AMERICAN EAGLE GROUP INC, PRES14A, 1996-11-07

AMERICAN EAGLE GROUP INC
PRES14A, 1996-11-07
FIRE, MARINE & CASUALTY INSURANCE

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<PAGE> 1

SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934

Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12

AMERICAN EAGLE GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.

(1) Title of each class of securities to which transaction applies:

- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:

- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):

- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:

- --------------------------------------------------------------------------------
(5) Total fee paid:

- --------------------------------------------------------------------------------

[ ] Fee paid previously with preliminary materials.

- --------------------------------------------------------------------------------

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:

- --------------------------------------------------------------------------------
(3) Filing Party:

- --------------------------------------------------------------------------------
(4) Date Filed:

- --------------------------------------------------------------------------------
<PAGE> 2

[AMERICAN EAGLE LOGO]

AMERICAN EAGLE GROUP, INC.
12801 N. CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75243

December , 1996

Dear Stockholder:

You are cordially invited to attend a special meeting (the "Special
Meeting") of the stockholders of American Eagle Group, Inc. (the "Company") to
be held on December 30, 1996 at 9:00 a.m. local time at
, Dallas, Texas .

At the Special Meeting, you will be asked to approve a transaction in which
the Company will issue convertible preferred stock to American Financial Group,
Inc. for $35 million in cash. The transaction will provide the Company with a
significant capital infusion that will enable the Company to contribute capital
to its subsidiary, American Eagle Insurance Company, and to pay down bank debt;
the remainder, after transaction expenses, will be used for general corporate
purposes. In addition to the capital investment, the transaction embodies a
strategic alliance that will allow the Company to market and underwrite both new
and expanded aviation insurance product lines, and permit the Company to offer
products to its insureds providing the financial security of an insurer rated
"A" (Excellent) by A.M. Best Company. The attached Proxy Statement describes the
transaction in detail and you are urged to review the Proxy Statement carefully.

CS First Boston Corporation, the investment banking firm retained by the
Company to act as financial advisor in connection with the transaction, has
rendered its written opinion to the Board of Directors of the Company to the
effect that, as of November 5, 1996 and based upon and subject to certain
matters stated in such opinion, the cash consideration to be received by the
Company in the sale of the securities issued in the transaction is fair to the
Company from a financial point of view.

THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
TRANSACTION AND HAS DETERMINED THAT IT IS FAIR TO AND IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE FOR THE PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING.

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE SPECIAL
MEETING. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED
PROXY CARD. IF YOU ATTEND THE MEETING AND VOTE IN PERSON, YOUR VOTE WILL
SUPERSEDE YOUR PROXY.

Sincerely,

/s/ M. PHILIP GUTHRIE

M. PHILIP GUTHRIE
Chairman of the Board, Chief
Executive Officer and President
<PAGE> 3

[AMERICAN EAGLE LOGO]

AMERICAN EAGLE GROUP, INC.
12801 N. CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75243

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 30, 1996

TO THE STOCKHOLDERS OF AMERICAN EAGLE GROUP, INC.:

NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of
stockholders of American Eagle Group, Inc., a Delaware corporation (the
"Company"), will be held on December 30, 1996, commencing at 9:00 a.m., local
time, at , Dallas, Texas to consider and
act upon the following matters which are described in more detail in the
accompanying Proxy Statement:

1. To consider and vote upon a proposal (the "Proposal") to approve a
Securities Purchase Agreement dated as of November 5, 1996 (the "Securities
Purchase Agreement") between the Company and American Financial Group,
Inc., an Ohio corporation ("AFG"), and the performance by the Company of
all transactions and acts contemplated thereby (collectively, the
"Transaction"), including, among other things, (a) the sale and issuance to
AFG for an aggregate purchase price of $35 million of 350,000 shares of the
Company's Series D Preferred Stock, par value $.01 per share (the "Series D
Preferred Stock"), which shall initially be convertible into an aggregate
of 6,666,667 shares of the Company's Common Stock, par value $.01 per share
(the "Common Stock"), at a conversion price of $5.25 per share (subject to
antidilution provisions), (b) the issuance of up to an additional 196,200
shares of Series D Preferred Stock that may be issued by the Company as
dividends in kind on the shares of Series D Preferred Stock, (c) the
issuance of up to 10,403,810 warrants ("Warrants") (subject to antidilution
provisions) to purchase shares of Common Stock that the Company will be
required to issue if the Company elects to redeem the Series D Preferred
Stock prior to the seventh anniversary of the date of initial issuance, and
(d) the issuance of up to 10,403,810 shares (subject to antidilution
provisions) of Common Stock issuable upon conversion of shares of Series D
Preferred Stock and exercise of Warrants.

2. To consider and act upon such other business as may properly be
brought before the meeting or any adjournment or postponement thereof.

Holders of record of shares of the Company's Common Stock, at the close of
business on December 4, 1996, the record date for the Special Meeting, are
entitled to notice of, and to vote at, the Special Meeting and any adjournment
or postponement thereof.

When a proxy is returned properly executed, the shares represented thereby
will be voted in accordance with the indicated instructions. However, if no
instructions have been specified on the returned proxy, the shares represented
thereby will be voted "FOR" approval of the Proposal. The affirmative vote of a
majority of the outstanding shares of Common Stock present, in person or by
proxy, and entitled to vote at the Special Meeting is required to approve the
Proposal, provided that the total votes cast on the Proposal constitute a
majority of the outstanding shares of Common Stock.
<PAGE> 4

Any stockholder giving a proxy has the right to revoke it at any time
before it is voted by filing, with the Secretary of the Company, either an
instrument revoking the proxy or a duly executed proxy bearing a later date.
Proxies also may be revoked by attending the meeting and voting in person.

By Order of the Board of Directors
AMERICAN EAGLE GROUP, INC.

/s/ M. PHILIP GUTHRIE

M. PHILIP GUTHRIE
Chairman of the Board, Chief Executive
Officer and President

YOUR VOTE IS IMPORTANT. TO ASSURE YOUR REPRESENTATION AT THE SPECIAL
MEETING, PLEASE DATE THE ENCLOSED PROXY CARD, WHICH IS SOLICITED BY THE BOARD OF
DIRECTORS OF THE COMPANY, SIGN EXACTLY AS YOUR NAME APPEARS THEREON AND RETURN
IT IMMEDIATELY.

December , 1996
<PAGE> 5

'[AMERICAN EAGLE LOGO]

AMERICAN EAGLE GROUP, INC.
12801 N. CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75243

PROXY STATEMENT

SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 30, 1996

This Proxy Statement is being furnished to holders of Common Stock, par
value $.01 per share (the "Common Stock"), of American Eagle Group, Inc., a
Delaware corporation (the "Company"), in connection with the solicitation of
proxies by the Board of Directors of the Company for use at a special meeting of
stockholders of the Company (the "Special Meeting"), to be held at 9:00 a.m.,
local time, on December 30, 1996, at ,
Dallas, Texas, and at any and all adjournments or postponements thereof.

At the Special Meeting, holders of Common Stock will be asked to consider
and vote upon a proposal (the "Proposal") to approve a Securities Purchase
Agreement dated as of November 5, 1996 (the "Securities Purchase Agreement")
between the Company and American Financial Group, Inc., an Ohio corporation
("AFG"), and the performance by the Company of all transactions and acts
contemplated thereby (collectively, the "Transaction"), including, among other
things, (a) the sale and issuance to AFG for an aggregate purchase price of $35
million of 350,000 shares of the Company's Series D Preferred Stock, par value
$.01 per share (the "Series D Preferred Stock"), which shall initially be
convertible into an aggregate of 6,666,667 shares of Common Stock at a
conversion price of $5.25 per share (subject to antidilution provisions), (b)
the issuance of up to an additional 196,200 shares of Series D Preferred Stock
that may be issued by the Company as dividends in kind on the shares of Series D
Preferred Stock, (c) the issuance of up to 10,403,810 warrants ("Warrants")
(subject to antidilution provisions) to purchase shares of Common Stock that the
Company will be required to issue if the Company elects to redeem the Series D
Preferred Stock prior to the seventh anniversary of the date of initial
issuance, and (d) the issuance of up to 10,403,810 shares (subject to
antidilution provisions) of Common Stock issuable upon conversion of shares of
Series D Preferred Stock and exercise of Warrants.

The Securities Purchase Agreement also embodies a strategic alliance with
AFG that will allow the Company to market and underwrite new and expanded
aviation insurance product lines, and permit the Company to offer products to
its insureds providing them the financial security of an insurer rated "A"
(Excellent) by A.M. Best Company.

This Proxy Statement and the accompanying Notice of Special Meeting of
Stockholders and Proxy were first mailed to stockholders on or about December 4,
1996.
<PAGE> 6

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.................................... 3
The Special Meeting...................... 3
Time and Place......................... 3
Purpose................................ 3
Voting; Votes Required for Approval.... 3
The Transaction.......................... 3
Securities Purchase Agreement.......... 3
Reasons for the Transaction............ 5
Opinion of Financial Advisor........... 7
Conditions to the Transaction.......... 7
No Dissenters' Rights or Preemptive
Rights............................... 7
Certain Considerations................. 7
Interests of Certain Persons in the
Transaction.......................... 7
THE SPECIAL MEETING........................ 8
Time and Place; Purpose.................. 8
Voting; Vote Required for Approval....... 8
Proxies.................................. 8
Solicitation............................. 9
THE TRANSACTION............................ 9
General.................................. 9
Reasons for the Transaction.............. 11
Opinion of Financial Advisor............. 13
Use of Proceeds.......................... 16
Regulatory Approvals..................... 16
No Dissenters' Rights or Preemptive
Rights................................. 16
Interests of Certain Persons in the
Transaction............................ 17
CERTAIN CONSIDERATIONS..................... 18
Impact on Voting and Other Rights of
Stockholders; Impact on Future Share
Issuances.............................. 18
Substantial Equity Ownership on
Conversion............................. 18
Restrictions on the Ability of AFG to
Effect a Business Combination with the
Company................................ 19
Strategic Alliance Arrangements.......... 20
Effect on Capital and Earnings Available
for Common Stockholders................ 20
CAPITALIZATION............................. 21
THE SECURITIES PURCHASE AGREEMENT AND
RELATED AGREEMENTS....................... 22

<CAPTION>
PAGE
----
<S> <C>
Issuance and Sale of Series D Preferred
Stock.................................. 22
Recapitalization Charge.................. 22
Certain Covenants........................ 22
AFG Representation on Board of
Directors.............................. 22
AFG Voting Agreement..................... 22
Strategic Alliance....................... 23
Conditions Precedent..................... 23
Restriction on Transferability of Series
D Preferred Stock...................... 23
Certain Representations and Warranties... 23
No Solicitation.......................... 24
Termination.............................. 24
Break-up Warrants........................ 25
Warrants Issuable Upon Early
Redemption............................. 25
Registration Rights Agreements........... 26
Amended Registration Rights Agreement.... 27
DESCRIPTION OF SERIES D PREFERRED STOCK.... 27
Priority................................. 27
Dividends................................ 27
Voting Rights............................ 27
Conversion............................... 28
Redemption............................... 29
Liquidation Preference................... 29
Restriction on Transfer.................. 29
Preemptive Rights........................ 29
AFG'S DESIGNEES FOR DIRECTORS.............. 29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS, DIRECTORS AND MANAGEMENT......... 30
STOCKHOLDER PROPOSALS...................... 32
AVAILABLE INFORMATION...................... 32
APPENDIX I -- OPINION OF CS FIRST BOSTON
CORPORATION
APPENDIX II -- SECURITIES PURCHASE AGREEMENT
APPENDIX III -- CERTIFICATE OF DESIGNATION
</TABLE>

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<PAGE> 7

SUMMARY

The following is only a summary of certain information contained elsewhere
in this Proxy Statement and does not purport to be complete. Reference is made
to, and this Summary is qualified in its entirety by, the more detailed
information contained elsewhere in this Proxy Statement, including the attached
Appendices. Stockholders are urged to read this Proxy Statement and the
Appendices in their entirety.

THE SPECIAL MEETING

TIME AND PLACE

The Special Meeting will be held at 9:00 a.m., local time, on December 30,
1996, at
, Dallas, Texas.

PURPOSE

At the Special Meeting, holders of the Company's Common Stock will be asked
to consider and vote on the Proposal. If the Proposal is approved and the
Transaction is consummated, the Company will issue to American Financial Group,
Inc. ("AFG") 350,000 shares of Series D Preferred Stock for an aggregate
purchase price of $35 million. The Company will use the net proceeds from the
Transaction to provide capital to its insurance company subsidiary, American
Eagle Insurance Company ("AEIC"), and to pay down bank debt; the remainder,
after transaction expenses, will be used for general corporate purposes.

VOTING; VOTES REQUIRED FOR APPROVAL

The Board of Directors of the Company has established December 4, 1996 as
the record date (the "Record Date") for the determination of stockholders
entitled to notice of and to vote at the Special Meeting. Each share of Common
Stock is entitled to one vote. On the Record Date, there were shares
of Common Stock outstanding.

Because the Transaction will involve the issuance of securities convertible
into Common Stock in an amount in excess of 20% of the aggregate number of
shares of Common Stock outstanding, the New York Stock Exchange (the "NYSE")
requires that the Proposal be approved by the affirmative vote of the holders of
a majority of the outstanding shares of Common Stock entitled to vote and
present, in person or by proxy, at the Special Meeting, provided that the total
votes cast on the Proposal constitute at least a majority of the outstanding
shares of Common Stock.

Mason Best Company, L.P. ("Mason Best"), which owns 2,960,772 shares of
Common Stock, representing approximately 42% of the outstanding shares of Common
Stock, has entered into an agreement with AFG (the "Mason Best Voting
Agreement") to vote all of such shares for approval of the Proposal.

THE TRANSACTION

SECURITIES PURCHASE AGREEMENT

On November 5, 1996, the Company and AFG entered into the Securities
Purchase Agreement, which, subject to the terms and conditions thereof, provides
for the sale and issuance by the Company to AFG of 350,000 shares of Series D
Preferred Stock for an aggregate purchase price of $35 million. Consummation of
the Securities Purchase Agreement is subject to certain conditions, including
approval of the Proposal by the stockholders of the Company.

Terms of the Series D Preferred Stock. The Series D Preferred Stock will be
entitled to a per annum cumulative dividend equal to 9% payable quarterly, with
payment commencing April 1, 1997. At the option of the Company, during the first
five years after the date of closing of the Securities Purchase Agreement (the
"Closing Date"), dividends may be paid in cash or in kind (whereby a holder, in
lieu of cash, receives shares of Series D Preferred Stock having a liquidation
value equal to the dividends declared).

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<PAGE> 8

The Series D Preferred Stock will be convertible into shares of Common
Stock at any time at a conversion price of $5.25 per share (subject to
antidilution provisions). The Series D Preferred Stock may be redeemed at any
time at the Company's option; provided, however, if the Company redeems any
shares of Series D Preferred Stock prior to the seventh anniversary of the
Closing Date, the Company shall, in addition to the cash payable to the holder,
issue to the holder, for each share of Common Stock into which the redeemed
shares of Series D Preferred Stock are then convertible, a Warrant to purchase
one share of Common Stock of the Company at an exercise price of $5.25 per share
(subject to antidilution provisions). The Company is required to redeem 10% of
the outstanding shares of Series D Preferred Stock on the first business day of
each year, commencing with the first business day in January 2008, and all
remaining outstanding shares are required to be redeemed on the first business
day in January 2017. The redemption price for the Series D Preferred Stock is
$100.00 per share plus an amount equal to all accrued and unpaid dividends to
the date of redemption.

Until AFG and its affiliates no longer own Series D Preferred Stock and
shares ("Underlying Shares") of Common Stock issued or issuable upon exercise of
conversion rights relating to the Series D Preferred Stock or upon the exercise
of the Warrants representing in the aggregate the ownership, or the right to
acquire ownership, of 51% of the Underlying Shares or until the seventh
anniversary of the Closing Date, whichever is earlier, AFG shall be entitled to
nominate for election 30% of the Company's directors and, if elected, at least
one director representing AFG shall serve on each standing committee of the
Board of Directors. Notwithstanding the foregoing, the number of directors that
AFG is entitled to nominate shall be reduced by the number of directors that the
holders of the Series D Preferred Stock are entitled to elect as a class under
the terms of the Certificate of Designation for the Series D Preferred Stock
(the "Certificate of Designation"). Mason Best has agreed to vote all shares
owned by it in favor of the election of AFG's nominees. If AFG's nominees fail
to be elected to the Board of Directors, AFG shall nevertheless be entitled to
have an equal number of representatives attend each meeting of the Board of
Directors. The Certificate of Designation provides that, upon the occurrence and
continuation of a default in dividend payments for at least two consecutive
quarters or a default in any mandatory redemption payment on the Series D
Preferred Stock, the holders of the Series D Preferred Stock, voting as a
separate class, shall be entitled at the next annual or special meeting of
stockholders to elect a majority of the directors of the Company to be elected.

The Certificate of Designation provides that the holders of the Series D
Preferred Stock, for the seven years following the Closing Date, shall be
entitled collectively to cast 20% of the votes eligible to be cast on each
matter submitted to a vote of the holders of capital stock of the Company,
except that if the aggregate number of shares of Common Stock issuable upon
conversion of the Series D Preferred Stock represents less than 20% of the
outstanding shares of Common Stock on a fully diluted basis, then each share of
Series D shall be entitled to the number of votes equal to the number of shares
of Common Stock into which such share of Series D Preferred Stock is then
convertible. In addition, the Securities Purchase Agreement provides that until
the date which is three years and 180 days after the Closing Date, so long as
AFG and any affiliate of AFG shall beneficially own Series D Preferred Stock or
Underlying Shares which represent in the aggregate the ownership, or right to
acquire ownership, of at least 51% of the Underlying Shares, AFG shall, if it
and its Affiliates hold any combination of Series D Preferred Stock and Common
Stock representing the right to vote more than 20% of the total votes eligible
to be voted on a matter on which the holders of Common Stock have the right to
vote, cast all votes in excess of such 20% in proportion to the actual vote of
holders of all remaining votes (including AFG's 20% vote).

AFG and its affiliates may assign or transfer to any person shares of the
Series D Preferred Stock or the Underlying Shares, representing in the aggregate
ownership, or the right to acquire ownership, of at least 51% of the Underlying
Shares and the right of AFG in the Securities Purchase Agreement to nominate 30%
of the Company's directors only if such person assumes the voting restrictions
in the Securities Purchase Agreement which are described in the immediately
preceding paragraph.

The Company will enter into a Registration Rights Agreement with AFG
pursuant to which AFG will be granted certain demand and "piggyback"
registration rights.

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<PAGE> 9

For a more complete description of the Series D Preferred Stock and AFG's
rights as a holder of Series D Preferred Stock, see "Description of Series D
Preferred Stock", and "The Securities Purchase Agreement and Related
Agreements."

Strategic Alliance with AFG. The Securities Purchase Agreement embodies a
strategic alliance with AFG that will allow the Company to market and underwrite
both new and expanded aviation insurance product lines. For example, AFG has
agreed to provide a facility for the Company to offer workers compensation
coverage for its aviation insureds. These new and expanded products are expected
to provide the Company with enhanced opportunities for additional business by
attracting and retaining preferred accounts.

The Company also anticipates that the strategic alliance will permit the
Company to offer, when required by an insured, products providing the financial
security of an insurer rated "A" (Excellent) by Best. The Company anticipates
that this arrangement will, over the long term, reduce the costs the Company is
currently incurring for similar arrangements with other insurers.

In accordance with the provisions of the Securities Purchase Agreement, AFG
intends to nominate two of its senior executives to serve on the Company's Board
of Directors. See "AFG's Designees for Directors." The Company expects to
benefit from the experience and expertise of these executives.

American Financial Group, Inc. ("AFG") was incorporated as an Ohio
corporation in 1994. Its address is One East Fourth Street, Cincinnati, Ohio
45202; its phone number is (513) 579-2121. AFG is a holding company which,
through its subsidiaries, is engaged primarily in specialty and multi-line
property and casualty insurance businesses and in the sale of tax-deferred
annuities. AFG's property and casualty operations originated in 1872 and
represent the seventeenth largest property and casualty group in the United
States based on 1995 statutory net premiums written of $3.1 billion. AFG was
formed for the purpose of acquiring American Financial Corporation and American
Premier Underwriters, Inc. in merger transactions completed on April 3, 1995.
AFG's common stock is listed on the NYSE. At December 31, 1995, AFG had
stockholders' equity of approximately $2.9 billion. AFG's principal insurance
company subsidiaries are rated "A" (Excellent) by A. M. Best Company ("Best").

Recapitalization Charge. The Securities Purchase Agreement provides that
the Company will record a $15 million (pre-tax) recapitalization charge in its
financial results for the quarter in which the Transaction is recorded. The
recapitalization charge will provide additional strengthening of the Company's
balance sheet and overall reserve levels, and is intended to cover contingencies
and estimated exposures associated with various previously reported strategic
actions and product line discontinuations.

Certain other provisions. Concurrently with the execution of the Securities
Purchase Agreement, the Company issued to AFG 800,000 warrants (the "Break-up
Warrants") to purchase an aggregate of 800,000 shares of Common Stock at an
exercise price of $3.45 per share. The Break-up Warrants will be exercisable
only if the Securities Purchase Agreement is terminated prior to the approval of
the Proposal by the stockholders of the Company (i) by the Company if the Board
of Directors of the Company determines in the exercise of its fiduciary duties
that such termination is required by reason of a Competing Proposal (as defined
in the Securities Purchase Agreement), or (ii) by the Company or AFG if the
Company's Board of Directors withdraws or modifies in a manner materially
adverse to AFG its approval of the Securities Purchase Agreement and recommends
a Competing Proposal to the stockholders of the Company. Upon the closing (the
"Closing") of the Securities Purchase Agreement and issuance of the Series D
Preferred Stock, the Break-up Warrants will expire.

REASONS FOR THE TRANSACTION

Financial Condition. The Company's financial condition and operating
results have been significantly adversely affected as a result of the poor
financial performance of certain of the Company's lines of business and a
special charge to earnings of $20.6 million after tax taken by the Company in
the fourth quarter of 1995 (the "Special Charge").

The Company recorded the Special Charge for certain discontinued lines and
classes of business and increased reserves for incurred but not reported losses
("IBNR") and unearned premium. The majority of the

5
<PAGE> 10

Special Charge related to the Company's poor financial performance in, and
decision to withdraw from, the franchised new automobile dealer line of business
and certain classes of commercial aviation business. As a result of the Special
Charge, net book value declined from $10.11 at September 30, 1995 to $7.58 at
December 31, 1995. Based on the Special Charge, Best lowered AEIC's rating from
"A-" (Excellent) to "B++" (Very Good) on March 4, 1996. Subsequent to Best's
rating action, the Company announced that it was pursuing various alternatives
for increasing the capital and surplus of AEIC.

In May 1996, the Company reported a net loss of $2.8 million for the first
quarter of 1996, due mainly to an increase in reported claims in the
transportation line of business and weather related claims, and a decrease in
net book value to $7.01 at March 31, 1996. Due to the Company's first quarter
financial performance and the further deterioration of its capitalization, Best
further downgraded AEIC's rating to "B" (Adequate) on May 24, 1996. Best
additionally placed a negative outlook on the rating, pending the outcome of
ongoing capital-raising efforts of the Company.

In October 1996, the Company withdrew from the transportation line of
business in connection with a strategic refocusing by the Company on the
aviation, marine and artisan contractor product lines where, in the view of
management, historic profitability and the Company's competitive advantages are
the greatest. During 1996, the Company's transportation line of business had
been its primary source of unacceptable underwriting results. The Company also
discontinued the quarterly dividend on its Common Stock in order to preserve
capital. In the second and third quarters of 1996, the Company reported net
losses of $0.6 million and $1.2 million, respectively, decreasing net book value
to $6.68 at September 30, 1996.

The third quarter results and the Company's performance over the first nine
months of 1996 increased the likelihood that Best might further downgrade AEIC's
rating if the Company were unable to obtain additional capital. In the opinion
of management, a further downgrade by Best could have a significant adverse
effect on the Company's business.

Decision to Pursue Strategic Relationship. In February 1996, the Board of
Directors of the Company began discussing the Company's need for additional
capital in light of the Special Charge. After the downgrade of AEIC's rating by
Best in March 1996, management began an in-depth review of various forms of
capital transactions. The Board met on six separate occasions from May through
November 4, 1996 to review the status and proposed terms of various potential
transactions. Ultimately determining that a properly structured strategic
alliance would offer stockholders the best opportunity to maximize stockholder
value, the Board deliberated the AFG proposal at length and determined that the
proposed Transaction with AFG was the best available transaction.

Recommendation of the Board of Directors. In light of the financial
background described above, the Transaction involves matters of great importance
to the Company and its stockholders. The Board of Directors has unanimously
approved the Securities Purchase Agreement and believes that the Transaction is
in the best interests of the Company and its stockholders.

The Board of Directors, in approving the Transaction and recommending
stockholder approval of the Proposal, considered a number of factors, including
the following: (i) consummation of the Transaction will provide the Company with
$35 million of new capital (before deducting the estimated expenses of the
Transaction), a majority of which will be utilized to provide capital to AEIC
and pay down bank debt; (ii) consummation of the Transaction, barring any
unforeseen events, would likely avoid a further ratings downgrading by Best,
although it will not ensure that a downgrading will not occur in the future;
(iii) the anticipated benefits to the Company of the strategic alliance with
AFG; (iv) the expected benefits from the addition of members of AFG's senior
management to the Board of Directors; (v) the lack of certainty that any of the
possible alternative transactions considered by the Board of Directors would be
successful on an expedited basis and on terms as favorable to the Company as the
Transaction; (vi) the existing assets, operations, earnings and prospects of the
Company in light of the economic and regulatory climate; (vii) the terms of the
Securities Purchase Agreement, including the voting rights, conversion rights,
preferences and other rights of the Series D Preferred Stock; (viii) the written
opinion of CS First Boston Corporation ("CS First Boston"), the financial
advisor to the Company, described below; (ix) the high probability of
consummation of the Transaction (including the absence of a material adverse
change condition to AFG's

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obligation to close); and (x) the potential adverse consequences of delaying a
transaction. See "The Transaction -- Reasons for the Transaction."

