------ ------
JANUARY DECEMBER
31, 31,
(IN MILLIONS) 1995 1994
------ ------
<S> <C> <C>
Net assets of AFC............................................. $1,117 $1,360
Less dividend paid on January 30, 1995........................ - (250)
------ ------
Net assets purchased.......................................... 1,117 1,110
------ ------
Increase (decrease) in AFC's net asset value to estimated fair
value:
Held-to-maturity fixed maturity securities............... (178) (284)
Mortgage loans on real estate............................ (26) (12)
Equity securities........................................ (4) -
Investment real estate................................... (2) -
Other long-term investments.............................. 2 -
Deferred policy acquisition costs........................ (513) (511)
Cost of insurance purchased (historical)................. (174) (175)
Cost of insurance purchased.............................. 645 752
Acquisition-related goodwill............................. (80) (80)
Insurance and annuity liabilities........................ 75 100
Income tax liabilities................................... 69 45
Other assets/liabilities, net............................ (4) -
------ ------
Total estimated fair value adjustments.............. (190) (165)
Acquisition-related costs..................................... - (18)
------ ------
Total acquisition cost.............................. 927 927
American General transaction costs............................ (7) (7)
------ ------
Cash purchase price................................. $ 920 $ 920
====== ======
</TABLE>
As explained in Note A, purchase accounting adjustments will change as
additional information becomes available, affecting the ultimate allocation of
the purchase price.
NOTE C. DEBT AND PREFERRED STOCK OF SUBSIDIARY
The AFC acquisition was financed at closing by short-term floating-rate
corporate debt at an average rate of 6%. The pro forma consolidated financial
statements reflect the proposed permanent financing of the transaction, as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS) AMOUNT ASSUMED
TYPE OF ISSUE OUTSTANDING RATE
--------------------------------------------------------------- ------------- -------
<S> <C> <C>
Short-term floating-rate corporate debt........................ $ 220 6.05%
Long-term fixed-rate corporate debt............................ 450 7.45%
Preferred stock of subsidiary.................................. 250 8.625%
------
Total................................................ $ 920
=========
</TABLE>
The assumed floating rate for short-term corporate debt, expected to be
issued on a staggered maturity basis, is based on American General's portfolio
rate with a 16 day average portfolio maturity. The assumed
8
<PAGE> 9
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
rate for the long-term fixed-rate corporate debt is based on a 10 year Treasury
rate plus 60 basis points. The assumed rate for preferred stock of subsidiary is
based on estimates from investment bankers.
NOTE D. DEBT AND PREFERRED STOCK OF SUBSIDIARY ISSUE COSTS
Issue costs, deducted from the proceeds of the proposed permanent financing
of the AFC acquisition (see Note C), are assumed to be .35% for long-term
fixed-rate corporate debt and 3.15% for preferred stock of subsidiary. These
costs are capitalized and amortized into expense over an assumed maturity period
of 10 years for long-term corporate debt and 30 years for preferred stock of
subsidiary.
NOTE E. ACCRETION OF DISCOUNT ON FIXED MATURITY SECURITIES AND MORTGAGE LOANS ON
REAL ESTATE
AFC's historical consolidated financial statements accrete the difference
between par value and amortized cost of fixed maturity securities and mortgage
loans to income on an effective yield basis over the remaining lives of the
individual fixed maturity securities and mortgage loans. The pro forma
consolidated financial statements are adjusted to reflect additional accretion
of the difference, at the assumed acquisition date, between amortized cost and
fair value of these same fixed maturity securities and mortgage loans.
Expected incremental accretion of the discount on fixed maturity securities
and mortgage loans for the next five years is $9 million, $11 million, $14
million, $16 million, and $19 million (pretax), respectively.
NOTE F. NET INVESTMENT INCOME
The liquidation by AFC of its investments to fund the $250 million cash
dividend paid to its shareholder prior to the acquisition (see Note A) is
expected to reduce net investment income by $6 million (pretax) per year.
The liquidation of $25 million of short-term investments to fund
transaction and acquisition-related costs is expected to reduce interest income
by $1 million (pretax) per year.
Annual projected expense savings of $8 million, primarily associated with
centralizing AFC's investment management function at American General
immediately following the acquisition, are included in the pro forma
consolidated financial statements.
NOTE G. REALIZED INVESTMENT GAINS (LOSSES)
Realized and unrealized investment losses of $31 million and gains of $1
million (pretax) on trading securities recorded by AFC in 1994 and January 1995,
respectively, are reversed since equity securities were assumed to be liquidated
prior to the acquisition to fund the cash dividend to AFC's shareholder (see
Note A). For purposes of the pro forma consolidated financial statements, the
dividend is assumed to occur on January 1, 1994.
Realized investment gains of $17 million (pretax) on fixed maturity
securities recorded by AFC in 1994 are reversed for purposes of the pro forma
consolidated financial statements, since they will not be a component of total
revenues in the future. The gains realized by AFC were indicative of the low
interest rate environment that prevailed in early 1994. Assuming the acquisition
occurred at January 1, 1994, these gains would not have been realized because
American General's purchased bases in the securities sold would have been
higher.
NOTE H. INSURANCE AND ANNUITY BENEFITS
AFC's historical insurance and annuity benefits are increased primarily to
reflect the change in the pattern of reserving for future benefits, primarily
for AFC's participating life insurance contracts.
9
<PAGE> 10
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE I. AMORTIZATION EXPENSE -- DEFERRED POLICY ACQUISITION COSTS ("DPAC"), COST
OF INSURANCE PURCHASED ("CIP"), AND ACQUISITION-RELATED GOODWILL
The expense recorded on AFC's historical consolidated financial statements
for the amortization of DPAC, historical CIP, and acquisition-related goodwill
is reversed to reflect the elimination of the related intangible assets under
purchase accounting.
NOTE J. AMORTIZATION OF CIP
CIP reflects the estimated fair value of the business in force and
represents the portion of the purchase price that is allocated to the value of
the right to receive future cash flows from insurance contracts existing at the
assumed date of the acquisition. Such value is the actuarially-determined amount
that, when amortized into income, results in expected earnings that meet the
profit objective of American General. This profit objective is an expected
aftertax rate of return of 13.5% on capital required to support the business in
force. This rate of return is believed to be appropriate based on considerations
of the relative risk associated with realizing the expected cash flows, the cost
of capital to American General to fund the acquisition, and the operating
environment of AFC, namely, the regulatory and tax factors affecting future
profitability and the profit objectives of American General for newly issued
policies.
The value allocated to CIP is based on a preliminary valuation;
accordingly, this amount will be adjusted after final determination of the
value. On a pro forma basis, assuming that the acquisition occurred at December
31, 1994, expected gross amortization using current assumptions and accretion of
interest based on an interest rate equal to the liability or contract rate (5%
to 8%), for each of the years in the five-year period ending December 31, 1999,
is as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
YEAR ENDING BEGINNING GROSS ACCRETION NET ENDING
DECEMBER 31, BALANCE AMORTIZATION OF INTEREST AMORTIZATION BALANCE
--------------- --------- ------------ ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
1995.......................... $ 752 $ 97 $56 $ 41 $ 711
1996.......................... 711 93 53 40 671
1997.......................... 671 89 50 39 632
1998.......................... 632 84 47 37 595
1999.......................... 595 79 45 34 561
</TABLE>
NOTE K. INTEREST EXPENSE AND DIVIDENDS ON PREFERRED STOCK OF SUBSIDIARY
Interest expense is increased to reflect the issuance of long-term
fixed-rate corporate debt and short-term floating-rate corporate debt assuming
the proposed permanent financing of the AFC acquisition had been effective on
January 1, 1994 (see Note C). The components of pretax interest expense for 1994
are as follows:
<TABLE>
<CAPTION>
ANNUAL
(IN MILLIONS) ASSUMED AMOUNT INTEREST
TYPE OF ISSUE RATE OUTSTANDING EXPENSE
------------------------------------------------------ ------- ----------- -------
<S> <C> <C> <C>
Short-term floating-rate corporate debt............... 6.05% $ 220 $13
Long-term fixed-rate corporate debt................... 7.45% 450 34
----------- -------
$ 670 $47
========= ======
</TABLE>
Interest expense for the three months ended March 31, 1995 is adjusted to
reflect the incremental increase in interest expense assuming the permanent
financing of the AFC acquisition had been effective on January 1, 1995 (see Note
C).