OPINION OF FINANCIAL ADVISOR

CS First Boston, financial advisor to the Company, has rendered to the
Board of Directors of the Company a written opinion, dated November 5, 1996, to
the effect that, as of such date and based upon and subject to certain matters
stated in such opinion, the cash consideration to be received by the Company in
the Transaction was fair to the Company from a financial point of view. A copy
of the opinion of CS First Boston dated November 5, 1996 is attached hereto as
Appendix I and should be read carefully in its entirety with respect to the
assumptions made, matters considered and limitations on the review undertaken in
connection with such opinion. The opinion of CS First Boston is directed only to
the fairness of the cash consideration to be received by the Company in the
Transaction from a financial point of view, does not address any other aspect of
the Transaction or any related transaction and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
Special Meeting. See "The Transaction -- Opinion of Financial Advisor."

CONDITIONS TO THE TRANSACTION

Consummation of the Transaction is subject to a number of conditions,
including approval of the Proposal by the stockholders of the Company, the
expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and receipt of regulatory approvals from applicable state insurance
commissions in the States of Texas and California. See "The
Transaction -- Regulatory Approvals" and "The Securities Purchase Agreement and
Related Agreements -- Conditions Precedent."

NO DISSENTERS' RIGHTS OR PREEMPTIVE RIGHTS

Under Delaware law, holders of Common Stock are not entitled to dissenters'
appraisal rights or preemptive rights in connection with the Transaction and the
issuance of the Series D Preferred Stock.

CERTAIN CONSIDERATIONS

Stockholders should refer to the information under "Certain Considerations"
for a discussion of certain matters that should be considered in connection with
an evaluation of the Proposal.

INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION

Certain officers, directors and stockholders of the Company have certain
interests or obligations with respect to the Transaction that are different
from, or in addition to, the interests of stockholders of the Company generally.
The Securities Purchase Agreement provides as a condition to AFG's obligation to
close that the Company shall have adjusted the exercise price of existing stock
options granted to the current officers and directors of the Company or its
subsidiaries pursuant to its 1991 Nonqualified Stock Option Plan, 1994 Stock
Incentive Plan and 1994 Directors Option Plan to the market price on the date of
adjustment and shall provide that all such options shall have a vesting period
of three years, with one-third of the options vesting on each anniversary date
of the date of adjustment. The Company will make such adjustment on the Closing
Date. See "The Transaction -- Interests of Certain Persons in the Transaction."

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<PAGE> 12

THE SPECIAL MEETING

This Proxy Statement is being furnished in connection with the solicitation
of proxies from the holders of Common Stock by the Company's Board of Directors
for use at the Special Meeting.

TIME AND PLACE; PURPOSE

The Special Meeting will be held on December 30, 1996, at ,
Dallas, Texas, , commencing at 9:00 a.m. local time. At the Special
Meeting, holders of Common Stock will consider and vote upon the Proposal. No
other business will be presented at the Special Meeting other than those matters
incidental to the conduct of the Special Meeting.

It is a condition to the consummation of the Transaction that the Proposal
be approved. Therefore, unless the Proposal is approved by the stockholders, the
Transaction will not be consummated.

VOTING; VOTE REQUIRED FOR APPROVAL

The Board of Directors has established December 4, 1996 as the Record Date
for the determination of stockholders entitled to notice of and to vote at the
Special Meeting. Only holders of record of Common Stock at the close of business
on such date are entitled to vote at the Special Meeting. On the Record Date,
the Company had outstanding and entitled to vote shares of Common
Stock.

The presence, either in person or by proxy, of the holders of at least a
majority of the outstanding shares of Common Stock entitled to vote is necessary
to constitute a quorum at the Special Meeting.

Because the Transaction will involve the issuance of securities convertible
into Common Stock in an amount in excess of 20% of the aggregate number of
shares of Common Stock outstanding, the NYSE requires that the Proposal be
approved by the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock entitled to vote and present, in person or by proxy, at
the Special Meeting, provided that the total votes cast on the Proposal
constitute at least a majority of the outstanding shares of Common Stock.

Pursuant to the Mason Best Voting Agreement, Mason Best has agreed to vote
all shares of Common Stock owned by it in favor of the Proposal. Mason Best owns
2,960,772 shares of Common Stock, representing approximately 42% of the shares
of Common Stock outstanding.

The holder of each outstanding share of Common Stock is entitled to one
vote per share on each matter considered at the Special Meeting. On all matters
considered at the Special Meeting, broker non-votes will be treated as neither a
vote "for" nor "against" the matter, although they will be counted in
determining if a quorum is present. In addition, abstentions are considered in
determining the number of votes required to attain a majority of the shares
present or represented at the Special Meeting and entitled to vote. Accordingly,
an abstention from voting on the Proposal by a stockholder present in person or
represented by proxy at the meeting has the same legal effect as a vote
"against" the Proposal because it represents a share present or represented at
the Special Meeting and entitled to vote, thereby increasing the number of
affirmative votes required to approve the Proposal.

PROXIES

All shares of Common Stock represented by properly executed proxies will be
voted at the Special Meeting in accordance with the directions indicated on the
respective proxies unless the proxies have been previously revoked. Unless
contrary direction is given, all shares of Common Stock represented by proxies
will be voted FOR approval of the Proposal and in the proxy holder's discretion
as to such other matters incident to the conduct of the Special Meeting. If any
other matters are properly presented at the Special Meeting for action,
including a question of adjourning the meeting from time to time, the persons
named in the proxies and acting thereunder will have discretion to vote on those
matters in accordance with their best judgment.

All holders of Common Stock are requested to complete, sign, date and
promptly return the enclosed proxy card in the postage paid envelope provided
for this purpose in order to ensure that their shares are voted.

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<PAGE> 13

A stockholder executing and returning a proxy has the power to revoke the proxy
at any time before it is voted. A stockholder who wishes to revoke a proxy can
do so by executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of the Company prior to the vote at the Special
Meeting or by appearing in person at the Special Meeting and voting in person
the shares to which the proxy relates. Any written notice revoking the proxy
should be sent to American Eagle Group, Inc., 12801 N. Central Expressway, Suite
800, Dallas, Texas 75243, Attention: Secretary.

SOLICITATION

The Company will bear the expenses in connection with this solicitation,
including the cost of preparing and mailing this Proxy Statement. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of the Company in person or by telephone, telegram or
other means of communication. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Arrangements will also be made
with custodians, nominees and fiduciaries for forwarding of proxy solicitation
materials to beneficial owners of shares held of record by such custodians,
nominees and fiduciaries, and the Company will reimburse such custodians,
nominees and fiduciaries for reasonable expenses incurred in connection
therewith. In addition, the Company has retained to assist in the
solicitation of proxies for a fee of approximately $ , plus
reimbursement of reasonable out-of-pocket expenses incurred in connection with
this solicitation.

THE TRANSACTION

GENERAL

Terms of the Series D Preferred Stock. The Series D Preferred Stock will be
entitled to a per annum cumulative dividend equal to 9% payable quarterly, with
payment commencing April 1, 1997. At the option of the Company, during the first
five years after the Closing Date, dividends may be paid in cash or in kind
(whereby a holder, in lieu of cash, receives shares of Series D Preferred Stock
having a liquidation value equal to the dividends declared).

Until AFG and its affiliates no longer own Series D Preferred Stock and
Underlying Shares representing in the aggregate the ownership, or the right to
acquire ownership, of 51% of the Underlying Shares or until the seventh
anniversary of the Closing Date, whichever is earlier, AFG shall be entitled to
nominate for election 30% of the Company's directors and, if elected, at least
one director representing AFG shall serve on each standing committee of the
Board of Directors. Notwithstanding the foregoing, the number of directors that

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<PAGE> 14

AFG is entitled to nominate shall be reduced by the number of directors that the
holders of the Series D Preferred Stock are entitled to elect as a class under
the terms of the Certificate of Designation for the Series D Preferred Stock.
Mason Best has agreed to vote all shares owned by it in favor of the election of
AFG's nominees. If AFG's nominees fail to be elected to the Board of Directors,
AFG shall nevertheless be entitled to have an equal number of representatives
attend each meeting of the Board of Directors. The Certificate of Designation
provides that, upon the occurrence and continuation of a default in dividend
payments for at least two consecutive quarters or a default in any mandatory
redemption payment on the Series D Preferred Stock, the holders of the Series D
Preferred Stock, voting as a separate class, shall be entitled at the next
annual or special meeting of stockholders to elect a majority of the directors
of the Company to be elected.

The Certificate of Designation provides that, for the seven years following
the Closing Date, the holders of the Series D Preferred Stock shall be entitled
collectively to cast 20% of the votes eligible to be cast on each matter
submitted to a vote of the holders of capital stock of the Company, except that
if the aggregate number of shares of Common Stock issuable upon conversion of
the Series D Preferred Stock represents less than 20% of the outstanding shares
of Common Stock on a fully diluted basis, then each share of Series D Preferred
Stock shall be entitled to the number of votes equal to the number of shares of
Common Stock into which such share of Series D Preferred Stock is then
convertible. In addition, the Securities Purchase Agreement provides that until
the date which is three years and 180 days after the Closing Date, so long as
AFG or any affiliate of AFG shall beneficially own Series D Preferred Stock or
Underlying Shares which represent in the aggregate the ownership, or right to
acquire ownership, of at least 51% of the Underlying Shares, AFG shall, if it
and its Affiliates hold any combination of Series D Preferred Stock and Common
Stock representing the right to vote more than 20% of the total votes eligible
to be voted on a matter on which the holders of Common Stock have the right to
vote, vote all votes in excess of such 20% in proportion to the actual vote of
holders of all remaining votes (including AFG's 20% vote).

The Company will enter into a Registration Rights Agreement with AFG
pursuant to which AFG will be granted three demand and unlimited "piggyback"
registration rights.

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<PAGE> 15

and overall reserve levels, and is intended to cover contingencies and estimated
exposures associated with various previously reported strategic actions and
product line discontinuations.

Certain other provisions. Concurrently with the execution of the Securities
Purchase Agreement, the Company issued to AFG 800,000 Break-up Warrants to
purchase an aggregate of 800,000 shares of Common Stock at an exercise price of
$3.45 per share. The Break-up Warrants will be exercisable only if the
Securities Purchase Agreement is terminated prior to the approval of the
Proposal by the stockholders of the Company (i) by the Company if the Board of
Directors of the Company determines in the exercise of its fiduciary duties that
such termination is required by reason of a Competing Proposal (as defined in
the Securities Purchase Agreement), or (ii) by the Company or AFG if the
Company's Board of Directors withdraws or modifies in a manner materially
adverse to AFG its approval of the Securities Purchase Agreement and recommends
a Competing Proposal to the stockholders of the Company. Upon the Closing of the
Securities Purchase Agreement and issuance of the Series D Preferred Stock, the
Break-up Warrants will expire.

AFG. AFG was incorporated as an Ohio corporation in 1994. Its address is
One East Fourth Street, Cincinnati, Ohio 45202; its phone number is (513)
579-2121. AFG is a holding company which, through its subsidiaries, is engaged
primarily in specialty and multi-line property and casualty insurance businesses
and in the sale of tax-deferred annuities. AFG's property and casualty
operations originated in 1872 and represent the seventeenth largest property and
casualty group in the United States based on 1995 statutory net premiums written
of $3.1 billion. AFG was formed for the purpose of acquiring American Financial
Corporation and American Premier Underwriters, Inc. in merger transactions
completed on April 3, 1995. AFG's common stock is listed on the NYSE. At
December 31, 1995, AFG had stockholders' equity of approximately $2.9 billion.
AFG's principal insurance company subsidiaries are rated "A" (Excellent) by
Best.

REASONS FOR THE TRANSACTION

During 1995, the Company saw two developing issues which were adversely
affecting financial results. First, the auto dealer line of business was
generating an unacceptably high loss ratio. This loss ratio was deteriorating in
1995, after having begun to trend unacceptably in 1994. Second, adverse loss
experience in the commercial aviation line of the general aviation business had
been observed earlier in 1995, and continued to develop adversely at an even
greater rate during the fourth quarter. Based on additional analysis, the
Company withdrew from the auto dealer line of business and discontinued writing
certain classes of business in the three troublesome segments of its eight
commercial aviation segments. In addition, during the latter half of 1995 and
the beginning of 1996, the Company implemented a number of underwriting actions,
including underwriting policy changes, revisions in risk selection criteria,
tightening of underwriting standards and guidelines, and expanded systems of
pricing and underwriting control.

As a result primarily of these two factors, the Company recorded the
Special Charge for certain discontinued lines and classes of business and
increased reserves for IBNR and unearned premium. Approximately $8.9 million of
the Special Charge resulted from additional case reserves and related costs for
the three segments of the commercial general aviation business in which coverage
was discontinued. Approximately $0.7 million of the Special Charge resulted from
additional case reserves and related costs from the auto dealer program. The
remainder of the Special Charge, approximately $11.0 million, resulted from an
increase of IBNR and unearned premium reserves, which included reserves for the
discontinued lines and classes of business. As a result of the Special Charge,
net book value declined from $10.11 at September 30, 1995 to $7.58 at year end
1995.

Based on the Special Charge taken by the Company, on March 4, 1996, Best
lowered AEIC's rating from "A-" (Excellent) to "B++" (Very Good). This action
was based on Best's expectations regarding the Company's ability to raise new
capital in a relatively short period, and that satisfactory operating
performance

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<PAGE> 16

would resume, allowing the Company to generate internal capital. Subsequent to
Best's rating action, the Company stated in its 1995 Annual Report that it was
pursuing various alternatives for increasing the capital and surplus of AEIC.

In the first quarter of 1996, the Company experienced a deterioration in
the performance of the transportation line of business and instituted a full
review of the internal and external factors affecting its performance. On May
13, 1996, the Company reported a net loss of $2.8 million for the first quarter
of 1996, due mainly to an increase in reported claims in the transportation line
of business and weather related claims, and a decrease in net book value to
$7.01 at March 31, 1996.

On May 24, 1996, Best downgraded AEIC's rating from "B++" (Very Good) to
"B" (Adequate) due to the Company's poor first quarter financial performance and
the further deterioration of its capitalization. Best stated that the first
quarter 1996 loss placed additional pressure on the Company to raise capital in
a timely fashion while making it more difficult for the Company to do so. Best
additionally placed a negative outlook on the rating, pending the outcome of
ongoing capital-raising efforts of the Company. Best acknowledged that the
Company was exploring capital-raising alternatives, and stated that Best would
review the rating for possible upgrade or removal of the negative outlook. If,
however, the Company proved unsuccessful in raising capital or if operating
results did not improve, Best stated that it would likely downgrade the rating
further. Any further downgrade would likely have a significant adverse effect on
the Company, its competitive position, and its future performance.

Upon completion of the Company's review of the transportation line of
business, on October 1, 1996, the Company withdrew from the transportation line
of business. During 1996 the Company's transportation line of business had been
its primary source of unacceptable underwriting results. In connection with this
withdrawal, the Company began a strategic refocusing on those product lines
where the Company believes historic profitability and sustainable competitive
advantages are the greatest -- Aviation, Marine, and Artisan Contractors. The
Company believes that the changes made in the commercial aviation segment have
continued to produce increasing improvements, and that withdrawing from
transportation allows the Company to devote increasing amount of capital and
resources to the remaining lines. On September 30, 1996, the Company also
discontinued the quarterly dividend on its common stock in order to more quickly
build the capital level of the Company.

In the second and third quarters of 1996, the Company reported net losses
of $0.6 million and $1.2 million, respectively, decreasing net book value to
$6.68 at September 30, 1996, increasing the net loss for the three quarters
ended September 30, 1996 to $4.5 million, and making the possibility of a
further Best downgrade more likely without a timely infusion of capital.

In connection with each quarter of reported losses, the Company has
renegotiated its bank credit agreement to bring the Company into compliance with
certain financial covenants. Amendments to its Amended and Restated Credit
Agreement were entered into on February 23, March 18, May 3, September 20, and
November 6, 1996, to effect these negotiations.

Decision to Pursue a Strategic Relationship. At the February 23, 1996
meeting of the Company's Board of Directors (the "Board"), Board members began
discussing the Company's need for additional capital in light of the Special
Charge. While access to the public markets was unlikely, CS First Boston had
informed management that it believed an opportunity existed in the private
markets to place equity linked securities. After the initial Best downgrade and
a review of the first quarter results, management began an in-depth review of
the potential benefits and problems with various forms of capital transactions.
At its next meeting, the Board analyzed a proposed term sheet prepared by
management and CS First Boston for a private equity linked offering. In May
1996, the Board approved the retention of CS First Boston to advise the Company
with respect to potential transactions, and management was authorized to pursue
a capital raising transaction. See "-- Opinion of Financial Advisor."

CS First Boston and, to a limited extent, officers of the Company, then
began a process of selectively canvassing the private markets for indications of
interest in a capital raising transaction. During the course of

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<PAGE> 17

these efforts, numerous contacts were initiated, and unsolicited indications of
interest were received. CS First Boston initially contacted AFG in August 1996.

During the course of these efforts, the Board met on six occasions from May
through November 4, 1996 and reviewed the status of the various negotiations.
With each developing negotiation, the Board considered a wide range of factors,
such as potential ultimate terms, earnings per share impact, dilutive impact,
possible strategic synergies, reserving questions, expectations of Best, timing
and special factors unique to each proposal. On several occasions the Board
analyzed alternative types of transactions, such as a private offering of equity
linked securities, a strategic alliance and a sale of the Company, and
ultimately determined that a transaction involving not only additional capital
but the strong potential for strategic synergies presented the best opportunity
for maximizing stockholder value. At its final two meetings during which it
considered and ultimately approved the proposed Transaction with AFG, the Board,
with its financial and legal advisors, again reviewed in detail all of the
contacts that had been made, the various proposals and indications of interest
that had been received, and the current status of all discussions and
negotiations with all parties that had expressed interest in a transaction of
any type with the Company. The Board analyzed the relative economic benefits
(including the benefits of potential synergies with a strategic partner),
contingencies to closing, timing of closing, operating results and financial
condition of the Company, exposure to a further downgrade of its Best rating,
and other business risks attendant to the various proposals or expressions of
interest that were outstanding, and determined that its strategy of pursuing a
transaction involving raising additional capital provided by a strategic partner
remained the best opportunity for maximizing stockholder value. The Board
deliberated the AFG proposal at length and determined that the Transaction
offered the best available transaction for the Company and its stockholders.

The Board of Directors, in approving the Transaction and recommending
stockholder approval of the Proposal, considered a number of factors, including
the following: (i) consummation of the Transaction will provide the Company with
$35 million of new capital (before deducting the estimated expenses of the
Transaction), a majority of which will be utilized to provide capital to AEIC
and pay down bank debt; (ii) consummation of the Transaction, barring any
unforeseen events, would likely avoid a further ratings downgrading by Best,
although it will not ensure that a downgrading will not occur in the future;
(iii) the expected benefits to the Company of the strategic alliance with AFG;
(iv) the expected benefits from the addition of members of AFG's senior
management to the Board of Directors; (v) the lack of certainty that any of the
possible alternative transactions considered by the Board of Directors would be
successful on an expedited basis and on terms as favorable to the Company as the
Transaction; (vi) the existing assets, operations, earnings and prospects of the
Company in light of the economic and regulatory climate; (vii) the terms of the
Securities Purchase Agreement, including the voting rights, conversion rights,
preferences and other rights of the Series D Preferred Stock; (viii) the written
opinion of CS First Boston delivered to the Board of Directors of the Company on
November 5, 1996, to the effect that, as of November 5, 1996 and based upon and
subject to certain matters stated in such opinion, the cash consideration to be
received by the Company in the Transaction is fair to the Company, from a
financial point of view; (ix) the high probability of consummation of the
transaction (including the absence of a material adverse change condition to
AFG's obligation to close); and (x) the potential adverse consequences of
delaying a transaction.

OPINION OF FINANCIAL ADVISOR

CS First Boston has acted as financial advisor to the Company in connection
with the Transaction. CS First Boston was selected by the Company based on CS
First Boston's experience, expertise and familiarity with the Company and its
business. CS First Boston is an internationally recognized investment banking
firm and is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate, estate and
other purposes.

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<PAGE> 18

In connection with CS First Boston's engagement, the Company requested that
CS First Boston evaluate the fairness of the cash consideration to be received
by the Company in the Transaction from a financial point of view. On November 5,
1996, CS First Boston rendered to the Company's Board of Directors a written
opinion to the effect that, as of such date and based upon and subject to
certain matters stated in such opinion, the cash consideration to be received by
the Company in the Transaction was fair to the Company from a financial point of
view.

The full text of CS First Boston's written opinion to the Board of
Directors of the Company dated November 5, 1996, which sets forth the
assumptions made, matters considered and limitations on the review undertaken,
is attached as Appendix I to this Proxy Statement and is incorporated herein by
reference. Stockholders of the Company are urged to read this opinion carefully
in its entirety. CS First Boston's opinion is directed only to the fairness of
the cash consideration to be received by the Company in the Transaction from a
financial point of view, does not address any other aspect of the proposed
Transaction or any related transaction and does not constitute a recommendation
to any stockholder as to how such stockholder should vote at the Special
Meeting. The summary of the opinion of CS First Boston set forth in this Proxy
Statement is qualified in its entirety by reference to the full text of such
opinion.

In arriving at its opinion, CS First Boston reviewed the Securities
Purchase Agreement and certain related documents and certain publicly available
business and financial information relating to the Company. CS First Boston also
reviewed certain other information, including financial forecasts, provided to
CS First Boston by the Company and met with the management of the Company to
discuss the business and prospects of the Company, including the distressed
financial position of the Company and the near-term liquidity needs of, and
capital resources available to, the Company. CS First Boston also considered
certain financial and stock market data of the Company and compared that data
with similar data for other publicly held companies in businesses similar to
those of the Company and considered, to the extent publicly available, the
financial terms of certain other significant equity and equity-linked
investments in other publicly traded companies. CS First Boston also considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria which CS First Boston deemed relevant.

In connection with its review, CS First Boston did not assume any
responsibility for independent verification of any of the information provided
to or otherwise reviewed by CS First Boston and relied upon such information
being complete and accurate in all material respects. With respect to the
financial forecasts, CS First Boston assumed that such forecasts were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of the Company as to the future financial
performance of the Company. In addition, CS First Boston did not make an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of the Company, nor was CS First Boston furnished with any such
evaluations or appraisals. CS First Boston's opinion was necessarily based on
information available to CS First Boston, and financial, stock market and other
conditions as they existed and could be evaluated, on the date of its opinion.
In connection with its engagement, CS First Boston was not requested to, and did
not, solicit third party indications of interest in acquiring all or
substantially all of the Company. Although CS First Boston evaluated the cash
consideration to be received by the Company in the Transaction from a financial
point of view, CS First Boston was not requested to, and did not, recommend the
specific consideration payable in the Transaction, which consideration was
determined through negotiation between the Company and AFG. No other limitations
were imposed by the Company on CS First Boston with respect to the
investigations made or procedures followed by CS First Boston in rendering its
opinion.

In preparing its opinion to the Board of Directors of the Company, CS First
Boston performed a variety of financial and comparative analyses, including
those described below. The summary of CS First Boston's analyses set forth below
does not purport to be a complete description of the analyses underlying CS
First Boston's opinion. The preparation of a fairness opinion is a complex
analytic process involving various determinations as to the most appropriate and
relevant methods of financial analyses and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. In arriving at its opinion, CS First Boston
made qualitative judgments as to the significance and relevance of each analysis
and factor considered by it. Accordingly, CS First Boston believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and factors, without

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<PAGE> 19

considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and its opinion. In its analyses,
CS First Boston made numerous assumptions with respect to the Company, industry
performance, regulatory, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of the
Company. No company, transaction or business used in such analyses as a
comparison is identical to the Company or the Transaction, nor is an evaluation
of the results of such analyses entirely mathematical; rather, such analyses
involve complex considerations and judgments concerning financial and operating
characteristics and other facts that could affect the acquisition, public
trading or other values of the companies, business segments or transactions
being analyzed. The estimates contained in such analyses and the ranges of
valuations resulting from any particular analysis are not necessarily indicative
of actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by such analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. CS First Boston's opinion and
financial analyses were only one of many factors considered by the Board of
Directors of the Company in its evaluation of the Transaction and should not be
viewed as determinative of the views of the Company's Board or management with
respect to the proposed Transaction or the cash consideration to be received by
the Company in the Transaction.

The following is a summary of the material financial analyses performed by
CS First Boston in arriving at its written opinion dated November 5, 1996, but
does not purport to be a complete description of the analyses performed by CS
First Boston for such purposes.

Comparison With Other Transactions. CS First Boston examined transactions
involving significant equity or equity-linked investments in various companies
in a variety of industries that had occurred since 1984, or were pending as of
October 28, 1996. In addition, CS First Boston examined several recent
transactions in the insurance industry involving significant equity or
equity-linked investments. CS First Boston then analyzed the proposed terms of
the Transaction as compared to the corresponding terms of such prior
transactions, including, without limitation, the size of the investment, voting
power acquired by the investor, whether board representation was acquired by the
investor, dividend or interest rates applicable to the investment, the
relationship between conversion price and market price of the underlying common
stock (in the case of investments in convertible preferred stock or convertible
debentures), the relationship between exercise price and market price (in the
case of investments that included warrants or options to purchase common stock),
and the relationship between purchase price and market price (in the case of
direct common stock investments). In particular, such analysis indicated that
the average conversion premiums for convertible securities and warrant or option
exercise price premiums was 18.1% and the average of dividend and interest rates
applicable to such investments was 8.7%.

Pro Forma Analysis. CS First Boston analyzed the estimated pro forma
effects of the Transaction on the Company's balance sheet at June 30, 1996 and
anticipated operating results for 1996 (as if the Transaction had been completed
at the beginning of the year) and 1997-1999, based on managements's then-current
expectations for results for such periods and certain other assumptions supplied
by the Company to CS First Boston.

Public or Rule 144A Offering Analysis. CS First Boston analyzed public
offerings and Rule 144A offerings of convertible securities and non-convertible
preferred securities completed during 1996 by companies in a variety of
industries. Using such analysis and estimates of the terms on which the Company
might successfully issue convertible preferred stock as an alternative financing
method to raise capital, CS First Boston made certain comparisons, including,
but not limited to, dividend rates and payment options, optional redemption
provisions, and conversion features, with those of the Transaction. In addition,
CS First Boston analyzed the likelihood of completing a public or Rule 144A
offering for the Company based on then-current market conditions.

Historical Relative Trading and Valuation Comparisons. CS First Boston
examined the history of the trading prices for the Common Stock, and the
relationship between the movements in the prices of such shares and movements in
certain stock indices. CS First Boston also compared the consideration to be

15
<PAGE> 20

received by the Company pursuant to the Transaction to the historical public
trading prices of the Common Stock.

Miscellaneous. Pursuant to the terms of CS First Boston's engagement, the
Company has agreed to pay CS First Boston for its services in connection with
the Transaction an aggregate financial advisory fee equal to 4% of the gross
proceeds raised by the Company in the Transaction. The Company also has agreed
to reimburse CS First Boston for out-of-pocket expenses incurred by CS First
Boston in performing its services, including the reasonable fees and expenses of
legal counsel and any other advisor retained by CS First Boston, and to
indemnify CS First Boston and certain related persons and entities against
certain liabilities, including liabilities under the federal securities laws,
arising out of CS First Boston's engagement.

CS First Boston has in the past provided financial services to the Company
and AFG unrelated to the proposed Transaction, for which services CS First
Boston has received compensation. In the ordinary course of business, CS First
Boston and its affiliates may actively trade the equity securities of the
Company and both the debt and equity securities of AFG for their own account and
for accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.

USE OF PROCEEDS

The net proceeds to the Company from the Transaction are estimated to be
approximately $33 million, after the deduction of the expenses of the
Transaction, which are expected to total approximately $2 million. The net
proceeds will be used to contribute capital to AEIC and to pay down bank debt;
the remainder will be used for general corporate purposes. See "Capitalization."

REGULATORY APPROVALS

Under the HSR Act, and the rules promulgated thereunder, certain
transactions, including certain of the transactions contemplated by the
Securities Purchase Agreement, may not be consummated unless certain information
has been furnished to the Federal Trade Commission (the "FTC") and the Antitrust
Division of the Justice Department (the "Antitrust Division") and certain
waiting period requirements have been satisfied. Pursuant to the HSR Act, AFG
and the Company will promptly file Notification and Report Forms with the FTC
and the Antitrust Division for review in connection with the Securities Purchase
Agreement. It is expected that the HSR Act waiting period will expire thirty
days after the filing of such forms. However, prior to such time, the Antitrust
Division or the FTC may extend the waiting period by requesting additional
information. Moreover, notwithstanding the termination of the HSR Act waiting
period, at any time before or after the consummation of the transactions
contemplated by the Securities Purchase Agreement, any person may take action
under the antitrust laws, including seeking to enjoin the consummation of the
transactions contemplated by the Securities Purchase Agreement or seeking the
divestiture by AFG of all or any part of the securities received by it pursuant
to the Securities Purchase Agreement. There can be no assurance that a challenge
to the transactions contemplated by the Securities Purchase Agreement on
antitrust grounds will not be made or that, if such a challenge is made, it
would not be successful.

The Company's insurance subsidiaries are subject to regulation by various
state authorities, including regulation dealing with the acquisition of control
of such subsidiaries. A presumption of control generally arises from ownership
of 10% or more of the voting securities of any person. AFG will promptly make
the requisite filings with the California Insurance Commissioner and the Texas
Department of Insurance relating to the acquisition of control of the Company
and AEIC. There can be no assurance that the necessary approvals by the state
insurance regulators will be received by any particular date.

NO DISSENTERS' RIGHTS OR PREEMPTIVE RIGHTS

Stockholders have no dissenters' rights or preemptive rights in connection
with the issuance of the Series D Preferred Stock.

16
<PAGE> 21

INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION

Certain officers, directors and stockholders of the Company have certain
interests or obligations with respect to the Transaction that are different
from, or in addition to, the interests of stockholders of the Company generally.
The Securities Purchase Agreement provides as a condition to AFG's obligation to
close that the Company shall have adjusted the exercise price and vesting period
of existing stock options granted to the current officers and directors of the
Company or its subsidiaries pursuant to its 1991 Nonqualified Stock Option Plan,
1994 Stock Incentive Plan and 1994 Directors Option Plan to the market price on
the date of adjustment and shall provide that all such options shall have a
vesting period of three years, with one-third of the options vesting on each
anniversary date of the date of adjustment. The Company will make such
adjustment on the Closing Date and all such options will, subject to Closing of
the Securities Purchase Agreement, be exercisable at the market price (as
defined in the applicable plan agreement) on the Closing Date. The following
table sets forth certain information concerning stock options owned by certain
executive officers and directors of the Company that are affected by the
adjustment.

<TABLE>
<CAPTION>
TOTAL TOTAL WEIGHTED
OUTSTANDING VESTED AVG. PRIOR
NAME AND POSITION OPTIONS(1) OPTIONS(1) EXERCISE PRICE(1)
- ----------------- ----------- ---------- -----------------
<S> <C> <C> <C>
M. Philip Guthrie...................................... 230,714 190,659 $ 10.73
Chairman of the Board, Chief Executive
Officer and President

Frederick G. Anderson.................................. 72,695 57,088 $ 10.75
Senior Vice President/General
Counsel and Secretary

Richard M. Kurz........................................ 66,334 41,874 $ 10.26
Senior Vice President/
Chief Financial Officer

Allen N. Walton III.................................... 62,643 44,939 $ 10.67
President/Aviation Division
AEIC

George C. Hill III..................................... 77,825 70,639 $ 11.27
Senior Vice President/AEIC

Joseph M. Grant........................................ 15,000 7,500 $ 9.10
Director

Keith W. Hughes........................................ 11,389 2,963 $ 9.88
Director

James E. Maser......................................... 12,890 3,463 $ 8.73
Director

Elvis L. Mason......................................... 15,000 7,500 $ 9.10
Director
</TABLE>

- ---------------

(1) The exercise price of all outstanding options shown in the table, including
vested options, will be adjusted on the Closing Date to the market price on
the Closing Date and thereafter all such options will be subject to a new
three-year vesting period.

17
<PAGE> 22

CERTAIN CONSIDERATIONS

While the Board of Directors is of the opinion that the Transaction is fair
to, and in the best interests of, the Company and its stockholders, stockholders
should consider the following possible effects in evaluating the Proposal.

IMPACT ON VOTING AND OTHER RIGHTS OF STOCKHOLDERS; IMPACT ON FUTURE SHARE
ISSUANCES

The Transaction involves the issuance of securities that will entitle the
holders to special voting rights. Until AFG and its affiliates no longer own
Series D Preferred Stock and Underlying Shares representing in the aggregate the
ownership, or the right to acquire ownership, of 51% of the Underlying Shares,
or until the seventh anniversary of the Closing Date, whichever is earlier, AFG
shall be entitled to nominate for election 30% of the Company's directors and,
if elected, at least one director representing AFG shall serve on each standing
committee of the Board of Directors. Notwithstanding the foregoing, the number
of directors that AFG is entitled to nominate shall be reduced by the number of
directors that the holders of the Series D Preferred Stock are entitled to elect
as a class under the terms of the Certificate of Designation for the Series D
Preferred Stock. Mason Best has agreed to vote all shares owned by it in favor
of the election of AFG's nominees. If AFG's nominees fail to be elected to the
Board of Directors, AFG shall nevertheless be entitled to have an equal number
of representatives attend each meeting of the Board of Directors. The
Certificate of Designation provides that, upon the occurrence and continuation
of a default in dividend payments for at least two consecutive quarters or a
default in any mandatory redemption payment on the Series D Preferred Stock, the
holders of the Series D Preferred Stock, voting as a separate class, shall be
entitled at the next annual or special meeting of stockholders to elect a
majority of the directors of the Company to be elected. See "The Securities
Purchase Agreement and Related Agreements."

For the seven years following the Closing Date, the holders of the Series D
Preferred Stock shall be entitled collectively to cast 20% of the votes eligible
to be cast in each matter submitted to a vote of the holders of capital stock of
the Company, except that if the aggregate number of shares of Common Stock
issuable upon conversion of the Series D Preferred Stock represents less than
20% of the outstanding shares of Common Stock on a fully diluted basis, then
each share of Series D Preferred Stock shall be entitled to the number of votes
equal to the number of shares of Common Stock into which such share of Series D
preferred Stock is then convertible. In addition, without the approval of
holders of two-thirds of the outstanding shares of Series D Preferred Stock
voting separately as a class, the Company cannot (i) in any manner (including by
merger or consolidation), amend, alter or repeal any provisions of the
resolutions establishing the Series D Preferred Stock so as to adversely affect
the powers, preferences or special rights of such Series D Preferred Stock, or
(ii) authorize the issuance of, or authorize any obligation or security
convertible into or evidencing the right to purchase shares of, any additional
class or series prior to the Series D Preferred Stock in the payment of
dividends or the preferential distribution of assets.

The holders of Series D Preferred Stock will be entitled to certain
preferences over holders of Common Stock. The shares of Series D Preferred Stock
will be entitled to a per annum dividend equal to 9% payable quarterly prior to
the payment of any dividends on shares of Common Stock, although dividends on
the Series D Preferred Stock may be paid in kind (in lieu of cash) by the
Company during the first five years following the Closing Date. The Series D
Preferred Stock will also rank prior to Common Stock with respect to rights upon
liquidation, winding up or dissolution of the Company. The Series D Preferred
Stock will rank junior to the Company's Series B Cumulative Preferred Stock with
respect to dividends and rights upon liquidation. See "Description of Series D
Preferred Stock."

SUBSTANTIAL EQUITY OWNERSHIP ON CONVERSION

The Series D Preferred Stock will entitle AFG to acquire a substantial
percentage of the outstanding shares of Common Stock. If the 350,000 shares of
Series D Preferred Stock were fully converted into shares of Common Stock, AFG
would receive 6,666,667 shares of Common Stock. In addition, the Company is
entitled to pay dividends on outstanding shares of Series D Preferred Stock
during the first five years following the Closing Date by the payment in kind of
additional shares of Series D Preferred Stock ("PIK Shares") having

18
<PAGE> 23

a liquidation value equal to the amount of dividends owed. The PIK Shares would
also be convertible into additional shares of Common Stock. Furthermore, if the
Company elects to redeem shares of Series D Preferred Stock prior to the seventh
anniversary of the Closing Date, the Company must issue to the holder one
Warrant to purchase one share of Common Stock for each share of Common Stock
into which the redeemed shares of Series D Preferred Stock are then convertible.
The table below shows the number of shares of Common Stock and the percentage of
the fully diluted shares of Common Stock outstanding that AFG could acquire on
conversion of the Series D Preferred Stock.

<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF SHARES
SHARES OUTSTANDING
---------- -----------
<S> <C> <C>
Common Stock purchasable on full conversion of the
original 350,000 shares of Series D Preferred Stock..... 6,666,667 48.6(1)
Common Stock purchasable on full exercise of the 196,178
PIK Shares(2)........................................... 3,736,724 21.4(3)
----------
Total Potential Holdings........................ 10,403,391 59.6(3)
==========
</TABLE>

- ---------------

(1) Based on the number of shares of Common Stock outstanding as of September
30, 1996 (7,047,498 shares), as adjusted to give effect to the issuance of
shares of Common Stock issuable on conversion of the original 350,000 shares
of Series D Preferred Stock.

(2) Assuming all dividends payable on outstanding shares of Series D Preferred
Stock during the first five years following the Closing Date were paid by
the issuance of PIK Shares.

(3) Based on the number of shares of Common Stock outstanding as of September
30, 1996 (7,047,498 shares), as adjusted to give effect to the issuance of
shares of Common Stock issuable on conversion of the original 350,000 shares
of Series D Preferred Stock and on conversion of 196,178 PIK Shares,
assuming the Company does not issue any shares of Common Stock other than
upon conversion of shares of Series D Preferred Stock (including PIK Shares)
or redeem or otherwise repurchase, retire or cancel any outstanding shares
of Common Stock.

RESTRICTIONS ON THE ABILITY OF AFG TO EFFECT A BUSINESS COMBINATION WITH THE
COMPANY

The Series D Preferred Stock will initially be convertible into an
aggregate of 6,666,667 shares of Common Stock, or approximately 48.6% of the
outstanding Common Stock (including the Underlying Shares) as of the Closing
Date. In addition to the voting restrictions described under the heading "The
Transaction -- General -- Terms of the Series D Preferred Stock," the Company's
certificate of incorporation (the "Certificate") contains certain provisions
that will restrict the ability of AFG to effect a business combination with the
Company following the Closing. The Certificate provides that, in addition to any
other vote required by law, a "business combination" (which is defined in the
Certificate to generally include: (i) any merger or consolidation with or into;
(ii) any sale or other transfer of assets aggregating $1.0 million or more to;
or (iii) certain other material corporate transactions with, a "related person"
(which is defined in the Certificate to generally include any person, entity or
group which beneficially owns 10% or more of the outstanding voting stock of the
Company; provided, however, that Mason Best and its affiliates and certain of
its assigns are deemed not to be a "related person")) shall require the
affirmative vote of the holders of at least 75% or more of the combined voting
power of the then outstanding shares of voting capital stock of the Company,
voting together as a single class; provided, however, if there are one or more
"continuing directors" then in office, and such business combination has been
approved by a majority of the Board of Directors (including at least a majority
of the "continuing directors"), then such "business combination" shall only
require such vote as is required by law or by other provisions of the
Certificate. A "continuing director" means generally, as to any related person,
any member of the Board of Directors who: (i) is not, and is not affiliated
with, the related person; and (ii) became a member of the Board of Directors
prior to the time the related person became a related person or is a successor
to a continuing director. Following the Transaction, AFG will be a "related
person" within the meaning of the business combination provisions of the
Certificate and, as such, will be subject to such provisions.

19
<PAGE> 24

Following the termination of the voting restrictions, which will occur
approximately 3 1/2 years after the Closing Date, AFG may have the ability to
exert substantial control over the Company subject to the foregoing business
combination restrictions.

STRATEGIC ALLIANCE ARRANGEMENTS

Pursuant to the Securities Purchase Agreement, the Company and AFG will
enter into a strategic alliance. See "The Transaction -- General -- Strategic
Alliance with AFG." The strategic alliance will enable the Company to move into
areas in which it is not currently selling insurance and expand its current line
of business. The strategic alliance, however, will not be under the complete
control of the Company, and the parties have not yet addressed policies and
procedures that will be put in place for the management of such alliance. No
assurances can be made that the Company and AFG will be able to agree upon the
definitive terms of the strategic alliance or that, when the alliance is formed,
it will be profitable or otherwise beneficial to the Company.

EFFECT ON CAPITAL AND EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS

After giving effect to the estimated expenses of the Transaction and the
recapitalization charge (see "The Securities Purchase Agreement and Related
Agreements -- Recapitalization Charge"), the sale of the Series D Preferred
Stock to AFG would increase the Company's capital by approximately $12.0 million
after the recapitalization charge of $15 million. Dividends on the Series D
Preferred Stock would reduce earnings available for common stockholders by
approximately $3.2 million per annum before PIK shares. Based upon the number of
shares of Common Stock outstanding as of September 30, 1996 and without giving
effect to the conversion of any shares of Series D Preferred Stock, the
quarterly dividends on outstanding shares of Series D Preferred Stock would
reduce the Company's primary earnings per share by approximately $.45 per year.

20
<PAGE> 25

CAPITALIZATION

The following table sets forth the summary capitalization of the Company
and its subsidiaries as of September 30, 1996, and as adjusted to give effect to
the consummation of the Transaction, the application of the estimated net
proceeds therefrom and the incurrence of the recapitalization charge.

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 AS ADJUSTED(1)
------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Note payable................................................... $13,250 $ --
Series B cumulative preferred stock, $.01 par value; 162,857
shares authorized, 162,857 shares issued and outstanding..... 1,629 1,629
Series D cumulative convertible redeemable preferred stock,
$.01 par value; no shares authorized or issued; 546,200
shares authorized as adjusted, 350,000 shares issued as
adjusted(2).................................................. -- 35,000
Stockholders' equity
Common Stock, $.01 par value; 21,000,000 shares authorized,
7,121,380 shares issued................................... 71 71
Additional paid-in capital................................... 45,555 45,555
Unrealized investments losses................................ (252) (252)
Retained earnings............................................ 1,819 (7,931)
Less 73,882 shares of Common Stock held in treasury, at
cost.................................................... (87) (87)
------- -------
Total stockholders' equity........................... 47,106 37,356
------- -------
Total capitalization................................. $61,985 $ 73,985
======= =======
</TABLE>

- ---------------

(1) As adjusted to give effect to the sale by the Company of 350,000 shares of
Series D Preferred Stock at a price of $100 per share for an aggregate
purchase price of $35 million, the application of the estimated net proceeds
therefrom and the incurrence of the recapitalization charge.

(2) The Company's Certificate of Incorporation authorizes the Company to issue
an aggregate of 5 million shares of preferred stock, par value $.01 per
share, of which the Company has issued 162,857 shares as Series B Cumulative
Preferred Stock and has reserved 546,200 shares for issuance as Series D
Preferred Stock.

21
<PAGE> 26

THE SECURITIES PURCHASE AGREEMENT AND RELATED AGREEMENTS

The following is a summary of certain provisions of the Securities Purchase
Agreement and certain related agreements. A copy of the Securities Purchase
Agreement is attached hereto as Appendix II. This summary is not intended to be
complete and stockholders are urged to read the Securities Purchase Agreement
and related agreements in their entirety.

The Board of Directors reserves its right to amend or waive the provisions
of the Securities Purchase Agreement and the other documents related thereto in
all respects before or after the approval of the Proposal by the stockholders.
In addition, the Board of Directors reserves the right to terminate the
Securities Purchase Agreement in accordance with its terms before or after
stockholder approval of the Proposal.

ISSUANCE AND SALE OF SERIES D PREFERRED STOCK

Pursuant to the Securities Purchase Agreement, the Company will sell, and
AFG will purchase, 350,000 shares of Series D Preferred Stock for $35 million.

RECAPITALIZATION CHARGE

In addition, the Company will record a $15 million (pre-tax)
recapitalization charge in its financial results for the quarter in which the
Transaction is recorded. The recapitalization charge will provide additional
strengthening of the Company's balance sheet and overall reserve levels, and is
intended to cover contingencies and estimated exposures associated with various
previously reported strategic actions and product line discontinuations.

CERTAIN COVENANTS

Pursuant to the Securities Purchase Agreement, the Company has agreed that,
if the Company has no securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended, it will deliver copies of its annual and
quarterly financial statements to AFG and will furnish AFG with copies of any
documents required to be filed with the SEC or other governmental agencies. The
Company has agreed that, prior to the Closing Date, it will conduct its business
in the ordinary course and properly maintain its existence and property.

AFG REPRESENTATION ON BOARD OF DIRECTORS

Until AFG and its affiliates no longer own Series D Preferred Stock and
Underlying Shares representing in the aggregate the ownership, or right to
acquire ownership, of 51% of the Underlying Shares or until the seventh
anniversary of the Closing, whichever is earlier, AFG shall be entitled to
nominate for election 30% of the Company's directors and, if elected, at least
one director representing AFG shall serve on each standing committee of the
Board of Directors. Notwithstanding the foregoing, the number of directors that
AFG is entitled to nominate shall be reduced by the number of directors that the
holders of the Series D Preferred Stock are entitled to elect as a class under
the terms of the Certificate of Designation for the Series D Preferred Stock. If
AFG's designees fail to be elected to the Board of Directors, AFG shall
nevertheless be entitled to have an equal number of representatives attend each
meeting of the Board of Directors. Such representatives shall be entitled to
receive all materials and information provided to the Company's Board of
Directors and shall receive the same notices as are given to the Company's Board
of Directors.

AFG VOTING AGREEMENT

The Securities Purchase Agreement also provides that, until the date which
is three years and 180 days after the Closing Date, so long as AFG and any
affiliate of AFG shall beneficially own Series D Preferred Stock or Underlying
Shares which represent in the aggregate the ownership, or right to acquire
ownership, of at least 51% of the Underlying Shares, AFG shall, if it and its
Affiliates hold any combination of Series D Preferred Stock and Common Stock
representing the right to vote more than 20% of the total votes eligible to

22
<PAGE> 27

be voted on a matter on which the holders of Common Stock have the right to
vote, vote all votes in excess of such 20% in proportion to the actual vote of
holders of all remaining votes (including AFG's 20% vote).

STRATEGIC ALLIANCE

Pursuant to the Securities Purchase Agreement, the Company and AFG will
enter into a strategic alliance. See "The Transaction -- General -- Strategic
Alliance with AFG."

CONDITIONS PRECEDENT

The Securities Purchase Agreement provides that the obligations of AFG to
consummate the transactions contemplated by the Securities Purchase Agreement
are subject to the fulfillment prior to or on the Closing Date of certain
conditions precedent, or the waiver thereof by AFG, including the following: (a)
the Proposal shall have been approved by the requisite vote of the Company's
stockholders; (b) the representations and warranties of the Company shall be
true and correct when made; (c) no change in applicable law shall have occurred
as a consequence of which it shall have become and continue to be unlawful for
AFG to perform any of its agreements or obligations under the Securities
Purchase Agreement, or under any of the other agreements contemplated by the
Securities Purchase Agreement (the "Transaction Documents") or for the Company
or any subsidiary of the Company to perform any of its agreements or obligations
under the Securities Purchase Agreement or under any of the other Transaction
Documents; (d) the Company shall have performed and complied in all material
respects with all agreements and conditions contained in the Securities Purchase
Agreement required to be performed or complied with by the Company prior to or
at the Closing; (e) the Company shall have furnished to AFG a written legal
opinion in form reasonably acceptable to AFG; (f) the Company and AFG shall have
received all consents necessary for completion of the transactions contemplated
by the Securities Purchase Agreement including regulatory approvals; (g) Mason
Best and the Company shall have entered into an Amended Registration Rights
Agreement; (h) Mason Best shall have entered into the Voting Agreement; and (i)
the Company shall have adjusted the exercise price of existing stock options
granted to continuing officers and directors of the Company or its Subsidiaries
pursuant to its 1991 Nonqualified Stock Option Plan, 1994 Stock Incentive Plan
and 1994 Directors Option Plan to the market price on the date of adjustment and
shall have set the vesting period of such stock options to three years, with
one-third of the options vesting on each anniversary of the adjustment date.

The obligations of the Company to consummate the transactions contemplated
by the Securities Purchase Agreement are subject AFG's fulfillment, prior to or
on the Closing Date, of certain conditions precedent reciprocal to the
conditions contained in paragraphs (a), (b), (c), and (f) above.

RESTRICTION ON TRANSFERABILITY OF SERIES D PREFERRED STOCK

As long as AFG has certain rights or obligations regarding Board
representation and voting agreements pursuant to the Securities Purchase
Agreement, AFG and any of its Affiliates may assign or transfer to any person
shares of Series D Preferred Stock or Underlying Shares, representing in the
aggregate ownership, or the right to acquire ownership, of at least 51% of the
Underlying Shares and all of their rights described under "-- AFG Representation
on Board of Directors", so long as such person assumes all of the obligations
described under "-- AFG Voting Agreement."

CERTAIN REPRESENTATIONS AND WARRANTIES

Under the Securities Purchase Agreement, the Company has made certain
representations and warranties to AFG as to the Company, including (i) corporate
existence, organization and qualification; (ii) corporate power and authority;
(iii) enforceability of the various agreements entered into; (iv) absence of
conflicts; (v) litigation; (vi) financial condition; (vii) absence of certain
changes to its business, financial condition or capitalization; (viii) absence
of material defaults; (ix) compliance with laws; (x) taxes; (xi) employee
benefits plans; (xii) compliance with environmental laws; (xiii) investment
company status; (xiv) capitalization of the Company and its Subsidiaries; (xv)
title to properties; (xvi) absence of undisclosed liabilities; and other
matters.

23
<PAGE> 28

Under the Securities Purchase Agreement, AFG has made certain
representations and warranties to the Company as to AFG, including (i) corporate
existence and organization; (ii) corporate authorization and compliance with
law; (iii) required consents, approvals and licenses from governmental
authorities or other third parties; (iv) enforceability of the various
agreements entered into; (v) investment intent; and (vi) commissions.

NO SOLICITATION

After the date of the Securities Purchase Agreement, the Company shall not,
and the Company shall direct and use its reasonable best efforts to cause the
officers, directors, employees, agents, advisors and other representatives of
the Company not to, directly or indirectly, (i) solicit, initiate, knowingly
encourage, or participate in discussions or negotiations regarding, any
proposals or offers from any person, entity or group (an "Offeror") relating to
any Competing Proposal (as defined below), or (ii) furnish to any other Offeror
any non-public information or access to such information with respect to, or
otherwise concerning, any Competing Proposal. The Company shall immediately
cease and cause to be terminated any existing discussions or negotiations with
any third parties conducted heretofore with respect to any proposed Competing
Proposal.