10
<PAGE> 11
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
A 1% increase/decrease in the short-term floating rate would
increase/decrease the above pro forma annual interest expense by approximately
$2 million (pretax) per year. A 1% increase/decrease in the long-term fixed rate
would increase/decrease the above annual pro forma interest expense by
approximately $5 million (pretax) per year.
Dividends on preferred stock of subsidiary are assumed to be at a pretax
rate of 8.625% on $250 million of preferred stock issued in connection with the
proposed permanent financing of the AFC acquisition. The dividends are shown net
of an $8 million tax benefit per year to reflect the tax deductibility of these
dividends (see Note C).
NOTE L. INCOME TAX EXPENSE
All of the applicable pro forma consolidated financial statement
adjustments, except goodwill amortization, are tax effected at an assumed
effective income tax rate of 37% for AFC and 35% for WNC.
NOTE M. INTEREST EXPENSE AND NET INVESTMENT INCOME -- WNC
The purchase of WNC was funded as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Sale of equity securities............................................ $ 59
Sale or maturity of short-term investments........................... 39
Issuance of short-term floating-rate debt............................ 176
----
Total...................................................... $274
====
</TABLE>
Interest expense is increased, and net investment income is reduced, in
1994 to reflect the liquidation of investments and the issuance of short-term
debt to fund the acquisition of the 40% interest in WNC. Interest expense of $11
million is calculated at an assumed rate of 6.05% per year on $176 million of
short-term debt. Foregone net investment income is calculated as follows:
(IN MILLIONS)
<TABLE>
<CAPTION>
ANNUAL
FOREGONE
NET
ASSUMED AMOUNT INVESTMENT
TYPE OF ISSUE SOLD RATE SOLD INCOME
-------------------------------------------------------- ----- --- ----------
<S> <C> <C> <C>
Equity securities....................................... 3.37% $59 $2
Short-term investments.................................. 6.25% 39 2
--
---
$98 $4
=== ==========
</TABLE>
11
<PAGE> 12
AMERICAN GENERAL CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE N. EQUITY IN EARNINGS OF WNC
The purchase price of WNC was allocated as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
40% of net assets of WNC at December 23, 1994......................... $136
Increase (decrease) in WNC's net asset value at
December 23, 1994 to estimated fair value:
Mortgage loans on real estate.................................... (5)
Credit-tenant loans.............................................. (5)
Deferred policy acquisition costs................................ (144)
Cost of insurance purchased (historical)......................... (42)
Cost of insurance purchased...................................... 232
Acquisition-related goodwill..................................... 136
Insurance and annuity liabilities................................ (23)
Income tax liabilities........................................... (1)
Other assets/liabilities......................................... (10)
----
Total estimated fair value adjustments...................... 138
----
Cash purchase price......................................... $274
====
</TABLE>
The investment in WNC is reported using the equity method of accounting.
American General records 40% of WNC's earnings, adjusted for purchase accounting
and other pro forma adjustments. The equity in earnings of WNC is tax effected
by American General at 35%, less an estimated dividends received deduction.
The equity in earnings of WNC and American General's related tax expense
are calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED
(IN MILLIONS) DECEMBER 31, 1994
-----------------
<S> <C>
40% of WNC's earnings.......................................... $ 29
Purchase accounting adjustments:
Reversal of amortization expense............................. 8
Accretion of discount on fixed maturity securities........... 7
Release of reserves.......................................... 1
Amortization of CIP.......................................... (24)
Pro forma adjustments:
Reduction in investment management fee....................... 3
Reversal of realized investment losses....................... 14
Reversal of trading gains.................................... (1)
------
Taxable adjustments............................................ 8
Tax effect on above adjustments................................ (3)
Amortization of goodwill....................................... (7)
------
Equity in earnings of WNC............................ 27
American General tax on undistributed earnings*................ 8
------
Net aftertax equity in earnings of WNC............... $ 19
======
</TABLE>
*Reflects dividends received deduction.
Dividends received from WNC, at an assumed annual rate of $.16/share or $1
million per quarter, reduce American General's investment in WNC and have no
impact on the pro forma consolidated statement of income, except for the
dividends received deduction.
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<PAGE> 13
SIGNATURE
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 hereunto duly authorized.
AMERICAN GENERAL CORPORATION
By: /s/ AUSTIN P. YOUNG
-----------------------------
Austin P. Young
Senior Vice President and
Chief Financial Officer
Dated: May 9, 1995
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