Notwithstanding the foregoing, until the stockholders of the Company have
approved the transactions contemplated by the Securities Purchase Agreement, the
Company shall not be prohibited by the Securities Purchase Agreement from (i)
participating in discussions or negotiations with, and, during such period, the
Company may furnish information to, an Offeror that seeks to engage in
discussions or negotiations, requests information or makes a proposal to acquire
the Company pursuant to a Competing Proposal, if the Company's directors
determine in good faith that such action is required for the discharge of their
fiduciary obligations, after consultation with independent legal counsel, who
may be the Company's regularly engaged legal counsel and financial advisors (a
"Director Duty"); (ii) complying with Rule 14d-9 or Rule 14e-2 promulgated under
the Securities Exchange Act of 1934 (the "Exchange Act") with regard to a tender
or exchange offer; (iii) making any disclosure to the Company's stockholders in
accordance with a Director Duty; (iv) failing to make, modifying or amending its
recommendations, consents or approvals referred to herein in accordance with a
Director Duty; or (v) terminating the Securities Purchase Agreement and entering
into an agreement providing for a Competing Proposal in accordance with a
Director Duty. In the event that the Company or any of its officers, directors,
employees, agents, advisors or other representatives participate in discussions
or negotiations with, or furnish information to an Offeror that seeks to engage
in such discussions or negotiations, requests information or makes a proposal to
acquire the Company pursuant to a Competing Proposal, then subject to any
confidentiality requirements of an Offeror: (i) the Company shall immediately
disclose to AFG the decision of the Company's directors; (ii) the identity of
the Offeror; and (iii) copies of all information or material not previously
furnished to AFG which the Company, or its agents, provides or causes to be
provided to such Offeror or any of its officers, directors, employees, agents,
advisors or representatives. "Competing Proposal" means any proposal or offer to
the Company or the stockholders of the Company with respect to (i) any merger,
consolidation, share exchange, business combination, or other similar
transaction, (ii) any sale, lease, exchange, transfer or other disposition of
all or substantially all of the assets of the Company and its material
subsidiaries, taken as a whole, in a single transaction or series of related
transactions, or (iii) any tender offer or exchange offer for shares of the
Common Stock.

TERMINATION

The Securities Purchase Agreement may be terminated at any time prior to
the Closing Date: (a) by mutual written consent of the Company and AFG; (b) by
the Company or AFG upon written notice to the other party, if the Closing shall
not have occurred on or prior to March 31, 1997 (the "Outside Date"), unless
such failure of consummation shall be due to the failure of the party seeking
such termination to perform or observe in all material respects the covenants
and agreements hereof to be performed or observed by such party; (c) by the
Company or AFG, upon written notice to the other party, if a governmental
authority of competent jurisdiction shall have issued an injunction, order or
decree enjoining or otherwise prohibiting the consummation of the transactions
contemplated by the Securities Purchase Agreement, and such injunction,

24
<PAGE> 29

order or decree shall have become final and nonappealable or if a governmental
authority has otherwise made a final determination that any required regulatory
consent would not be forthcoming; provided, however, that the party seeking to
terminate the Securities Purchase Agreement pursuant to this clause has used all
required efforts to remove such injunction, order or decree; (d) by the Company,
if prior to approval by the stockholders of the Company of the Proposal, the
Board of Directors of the Company determines in accordance with a Director Duty
that such termination is required by reason of a Competing Proposal; or (e) by
the Company or AFG, if prior to approval of the stockholders of the Company of
the Proposal, the Board of Directors of the Company shall have withdrawn or
modified in a manner materially adverse to AFG its approval of the adoption of
the Proposal, because the Board of Directors has determined to recommend to the
Company's stockholders or approve a Competing Proposal, in accordance with a
Director Duty.

In the event that the Securities Purchase Agreement is terminated by reason
of (d) or (e) above, the Break-up Warrants issued to AFG under the Securities
Purchase Agreement shall become immediately exercisable and AFG shall have all
of the benefits of the Warrant Registration Rights Agreement relating to such
Break-up Warrants. In the event that the Securities Purchase Agreement is
terminated due to any other reason described above, the Break-up Warrants shall
be cancelled and neither party shall have any further rights or obligations
under the Securities Purchase Agreement or the Registration Rights Agreement.

If either party shall default in the performance of its obligations under
the Securities Purchase Agreement, the non-defaulting party shall retain all
rights and remedies, whether arising in equity or at law, including actions for
specific performance and damages, as a result of the default by the other party
under the Securities Purchase Agreement.

BREAK-UP WARRANTS

The Break-up Warrants were issued to AFG upon execution of the Securities
Purchase Agreement pursuant to a Warrant Subscription Agreement dated as of
November 5, 1996 between the Company and AFG. Pursuant to the Warrant
Subscription Agreement, the Company issued AFG the Break-up Warrants for 800,000
shares of Common Stock exercisable for $3.45 per share. The Break-up Warrants
may be exercised commencing the first business day following the termination of
the Securities Purchase Agreement pursuant to the provisions described above
permitting such termination in order to accept a Competing Proposal, and
thereafter remain exercisable until November 4, 2003. The Break-up Warrants
shall be cancelled simultaneously with the Closing under the Securities Purchase
Agreement.

The exercise price and number of shares subject to the Break-up Warrants
are subject to adjustment pursuant to customary antidilution provisions. In
addition, in case of any consolidation of the Company with or merger of the
Company into another corporation or in case of any sale, transfer or lease to
another corporation of all or substantially all the property of the Company,
each holder of Break-up Warrants shall thereafter be entitled, upon payment of
the exercise price in effect immediately prior to such action, to purchase upon
exercise of each Break-up Warrant the kind and amount of cash, shares and other
securities and property which such holder would have owned or have been entitled
to receive after the happening of such consolidation, merger, sale, transfer or
lease had such Break-up Warrant been exercised immediately prior to such action,
provided, however, that no adjustment in respect of dividends, interest or other
income on or from such shares or other securities and property shall be made
during the term or upon the exercise of a Break-up Warrant.

Subject to compliance with applicable securities laws, the Break-up
Warrants are transferable. In addition, the holders thereof are entitled to
certain demand and piggyback registration rights.

WARRANTS ISSUABLE UPON EARLY REDEMPTION

Certain warrants (the "Warrants") shall be issued upon the early redemption
of the Series D Preferred Stock, which may be done at any time at the Company's
option. In the event of a redemption of Series D Preferred Stock prior to the
seventh anniversary of the Closing Date, the Company shall, in addition to the
cash payable to the holder, issue to the holder, for each share of Common Stock
into which the redeemed shares of Series D Preferred Stock are then convertible,
a Warrant to purchase one share of Common Stock of

25
<PAGE> 30

the Company at an exercise price of $5.25 per share (subject to antidilution
provisions) under the terms of the Form of Warrant Subscription Agreement
attached as an exhibit to the Securities Purchase Agreement. The Warrants may be
exercised commencing the first business day following their issuance and
thereafter remain exercisable until November 4, 2003, at which time all
unexercised Warrants will expire.

The exercise price and number of shares subject to the Warrants are subject
to adjustment pursuant to customary antidilution provisions. In addition, in
case of any consolidation of the Company with or merger of the Company into
another corporation or in case of any sale, transfer or lease to another
corporation of all or substantially all the property of the Company, each holder
of Warrants shall thereafter be entitled, upon payment of the exercise price in
effect immediately prior to such action, to purchase upon exercise of each
Warrant the kind and amount of cash, shares and other securities and property
which such holder would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, transfer or lease had such
Warrant been exercised immediately prior to such action, provided, however, that
no adjustment in respect of dividends, interest or other income on or from such
shares or other securities and property shall be made during the term or upon
the exercise of a Warrant.

Subject to compliance with applicable securities laws, the Redemption
Warrants are transferable. In addition, the holders thereof are entitled to
certain demand and piggyback registration rights.

REGISTRATION RIGHTS AGREEMENTS

The Company will enter into a Registration Rights Agreement with AFG with
respect to the shares of Series D Preferred Stock, the shares of Common Stock
purchased upon conversion of the Series D Preferred Stock (the "Common Shares")
and the Warrants issuable upon optional redemption of the Series D Preferred
Stock by the Company prior to the seventh anniversary of the Closing Date
(collectively, the "Registrable Securities"). Pursuant to the Registration
Rights Agreement, AFG shall have the right on three occasions to demand
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of the Registrable Securities; provided, however, that the Company shall
in no event (including by reason of any assignment of rights by AFG or any other
holder of Registrable Securities) be subject to more than three demand
registrations under such agreement and shall not be obligated at any time to
register the lesser of (i) 25% of the total outstanding number of Series D
Preferred Stock, Common Shares or Warrants, whichever is the case, or (ii)
Registrable Securities with a market value (based on the market value of the
underlying shares of Common Stock) of less than $1.0 million pursuant to any
such request. The Registration Rights Agreement also provides that, in the event
the Company proposes to register any of its securities under the Securities Act
for its own account or for the account of any other person, AFG will be entitled
to include Registrable Shares in any such registration, subject to the right of
the managing underwriter of any such offering in certain circumstances to
exclude some or all of such Registrable Shares from such registration.

The Company will also enter into a Warrant Registration Rights Agreement
with AFG with respect to the Break-up Warrants and the shares of Common Stock
acquired upon exercise of the Break-up Warrants (the "Warrant Shares, and
together with the Break-up Warrants, the "Break-up Securities"). Pursuant to the
Warrant Registration Rights Agreement, AFG shall have the right on three
occasions to demand registration of the Break-up Securities under the Securities
Act; provided, however, that the Company shall in no event (including by reason
of any assignment of rights by AFG or any other holder of Break-up Securities)
be subject to more than three demand registrations under such agreement and
shall not be obligated at any time to register the lesser of (i) 25% of the
total number of Break-up Warrants or Warrant Shares outstanding or (ii) Warrant
Shares with a market value (based on the market value of the underlying shares
of Common Stock) of less than $1.0 million pursuant to any such request. The
Warrant Registration Rights Agreement also provides that, in the event the
Company proposes to register any of its securities under the Securities Act for
its own account or for the account of any other person, AFG will be entitled to
include Break-up Securities in such registration, subject to the right of the
managing underwriter of any such offering in certain circumstances to exclude
some or all of such Break-up Securities from such registration.

26
<PAGE> 31

AMENDED REGISTRATION RIGHTS AGREEMENT

The Company and Mason Best will amend the Existing Registration Rights
Agreement dated March 21, 1994 to provide that holders of registrable securities
under such agreement will not have the right to include their shares in a
registration statement filed by the Company for an underwritten offering of
securities by AFG if the managing underwriter shall have rendered an opinion
that such registration materially would impair AFG's ability to sell the
securities being registered for sale by AFG.

DESCRIPTION OF SERIES D PREFERRED STOCK

The following is a summary of the terms of the Series D Preferred Stock.
The rights, preferences and privileges of the Series D Preferred Stock are
contained in the Certificate of Designation, a copy of which is attached hereto
as Appendix III. Stockholders are urged to read the Certificate of Designation
in its entirety.

PRIORITY

The Series D Preferred Stock will have a liquidation value of $100 per
share (the "Liquidation Value"). The Series D Preferred Stock will rank prior to
the Common Stock and to all other shares of capital stock of the Company that
are junior to the Series D Preferred Stock with respect to the payment of
dividends and payments or distributions upon liquidation (the Common Stock and
all such shares are referred to herein as the "Junior Stock"). The Series D
Preferred Stock will rank junior to the Company's Series B Cumulative Preferred
Stock (the "Series B Preferred Stock") with respect to dividends and rights upon
liquidation and will be subject to the creation of other stock ranking senior
to, on a parity with, or junior to, the Series D Preferred Stock to the extent
not prohibited by the Company's Certificate of Incorporation, except that
creation of stock ranking senior to the Series D Preferred Stock is subject to
the approval of the holders of two-thirds of the outstanding shares of Series D
Preferred Stock voting separately as a class. See "-- Voting Rights."

DIVIDENDS

The Series D Preferred Stock will be entitled to a per annum cumulative
dividend equal to 9% payable quarterly as declared by the Board beginning April
1, 1997. At the option of the Company, dividends will be payable either in cash
or in kind (whereby the holder receives, in lieu of cash, shares of Series D
Preferred Stock having a liquidation value equal to the dividends declared)
during the first five years after the Closing Date. Following the fifth
anniversary of the Closing Date, dividends will be payable quarterly only in
cash.

Subject to the rights of holders of the Series B Preferred Stock, the
Company shall not declare or pay or set apart for payment any dividend (other
than dividends payable in shares of Junior Stock) for any period upon any Junior
Stock or any stock of the Company ranking on a parity with the Series D
Preferred Stock as to dividends, nor shall the Company redeem or purchase any
such shares or pay any money to a sinking fund for the redemption or repurchase
of any such shares unless all dividends on the Series D Preferred Stock,
including all accrued and unpaid dividends, have been paid in full.
Notwithstanding the foregoing, the Company may pay dividends on the shares of
the Series D Preferred Stock and shares of stock of the Company ranking on a
parity therewith as to dividends ratably in proportion to the sums which would
be payable on such shares if all dividends, including accumulations, if any,
were declared and paid in full. Accumulations of dividends on any shares of the
Series D Preferred Stock shall bear interest at 9% per annum, compounded
quarterly.

VOTING RIGHTS

The holders of shares of Series D Preferred Stock shall be entitled to the
following voting rights for the seven year period commencing on the Closing
Date. Thereafter, holders of Series D Preferred Stock will have no voting rights
except as set forth in (b) and (c) or as otherwise provided by law:

(a) With regard to any matter submitted to a vote of the holders of
capital stock of the Company, the holders of the Series D Preferred Stock
shall be entitled collectively to cast 20% of the votes eligible

27
<PAGE> 32

to be cast in such matters; provided, however, in the event that the
aggregate number of shares of Common Stock into which the Series D
Preferred Stock is convertible represents less than 20% of the aggregate
number of all shares of Common Stock outstanding (on a fully diluted
basis), then each holder of a share of Series D Preferred Stock shall be
entitled to cast one vote for each full share of Common Stock into which
such share is then convertible with respect to any such matter;

(b) Notwithstanding the foregoing, upon the occurrence and
continuation of an Event of Default (defined as a default in dividend
payments for at least two consecutive quarters or a default in any
mandatory redemption payment on the Series D Preferred Stock), each share
of Series D Preferred Stock shall be entitled to cast the number of votes
equal to the number of shares of Common Stock into which such share is then
convertible on any matter submitted for the consideration of the
stockholders of the Company, and the holders of the Series D Preferred
Stock, voting separately, as a class shall be entitled at the next annual
or special meeting of stockholders to elect such number of directors which
is a majority (rounded up) of the directors to be elected. The term of
office of directors elected under these circumstances shall end upon the
earlier of the termination of the Event of Default and the next annual
meeting of stockholders; and

(c) Without the approval of holders of two-thirds of the outstanding
shares of Series D Preferred Stock voting separately as a class, the
Company will not, in any manner (including by merger or consolidation) (i)
amend, alter or repeal any provisions of the resolutions establishing the
Series D Preferred Stock so as to adversely affect the powers, preferences
or special rights of such Series D Preferred Stock, or (ii) authorize the
issuance of, or authorize any obligation or security convertible into or
evidencing the right to purchase shares of, any additional class or series
of stock ranking prior to the Series D Preferred Stock in the payment of
dividends or the preferential distribution of assets. The foregoing shall
not be interpreted to require any vote or consent of the Series D Preferred
Stock in connection with the authorization or issuance of any series of
Preferred Stock ranking on a parity with or junior to the Series D
Preferred Stock as to dividends and/or the distribution of assets.

In addition, pursuant to the Securities Purchase Agreement, until AFG and
its affiliates no longer own Series D Preferred Stock and Underlying Shares
representing in the aggregate the ownership, or the right to acquire ownership,
of 51% of the Underlying Shares, or until the seventh anniversary of the Closing
Date, whichever is earlier, AFG shall be entitled to nominate for election to
the Company's Board of Directors at least the number of directors which
represents 30% (rounded up to the next director) of the number of directors
serving at any one time, and, if elected, at least one of the directors
representing AFG shall serve on each of the standing committees of the Board of
Directors. Notwithstanding the foregoing, the number of directors that AFG shall
be entitled to nominate shall be reduced to the extent and by the number of
directors the holders of Series D Preferred Stock are entitled to elect as a
class under the terms of the Certificate of Designation. In the event AFG's
representatives fail to be elected as directors, the Company agrees that AFG
shall be entitled to have an equal number of representatives in place of such
directors attend each meeting of the Board of Directors. Such representatives
shall be entitled to receive all materials and information provided to the
Company's Board of Directors and shall receive the same notices as are given to
the Company's Board of Directors.

CONVERSION

The Series D Preferred Stock will be convertible at any time, in whole or
in part, at the option of the holder into shares of the Common Stock at a per
share conversion price equal to $5.25 per share of Common Stock (the "Conversion
Price"). The Conversion Price is subject to certain post-closing antidilution
adjustments upon the occurrence of certain events such as (i) stock dividends,
stock splits and reverse stock splits, (ii) stock reclassifications or
combinations, (iii) issuances of rights, warrants or securities convertible or
exchangeable into Common Stock, which rights, options, warrants or securities
have a conversion or exercise price per share less than the market value of the
Common Stock, and (v) distributions of evidences of indebtedness or of assets to
holders of Common Stock. In the case of a merger or consolidation, holders of

28
<PAGE> 33

Series D Preferred Stock shall have the right to convert the shares into the
kind and amount of shares and other property receivable in such transaction by
the holders of the Common Stock.

REDEMPTION

The Company may, at its option, redeem shares of Series D Preferred Stock
for cash, at any time and from time to time, in whole or in part, by vote of its
Board of Directors; provided, however, in the event that any share of Series D
Preferred Stock is redeemed by the Company on or before the seventh anniversary
of the Closing Date, in addition to the cash payable to the holder of each such
share, the holder shall, for each share of Common Stock into which the redeemed
share of Series D Preferred Stock is then convertible, receive a Warrant to
purchase one share of Common Stock of the Company at an exercise price of $5.25
per share, or, in the event of any adjustment to the Conversion Price hereunder,
at the adjusted Conversion Price, at any time prior to the seventh anniversary
of the Closing Date. The Company is required to redeem 10% of the outstanding
shares of Series D Preferred Stock on the first business day of each year,
commencing with the year 2008, and all remaining outstanding shares are required
to be redeemed on the first business day of the year 2018. The redemption price
of each share of Series D Preferred Stock is $100.00 per share plus an amount
equal to accrued and unpaid dividends to the date fixed for redemption. Any
redemption made shall be on a pro rata basis.

LIQUIDATION PREFERENCE

Subject to the rights of holders of the Series B Preferred Stock, in the
event of liquidation of the Company, the holders of shares of Series D Preferred
Stock shall be entitled to receive a liquidation payment of $100.00 per share
plus all accrued and unpaid dividends thereon to the date of payment before any
payment or distribution of assets may be made to holders of Junior Stock.

RESTRICTION ON TRANSFER

In addition to the restrictions on transfer of the Series D Preferred Stock
applicable to AFG, which are contained in the Securities Purchase Agreement, the
Certificate of Designation requires that certificates for shares of Series D
Preferred Stock contain a restrictive legend noting the fact that such shares
have not been registered under the Securities Act of 1933. Holders of Series D
Preferred Stock also agree to notify the Company in writing of any proposed
transfer of such stock, accompanied by written opinions of counsel and written
assurances of appropriate securities regulatory agencies as to the legality of
the proposed transfer.

PREEMPTIVE RIGHTS

Holders of the Series D Preferred Stock have no preemptive rights.

AFG'S DESIGNEES FOR DIRECTORS

AFG has advised the Company that it intends to nominate the persons named
below to serve as directors of the Company until the next annual meeting of
stockholders and until their successors are elected and have been duly
qualified. AFG has advised the Company that it currently does not know of any
circumstance which could render any of these individuals unable to take office.

Gary J. Gruber. Mr. Gruber, age 41, is a Senior Vice President of Great
American Insurance Company ("Great American"), a subsidiary of AFG, and has
served in such capacity for more than the past five years. From October 1990 to
June 1995, Mr. Gruber also served as the treasurer of Great American.

Thomas A. Hayes. Mr. Hayes, age 53, is a Senior Vice President and
President of the Commercial Division of Great American and has served in such
capacities since June 30, 1995. Mr. Hayes has also served as a director of Great
American for more than the past five years. Prior to June 30, 1995, Mr. Hayes
served as an Executive Vice President of Great American for more than five
years.

At the Closing, the Company's Board of Directors will appoint the nominees
of AFG to positions on the Board of Directors.

29
<PAGE> 34

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND MANAGEMENT

The following table sets forth certain information, with respect to the
beneficial ownership of the Company's Common Stock, as of October 31, 1996, by
(i) all persons who are known by the Company to be beneficial owners of five
percent or more of such stock, (ii) each director of the Company, (iii) each
named executive officer and (iv) all executive officers and directors of the
Company as a group. Unless otherwise noted, the persons named below have sole
voting and investment power with respect to such shares. No effect has been
given to shares reserved for issuance under outstanding stock options except
where otherwise indicated.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------
NAME AND ADDRESS OF OWNER NUMBER OF % OF CLASS
OR IDENTITY OF GROUP SHARES OUTSTANDING(1)
- ------------------------------------------------------------------- --------- --------------
<S> <C> <C>
Mason Best Company, L.P.(2)........................................ 2,960,772 42.0
2121 San Jacinto, Ste. 1000
Dallas, Texas 75201
Heartland Advisors, Inc.(3)........................................ 443,000 6.3
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
M. Philip Guthrie(4)............................................... 197,665 2.7
Frederick G. Anderson(5)........................................... 59,223 *
George C. Hill III(6).............................................. 68,406 *
Richard M. Kurz(7)................................................. 43,584 *
Allen N. Walton III(8)............................................. 46,581 *
Joseph M. Grant(9)................................................. 7,500 *
James E. Maser(10)................................................. 8,927 *
Elvis L. Mason(11)................................................. 2,973,272 42.2
Keith W. Hughes(9)................................................. 2,963 *
All directors and executive officers as a group (23 persons
including those listed above).................................... 3,566,594 50.4
</TABLE>

- ---------------

* less than one percent

(1) Shares of Common Stock which are not outstanding but the beneficial
ownership of which can be acquired by a person upon exercise of an option
or warrant within sixty days of the date of this Proxy Statement are deemed
outstanding for the purpose of computing the percentage of outstanding
shares beneficially owned by such person. However, such shares are not
deemed to be outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned by any other person.

(2) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated February 9, 1995.

(3) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated February 9, 1996.

(4) Includes 1,400 shares of Common Stock held by Mr. Guthrie's wife, 200
shares of Common Stock held by Mr. Guthrie's son, and 190,667 shares of
Common Stock which may be acquired upon the exercise of options.

(5) Includes 300 shares of Common Stock held by Mr. Anderson's wife, and 57,090
shares of Common Stock which may be acquired upon the exercise of options.

30
<PAGE> 35

(6) Includes 1,000 shares of stock held by a trust for which Mr. Hill is the
trustee, and 67,306 shares of Common Stock which may be acquired upon the
exercise of options.

(7) Includes 41,874 shares of Common Stock which may be acquired upon the
exercise of options.

(8) Includes 44,940 shares of Common Stock which may be acquired upon the
exercise of options.

(9) All amounts listed represent shares of Common Stock which may be acquired
upon the exercise of options.

(10) Includes 6,927 shares of Common Stock which may be acquired upon the
exercise of options.

(11) Elvis L. Mason, the Managing Partner of Mason Best Company, L.P., may be
deemed to be the beneficial owner of all shares held by Mason Best Company,
L.P. Includes 5,000 shares held in a qualified retirement plan of which Mr.
Mason is the sole beneficiary and 7,500 shares of Common Stock which may be
acquired upon exercise of options.

31
<PAGE> 36

STOCKHOLDER PROPOSALS

Any stockholder who wishes to submit a proposal for inclusion in the proxy
material and for presentation at the Company's 1997 Annual Meeting of
Stockholders must forward such proposal to the Secretary of the Company at the
address indicated on the second page of this proxy statement, so that the
Secretary receives it no later than November 30, 1996.

The Company's Bylaws also require that notice of nominations of persons for
election to the Board of Directors at the 1997 Annual Meeting Stockholders,
other than those made by or at the direction of the Board of Directors, must be
received by the Secretary not later than the close of business on the tenth day
following the date on which the Company first makes public disclosure of the
date of the meeting; provided, however, that in the event that the meeting is
adjourned, and the Company is required by Delaware law to give notice to
stockholders of the adjourned meeting date, written notice of such stockholder's
intent to make such nomination at such adjourned meeting must be delivered to or
received by the Secretary of the Company no later than the close of business on
the fifth day following the earlier of: (i) the date the Company makes public
disclosure of the date of the adjourned meeting; or (ii) the date on which
notice of such adjourned meeting is first given to stockholders. The notice must
present certain information concerning the nominees and the stockholder making
the nominations, as set forth in the Bylaws. The Secretary must receive a
statement of any such nominee's consent to serve if elected.

AVAILABLE INFORMATION

The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "SEC"). Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549; and at
its regional offices located at 7 World Trade Center, New York, New York 10048
and 500 West Madison Street, Suite 1400, Chicago Illinois 60661-2511. Copies of
such materials may also be obtained from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain fees
prescribed by the SEC. The SEC also maintains a site on the World Wide Web, the
address of which is http/www.sec.gov., that contains reports, proxy and
information statements and other information regarding reporting companies that
file electronically with the SEC. The Company's Common Stock is listed on the
NYSE and, accordingly, reports, proxy statements and other information are
available for inspection at the offices of the NYSE at 20 Broad Street, New
York, New York 10005.

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<PAGE> 37
APPENDIX I

[CS FIRST BOSTON LETTERHEAD]

November 5, 1996

Board of Directors
American Eagle Group, Inc.
12801 North Central Expressway, Suite 800
Dallas, Texas 75243

Gentlemen:

You have asked us to advise you with respect to the fairness to American Eagle
Group, Inc. ("AEG") from a financial point of view of the cash consideration to
be received by AEG pursuant to the terms of a Securities Purchase Agreement,
dated November 5, 1996 (the "Purchase Agreement"), by and between AEG and
American Financial Group, Inc. ("AFG"). The Purchase Agreement provides for,
among other things, the purchase by AFG of an aggregate of 350,000 shares of
newly authorized Series D Preferred Stock, par value $0.01 per share, of AEG
(the "Series D Preferred Stock") for an aggregate purchase price of $35 million
in cash (the "Financing").

In arriving at our opinion, we have reviewed the Purchase Agreement and certain
related documents and certain publicly available business and financial
information relating to AEG. We have also reviewed certain other information,
including financial forecasts, provided to us by AEG, and have met with AEG's
management to discuss the business and prospects of AEG, including the
distressed financial position of AEG and the near-term liquidity needs of, and
capital resources available to, AEG.

We have also considered certain financial and stock market data for AEG, and we
have compared that data with similar data for other publicly traded companies
in businesses similar to those of AEG and we have considered, to the extent
publicly available, the financial terms of certain other significant equity and
equity-linked investments in other publicly traded companies. We also
considered such other information, financial studies, analyses, and
investigations and financial, economic and market criteria which we deem
relevant.

In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that such forecasts have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of AEG as to the future financial performance of
AEG. In addition, we have not made an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of AEG, nor have we been
furnished with any such evaluations or appraisals. Our opinion is necessarily
based on information available to us, and financial, economic, market and other
conditions as they exist and can be evaluated, on the date hereof. In
<PAGE> 38
Board of Directors
American Eagle Group, Inc.
November 5, 1996
Page 2

connection with our engagement we were not requested to, and did not, solicit
third party indications of interest in acquiring all or substantially all of
AEG.

We have acted as financial advisor to AEG in connection with the Financing and
will receive a fee for our services, a significant portion of which is
contingent upon consummation of the Financing. CS First Boston has in the past
provided financial services to AEG and AFG unrelated to the proposed Financing,
for which services CS First Boston has received compensation. In the ordinary
course of our business, CS First Boston and its affiliates may actively trade
the equity securities of AEG and both the debt and equity securities of AFG for
their own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.

It is understood that this letter is for the information of the Board of
Directors of AEG in connection with its evaluation of the Financing, does not
constitute a recommendation to any stockholder as to how such stockholder
should vote on the proposed Financing and is not to be quoted or referred to,
in whole or in part, in any registration statement, prospectus or proxy
statement, or in any other document used in connection with the offering or
sale of securities, nor shall this letter be used for any other purposes,
without CS First Boston's prior written consent.

Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the cash consideration to be received by AEG pursuant to the Financing
is fair to AEG from a financial point of view.

Very truly yours,

CS FIRST BOSTON CORPORATION

By:/s/ JONATHAN PLUTZIK
----------------------------
Jonathan Plutzik
Managing Director
<PAGE> 39
APPENDIX II

================================================================================

SECURITIES PURCHASE AGREEMENT

BETWEEN

AMERICAN FINANCIAL GROUP, INC.,

PURCHASER

AND

AMERICAN EAGLE GROUP, INC.,

SELLER

================================================================================

Execution Copy
<PAGE> 40
- i -

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1 INTERPRETATION
1.1 Definitions . . . . . . . . . . . . . . . . . . . . 1
1.2 Rules of Construction . . . . . . . . . . . . . . . 7

ARTICLE 2 SALE AND PURCHASE OF PURCHASED SECURITIES
2.1 Sale and Purchase of Purchased Securities . . . . . 8
2.2 Purchase Price . . . . . . . . . . . . . . . . . . 8
2.3 Delivery of Warrants . . . . . . . . . . . . . . . 8
2.4 Closing. . . . . . . . . . . . . . . . . . . . . . 8
2.5 Use of Proceeds . . . . . . . . . . . . . . . . . . 8

ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER
3.1 Corporate Existence . . . . . . . . . . . . . . . . 9
3.2 Corporate Power; Authorization . . . . . . . . . . 9
3.3 Enforceable Obligations . . . . . . . . . . . . . . 9
3.4 No Legal Bar . . . . . . . . . . . . . . . . . . . 9
3.5 Absence of Conflicts . . . . . . . . . . . . . . . 10
3.6 Litigation . . . . . . . . . . . . . . . . . . . . 10
3.7 Financial Condition . . . . . . . . . . . . . . . . 10
3.8 No Change . . . . . . . . . . . . . . . . . . . . . 10
3.9 No Default . . . . . . . . . . . . . . . . . . . . 10
3.10 Compliance with Laws . . . . . . . . . . . . . . . 11
3.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . 11
3.12 ERISA . . . . . . . . . . . . . . . . . . . . . . . 11
3.13 Environmental Matters . . . . . . . . . . . . . . . 11
3.14 Investment Company Act . . . . . . . . . . . . . . 11
3.15 Capitalization of Seller . . . . . . . . . . . . . 11
3.16 Capitalization of Subsidiaries . . . . . . . . . . 11
3.17 Title to Assets; Leases . . . . . . . . . . . . . . 12
3.18 Disclosure . . . . . . . . . . . . . . . . . . . . 12
3.19 Undisclosed Liabilities . . . . . . . . . . . . . . 12
3.20 Compliance with Federal Reserve Regulations . . . . 12
3.21 Survival of Representations and Warranties . . . . 12

ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER
4.1 Representations and Warranties of Purchaser . . . . 12

ARTICLE 5 AFFIRMATIVE COVENANTS
5.1 Financial Statements . . . . . . . . . . . . . . . 15
5.2 Conduct of Business and Maintenance of Existence . 16
5.3 Maintenance of Property; Insurance . . . . . . . . 16
5.4 Strategic Alliance. . . . . . . . . . . . . . . . . 16
5.5 Recapitalization Charge . . . . . . . . . . . . . . 16
</TABLE>

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<TABLE>
<S> <C> <C>
ARTICLE 6 OTHER PROVISIONS
6.1 Shareholder Approval . . . . . . . . . . . . . . . 17
6.2 Regulatory Approvals . . . . . . . . . . . . . . . 17
6.3 Reservation of Shares . . . . . . . . . . . . . . . 17
6.4 Good Faith by Seller . . . . . . . . . . . . . . . 17
6.5 Board of Directors . . . . . . . . . . . . . . . . 18
6.6 Voting Agreement. . . . . . . . . . . . . . . . . . 18
6.7 No Solicitation and Other Actions. . . . . . . . . 18

ARTICLE 7 CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
7.1 Conditions Precedent . . . . . . . . . . . . . . . 20

ARTICLE 8 CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS
8.1 Conditions Precedent . . . . . . . . . . . . . . . 22

ARTICLE 9 TERMINATION OF AGREEMENT
9.1 Termination . . . . . . . . . . . . . . . . . . . . 23
9.2 Effect of Termination . . . . . . . . . . . . . . . 24
9.3 Default under the Agreement. . . . . . . . . . . . 24

ARTICLE 10 MISCELLANEOUS
10.1 Amendments and Waivers . . . . . . . . . . . . . . 24
10.2 No Waiver; Cumulative Remedies . . . . . . . . . . 24
10.3 Notices . . . . . . . . . . . . . . . . . . . . . . 25
10.4 Successors and Assigns . . . . . . . . . . . . . . 26
10.5 Enforcement Costs . . . . . . . . . . . . . . . . . 26
10.6 Counterparts . . . . . . . . . . . . . . . . . . . 26
10.7 Term . . . . . . . . . . . . . . . . . . . . . . . 26
10.8 Consent to Jurisdiction . . . . . . . . . . . . . . 26
</TABLE>

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EXHIBITS

Exhibit A Amended Registration Rights Agreement
Exhibit B Preferred Stock Designation
Exhibit C Intentionally Omitted
Exhibit D Form of Registration Rights Agreement
Exhibit E Form of Warrant
Exhibit F Form of Warrant Registration Rights
Agreement
Exhibit G Form of Mason Best Commitment

SCHEDULES

Schedule 3.2 Consents
Schedule 3.6 Litigation
Schedule 3.8 Absence of Change
Schedule 3.15 Capitalization of Seller
Schedule 3.16 Capitalization of Subsidiaries

<PAGE> 43
SECURITIES PURCHASE AGREEMENT

THIS SECURITIES PURCHASE AGREEMENT is made this 5th day of November,
1996, by and between AMERICAN EAGLE GROUP, INC., a Delaware corporation
("Seller"), and AMERICAN FINANCIAL GROUP, INC., an Ohio corporation
("Purchaser").

ARTICLE 1

INTERPRETATION

Section 1.1 Definitions. The following capitalized terms are
defined as follows:

"Affiliate" means any Person which directly or indirectly controls, or
is controlled by, or is under common control with, any Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities, by contract or otherwise. The term
"Affiliate" does not include the Purchaser nor any of its subsidiaries or
affiliates.

"AFG" shall mean American Financial Group, Inc., an Ohio corporation,
and any of its subsidiaries designated to purchase Seller's securities
hereunder.

"Agreement" or "this Agreement" means this Securities Purchase
Agreement (including all exhibits and schedules annexed hereto) as originally
executed, or if supplemented, amended, or restated from time to time, as so
supplemented, amended, or restated.

"Amended Registration Rights Agreement" means the Amended Registration
Rights Agreement in the form of Exhibit A, to be executed by Seller and Mason
Best Company L.P. amending the Registration Rights Agreement between such
parties dated March 21, 1994.

"Bank Debt" means the indebtedness of Seller pursuant to the terms of
an Amended and Restated Credit Agreement dated as of December 29, 1994 among
Seller, the lenders described therein and The First National Bank of Chicago,
as Agent, as amended by Amendments to the Restated Credit Agreement dated as of
February 23, 1996, March 18, 1996, May 3, 1996 and September 20, 1996, and as
may be amended in the future.

"Business Day" means any day, except a Saturday, Sunday or legal
holiday, on which commercial banking institutions are open for business in
Dallas, Texas, Cincinnati, Ohio and New York, New York.

"Capitalized Lease" shall mean any lease the obligation for Rentals
with respect to which is required to be capitalized on a balance sheet of the
lessee in accordance with GAAP.

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"Certificate of Designation" shall mean the Certificate of Designation
of the terms of the Preferred Stock, in the form of Exhibit B, to be executed
and filed by Seller authorizing the issuance of, and setting forth the terms
of, the Preferred Stock.

"Closing Date" means the fifth Business Day following the date on
which all conditions precedent specified in Article 7 hereof shall have been
satisfied in full or waived in writing, but in any event, such date shall be
within one hundred eighty (180) days of the execution of this Agreement.

"Code" means the Internal Revenue Code of 1986, as amended from time
to time.

"Commission" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar powers.

"Common Stock" shall mean the voting Common Stock of the Seller, par
value $.01 per share.

"Commonly Controlled Entity" means an entity, whether or not
incorporated, which is under common control with the Seller within the meaning
of Section 4001 of ERISA or is part of a group which includes the Seller and
which is treated as a single employer under Section 414 of the Code.

"Competing Proposal" means any proposal or offer to the Seller or the
stockholders of the Seller with respect to (i) any merger, consolidation, share
exchange, business combination, or other similar transaction, (ii) any sale,
lease, exchange, transfer or other disposition of all or substantially all of
the assets of the Seller and its material Subsidiaries, taken as a whole, in a
single transaction or series of related transactions, or (iii) any tender,
exchange or other offer for shares of the Seller's Stock.

"Contractual Obligation" means, with respect to any Person, any
provision or requirement of any security issued by such Person or of any
agreement, instrument or other undertaking to which such Person is a party or
by which it or any of its property is bound.

"Convertible Securities" shall mean evidence of indebtedness, shares
of stock or other securities which are directly or indirectly convertible into
or exchangeable for, with or without payment of additional consideration,
shares of Stock, either immediately or upon the arrival of a specified date or
the happening of a specified event.

"Director Duty" has the meaning set forth in Section 6.7 hereof.

"Employee Benefit Plan" means any employee benefit plan within the
meaning of Section 3(3) of ERISA, other than a Multiemployer Plan.

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"Environmental Laws" means all federal, state and local laws, rules,
regulations, ordinances, permits, orders, writs, judgments, injunctions,
decrees, determinations, awards and consent decrees relating to hazardous
substances and environmental matters applicable to the business, operations or
activities of the Seller or any Subsidiary of the Seller.

"ERISA" means the Employee Retirement Income Security Act of 1974 and
the rules and regulations issued thereunder, as amended from time to time and
any successor statute.

"ERISA Affiliate" means, in relation to any Person, any trade or
business (whether or not incorporated) which is a member of a group of which
that Person is a member and which is under common control within the meaning of
the regulations promulgated under Section 414 of the Code.

"Exchange" means the New York Stock Exchange, Inc.

"Financial Statements" means those audited consolidated financial
statements of Seller and its Subsidiaries for the periods ended December 31,
1995 and those unaudited statements for the nine months ended September 30,
1996, previously delivered to the Purchaser.

"GAAP" means generally accepted accounting principles in the United
States at the time in effect.

"Guarantee Obligation" means, with respect to any Person, any
obligation in the nature of a guaranty, repurchase arrangement, loan or
advancement agreement, reimbursement obligation, comfort letter, hold harmless,
indemnity or counter-indemnity or similar obligation, with respect to any
indebtedness, lease, dividend or other obligations of any other Person,
directly or indirectly, fixed or contingent, matured or unmatured which is
required to be disclosed in the financial statements of Seller under GAAP;
provided, however, that the term shall not include endorsements of instruments
for deposit or collection in the ordinary course of business. The amount of
any Guarantee Obligation shall be deemed to be the maximum amount for which the
guaranteeing person may be liable pursuant to the terms of the instrument
embodying such Guarantee Obligation, or if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof.

"Indebtedness" means, with respect to any Person at any date, (a) all
indebtedness of such Person for borrowed money, (b) indebtedness of such Person
for the deferred purchase price of services or property, which purchase price
is (i) due twelve (12) months or more from the date of incurrence of the
obligation in respect thereof or (ii) is evidenced by a note, bond, debenture
or similar instrument, (c) all obligations of such Person under Capitalized
Leases, (d) all obligations of such Person in respect of acceptances, letters
of credit or similar facilities issued or created for the account of such
Person, and (e) all liabilities secured by any Lien on any property owned by
such Person even though such Person has not assumed or otherwise become liable
for the payment thereof.

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"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any Capitalized Lease having substantially the same
economic effect as any of the foregoing, and the filing of any Financing
Statement under the Uniform Commercial Code or comparable law of any
jurisdiction in respect of any of the foregoing). The term "Lien" shall
include reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting property.

"Market Price" per share of Common Stock on any date shall be deemed
to be the average of the daily closing prices for the preceding five business
days before the day in question. The closing price for each day shall be the
last reported sale price regular way or, in case no such reported sale takes
place on such day, the average of the reported closing bid and asked prices
regular way, in either case on the Exchange or, if the Common Stock is not
listed or admitted to trading on the Exchange, on the principal national
securities exchange on which the Common Stock is listed or admitted to trading
or, if not listed or admitted to trading on any national securities exchange,
the average of the closing bid and asked prices as reported by the National
Association of Securities Dealers Automated Quotation System.

"Material Adverse Effect" means a material adverse effect on (a) the
business, operations, property or condition (financial or otherwise) of the
Seller and its Subsidiaries, considered as one entity, (b) the ability of the
Seller to perform its obligations under this Agreement or any other Transaction
Document to which it is a party, or (c) the validity or enforceability of this
Agreement or any of the other Transaction Documents or the rights or remedies
of the Purchaser.

"Multiemployer Plan" means a Plan which is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.

"Obligations" means, the obligations of the Seller to the Purchaser
presently existing or hereafter arising under any Transaction Documents,
including without limitation, the Seller's obligation to redeem or repurchase
the Preferred Stock in accordance with the terms of the Certificate of
Designation.

"Options" shall mean any options or other rights to subscribe for,
purchase or acquire any Stock.

"PBGC" means the Pension Benefit Guaranty Corporation.

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"Permitted Liens" shall mean:

(a) liens securing the Bank Debt;

(b) liens arising by operation of law for taxes not yet
due and payable;

(c) statutory liens of mechanics, materialmen, shippers
and warehousemen for services or materials for which payment is not
yet due and which occur in the ordinary course of business;

(d) liens, charges, encumbrances and priority claims
incidental to the conduct of business or the ownership of properties
and assets or other liens of like general nature incurred in the
ordinary course of business and not in connection with the borrowing
of money, provided in each case, the obligation secured is not overdue
or, if overdue is being contested in good faith and by appropriate and
lawful proceedings promptly initiated and diligently conducted (of
which the Seller has given prior written notice to the Purchaser) and
for which appropriate reserves (in accordance with GAAP) have been
established and so long as levy and execution have been and continue
to be stayed;

(e) liens incurred or pledges or deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; and

(f) liens imposed by law, such as carriers',
warehousemen's or mechanics' liens, incurred by it in good faith in
the ordinary course of business, and liens arising out of a judgment
or award against it with respect to which it will currently be
prosecuting an appeal, a stay of execution pending such appeal having
been secured.

"Person" means an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
limited liability company, governmental authority or other entity of whatever
nature.

"Preferred Stock" means the shares of Series D Preferred Stock of the
Seller issued pursuant to the terms of the Certificate of Designation.

"Preferred Stock Certificate" means the stock certificate of Seller
representing 350,000 shares of Preferred Stock to be issued to Purchaser.

"Purchased Securities" means the 350,000 shares of Preferred Stock
purchased pursuant to the terms of this Agreement.

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"Registration Rights Agreement" means the Registration Rights
Agreement to be executed between Seller and Purchaser on or before the Closing
in the form of Exhibit D attached hereto.

"Rentals" shall mean and include all fixed rents (including as such
all payments which the lessee is obligated to make to the lessor on termination
of the lease or surrender of the property) payable by the Seller or its
Subsidiaries, as lessee or sublessee under a lease of real or personal
property, but shall be exclusive of any amounts required to be paid by the
Seller or its Subsidiaries (whether or not designated as rents or additional
rents) on account of maintenance, repairs, insurance, taxes and similar
charges.

"Reportable Event" means any of the events set forth in Section
4043(b) of ERISA, other than those events as to which the thirty (30) day
notice period is waived under subsections .13, .14, .16, .18, .19 or .20 of
PBGC Reg. Section 2615.

"Requirements of Law" means, with respect to any Person, the
Certificate of Incorporation and By-Laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation or
determination of any governmental or political subdivision of any agency,
authority, bureau, central bank, commission, department or any court,
arbitrator, or grand jury, in each case whether foreign or domestic, applicable
to or binding upon such Person or any of its property or to which such Person
or any of its property is subject.

"Responsible Officer" means, with respect to any Person, the (i) chief
executive officer or the president of such Person, and (ii) with respect to
financial matters, the chief financial officer, or any vice president with
financial responsibilities of such Person.

"Stock" shall mean all classes and categories of the capital stock of
the Seller or any of its Subsidiaries whether then issued or issuable,
including without limitation, the Common Stock.

"Stock Purchase Rights" shall mean Options and Convertible Securities.

"Subsidiary" means, with respect to any Person, a corporation,
partnership or other entity of which shares of stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other managers of such corporation, partnership or other entity
are at the time owned, or the management of which is otherwise controlled,
directly or indirectly, through one or more intermediaries, or both, by such
Person. Unless otherwise qualified, all references to a "Subsidiary" or to
"Subsidiaries" in this Agreement shall refer to any Subsidiary or all
Subsidiaries of the Seller, whether now in existence or hereafter organized.

"Transaction Documents" means this Agreement, the Warrants, the
Preferred Stock Certificate, the Certificate of Designation, the Warrant
Registration Rights Agreement, the Registration Rights Agreement, the Amended
Registration Rights Agreement, and all other

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documents, instruments, certificates and other agreements in connection with
the sale of the Purchased Securities.

"Underlying Shares" means shares of Common Stock issued or issuable
upon exercise of conversion rights relating to the Preferred Stock or exercise
of warrants issued upon redemption of Preferred Stock.

"Uniform Commercial Code" or "UCC" means the Uniform Commercial Code
in each case in effect in the jurisdiction where the Collateral is located.

"Warrant" or "Warrants" means one or more of the Warrants for the
purchase of 800,000 shares of Common Stock issued by Seller to the Purchaser on
the date hereof, a copy of which is attached hereto as Exhibit E.

"Warrant Holder" and "Warrant Holders" shall mean the Purchaser and
any subsequent holder of the Warrants.

"Warrant Registration Rights Agreement" means the Registration Rights
Agreement executed contemporaneously herewith and attached hereto as Exhibit F.

Section 1.2 Rules of Construction.

(a) Use of Capitalized Terms. For purposes of this
Agreement, unless the context otherwise requires, the capitalized
terms used in this Agreement shall have the meanings herein assigned
to them, and such definitions shall be applicable to both singular and
plural forms of such terms.

(b) Construction. All references in this Agreement to
the single number and neuter gender shall be deemed to mean and
include the plural number and all genders, and vice versa, unless the
context shall otherwise require.

(c) Headings. The underlined headings contained herein
are for convenience only and shall not affect the interpretation of
this Agreement.

(d) Entire Agreement. This Agreement and the other
Transaction Documents shall constitute the entire agreement of the
parties with respect to the subject matter hereof.

(e) Severability. Any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof,

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and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other
jurisdiction.

(f) Governing Law. This Agreement and the rights and
obligations of the parties under this Agreement shall be governed by,
and construed and interpreted in accordance with, the law of the State
of Delaware.

ARTICLE 2

SALE AND PURCHASE OF PURCHASED SECURITIES

Section 2.1 Sale and Purchase of Purchased Securities. Subject
to all of the terms and conditions hereof and in reliance on the
representations and warranties set forth or referred to herein, the Seller
agrees to issue and sell to the Purchaser, and the Purchaser agrees to
purchase, the Purchased Securities from the Seller on the Closing Date.

Section 2.2 Purchase Price. The aggregate purchase price for the
Purchased Securities is Thirty-Five Million and 00/100 Dollars ($35,000,000.00)
(the "Purchase Price").

Section 2.3 Delivery of Warrants. In consideration for the
execution and delivery of this Agreement by Purchaser; contemporaneously with
the execution of this Agreement, the Seller shall deliver the Warrants and the
Warrant Registration Rights Agreement to Purchaser. If the Seller terminates
this Agreement on or before the Closing Date pursuant to Section 9.1(e) or (f)
hereof, the Warrants shall become immediately exercisable. Upon Closing (as
defined below), the Warrants and the Warrant Registration Rights Agreement will
be cancelled.

Section 2.4 Closing. The Closing of the purchase and sale of the
Purchased Securities (the "Closing") will take place at the offices of the
Seller in Dallas, Texas on the date that all conditions to closing have been
met or waived (the "Closing Date") or such other location and date as the
parties may mutually agree. At the Closing, the Seller will deliver the
Purchased Securities to the Purchaser against payment by the Purchaser of the
Purchase Price in immediately available funds. The Purchased Securities will
be issued to the Purchaser on the Closing Date and registered in the
Purchaser's name on the Seller's records.

Section 2.5 Use of Proceeds. Substantially all proceeds of the
sale of the Purchased Securities shall be used by the Seller to pay transaction
expenses and for general corporate purposes. Seller shall also use such
proceeds to repay Bank Debt to the extent repayment is consistent with banking,
regulatory and rating agency considerations of Seller.

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ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF SELLER

In order to induce the Purchaser to enter into this Agreement, the
Seller hereby represents and warrants to the Purchaser that:

Section 3.1 Corporate Existence. Each of the Seller and its
Subsidiaries now in existence is a corporation duly organized, validly
existing, and in good standing under the laws of its jurisdiction of
incorporation, with full power and authority to conduct its respective business
as presently conducted. Each of the Seller and its Subsidiaries is duly
qualified as a foreign corporation and in good standing in all other
jurisdictions in which their respective activities or ownership of property
requires such qualification, except where the failure to be so qualified would
not have a Material Adverse Effect.

Section 3.2 Corporate Power; Authorization. Subject to the
approval of the stockholders of Seller of the transactions contemplated by this
Agreement, the Seller has the corporate power and authority to make, deliver
and perform this Agreement and such other Transaction Documents to which it is
a party and has taken, or by the Closing Date will have taken, all necessary
corporate action to authorize the issuance of the Purchased Securities on the
terms and conditions of this Agreement and to authorize the execution, delivery
and performance of this Agreement and such other Transaction Documents to which
it is a party. No consent or authorization of, or filing with, any Person
(including, without limitation, any governmental authority or agency having
jurisdiction over the Seller or its Subsidiaries), is required to be made or
obtained by Seller in connection with the issuance of the Purchased Securities
or the execution, delivery and performance by the Seller, and the validity or
enforceability (with respect to the Seller) of this Agreement, or such other
Transaction Documents to which Seller is a party, except for consents and
filings referred to or disclosed on Schedule 3.2.

Section 3.3 Enforceable Obligations. This Agreement, the Warrant
and the other Transaction Documents have been, or on or prior to the Closing
Date will be, duly executed and delivered on behalf of the Seller, and
constitute, or will constitute, the legal, valid and binding obligation of the
Seller, enforceable against it in accordance with their terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at law).

Section 3.4 No Legal Bar. Except as set forth on Schedule 3.2,
the execution, delivery and performance of this Agreement, the Warrant and the
other Transaction Documents and the consummation of the transactions
contemplated thereby, will not violate any Requirements of Law or any
Contractual Obligation of the Seller or its Subsidiaries.

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Section 3.5 Absence of Conflicts. Except as set forth on
Schedule 3.2, neither the execution and delivery of this Agreement, the Warrant
or the other Transaction Documents, the consummation of the transactions
contemplated by such documents nor the performance of or compliance with the
terms and conditions of such documents will (i) result in a breach of or a
default under any agreement or instrument to which the Seller or any Subsidiary
of the Seller is a party or by which their properties may be subject or bound,
or (ii) except as contemplated by such documents, result in the creation or
imposition of any Lien upon any property of the Seller or any Subsidiary of the
Seller.

Section 3.6 Litigation. Except as set forth on Schedule 3.6, to
the knowledge of the Seller, no litigation, investigation or proceeding of or
before any arbitrator or governmental authority is pending or threatened by or
against the Seller or against any Subsidiary of the Seller or any of their
properties or revenues, existing or future which could have a Material Adverse
Effect.

Section 3.7 Financial Condition. The Financial Statements
delivered to Purchaser fairly present the assets, liabilities and financial
condition of the Seller and its Subsidiaries, as of the dates thereof and in
accordance with GAAP (except that any unaudited Financial Statements may not
contain any or all of the footnotes required by GAAP and are subject to usual
year-end audit adjustments not materially affecting the results of operations).
The Financial Statements of Seller and its Subsidiaries contain no omissions or
misstatements which are or may be material to the Seller and its Subsidiaries,
treated as one entity. There has been no material adverse change in the
assets, liabilities, business or financial condition of the Seller and its
Subsidiaries, treated as one entity, since the date of such Financial
Statements. Except for trade payables arising in the ordinary course of
business since the dates reflected in such Financial Statements, the Seller and
its Subsidiaries have no Indebtedness and no Guarantee Obligations other than
as reflected in such Financial Statements. The Financial Statements of Seller
and its Subsidiaries, including the related schedules and notes thereto, have
been prepared in accordance with GAAP consistently applied throughout the
periods involved (except that any unaudited Financial Statements may not
contain any or all of the footnotes required by GAAP and are subject to year
end audit adjustments).

Section 3.8 No Change. Except as set forth on Schedule 3.8,
since September 30, 1996 through the date of this Agreement, to the knowledge
of the Seller, there has been no development or event, which has had or could
reasonably be expected to have a Material Adverse Effect, and no dividends or
other distributions have been declared, paid or made upon any shares of the
Stock of the Seller or its Subsidiaries, nor has any of such Stock been
redeemed, retired, purchased or otherwise acquired for value by the Seller or
its Subsidiaries.

Section 3.9 No Default. Neither the Seller nor any Subsidiary of
the Seller is in default under or with respect to any of its Contractual
Obligations in any respect which could reasonably be expected to have a
Material Adverse Effect.

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Section 3.10 Compliance with Laws. Except for any violation
which, individually or in the aggregate, would not have a Material Adverse
Effect, Seller and its Subsidiaries are in compliance with all Requirements of
Law.

Section 3.11 Taxes. The Seller has filed or caused to be filed
all tax returns which are required to be filed by it or any of its Subsidiaries
and all taxes shown to be due and payable on said returns or on any assessments
made against it, any Subsidiary or any of their property, and all other taxes,
fees or other charges imposed on Seller, any Subsidiary of Seller or any of
their property by any governmental authority that are due and payable, have
been paid (other than any taxes, fees or other charges the amount or validity
of which are currently being contested in good faith by appropriate proceedings
and with respect to which adequate reserves in conformity with GAAP have been
provided on the books of the Seller or such Subsidiary); to the knowledge of
Seller, no tax Lien has been filed and no claim is being asserted, with respect
to any such tax, fee or other charge.

Section 3.12 ERISA. Seller and its ERISA Affiliates are in
compliance, in all material respects, with any applicable provisions of ERISA
and the regulations thereunder and the Code, with respect to all Employee
Benefit Plans.

Section 3.13 Environmental Matters. Except for any violation
which, individually or in the aggregate, would not have a Material Adverse
Effect, neither the Seller nor any of its Subsidiaries is in violation of any
Environmental Law.

Section 3.14 Investment Company Act. Neither the Seller nor any
of its Subsidiaries is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.

Section 3.15 Capitalization of Seller. Schedule 3.15 hereto
states the authorized capitalization of the Seller and the number of shares of
each class of Stock of the Seller issued and outstanding thereof. All such
issued and outstanding shares have been duly authorized and validly issued, are
fully paid and nonassessable and free of any claims of preemptive rights.
Other than as created pursuant to this Agreement and stock option plans adopted
prior to the date hereof by Seller, there are no outstanding Stock Purchase
Rights issued by the Seller.

Section 3.16 Capitalization of Subsidiaries. Schedule 3.16
attached hereto contains a list of the Subsidiaries of the Seller, the
jurisdictions of incorporation applicable thereto and the percentage of the
voting common stock or other issued capital stock thereof owned by the Seller
or its Subsidiaries. There are no Stock Purchase Rights issued by any
Subsidiary of the Seller. The Seller or its Subsidiaries, as the case may be,
have good and valid title to all shares they purport to own of the capital
stock of each such Subsidiary, free and clear in each case of any Lien, except
liens securing the Bank Debt. All Stock of each Subsidiary has been duly
issued and is fully paid and non- assessable.

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Section 3.17 Title to Assets; Leases. The Seller and its
Subsidiaries will own all of the assets reflected in the Financial Statements
as of the Closing Date, subject to no Liens other than Permitted Liens except
for assets sold prior thereto in the ordinary course of business. Each of the
Seller and its Subsidiaries enjoys peaceful and undisturbed possession, and is
in compliance with the terms of all leases of real property on which facilities
operated by them are situated and of all leases of personal property, except
where failure to enjoy such possession or such noncompliance would not have a
Material Adverse Effect.

Section 3.18 Disclosure. No representation or warranty made by
the Seller in this Agreement or in any other document furnished in connection
herewith contains any misrepresentation of a material fact or omits to state
any material fact necessary to make the statements herein or therein not
misleading.

Section 3.19 Undisclosed Liabilities. Neither the Seller nor any
Subsidiary of Seller has any material obligation or liability (whether accrued,
absolute, contingent, unliquidated, or otherwise, whether due or to become due)
arising out of transactions entered into at or prior to the Closing Date, or
any action or inaction at or prior to the Closing Date, except liabilities
reflected on the Financial Statements or notes thereto; liabilities incurred
in the ordinary course of business (none of which are liabilities for breach of
contract, breach of warranty, torts, infringements, claims or lawsuits);
liabilities or obligations disclosed in the schedules hereto; and liabilities
or obligations incurred pursuant to the Transaction Documents.

Section 3.20 Compliance with Federal Reserve Regulations. None of
the transactions contemplated in the Agreement will violate or result in a
violation of Section 7 of the Securities Exchange Act of 1934, as amended, or
any regulation issued pursuant thereto, including, without limitation,
Regulations G, T, U and X of the Board of Governors of the Federal Reserve
System, 12 C.F.R., Chapter II.

Section 3.21 Survival of Representations and Warranties. The
foregoing representations and warranties are made by the Seller with the
knowledge and intention that the Purchaser will rely thereon and shall survive
the execution and delivery of this Agreement until the Closing Date.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF PURCHASER

Section 4.1 Representations and Warranties of Purchaser. In
order to induce the Seller to enter into this Agreement, the Purchaser hereby
represents and warrants to the Seller as set forth in this Section 4.1.

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(a) Corporate Existence. The Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation.

(b) Corporate Power; Authorization.

(i) Authorization and Compliance With Law. The
Purchaser has the corporate power and authority to make,
deliver and perform this Agreement and the other Transaction
Documents to which it is a party. The execution, delivery and
performance of this Agreement by the Purchaser and such other
Transaction Documents to which it is a party, and the
acquisition of the Warrant and the Purchased Securities
pursuant to the terms hereof or thereof, have been duly
authorized by all necessary action, corporate and otherwise,
on the part of the Purchaser. The execution, delivery and
performance of this Agreement by the Purchaser and such other
Transaction Documents to which it is a party, the acquisition
and ownership of the Warrant or the Purchased Securities
issued to the Purchaser and the consummation of the
transactions contemplated by the foregoing, do not and will
not violate any Requirements of Law applicable to the
Purchaser or any Contractual Obligation of the Purchaser.

(ii) Approvals. No authorization, consent,
approval, license or filing with any Person (including,
without limitation, any governmental authority or agency
having jurisdiction over the Purchaser) is or will be
necessary for the valid execution, delivery or performance of
this Agreement by the Purchaser and such other Transaction
Documents to which it is a party, the acquisition and
ownership of the Warrant and/or the Purchased Securities
issued to the Purchaser or the consummation of the
transactions contemplated by the foregoing, or the validity or
enforceability (with respect to the Purchaser) of this
Agreement, or such other Transaction Documents to which the
Purchaser is a party.

(c) Enforceable Obligations. This Agreement and the
other Transaction Documents to which the Purchaser, is a party have
been, or on or prior to the Closing Date will be, duly executed and
delivered on behalf of the Purchaser, and constitute or will
constitute the legal, valid and binding obligation of the Purchaser,
enforceable against it in accordance with their terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the enforcement
of creditors' rights generally and by general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity
or at law).

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(d) Investment Representations of the Purchaser.

(i) No Distributive Intent; Restricted
Securities. The Purchaser is acquiring the Purchased
Securities and Warrants for its own account with no present
intention of reselling or otherwise distributing any of the
Purchased Securities or the Warrants or participating in a
distribution of such Purchased Securities or Warrants in
violation of the Securities Act, or any applicable state
securities laws. The Purchaser acknowledges that it has been
advised and is aware that (A) the Seller is relying upon an
exception under the Securities Act predicated upon the
Purchaser's representations and warranties contained in this
Agreement in connection with the issuance of the Purchased
Securities and the Warrants pursuant to this Agreement, (B)
the Purchased Securities and the Warrants in the hands of the
Purchaser will be "restricted securities" within the meaning
of Rule 144 promulgated by the Commission pursuant to the
Securities Act and, unless and until registered under the
Securities Act, will be subject to limitations on resale
(including, among others, limitations on the amount of
securities that can be resold and the timing and manner of
resale) set forth in Rule 144 or in administrative
interpretations of the Securities Act by the Commission or in
other rules and regulations promulgated thereunder by the
Commission, in effect at the time of the proposed sale or
other disposition of the Purchased Securities or the Warrants,
and (C) the Purchaser has no registration rights except as
provided for in the Registration Rights Agreement, and the
Seller has no plans to register any securities except in
accordance with those rights.

(e) Survival of Representations and Warranties. The
foregoing representations and warranties are made by the Purchaser
with the knowledge and intention that the Seller will rely thereon and
shall survive the execution and delivery of this Agreement.

Section 4.2 Commissions.

(a) No Commissions of Purchaser. No outside parties have
participated with respect to the negotiation of this Agreement and the
transactions contemplated hereby on behalf of the Purchaser and the
Purchaser shall indemnify and hold the Seller harmless with respect to
any claim for any broker's or finder's fees or commissions with
respect to the transactions contemplated hereby by anyone found to
have been acting on behalf of the Purchaser.

(b) No Commissions of Seller. Seller shall indemnify and
hold the Purchaser harmless with respect to any claim for any broker's
or finder's fees or commissions with respect to the transactions
contemplated hereby by anyone found to have been acting on behalf of
the Seller.

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ARTICLE 5

AFFIRMATIVE COVENANTS

Section 5.1 Financial Statements. So long as any of the Warrants
or Purchased Securities are outstanding, the Seller will comply, and will cause
each of its Subsidiaries, where applicable, to comply, with the following
provisions:

(a) Year End Report. If the Seller has no securities
registered under Section 12 of the Securities Exchange Act of 1934, as
amended, as soon as available, but in any event within ninety (90)
days after the end of each fiscal year of the Seller, Seller shall
deliver to the Purchaser copies of the audited consolidated financial
statements of the Seller and its Subsidiaries including the balance
sheets as at the end of such year and the related statements of income
and retained earnings and of cash flows for such year, in each case
containing in comparative form the figures for the previous year.
Such financial statements shall be accompanied by an opinion of a firm
of independent certified public accountants of nationally recognized
standing reasonably acceptable to the Purchaser, stating that such
financial statements fairly present the respective financial positions
of the Seller and its Subsidiaries, as the case may be, and the
results of operations and changes in financial position for the fiscal
year then ended in conformity with GAAP.

(b) Quarterly Reports. If the Seller has no securities
registered under Section 12 of the Securities Exchange Act of 1934, as
amended, as soon as available, but in any event not later than
forty-five (45) days after the end of each fiscal quarter (except the
last fiscal quarter) of each fiscal year, the Seller shall deliver to
the Purchaser copies of the unaudited consolidated balance sheets of
the Seller and its Subsidiaries as at the end of such quarter and the
related unaudited statements of income and retained earnings and of
cash flows for such quarter and the portion of the fiscal year through
the end of such quarter, setting forth in each case in comparative
form the figures for the previous year, certified by a Responsible
Officer of the Seller as being properly prepared, complete and correct
in all material respects (subject to normal year-end audit
adjustments).

All of such financial statements shall be complete and correct in all material
respects and be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods.

(c) Commission and Other Reports. Promptly upon becoming
available, Seller shall furnish, or if necessary cause its
Subsidiaries to furnish, one copy of each financial statement, report,
notice or proxy statement required to be sent by the Seller or any of
its Subsidiaries to stockholders generally and of each regular or
periodic report filed by the Seller or any of its Subsidiaries with
any securities exchange or the Commission or any

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successor agency, and copies of any orders in any proceedings to which
the Seller or any of its Subsidiaries is a party, issued by any
governmental agency, federal or state, having jurisdiction over the
Seller or any of its Subsidiaries, which could have a Material Adverse
Effect.

Section 5.2 Conduct of Business and Maintenance of Existence.
Prior to the Closing Date, Seller will, and will cause each of its Subsidiaries
to, preserve, renew and keep in full force and effect its corporate existence
and take all reasonable action to maintain all rights, privileges and
franchises necessary or desirable in the normal conduct of its business.
Seller shall, and shall cause each of its Subsidiaries to, comply with all
Contractual Obligations and Requirements of Law, except to the extent the
failure to comply therewith could not be reasonably expected to have a Material
Adverse Effect.

Section 5.3 Maintenance of Property; Insurance. Prior to the
Closing Date, the Seller will maintain, preserve and keep, and will cause its
Subsidiaries to maintain, preserve and keep, its properties which are used or
useful in the conduct of its business (whether owned in fee or a leasehold
interest) in good repair and working order and from time to time make all
necessary repairs, replacements, renewals and additions so that at all times
the efficiency thereof, in all material respects, shall be maintained. Seller
shall maintain, and shall cause each of its Subsidiaries to maintain, with
financially sound and reputable insurance companies, insurance on all of their
real and personal property in such forms and amounts and against such risks as
are usually insured against in the same general area by companies engaged in
the same or a similar business; and furnish to the Purchaser, upon written
request, full information as to the insurance carried.

Section 5.4 Strategic Alliance.

(a) After the Closing, the Purchaser agrees to provide to
Seller a facility that will permit Seller to offer workers
compensation insurance to its aviation insureds.

(b) After the Closing, Purchaser and Seller shall
negotiate, in good faith, the terms of an underwriting management
agreement pursuant to which Seller shall offer to provide underwriting
and claims management services to Purchaser for those lines of
aviation insurance that Seller currently underwrites, and Purchaser
shall offer to provide Seller, where commercially desirable,
underwriting capacity of an insurance carrier rated "A" by A.M. Best
Company.

(c) The Purchaser and Seller agree to fulfill their
respective obligations under this Section through their appropriate
subsidiaries. The Purchaser and Seller agree to negotiate, in good
faith, terms of agreements that are mutually agreeable.

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Section 5.5 Recapitalization Charge. Seller agrees that it will
record a Fifteen Million and 00/100 Dollar ($15,000,000.00) (pre-tax)
recapitalization charge in its financial results for the quarter in which this
transaction is recorded.

ARTICLE 6

OTHER PROVISIONS

Section 6.1 Shareholder Approval. The Seller shall take such
action necessary to obtain shareholder approval of the transactions
contemplated herein as promptly as practicable after the execution of this
Agreement. As soon as practicable following the date hereof, the Purchaser and
the Seller shall cooperate to prepare promptly and file with the SEC a Proxy or
Information Statement with respect to the transactions contemplated by this
Agreement (the "Information Statement"). Promptly after the approval by the
staff of the Commission of the Information Statement, the Seller shall mail the
Information Statement to all holders of the Seller's Common Stock. The
Purchaser and the Seller shall cooperate with each other in the preparation of
the Information Statement and shall advise the other in writing if, prior to
the vote of the shareholders of the Seller, any such party shall obtain
knowledge of any facts that might make it necessary or appropriate to amend or
supplement the Information Statement in order to make the statements contained
or incorporated by reference therein not misleading or to comply with
applicable law. Notwithstanding the foregoing, each party shall be responsible
for the information and disclosures which it makes or incorporates by reference
in all regulatory filings and the Information Statement.

Section 6.2 Regulatory Approvals. Seller and Purchaser shall
promptly apply for and use their commercially reasonable best efforts to obtain
all applicable federal and state regulatory approvals and other approvals
required to effectuate the provisions of this Agreement, including all filings
under Hart-Scott-Rodino and with the appropriate state insurance commissions.

Section 6.3 Reservation of Shares. The Seller agrees to
authorize and reserve for issuance a sufficient number of authorized but
unissued shares of Common Stock and Preferred Stock for the purposes of this
Agreement and to take such action as may be necessary to ensure that all shares
of Common Stock issued upon exercise of the Warrants or upon conversion of the
Preferred Stock will be duly and validly authorized and issued, fully paid and
nonassessable and that all shares of Preferred Stock issued at the Closing or
thereafter issued to Purchaser pursuant to the Certificate of Designation will
be duly and validly authorized and issued, fully paid and nonassessable.

Section 6.4 Good Faith by Seller. The Seller will not, by
amendment to its certificate of incorporation or through any reorganization,
reclassification, or any other means, avoid or seek to avoid the observance or
performance of any of the terms of Articles 6 hereof, but will at all times in
good faith carry out all such terms and take all such action as may be
necessary or appropriate to protect the rights of the Purchaser.

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Section 6.5 Board of Directors. Purchaser shall have the rights
set forth in this Section until the earlier of (i) the time that Purchaser and
its Affiliates no longer own Preferred Stock and Underlying Shares representing
in the aggregate the ownership, or right to acquire ownership, of fifty-one
percent (51%) of the Underlying Shares or (ii) the seventh anniversary of the
Closing Date. Purchaser may nominate for election to Seller's Board of
Directors and the Seller shall place on the proxy sent to its shareholders,
applicable nominees who represent thirty percent (30%) (rounded up to the next
director) of the number of directors serving at any one time, and at least one
of the directors representing the Purchaser shall serve on each of the standing
committees of the Board of Directors. Notwithstanding the foregoing, the
number of directors which the Purchaser shall be entitled to nominate pursuant
to this Section 6.5 shall be reduced to the extent and by the number of
directors the holders of Preferred Stock are entitled to elect as a class under
the terms of the Certificate of Designation. In the event the Purchaser's
representatives fail to be elected as directors, Seller agrees that Purchaser
shall be entitled to have an equal number of representatives in place of such
directors attend each meeting of the Board of Directors. Such representatives
shall be entitled to receive all materials and information provided to Seller's
Board of Directors and shall receive the same notice as is given to the
Seller's Board of Directors.

Section 6.6 Voting Agreement. For so long as Purchaser and its
Affiliates shall beneficially own Preferred Stock or Underlying Shares which
represent in the aggregate the ownership, or right to acquire ownership, of at
least fifty-one percent (51%) of the Underlying Shares, the Purchaser shall and
shall cause its Affiliates, to vote all shares of Preferred Stock and Common
Stock held by Purchaser or its Affiliates as follows:

(a) With respect to any matter on which the holders of
Common Stock have the right to vote, if Purchaser and its Affiliates
hold any combination of Preferred Stock and Common Stock that
represents the right to vote more than 20% of the total votes eligible
to be voted on such matter, then Purchaser agrees to vote all of its
votes in excess of such 20% in proportion to the actual vote of
holders of all remaining votes (including the Purchaser's 20% vote);

(b) The voting agreement contained in this Section will
terminate and expire on the date that is three years and one hundred
eighty (180) days after the Closing Date.

(c) Purchaser agrees that all certificates representing
shares of Preferred Stock or Underlying Shares shall contain a legend
referencing the foregoing restrictions on voting rights for so long as
such restrictions are applicable.

Section 6.7 No Solicitation and Other Actions.

(a) From and after the date of this Agreement and except
as set forth in subsection 6.7(b), the Seller shall not, and the
Seller shall direct and use its reasonable best

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efforts to cause the officers, directors, employees, agents, advisors
and other representatives of the Seller not to, directly or
indirectly, (i) solicit, initiate, knowingly encourage, or participate
in discussions or negotiations regarding, any proposals or offers from
any Person (an "Offeror") relating to any Competing Proposal, or (ii)
furnish to any other Offeror any non-public information or access to
such information with respect to, or otherwise concerning, any
Competing Proposal. The Seller shall immediately cease and cause to
be terminated any existing discussions or negotiations with any Person
conducted heretofore with respect to any proposed Competing Proposal.

(b) Notwithstanding anything to the contrary contained in
this Section 6.7 or in any other provision of this Agreement, until
the Shareholders of the Seller have approved the transactions
contemplated by this Agreement, the Seller shall not be prohibited by
this Agreement from (i) participating in discussions or negotiations
with, and, during such period, the Seller may furnish information to,
an Offeror that seeks to engage in discussions or negotiations,
requests information or makes a proposal to acquire the Seller
pursuant to a Competing Proposal, if the Seller's directors determine
in good faith that such action is required for the discharge of their
fiduciary obligations, after consultation with independent legal and
financial advisors, who may be the Seller's regularly engaged legal
counsel and financial advisors (a "Director Duty"); (ii) complying
with Rule 14d-9 or Rule 14e-2 promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act") with regard to a tender or
exchange offer; (iii) making any disclosure to the Seller's
shareholders in accordance with a Director Duty; (iv) failing to make,
modifying or amending its recommendations, consents or approvals
referred to herein in accordance with a Director Duty; (v) terminating
this Agreement and entering into an agreement providing for a
Competing Proposal in accordance with a Director Duty; or (vi) take
any other action as may be appropriate in order for the Seller's Board
of Directors to act in a manner that is consistent with its fiduciary
obligations under applicable law . In the event that the Seller or
any of its officers, directors, employees, agents, advisors or other
representatives participate in discussions or negotiations with, or
furnish information to an Offeror that seeks to engage in such
discussions or negotiations, requests information or makes a Competing
Proposal, then, subject to any confidentiality requirements of an
Offeror (i) the Seller shall immediately disclose to the Purchaser the
decision of the Seller's directors; (ii) the identity of the Offeror;
and (iii) copies of all information or material not previously
furnished to Purchaser which the Seller, or its agents, provides or
causes to be provided to such Offeror or any of its officers,
directors, employees, agents, advisors or representatives.

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ARTICLE 7

CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS

Section 7.1 Conditions Precedent. The obligation of the
Purchaser to purchase the Purchased Securities pursuant to this Agreement on
the Closing Date is subject to the satisfaction or waiver in writing of the
following conditions precedent (in form, substance and action as is reasonably
satisfactory to Purchaser):

(a) Certified Copies of Charter Documents. The Purchaser
shall have received from the Seller and each of its Subsidiaries a
copy, certified by a duly authorized officer of the Seller to be true
and complete on and as of the Closing Date, of each of the charter or
other organization documents and by-laws of the Seller or each
Subsidiary each as in effect on such date of certification (together
with all, if any, amendments thereto);

(b) Proof of Appropriate Action. The Purchaser shall
have received from the Seller a copy, certified by a duly authorized
officer of the Seller to be true and complete on and as of the Closing
Date, of the records of all action taken by the board of directors and
shareholders of the Seller to authorize the execution and delivery of
this Agreement, each of the Transaction Documents and any other
agreements entered into on the Closing Date and to which it is a party
or is to become a party as contemplated or required by this Agreement,
and its performance in all material respects of all of its agreements
and obligations under each of such documents;

(c) Incumbency Certificates. The Purchaser shall have
received from the Seller an incumbency certificate, dated the Closing
Date, signed by a duly authorized officer of the Seller and giving the
name and bearing a specimen signature of each individual who shall be
authorized to sign, in the name and on behalf of the Seller this
Agreement and each of the other Transaction Documents to which such
person is or is to become a party on the Closing Date, and to give
notices and to take other action on behalf of the Seller under such
documents;

(d) Representations and Warranties. Each of the
representations and warranties made by and on behalf of the Seller and
its Subsidiaries to the Purchaser in this Agreement and in the other
Transaction Documents shall be true and correct when made and the
representations and warranties contained in Sections 3.15 and 3.16
hereof shall be true and correct as of the Closing Date;

(e) Transaction Documents. Each of the Transaction
Documents shall have been duly and properly authorized, executed and
delivered to the Purchaser and filed by Seller,

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if required of Seller to be effective and shall be in full force and
effect on and as of the Closing Date;

(f) Legality of Transactions. No change in applicable
law shall have occurred as a consequence of which it shall have become
and continue to be unlawful for the Purchaser to perform any of its
agreements or obligations under this Agreement, or under any of the
other Transaction Documents, or for the Seller or any Subsidiary of
the Seller to perform any of its agreements or obligations under this
Agreement or under any of the other Transaction Documents;

(g) Performance, Etc. The Seller shall have duly and
properly performed, complied with and observed its respective
covenants, agreements and obligations contained in each of the
Transaction Documents in all material respects.

(h) Legal Opinions. The Purchaser shall have received a
written legal opinion of counsel to Seller, addressed to the
Purchaser, dated the Closing Date, which shall be reasonably
acceptable to the Purchaser;

(i) Consents. The Purchaser and Seller shall have
received all consents necessary for the completion of the transactions
contemplated by this Agreement and each of the Transaction Documents,
including any regulatory approvals and all instruments and documents
incidental thereto.

(j) Amended Registration Rights Agreement. Mason Best
Company L.P. and Seller shall have entered into the Amended
Registration Rights Agreement.

(k) Commitment of Mason Best Company L.P. Within five
(5) days after the date hereof, the Purchaser shall have received a
written commitment from Mason Best Company L.P. substantially in the
form of the attached Exhibit "G" that it will vote its shares of
Common Stock in favor of (i) the transactions contemplated herein and
(ii) the representatives of Purchaser to be elected as directors of
the Seller.

(l) Adjustment to Stock Option Exercise Price. The
Seller shall have adjusted the exercise price of existing Stock
Options granted to continuing officers and directors of Seller or its
Subsidiaries pursuant to its 1991 Nonqualified Stock Option Plan, 1994
Stock Incentive Plan and 1994 Directors Option Plan effective on the
Closing Date to the market price on the date of adjustment (the "Reset
Options"). The Reset Options shall have a vesting period of three (3)
years, with one-third ( 1/3) of the Options vesting on each
anniversary of the date of the Reset Options.

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ARTICLE 8

CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS

Section 8.1 Conditions Precedent. The obligation of the Seller
to sell the Purchased Securities pursuant to this Agreement on the Closing Date
is subject to the satisfaction or waiver in writing of the following conditions
precedent (in form, substance and action as is reasonably satisfactory to the
Seller):

(a) Proof of Appropriate Action. The Seller shall have
received from the Purchaser a copy, certified by a duly authorized
officer of the Purchaser to be true and complete on and as of the
Closing Date, of the records of all action taken by the Board of
Directors or Executive Committee of the Purchaser to authorize the
execution and delivery of this Agreement and any other agreements
entered into on the Closing Date and to which it is a party or is to
become a party as contemplated or required by this Agreement, and its
performance of all of its agreements and obligations under each of
such documents;

(b) Incumbency Certificates. The Seller shall have
received from the Purchaser an incumbency certificate, dated the
Closing Date, signed by a duly authorized officer of the Purchaser and
giving the name and bearing a specimen signature of each individual
who shall be authorized (i) to sign, in the name and on behalf of the
Purchaser, this Agreement and each of the other Transaction Documents
to which such person is or is to become a party on the Closing Date,
and (ii) to give notices and to take other action on behalf of the
Purchaser under such documents;

(c) Representations and Warranties. Each of the
representations and warranties made by and on behalf of the Purchaser
to the Seller in this Agreement and in the other Transaction Documents
shall be true and correct when made;

(d) Transaction Documents. Each of the Transaction
Documents shall have been duly and properly authorized, executed and
delivered to the Seller by the respective party or parties thereto and
shall be in full force and effect on and as of the Closing Date;

(e) Legality of Transactions. No changes in applicable
law shall have occurred as a consequence of which it shall have become
and continue to be unlawful (i) for the Purchaser to perform any of
its agreements or obligations under this Agreement, or under any of
the other Transaction Documents, or (ii) for the Seller or any
Subsidiary of the Seller to perform any of its agreements or
obligations under this Agreement or under any of the other Transaction
Documents;

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(f) Approvals and Consents. The Seller shall have
received all approvals and consents necessary for the completion of
the transactions contemplated by the Agreement and each of the
Transaction Documents, including Shareholder approval as contemplated
by Section 6.1 hereof and regulatory consent as contemplated by
Section 6.2 hereof; and

(g) Performance, Etc. The Purchaser shall have duly and
properly performed, complied with and observed its respective
covenants, agreements and obligations contained in each of the
Transaction Documents.

ARTICLE 9

TERMINATION OF AGREEMENT

Section 9.1 Termination. Notwithstanding any other provision of
this Agreement, this Agreement may be terminated at any time prior to the
Closing Date:

(a) by mutual written consent of the Seller and the
Purchaser;

(b) by the Seller or the Purchaser, upon written notice
to the other party, if the Closing shall not have occurred on or prior
to March 31, 1997 (the "Outside Date"), unless such failure of
consummation shall be due to the failure of the party seeking such
termination to perform or observe in all material respects the
covenants and agreements hereof to be performed or observed by such
party;

(c) by the Seller or the Purchaser, upon written notice
to the other party, if a governmental authority of competent
jurisdiction shall have issued an injunction, order or decree
enjoining or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement, and such injunction,
order or decree shall have become final and non-appealable or if a
governmental authority has otherwise made a final determination that
any required regulatory consent would not be forthcoming; provided,
however, that the party seeking to terminate this Agreement pursuant
to this clause has used all required efforts to remove such
injunction, order or decree;

(d) by the Seller, if prior to approval by the
Shareholders of the Seller of the transactions contemplated by this
Agreement, the Board of Directors of the Seller determines in
accordance with a Director Duty that such termination is required by
reason of a Competing Proposal; or

(e) by the Seller or the Purchaser, if prior to approval
by the Shareholders of the Seller of the transactions contemplated by
this Agreement, the Board of Directors of the Seller shall have
withdrawn or modified in a manner materially adverse to the Purchaser
its

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approval of the adoption of this Agreement, because the Board of
Directors has determined to recommend to the Seller's shareholders or
approve a Competing Proposal, in accordance with a Director Duty;
provided, however, that any communication that advises that Seller has
received a Competing Offer or is engaging in any activity permitted
under Section 6.7(b) with respect to a Competing Offer shall in no
event be deemed a withdrawal or modification adverse to the Purchaser
of its approval of this Agreement.

Section 9.2 Effect of Termination. In the event that this
Agreement is terminated pursuant to clause 9.1(d) or 9.1(e) hereof, the
Warrants issued to the Purchaser pursuant to Section 2.3 hereof shall become
immediately exercisable and the Purchaser shall have all of the benefits of the
Warrant Registration Rights Agreement and Purchaser shall have no further
rights hereunder. In the event that this Agreement is terminated pursuant to
any other clause of Section 9.1, the Warrants shall be cancelled and neither
party shall have any further rights or obligations under this Agreement, the
Warrant Registration Rights Agreement or the Warrant Subscription Agreement.

Section 9.3 Default under the Agreement. If either party shall
default in the performance of its obligations hereunder, the non-defaulting
party shall retain all rights and remedies, whether arising in equity or at
law, including actions for specific performance and damages, as a result of the
default by the other party under this Agreement.

ARTICLE 10

MISCELLANEOUS

Section 10.1 Amendments and Waivers. The Seller and the Purchaser
may amend this Agreement or the other Transaction Documents to which they are
parties, and the Purchaser may waive future compliance by the Seller with any
provision of this Agreement or such other Transaction Documents, but no such
amendment or waiver shall be effective unless in a written instrument executed
by an authorized officer of the Purchaser and Seller.

Section 10.2 No Waiver; Cumulative Remedies. No failure to
exercise and no delay in exercising, on the part of the Purchaser or Seller,
any right, remedy, power or privilege hereunder, shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, remedy, power
or privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The Purchaser or
Seller, as the case may be, shall not be deemed to have waived any of its'
rights hereunder or under any other agreement, instrument or paper signed by it
unless such waiver shall be in writing and signed by the Purchaser or Seller,
as the case may be. The rights, remedies, powers and privileges herein
provided are cumulative and not exclusive of any rights, remedies, powers and
privileges provided by law, and are supplemental and in addition to such
rights, remedies, powers and privileges provided in Transaction Documents.

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Section 10.3 Notices. All notices, consents, requests and demands
to or upon the respective parties hereto shall be in writing and, unless
otherwise expressly provided herein, shall be deemed to have been duly given or
made when delivered by hand, or when deposited in the mail, postage prepaid,
or, in the case of telex, telegraphic or telecopy notice, when sent, addressed
as follows:

If to the Purchaser:

American Financial Group, Inc.
One East Fourth Street, Suite 919
Cincinnati, Ohio 45202
Attention: Samuel J. Simon
Telephone: (513) 579-2542
Telecopy: (513) 579-2113

With a copy to:

Keating, Muething & Klekamp, P.L.L.
1800 Provident Tower
Cincinnati, Ohio 45202
Attention: Paul V. Muething
Telephone: (513) 579-6517
Telecopy: (513) 579-6957

If to the Seller:

American Eagle Group, Inc.
12801 North Central Expressway, Suite 800
Dallas, Texas 75243
Attention: Chairman of the Board
Telephone: (972) 448-1460
Telecopy: (972) 448-1401

With a copy to:

Frederick G. Anderson
Senior Vice President and General Counsel
American Eagle Group, Inc.
12801 North Central Expressway, Suite 800
Dallas, Texas 75243
Telephone: (972) 448-1431
Telecopy: (972) 448-1401

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Notices of changes of address shall be given in the same manner.

Section 10.4 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the Seller, the Purchaser and their
respective successors and permitted assigns. For so long as Purchaser has any
rights or obligations specified in Sections 6.5 and 6.6 hereof, the Purchaser
and any of its Affiliates may assign or transfer to any Person (including a
group as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended), the shares of Preferred Stock or Underlying Shares, representing in
the aggregate ownership, or the right to acquire ownership, of at least
fifty-one percent (51%) of the Underlying Shares and all of their rights under
Section 6.5 above, only if such Person assumes all of the obligations under
Section 6.6 above.

Section 10.5 Enforcement Costs. All reasonable costs and expenses
incurred by a party to enforce the terms of this Agreement and performance by
the other party of its obligations hereunder including, without limitation,
stationery and postage, telephone and telegraph, secretarial and clerical
expenses, the fees or salaries of any collection agents utilized, and all
attorneys' fees and legal expenses incurred in connection herewith whether
through judicial proceedings or otherwise, or in enforcing or protecting its
rights and interests under this Agreement or under any other instrument or
document delivered pursuant hereto, or in protecting the rights of any holder
or holders with respect thereto, or in defending or prosecuting any actions or
proceedings arising out of or relating to the transactions contemplated hereby,
shall be paid by the party which does not prevail in such action or proceeding,
upon demand.

Section 10.6 Counterparts. This Agreement may be executed by one
or more of the parties to this Agreement on any number of separate counterparts
and all of said counterparts taken together shall be deemed to constitute one
and the same instrument.

Section 10.7 Term. This Agreement shall terminate upon the latest
of (i) the redemption of all shares of the Preferred Stock, or (ii) seven (7)
years from the Date of Issuance.

Section 10.8 Consent to Jurisdiction. The Seller hereby
absolutely and irrevocably consents and submits to the jurisdiction of the
courts of the State of Ohio and of any federal court located in the said state
in connection with any actions or proceedings brought against the Seller by the
Purchaser arising out of or relating to this Agreement or any other Transaction
Documents. The Seller hereby waives and shall not assert in any such action or
proceeding, in each case, to the fullest extent permitted by applicable law,
any claim that (a) the Seller is not personally subject to the jurisdiction of
any such court, (b) the Seller is immune from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to it or its property, (c) any
such suit, action or proceeding is brought in an inconvenient forum, (d) the
venue of any such suit, action or proceeding is improper, or (e) this Agreement
or any Transaction Documents may not be enforced in or by any such court. In
any such

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<PAGE> 69
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action or proceeding, the Seller hereby absolutely and irrevocably waives
personal service of any summons, complaint, declaration or other process and
hereby absolutely and irrevocably agrees that the service thereof may be made
by certified, registered first-class mail directed to the Seller. Anything
hereinbefore to the contrary notwithstanding, the Purchaser hereof may sue the
Seller in the courts of any other country, state of the United States or place
where the Seller or any of the property or assets may be found or in any other
appropriate jurisdictions.

IN WITNESS WHEREOF, the parties have duly executed this Agreement by
their duly authorized officers as of the date first above written.

SELLER:

AMERICAN EAGLE GROUP, INC.

By:
------------------------------
Its:
------------------------------

PURCHASER:

AMERICAN FINANCIAL GROUP, INC.

By:
------------------------------
Its:
------------------------------

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<PAGE> 70
APPENDIX III

CERTIFICATE OF DESIGNATION

SERIES D PREFERRED STOCK

AMERICAN EAGLE GROUP, INC., a corporation duly organized and existing
under the laws of the State of Delaware (the "Company"), DOES HEREBY CERTIFY:

That pursuant to authority conferred upon the Board of Directors of
the Company by the Certificate of Incorporation, as amended, of the Company
(the "Certificate of Incorporation") and pursuant to the provisions of Section
151 of the General Corporation Law of the State of Delaware, the Board of
Directors of the Company duly adopted the following resolutions at a meeting
held on November 4, 1996.

"RESOLVED: That pursuant to the authority vested in the Board of
Directors of the Company pursuant to the Certificate of Incorporation of the
Company, the Board of Directors of the Company hereby creates the Series D
Preferred Stock of the Company from the authorized but unissued preferred
stock, $.01 par value, of the Company and fixes the number of shares,
designation, powers, preferences and relative rights of such Series D
Cumulative Preferred Stock as follows:

1. DESIGNATION AND NUMBER. The distinctive designation of the
series shall be the Series D Preferred Stock (the "Series D Preferred Stock");
the number of shares of the Series D Preferred Stock which the Company is
authorized to issue shall be 546,200.

2. DEFINITIONS. For purposes of this resolution, the following
terms shall have the meanings indicated.

(a) As used herein:

(i) The term "Commission" means the Securities
and Exchange Commission or any other federal agency at the
time administering the Securities Act.

(ii) The term "Common Stock" means the $0.01 par
value voting Common Stock of the Company.

(iii) The term "Current Market Price" per share of
Common Stock on any date shall be deemed to be the average of
the daily closing prices for 30 consecutive business days
commencing 45 business days before the day in question. The
closing price for each day shall be the last reported sale
price regular way or, in case no such reported sale takes
place on such day, the average
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of the reported closing bid and asked prices regular way for
such day, in each case on the New York Stock Exchange or, if
the Common Stock is not listed or admitted to trading on the
New York Stock Exchange, on the principal national securities
exchange on which the shares of Common Stock are listed or
admitted to trading or, if not listed or admitted to trading
on any national securities exchange the average of the closing
bid and asked prices of the Common Stock in the
over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotations
National Market System (or any comparable system) or, if the
Common Stock is not quoted on such National Market System (or
any comparable system), the average of the closing bid and
asked prices in the over-the-counter market as furnished by
any New York Stock Exchange member firm selected from time to
time by the Board of Directors for that purpose or, in the
absence of such quotations, such other method of determining
market value as the Board of Directors shall in good faith
from time to time reasonably deem to be fair. In the absence
of one or more such quotations, the Company shall determine
the current market price on the basis of such quotations as it
considers appropriate.

(iv) The term "Date of Issuance" means the date on
which the Company initially issues any shares, regardless of
the number of times transfer of such share is made on the
stock records maintained by or for the Company and regardless
of the number of certificates which may be issued to evidence
such share.

(v) The term "Event of Default" with respect to
the Preferred Stock shall mean a continuing default in the
payment of any dividend under Section 3 hereof for at least
two consecutive quarters or any mandatory redemption payment
under Section 7(b) hereof.

(vi) The term "Junior Stock" means the Common
Stock and all other shares of capital stock of the Company
that are junior to the Series D Preferred Stock with respect
to the payment of dividends and payments or distributions upon
Liquidation.

(vii) The term "Liquidation" means the voluntary or
involuntary liquidation, distribution of assets (other than
payment of dividends), dissolution or winding-up of the
Company.

(viii) The term "outstanding", when used with
reference to shares of stock, means issued shares, excluding
shares held by the Company or a subsidiary.
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(ix) The term "Person" means any corporation,
partnership, trust, organization, association or other entity
or individual.

(x) The term "Registration Rights Agreement"
shall mean that certain Registration Rights Agreement between
the Company and American Financial Group, Inc. in the form
attached as Exhibit D to that certain Securities Purchase
Agreement between the Company and American Financial Group,
Inc. dated November 5, 1996.

(xi) The term "Securities Act" means the
Securities Act of 1933, as amended, or any successor federal
statute, and the rules and regulations of the Commission
thereunder.

(xii) The term "Senior Stock" means the Series B
Cumulative Preferred Stock and all other shares of capital
stock that are senior to the Series D Preferred Stock with
respect to the payment of dividends and payments and
distributions upon Liquidation.

(xiii) The term "Series D Preferred Stock" means the
series of the preferred stock, $0.01 par value, of the Company
as defined by the terms and provisions hereof and designated
the Series D Preferred Stock.

(xiv) The term "Transfer" means any transfer or
disposition of shares of Series D Preferred Stock, or any
interest thereon.

(xv) The term "Warrant Subscription Agreement"
means that certain Warrant Subscription Agreement between the
Company and American Financial Group, Inc. in the form
attached hereto as Annex A.

(b) All accounting terms used herein and not expressly
defined herein shall have the meanings given to them in accordance
with generally accepted accounting principles as of the Date of
Issuance.

3. DIVIDENDS.

(a) Subject to the rights of the holders of Senior Stock,
the holders of each share of Series D Preferred Stock shall be
entitled to receive, when and as declared by the Company's Board of
Directors and to the extent permitted under the laws of the State of
Delaware, cumulative preferential cash dividends at an annual rate of
$9.00 per share, of which cash dividends of $2.25 per share will be
payable on the first business day of each January, April, July and
October beginning April 1, 1997; provided, however, in the
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event that the Date of Issuance is not the first business day of
either January, April, July or October, the initial dividend payment
shall be prorated based upon the actual number of days elapsed since
the Date of Issuance. The holders of record of the Series D Preferred
Stock entitled to receive a particular dividend payment shall be
determined on the date 15 days prior to the date scheduled for such
payment.

(b) For a term of five years beginning on the first Date
of Issuance for any shares of Series D Preferred Stock, at the option
of the Company, dividends on outstanding shares of Series D Preferred
Stock may be paid in shares of Series D Preferred Stock having a
liquidation preference approximately equal to the amount of the
dividend payable. No fractional shares of Series D Preferred Stock
will be issued. In the event that the Company elects to pay dividends
by issuing shares of Series D Preferred Stock, the Company may
maintain an accounting of the fractional shares that would have been
issued to each holder and at any time such fractions equal or exceed
one share, such shares shall be issued with fractions remaining in
closed accounts paid in cash in lieu of fractional shares. In the
alternative, the Company may pay cash in lieu of fractional shares.
Cash payments in lieu of fractions will be based on the liquidation
value of $100.00 per share.

(c) The Company shall not declare or pay or set apart for
payment any dividend (other than dividends payable in shares of Junior
Stock) for any period upon any Junior Stock or any stock of the
Company ranking on a parity with the Series D Preferred Stock as to
dividends, nor shall the Company redeem or purchase any such shares or
pay any money to a sinking fund for the redemption or repurchase of
any such shares unless all dividends on the Series D Preferred Stock,
including all accrued and unpaid dividends, have been paid in full.
Notwithstanding this Paragraph 3(c), the Company may pay dividends on
the shares of the Series D Preferred Stock and shares of stock of the
Company ranking on a parity therewith as to dividends ratably in
proportion to the sums which would be payable on such shares if all
dividends, including accumulations, if any, were declared and paid in
full.

(d) Cash dividends upon shares of the Series D Preferred
Stock shall be payable by check or wire transfer, at the option of the
Company, and shares of Series D Preferred Stock issued in lieu of cash
dividends shall be issued to the registered holders of Series D
Preferred Stock at the address set forth in the books and records of
the Company or any transfer agent and/or registrar appointed for the
Series D Preferred Stock and shall commence to accrue and be
cumulative from their respective Dates of Issuance. Accumulations of
dividends on any shares of the Series D Preferred Stock shall bear
interest at 9% per annum, compounded quarterly.
<PAGE> 74
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4. LIQUIDATION. Subject to the rights of holders of Senior
Stock, in the event of any Liquidation, before any payment or distribution of
the assets of the Company (whether capital or surplus), or the proceeds
thereof, shall be made or set apart for the holders of shares of Junior Stock,
holders of shares of Series D Preferred Stock shall be entitled to receive
payment of $100.00 per share of Series D Preferred Stock held by them plus all
accrued and unpaid dividends thereon to the date of such payment. If the
assets of the Company shall be insufficient to pay in full such preferential
amounts to the holders of Series D Preferred Stock and the holders of any other
shares of capital stock of the Company ranking on a parity with holders of
Series D Preferred Stock as to payments or distributions upon Liquidation, then
such assets shall be distributed among such holders of Series D Preferred Stock
and such other stock ratably in accordance with the respective amounts which
would be payable on such shares of Series D Preferred Stock and such other
stock if all amounts payable thereon were paid in full.

5. VOTING RIGHTS. The holders of shares of Series D Preferred
Stock shall be entitled to the voting rights as set forth below for the first
seven years following the first Date of Issuance of any shares of Series D
Preferred Stock. After the seventh anniversary of the Date of Issuance, the
holders of shares of Series D Preferred Stock will have no voting rights,
except as set forth in subsections (c) and (d) below or as otherwise provided
by law.

(a) With regard to any matter to be submitted to a vote
of the holders of the Common Stock of the Company either to be voted
upon at a meeting called for the purpose of considering such matter or
submitted to holders for purposes of obtaining their written consent,
the holders of all outstanding shares of Series D Preferred Stock
shall (except as set forth in subsection (b) below) be entitled to
collectively exercise voting rights which, in the aggregate, afford to
such holders the right to cast votes equal to 20% of the votes
eligible to be cast with respect to any such vote. In order to
determine the number of votes which the holder of any share of Series
D Preferred Stock may cast in any such vote, the total number of votes
attributable to the Common Stock and any other class or series of
capital stock entitled to vote shall be divided by .80, and the
difference between such quotient and the total number of votes
attributable to the Common Stock and any other class or series of
capital stock entitled to vote with the Common Stock shall be the
aggregate number of votes (the "Total Series D Votes") which the
holders of all outstanding shares of Series D Preferred Stock shall be
entitled to cast. The holder of each share of Series D Preferred
Stock shall be entitled to cast the number (or a fraction thereof) of
votes equal to the Total Series D Votes divided by the number of
shares of Series D Preferred Stock outstanding on the record date
established with respect to such vote.

(b) Not withstanding the terms of paragraph (a) above, in
the event that the aggregate number of shares of Common Stock into
which the outstanding shares of Series D Preferred Stock is
convertible represents less than 20% of the aggregate number of all
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shares of Common Stock outstanding, then each holder of a share of
Series D Preferred Stock shall be entitled to cast the number of votes
equal to the number of shares of Common Stock into which the Series D
Preferred Stock is then convertible, with respect to any such matter.

(c) Notwithstanding the other terms of this Section 5,
upon the occurrence and continuation of an Event of Default, each
share of Series D Preferred Stock shall be entitled to cast the
number of votes equal to the number of shares of Common Stock into
which the Series D Preferred Stock is then convertible, on any matter
submitted for the consideration of the holders of the Common Stock of
the Company. In addition, the holders of the Series D Preferred Stock
voting as a separate class shall be entitled at the next annual
meeting of shareholders or the next special meeting of shareholders,
to elect such number of directors which is a majority (rounded up) of
the directors to be elected. Any director who shall have been elected
by the holders of the Series D Preferred Stock as a class pursuant to
this Section 5(c) shall hold office for a term expiring on the earlier
of the termination of the Event of Default and the next annual meeting
of shareholders and during such term may be removed for cause at any
time, but may be removed without cause only by the affirmative votes
of holders of record of a majority of the then outstanding shares of
Series D Preferred Stock given at a special meeting of such
shareholders called for such purpose.

(d) So long as any shares of Series D Preferred Stock are
outstanding, the Company shall not, in any manner, whether by
amendment to its Certificate of Incorporation or By-Laws, by merger
(whether or not the Company is the surviving corporation in such
merger), by consolidation, or otherwise, without the written consent
or the affirmative vote at a meeting called for that purpose of the
holders of at least a majority of the votes of the shares of Series D
Preferred Stock then outstanding, voting separately as a class, (i)
amend, alter or repeal any of the provisions of any resolution or
resolutions establishing the Series D Preferred Stock so as to affect
adversely the powers, preferences or special rights of such Series D
Preferred Stock, or (ii) authorize the issuance of, or authorize any
obligation or security convertible into or evidencing the right to
purchase shares of, any additional class or series of stock ranking
prior to the Series D Preferred Stock in the payment of dividends or
the preferential distribution of assets.

Nothing in this Subsection (d) shall be deemed to require any
vote or consent of the holders of shares of Series D Preferred Stock
in connection with the authorization or issuance of any series of
Preferred Stock ranking on a parity with or junior to the Series D
Preferred Stock as to dividends and/or distribution of assets.
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6. CONVERSION RIGHTS.

(a) Shares of Series D Preferred Stock may be converted
at the option of the holder thereof at any time prior to the close of business
on the business day next preceding the date fixed for redemption of such shares
pursuant to Section 7 hereof, into fully paid and nonassessable shares of
Common Stock of the Corporation at the rate of 19.0476 shares of Common Stock
of the Company as now constituted for each share of Series D Preferred Stock
surrendered for conversion. The conversion rate expressed may also be
expressed as a conversion price of $5.25 (the "Conversion Price") taking each
share of Series D Preferred Stock at a value of $100.00. The Conversion Price
shall be subject to adjustment from time to time as follows:

(i) In case the Company shall declare a dividend
or other distribution on shares of Common Stock which is
payable in Common Stock, then the Conversion Price in effect
immediately prior to the declaration of such dividend or
distribution shall be reduced to the quotient obtained by
dividing (a) the product of (x) the number of shares of Common
Stock outstanding immediately prior to such declaration,
multiplied by (y) the then effective Conversion Price, by (b)
the total number of shares of Common Stock outstanding
immediately after such dividend or other distribution is paid.
The registered holder of each share of Series D Preferred
Stock shall thereafter be entitled to purchase, at the
Conversion Price resulting from such adjustment, the number of
shares of Common Stock obtained by multiplying the Conversion
Price in effect immediately prior to such adjustment by the
number of shares of Common Stock issuable pursuant hereto
immediately prior to such adjustment and dividing the product
thereof by the Conversion Price resulting from such
adjustment.

(ii) In case outstanding shares of Common Stock
shall be subdivided into a greater number of shares of Common
Stock, the Conversion Price in effect at the opening of
business on the day immediately prior to the day upon which
such subdivision becomes effective shall be proportionately
reduced and the number of shares of Common Stock issuable
pursuant hereto immediately prior to such subdivision shall be
proportionately increased, and, conversely, in case
outstanding shares of Common Stock shall be combined into a
smaller number of shares of Common Stock, the Conversion Price
in effect at the opening of business on the day immediately
prior to the day upon which such combination becomes effective
shall be proportionately increased and the number of shares of
Common Stock issuable pursuant hereto immediately prior to
such combination shall be proportionately reduced, such
reduction or increase, as the case may be, to become effective
immediately after the opening of business on the day following
the day upon which such subdivision or combination becomes
effective.
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(iii) The reclassification of Common Stock into
securities other than Common Stock (other than any
reclassification upon a consolidation or merger to which
Section 6(h) below applies) shall be deemed to involve (x) a
distribution of securities other than Common Stock to all
holders of Common Stock (and the effective date of such
reclassification shall be deemed to be the Record Date within
the meaning of Subparagraph 6(a)(iv) below), and (y) a
subdivision or combination, as the case may be, of the number
of shares of Common Stock outstanding immediately prior to
such reclassification into the number of shares of Common
Stock outstanding immediately thereafter (and the effective
date of such reclassification shall be deemed to be "the day
upon which such subdivision becomes effective" and "the day
upon which such combination becomes effective" as the case may
be, within the meaning of Subparagraph 6(a)(ii) above.)

(iv) In case the Company shall issue rights,
options, or warrants or shall issue securities convertible or
exchangeable for shares of Common Stock ("Convertible
Securities") to all holders of its outstanding Common Stock,
without any charge to such holders, entitling them (for a
period within forty five (45) days after the record date
mentioned below) to subscribe for or purchase shares of Common
Stock at a price per share which is lower at the record date
fixed for the determination of stockholders entitled to
receive such rights, options, warrants or Convertible
Securities (other than pursuant to a dividend reinvestment
plan or pursuant to any employee or director benefit or stock
option plan) (the "Record Date") than the then Current Market
Price per share of Common Stock, the number of shares of
Common Stock issuable pursuant hereto shall be determined by
multiplying the number of shares of Common Stock issuable
pursuant hereto upon Conversion of each share of Series D
Preferred Stock by a fraction, of which the numerator shall be
the number of shares of Common Stock outstanding at the close
of business on the Record Date of such rights, options,
warrants or Convertible Securities plus the number of
additional shares of Common Stock offered for subscription or
purchase, and of which the denominator shall be the number of
shares of Common Stock outstanding at the close of business on
the Record Date of such rights, options, warrants or
Convertible Securities plus the number of shares of Common
Stock which the aggregate offering price of the total number
of shares of Common Stock so offered would purchase at the
then Current Market Price per share of Common Stock. Such
adjustment shall be made whenever such rights, options,
warrants or Convertible Securities are issued, and shall
become effective immediately after the opening of business on
the day following the Record Date for the determination of
stockholders entitled to receive such rights, options,
warrants or Convertible Securities. Upon the foregoing
adjustment having been made, the Conversion Price then in
effect shall be adjusted by multiplying such Conversion Price
in effect immediately prior to such
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adjustment by a fraction, of which the numerator shall be the
number of shares of Common Stock issuable pursuant hereto
immediately prior to such adjustment, and of which the
denominator shall be the number of shares of Common Stock
issuable pursuant hereto immediately thereafter. For the
purpose of this subparagraph 6(a)(iv), the number of shares of
Common Stock at any time outstanding shall not include shares
held in the treasury of the Company or issuable pursuant to
warrants held in or issued to treasury but shall include
shares issuable in respect of scrip certificates issued in
lieu of fractions of shares of Common Stock.

(v) In case the Company shall distribute to
all holders of its shares of Common Stock evidences of its
indebtedness or assets (excluding cash dividends or
distributions payable out of consolidated earnings or earned
surplus and the extraordinary events referred to in
subparagraphs 6(a)(i) through 6(a)(iii) above) or rights,
options or warrants, or convertible or exchangeable securities
containing the right to subscribe for or purchase evidences of
such indebtedness or assets, then in each case the Conversion
Price shall be reduced by multiplying the Conversion Price in
effect immediately prior to the close of business on the date
fixed for the determination of stockholders entitled to
receive such a distribution by a fraction, of which the
numerator shall be the then Current Market Price per share of
Common Stock on the date of such distribution, less the then
fair value (as determined in good faith by the Board of
Directors of the Company, whose determination shall in the
absence of manifest error be conclusive) of the portion of the
assets or evidences of indebtedness so distributed and of
which the denominator shall be the then Current Market Price
per share of Common Stock. Such adjustment shall be made
whenever any such distribution is made, and shall become
effective immediately prior to the opening of business on the
day following the record date for the determination of
stockholders entitled to receive such distribution.

In the event of a distribution by the Company to
all holders of its shares of Common Stock of capital stock of
a subsidiary or rights, options, warrants or Convertible
Securities for such stock, then in lieu of an adjustment in
the Conversion Price, the holder of each share of Series D
Preferred Stock, upon the conversion thereof at any time after
such distribution shall be entitled to receive the stock or
other securities to which such holder would have been entitled
if such holder had converted the shares of Series D Preferred
Stock into Common Stock immediately prior to such
distribution.

(vi) In case the Company shall issue or sell
Convertible Securities (excluding issuances or sales referred
to in subparagraph 6(a)(iv) above), there
<PAGE> 79
- 10 -

shall be determined the price per share for which shares of
Common Stock are issuable upon the conversion or exchange
thereof, such determination to be made by dividing (a) the
total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible
Securities, plus the average of the maximum and minimum
aggregate amount of additional consideration, if any, payable
to the Company upon the conversion or exchange of all such
Convertible Securities by (b) the maximum number of shares of
Common Stock of the Company issuable upon conversion or
exchange of all of such Convertible Securities; and such issue
or sale shall be deemed to be an issue or sale for cash (as of
the date of issue or sale of such Convertible Securities) of
such maximum number of shares of Common Stock at the price per
share so determined.

If such Convertible Securities shall by their terms
provide for an increase or increases, with the passage of
time, in the amount of additional consideration, if any,
payable to the Company, or in the rate of exchange, upon the
conversion or exchange thereof, the adjusted Conversion Price
shall, forthwith upon any such increase becoming effective, be
readjusted (but to no greater extent than originally adjusted)
to reflect the same.

(vii) In case the Company shall grant any
rights, warrants or options to subscribe for, purchase or
otherwise acquire shares of Common Stock (excluding grants
pursuant to employee or director stock option or benefit
plans), there shall be determined the minimum price per share
for which a share of Common Stock is issuable upon the
exercise of all such rights, warrants or options, such
determination to be made by dividing (a) the total amount, if
any, received or receivable by the Company as consideration
for the granting of such rights, warrants or options, plus the
average of the maximum and minimum aggregate amount of
additional consideration payable to the Company upon the
exercise of such rights, warrants or options by (b) the
maximum number of shares of Common Stock of the Company
issuable upon the exercise of all such rights, warrants or
options, and the granting of all such rights, warrants or
options shall be deemed to be an issue or sale for cash (as of
the date of the granting of such rights, warrants or options)
of such maximum number of shares of Common Stock at the price
per share so determined.

If such rights, warrants or options shall by their
terms provide for an increase or increases, with the passage
of time, in the amount of additional consideration payable to
the Company upon the exercise thereof, the adjusted Conversion
Price shall, forthwith upon any such increase becoming
effective, be readjusted (but to no greater extent than
originally adjusted) to reflect the same.
<PAGE> 80
- 11 -

(viii) In case the Company shall grant any
rights, warrants or options to subscribe for, purchase or
otherwise acquire Convertible Securities, such Convertible
Securities shall be deemed, for the purposes of subparagraph
6(a)(vi), to have been issued and sold (as of the actual date
of issue or sale of such Convertible Securities) for the total
amount received or receivable by the Company as consideration
for the granting of such rights, warrants or options plus the
average of the maximum and minimum aggregate amount of
additional consideration, if any, payable to the Company upon
the exercise of all such rights, warrants or options.

If such rights, warrants or options shall by their
terms provide for an increase or increases, with the passage
of time, in the amount of additional consideration payable to
the Company upon the exercise thereof, the adjusted
Conversion Price shall, forthwith upon any such increase
becoming effective, be readjusted (but to no greater extent
than originally adjusted) to reflect the same.

(ix) In case the Company shall issue or sell
its shares of Common Stock or be deemed to have issued or sold
Common Stock in accordance with the provisions of
subparagraphs 6(a)(vi), 6(a)(vii) or 6(a)(viii) above, for a
consideration per share which is below the then Current Market
Price per share for its shares of Common Stock, then the
following provisions shall apply. An Adjusted Fair Market
Value shall be computed (to the nearest cent, a half cent or
more being considered a full cent) by dividing:

a) the sum of (x) the result
obtained by multiplying the number of shares of
Common Stock of the Company outstanding immediately
prior to such issue or sale by the then Current
Market Price, plus (y) the consideration, if any,
received by the Company upon such issue or sale; by

b) the number of shares of Common
Stock of the Company outstanding immediately after
such issue or sale.

The resulting number shall be deemed to be the
Adjusted Fair Market Value per share. Thereafter, the
Conversion Price shall be adjusted to be equal to the product
of the Conversion Price in effect immediately prior to such
actions, multiplied by a fraction the numerator of which is
the Adjusted Fair Market Value per share and the denominator
of which is the Current Market Price per share immediately
prior to such actions. Upon any such adjustment of the
Conversion Price hereunder, the number of shares of Common
Stock issuable upon conversion of a share of Series D
Preferred Stock will be adjusted to the number of shares
<PAGE> 81
- 12 -

determined by multiplying the Conversion Price in effect
immediately prior to such adjustment by the number of shares
of Common Stock issuable upon conversion of a share of Series
D Preferred Stock immediately prior to such adjustment and
dividing the product thereof by the Conversion Price resulting
from such adjustment.

The provisions of this subparagraph 6(a)(ix) shall
not apply to an issuance or sale of shares of the Company's
Common Stock in connection with an underwritten public
offering for cash, unless the underwritten public offering is
in the form of a transaction exempted from registration in the
United States under Regulation S.

(b) No adjustment in the number of shares of Common
Stock issuable upon conversion of shares of Series D Preferred Stock
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
shares of Common Stock issuable upon conversion; provided, however,
that any adjustments which by reason of this paragraph 6(b) are not
required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations shall be made to the
nearest one-thousandth of a share.

(c) No adjustment in the number of shares of Common
Stock issuable upon conversion need be made under subparagraphs
6(a)(iv) and 6(a)(v) if the Company issues or distributes to each
holder of shares of Series D Preferred Stock the rights, options,
warrants, or convertible or exchangeable securities, or evidence of
indebtedness or assets referred to in those subparagraphs which each
holder of Shares of Series D Preferred Stock would have been entitled
to receive had the Series D Preferred Stock been converted prior to
the happening of such event or the record date with respect thereto.
No adjustment in the number of shares of Common Stock issuable upon
conversion need be made for sales of Common Stock pursuant to a
Company plan for reinvestment of dividends or interest. No adjustment
need be made for a change in the par value of the Common Stock. No
such adjustment need be made in respect of the issuance and subsequent
exercise of employee or director benefit or stock options shares of
Common Stock.

(d) For the purpose of this Section 6, the term "shares
of Common Stock" shall mean (i) the class of stock designated as the
Common Stock of the Company at the date of this Agreement, or (ii) any
other class of stock resulting from successive changes or
reclassification of such shares consisting solely of changes in par
value, or from par value to no par value, or from no par value to par
value. In the event that at any time, as a result of an adjustment
made pursuant to subparagraph 6(a)(iii) above, the Holders shall
become entitled to purchase any shares of the Company other than
shares of
<PAGE> 82
- 13 -

Common Stock, thereafter the number of such other shares so issuable
upon conversion and the Conversion Price of such shares shall be
subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in subparagraph 6(a)(i) through 6(a)(ix),
inclusive, above, and the provisions of subsections 6(f) through 6(g),
inclusive, with respect to the Common Stock, shall apply on like terms
to any such other shares.

(e) Upon the expiration of any rights, options,
warrants or conversion or exchange privileges, if any thereof shall
not have been exercised, the Conversion Price and the number of shares
of Common Stock issuable upon conversion shall, upon such expiration,
be readjusted and shall thereafter be such as it would have been had
it been originally adjusted (or had the original adjustment not been
required, as the case may be) as if (A) the only shares of Common
Stock so issued were the shares of Common Stock, if any, actually
issued or sold upon the exercise of such rights, options, warrants or
conversion or exchange rights and (B) such shares of Common Stock, if
any, were issued or sold for the consideration, if any, actually
received by the Company for the issuance, sale or grant of all such
rights, options, warrants or conversion or exchange rights whether or
not exercised; provided, further, that no such readjustment shall have
the effect of increasing the Conversion Price by an amount in excess
of the amount of the adjustment initially made in respect to the
issuance, sale of grant of such rights, options, warrants or
conversion or exchange rights.

(f) Upon any issuance or sale for a consideration other
than cash, or a consideration part of which is other than cash, of any
shares of Common Stock or Convertible Securities or any rights or
options to subscribe for, purchase or otherwise acquire any shares of
Common Stock or Convertible Securities, the amount of the
consideration other than cash received by the Company shall be deemed
to be the fair value of such consideration as determined in good faith
by the Board of Directors of the Company. In case any shares of
Common Stock or Convertible Securities or any rights, options or
warrants to subscribe for, purchase or otherwise acquire any shares of
Common Stock or Convertible Securities shall be issued or sold
together with other shares, stock or securities or other assets of the
Company for a consideration which covers both, the consideration for
the issue or sale of such shares of Common Stock or Convertible
Securities or such rights or options shall be deemed to be the portion
of such consideration allocated thereto in good faith by the Board of
Directors of the Company.

(g) Whenever the number of shares of Common Stock
issuable upon conversion or the Conversion Price of the shares of
Series D Preferred Stock is adjusted, as herein provided, the Company
shall promptly mail by first class mail, postage prepaid, to each
holder of shares of Series D Preferred Stock notice of such adjustment
or adjustments and shall obtain a certificate from a firm of
independent public accountants
<PAGE> 83
- 14 -

selected by the Board of Directors of the Company (who may be the
regular accountants employed by the Company) setting forth the number
of shares of Common Stock issuable upon conversion and the Conversion
Price after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by
which such adjustment was made. Such certificate shall be conclusive
evidence of the correctness of such adjustment.

(h) In case of any consolidation of the Company with or
merger of the Company into another corporation or in case of any sale,
transfer or lease to another corporation of all or substantially all
the property of the Company, the Company or such successor or
purchasing corporation, as the case may be, shall expressly provide
that each holder of Series D Preferred Stock shall have the right to
receive upon conversion of the Series D Preferred Stock the kind and
amount of shares and other securities and property which he would have
owned or have been entitled to receive after the happening of such
consolidation, merger, sale, transfer or lease had such conversion
taken place immediately prior to such action; provided, however, that
no adjustment in respect of dividends, interest or other income on or
from such shares or other securities and property shall be made until
conversion of the Shares of Series D Preferred Stock. The provisions
of this subsection (h) shall similarly apply to successive
consolidations, mergers, sales, transfers or leases.

(i) Irrespective of any adjustments in the Conversion
Price or the number or kind of shares purchasable upon conversion,
shares of Series D Preferred Stock theretofore or thereafter issued
may continue to express the same price and number and kind of shares
as are stated in the Series D Preferred Stock initially issuable
pursuant to this Certificate of Designation.

(j) The holder of any shares of Series D Preferred
Stock may exercise its option to convert such shares into shares of
Common Stock by surrendering for such purpose to the Company at its
principal office the certificates representing the shares to be
converted, accompanied by written notice that such holder elects to
convert such shares. Said notice shall also state the name in which
the certificate for shares of Common Stock which shall be issuable on
such conversion shall be issued. Each certificate or certificates
surrendered for conversion shall, unless the shares issuable on
conversion are to be issued in the same name as that in which such
certificate or certificates are registered, be accompanied by
instruments of transfer, in form satisfactory to the Company, duly
executed by the holder or his duly authorized attorney. Each
conversion shall be deemed to have been effected on the date on which
such certificate shall have been surrendered and such notice received
by the Company as aforesaid. As promptly as practicable on or after
the conversion date, the Company shall issue and
<PAGE> 84
- 15 -

deliver to the person entitled to receive the same a certificate
representing the number of full shares of Common Stock issuable upon
such conversion.

(k) Upon any conversion of shares of Series D Preferred
Stock, no allowance, adjustment or payment shall be made with respect
to accrued but unpaid dividends upon such Series D Preferred Stock or
with respect to dividends on the Common Stock to be issued upon
conversion.

(l) In connection with the conversion of shares of
Series D Preferred Stock into Common Stock, no fractional shares of
Series D Preferred Stock or of Common Stock shall be issued, but the
Company shall pay a cash adjustment in respect of such fractional
interest, calculated based on the market price of the Common Stock on
the date of conversion.

(m) The issuance of stock certificates on conversions
shall be made without charge to converting shareholders for any tax in
respect of the issuance thereof. The Company shall not, however, be
required to pay any tax which may be payable in respect of any
registration of transfer involved in the issue and delivery of stock
in any name other than that of the holder of the shares of Series D
Preferred Stock converted, and the Company shall not be required to so
issue or deliver any stock certificate unless and until the person or
persons requesting the registration of transfer shall have paid to the
Company the amount of such tax.

(n) The Company shall at all times reserve and keep
available out of its authorized Common Stock the full number of shares
of Common Stock deliverable upon the conversion of all outstanding
shares of Series D Preferred Stock.

7. REDEMPTION.

(a) The Company may, at its option, redeem shares of
Series D Preferred Stock for cash, at any time and from time to time,
in whole or in part, by vote of its Board of Directors; provided,
however, in the event that any share of Series D Preferred Stock is
redeemed by the Company on or before the seventh anniversary of the
first Date of Issuance, in addition to the cash payable to the holder
of each such share, the holder shall receive a warrant to purchase one
share of Common Stock of the Company for each share of Common Stock
into which such share of Series D Preferred Stock is then convertible,
exercisable at $5.25 per share of Common Stock, or, in the event of
any adjustment to the Conversion Price hereunder, at the adjusted
Conversion Price, at any time prior to the seventh anniversary of the
first Date of Issuance. Such warrants shall be issued in the form
attached to the Warrant Subscription Agreement and such warrants
<PAGE> 85
- 16 -

and the shares of Common Stock issuable upon exercise of the warrants
shall be entitled to the benefits of the Registration Rights
Agreement.

(b) To the extent permitted under the laws of the State
of Delaware, the Company shall redeem shares of Preferred Stock as
follows: (i) 10% of the shares of Series D Preferred Stock
outstanding shall be redeemed on the first business day of each year
beginning 2008, and (ii) all remaining outstanding shares of Series D
Preferred Stock shall be redeemed on the first business day of the
year 2018. If the Company cannot legally redeem all shares of
Preferred Stock required to be redeemed by it on any particular date,
then the Company shall redeem such shares as soon as it can legally do
so. The redemption price of each share of Series D Preferred Stock
(the "Redemption Price") shall be $100.00 per share plus an amount
equal to all unpaid dividends, whether or not earned or declared,
accrued to the date fixed for redemption.

(c) Notice of any optional or mandatory redemption of
all or any of the shares of the Series D Preferred Stock shall be sent
by the Secretary of the Company by first-class mail, postage prepaid,
at least 30 but not more than 60 days prior to the date fixed for such
redemption (the "Redemption Date"), to the holders of the shares of
the Series D Preferred Stock to be redeemed, at their respective
addresses appearing on the books of the Company. The Company shall
pay the Redemption Price in immediately available funds to the holders
of shares to be redeemed on the latter of the Redemption Date or the
date such holder surrenders the certificate representing the shares to
be redeemed to the Company at its principal office. Notwithstanding
that any certificate for Shares of Series D Preferred Stock so called
for redemption shall not have been surrendered for cancellation, the
shares represented thereby shall no longer be deemed outstanding, the
dividends thereon shall cease to accrue from and after the Redemption
Date, and all rights with respect to the Series D Preferred Stock so
called for redemption shall forthwith after such Redemption Date cease
and terminate, excepting only the right of the holder to receive the
Redemption Price thereof plus accrued and unpaid dividends to the
Redemption Date without interest.

(d) If any proposed redemption of shares of the Series
D Preferred Stock shall be of less than all then outstanding shares of
Series D Preferred Stock, such redemption shall be made on a pro rata
basis, as nearly as possible, among all holders of shares of the
Series D Preferred Stock outstanding at the time of redemption in the
same proportion that each such holder's then respective holding of
such shares shall bear to the aggregate number of such shares then
outstanding.
<PAGE> 86
- 17 -

8. RESTRICTIONS ON TRANSFER.

(a) No transfer of any shares of Series D Preferred
Stock, nor any interest therein, shall be made except upon the
conditions specified in this Section 8, which conditions are intended
to ensure compliance with the provisions of the Securities Act and all
applicable state securities laws in respect of the Transfer of any of
such securities or any interest therein.

(b) Each certificate for shares of Series D Preferred
Stock shall include a legend in substantially the following form:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND NEITHER THESE
SECURITIES NOR ANY INTEREST THEREIN MAY BE SOLD, TRANSFERRED,
PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT,
APPLICABLE STATE SECURITIES LAWS AND THE RULES AND REGULATIONS
THEREUNDER. BY ACCEPTANCE HEREOF, THE HOLDER OF THIS
CERTIFICATE REPRESENTS THAT IT IS ACQUIRING THESE SECURITIES
FOR INVESTMENT AND AGREES TO COMPLY IN ALL RESPECTS WITH
SECTION 8 OF THE CERTIFICATE OF DESIGNATION OF THE SERIES D
CUMULATIVE PREFERRED STOCK OF THE COMPANY, A COPY OF WHICH MAY
BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER
OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY
AT ITS PRINCIPAL EXECUTIVE OFFICE.

(c) The holder of each certificate representing Series
D Preferred Stock by acceptance thereof agrees to comply in all
respects with the provisions of this Section 8. Prior to any proposed
Transfer of any Shares of Series D Preferred Stock, the holder thereof
shall give written notice to the Company of such holder's intention to
effect such Transfer. Each such notice shall describe the manner and
circumstances of the proposed Transfer in reasonable detail, and shall
be accompanied by (a) a written opinion of counsel to the Company,
addressed to the Company, to the effect that the proposed Transfer may
be effected without registration under the Securities Act and any
applicable
<PAGE> 87
- 18 -

state securities laws of the Series D Preferred Stock, or (b) written
assurance from the staff of the Commission and any applicable state
agency or commission that it will not recommend that any action be
taken by the Commission or such agency or commission in the event such
Transfer is effected without registration under the Securities Act or
any applicable state securities law. Such proposed Transfer may be
effected only if the Company shall have received such notice and such
opinion of counsel or written assurance, whereupon the holder of such
Shares shall be entitled to Transfer such Shares of Series D Preferred
Stock in accordance with the terms of the Notice delivered by the
holder to the Company. Each certificate evidencing the Series D
Preferred Stock so transferred shall bear the legend set forth in
Paragraph (b) of this Section 8.

9. General.

(a) The section headings contained in this resolution
are for reference purposes only and shall not affect, in any way, the
meaning of this resolution.

(b) Shares of Series D Preferred Stock which have been
issued and have been converted, redeemed, repurchased or reacquired in
any manner by the Company shall become authorized and unissued shares
of the Company's undesignated preferred stock, $.01 par value, but
shall not be reissued as shares of Series D Preferred Stock.

IN WITNESS WHEREOF, the Company has caused this Certificate to be
signed by the undersigned officers this ____ day of ____________, 1996.

AMERICAN EAGLE GROUP, INC.

BY:
-------------------------------------
Its:
------------------------------------

ATTEST:

- -----------------------------------
<PAGE> 88

- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
AMERICAN EAGLE GROUP, INC.
12801 NORTH CENTRAL EXPRESSWAY, SUITE 800, DALLAS, TEXAS 75243
SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS ON MAY 10, 1996
P
R The undersigned hereby appoints M. Philip Guthrie and Frederick G. Anderson, and each of them, his/her
O Proxies, with full power to appoint his substitute, and hereby authorize them to represent and to
X vote, as designated hereon, all shares of capital stock of American Eagle Group, Inc. held of record
Y by the undersigned on December 4, 1996, at the Special Meeting of Stockholders to be held on December
30, 1996, and any adjournments thereof, and hereby further authorizes each of them, in their
discretion, to vote upon any other business that may properly come before the meeting.
</TABLE>

(Change of address)

-------------------------------

-------------------------------
If you have written in the
above space, please mark the
corresponding box on the
reverse side of this card.)

You are encouraged to specify your choice by marking the appropriate
boxes, SEE REVERSE SIDE, but you need not mark any boxes with regard to
the Proposal if you wish to vote FOR such Proposal. The Proxies cannot
vote your shares unless you sign and return this card.
SEE
REVERSE
SIDE
- --------------------------------------------------------------------------------
<PAGE> 89

<TABLE>
<C> <S>
PLEASE MARK YOUR
VOTES AS IN THIS
X EXAMPLE.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.
- ----------------------------

<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C>
1. TO APPROVE THE PROPOSAL [ ] N N 2. IN THEIR DISCRETION,
AS FURTHER DESCRIBED IN THE PROXIES ARE
THE ACCOMPANYING PROXY AUTHORIZED TO VOTE
STATEMENT UPON SUCH OTHER
BUSINESS AS MAY
PROPERLY COME
BEFORE THE SPECIAL
MEETING.
ADDRESS CHANGE [ ]
SIGNATURE(S)____________________________________ DATE ____________________ THE SIGNERS HEREBY REVOKES ALL PROXIES
NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS HEREON, JOINT OWNERS SHOULD EACH SIGN. HERETOFORE GIVEN BY THE SIGNER TO VOTE AT SAID
WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR TRUSTEE OR GUARDIAN PLEASE MEETING OR ANY ADJOURNMENTS THEREOF.
GIVE FULL TITLE AS SUCH.
</TABLE>